[G.R. No. 118233. December 10, 1999.] filed out of time. Citing Section 187, R.A. No.
ime. Citing Section 187, R.A. No. 7160, he said:
ANTONIO Z. REYES, ELISEO P. OCAMPO and EDITHA ARCIAGA-
SANTOS, Petitioners, v. COURT OF APPEALS, HON. SECRETARY OF JUSTICE
FRANKLIN DRILON and MAYOR JINGGOY ESTRADA (JOSE EJERCITO) OF THE
MUNICIPALITY OF SAN JUAN, METRO MANILA, Respondents.
RESOLUTION
QUISUMBING, J.:
For review is the decision of the Court of Appeals, dated August 3, 1994 and its resolution
dated December 8, 1994 in CA-G.R. SP No. 32473. Said decision dismissed the prohibition
case brought by the petitioners against respondent officials of the Municipality of San Juan
to stop the enforcement of Tax Ordinance Nos. 87, 91, 95, 100 and 101.
The factual antecedents are as follows:
The Sangguniang Bayan of San Juan, Metro Manila implemented several tax ordinances as
follows:
Ordinance No. Title
87 An ordinance imposing a municipal tax of fifty percent (50%) of one percent (1%) of
the gross receipt on business of printing and publication
91 An ordinance imposing a transfer tax equivalent to fifty percent (50%) of one percent
(1%) of the total consideration on the sale, donation, barter or any other mode of
transferring ownership or title of real property situated in San Juan, Metro Manila, or its
fair market value, whichever is higher
95 An ordinance imposing fifty percent (50%) of one percent of (1%) for social housing
tax on the assessed value of all real estate property in San Juan, Metro Manila in excess of
P50,000.00 value as provided in the New Urban Land Reform Law, also known as R.A.
7279.
100 An ordinance imposing new rates of business taxes of the Municipality of San Juan
Metro Manila
101 An ordinance levying an annual "Ad Valorem" tax on real property and an additional
tax accruing to the special education fund (SEF)
On May 21, 1993, petitioners filed an appeal with the Department of Justice assailing the
constitutionality of these tax ordinances allegedly because they were promulgated without
previous public hearings thereby constituting deprivation of property without due process
of law.
On June 10, 1993, respondent Secretary of Justice dismissed the appeal for having been
"It appears that the tax ordinances in question took effect on September 24, 1992, in the
case of Tax Ordinance No. 87, until October 22, 1992, in the case of Tax Ordinance Nos.
91 and 95, and until October 29, 1992, in the case of Tax Ordinance Nos. 100 and 101, or
more than thirty (30) days from the effectivity thereof when the appeal was filed and
received by this Department on May 21, 1993 and therefore not in accordance with the
requirements provided for under Section 187 of the Local Government Code of 1991.
WHEREFORE, the instant appeal, having been filed out of time, is hereby DISMISSED."
Undaunted, petitioners filed with the Court of Appeals a petition for certiorari and
prohibition (CA-G.R. SP No. 32473). But respondent court affirmed the decision of the
Secretary. On December 8, 1994, the motion for reconsideration filed by the petitioners
was denied for lack of merit.
Hence, the present petition for review, raising the following questions:
"1. Whether or not the questioned tax ordinances are violative of the Constitution,
considering the undisputed fact that no public hearings were ever held on the ordinances
before they were passed and approved as required by the Local Government Code of
1991, thereby constituting as they do a deprivation of property without due process;
"2. Whether or not the wording of the law under Section 187 of the Local Government
Code of 1991 that "any question on the constitutionality . . . of tax ordinance . . . may be
raised on appeal within thirty (30) days from the effectivity thereof . . ." is a reductio ad
absurdum, since if the tax ordinance is found to be unconstitutional, it will be considered
as never having become effective at all from the very beginning, for which reason the
thirty-day appeal period cannot be reckoned and cannot be enforced;
"3. Whether or not the constitutionality of a tax ordinance, or any law for that matter, can
be questioned at any time despite the prescription of a limited period within which to
question it, as in the case at bar; and
"4. Whether or not the constitutionality of an ordinance or a law may be questioned even if
the question of constitutionality may not have been originally or initially raised, or is not
the lis mota of the case, if it appears that a determination of the question of
constitutionality is necessary to a decision of the case."
In our view, the pertinent issues for our resolution now are:
1. Whether or not the Court of Appeals erred in affirming the decision of the Secretary of
Justice who dismissed the prohibition suit, on the ground that it was filed out of time?
2. Whether or not lack of mandatory public hearings prior to enacting Municipal Ordinance
Nos. 87, 91, 95, 100 and 101 render them void on the ground of deprivation of property
without due process?
3. Whether or not the constitutional validity of Sec. 187 of the Local Government Code
could be raised for the first time on appeal?
According to petitioners, respondent Secretary erred in declaring that they failed to file
their appeal on time. Also, they assail Municipal Ordinance Nos. 87, 91, 95, 100 and 101,
for alleged failure of the Municipal Council of San Juan to conduct mandatory public
hearings. Because of this, they claim the ordinances are inoperative, as though they were
never passed. Consequently, no prescriptive thirty-day period to question the validity of
the ordinance could toll to bar their appeal to the Department of Justice.
Sec. 187 of R.A. 7160, cited by respondent Secretary, provides as follows:
"SECTION 187. Procedure for Approval and Effectivity of Tax Ordinances and Revenue
Measures; Mandatory Public Hearings. — The procedure for approval of local tax
ordinances and revenue measures shall be in accordance with the provisions of this Code:
Provided, That public hearings shall be conducted for the purpose prior to the enactment
thereof: Provided further, That any question on the constitutionality or legality of tax
ordinances or revenue measures may be raised on appeal within thirty (30) days from the
effectivity thereof to the Secretary of Justice who shall render a decision within sixty (60)
days from the date of receipt of the appeal: Provided, however, That such appeal shall not
have the effect of suspending the effectivity of the ordinance and the accrual and payment
of the tax, fee, or charge levied therein: Provided, finally, That within thirty (30) days
after receipt of the decision or the lapse of the sixty-day period without the Secretary of
Justice acting upon the appeal, the aggrieved party may file appropriate proceedings with
a court of competent jurisdiction."
Clearly, the law requires that the dissatisfied taxpayer who questions the validity or
legality of a tax ordinance must file his appeal to the Secretary of Justice, within 30 days
from effectivity thereof. In case the Secretary decides the appeal, a period also of 30 days
is allowed for an aggrieved party to go to court. But if the Secretary does not act thereon,
after the lapse of 60 days, a party could already proceed to seek relief in court. These
three separate periods are clearly given for compliance as a prerequisite before seeking
redress in a competent court. Such statutory periods are set to prevent delays as well as
enhance the orderly and speedy discharge of judicial functions. For this reason the courts
construe these provisions of statutes as mandatory.
A municipal tax ordinance empowers a local government unit to impose taxes. The power
to tax is the most effective instrument to raise needed revenues to finance and support
the myriad activities of local government units for the delivery of basic services essential
to the promotion of the general welfare and enhancement of peace, progress, and
prosperity of the people. Consequently, any delay in implementing tax measures would be
to the detriment of the public. It is for this reason that protests over tax ordinances are
required to be done within certain time frames. In the instant case, it is our view that the
failure of petitioners to appeal to the Secretary of Justice within 30 days as required by
Sec. 187 of R.A. 7160 is fatal to their cause.
On the second issue, petitioners allege that the Sangguniang Bayan of San Juan did not
comply with the prescribed procedure for enacting an ordinance because they failed to
conduct public hearings.
In Figuerres v. Court of Appeals, where the municipality failed to conduct public hearings
prior to enacting the revisions on the schedule of fair market values and assessment level
of classes of real estate properties, the Court said:
"Petitioner is right in contending that public hearings are required to be conducted prior to
the enactment of an ordinance imposing real property taxes. R.A. No. 7160, Sec. 186,
provides that an ordinance levying taxes, fees, or charges ‘shall not be enacted without
any prior public hearing conducted for the purpose.’
However, it is noteworthy that apart from her bare assertions, petitioner Figuerres has not
presented any evidence to show that no public hearings were conducted prior to the
enactment of the ordinances in question. On the other hand, the Municipality of
Mandaluyong claims that public hearings were indeed conducted before the subject
ordinances were adopted, although it likewise failed to submit any evidence to establish
this allegation. However, in accordance with the presumption of validity in favor of an
ordinance, their constitutionality or legality should be upheld in the absence of evidences
showing that procedure prescribed by law was not observed in their enactment. . . .
Furthermore, the lack of a public hearing is a negative allegation essential to petitioner’s
cause of action in the present case. Hence, as petitioner is the party asserting it, she has
the burden of proof. Since petitioner failed to rebut the presumption of validity in favor of
the subject ordinances and to discharge the burden of proving that no public hearings
were conducted prior to the enactment thereof, we are constrained to uphold their
constitutionality or legality."
We find Figuerres instructive. Petitioners have not proved in the case before us that the
Sangguniang Bayan of San Juan failed to conduct the required public hearings before the
enactment of Ordinance Nos. 87, 91, 95, 100 and 101. Although the Sanggunian had the
control of records or the better means of proof regarding the facts alleged, petitioners are
not relieved from the burden of proving their averments. Proof that public hearings were
not held falls on petitioners’ shoulders. For failing to discharge that burden, their petition
was properly dismissed.
In any event, for the purpose of securing certainty where doubt would be intolerable, it is
a general rule that the regularity of the enactment of an officially promulgated statute or
ordinance may not be impeached by parol evidence or oral testimony either of individual
officers and members, or of strangers who may be interested in nullifying legislative
action. This rule supplements the presumption in favor of the regularity of official conduct
which we have upheld repeatedly, absent a clear showing to the contrary.
Finally, on the validity of Section 187 of R.A. 7160, the Local Government Code, we must
stress that the constitutionality of an act of Congress will not be passed upon by the Court
unless at the first opportunity that question is properly raised and presented in an
appropriate case, and is necessary to a determination of the case, particularly where the
issue of constitutionality is the very lis mota presented. The constitutional validity of a
statutory provision should not be entertained by the Court where it was not specifically
raised below, insisted upon, and adequately argued. Moreover, given the circumstances in
this case, we find no genuine necessity to dwell on the issue of constitutional invalidity of
Section 187 in relation to issue of valid enactment of the subject ordinances, as shown in
the foregoing discussion. Suffice it now to say that, having resolved the first and second
issues, we find no grave abuse of discretion nor reversible error in the decision of the
respondent appellate court. Further constitutional scrutiny of Section 187 is unwarranted.
WHEREFORE, the present petition is DISMISSED for lack of merit and the assailed decision
of the Court of Appeals is AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza, Panganiban, Purisima,
Pardo, Buena, Gonzaga-Reyes, Ynares-Santiago and De Leon, Jr., JJ., concur.
G.R. No. 131359 May 5, 1999
MANILA ELECTRIC COMPANY, petitioner,
vs.
PROVINCE OF LAGUNA and BENITO R. BALAZO, in his capacity as Provincial
Treasurer of Laguna, respondents.
VITUG, J.:
On various dates, certain municipalities of the Province of Laguna, including, Biñan, Sta.
Rosa, San Pedro, Luisiana, Calauan and Cabuyao, by virtue of existing laws then in effect,
issued resolutions through their respective municipal councils granting franchise in favor of
petitioner Manila Electric Company ("MERALCO") for the supply of electric light, heat and
power within their concerned areas. On 19 January 1983, MERALCO was likewise granted
a franchise by the National Electrification Administration to operate an electric light and
power service in the Municipality of Calamba, Laguna.
On 12 September 1991, Republic Act No. 7160, otherwise known as the "Local
Government Code of 1991," was enacted to take effect on 01 January 1992 enjoining local
government units to create their own sources of revenue and to levy taxes, fees and
charges, subject to the limitations expressed therein, consistent with the basic policy of
local autonomy. Pursuant to the provisions of the Code, respondent province enacted
Laguna Provincial Ordinance No. 01-92, effective 01 January 1993, providing, in part, as
follows:
Sec. 2.09. Franchise Tax. — There is hereby imposed a tax on businesses enjoying a
franchise, at a rate of fifty percent (50%) of one percent (1%) of the gross annual
receipts, which shall include both cash sales and sales on account realized during the
preceding calendar year within this province, including the territorial limits on any city
located in the province.
On the basis of the above ordinance, respondent Provincial Treasurer sent a demand letter
to MERALCO for the corresponding tax payment. Petitioner MERALCO paid the tax, which
then amounted to P19,520.628.42, under protest. A formal claim for refund was thereafter
sent by MERALCO to the Provincial Treasurer of Laguna claiming that the franchise tax it
had paid and continued to pay to the National Government pursuant to P.D. 551 already
included the franchise tax imposed by the Provincial Tax Ordinance. MERALCO, contended
that the imposition of a franchise tax under Section 2.09 of Laguna Provincial Ordinance
No. 01-92, insofar as it concerned MERALCO, contravened the provisions of Section 1 of
P.D. 551 which read:
Any provision of law or local ordinance to the contrary notwithstanding, the franchise
tax payable by all grantees of franchises to generate, distribute and sell electric current
for light, heat and power shall be two per cent (2%) of their gross receipts received
from the sale of electric current and from transactions incident to the generation,
distribution and sale of electric current.
Such franchise tax shall be payable to the Commissioner of Internal Revenue or his
duly authorized representative on or before the twentieth day of the month following
the end of each calendar quarter or month, as may be provided in the respective
franchise or pertinent municipal regulation and shall, any provision of the Local Tax
Code or any other law to the contrary notwithstanding, be in lieu of all taxes and
assessments of whatever nature imposed by any national or local authority on
earnings, receipts, income and privilege of generation, distribution and sale of electric
current.
On 28 August 1995, the claim for refund of petitioner was denied in a letter signed by
Governor Jose D. Lina relied on a more recent law, i.e. Republic Act No. 7160 or the Local
Government Code of 1991, than the old decree invoked by petitioner.
On 14 February 1996, petitioner MERALCO filed with the Regional Trial Court of Sta. Cruz,
Laguna, a complaint for refund, with a prayer for the issuance of a writ of preliminary
injunction and/or temporary restraining order, against the Province of Laguna and also
Benito R. Balazo in his capacity as the Provincial Treasurer of Laguna. Aside from the
amount of P19,520,628.42 for which petitioner MERALCO had priorly made a formal
request for refund, petitioner thereafter likewise made additional payments under protest
on various dates totaling P27,669,566.91.
The trial court, in its assailed decision of 30 September 1997, dismissed the complaint and
concluded:
WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING CONSIDERATIONS, JUDGMENT is
hereby rendered in favor of the defendants and against the plaintiff, by:
1. Ordering the dismissal of the Complaint; and
2. Declaring Laguna Provincial Tax Ordinance No. 01-92 as valid, binding, reasonable
and enforceable.
In the instant petition, MERALCO assails the above ruling and brings up the following
issues; viz:
 1. Whether the imposition of a franchise tax under Section 2.09 of Laguna Provincial
Ordinance No. 01-92, insofar as petitioner is concerned, is violative of the non-
impairment clause of the Constitution and Section 1 of Presidential Decree No. 551.
2. Whether Republic Act No. 7160, otherwise known Local Government Code of 1991,
has repealed, amended or modified Presidential Decree No. 551.
3. Whether the doctrine of administrative remedies is applicable in this case.
The petition lacks merit.
Prefatorily, it might be well to recall that local governments do not have the inherent
power to tax except to the extent that such power might be delegated to them either by
the basic law or by statute. Presently, under Article X of the 1987 Constitution, a general
delegation of that power has been given in favor of local government units. Thus:
Sec. 3. The Congress shall enact a local government code which shall provide for a
more responsive and accountable local government structure instituted through a
system of decentralization with effective mechanisms of recall, initiative, and
referendum, allocate among the different local government units their powers,
responsibilities, and resources, and provide for the qualifications, election, appointment
and removal, term, salaries, powers and functions, and duties of local officials, and all
other matters relating to the organization and operation of the local units.
xxx xxx xxx
Sec. 5. Each local government unit shall have the power to create its own sources of
revenues and to levy taxes, fees, and charges subject to such guidelines and limitations
as the Congress may provide, consistent with the basic policy of local autonomy. Such
taxes, fees, and charges shall accrue exclusively to the local governments.
The 1987 Constitution has a counterpart provision in the 1973 Constitution which did
come out with a similar delegation of revenue making powers to local governments.
Under regime of the 1935 Constitution no similar delegation of tax powers was provided,
and local government units instead derived their tax powers under a limited statutory
authority. Whereas, then, the delegation of tax powers granted at that time by statute to
local governments was confined and defined (outside of which the power was deemed
withheld), the present constitutional rule (starting with the 1973 Constitution), however,
would broadly confer such tax powers subject only to specific exceptions that the law
might prescribe.
Under the now prevailing Constitution, where there is neither a grant nor a prohibition by
statute, the tax power must be deemed to exist although Congress may provide statutory
limitations and guidelines. The basic rationale for the current rule is to safeguard the
viability and self-sufficiency of local government units by directly granting them general
and broad tax powers. Nevertheless, the fundamental law did not intend the delegation to
be absolute and unconditional; the constitutional objective obviously is to ensure that,
while the local government units are being strengthened and made more autonomous, the
legislature must still see to it that (a) the taxpayer will not be over-burdened or saddled
with multiple and unreasonable impositions; (b) each local government unit will have its
fair share of available resources; (c) the resources of the national government will not be
unduly disturbed; and (d) local taxation will be fair, uniform, and just.
The Local Government Code of 1991 has incorporated and adopted, by and large, the
provisions of the now repealed Local Tax Code, which had been in effect since 01 July
1973, promulgated into law by Presidential Decree No. 231 pursuant to the then provisions
of Section 2, Article XI, of the 1973 Constitution. The 1991 Code explicitly authorizes
provincial governments, notwithstanding "any exemption granted by any law or other
special law, . . . (to) impose a tax on businesses enjoying a franchise." Section 137
thereof provides:
Sec. 137. Franchise Tax — Notwithstanding any exemption granted by any law or other
special law, the province may impose a tax on businesses enjoying a franchise, at a
rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts
for the preceding calendar year based on the incoming receipt, or realized, within its
territorial jurisdiction. In the case of a newly started business, the tax shall not exceed
one-twentieth (1/20) of one percent (1%) of the capital investment. In the succeeding
calendar year, regardless of when the business started to operate, the tax shall be
based on the gross receipts for the preceding calendar year, or any fraction thereof, as
provided herein. (Underscoring supplied for emphasis)
Indicative of the legislative intent to carry out the Constitutional mandate of vesting broad
tax powers to local government units, the Local Government Code has effectively
withdrawn under Section 193 thereof, tax exemptions or incentives theretofore enjoyed by
certain entities. This law states:
Sec. 193. Withdrawal of Tax Exemption Privileges — Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under R.A. No. 6938, non-
stock and non-profit hospitals and educational institutions, are hereby withdrawn upon
the effectivity of this Code. (Underscoring supplied for emphasis)
The Code, in addition, contains a general repealing clause in its Section 534; thus:
Sec. 534. Repealing Clause. — . . .
(f) All general and special laws, acts, city charters, decrees, executive orders,
proclamations and administrative regulations, or part or parts thereof which are
inconsistent with any of the provisions of this Code are hereby repealed or modified
accordingly. (Underscoring supplied for emphasis)
To exemplify, in Mactan Cebu International Airport Authority vs. Marcos, the Court upheld
the withdrawal of the real estate tax exemption previously enjoyed by Mactan Cebu
International Airport Authority. The Court ratiocinated:
. . . These policy considerations are consistent with the State policy to ensure
autonomy to local governments and the objective of the LGC that they enjoy genuine
and meaningful local autonomy to enable them to attain their fullest development as
self-reliant communities and make them effective partners in the attainment of national
goals. The power to tax is the most effective instrument to raise needed revenues to
finance and support myriad activities if local government units for the delivery of basic
services essential to the promotion of the general welfare and the enhancement of
peace, progress, and prosperity of the people. It may also be relevant to recall that the
original reasons for the withdrawal of tax exemption privileges granted to government-
owned and controlled corporations and all other units of government were that such
privilege resulted in serious tax base erosion and distortions in the tax treatment of
similarity situated enterprises, and there was a need for these entities to share in the
requirements of development, fiscal or otherwise, by paying the taxes and other
charges due from them.
Petitioner in its complaint before the Regional Trial Court cited the ruling of this Court
in Province of Misamis Oriental vs. Cagayan Electric Power and Light Company, Inc.; thus:
In an earlier case, the phrase "shall be in lieu of all taxes and at any time levied,
established by, or collected by any authority" found in the franchise of the Visayan
Electric Company was held to exempt the company from payment of the 5% tax on
corporate franchise provided in Section 259 of the Internal Revenue Code (Visayan
Electric Co. vs. David, 49 O.G. [No. 4] 1385)
Similarly, we ruled that the provision: "shall be in lieu of all taxes of every name and
nature" in the franchise of the Manila Railroad (Subsection 12, Section 1, Act No. 1510)
exempts the Manila Railroad from payment of internal revenue tax for its importations
of coal and oil under Act No. 2432 and the Amendatory Acts of the Philippine
Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).
The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act No.
1497) justified the exemption of the Philippine Railway Company from payment of the
tax on its corporate franchise under Section 259 of the Internal Revenue Code, as
amended by R.A. No. 39 (Philippine Railway Co vs. Collector of Internal Revenue, 91
Phil. 35).
Those magic words, "shall be in lieu of all taxes" also excused the Cotabato Light and
Ice Plant Company from the payment of the tax imposed by Ordinance No. 7 of the City
of Cotabato (Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA 231).
So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company
when it was required to pay the corporate franchise tax under Section 259 of the
Internal Revenue Code, as amended by R.A. No. 39 (Carcar Electric & Ice Plant vs.
Collector of Internal Revenue, 53 O.G. [No. 4]. 1068). This Court pointed out that such
exemption is part of the inducement for the acceptance of the franchise and the
rendition of public service by the grantee.
In the recent case of the City Government of San Pablo, etc., et al. vs. Hon. Bienvenido V.
Reyes, et al., the Court has held that the phrase in lieu of all taxes "have to give way to
the peremptory language of the Local Government Code specifically providing for the
withdrawal of such exemptions, privileges," and that "upon the effectivity of the Local
Government Code all exemptions except only as provided therein can no longer be invoked
by MERALCO to disclaim liability for the local tax." In fine, the Court has viewed its
previous rulings as laying stress more on the legislative intent of the amendatory law —
whether the tax exemption privilege is to be withdrawn or not — rather than on whether
the law can withdraw, without violating the Constitution, the tax exemption or not.
While the Court has, not too infrequently, referred to tax exemptions contained in special
franchises as being in the nature of contracts and a part of the inducement for carrying on
the franchise, these exemptions, nevertheless, are far from being strictly contractual in
nature. Contractual tax exemptions, in the real sense of the term and where the non-
impairment clause of the Constitution can rightly be invoked, are those agreed to by the
taxing authority in contracts, such as those contained in government bonds or debentures,
lawfully entered into by them under enabling laws in which the government, acting in its
private capacity, sheds its cloak of authority and waives its governmental immunity. Truly,
tax exemptions of this kind may not be revoked without impairing the obligations of
contracts. These contractual tax exemptions, however, are not to be confused with tax
exemptions granted under franchises. A franchise partakes the nature of a grant which is
beyond the purview of the non-impairment clause of the Constitution. Indeed, Article XII,
Section 11, of the 1987 Constitution, like its precursor provisions in the 1935 and the
1973 Constitutions, is explicit that no franchise for the operation of a public utility shall be
granted except under the condition that such privilege shall be subject to amendment,
alteration or repeal by Congress as and when the common good so requires.
WHEREFORE, the instant petition is hereby DISMISSED. No costs.
SO ORDERED.
Romero, Panganiban, Purisima and Gonzaga-Reyes, JJ., concur.
G.R. No. 155491               July 21, 2009
SMART COMMUNICATIONS, INC., Petitioner,
vs.
THE CITY OF DAVAO, represented herein by its Mayor Hon. RODRIGO DUTERTE,
and the SANGGUNIANG PANLUNSOD OF DAVAO CITY, Respondents.
RESOLUTION
NACHURA, J.:
Before the Court is a Motion for Reconsideration filed by Smart Communications, Inc.
(Smart) of the Decision of the Court dated September 16, 2008, denying its appeal of the
Decision and Order of the Regional Trial Court (RTC) of Davao City, dated July 19, 2002
and September 26, 2002, respectively.
Briefly, the factual antecedents are as follows:
On February 18, 2002, Smart filed a special civil action for declaratory relief for the
ascertainment of its rights and obligations under the Tax Code of the City of Davao, which
imposes a franchise tax on businesses enjoying a franchise within the territorial
jurisdiction of Davao. Smart avers that its telecenter in Davao City is exempt from
payment of franchise tax to the City.
On July 19, 2002, the RTC rendered a Decision denying the petition. Smart filed a motion
for reconsideration, which was denied by the trial court in an Order dated September 26,
2002. Smart filed an appeal before this Court, but the same was denied in a decision
dated September 16, 2008. Hence, the instant motion for reconsideration raising the
following grounds: (1) the "in lieu of all taxes" clause in Smart’s franchise, Republic Act
No. 7294 (RA 7294), covers local taxes; the rule of strict construction against tax
exemptions is not applicable; (2) the "in lieu of all taxes" clause is not rendered ineffective
by the Expanded VAT Law; (3) Section 23 of Republic Act No. 7925 (RA 7925) includes a
tax exemption; and (4) the imposition of a local franchise tax on Smart would violate the
constitutional prohibition against impairment of the obligation of contracts.
Section 9 of RA 7294 and Section 23 of RA 7925 are once again put in issue. Section 9 of
Smart’s legislative franchise contains the contentious "in lieu of all taxes" clause. The
Section reads:
Section 9. Tax provisions. — The grantee, its successors or assigns shall be liable to pay
the same taxes on their real estate buildings and personal property, exclusive of this
franchise, as other persons or corporations which are now or hereafter may be required by
law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise
tax equivalent to three percent (3%) of all gross receipts of the business transacted under
this franchise by the grantee, its successors or assigns and the said percentage shall be in
lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee, its
successors or assigns shall continue to be liable for income taxes payable under Title II of
the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72
unless the latter enactment is amended or repealed, in which case the amendment or
repeal shall be applicable thereto.
xxx
Section 23 of RA 7925, otherwise known as the most favored treatment clause or equality
clause, contains the word "exemption," viz.:
SEC. 23. Equality of Treatment in the Telecommunications Industry — Any advantage,
favor, privilege, exemption, or immunity granted under existing franchises, or may
hereafter be granted, shall ipso facto become part of previously granted
telecommunications franchises and shall be accorded immediately and unconditionally to
the grantees of such franchises: Provided, however, That the foregoing shall neither apply
to nor affect provisions of telecommunications franchises concerning territory covered by
the franchise, the life span of the franchise, or the type of the service authorized by the
franchise.
A review of the recent decisions of the Court on the matter of exemptions from local
franchise tax and the interpretation of the word "exemption" found in Section 23 of RA
7925 is imperative in order to resolve this issue once and for all.
In Digital Telecommunications Philippines, Inc. (Digitel) v. Province of Pangasinan, Digitel
used as an argument the "in lieu of all taxes" clauses/provisos found in the legislative
franchises of Globe, Smart and Bell, vis-à-vis Section 23 of RA 7925, in order to claim
exemption from the payment of local franchise tax. Digitel claimed, just like the petitioner
in this case, that it was exempt from the payment of any other taxes except the national
franchise and income taxes. Digitel alleged that Smart was exempted from the payment of
local franchise tax.
However, it failed to substantiate its allegation, and, thus, the Court denied Digitel’s claim
for exemption from provincial franchise tax. Cited was the ruling of the Court in PLDT v.
City of Davao, wherein the Court, speaking through Mr. Justice Vicente V. Mendoza, held
that in approving Section 23 of RA No. 7925, Congress did not intend it to operate as a
blanket tax exemption to all telecommunications entities. Section 23 cannot be considered
as having amended PLDT’s franchise so as to entitle it to exemption from the imposition of
local franchise taxes. The Court further held that tax exemptions are highly disfavored and
that a tax exemption must be expressed in the statute in clear language that leaves no
doubt of the intention of the legislature to grant such exemption. And, even in the
instances when it is granted, the exemption must be interpreted in strictissimi juris against
the taxpayer and liberally in favor of the taxing authority.
The Court also clarified the meaning of the word "exemption" in Section 23 of RA 7925:
that the word "exemption" as used in the statute refers or pertains merely to an
exemption from regulatory or reporting requirements of the Department of Transportation
and Communication or the National Transmission Corporation and not to an exemption
from the grantee’s tax liability.
In Philippine Long Distance Telephone Company (PLDT) v. Province of Laguna, PLDT was a
holder of a legislative franchise under Act No. 3436, as amended. On August 24, 1991, the
terms and conditions of its franchise were consolidated under Republic Act No. 7082,
Section 12 of which embodies the so-called "in-lieu-of-all taxes" clause. Under the said
Section, PLDT shall pay a franchise tax equivalent to three percent (3%) of all its gross
receipts, which franchise tax shall be "in lieu of all taxes." The issue that the Court had to
resolve was whether PLDT was liable to pay franchise tax to the Province of Laguna in view
of the "in lieu of all taxes" clause in its franchise and Section 23 of RA 7925.
Applying the rule of strict construction of laws granting tax exemptions and the rule that
doubts are resolved in favor of municipal corporations in interpreting statutory provisions
on municipal taxing powers, the Court held that Section 23 of RA 7925 could not be
considered as having amended petitioner's franchise so as to entitle it to exemption from
the imposition of local franchise taxes.
In ruling against the claim of PLDT, the Court cited the previous decisions in PLDT v. City
of Davao and PLDT v. City of Bacolod, in denying the claim for exemption from the
payment of local franchise tax.
In sum, the aforecited jurisprudence suggests that aside from the national franchise tax,
the franchisee is still liable to pay the local franchise tax, unless it is expressly and
unequivocally exempted from the payment thereof under its legislative franchise. The "in
lieu of all taxes" clause in a legislative franchise should categorically state that the
exemption applies to both local and national taxes; otherwise, the exemption claimed
should be strictly construed against the taxpayer and liberally in favor of the taxing
authority.
Republic Act No. 7716, otherwise known as the "Expanded VAT Law," did not remove or
abolish the payment of local franchise tax. It merely replaced the national franchise tax
that was previously paid by telecommunications franchise holders and in its stead imposed
a ten percent (10%) VAT in accordance with Section 108 of the Tax Code. VAT replaced
the national franchise tax, but it did not prohibit nor abolish the imposition of local
franchise tax by cities or municipaties.
The power to tax by local government units emanates from Section 5, Article X of the
Constitution which empowers them to create their own sources of revenues and to levy
taxes, fees and charges subject to such guidelines and limitations as the Congress may
provide. The imposition of local franchise tax is not inconsistent with the advent of the
VAT, which renders functus officio the franchise tax paid to the national government. VAT
inures to the benefit of the national government, while a local franchise tax is a revenue of
the local government unit.
WHEREFORE, the motion for reconsideration is DENIED, and this denial is final.
SO ORDERED.
[G.R. No. 137377. December 18, 2001.]
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. MARUBENI
CORPORATION, Respondent.
DECISION
PUNO, J.:
In this petition for review, the Commissioner of Internal Revenue assails the decision
dated January 15, 1999 of the Court of Appeals in CA-G.R. SP No. 42518 which affirmed
the decision dated July 29, 1996 of the Court of Tax Appeals in CTA Case No. 4109. The
tax court ordered the Commissioner of Internal Revenue to desist from collecting the 1985
deficiency income, branch profit remittance and contractor’s taxes from Marubeni
Corporation after finding the latter to have properly availed of the tax amnesty under
Executive Orders Nos. 41 and 64, as amended.
Respondent Marubeni Corporation is a foreign corporation organized and existing under
the laws of Japan. It is engaged in general import and export trading, financing and the
construction business. It is duly registered to engage in such business in the Philippines
and maintains a branch office in Manila.
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter
of authority to examine the books of accounts of the Manila branch office of respondent
corporation for the fiscal year ending March 1985. In the course of the examination,
petitioner found respondent to have undeclared income from two (2) contracts in the
Philippines, both of which were completed in 1984. One of the contracts was with the
National Development Company (NDC) in connection with the construction and installation
of a wharf/port complex at the Leyte Industrial Development Estate in the municipality of
Isabel, province of Leyte. The other contract was with the Philippine Phosphate Fertilizer
Corporation (Philphos) for the construction of an ammonia storage complex also at the
Leyte Industrial Development Estate.
On March 1, 1986, petitioner’s revenue examiners recommended an assessment for
deficiency income, branch profit remittance, contractor’s and commercial broker’s taxes.
Respondent questioned this assessment in a letter dated June 5, 1986.
On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from
petitioner assessing respondent several deficiency taxes. The assessed deficiency internal
revenue taxes, inclusive of surcharge and interest, were as follows:chanrob1es virtua1
1aw 1ibrary
I. DEFICIENCY INCOME TAX
FY ended March 31, 1985
Undeclared gross income (Philphos
and NDC construction projects) P967,269,811.14
Less: Cost and expenses (50%) 483,634,905.57
———————
Net undeclared income 483,634,905.57
Income tax due thereon 169,272,217.00
Add: 50% surcharge 84,636,108.50
———————
20% int. p.a.fr. 7-15-85
Contractor’s tax due thereon (4%) 38,690,792.00
to 8-15-86 36,675,646.90
Add: 50% surcharge for non-declaration 19,345,396.00
———————
20% surcharge for late payment 9,672,698.00
TOTAL AMOUNT DUE P290,583,972.40
———————
============
Sub-total 67,708,886.00
II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
Add: 20% int. p.a.fr. 4-21-85
FY ended March 31, 1985
to 8-15-86 17,854,739.46
Undeclared gross income from
———————
Philphos and NDC construction projects P483,634,905.57
TOTAL AMOUNT DUE P85,563,625.46
Less: Income tax thereon 169,272,217.00
============
———————
IV. DEFICIENCY COMMERCIAL BROKER’S TAX
Amount subject to Tax 314,362,688.57
FY ended March 31, 1985
———————
Undeclared share from commission income
Tax due thereon 47,154,403.00
(denominated as "subsidy from Home
Add: 50% surcharge 23,577,201.50
Office") P24,683,114.50
20% int. p.a.fr. 4-26-85
———————
to 8-15-86 12,305,360.66
Tax due thereon 1,628,569.00
———————
Add: 50% surcharge for non-declaration 814,284.50
TOTAL AMOUNT DUE P83,036,965.16
20% surcharge for late payment 407,142.25
============
———————
III. DEFICIENCY CONTRACTOR’S TAX
Sub-total 2,849,995.75
FY ended March 31, 1985
Add: 20% int. p.a.fr. 4-21-85
Undeclared gross receipts/gross income from
to 8-15-86 751,539.98
Philphos and NDC construction projects P967,269,811.14
———————
TOTAL AMOUNT DUE P3,600,535.68
============
The 50% surcharge was imposed for your client’s failure to report for tax purposes the
aforesaid taxable revenues while the 25% surcharge was imposed because of your client’s
failure to pay on time the above deficiency percentage taxes.
x       x       x"
Petitioner found that the NDC and Philphos contracts were made on a "turn-key" basis and
that the gross income from the two projects amounted to P967,269,811.14. Each contract
was for a piece of work and since the projects called for the construction and installation of
facilities in the Philippines, the entire income therefrom constituted income from Philippine
sources, hence, subject to internal revenue taxes. The assessment letter further stated
that the same was petitioner’s final decision and that if respondent disagreed with it,
respondent may file an appeal with the Court of Tax Appeals within thirty (30) days from
receipt of the assessment.
On September 26, 1986, respondent filed two (2) petitions for review with the Court of
Tax Appeals. The first petition, CTA Case No. 4109, questioned the deficiency income,
branch profit remittance and contractor’s tax assessments in petitioner’s assessment
letter. The second, CTA Case No. 4110, questioned the deficiency commercial broker’s
assessment in the same letter.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 declaring a one-time amnesty
covering unpaid income taxes for the years 1981 to 1985 was issued. Under this E.O., a
taxpayer who wished to avail of the income tax amnesty should, on or before October 31,
1986: (a) file a sworn statement declaring his net worth as of December 31, 1985; (b) file
a certified true copy of his statement declaring his net worth as of December 31, 1980 on
record with the Bureau of Internal Revenue (BIR), or if no such record exists, file a
statement of said net worth subject to verification by the BIR; and (c) file a return and pay
a tax equivalent to ten per cent (10%) of the increase in net worth from December 31,
1980 to December 31, 1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated
October 30, 1986 and attached thereto its sworn statement of assets and liabilities and
net worth as of Fiscal Year (FY) 1981 and FY 1986. The return was received by the BIR on
November 3, 1986 and respondent paid the amount of P2,891,273.00 equivalent to ten
percent (10%) of its net worth increase between 1981 and 1986.
The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to
December 5, 1986 by E.O. No. 54 dated November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by
Executive Order (E.O.) No. 64. In addition to the income tax amnesty granted by E.O. No.
41 for the years 1981 to 1985, E.O. No. 64 included estate and donor’s taxes under Title
III and the tax on business under Chapter II, Title V of the National Internal Revenue
Code, also covering the years 1981 to 1985. E.O. No. 64 further provided that the
immunities and privileges under E.O. No. 41 were extended to the foregoing tax liabilities,
and the period within which the taxpayer could avail of the amnesty was extended to
December 15, 1986. Those taxpayers who already filed their amnesty return under E.O.
No. 41, as amended, could avail themselves of the benefits, immunities and privileges
under the new E.O. by filing an amended return and paying an additional 5% on the
increase in net worth to cover business, estate and donor’s tax liabilities.
The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95
dated December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax amnesty return under the
benefit of E.O. No. 64 and paid a further amount of P1,445,637.00 to the BIR equivalent
to five percent (5%) of the increase of its net worth between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals
rendered a decision in CTA Case No. 4109. The tax court found that respondent had
properly availed of the tax amnesty under E.O. Nos. 41 and 64 and declared the deficiency
taxes subject of said case as deemed cancelled and withdrawn. The Court of Tax Appeals
disposed of as follows:
"WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED to
DESIST from collecting the 1985 deficiency taxes it had assessed against petitioner and
the same are deemed considered [sic] CANCELLED and WITHDRAWN by reason of the
proper availment by petitioner of the amnesty under Executive Order No. 41, as
amended."
Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the
Court of Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the
decision of the Court of Tax Appeals. Hence, this recourse.
Before us, petitioner raises the following issues:
"(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of
Tax Appeals which ruled that herein respondent’s deficiency tax liabilities were
extinguished upon respondent’s availment of tax amnesty under Executive Orders Nos. 41
and 64.
(2) Whether or not respondent is liable to pay the income, branch profit remittance, and
contractor’s taxes assessed by petitioner."
The main controversy in this case lies in the interpretation of the exception to the amnesty
coverage of E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein —
income tax, branch profit remittance tax and contractor’s tax. These taxes are covered by
the amnesties granted by E.O. Nos. 41 and 64. Petitioner claims, however, that
respondent is disqualified from availing of the said amnesties because the latter falls under
the exception in Section 4 (b) of E.O. No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted
thereunder, viz:
"Sec. 4. Exceptions. — The following taxpayers may not avail themselves of the amnesty
herein granted:
a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;
b) Those with income tax cases already filed in Court as of the effectivity hereof;
c) Those with criminal cases involving violations of the income tax law already filed in
court as of the effectivity hereof;
d) Those that have withholding tax liabilities under the National Internal Revenue Code, as
amended, insofar as the said liabilities are concerned;
e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of the
effectivity hereof as a result of information furnished under Section 316 of the National
Internal Revenue Code, as amended;
f) Those with pending cases involving unexplained or unlawfully acquired wealth before the
Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and
Transactions) and Chapter Four (Malversation of Public Funds and Property) of the Revised
Penal Code, as amended."
Petitioner argues that at the time respondent filed for income tax amnesty on October 30,
1986, CTA Case No. 4109 had already been filed and was pending; before the Court of Tax
Appeals. Respondent therefore fell under the exception in Section 4 (b) of E.O. No. 41.
Petitioner’s claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and
unambiguous. It excepts from income tax amnesty those taxpayers "with income tax
cases already filed in court as of the effectivity hereof." The point of reference is the date
of effectivity of E.O. No. 41. The filing of income tax cases in court must have been made
before and as of the date of effectivity of E.O. No. 41. Thus, for a taxpayer not to be
disqualified under Section 4 (b) there must have been no income tax cases filed in court
against him when E.O. No. 41 took effect. This is regardless of when the taxpayer filed for
income tax amnesty, provided of course he files it on or before the deadline for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985
deficiency income, branch profit remittance and contractor’s tax assessments was filed by
respondent with the Court of Tax Appeals on September 26, 1986. When E.O. No. 41
became effective on August 22, 1986, CTA Case No. 4109 had not yet been filed in court.
Respondent corporation did not fall under the said exception in Section 4 (b), hence,
respondent was not disqualified from availing of the amnesty for income tax under E.O.
No. 41.
The same ruling also applies to the deficiency branch profit remittance tax assessment. A
branch profit remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II,
Chapter III of the National Internal Revenue Code. 6 In the tax code, this tax falls under
Title II on Income Tax. It is a tax on income. Respondent therefore did not fall under the
exception in Section 4 (b) when it filed for amnesty of its deficiency branch profit
remittance tax assessment.
The difficulty herein is with respect to the contractor’s tax assessment and respondent’s
availment of the amnesty under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O.
No. 41 by including estate and donor’s taxes and tax on business. Estate and donor’s
taxes fall under Title III of the Tax Code while business taxes fall under Chapter II, Title V
of the same. The contractor’s tax is provided in Section 205, Chapter II, Title V of the Tax
Code; it is defined and imposed under the title on business taxes, and is therefore a tax on
business.
When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to
the coverage of the amnesty for business, estate and donor’s taxes. Instead, Section 8 of
E.O. No. 64 provided that:
"Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or
inconsistent with this amendatory Executive Order shall remain in full force and effect."
By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or
inconsistent with the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of
E.O. No. 41 on the exceptions to amnesty coverage also applied to E.O. No. 64. With
respect to Section 4 (b) in particular, this provision excepts from tax amnesty coverage a
taxpayer who has "income tax cases already filed in court as of the effectivity hereof." As
to what Executive Order the exception refers to, respondent argues that because of the
words "income" and "hereof," they refer to Executive Order No. 41.
In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed
to refer to E.O. No. 41 and its date of effectivity. The general rule is that an amendatory
act operates prospectively. While an amendment is generally construed as becoming a
part of the original act as if it had always been contained therein, it may not be given a
retroactive effect unless it is so provided expressly or by necessary implication and no
vested right or obligations of contract are thereby impaired.
There is nothing in E.O. No. 64 that provides that it should retroact to the date of
effectivity of E.O. No. 41, the original issuance. Neither is it necessarily implied from E.O.
No. 64 that it or any of its provisions should apply retroactively. Executive Order No. 64 is
a substantive amendment of E.O. No. 41. It does not merely change provisions in E.O. No.
41. It supplements the original act by adding other taxes not covered in the first. It has
been held that where a statute amending a tax law is silent as to whether it operates
retroactively, the amendment will not be given a retroactive effect so as to subject to tax
past transactions not subject to tax under the original act. In an amendatory act, every
case of doubt must be resolved against its retroactive effect.
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general
pardon or intentional overlooking by the State of its authority to impose penalties on
persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of an
absolute forgiveness or waiver by the government of its right to collect what is due it and
to give tax evaders who wish to relent a chance to start with a clean slate. A tax amnesty,
much like a tax exemption, is never favored nor presumed in law. If granted, the terms of
the amnesty, like that of a tax exemption, must be construed strictly against the taxpayer
and liberally in favor of the taxing authority. For the right of taxation is inherent in
government. The State cannot strip itself of the most essential power of taxation by
doubtful words. He who claims an exemption (or an amnesty) from the common burden
must justify his claim by the clearest grant of organic or state law. It cannot be allowed to
exist upon a vague implication. If a doubt arises as to the intent of the legislature, that
doubt must be resolved in favor of the state.
In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should
therefore be construed strictly against the taxpayer. The term "income tax cases" should
be read as to refer to estate and donor’s taxes and taxes on business while the word
"hereof," to E.O. No. 64. Since Executive Order No. 64 took effect on November 17, 1986,
consequently, insofar as the taxes in E.O. No. 64 are concerned, the date of effectivity
referred to in Section 4 (b) of E.O. No. 41 should be November 17, 1986.
Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took
effect on November 17, 1986, CTA Case No. 4109 was already filed and pending in court.
By the time respondent filed its supplementary tax amnesty return on December 15,
1986, respondent already fell under the exception in Section 4 (b) of E.O. Nos. 41 and 64
and was disqualified from availing of the business tax amnesty granted therein.
It is respondent’s other argument that assuming it did not validly avail of the amnesty
under the two Executive Orders, it is still not liable for the deficiency contractor’s tax
because the income from the projects came from the "Offshore Portion" of the contracts.
The two contracts were divided into two parts, i.e., the Onshore Portion and the Offshore
Portion. All materials and equipment in the contract under the "Offshore Portion" were
manufactured and completed in Japan, not in the Philippines, and are therefore not subject
to Philippine taxes.
Before going into respondent’s arguments, it is necessary to discuss the background of the
two contracts, examine their pertinent provisions and implementation.
The NDC and Philphos are two government corporations. In 1980, the NDC, as the
corporate investment arm of the Philippine Government, established the Philphos to
engage in the large-scale manufacture of phosphatic fertilizer for the local and foreign
markets. The Philphos plant complex which was envisioned to be the largest phosphatic
fertilizer operation in Asia, and among the largest in the world, covered an area of 180
hectares within the 435-hectare Leyte Industrial Development Estate in the municipality of
Isabel, province of Leyte.
In 1982, the NDC opened for public bidding a project to construct and install a modern,
reliable, efficient and integrated wharf/port complex at the Leyte Industrial Development
Estate. The wharf/port complex was intended to be one of the major facilities for the
industrial plants at the Leyte Industrial Development Estate. It was to be specifically
adapted to the site for the handling of phosphate rock, bagged or bulk fertilizer products,
liquid materials and other products of Philphos, the Philippine Associated Smelting and
Refining Corporation (Pasar), and other industrial plants within the Estate. The bidding
was participated in by Marubeni Head Office in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered
into an agreement entitled "Turn-Key Contract for Leyte Industrial Estate Port
Development Project Between National Development Company and Marubeni Corporation."
The Port Development Project would consist of a wharf, berths, causeways, mechanical
and liquids unloading and loading systems, fuel oil depot, utilities systems, storage and
service buildings, offsite facilities, harbor service vessels, navigational aid system, fire-
fighting system, area lighting, mobile equipment, spare parts and other related facilities.
The scope of the works under the contract covered turn-key supply, which included grants
of licenses and the transfer of technology and know-how, and:
". . . the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the Wharf-
Port Complex as set forth in Annex I of this Contract, as well as the coordination of tie-ins
at boundaries and schedule of the use of a part or the whole of the Wharf/Port Complex
through the Owner, with the design and construction of other facilities around the site. The
scope of works shall also include any activity, work and supply necessary for, incidental to
or appropriate under present international industrial port practice, for the timely and
successful implementation of the object of this Contract, whether or not expressly referred
to in the abovementioned Annex I."
The contract price for the wharf/port complex was ¥12,790,389,000.00 and
P44,327,940.00. In the contract, the price in Japanese currency was broken down into two
portions: (1) the Japanese Yen Portion I; (2) the Japanese Yen Portion II, while the price
in Philippine currency was referred to as the Philippine Pesos Portion. The Japanese Yen
Portions I and II were financed in two (2) ways: (a) by yen credit loan provided by the
Overseas Economic Cooperation Fund (OECF); and (b) by supplier’s credit in favor of
Marubeni from the Export-Import Bank of Japan. The OECF is a Fund under the Ministry of
Finance of Japan extended by the Japanese government as assistance to foreign
governments to promote economic development. The OECF extended to the Philippine
Government a loan of ¥7,560,000,000.00 for the Leyte Industrial Estate Port Development
Project and authorized the NDC to implement the same. The other type of financing is an
indirect type where the supplier, i.e., Marubeni, obtained a loan from the Export-Import
Bank of Japan to advance payment to its sub-contractors.
Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos
Portion were further broken down and subdivided according to the materials, equipment
and services rendered on the project. The price breakdown and the corresponding
materials, equipment and services were contained in a list attached as Annex III to the
contract.
A few months after execution of the NDC contract, Philphos opened for public bidding a
project to construct and install two ammonia storage tanks in Isabel. Like the NDC
contract, it was Marubeni Head Office in Japan that participated in and won the bidding.
Thus, on May 2, 1982, Philphos and respondent corporation entered into an agreement
entitled "Turn-Key Contract for Ammonia Storage Complex Between Philippine Phosphate
Fertilizer Corporation and Marubeni Corporation." The object of the contract was to
establish and place in operating condition a modern, reliable, efficient and integrated
ammonia storage complex adapted to the site for the receipt and storage of liquid
anhydrous ammonia and for the delivery of ammonia to an integrated fertilizer plant
adjacent to the storage complex and to vessels at the dock. The storage complex was to
consist of ammonia storage tanks, refrigeration system, ship unloading system, transfer
pumps, ammonia heating system, fire-fighting system, area lighting, spare parts, and
other related facilities. The scope of the works required for the completion of the ammonia
storage complex covered the supply, including grants of licenses and transfer of
technology and know-how, and:
". . . the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the
Ammonia Storage Complex as set forth in Annex I of this Contract, as well as the
coordination of tie-ins at boundaries and schedule of the use of a part or the whole of the
Ammonia Storage Complex through the Owner with the design and construction of other
facilities at and around the Site. The scope of works shall also include any activity, work
and supply necessary for, incidental to or appropriate under present international
industrial practice, for the timely and successful implementation of the object of this
Contract, whether or not expressly referred to in the abovementioned Annex I."
The contract price for the project was ¥3,255,751,000.00 and P17,406,000.00. Like the
NDC contract, the price was divided into three portions. The price in Japanese currency
was broken down into the Japanese Yen Portion I and Japanese Yen Portion II while the
price in Philippine currency was classified as the Philippine Pesos Portion. Both Japanese
Yen Portions I and II were financed by supplier’s credit from the Export-Import Bank of
Japan. The price stated in the three portions were further broken down into the
corresponding materials, equipment and services required for the project and their
individual prices. Like the NDC contract, the breakdown in the Philphos contract is
contained in a list attached to the latter as Annex III.
The division of the price into Japanese Yen Portions I and II and the Philippine Pesos
Portion under the two contracts corresponds to the two parts into which the contracts were
classified — the Foreign Offshore Portion and the Philippine Onshore Portion. In both
contracts, the Japanese Yen Portion I corresponds to the Foreign Offshore Portion.
Japanese Yen Portion II and the Philippine Pesos Portion correspond to the Philippine
Onshore Portion.
Under the Philippine Onshore Portion, respondent does not deny its liability for the
contractor’s tax on the income from the two projects. In fact respondent claims, which
petitioner has not denied, that the income it derived from the Onshore Portion of the two
projects had been declared for tax purposes and the taxes thereon already paid to the
Philippine government. It is with regard to the gross receipts from the Foreign Offshore
Portion of the two contracts that the liabilities involved in the assessments subject of this
case arose. Petitioner argues that since the two agreements are turn-key, they call for the
supply of both materials and services to the client, they are contracts for a piece of work
and are indivisible. The situs of the two projects is in the Philippines, and the materials
provided and services rendered were all done and completed within the territorial
jurisdiction of the Philippines. Accordingly, respondent’s entire receipts from the contracts,
including its receipts from the Offshore Portion, constitute income from Philippine sources.
The total gross receipts covering both labor and materials should be subjected to
contractor’s tax in accordance with the ruling in Commissioner of Internal Revenue v.
Engineering Equipment & Supply Co.
A contractor’s tax is imposed in the National Internal Revenue Code (NIRC) as follows:
"Sec. 205. Contractors, proprietors or operators of dockyards, and others. —A contractor’s
tax of four percent of the gross receipts is hereby imposed on proprietors or operators of
the following business establishments and/or persons engaged in the business of selling or
rendering the following services for a fee or compensation:
(a) General engineering, general building and specialty contractors, as defined in Republic
Act No. 4566;
x           x           x
(q) Other independent contractors. The term "independent contractors" includes persons
(juridical or natural) not enumerated above (but not including individuals subject to the
occupation tax under the Local Tax Code) whose activity consists essentially of the sale of
all kinds of services for a fee regardless of whether or not the performance of the service
calls for the exercise or use of the physical or mental faculties of such contractors or their
employees. It does not include regional or area headquarters established in the Philippines
by multinational corporations, including their alien executives, and which headquarters do
not earn or derive income from the Philippines and which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries or branches in
the Asia-Pacific Region.
x       x       x
Under the afore-quoted provision, an independent contractor is a person whose activity
consists essentially of the sale of all kinds of services for a fee, regardless of whether or
not the performance of the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees. The word "contractor" refers to a person
who, in the pursuit of independent business, undertakes to do a specific job or piece of
work for other persons, using his own means and methods without submitting himself to
control as to the petty details.
A contractor’s tax is a tax imposed upon the privilege of engaging in business. It is
generally in the nature of an excise tax on the exercise of a privilege of selling services or
labor rather than a sale on products; and is directly collectible from the person exercising
the privilege. Being an excise tax, it can be levied by the taxing authority only when the
acts, privileges or business are done or performed within the jurisdiction of said authority.
Like property taxes, it cannot be imposed on an occupation or privilege outside the taxing
district.
In the case at bar, it is undisputed that respondent was an independent contractor under
the terms of the two subject contracts. Respondent, however, argues that the work
therein were not all performed in the Philippines because some of them were completed in
Japan in accordance with the provisions of the contracts.
An examination of Annex III to the two contracts reveals that the materials and equipment
to be made and the works and services to be performed by respondent are indeed
classified into two. The first part, entitled "Breakdown of Japanese Yen Portion I" provides:
"Japanese Yen Portion I of the Contract Price has been subdivided according to discrete
portions of materials and equipment which will be shipped to Leyte as units and lots. This
subdivision of price is to be used by owner to verify invoice for Progress Payments under
Article 19.2.1 of the Contract. The agreed subdivision of Japanese Yen Portion I is as
follows:
x       x       x
The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese
Yen Portion II and the Philippine Pesos Portion enumerate other materials and equipment
and the construction and installation work on the project. In other words, the supplies for
the project are listed under Portion I while labor and other supplies are listed under
Portion II and the Philippine Pesos Portion. Mr. Takeshi Hojo, then General Manager of the
Industrial Plant Section II of the Industrial Plant Department of Marubeni Corporation in
Japan who supervised the implementation of the two projects, testified that all the
machines and equipment listed under Japanese Yen Portion I in Annex III were
manufactured in Japan. The machines and equipment were designed, engineered and
fabricated by Japanese firms sub-contracted by Marubeni from the list of sub-contractors
in the technical appendices to each contract. Marubeni sub-contracted a majority of the
equipment and supplies to Kawasaki Steel Corporation which did the design, fabrication,
engineering and manufacture thereof; Yashima & Co. Ltd. which manufactured the mobile
equipment; Bridgestone which provided the rubber fenders of the mobile equipment; and
B.S. Japan for the supply of radio equipment. The engineering and design works made by
Kawasaki Steel Corporation included the lay-out of the plant facility and calculation of the
design in accordance with the specifications given by Respondent. All sub-contractors and
manufacturers are Japanese corporations and are based in Japan and all engineering and
design works were performed in that country.
The materials and equipment under Portion I of the NDC Port Project is primarily
composed of two (2) sets of ship unloader and loader; several boats and mobile
equipment. The ship unloader unloads bags or bulk products from the ship to the port
while the ship loader loads products from the port to the ship. The unloader and loader are
big steel structures on top of each is a large crane and a compartment for operation of the
crane. Two sets of these equipment were completely manufactured in Japan according to
the specifications of the project. After manufacture, they were rolled on to a barge and
transported to Isabel, Leyte. Upon reaching Isabel, the unloader and loader were rolled off
the barge and pulled to the pier to the spot where they were installed. Their installation
simply consisted of bolting them onto the pier.
Like the ship unloader and loader, the three tugboats and a line boat were completely
manufactured in Japan. The boats sailed to Isabel on their own power. The mobile
equipment, consisting of three to four sets of tractors, cranes and dozers, trailers and
forklifts, were also manufactured and completed in Japan. They were loaded on to a
shipping vessel and unloaded at the Isabel Port. These pieces of equipment were all on
wheels and self-propelled. Once unloaded at the port, they were ready to be driven and
perform what they were designed to do.
In addition to the foregoing, there are other items listed in Japanese Yen Portion I in
Annex III to the NDC contract. These other items consist of supplies and materials for five
(5) berths, two (2) roads, a causeway, a warehouse, a transit shed, an administration
building and a security building. Most of the materials consist of steel sheets, steel pipes,
channels and beams and other steel structures, navigational and communication as well as
electrical equipment.
In connection with the Philphos contract, the major pieces of equipment supplied by
respondent were the ammonia storage tanks and refrigeration units. The steel plates for
the tank were manufactured and cut in Japan according to drawings and specifications and
then shipped to Isabel. Once there, respondent’s employees put the steel plates together
to form the storage tank. As to the refrigeration units, they were completed and
assembled in Japan and thereafter shipped to Isabel. The units were simply installed
there. Annex III to the Philphos contract lists down under the Japanese Yen Portion I the
materials for the ammonia storage tank, incidental equipment, piping facilities, electrical
and instrumental apparatus, foundation material and spare parts.
All the materials and equipment transported to the Philippines were inspected and tested
in Japan prior to shipment in accordance with the terms of the contracts. The inspection
was made by representatives of respondent corporation, of NDC and Philphos. NDC, in
fact, contracted the services of a private consultancy firm to verify the correctness of the
tests on the machines and equipment while Philphos sent a representative to Japan to
inspect the storage equipment.
The sub-contractors of the materials and equipment under Japanese Yen Portion I were all
paid by respondent in Japan. In his deposition upon oral examination, Kenjiro Yamakawa,
formerly the Assistant General Manager and Manager of the Steel Plant Marketing
Department, Engineering & Construction Division, Kawasaki Steel Corporation, testified
that the equipment and supplies for the two projects provided by Kawasaki under
Japanese Yen Portion I were paid by Marubeni in Japan. Receipts for such payments were
duly issued by Kawasaki in Japanese and English. Yashima & Co. Ltd. and B.S. Japan were
likewise paid by Marubeni in Japan.
Between Marubeni and the two Philippine corporations, payments for all materials and
equipment under Japanese Yen Portion I were made to Marubeni by NDC and Philphos also
in Japan. The NDC, through the Philippine National Bank, established letters of credit in
favor of respondent through the Bank of Tokyo. The letters of credit were financed by
letters of commitment issued by the OECF with the Bank of Tokyo. The Bank of Tokyo,
upon respondent’s submission of pertinent documents, released the amount in the letters
of credit in favor of respondent and credited the amount therein to respondent’s account
within the same bank.
Clearly, the service of "design and engineering, supply and delivery, construction, erection
and installation, supervision, direction and control of testing and commissioning,
coordination. . ." of the two projects involved two taxing jurisdictions. These acts occurred
in two countries — Japan and the Philippines. While the construction and installation work
were completed within the Philippines, the evidence is clear that some pieces of equipment
and supplies were completely designed and engineered in Japan. The two sets of ship
unloader and loader, the boats and mobile equipment for the NDC project and the
ammonia storage tanks and refrigeration units were made and completed in Japan. They
were already finished products when shipped to the Philippines. The other construction
supplies listed under the Offshore Portion such as the steel sheets, pipes and structures,
electrical and instrumental apparatus, these were not finished products when shipped to
the Philippines. They, however, were likewise fabricated and manufactured by the sub-
contractors in Japan. All services for the design, fabrication, engineering and manufacture
of the materials and equipment under Japanese Yen Portion I were made and completed in
Japan. These services were rendered outside the taxing jurisdiction of the Philippines and
are therefore not subject to contractor’s tax.
Contrary to petitioner’s claim, the case of Commissioner of Internal Revenue v.
Engineering Equipment & Supply Co is not in point. In that case, the Court found that
Engineering Equipment, although an independent contractor, was not engaged in the
manufacture of air conditioning units in the Philippines. Engineering Equipment designed,
supplied and installed centralized air-conditioning systems for clients who contracted its
services. Engineering, however, did not manufacture all the materials for the air-
conditioning system. It imported some items for the system it designed and installed. The
issues in that case dealt with services performed within the local taxing jurisdiction. There
was no foreign element involved in the supply of materials and services.
With the foregoing discussion, it is unnecessary to discuss the other issues raised by the
parties.
IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is
affirmed.
SO ORDERED.
Davide, Jr., C.J., Kapunan, Pardo, and Ynares-Santiago, JJ., concur.
G.R. No. 193007               July 19, 2011
RENATO V. DIAZ and AURORA MA. F. TIMBOL, Petitioners,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.
DECISION
ABAD, J.:
May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for
declaratory relief assailing the validity of the impending imposition of value-added tax
(VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an
interest as regular users of tollways in stopping the BIR action. Additionally, Diaz claims
that he sponsored the approval of Republic Act 7716 (the 1994 Expanded VAT Law or
EVAT Law) and Republic Act 8424 (the 1997 National Internal Revenue Code or the NIRC)
at the House of Representatives. Timbol, on the other hand, claims that she served as
Assistant Secretary of the Department of Trade and Industry and consultant of the Toll
Regulatory Board (TRB) in the past administration.
Petitioners allege that the BIR attempted during the administration of President Gloria
Macapagal-Arroyo to impose VAT on toll fees. The imposition was deferred, however, in
view of the consistent opposition of Diaz and other sectors to such move. But, upon
President Benigno C. Aquino III’s assumption of office in 2010, the BIR revived the idea
and would impose the challenged tax on toll fees beginning August 16, 2010 unless
judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to
include toll fees within the meaning of "sale of services" that are subject to VAT; that a toll
fee is a "user’s tax," not a sale of services; that to impose VAT on toll fees would amount
to a tax on public service; and that, since VAT was never factored into the formula for
computing toll fees, its imposition would violate the non-impairment clause of the
constitution.
On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the
implementation of the VAT. The Court required the government, represented by
respondents Cesar V. Purisima, Secretary of the Department of Finance, and Kim S.
Jacinto-Henares, Commissioner of Internal Revenue, to comment on the petition within 10
days from notice. Later, the Court issued another resolution treating the petition as one
for prohibition.
On August 23, 2010 the Office of the Solicitor General filed the government’s
comment. The government avers that the NIRC imposes VAT on all kinds of services of
franchise grantees, including tollway operations, except where the law provides otherwise;
that the Court should seek the meaning and intent of the law from the words used in the
statute; and that the imposition of VAT on tollway operations has been the subject as early
as 2003 of several BIR rulings and circulars.
The government also argues that petitioners have no right to invoke the non-impairment
of contracts clause since they clearly have no personal interest in existing toll operating
agreements (TOAs) between the government and tollway operators. At any rate, the non-
impairment clause cannot limit the State’s sovereign taxing power which is generally read
into contracts.
Finally, the government contends that the non-inclusion of VAT in the parametric formula
for computing toll rates cannot exempt tollway operators from VAT. In any event, it cannot
be claimed that the rights of tollway operators to a reasonable rate of return will be
impaired by the VAT since this is imposed on top of the toll rate. Further, the imposition of
VAT on toll fees would have very minimal effect on motorists using the tollways.
In their reply to the government’s comment, petitioners point out that tollway operators
cannot be regarded as franchise grantees under the NIRC since they do not hold legislative
franchises. Further, the BIR intends to collect the VAT by rounding off the toll rate and
putting any excess collection in an escrow account. But this would be illegal since only the
Congress can modify VAT rates and authorize its disbursement. Finally, BIR Revenue
Memorandum Circular 63-2010 (BIR RMC 63-2010), which directs toll companies to record
an accumulated input VAT of zero balance in their books as of August 16, 2010,
contravenes Section 111 of the NIRC which grants entities that first become liable to VAT
a transitional input tax credit of 2% on beginning inventory. For this reason, the VAT on
toll fees cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for declaratory relief as one for
prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding VAT coverage by including
tollway operators and tollway operations in the terms "franchise grantees" and "sale of
services" under Section 108 of the Code; and
2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on
tax and not a tax on services; b) will impair the tollway operators’ right to a reasonable
return of investment under their TOAs; and c) is not administratively feasible and
cannot be implemented.
The Court’s Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as one for
prohibition rather than one for declaratory relief, the characterization that petitioners Diaz
and Timbol gave their action. The government has sought reconsideration of the Court’s
resolution, however, arguing that petitioners’ allegations clearly made out a case for
declaratory relief, an action over which the Court has no original jurisdiction. The
government adds, moreover, that the petition does not meet the requirements of Rule 65
for actions for prohibition since the BIR did not exercise judicial, quasi-judicial, or
ministerial functions when it sought to impose VAT on toll fees. Besides, petitioners Diaz
and Timbol has a plain, speedy, and adequate remedy in the ordinary course of law
against the BIR action in the form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one for prohibition
if the case has far-reaching implications and raises questions that need to be resolved for
the public good. The Court has also held that a petition for prohibition is a proper remedy
to prohibit or nullify acts of executive officials that amount to usurpation of legislative
authority.
Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would
impact, not only on the more than half a million motorists who use the tollways everyday,
but more so on the government’s effort to raise revenue for funding various projects and
for reducing budgetary deficits.
To dismiss the petition and resolve the issues later, after the challenged VAT has been
imposed, could cause more mischief both to the tax-paying public and the government. A
belated declaration of nullity of the BIR action would make any attempt to refund to the
motorists what they paid an administrative nightmare with no solution. Consequently, it is
not only the right, but the duty of the Court to take cognizance of and resolve the issues
that the petition raises.
Although the petition does not strictly comply with the requirements of Rule 65, the Court
has ample power to waive such technical requirements when the legal questions to be
resolved are of great importance to the public. The same may be said of the requirement
of locus standi which is a mere procedural requisite.
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied,
assessed, and collected, according to Section 108, on the gross receipts derived from the
sale or exchange of services as well as from the use or lease of properties. The third
paragraph of Section 108 defines "sale or exchange of services" as follows:
The phrase ‘sale or exchange of services’ means the performance of all kinds of services in
the Philippines for others for a fee, remuneration or consideration, including those
performed or rendered by construction and service contractors; stock, real estate,
commercial, customs and immigration brokers; lessors of property, whether personal or
real; warehousing services; lessors or distributors of cinematographic films; persons
engaged in milling, processing, manufacturing or repacking goods for others; proprietors,
operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers; dealers in securities; lending investors; transportation
contractors on their transport of goods or cargoes, including persons who transport goods
or cargoes for hire and other domestic common carriers by land relative to their transport
of goods or cargoes; common carriers by air and sea relative to their transport of
passengers, goods or cargoes from one place in the Philippines to another place in the
Philippines; sales of electricity by generation companies, transmission, and distribution
companies; services of franchise grantees of electric utilities, telephone and telegraph,
radio and television broadcasting and all other franchise grantees except those under
Section 119 of this Code and non-life insurance companies (except their crop insurances),
including surety, fidelity, indemnity and bonding companies; and similar services
regardless of whether or not the performance thereof calls for the exercise or use of the
physical or mental faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on "all kinds of services" rendered in
the Philippines for a fee, including those specified in the list. The enumeration of affected
services is not exclusive. By qualifying "services" with the words "all kinds," Congress has
given the term "services" an all-encompassing meaning. The listing of specific services are
intended to illustrate how pervasive and broad is the VAT’s reach rather than establish
concrete limits to its application. Thus, every activity that can be imagined as a form of
"service" rendered for a fee should be deemed included unless some provision of law
especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the
Toll Operation Decree establishes the legal basis for the services that tollway operators
render. Essentially, tollway operators construct, maintain, and operate expressways, also
called tollways, at the operators’ expense. Tollways serve as alternatives to regular public
highways that meander through populated areas and branch out to local roads. Traffic in
the regular public highways is for this reason slow-moving. In consideration for
constructing tollways at their expense, the operators are allowed to collect government-
approved fees from motorists using the tollways until such operators could fully recover
their expenses and earn reasonable returns from their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter’s
use of the tollway facilities over which the operator enjoys private proprietary rights that
its contract and the law recognize. In this sense, the tollway operator is no different from
the following service providers under Section 108 who allow others to use their properties
or facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses,
inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes, including persons
who transport goods or cargoes for hire and other domestic common carriers by land
relative to their transport of goods or cargoes; and
7. Common carriers by air and sea relative to their transport of passengers, goods or
cargoes from one place in the Philippines to another place in the Philippines.
It does not help petitioners’ cause that Section 108 subjects to VAT "all kinds of services"
rendered for a fee "regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties." This means that "services" to be
subject to VAT need not fall under the traditional concept of services, the personal or
professional kinds that require the use of human knowledge and skills.
And not only do tollway operators come under the broad term "all kinds of services," they
also come under the specific class described in Section 108 as "all other franchise
grantees" who are subject to VAT, "except those under Section 119 of this Code."
Tollway operators are franchise grantees and they do not belong to exceptions (the low-
income radio and/or television broadcasting companies with gross annual incomes of less
than ₱10 million and gas and water utilities) that Section 119 spares from the payment of
VAT. The word "franchise" broadly covers government grants of a special right to do an act
or series of acts of public concern.
Petitioners of course contend that tollway operators cannot be considered "franchise
grantees" under Section 108 since they do not hold legislative franchises. But nothing in
Section 108 indicates that the "franchise grantees" it speaks of are those who hold
legislative franchises. Petitioners give no reason, and the Court cannot surmise any, for
making a distinction between franchises granted by Congress and franchises granted by
some other government agency. The latter, properly constituted, may grant franchises.
Indeed, franchises conferred or granted by local authorities, as agents of the state,
constitute as much a legislative franchise as though the grant had been made by Congress
itself. The term "franchise" has been broadly construed as referring, not only to
authorizations that Congress directly issues in the form of a special law, but also to those
granted by administrative agencies to which the power to grant franchises has been
delegated by Congress.
Tollway operators are, owing to the nature and object of their business, "franchise
grantees." The construction, operation, and maintenance of toll facilities on public
improvements are activities of public consequence that necessarily require a special grant
of authority from the state. Indeed, Congress granted special franchise for the operation of
tollways to the Philippine National Construction Company, the former tollway
concessionaire for the North and South Luzon Expressways. Apart from Congress, tollway
franchises may also be granted by the TRB, pursuant to the exercise of its delegated
powers under P.D. 1112. The franchise in this case is evidenced by a "Toll Operation
Certificate."
Petitioners contend that the public nature of the services rendered by tollway operators
excludes such services from the term "sale of services" under Section 108 of the Code.
But, again, nothing in Section 108 supports this contention. The reverse is true. In
specifically including by way of example electric utilities, telephone, telegraph, and
broadcasting companies in its list of VAT-covered businesses, Section 108 opens other
companies rendering public service for a fee to the imposition of VAT. Businesses of a
public nature such as public utilities and the collection of tolls or charges for its use or
service is a franchise.
Nor can petitioners cite as binding on the Court statements made by
certain lawmakers in the course of congressional deliberations of the would-be law. As the
Court said in South African Airways v. Commissioner of Internal Revenue, "statements
made by individual members of Congress in the consideration of a bill do not necessarily
reflect the sense of that body and are, consequently, not controlling in the interpretation
of law." The congressional will is ultimately determined by the language of the law that the
lawmakers voted on. Consequently, the meaning and intention of the law must first be
sought "in the words of the statute itself, read and considered in their natural, ordinary,
commonly accepted and most obvious significations, according to good and approved
usage and without resorting to forced or subtle construction."
Two. Petitioners argue that a toll fee is a "user’s tax" and to impose VAT on toll fees is
tantamount to taxing a tax. Actually, petitioners base this argument on the following
discussion in Manila International Airport Authority (MIAA) v. Court of Appeals:
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil
Code, like "roads, canals, rivers, torrents, ports and bridges constructed by the State," are
owned by the State. The term "ports" includes seaports and airports. The MIAA Airport
Lands and Buildings constitute a "port" constructed by the State. Under Article 420 of the
Civil Code, the MIAA Airport Lands and Buildings are properties of public dominion and
thus owned by the State or the Republic of the Philippines.
x x x The operation by the government of a tollway does not change the character of the
road as one for public use. Someone must pay for the maintenance of the road, either the
public indirectly through the taxes they pay the government, or only those among the
public who actually use the road through the toll fees they pay upon using the road. The
tollway system is even a more efficient and equitable manner of taxing the public for the
maintenance of public roads.
The charging of fees to the public does not determine the character of the property
whether it is for public dominion or not. Article 420 of the Civil Code defines property of
public dominion as "one intended for public use." Even if the government collects toll fees,
the road is still "intended for public use" if anyone can use the road under the same terms
and conditions as the rest of the public. The charging of fees, the limitation on the kind of
vehicles that can use the road, the speed restrictions and other conditions for the use of
the road do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges
to airlines, constitute the bulk of the income that maintains the operations of MIAA. The
collection of such fees does not change the character of MIAA as an airport for public use.
Such fees are often termed user’s tax. This means taxing those among the public who
actually use a public facility instead of taxing all the public including those who never use
the particular public facility. A user’s tax is more equitable – a principle of taxation
mandated in the 1987 Constitution." (Underscoring supplied)
Petitioners assume that what the Court said above, equating terminal fees to a "user’s tax"
must also pertain to tollway fees. But the main issue in the MIAA case was whether or not
Parañaque City could sell airport lands and buildings under MIAA administration at public
auction to satisfy unpaid real estate taxes. Since local governments have no power to tax
the national government, the Court held that the City could not proceed with the auction
sale. MIAA forms part of the national government although not integrated in the
department framework." Thus, its airport lands and buildings are properties of public
dominion beyond the commerce of man under Article 420(1) of the Civil Code and could
not be sold at public auction.
As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not
to establish a rule that tollway fees are user’s tax, but to make the point that airport lands
and buildings are properties of public dominion and that the collection of terminal fees for
their use does not make them private properties. Tollway fees are not taxes. Indeed, they
are not assessed and collected by the BIR and do not go to the general coffers of the
government.
It would of course be another matter if Congress enacts a law imposing a user’s tax,
collectible from motorists, for the construction and maintenance of certain roadways. The
tax in such a case goes directly to the government for the replenishment of resources it
spends for the roadways. This is not the case here. What the government seeks to tax
here are fees collected from tollways that are constructed, maintained, and operated by
private tollway operators at their own expense under the build, operate, and transfer
scheme that the government has adopted for expressways. Except for a fraction given to
the government, the toll fees essentially end up as earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes
in any sense. A tax is imposed under the taxing power of the government principally for
the purpose of raising revenues to fund public expenditures. Toll fees, on the other hand,
are collected by private tollway operators as reimbursement for the costs and expenses
incurred in the construction, maintenance and operation of the tollways, as well as to
assure them a reasonable margin of income. Although toll fees are charged for the use of
public facilities, therefore, they are not government exactions that can be properly treated
as a tax. Taxes may be imposed only by the government under its sovereign authority, toll
fees may be demanded by either the government or private individuals or entities, as an
attribute of ownership.
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the
nature of VAT as an indirect tax. In indirect taxation, a distinction is made between the
liability for the tax and burden of the tax. The seller who is liable for the VAT may shift or
pass on the amount of VAT it paid on goods, properties or services to the buyer. In such a
case, what is transferred is not the seller’s liability but merely the burden of the VAT.
Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer
bears its burden since the amount of VAT paid by the former is added to the selling price.
Once shifted, the VAT ceases to be a tax and simply becomes part of the cost that the
buyer must pay in order to purchase the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the
tollway operator. Under Section 105 of the Code, VAT is imposed on any person who, in
the course of trade or business, sells or renders services for a fee. In other words, the
seller of services, who in this case is the tollway operator, is the person liable for VAT. The
latter merely shifts the burden of VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were
deemed as a "user’s tax." VAT is assessed against the tollway operator’s gross receipts
and not necessarily on the toll fees. Although the tollway operator may shift the VAT
burden to the tollway user, it will not make the latter directly liable for the VAT. The
shifted VAT burden simply becomes part of the toll fees that one has to pay in order to use
the tollways.
Three. Petitioner Timbol has no personality to invoke the non-impairment of contract
clause on behalf of private investors in the tollway projects. She will neither be prejudiced
by nor be affected by the alleged diminution in return of investments that may result from
the VAT imposition. She has no interest at all in the profits to be earned under the TOAs.
The interest in and right to recover investments solely belongs to the private tollway
investors.
Besides, her allegation that the private investors’ rate of recovery will be adversely
affected by imposing VAT on tollway operations is purely speculative. Equally
presumptuous is her assertion that a stipulation in the TOAs known as the Material
Adverse Grantor Action will be activated if VAT is thus imposed. The Court cannot rule on
matters that are manifestly conjectural. Neither can it prohibit the State from exercising
its sovereign taxing power based on uncertain, prophetic grounds.
Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT
make the VAT on tollway operations impractical and incapable of implementation. They
cite the fact that, in order to claim input VAT, the name, address and tax identification
number of the tollway user must be indicated in the VAT receipt or invoice. The manner by
which the BIR intends to implement the VAT – by rounding off the toll rate and putting any
excess collection in an escrow account – is also illegal, while the alternative of giving
"change" to thousands of motorists in order to meet the exact toll rate would be a
logistical nightmare. Thus, according to them, the VAT on tollway operations is not
administratively feasible.
Administrative feasibility is one of the canons of a sound tax system. It simply means that
the tax system should be capable of being effectively administered and enforced with the
least inconvenience to the taxpayer. Non-observance of the canon, however, will not
render a tax imposition invalid "except to the extent that specific constitutional or
statutory limitations are impaired." Thus, even if the imposition of VAT on tollway
operations may seem burdensome to implement, it is not necessarily invalid unless some
aspect of it is shown to violate any law or the Constitution.
Here, it remains to be seen how the taxing authority will actually implement the VAT on
tollway operations. Any declaration by the Court that the manner of its implementation is
illegal or unconstitutional would be premature. Although the transcript of the August 12,
2010 Senate hearing provides some clue as to how the BIR intends to go about it, the
facts pertaining to the matter are not sufficiently established for the Court to pass
judgment on. Besides, any concern about how the VAT on tollway operations will be
enforced must first be addressed to the BIR on whom the task of implementing tax laws
primarily and exclusively rests. The Court cannot preempt the BIR’s discretion on the
matter, absent any clear violation of law or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010
which directs toll companies to record an accumulated input VAT of zero balance in their
books as of August 16, 2010, the date when the VAT imposition was supposed to take
effect. The issuance allegedly violates Section 111(A) of the Code which grants first time
VAT payers a transitional input VAT of 2% on beginning inventory.
In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of
negotiations with tollway operators who have been assessed VAT as early as 2005, but
failed to charge VAT-inclusive toll fees which by now can no longer be collected. The
tollway operators agreed to waive the 2% transitional input VAT, in exchange for
cancellation of their past due VAT liabilities. Notably, the right to claim the 2% transitional
input VAT belongs to the tollway operators who have not questioned the circular’s validity.
They are thus the ones who have a right to challenge the circular in a direct and proper
action brought for the purpose.
Conclusion
In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or
expand the VAT law’s coverage when she sought to impose VAT on tollway operations.
Section 108(A) of the Code clearly states that services of all other franchise grantees are
subject to VAT, except as may be provided under Section 119 of the Code. Tollway
operators are not among the franchise grantees subject to franchise tax under the latter
provision. Neither are their services among the VAT-exempt transactions under Section
109 of the Code.
If the legislative intent was to exempt tollway operations from VAT, as petitioners so
strongly allege, then it would have been well for the law to clearly say so. Tax exemptions
must be justified by clear statutory grant and based on language in the law too plain to be
mistaken. But as the law is written, no such exemption obtains for tollway operators. The
Court is thus duty-bound to simply apply the law as it is found.
Lastly, the grant of tax exemption is a matter of legislative policy that is within the
exclusive prerogative of Congress. The Court’s role is to merely uphold this legislative
policy, as reflected first and foremost in the language of the tax statute. Thus, any
unwarranted burden that may be perceived to result from enforcing such policy must be
properly referred to Congress. The Court has no discretion on the matter but simply
applies the law.
The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716
or the Expanded Value-Added Tax law was passed. It is only now, however, that the
executive has earnestly pursued the VAT imposition against tollway operators. The
executive exercises exclusive discretion in matters pertaining to the implementation and
execution of tax laws. Consequently, the executive is more properly suited to deal with the
immediate and practical consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of
Internal Revenue’s motion for reconsideration of its August 24, 2010 resolution,
DISMISSES the petitioners Renato V. Diaz and Aurora Ma. F. Timbol’s petition for lack of
merit, and SETS ASIDE the Court’s temporary restraining order dated August 13, 2010.
SO ORDERED.
G.R. No. L-26521      December 28, 1968
EUSEBIO VILLANUEVA, ET AL., plaintiff-appellee,
vs.
CITY OF ILOILO, defendants-appellants.
Pelaez, Jalandoni and Jamir for plaintiff-appellees.
Assistant City Fiscal Vicente P. Gengos for defendant-appellant.
CASTRO, J.:
Appeal by the defendant City of Iloilo from the decision of the Court of First Instance of
Iloilo declaring illegal Ordinance 11, series of 1960, entitled, "An Ordinance Imposing
Municipal License Tax On Persons Engaged In The Business Of Operating Tenement
Houses," and ordering the City to refund to the plaintiffs-appellees the sums of collected
from them under the said ordinance.
On September 30, 1946 the municipal board of Iloilo City enacted Ordinance 86, imposing
license tax fees as follows: (1) tenement house (casa de vecindad), P25.00 annually; (2)
tenement house, partly or wholly engaged in or dedicated to business in the streets of J.M.
Basa, Iznart and Aldeguer, P24.00 per apartment; (3) tenement house, partly or wholly
engaged in business in any other streets, P12.00 per apartment. The validity and
constitutionality of this ordinance were challenged by the spouses Eusebio Villanueva and
Remedies Sian Villanueva, owners of four tenement houses containing 34 apartments. This
Court, in City of Iloilo vs. Remedios Sian Villanueva and Eusebio Villanueva, L-12695,
March 23, 1959, declared the ordinance ultra vires, "it not appearing that the power to tax
owners of tenement houses is one among those clearly and expressly granted to the City
of Iloilo by its Charter."
On January 15, 1960 the municipal board of Iloilo City, believing, obviously, that with the
passage of Republic Act 2264, otherwise known as the Local Autonomy Act, it had
acquired the authority or power to enact an ordinance similar to that previously declared
by this Court as ultra vires, enacted Ordinance 11, series of 1960, hereunder quoted in
full:
AN ORDINANCE IMPOSING MUNICIPAL LICENSE TAX ON PERSONS ENGAGED IN THE
BUSINESS OF OPERATING TENEMENT HOUSES
Be it ordained by the Municipal Board of the City of Iloilo, pursuant to the provisions of
Republic Act No. 2264, otherwise known as the Autonomy Law of Local Government,
that:
Section 1. — A municipal license tax is hereby imposed on tenement houses in
accordance with the schedule of payment herein provided.
Section 2. — Tenement house as contemplated in this ordinance shall mean any
building or dwelling for renting space divided into separate apartments or accessorias.
Section 3. — The municipal license tax provided in Section 1 hereof shall be as follows:
I. Tenement houses:
(a) Apartment house made of strong materials P20.00 per door p.a.
(b) Apartment house made of mixed materials P10.00 per door p.a.
II Rooming house of strong materials P10.00 per door p.a.
Rooming house of mixed materials P5.00 per door p.a.
III. Tenement house partly or wholly engaged in or dedicated to
business in the following streets: J.M. Basa, Iznart, Aldeguer,
Guanco and Ledesma from Plazoleto Gay to Valeria. St. P30.00 per door p.a.
IV. Tenement house partly or wholly engaged in or dedicated to
business in any other street P12.00 per door p.a.
V. Tenement houses at the streets surrounding the super P24.00 per door p.a.

market as soon as said place is declared commercial
Section 4. — All ordinances or parts thereof inconsistent herewith are hereby amended.
Section 5. — Any person found violating this ordinance shall be punished with a fine
note exceeding Two Hundred Pesos (P200.00) or an imprisonment of not more than six
(6) months or both at the discretion of the Court.
1. The pertinent provisions of the Local Autonomy Act are hereunder quoted:
Section 6 — This ordinance shall take effect upon approval.
ENACTED, January 15, 1960.
In Iloilo City, the appellees Eusebio Villanueva and Remedios S. Villanueva are owners of
five tenement houses, aggregately containing 43 apartments, while the other appellees
and the same Remedios S. Villanueva are owners of ten apartments. Each of the
appellees' apartments has a door leading to a street and is rented by either a Filipino or
Chinese merchant. The first floor is utilized as a store, while the second floor is used as a
dwelling of the owner of the store. Eusebio Villanueva owns, likewise, apartment buildings
for rent in Bacolod, Dumaguete City, Baguio City and Quezon City, which cities, according
to him, do not impose tenement or apartment taxes.
By virtue of the ordinance in question, the appellant City collected from spouses Eusebio
Villanueva and Remedios S. Villanueva, for the years 1960-1964, the sum of P5,824.30,
and from the appellees Pio Sian Melliza, Teresita S. Topacio, and Remedios S. Villanueva,
for the years 1960-1964, the sum of P1,317.00. Eusebio Villanueva has likewise been
paying real estate taxes on his property.
On July 11, 1962 and April 24, 1964, the plaintiffs-appellees filed a complaint, and an
amended complaint, respectively, against the City of Iloilo, in the aforementioned court,
praying that Ordinance 11, series of 1960, be declared "invalid for being beyond the
powers of the Municipal Council of the City of Iloilo to enact, and unconstitutional for being
violative of the rule as to uniformity of taxation and for depriving said plaintiffs of the
equal protection clause of the Constitution," and that the City be ordered to refund the
amounts collected from them under the said ordinance.
On March 30, 1966, the lower court rendered judgment declaring the ordinance illegal on
the grounds that (a) "Republic Act 2264 does not empower cities to impose apartment
taxes," (b) the same is "oppressive and unreasonable," for the reason that it penalizes
owners of tenement houses who fail to pay the tax, (c) it constitutes not only double
taxation, but treble at that and (d) it violates the rule of uniformity of taxation.
The issues posed in this appeal are:
1. Is Ordinance 11, series of 1960, of the City of Iloilo, illegal because it imposes
double taxation?
2. Is the City of Iloilo empowered by the Local Autonomy Act to impose tenement
taxes?
3. Is Ordinance 11, series of 1960, oppressive and unreasonable because it carries a
penal clause?
4. Does Ordinance 11, series of 1960, violate the rule of uniformity of taxation?
SEC. 2. Any provision of law to the contrary notwithstanding, all chartered cities,
municipalities and municipal districts shall have authority to impose municipal license
taxes or fees upon persons engaged in any occupation or business, or exercising
privileges in chartered cities, municipalities or municipal districts by requiring them to
secure licences at rates fixed by the municipal board or city council of the city, the
municipal council of the municipality, or the municipal district council of the municipal
district; to collect fees and charges for services rendered by the city, municipality or
municipal district; to regulate and impose reasonable fees for services rendered in
connection with any business, profession or occupation being conducted within the city,
municipality or municipal district and otherwise to levy for public purposes, just and
uniform taxes, licenses or fees; Provided, That municipalities and municipal districts
shall, in no case, impose any percentage tax on sales or other taxes in any form based
thereon nor impose taxes on articles subject to specific tax, except gasoline, under the
provisions of the National Internal Revenue Code; Provided, however, That no city,
municipality or municipal district may levy or impose any of the following:
(a) Residence tax;
(b) Documentary stamp tax;
(c) Taxes on the business of persons engaged in the printing and publication of any
newspaper, magazine, review or bulletin appearing at regular intervals and having fixed
prices for subscription and sale, and which is not published primarily for the purpose of
publishing advertisements;
(d) Taxes on persons operating waterworks, irrigation and other public utilities except
electric light, heat and power;
(e) Taxes on forest products and forest concessions;
(f) Taxes on estates, inheritance, gifts, legacies, and other acquisitions mortis causa;
(g) Taxes on income of any kind whatsoever;
 (h) Taxes or fees for the registration of motor vehicles and for the issuance of all kinds
of licenses or permits for the driving thereof;
(i) Customs duties registration, wharfage dues on wharves owned by the national
government, tonnage, and all other kinds of customs fees, charges and duties;
(j) Taxes of any kind on banks, insurance companies, and persons paying franchise
tax; and
(k) Taxes on premiums paid by owners of property who obtain insurance directly with
foreign insurance companies.
A tax ordinance shall go into effect on the fifteenth day after its passage, unless the
ordinance shall provide otherwise: Provided, however, That the Secretary of Finance
shall have authority to suspend the effectivity of any ordinance within one hundred and
twenty days after its passage, if, in his opinion, the tax or fee therein levied or imposed
is unjust, excessive, oppressive, or confiscatory, and when the said Secretary exercises
this authority the effectivity of such ordinance shall be suspended.
In such event, the municipal board or city council in the case of cities and the
municipal council or municipal district council in the case of municipalities or
municipal districts may appeal the decision of the Secretary of Finance to the court
during the pendency of which case the tax levied shall be considered as paid under
protest.
It is now settled that the aforequoted provisions of Republic Act 2264 confer on local
governments broad taxing authority which extends to almost "everything, excepting those
which are mentioned therein," provided that the tax so levied is "for public purposes, just
and uniform," and does not transgress any constitutional provision or is not repugnant to a
controlling statute. Thus, when a tax, levied under the authority of a city or municipal
ordinance, is not within the exceptions and limitations aforementioned, the same comes
within the ambit of the general rule, pursuant to the rules of expressio unius est exclusio
alterius, and exceptio firmat regulum in casibus non excepti.
Does the tax imposed by the ordinance in question fall within any of the exceptions
provided for in section 2 of the Local Autonomy Act? For this purpose, it is necessary to
determine the true nature of the tax. The appellees strongly maintain that it is a "property
tax" or "real estate tax," and not a "tax on  persons engaged in any occupation or business
or exercising privileges," or a license tax, or a privilege tax, or an excise tax. Indeed, the
title of the ordinance designates it as a "municipal license tax on persons engaged in
the business of operating tenement houses," while section 1 thereof states that a
"municipal license tax is hereby imposed on tenement houses." It is the phraseology of
section 1 on which the appellees base their contention that the tax involved is a real estate
tax which, according to them, makes the ordinance ultra vires as it imposes a levy "in
excess of the one per centum real estate tax allowable under Sec. 38 of the Iloilo City
Charter, Com. Act 158.".
It is our view, contrary to the appellees' contention, that the tax in question is not a real
estate tax. Obviously, the appellees confuse the tax with the real estate tax within the
meaning of the Assessment Law, which, although not applicable to the City of Iloilo, has
counterpart provisions in the Iloilo City Charter. A real estate tax is a direct tax on the
ownership of lands and buildings or other improvements thereon, not specially
exempted, and is payable regardless of whether the property is used or not, although the
value may vary in accordance with such factor. The tax is usually single or indivisible,
although the land and building or improvements erected thereon are assessed separately,
except when the land and building or improvements belong to separate owners. It is a
fixed proportion of the assessed value of the property taxed, and requires, therefore, the
intervention of assessors. It is collected or payable at appointed times, and it constitutes a
superior lien on and is enforceable against the property subject to such taxation, and not
by imprisonment of the owner.
The tax imposed by the ordinance in question does not possess the aforestated attributes.
It is not a tax on the land on which the tenement houses are erected, although both land
and tenement houses may belong to the same owner. The tax is not a fixed proportion of
the assessed value of the tenement houses, and does not require the intervention of
assessors or appraisers. It is not payable at a designated time or date, and is not
enforceable against the tenement houses either by sale or distraint. Clearly, therefore, the
tax in question is not a real estate tax.
"The spirit, rather than the letter, or an ordinance determines the construction thereof,
and the court looks less to its words and more to the context, subject-matter,
consequence and effect. Accordingly, what is within the spirit is within the ordinance
although it is not within the letter thereof, while that which is in the letter, although not
within the spirit, is not within the ordinance." It is within neither the letter nor the spirit of
the ordinance that an additional real estate tax is being imposed, otherwise the subject-
matter would have been not merely tenement houses. On the contrary, it is plain from the
context of the ordinance that the intention is to impose a license tax on the operation of
tenement houses, which is a form of business or calling. The ordinance, in both its title
and body, particularly sections 1 and 3 thereof, designates the tax imposed as a
"municipal license tax" which, by itself, means an "imposition or exaction on the right to
use or dispose of property, to pursue a business, occupation, or calling, or to exercise a
privilege."
"The character of a tax is not to be fixed by any isolated words that may beemployed in
the statute creating it, but such words must be taken in the connection in which they
are used and the true character is to be deduced from the nature and essence of the
subject."17 The subject-matter of the ordinance is tenement houses whose nature and
essence are expressly set forth in section 2 which defines a tenement house as "any
building or dwelling for renting space divided into separate apartments or accessorias."
The Supreme Court, in City of Iloilo vs. Remedios Sian Villanueva, et al., L-12695,
March 23, 1959, adopted the definition of a tenement house 18 as "any house or
building, or portion thereof, which is rented, leased, or hired out to be occupied, or is
occupied, as the home or residence of three families or more living independently of
each other and doing their cooking in the premises or by more than two families upon
any floor, so living and cooking, but having a common right in the halls, stairways,
 yards, water-closets, or privies, or some of them." Tenement houses, being necessarily
offered for rent or lease by their very nature and essence, therefore constitute
a distinct form of business or calling, similar to the hotel or motel business, or the
operation of lodging houses or boarding houses. This is precisely one of the reasons
why this Court, in the said case of City of Iloilo vs. Remedios Sian Villanueva, et
al., supra, declared Ordinance 86 ultra vires, because, although the municipal board of
Iloilo City is empowered, under sec. 21, par. j of its Charter, "to tax, fix the license fee
for, and regulate hotels, restaurants, refreshment parlors, cafes, lodging houses,
boarding houses, livery garages, public warehouses, pawnshops, theaters,
cinematographs," tenement houses, which constitute a different business
enterprise, are not mentioned in the aforestated section of the City Charter of Iloilo.
Thus, in the aforesaid case, this Court explicitly said:.
"And it not appearing that the power to tax owners of tenement houses is one among
those clearly and expressly granted to the City of Iloilo by its Charter, the exercise of
such power cannot be assumed and hence the ordinance in question is ultra
vires insofar as it taxes a tenement house such as those belonging to defendants." .
The lower court has interchangeably denominated the tax in question as a tenement tax or
an apartment tax. Called by either name, it is not among the exceptions listed in section 2
of the Local Autonomy Act. On the other hand, the imposition by the ordinance of a license
tax on persons engaged in the business of operating tenement houses finds authority in
section 2 of the Local Autonomy Act which provides that chartered cities have the
authority to impose municipal license taxes or fees upon persons engaged in any
occupation or business, or exercising privileges within their respective territories, and
"otherwise to levy for public purposes, just and uniform taxes, licenses, or fees." .
2. The trial court condemned the ordinance as constituting "not only double taxation but
treble at that," because "buildings pay real estate taxes and also income taxes as provided
for in Sec. 182 (A) (3) (s) of the National Internal Revenue Code, besides the tenement
tax under the said ordinance." Obviously, what the trial court refers to as "income taxes"
are the fixed taxes on business and occupation provided for in section 182, Title V, of the
National Internal Revenue Code, by virtue of which persons engaged in "leasing or renting
property, whether on their account as principals or as owners of rental property or
properties," are considered "real estate dealers" and are taxed according to the amount of
their annual income.
While it is true that the plaintiffs-appellees are taxable under the aforesaid provisions of
the National Internal Revenue Code as real estate dealers, and still taxable under the
ordinance in question, the argument against double taxation may not be invoked. The
same tax may be imposed by the national government as well as by the local government.
There is nothing inherently obnoxious in the exaction of license fees or taxes with respect
to the same occupation, calling or activity by both the State and a political subdivision
thereof.
The contention that the plaintiffs-appellees are doubly taxed because they are paying the
real estate taxes and the tenement tax imposed by the ordinance in question, is also
devoid of merit. It is a well-settled rule that a license tax may be levied upon a business or
occupation although the land or property used in connection therewith is subject to
property tax. The State may collect an ad valorem tax on property used in a calling, and at
the same time impose a license tax on that calling, the imposition of the latter kind of tax
being in no sensea double tax.
"In order to constitute double taxation in the objectionable or prohibited sense the
same property must be taxed twice when it should be taxed but once; both taxes must
be imposed on the same property or subject-matter, for the same purpose, by the
same State, Government, or taxing authority, within the same jurisdiction or taxing
district, during the same taxing period, and they must be the same kind or character of
tax." It has been shown that a real estate tax and the tenement tax imposed by the
ordinance, although imposed by the sametaxing authority, are not of the same kind or
character.
At all events, there is no constitutional prohibition against double taxation in the
Philippines. It is something not favored, but is permissible, provided some other
constitutional requirement is not thereby violated, such as the requirement that taxes
must be uniform."
3. The appellant City takes exception to the conclusion of the lower court that the
ordinance is not only oppressive because it "carries a penal clause of a fine of P200.00 or
imprisonment of 6 months or both, if the owner or owners of the tenement buildings
divided into apartments do not pay the tenement or apartment tax fixed in said
ordinance," but also unconstitutional as it subjects the owners of tenement houses to
criminal prosecution for non-payment of an obligation which is purely sum of money." The
lower court apparently had in mind, when it made the above ruling, the provision of the
Constitution that "no person shall be imprisoned for a debt or non-payment of a poll
tax." It is elementary, however, that "a tax is not a debt in the sense of an obligation
incurred by contract, express or implied, and therefore is not within the meaning of
constitutional or statutory provisions abolishing or prohibiting imprisonment for debt, and
a statute or ordinance which punishes the non-payment thereof by fine or imprisonment is
not, in conflict with that prohibition." Nor is the tax in question a poll tax, for the latter is a
tax of a fixed amount upon all persons, or upon all persons of a certain class, resident
within a specified territory, without regard to their property or the occupations in which
they may be engaged. Therefore, the tax in question is not oppressive in the manner the
lower court puts it. On the other hand, the charter of Iloilo City empowers its municipal
board to "fix penalties for violations of ordinances, which shall not exceed a fine of two
hundred pesos or six months' imprisonment, or both such fine and imprisonment for each
offense." In Punsalan, et al. vs. Mun. Board of Manila, supra, this Court overruled the
pronouncement of the lower court declaring illegal and void an ordinance imposing an
occupation tax on persons exercising various professions in the City of Manilabecause it
imposed a penalty of fine and imprisonment for its violation.
4. The trial court brands the ordinance as violative of the rule of uniformity of taxation.
 "... because while the owners of the other buildings only pay real estate tax and income legally levied by local governments were only those specifically authorized by law, and
taxes the ordinance imposes aside from these two taxes an apartment or tenement tax. their power to tax was construed in strictissimi juris.
It should be noted that in the assessment of real estate tax all parts of the building or
buildings are included so that the corresponding real estate tax could be properly ACCORDINGLY, the judgment a quo is reversed, and, the ordinance in questionbeing valid,
imposed. If aside from the real estate tax the owner or owners of the tenement the complaint is hereby dismissed. No pronouncement as to costs..
buildings should pay apartment taxes as required in the ordinance then it will violate
the rule of uniformity of taxation."
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez,Fernando and
Capistrano, JJ., concur..
Complementing the above ruling of the lower court, the appellees argue that there is "lack
of uniformity" and "relative inequality," because "only the taxpayers of the City of Iloilo
G.R. No. 125704 August 28, 1998
are singled out to pay taxes on their tenement houses, while citizens of other cities, where
their councils do not enact a similar tax ordinance, are permitted to escape such
imposition." PHILEX MINING CORPORATION, Petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, COURT OF APPEALS, and THE COURT OF TAX APPEALS, Respondents.
It is our view that both assertions are undeserving of extended attention. This Court has
already ruled that tenement houses constitute a distinct class of property. It has likewise ROMERO, J.:
ruled that "taxes are uniform and equal when imposed upon all property of the same class
or character within the taxing authority." The fact, therefore, that the owners of other Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on
classes of buildings in the City of Iloilo do not pay the taxes imposed by the ordinance in April 8, 1996 in CA-G.R. SP No. 36975 affirming the Court of Tax Appeals decision in CTA
question is no argument at all against uniformity and equality of the tax imposition. Case No. 4872 dated March 16, 1995 ordering it to pay the amount of P110,677,668.52 as
Neither is the rule of equality and uniformity violated by the fact that tenement taxesare excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992
not imposed in other cities, for the same rule does not require that taxes for the same plus 20% annual interest from August 6, 1994 until fully paid pursuant to Sections 248
purpose should be imposed in different territorial subdivisions at the same time. So long and 249 of the Tax Code of 1977.
as the burden of the tax falls equally and impartially on all owners or operators of
tenement houses similarly classified or situated, equality and uniformity of taxation is The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its
accomplished. The plaintiffs-appellees, as owners of tenement houses in the City of Iloilo, tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter
have not shown that the tax burden is not equally or uniformly distributed among them, to of 1992 in the total amount of P123,821.982.52 computed as follows:
overthrow the presumption that tax statutes are intended to operate uniformly and
equally.
PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE
5. The last important issue posed by the appellees is that since the ordinance in the case
at bar is a mere reproduction of Ordinance 86 of the City of Iloilo which was declared by TAX DUE
this Court in L-12695, supra, as ultra vires, the decision in that case should be accorded
the effect of res judicata in the present case or should constitute estoppel by judgment. To 2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91
dispose of this contention, it suffices to say that there is no identity of subject-matter in
that case andthis case because the subject-matter in L-12695 was an ordinance which 3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60
dealt not only with tenement houses but also warehouses, and the said ordinance was
enacted pursuant to the provisions of the City charter, while the ordinance in the case at
4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88
bar was enacted pursuant to the provisions of the Local Autonomy Act. There is likewise
no identity of cause of action in the two cases because the main issue in L-12695 was
whether the City of Iloilo had the power under its charter to impose the tax levied by ----- ----- ------ ------
Ordinance 11, series of 1960, under the Local Autonomy Act which took effect on June 19,
1959, and therefore was not available for consideration in the decision in L-12695 which 47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39
was promulgated on March 23, 1959. Moreover, under the provisions of section 2 of the
Local Autonomy Act, local governments may now tax any taxable subject-matter or object ----- ----- ------ ------
not included in the enumeration of matters removed from the taxing power of local
governments.Prior to the enactment of the Local Autonomy Act the taxes that could be
1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25
2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88
----- ----- ------ ------
43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13
----- ----- ------ ------
90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52
========= ========= ========= =========
In a letter dated August 20, 1992, Philex protested the demand for payment of the tax
liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid
for the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore
these claims for tax credit/refund should be applied against the tax liabilities, citing our
ruling in Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc.
In reply, the BIR, in a letter dated September 7, 1992, found no merit in Philex's position.
Since these pending claims have not yet been established or determined with certainty, it
follows that no legal compensation can take place. Hence, the BIR reiterated its demand
that Philex settle the amount plus interest within 30 days from the receipt of the letter.
In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund
against its excise tax obligation, Philex raised the issue to the Court of Tax Appeals on
November 6, 1992. In the course of the proceedings, the BIR issued Tax Credit Certificate
SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities of
Philex of P123,821,982.52; effectively lowered the latter's tax obligation to
P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining
balance of P110,677,688.52 plus interest, elucidating its reason, to wit:
Thus, for legal compensation to take place, both obligations must be liquidated and
demandable. "Liquidated" debts are those where the exact amount has already been
determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition, p.
259). In the instant case, the claims of the Petitioner for VAT refund is still pending
litigation, and still has to be determined by this Court (C.T.A. Case No. 4707). A fortiori,
the liquidated debt of the Petitioner to the government cannot, therefore, be set-off
against the unliquidated claim which Petitioner conceived to exist in its favor (see
Compañia General de Tabacos vs. French and Unson, No. 14027, November 8, 1918, 39
Phil. 34).
Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off on
compensation since claim for taxes is not a debt or contract." The dispositive portion of
the CTA decision provides:
In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and
Petitioner is hereby ORDERED to PAY the Respondent the amount of P110,677,668.52
representing excise tax liability for the period from the 2nd quarter of 1991 to the 2nd
quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to
Section 248 and 249 of the Tax Code, as amended.
Aggrieved with the decision, Philex appealed the case before the Court of Appeals
docketed as CA-GR. CV No. 36975. Nonetheless, on April 8, 1996, the Court of Appeals a
Affirmed the Court of Tax Appeals observation. The pertinent portion of which reads:
WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the
decision dated March 16, 1995 is AFFIRMED.
Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution
dated July 11, 1996.
However, a few days after the denial of its motion for reconsideration, Philex was able to
obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for
1992 and 1994, computed as follows:
Period Covered Tax Credit Date
By Claims For Certificate of
VAT refund/credit Number Issue Amount
1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01
1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61
1989 007732 11 July 1996 P37,322,799.19
1990-1991 007751 16 July 1996 P84,662,787.46
1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95
In view of the grant of its VAT input credit/refund, Philex now contends that the same
should, ipso jure, off-set its excise tax liabilities since both had already become "due and
demandable, as well as fully liquidated;" hence, legal compensation can properly take
place.
We see no merit in this contention.
In several instances prior to the instant case, we have already made the pronouncement
that taxes cannot be subject to compensation for the simple reason that the government
and the taxpayer are not creditors and debtors of each other. There is a material
distinction between a tax and debt. Debts are due to the Government in its corporate
capacity, while taxes are due to the Government in its sovereign capacity. We find no
cogent reason to deviate from the aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, we categorically
held that taxes cannot be subject to set-off or compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against the claims that
the taxpayer may have against the government. A person cannot refuse to pay a tax on
the ground that the government owes him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of a lawsuit against the
government.
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v.
Commission on Audit, which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not
such a debt, demand, contract or judgment as is allowed to be set-off.
Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-
Suyoc Mines Inc., wherein we ruled that a pending refund may be set off against an
existing tax liability even though the refund has not yet been approved by the
Commissioner, is no longer without any support in statutory law.
It is important to note, that the premise of our ruling in the aforementioned case was
anchored on Section 51 (d) of the National Revenue Code of 1939. However, when the
National Internal Revenue Code of 1977 was enacted, the same provision upon which
the Itogon-Suyoc pronouncement was based was omitted. Accordingly, the doctrine
enunciated in Itogon-Suyoc cannot be invoked by Philex.
Despite the foregoing rulings clearly adverse to Philex's position, it asserts that the
imposition of surcharge and interest for the non-payment of the excise taxes within the
time prescribed was unjustified. Philex posits the theory that it had no obligation to pay
the excise tax liabilities within the prescribed period since, after all, it still has pending
claims for VAT input credit/refund with BIR.
We fail to see the logic of Philex's claim for this is an outright disregard of the basic
principle in tax law that taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance. Evidently, to countenance Philex's whimsical
reason would render ineffective our tax collection system. Too simplistic, it finds no
support in law or in jurisprudence.
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground
that it has a pending tax claim for refund or credit against the government which has not
yet been granted. It must be noted that a distinguishing feature of a tax is that it is
compulsory rather than a matter of bargain. Hence, a tax does not depend upon the
consent of the taxpayer. If any taxpayer can defer the payment of taxes by raising the
defense that it still has a pending claim for refund or credit, this would adversely affect the
government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due
simply because he has a claim against the government or that the collection of the tax is
contingent on the result of the lawsuit it filed against the government. Moreover, Philex's
theory that would automatically apply its VAT input credit/refund against its tax liabilities
can easily give rise to confusion and abuse, depriving the government of authority over
the manner by which taxpayers credit and offset their tax liabilities.
Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the
government is immaterial for the imposition of charges and penalties prescribed under
Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory
and the BIR is not vested with any authority to waive the collection thereof. The same
cannot be condoned for flimsy reasons, similar to the one advanced by Philex in justifying
its non-payment of its tax liabilities.
Finally, Philex asserts that the BIR violated Section 106 (e) of the National Internal
Revenue Code of 1977, which requires the refund of input taxes within 60 days, when it
took five years for the latter to grant its tax claim for VAT input credit/refund.
In this regard, we agree with Philex. While there is no dispute that a claimant has the
burden of proof to establish the factual basis of his or her claim for tax credit or
refund, however, once the claimant has submitted all the required documents it is the
function of the BIR to assess these documents with purposeful dispatch. After all, since
taxpayers owe honestly to government it is but just that government render fair service to
the taxpayers.
In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of
these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more
diligent and judicious with their duty, it could have granted the refund earlier. We need
not remind the BIR that simple justice requires the speedy refund of wrongly-held
taxes. Fair dealing and nothing less, is expected by the taxpayer from the BIR in the
latter's discharge of its function. As aptly held in Roxas v. Court of Tax Appeals:
The power of taxation is sometimes called also the power to destroy. Therefore it should
be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It
must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays
the golden egg" And, in order to maintain the general public's trust and confidence in the
Government this power must be used justly and not treacherously.
Despite our concern with the lethargic manner by which the BIR handled Philex's tax
claim, it is a settled rule that in the performance of governmental function, the State is not
bound by the neglect of its agents and officers. Nowhere is this more true than in the field
of taxation. Again, while we understand Philex's predicament, it must be stressed that the
same is not a valid reason for the non-payment of its tax liabilities.
To be sure, this is not to state that the taxpayer is devoid of remedy against public
servants or employees, especially BIR examiners who, in investigating tax claims are seen
to drag their feet needlessly. First, if the BIR takes time in acting upon the taxpayer's
claim for refund, the latter can seek judicial remedy before the Court of Tax Appeals in the
manner prescribed by law. Second, if the inaction can be characterized as willful neglect of
duty, then recourse under the Civil Code and the Tax Code can also be availed of.
Art. 27 of the Civil Code provides:
Art. 27. Any person suffering material or moral loss because a public servant or employee
refuses or neglects, without just cause, to perform his official duty may file an action for
damages and other relief against the latter, without prejudice to any disciplinary action
that may be taken.
More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:
xxx xxx xxx
(c) Wilfully neglecting to give receipts, as by law required for any sum collected in the
performance of duty or  wilfully neglecting to perform, any other duties enjoyed by law.
Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay
in the performance of official duties. In no uncertain terms must we stress that every
public employee or servant must strive to render service to the people with utmost
diligence and efficiency. Insolence and delay have no place in government service. The
BIR, being the government collecting arm, must and should do no less. It simply cannot
be apathetic and laggard in rendering service to the taxpayer if it wishes to remain true to
its mission of hastening the country's development. We take judicial notice of the
taxpayer's generally negative perception towards the BIR; hence, it is up to the latter to
prove its detractors wrong.
In sum, while we can never condone the BIR's apparent callousness in performing its
duties, still, the same cannot justify Philex's non-payment of its tax liabilities. The adage
"no one should take the law into his own hands" should have guided Philex's action.
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The
assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED.
SO ORDERED.
G.R. No. 183553               November 12, 2012
DIAGEO PHILIPPINES, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
PERLAS-BERNABE, J.:
Before the Court is a Petition for Review under Rule 45 of the Rules of Court assailing the
Decision of the Court of Tax Appeals (CTA) En Banc dated July 2, 2008 in CTA EB No. 260.
The petition seeks the proper interpretation of Section 130(D) of the National Internal
Revenue Code of 1997 (Tax Code), particularly, on the question of who may claim the
refund or tax credit of excise taxes paid on goods actually exported.
The Factual Antecedents
Petitioner Diageo Philippines, Inc. (Diageo) is a domestic corporation organized and
existing under the laws of the Republic of Philippines and is primarily engaged in the
business of importing, exporting, manufacturing, marketing, distributing, buying and
selling, by wholesale, all kinds of beverages and liquors and in dealing in any material,
article, or thing required in connection with or incidental to its principal business. It is
registered with the Bureau of Internal Revenue (BIR) as an excise tax taxpayer, with Tax
Identification No. 000-161-879-000.
For the period November 1, 2003 to December 31, 2004, Diageo purchased raw alcohol
from its supplier for use in the manufacture of its beverage and liquor products. The
supplier imported the raw alcohol and paid the related excise taxes thereon before the
same were sold to the petitioner. The purchase price for the raw alcohol included, among
others, the excise taxes paid by the supplier in the total amount of P12,007,528.83.
Subsequently, Diageo exported its locally manufactured liquor products to Japan, Taiwan,
Turkey and Thailand and received the corresponding foreign currency proceeds of such
export sales.
Within two (2) years from the time the supplier paid the subject excise taxes, Diageo filed
with the BIR Large Taxpayer’s Audit and Investigation Division II applications for tax
refund/issuance of tax credit certificates corresponding to the excise taxes which its
supplier paid but passed on to it as part of the purchase price of the subject raw alcohol
invoking Section 130(D) of the Tax Code.
However, due to the failure of the respondent Commissioner of Internal Revenue (CIR) to
act upon Diageo’s claims, the latter was constrained to timely file a petition for review
before the CTA.
On December 27, 2005, the CIR filed its Answer assailing Diageo’s lack of legal personality
to institute the claim for refund because it was not the one that paid the alleged excise
taxes but its supplier. Subsequently, the CIR filed a motion to dismiss reiterating the same
issue.
The Ruling of the Court of Tax Appeals
On July 20, 2006, the CTA Second Division issued a Resolution dismissing the petition on
the ground that Diageo is not the real party in interest to file the claim for refund. Citing
Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue, the CTA Second
Division ruled that although an excise tax is an indirect tax which can be passed on to the
purchaser of goods, the liability therefor still remains with the manufacturer or seller,
hence, the right to claim refund is only available to it. Diageo filed a motion for
reconsideration which was subsequently denied in the Resolution dated January 8, 2007.
On February 13, 2007, Diageo filed a petition for review which the CTA En Banc in its
Decision dated July 2, 2008dismissed, thereby affirming the ruling of the CTA Second
Division.
Citing Rule 3, Section 2, of the Rules of Court, the CTA En Banc held that the right to a
refund or tax credit of the excise taxes under Section 130(D) of the Tax Code is available
only to persons enumerated in Sections 130(A)(1) and (2) of the same Code because they
are the ones primarily and legally liable to pay such taxes. As Diageo failed to prove that it
had actually paid the claimed excise taxes as manufacturer-exporter, the CTA En Banc
likewise did not find it as the proper party to claim a refund.Hence, the instant petition.
Diageo claims to be a real party in interest entitled to recover the subject refund or tax
credit because it stands to be benefited or injured by the judgment in this suit. It contends
that the tax privilege under Section 130(D) applies to every exporter provided the
conditions therein set forth are complied with, namely, (1) the goods are exported either
in their original state or as ingredients or part of any manufactured goods or products; (2)
the exporter submits proof of exportation; and (3) the exporter likewise submits proof of
receipt of the corresponding foreign exchange payment. It argues that Section 130(D)
does not limit the grant of the tax privilege to manufacturers/producers-exporters only but
to every exporter of locally manufactured/produced goods subject only to the conditions
aforementioned.
The Issue
The sole issue to be resolved is whether Diageo has the legal personality to file a claim for
refund or tax credit for the excise taxes paid by its supplier on the raw alcohol it
purchased and used in the manufacture of its exported goods.
Ruling of the Court
The petition is without merit.
Excise taxes partake of the nature of indirect taxes.
Diageo bases its claim for refund on Section 130 of the Tax Code which reads:
Section 130.Filing of Return and Payment of Excise Tax on Domestic Products. – xxx
(A) Persons Liable to File a Return, Filing of Return on Removal and Payment of Tax.-
(1) Persons Liable to File a Return. – Every person liable to pay excise tax imposed under
this Title shall file a separate return for each place of production setting forth, among
others, the description and quantity or volume of products to be removed, the applicable
tax base and the amount of tax due thereon; Provided however, That in the case of
indigenous petroleum, natural gas or liquefied natural gas, the excise tax shall be paid by
the first buyer, purchaser or transferee for local sale, barter or transfer, while the excise
tax on exported products shall be paid by the owner, lessee, concessionaire or operator of
the mining claim. Should domestic products be removed from the place of production
without the payment of the tax, the owner or person having possession thereof shall be
liable for the tax due thereon.
xxxx
(D) Credit for Excise tax on Goods Actually Exported.- When goods locally produced or
manufactured are removed and actually exported without returning to the Philippines,
whether so exported in their original state or as ingredients or parts of any manufactured
goods or products, any excise tax paid thereon shall be credited or refunded upon
submission of the proof of actual exportation and upon receipt of the corresponding
foreign exchange payment: Provided, That the excise tax on mineral products, except coal
and coke, imposed under Section 151 shall not be creditable or refundable even if the
mineral products are actually exported.
A reading of the foregoing provision, however, reveals that contrary to the position of
Diageo, the right to claim a refund or be credited with the excise taxes belongs to its
supplier. The phrase "any excise tax paid thereon shall be credited or refunded" requires
that the claimant be the same person who paid the excise tax. In Silkair (Singapore) Pte,
Ltd. v. Commissioner of Internal Revenue, the Court has categorically declared that "[t]he
proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the
person on whom the tax is imposed by law and who paid the same even if he shifts the
burden thereof to another."
Excise taxes imposed under Title VI of the Tax Code are taxes on property which are
imposed on "goods manufactured or produced in the Philippines for domestic sales or
consumption or for any other disposition and to things imported." Though excise taxes are
paid by the manufacturer or producer before removal of domestic products from the place
of production or by the owner or importer before the release of imported articles from the
customs house, the same partake of the nature of indirect taxes when it is passed on to
the subsequent purchaser.
Indirect taxes are defined as those wherein the liability for the payment of the tax falls on
one person but the burden thereof can be shifted to another person. When the seller
passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay
it, to the purchaser as part of the price of goods sold or services rendered.
Accordingly, when the excise taxes paid by the supplier were passed on to Diageo, what
was shifted is not the tax per se but an additional cost of the goods sold. Thus, the
supplier remains the statutory taxpayer even if Diageo, the purchaser, actually shoulders
the burden of tax.
The statutory taxpayer is the proper party to claim refund of indirect taxes.
As defined in Section 22(N) of the Tax Code, a taxpayer means any person subject to
tax.1âwphi1 He is, therefore, the person legally liable to file a return and pay the tax as
provided for in Section 130(A). As such, he is the person entitled to claim a refund.
Relevant isSection 204(C) of the Tax Code which provides:
Section 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit
Taxes.- The Commissioner may -
xxxx
(C) Credit or refund taxes erroneously or illegally received or penalties imposed without
authority, refund the value of internal revenue stamps when they are returned in good
condition by the purchaser, and, in his discretion, redeem or change unused stamps that
have been rendered unfit for use and refined their value upon proof of destruction. No
credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing
with the Commissioner a claim for credit or refund within two (2) years after the payment
of the tax or penalty: Provided, however, that a return filed showing an overpayment shall
be considered as a written claim for credit or refund. (Emphasis supplied)
Pursuant to the foregoing, the person entitled to claim a tax refund is the statutory
taxpayer or the person liable for or subject to tax. In the present case, it is not disputed
that the supplier of Diageo imported the subject raw alcohol, hence, it was the one directly
liable and obligated to file a return and pay the excise taxes under the Tax Code before
the goods or products are removed from the customs house. It is, therefore, the statutory
taxpayer as contemplated by law and remains to be so, even if it shifts the burden of tax
to Diageo. Consequently, the right to claim a refund, if legally allowed, belongs to it and
cannot be transferred to another, in this case Diageo, without any clear provision of law
allowing the same.
Unlike the law on Value Added Tax which allows the subsequent purchaser under the tax
credit method to refund or credit input taxes passed on to it by a supplier, no provision for
excise taxes exists granting non-statutory taxpayer like Diageo to claim a refund or credit.
It should also be stressed that when the excise taxes were included in the purchase price
of the goods sold to Diageo, the same was no longer in the nature of a tax but already
formed part of the cost of the goods.
Finally, statutes granting tax exemptions are construed stricissimi juris against the
taxpayer and liberally in favor of the taxing authority. A claim of tax exemption must be
clearly shown and based on language in law too plain to be mistaken. Unfortunately,
Diageo failed to meet the burden of proof that it is covered by the exemption granted
under Section 130(D) of the Tax Code.
In sum, Diageo, not being the party statutorily liable to pay excise taxes and having failed
to prove that it is covered by the exemption granted under Section 130(D) of the Tax
Code, is not the proper party to claim a refund or credit of the excise taxes paid on the
ingredients of its exported locally produced liquor.
WHIEREFORE, the petition is DENIED and the assailed CTA En Banc Decision in CTA EB No.
260 dated July 2, 2008 is AFFIRMED.
SO ORDERED.
G.R. No. 167679               July 22, 2015
ING BANK N.V., engaged in banking operations in the Philippines as ING BANK
N.V. MANILA BRANCH, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONEN, J.:
Qualified taxpayers with pending tax cases may still avail themselves of the tax amnesty
program under Republic Act No. 9480, otherwise known as the 2007 Tax Amnesty Act.
Thus, the provision in BIR Revenue Memorandum Circular No. 19-2008 excepting "[i]ssues
and cases which were ruled by any court (even without finality) in favor of the BIR prior to
amnesty availment of the taxpayer" from the benefits of the law is illegal, invalid, and null
and void. The duty to withhold the tax on compensation arises upon its accrual.
This is a Petition for Review appealing the April 5, 2005 Decision of the Court of Tax
Appeals En Banc, which in turn affirmed the August 9, 2004 Decision and November 12,
2004 Resolution of the Court of Tax Appeals Second Division. The August 9, 2004 Decision
held petitioner ING Bank, N.V. Manila Branch (ING Bank) liable for (a) deficiency
documentary stamp tax for the taxable years 1996 and 1997 in the total amount of
₱238,545,052.38 inclusive of surcharges; (b) deficiency onshore tax for the taxable year
1996 in the total amount of ₱997,333.89 inclusive of surcharges and interest; and (c)
deficiency withholding tax on compensation for the taxable years 1996 and 1997 in the
total amount of ₱564,542.67 inclusive of interest. The Resolution denied ING Bank’s Deficiency Documentary Stamp Tax
Motion for Reconsideration. 1996 (ST- 3,838,753.06 959,688.27 4,798,441.33
DST-96-
While this case was pending before this court, ING Bank filed a Manifestation and 0178-99
Motion stating that it availed itself of the government’s tax amnesty program under 1997 (ST- 1,569,990.18 392,497.55 1,962,487.73
Republic Act No. 9480 with respect to its deficiency documentary stamp tax and deficiency DST-97-
onshore tax liabilities. What is at issue now is whether ING Bank is entitled to the 0181-99)
immunities and privileges under Republic Act No. 9480, and whether the assessment for 1997 (ST- 186,997,288.84 46,749,322.21 233,746,611.05
deficiency withholding tax on compensation is proper. DST-97-
0180-99)
ING Bank, "the Philippine branch of Internationale Nederlanden Bank N.V., a foreign Compromise Penalty
banking corporation incorporated in the Netherlands[,] is duly authorized by the Bangko 1996 (ST- 1,000.00 1,000.00
Sentral ng Pilipinas to operate as a branch with full banking authority in the Philippines." CP-96-
0179-99)
On January 3, 2000, ING Bank received a Final Assessment Notice dated December 3, 1997 (ST- 1,000.00 1,000.00
1999. The Final Assessment Notice also contained the Details of Assessment and 13 CP-97-
Assessment Notices "issued by the Enforcement Service of the Bureau of Internal Revenue 0186-99)
through its Assistant Commissioner Percival T. Salazar[.]" The Final Assessment Notice Deficiency Final Tax
covered the following deficiency tax assessments for taxable years 1996 and 1997: 1997 (ST- 53,200.89 20,551.58 73,752.47
FT-97-
Particulars Basic Tax( ) Surcharge( ) Interest( ) Total( ) 0183-99)
Deficiency Income Tax
1996 (ST- 20,916,785.03 11,346,639.55 32,263,424.58 490,514,844.13 54,830,688.21 127,307,159.31 672,652,691.65
TOTALS
INC-96- ========== ============ ============ ============
0174-99) === = = =
1997 (ST- 133,533,114.54 45,730,518.68 179,263,633.22
INC-97- On February 2, 2000, ING Bank "paid the deficiency assessments for [the] 1996
0185-99) compromise penalty, 1997 deficiency documentary stamp tax and 1997 deficiency final tax
Deficiency Withholding Tax on Compensation in the respective amounts of ₱1,000.00, ₱1,000.00 and ₱75,013.25 [the original amount
1996 (ST- 1,027,267.20 602,288.17 1,629,555.37 of ₱73,752.47 plus additional interest]." ING Bank, however, "protested [on the same day]
WC-96- the remaining ten (10) deficiency tax assessments in the total amount of
0175-99) ₱672,576,939.18."
1997 (ST- 2,505,925.25 968,042.36 3,473,967.61
WC-97- ING Bank filed a Petition for Review before the Court of Tax Appeals on October 26, 2000.
0184-99) This case was docketed as C.T.A. Case No. 6187. The Petition was filed to seek "the
Deficiency Onshore Tax cancellation and withdrawal of the deficiency tax assessments for the years 1996 and
1996 (ST- 8,267,437.54 4,847,209.95 13,114,647.49 1997, including the alleged deficiency documentary stamp tax on special savings accounts,
OT-96- deficiency onshore tax, and deficiency withholding tax on compensation mentioned
0176-99) above."
Deficiency Branch Profit Remittance Tax
1996 (ST- 39,215,700.00 22,992,218[.]63 62,207,918.63 After trial, the Court of Tax Appeals Second Division rendered its Decision on August 9,
RT-96- 2004, with the following disposition:
0177-99)
1997 (ST- 92,587,381.60 6,729,180.18 40,799,690.39 140,116,252.17 WHEREFORE, the assessments for 1996 and 1997 deficiency income tax, 1996 and 1997
RT-97- deficiency branch profit remittance tax and 1997 deficiency documentary stamp tax on
0181-99) IBCLs exceeding five days are hereby CANCELLED and WITHDRAWN. However, the
 assessments for 1996 and 1997 deficiency withholding tax on compensation, 1996 On December 20, 2007, ING Bank filed a Manifestation and Motion informing this court
deficiency onshore tax and 1996 and 1997 deficiency documentary stamp tax on special that it had availed itself of the tax amnesty authorized and granted under Republic Act No.
savings accounts are hereby UPHELD in the following amounts: 9480 covering "all national internal revenue taxes for the taxable year 2005 and prior
years, with or without assessments duly issued therefor, that have remained unpaid as of
Particulars Basic Tax Surcharge Interest Total December 31, 2005[.]" ING Bank stated that it filed before the Bureau of Internal Revenue
its Notice of Availment of Tax Amnesty Under Republic Act No. 9480 on December 14,
2007, together with the following documents:
Deficiency Withholding Tax on Compensation
1996 (ST-WC-96-0175-99) P 105,939.86 P 61,445.11 P 167,384.97
(1) Statement of Assets, Liabilities and Net Worth (SALN) as of December 31, 2005
1997 (ST-WC-97-0184-99) 287,795.44 109,362.26 397,157.70 (original and amended declarations);
Deficiency Onshore Tax
1996 (ST-OT-96-0176-99) 544,991.20 P 136,247.80 316,094.89 997,333.89 (2) Tax Amnesty Return For Taxable Year 2005 and Prior Years (BIR Form No.
Deficiency Documentary Stamp Tax 2116); and (3) Tax Amnesty Payment Form (Acceptance of Payment Form) for Taxable
1996 (ST-DST-96-0178-99) 3,838,753.06 959,688.27 4,798,441.33 Year 2005 and Prior Years (BIR Form No. 0617) showing payment of the amnesty tax
1997 (ST-DST-97-0180-99) 186,997,288.84 46,749,322.21 233,746,611.05 in the amount of ₱500,000.00.
TOTALS ₱191,774,768.40 ₱47,845,258.28 P 486,902.26 ₱240,106,928.94
ING Bank prayed that this court issue a resolution taking note of its availment of the tax
Accordingly, petitioner is ORDERED to PAY the respondent the aggregate amount of amnesty, and confirming its entitlement to all the immunities and privileges under Section
₱240,106,928.94, plus 20% delinquency interest per annum from February 3, 2000 until 6 of Republic Act No. 9480, particularly with respect to the "payment of deficiency
fully paid, pursuant to Section 249(C) of the National Internal Revenue Code of 1997. documentary stamp taxes on its special savings accounts for the taxable years 1996 and
1997 and deficiency tax on onshore interest income derived under the foreign currency
deposit system for taxable year 1996[.]"
SO ORDERED. (Emphasis in the original)

Both the Commissioner of Internal Revenue and ING Bank filed their respective Motions
for Reconsideration. Both Motions were denied through the Second Division’s Resolution
dated November 12, 2004, as follows:
WHEREFORE, the respondent’s Motion for Partial Reconsideration and the petitioner’s
Motion for Reconsideration are hereby DENIED for lack of merit. The pronouncement
reached in the assailed decision is REITERATED.
SO ORDERED.
On December 8, 2004, ING Bank filed its appeal before the Court of Tax Appeals En
Banc. The Court of Tax Appeals En Banc denied due course to ING Bank’s Petition for
Review and dismissed the same for lack of merit in the Decision promulgated on April 5,
2005.
Hence, ING Bank filed its Petition for Review before this court. The Commissioner of
Internal Revenue filed its Comment on October 5, 2005 and ING Bank its Reply on
December 14, 2005. Pursuant to this court’s Resolution dated January 25, 2006, the
Commissioner of Internal Revenue filed its Manifestation and Motion on February 14,
2006, stating that it is adopting its Comment as its Memorandum, and ING Bank filed its
Memorandum on March 9, 2006.
Pursuant to this court’s Resolution dated January 23, 2008, the Commissioner of Internal
Revenue filed its Comment and ING Bank, its Reply.
Originally, ING Bank raised the following issues in its pleadings:
First, whether "[t]he Court of Tax Appeals En Banc erred in concluding that petitioner’s
Special Saving Accounts are subject to documentary stamp tax (DST) as certificates of
deposit under Section 180 of the 1977 Tax Code";
Second, whether "[t]he Court of Tax Appeals En Banc erred in holding petitioner liable for
deficiency onshore tax considering that under the 1977 Tax Code and the pertinent
revenue regulations, the obligation to pay the ten percent (10%) final tax on onshore
interest income rests on the payors-borrowers and not on petitioner as payee-lender"; and
Third, whether "[t]he Court of Tax Appeals En Banc erred in holding petitioner liable for
deficiency withholding tax on compensation for the accrued bonuses in the taxable years
1996 and 1997 considering that these were not distributed to petitioner’s officers and
employees during those taxable years, hence, were not yet subject to withholding tax."
However, ING Bank availed itself of the tax amnesty under Republic Act No. 9480, with
respect to its liabilities for deficiency documentary stamp taxes on its special savings
accounts for the taxable years 1996 and 1997 and deficiency tax on onshore interest
income under the foreign currency deposit system for taxable year 1996.
Consequently, the issues now for resolution are:
First, whether petitioner ING Bank may validly avail itself of the tax amnesty granted by
Republic Act No. 9480; and
Second, whether petitioner ING Bank is liable for deficiency withholding tax on accrued
bonuses for the taxable years 1996 and 1997.
Tax amnesty availment
Petitioner ING Bank asserts that it is "qualified to avail of the tax amnesty under Section 5
[of Republic Act No. 9480] and . . . not disqualified under Section 8 [of the same
law]." Respondent Commissioner of Internal Revenue, for its part, does not deny the
authenticity of the documents submitted by petitioner ING Bank or dispute the payment of
the amnesty tax. However, respondent Commissioner of Internal Revenue claims that
petitioner ING Bank is not qualified to avail itself of the tax amnesty granted under
Republic Act No. 9480 because both the Court of Tax Appeals En Banc and Second Division
ruled in its favor that confirmed the liability of petitioner ING Bank for deficiency
documentary stamp taxes, onshore taxes, and withholding taxes.
Respondent Commissioner of Internal Revenue asserts that BIR Revenue Memorandum
Circular No. 19-2008 specifically excludes "cases which were ruled by any court (even
without finality) in favor of the BIR prior to amnesty availment of the taxpayer" from the
coverage of the tax amnesty under Republic Act No. 9480. In any case, respondent
Commissioner of Internal Revenue argues that petitioner ING Bank’s availment of the tax
amnesty is still subject to its evaluation, that it is "empowered to exercise [its] sound
discretion . . . in the implementation of a tax amnesty in favor of a taxpayer," and
"petitioner cannot presume that its application . . . would be granted[.]" Accordingly,
respondent Commissioner of Internal Revenue prays that "petitioner [ING Bank’s] motion
be denied for lack of merit."
Petitioner ING Bank counters that BIR Revenue Memorandum Circular No. 19-2008 cannot
override Republic Act No. 9480 and its Implementing Rules and Regulations, which only
exclude from tax amnesty "tax cases subject of final and [executory] judgment by the
courts." Petitioner ING Bank asserts that its full compliance with the conditions prescribed
in Republic Act No. 9480 (the conditions being submission of the requisite documents and
payment of the amnesty tax), which respondent Commissioner of Internal Revenue does
not dispute, confirms that it is "qualified to avail itself, and has actually availed itself, of
the tax amnesty." It argues that there is nothing in the law that gives respondent
Commissioner of Internal Revenue the discretion to rescind or erase the legal effects of its
tax amnesty availment. Thus, the issue is no longer about whether "[it] is entitled to avail
itself of the tax amnesty[,]" but rather whether the effects of its tax amnesty availment
extend to the assessments of deficiency documentary stamp taxes on its special savings
accounts for 1996 and 1997 and deficiency tax on onshore interest income for 1996.
Petitioner ING Bank points out the Court of Tax Appeals’ ruling in Metropolitan Bank and
Trust Company v. Commissioner of Internal Revenue, to the effect that full compliance
with the requirements of the tax amnesty law extinguishes the tax deficiencies subject of
the amnesty availment. Thus, with its availment of the tax amnesty and full compliance
with all the conditions prescribed in the statute, petitioner ING Bank asserts that it is
entitled to all the immunities and privileges under Section 6 of Republic Act No. 9480.
Withholding tax on compensation
Petitioner ING Bank claims that it is not liable for withholding taxes on bonuses accruing to
its officers and employees during taxable years 1996 and 1997. It maintains its position
that the liability of the employer to withhold the tax does not arise until such bonus is
actually distributed. It cites Section 72 of the 1977 National Internal Revenue Code, which
states that "[e]very employer making payment of wages shall deduct and withhold upon
such wages a tax," and BIR Ruling No. 555-88 (November 23, 1988) declaring that "[t]he
withholding tax on the bonuses should be deducted upon the distribution of the same to
the officers and employees[.]" Since the supposed bonuses were not distributed to the
officers and employees in 1996 and 1997 but were distributed in the succeeding year
when the amounts of the bonuses were finally determined, petitioner ING Bank asserts
that its duty as employer to withhold the tax during these taxable years did not arise.
Petitioner ING Bank further argues that the Court of Tax Appeals’ discussion on Section
29(j) of the 1993 National Internal Revenue Code and Section 3 of Revenue Regulations
No. 8-90 is not applicable because the issue in this case "is not whether the accrued
bonuses should be allowed as deductions from petitioner’s taxable income but, rather,
whether the accrued bonuses are subject to withholding tax on compensation in the
respective years of accrual[.]" Respondent Commissioner of Internal Revenue counters
that petitioner ING Bank’s application of BIR Ruling No. 555-88 is misplaced because as
found by the Second Division of the Court of Tax Appeals, the factual milieu is different:
In that ruling, bonuses are determined and distributed in the succeeding year "[A]fter [sic]
the audit of each company is completed (on or before April 15 of the succeeding year)".
The withholding and remittance of income taxes were also made in the year they were
distributed to the employees. . . .
In petitioner’s case, bonuses were determined during the year but were distributed in the
succeeding year. No withholding of income tax was effected but the bonuses were claimed
as an expense for the year. . . .
Since the bonuses were not subjected to withholding tax during the year they were
claimed as an expense, the same should be disallowed pursuant to the above-quoted law.
Respondent Commissioner of Internal Revenue contends that petitioner ING Bank’s act of
"claim[ing] [the] subject bonuses as deductible expenses in its taxable income although it
has not yet withheld and remitted the [corresponding withholding] tax" to the Bureau of
Internal Revenue contravened Section 29(j) of the 1997 National Internal Revenue Code,
as amended. Respondent Commissioner of Internal Revenue claims that "subject bonuses
should also be disallowed as deductible expenses of petitioner."
 I of Internal Revenue (BIR) a notice and Tax Amnesty Return accompanied by a Statement
Taxpayers with pending tax cases may avail themselves of the tax amnesty program
under Republic Act No. 9480.
In CS Garment, Inc. v. Commissioner of Internal Revenue, this court has "definitively
declare[d] . . . the exception ‘[i]ssues and cases which were ruled by any court (even
without finality) in favor of the BIR prior to amnesty availment of the taxpayer’ under BIR
[Revenue Memorandum Circular No.] 19-2008 [as] invalid, [for going] beyond the scope
of the provisions of the 2007 Tax Amnesty Law." Thus:
[N]either the law nor the implementing rules state that a court ruling that has not attained
finality would preclude the availment of the benefits of the Tax Amnesty Law. Both R.A.
9480 and DOF Order No. 29-07 are quite precise in declaring that "[t]ax cases subject of
final and executory judgment by the courts" are the ones excepted from the benefits of
the law. In fact, we have already pointed out the erroneous interpretation of the law in
Philippine Banking Corporation (Now: Global Business Bank, Inc.) v. Commissioner of
Internal Revenue, viz:
The BIR’s inclusion of "issues and cases which were ruled by any court (even without
finality) in favor of the BIR prior to amnesty availment of the taxpayer" as one of the
exceptions in RMC 19-2008 is misplaced. RA 9480 is specifically clear that the exceptions
to the tax amnesty program include "tax cases subject of final and executory judgment by
the courts." The present case has not become final and executory when Metrobank availed
of the tax amnesty program. (Emphasis in the original, citation omitted)
Moreover, in the fairly recent case of LG Electronics Philippines, Inc. v. Commissioner of
Internal Revenue, we confirmed that only cases that involve final and executory
judgments are excluded from the tax amnesty program as explicitly provided under
Section 8 of Republic Act No. 9480.
Thus, petitioner ING Bank is not disqualified from availing itself of the tax amnesty under
the law during the pendency of its appeal before this court.
II
Petitioner ING Bank showed that it complied with the requirements set forth under
Republic Act No. 9480. Respondent Commissioner of Internal Revenue never questioned or
rebutted that petitioner ING Bank fully complied with the requirements for tax amnesty
under the law. Moreover, the contestability period of one (1) year from the time of
petitioner ING Bank’s availment of the tax amnesty law on December 14, 2007 lapsed.
Correspondingly, it is fully entitled to the immunities and privileges mentioned under
Section 6 of Republic Act No. 9480. This is clear from the following provisions:
SEC. 2. Availment of the Amnesty. - Any person, natural or juridical, who wishes to avail
himself of the tax amnesty authorized and granted under this Act shall file with the Bureau
of Assets, Liabilities and Networth (SALN) as of December 31, 2005, in such form asmay
be prescribed in the implementing rules and regulations (IRR) of this Act, and pay the
applicable amnesty tax within six months from the effectivity of the IRR.
....
SEC. 4. Presumption of Correctness of the SALN. - The SALN as of December 31, 2005
shall be considered as true and correct except where the amount of declared networth is
understated to the extent of thirty percent (30%) or more as may be established in
proceedings initiated by, or at the instance of, parties other than the BIR or its agents:
Provided, That such proceedings must be initiated within one year following the date of the
filing of the tax amnesty return and the SALN. Findings of or admission in congressional
hearings, other administrative agencies of government, and/or courts shall be admissible
to prove a thirty percent (30%) under-declaration. . . . .
SEC. 6. Immunities and Privileges. - Those who availed themselves of the tax amnesty
under Section 5 hereof, and have fully complied with all its conditions shall be entitled to
the following immunities and privileges:
a. The taxpayer shall be immune from the payment of taxes, as well as addition
thereto, and the appurtenant civil, criminal or administrative penalties under the
National Internal Revenue Code of 1997, as amended, arising from the failure to pay
any and all internal revenue taxes for taxable year 2005 and prior years.
b. The taxpayer’s Tax Amnesty Returns and the SALN as of December 31, 2005 shall
not be admissible as evidence in all proceedings that pertain to taxable year 2005 and
prior years, insofar as such proceedings relate to internal revenue taxes, before
judicial, quasi-judicial or administrative bodies in which he is a defendant or
respondent, and except for the purpose of ascertaining the networth beginning January
1, 2006, the same shall not be examined, inquired or looked into by any person or
government office. However, the taxpayer may use this as a defense, whenever
appropriate, in cases brought against him.
c. The books of accounts and other records of the taxpayer for the years covered by
the tax amnesty availed of shall not be examined: Provided, That the Commissioner of
Internal Revenue may authorize in writing the examination of the said books of
accounts and other records to verify the validity or correctness of a claim for any tax
refund, tax credit (other than refund or credit of taxes withheld on wages), tax
incentives, and/or exemptions under existing laws. (Emphasis supplied)
Contrary to respondent Commissioner of Internal Revenue’s stance, Republic Act No. 9480
confers no discretion on respondent Commissioner of Internal Revenue. The provisions of
the law are plain and simple. Unlike the power to compromise or abate a taxpayer’s
liability under Section 204 of the 1997 National Internal Revenue Code that is within the
discretion of respondent Commissioner of Internal Revenue, its authority under Republic
Act No. 9480 is limited to determining whether (a) the taxpayer is qualified to avail oneself
of the tax amnesty; (b) all the requirements for availment under the law were complied In a report dated January 29, 2002, the commissioned independent CPA noted the
with; and (c) the correct amount of amnesty tax was paid within the period prescribed by following pertinent findings: . . .
law. There is nothing in Republic Act No. 9480 which can be construed as authority for
respondent Commissioner of Internal Revenue to introduce exceptions and/or conditions
to the coverage of the law nor to disregard its provisions and substitute his own personal Findings and Observations 1997 1996
judgment. Supporting document is under the P 930,307.56 P 1,849,040.70
name of the employee
Republic Act No. 9480 provides a general grant of tax amnesty subject only to the cases
specifically excepted by it. A tax amnesty "partakes of an absolute. . . waiver by the Supporting document is not under 537,456.37 53,384.80
Government of its right to collect what otherwise would be due it[.]" The effect of a the name of the Bank nor its
qualified taxpayer’s submission of the required documents and the payment of the employees (addressee is
prescribed amnesty tax was immunity from payment of all national internal revenue taxes "cash"/blank)
as well as all administrative, civil, and criminal liabilities founded upon or arising from non- Supporting document is under the 7,039,976.36 1,630,292.14
payment of national internal revenue taxes for taxable year 2005 and prior taxable years. name of the Bank

Finally, the documentary stamp tax and onshore income tax are covered by the tax Supporting document is in the name 362,919.59 62,615.91
amnesty program under Republic Act No. 9480 and its Implementing Rules and of another person (other than the
Regulations. Moreover, as to the deficiency tax on onshore interest income, it is worthy to employee claiming the expense)
state that petitioner ING Bank was assessed by respondent Commissioner of Internal
Supporting document is not dated 13,404.00 423,199.07
Revenue, not as a withholding agent, but as one that was directly liable for the tax on
within the period (i.e., 1996 and
onshore interest income and failed to pay the same.
1997)

Considering petitioner ING Bank’s tax amnesty availment, there is no more issue Date/year of transaction is not 31,510.00 26,126.49
regarding its liability for deficiency documentary stamp taxes on its special savings Indicated
accounts for 1996 and 1997 and deficiency tax on onshore interest income for 1996,
Amount is not supported by 313,319.09 935,044.28
including surcharge and interest.
liquidation document(s)

III. TOTAL ₱9,228,892.97 ₱4,979,703.39

The Court of Tax Appeals En Banc affirmed the factual finding of the Second Division that Based on the above report, only the expenses in the name of petitioner’s employee and
accrued bonuses were recorded in petitioner ING Bank’s books as expenses for taxable those under its name can be given credence. Therefore, the following expenses are valid
years 1996 and 1997, although no withholding of tax was effected: expenses for income tax purposes:

With the preceding defense notwithstanding, petitioner now maintained that the portion of
the disallowed bonuses in the amounts of ₱3,879,407.85 and ₱9,004,402.63 for the   1996 1997
respective years 1996 and 1997, were actually payments for reimbursements of Supporting document is under the ₱1,849,040.70 P 930,307.56
representation, travel and entertainment expenses of its officers. These expenses name of the employee
according to petitioner are not considered compensation of employees and likewise not
subject to withholding tax. Supporting document is under the 1,630,292.14 7,039,976.36
name of the Bank
In order to prove that the discrepancy in the accrued bonuses represents reimbursement
TOTAL ₱3,479,332.84 P 7,970,283.92
of expenses, petitioner availed of the services of an independent CPA pursuant to CTA
Circular No. 1-95, as amended. As a consequence, Mr. Ruben Rubio was commissioned by
the court to verify the accuracy of petitioner’s position and to check its supporting Consequently, petitioner is still liable for the amounts of ₱167,384.97 and ₱397,157.70
documents. representing deficiency withholding taxes on compensation for the respective years of
1996 and 1997, computed as follows:
 1996 1997 ....

Total Disallowed Accrued Bonus
Less: Substantiated
Reimbursement of Expense
P 3,879,407.85 P 9,004,402.63 (j) Additional requirement for deductibility of certain payments. — Any amount paid or
payable which is otherwise deductible from, or taken into account in computing gross
income for which depreciation or amortization may be allowed under this section, shall be
allowed as a deduction only if it is shown that the tax required to be deducted and
3,479,332.84 7,970,283.92 withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with
this section, Sections 51 and 74 of this Code. (Emphasis supplied)

Unsubstantiated P 400,075.01 P 1,034,119.43

Section 3 of Revenue Regulations No. 8-90 (now Section 2.58.5 of Revenue Regulations
No. 2-98) provides:
Tax Rate 26.48% 27.83%

Section 3. Section 9 of Revenue Regulations No. 6-85 is hereby amended to read as

Basic Withholding Tax Due follows:

Thereon P 105,939.86 P 287,795.44

Interest (Sec. 249)
Deficiency Withholding Tax on
Section 9. (a) Requirement for deductibility. Any income payment, which is otherwise
deductible under Sections 29 and 54 of the Tax Code, as amended, shall be allowed as a
61,445.11 109,362.26
deduction from the payor’s gross income only if it is shown that the tax required to be
withheld has been paid to the Bureau of Internal Revenue in accordance with Sections 50,
51, 72, and 74 also of the Tax Code.(Emphasis supplied)

Compensation P 167,384.97 P 397,157.70 Under the National Internal Revenue Code, every form of compensation for personal
services is subject to income tax and, consequently, to withholding tax. The term
"compensation" means all remunerations paid for services performed by an employee for
An expense, whether the same is paid or payable, "shall be allowed as a deduction only if his or her employer, whether paid in cash or in kind, unless specifically excluded under
it is shown that the tax required to be deducted and withheld therefrom [was] paid to the Sections 32(B) and 78(A) of the 1997 National Internal Revenue Code. The name
Bureau of Internal Revenue[.]" designated to the remuneration for services is immaterial. Thus, "salaries, wages,
emoluments and honoraria, bonuses, allowances (such as transportation, representation,
entertainment, and the like), [taxable] fringe benefits[,] pensions and retirement pay, and
Section 29(j) of the 1977 National Internal Revenue Code (now Section 34(K) of the 1997
other income of a similar nature constitute compensation income" that is taxable.
National Internal Revenue Code) provides:

Section 29. Deductions from gross income. — In computing taxable income subject to tax
under Sec. 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: . . . .
....
(a) Expenses. — (1) Business expenses. — (A) In general. — All ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or business,
including a reasonable allowance for salaries or other compensation for personal services
actually rendered; travelling expenses while away from home in the pursuit of a trade,
profession or business, rentals or other payments required to be made as a condition to
the continued use or possession, for the purpose of the trade, profession or business, of
property to which the taxpayer has not taken or is not taking title or in which he has no
equity.
Hence, petitioner ING Bank is liable for the withholding tax on the bonuses since it claimed
the same as expenses in the year they were accrued.
Petitioner ING Bank insists, however, that the bonus accruals in 1996 and 1997 were not
yet subject to withholding tax because these bonuses were actually distributed only in the
succeeding years of their accrual (i.e., in 1997 and 1998) when the amounts were finally
determined.
Petitioner ING Bank’s contention is untenable.
The tax on compensation income is withheld at source under the creditable withholding tax
system wherein the tax withheld is intended to equal or at least approximate the tax due
of the payee on the said income. It was designed to enable (a) the individual taxpayer to
meet his or her income tax liability on compensation earned; and (b) the government to
collect at source the appropriate taxes on compensation. Taxes withheld are creditable in
nature. Thus, the employee is still required to file an income tax return to report the
income and/or pay the difference between the tax withheld and the tax due on the
income. For over withholding, the employee is refunded. Therefore, absolute or exact
accuracy in the determination of the amount of the compensation income is not a
prerequisite for the employer’s withholding obligation to arise.
It is true that the law and implementing regulations require the employer to deduct and
pay the income tax on compensation paid to its employees, either actually or
constructively.
Section 72 of the 1977 National Internal Revenue Code, as amended, states:
SECTION 72. Income tax collected at source. — (a) Requirement of withholding. — Every
employer making payment of wages shall deduct and withhold upon such wages a tax
determined in accordance with regulations to be prepared and promulgated by the Minister
of Finance. (Emphasis supplied)
Sections 7 and 14 of Revenue Regulations No. 6-82, as amended, relative to the
withholding of tax on compensation income, provide:
Section 7. Requirement of withholding.— Every employer or any person who pays or
controls the payment of compensation to an employee, whether resident citizen or alien,
non-resident citizen, or nonresident alien engaged in trade or business in the Philippines,
must withhold from such compensation paid, an amount computed in accordance with
these regulations.
I. Withholding of tax on compensation paid to resident employees. – (a)In general, every
employer making payment of compensation shall deduct and withhold from such
compensation income for the entire calendar year, a tax determined in accordance with
the prescribed new Withholding Tax Tables effective January 1, 1992 (ANNEX "A").
....
Section 14. Liability for the Tax.— The employer is required to collect the tax by deducting
and withholding the amount thereof from the employee’s compensation as when paid,
either actually or constructively. An employer is required to deduct and withhold the tax
notwithstanding that the compensation is paid in something other than money (for
example, compensation paid in stocks or bonds) and to pay the tax to the collecting
officer. If compensation is paid in property other than money, the employer should make
necessary arrangements to ensure that the amount of the tax required to be withheld is
available for payment to the collecting officer.
Every person required to deduct and withhold the tax from the compensation of an
employee is liable for the payment of such tax whether or not collected from the
employee. If, for example, the employer deducts less than the correct amount of tax, or if
he fails to deduct any part of the tax, he is nevertheless liable for the correct amount of
the tax. However, if the employer in violation of the provisions of Chapter XI, Title II of
the Tax Code fails to deduct and withhold and thereafter the employee pays the tax, it
shall no longer be collected from the employer. Such payment does not, however, operate
to relieve the employer from liability for penalties or additions to the tax for failure to
deduct and withhold within the time prescribed by law or regulations. The employer will
not be relieved of his liability for payment of the tax required to be withheld unless he can
show that the tax has been paid by the employee.
The amount of any tax withheld/collected by the employer is a special fund in trust for the
Government of the Philippines.
When the employer or other person required to deduct and withhold the tax under this
Chapter XI, Title II of the Tax Code has withheld and paid such tax to the Commissioner of
Internal Revenue or to any authorized collecting officer, then such employer or person
shall be relieved of any liability to any person. (Emphasis supplied)
Constructive payment of compensation is further defined in Revenue Regulations No. 6-
82:
Section 25. Applicability; constructive receipt of compensation.
—....
Compensation is constructively paid within the meaning of these regulations when it is
credited to the account of or set apart for an employee so that it may be drawn upon by
him at any time although not then actually reduced to possession. To constitute payment
in such a case, the compensation must be credited or set apart for the employee without
any substantial limitation or restriction as to the time or manner of payment or condition
upon which payment is to be made, and must be made available to him so that it may be
drawn upon at any time, and its payment brought within his control and disposition.
(Emphasis supplied)
On the other hand, it is also true that under Section 45 of the 1997 National Internal
Revenue Code (then Section 39 of the 1977 National Internal Revenue Code, as
amended), deductions from gross income are taken for the taxable year in which "paid or
accrued" or "paid or incurred" is dependent upon the method of accounting income and
expenses adopted by the taxpayer.
In Commissioner of Internal Revenue v. Isabela Cultural Corporation, this court explained
the accrual method of accounting, as against the cash method:
Accounting methods for tax purposes comprise a set of rules for determining when and
how to report income and deductions. . . .
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year
when they are incurred cannot be claimed as deduction from income for the succeeding
year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable
deductions for the current year but failed to do so cannot deduct the same for the next
year.
The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to
pay them, in opposition to actual receipt or payment, which characterizes the cash method
of accounting. Amounts of income accrue where the right to receive them become fixed,
where there is created an enforceable liability. Similarly, liabilities are accrued when fixed
and determinable in amount, without regard to indeterminacy merely of time of payment.
For a taxpayer using the accrual method, the determinative question is, when do the facts
present themselves in such a manner that the taxpayer must recognize income or
expense? The accrual of income and expense is permitted when the all-events test has
been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the
availability of the reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of
such income or liability be determined with reasonable accuracy. However, the test does
not demand that the amount of income or liability be known absolutely, only that a
taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy. The all-events test is satisfied where computation remains uncertain,
if its basis is unchangeable; the test is satisfied where a computation may be unknown,
but is not as much as unknowable, within the taxable year. The amount of liability does
not have to be determined exactly; it must be determined with "reasonable accuracy."
Accordingly, the term "reasonable accuracy" implies something less than anex act or
completely accurate amount. (Emphasis supplied, citations omitted)
Thus, if the taxpayer is on cash basis, he expense is deductible in the year it was paid,
regardless of the year it was incurred. If he is on the accrual method, he can deduct the
expense upon accrual thereof. An item that is reasonably ascertained as to amount and
acknowledged to be due has "accrued"; actual payment is not essential to constitute
"expense."
Stated otherwise, an expense is accrued and deducted for tax purposes when (1) the
obligation to pay is already fixed; (2) the amount can be determined with reasonable
accuracy; and (3) it is already knowable or the taxpayer can reasonably be expected to
have known at the closing of its books for the taxable year.
Section 29(j) of the 1977 National Internal Revenue Code (Section 34(K) of the 1997
National Internal Revenue Code) expressly requires, as a condition for deductibility of an
expense, that the tax required to be withheld on the amount paid or payable is shown to
have been remitted to the Bureau of Internal Revenue by the taxpayer constituted as a
withholding agent of the government.
The provision of Section 72 of the 1977 National Internal Revenue Code (Section 79 of the
1997 National Internal Revenue Code) regarding withholding on wages must be read and
construed in harmony with Section 29(j) of the 1977 National Internal Revenue Code
(Section 34(K) of the 1997 National Internal Revenue Code) on deductions from gross
income. This is in accordance with the rule on statutory construction that an interpretation
is to be sought which gives effect to the whole of the statute, such that every part is made
effective, harmonious, and sensible, if possible, and not defeated nor rendered
insignificant, meaningless, and nugatory. If we go by the theory of petitioner ING Bank,
then the condition imposed by Section 29(j) would have been rendered nugatory, or we
would in effect have created an exception to this mandatory requirement when there was
none in the law.
Reading together the two provisions, we hold that the obligation of the payor/employer to
deduct and withhold the related withholding tax arises at the time the income was paid or
accrued or recorded as an expense in the payor’s/employer’s books, whichever comes
first.
Petitioner ING Bank accrued or recorded the bonuses as deductible expense in its books.
Therefore, its obligation to withhold the related withholding tax due from the deductions
for accrued bonuses arose at the time of accrual and not at the time of actual payment.
In Filipinas Synthetic Fiber Corporation v. Court of Appeals, the issue was raised on
"whether the liability to withhold tax at source on income payments to non-resident
foreign corporations arises upon remittance of the amounts due to the foreign creditors or
upon accrual thereof." In resolving this issue, this court considered the nature of the
accounting method employed by the withholding agent, which was the accrual method,
wherein it was the right to receive income, and not the actual receipt, that determined
when to report the amount as part of the taxpayer’s gross income. It upheld the lower
court’s finding that there was already a definite liability on the part of petitioner at the
maturity of the loan contracts. Moreover, petitioner already deducted as business expense
the said amounts as interests due to the foreign corporation. Consequently, the taxpayer
could not claim that there was "no duty to withhold and remit income taxes as yet because
the loan contract was not yet due and demandable." Petitioner, "[h]aving ‘written-off’ the
amounts as business expense in its books, . . . had taken advantage of the benefit
provided in the law allowing for deductions from gross income."
Here, petitioner ING Bank already recognized a definite liability on its part considering that
it had deducted as business expense from its gross income the accrued bonuses due to its
employees. Underlying its accrual of the bonus expense was a reasonable expectation or
probability that the bonus would be achieved. In this sense, there was already a
constructive payment for income tax purposes as these accrued bonuses were already
allotted or made available to its officers and employees.
We note petitioner ING Bank's earlier claim before the Court of Tax Appeals that the bonus
accruals in 1996 and 1997 were disbursed in the following year of accrual, as
reimbursements of representation, travel, and entertainment expenses incurred by its
employees. This shows that the accrued bonuses in the amounts of ₱400,075.0l (1996)
and Pl,034,119.43 (1997) on which deficiency withholding taxes of Pl67,384.97 (1996)
and ₱397,157.70 (1997) were imposed, respectively, were already set apart or made
available to petitioner ING Bank's officers and employees. To avoid any tax issue,
petitioner ING Bank should likewise have recognized the withholding tax liabilities
associated with the bonuses at the time of accrual.
WHEREFORE, the Petition is PARTLY GRANTED. The assessments with respect to petitioner
ING Bank's liabilities for deficiency documentary stamp taxes on its special savings
accounts for the taxable years 1996 and 1997 and deficiency tax on onshore interest
income under the foreign currency deposit system for taxable year 1996 are hereby SET
ASIDE solely in view of petitioner ING Bank's availment of the tax amnesty program under
Republic Act No. 9480. The April 5, 2005 Decision of the Court of Tax Appeals En Banc,
which affirmed the August 9, 2004 Decision and November 12, 2004 Resolution of the
Court of Tax Appeals Second Division holding petitioner ING Bank liable for deficiency
withholding tax on compensation for the taxable years 1996 and 1997 in the total amount
of ₱564,542.67 inclusive of interest, is AFFIRMED.
SO ORDERED.
[G.R. No. L-9408. October 31, 1956.]
EMILIO Y. HILADO, Petitioner, v. THE COLLECTOR OF INTERNAL REVENUE and
THE COURT OF TAX APPEALS, Respondents
Emilio Y. Hilado in his own behalf.
Solicitor General Ambrosio Padilla, Assistant Solicitor General Ramon Avanceña
and Solicitor Jose P. Alejandrofor Respondents.
SYLLABUS
1. TAXATION; INCOME TAX; LOSSES DEDUCTIBLE; LOSS CONSISTING OF PORTION OF
WAR DAMAGE CLAIM. — Petitioner claimed in his 1951 income tax return the deduction of
the portion of his war damage claim which had been duly approved by the Philippine War
Damage Commission under the Philippine Rehabilitation Act for 1946 but which was not
paid and never has been paid pursuant to a notice upon him by said Commission that said
part of his claim will not be paid until the United States Congress should make further
appropriation. He claims that said amount represents a "business asset" within the
meaning of said Act which he is entitled to deduct as a loss in his return for 1951. Held:
Assuming that the said amount represents a portion of petitioner’s war damage claim
which was not paid, the same would not be deductible as a loss in 1951 because,
according to petitioner, the last installment he received from the War Damage
Commission, together with the notice that no further payment would be made on his
claim, was in 1950. In the circumstance, said amount would at most be a proper deduction
from his 1950 gross income. Neither can the said amount be considered as a "business
asset" which can be deducted as a loss in contemplation of law because its collections is
not enforceable as a matter of right, but is dependently merely upon the generosity and
magnanimity of the U.S. government.
2. ID.; LOSSES OF PROPERTY DURING THE WAR DEDUCTIBLE IN THE YEAR OF ACTUAL
DESTRUCTION. — It is true that under the authority of section 338 of the National Internal
Revenue Code the Secretary of Finance, in the exercise of his administrative powers,
caused the issuance of General Circular No. V-123 as in implementation or interpretative
regulation of section 30 of the same Code, under which the aforesaid amount was allowed
to be deducted "in the year the last installment was received with notice that no further
payment would be made until the United States Congress makes further appropriation
therefore," but such circular was found latter to be wrong and was revoked and the
Secretary of Finance, through the V-139 which not only revoked and declared void his
previous Circular No. V-123 but laid down the rule that losses of property which occurred
during the period of World War II from fires, storms, shipwreck or other casualty, or from
robbery, theft, or embezzlement are deductible for income tax purposes in the year of
actual destruction of said property. As the amount claimed does not represent a "business
asses" that may be deducted as a loss in 1951, it is clear that the loss of the
corresponding asset or property could only be deducted in the year it was actually
sustained. This is in line with section 30 (d) of the National Internal Revenue Code which
prescribes that losses sustained are allowance as deduction only within the corresponding
taxable year.
3. ID.; ID.; WRONG CONSTRUCTION OF LAW CANNOT GIVE RISE TO VESTED RIGHTS. —
General Circular No. V-123, having been issued on a wrong construction of the law, cannot
give rise to a vested right that can be invoked by a taxpayer. The reason is obvious; a
vested right cannot spring from a wrong interpretation.
4. ADMINISTRATIVE LAW; CONSTRUCTION OF STATUTES BY ADMINISTRATIVE OFFICIALS
NOT BINDING ON THEIR SUCCESSORS. — The Secretary of Finance is vested with
authority to revoke, repeal or abrogate the acts or previous rulings of his predecessors in
office because the construction of a statute by those who administer it is not binding on
their successors if thereafter the latter become satisfied that a different construction
should be given. [Association of Clerical Employees v. Brotherhood of Railway & Steamship
Clerks, 85 F. (2d) 152, 109 A.L. R., 345.]
5. INTERNATIONAL LAW; NATURE OF INTERNAL REVENUE LAWS; ENFORCEABLE DURING
ENEMY OCCUPATION. — Internal revenue laws are not political in nature and as such were
continued in force during the period of enemy occupation and in effect were actually
enforced by the occupation government. As a matter of fact, income tax returns were filed
during that period and income tax payments were affected and considered valid and legal.
Such tax laws are deemed to be the laws of the occupied territory and not of the
occupying enemy.
DECISION
BAUTISTA ANGELO, J.:
On March 31, 1952, petitioner filed his income tax return for 1951 with the treasurer of
Bacolod City wherein he claimed, among other things, the amount of P12,837.65 as a
deductible item from his gross income pursuant to General Circular No. V-123 issued by
the Collector of Internal Revenue. This circular was issued pursuant to certain rules laid
down by the Secretary of Finance On the basis of said return, an assessment notice
demanding the payment of P9,419 was sent to petitioner, who paid the tax in monthly
installments, the last payment having been made on January 2, 1953.
Meanwhile, on August 30, 1952, the Secretary of Finance, through the Collector of Internal
Revenue, issued General Circular No. V-139 which not only revoked and declared void his
general Circular No. V- 123 but laid down the rule that losses of property which occurred
during the period of World War II from fires, storms, shipwreck or other casualty, or from
robbery, theft, or embezzlement are deductible in the year of actual loss or destruction of
said property. As a consequence, the amount of P12,837.65 was disallowed as a deduction
from the gross income of petitioner for 1951 and the Collector of Internal Revenue
demanded from him the payment of the sum of P3,546 as deficiency income tax for said
year. When the petition for reconsideration filed by petitioner was denied, he filed a
petition for review with the Court of Tax Appeals. In due time, this court rendered decision
affirming the assessment made by respondent Collector of Internal Revenue. This is an
appeal from said decision.
It appears that petitioner claimed in his 1951 income tax return the deduction of the sum
of P12,837.65 as a loss consisting in a portion of his war damage claim which had been
duly approved by the Philippine War Damage Commission under the Philippine
Rehabilitation Act of 1946 but which was not paid and never has been paid pursuant to a
notice served upon him by said Commission that said part of his claim will not be paid until
the United States Congress should make further appropriation. He claims that said amount
of P12,837.65 represents a "business asset" within the meaning of said Act which he is
entitled to deduct as a loss in his return for 1951. This claim is untenable.
To begin with, assuming that said amount represents a portion of the 75% of his war
damage claim which was not paid, the same would not be deductible as a loss in 1951
because, according to petitioner, the last installment he received from the War Damage
Commission, together with the notice that no further payment would be made on his
claim, was in 1950. In the circumstance, said amount would at most be a proper deduction
from his 1950 gross income. In the second place, said amount cannot be considered as a
"business asset" which can be deducted as a loss in contemplation of law because its
collection is not enforceable as a matter of right, but is dependent merely upon the
generosity and magnanimity of the U. S. government. Note that, as of the end of 1945,
there was absolutely no law under which petitioner could claim compensation for the
destruction of his properties during the battle for the liberation of the Philippines. And
under the Philippine Rehabilitation Act of 1946, the payments of claims by the War
Damage Commission merely depended upon its discretion to be exercised in the manner it
may see fit, but the non-payment of which cannot give rise to any enforceable right, for,
under said Act, "All findings of the Commission concerning the amount of loss or damage
sustained, the cause of such loss or damage, the persons to whom compensation pursuant
to this title is payable, and the value of the property lost or damaged, shall be conclusive
and shall not be reviewable by any court". (section 113).
It is true that under the authority of section 338 of the National Internal Revenue Code the
Secretary of Finance, in the exercise of his administrative powers, caused the issuance of
General Circular No. V-123 as an implementation or interpretative regulation of section 30
of the same Code, under which the amount of P12,837.65 was allowed to be deducted "in
the year the last installment was received with notice that no further payment would be
made until the United States Congress makes further appropriation therefor", but such
circular was found later to be wrong and was revoked. Thus, when doubts arose as to the
soundness or validity of such circular, the Secretary of Finance sought the advice of the
Secretary of Justice who, accordingly, gave his opinion the pertinent portion of which
reads as follows:
"Yet it might be argued that war losses were not included as deductions for the year when
they were sustained because the taxpayers had prospects that losses would be
compensated for by the United States Government; that since only uncompensated losses
are deductible, they had to wait until after the determination by the Philippine War
Damage Commission as to the compensability in part or in whole of their war losses so
that they could exclude from the deductions those compensated for by the said
Commission; and that, of necessity, such determination could be complete only much later
than in the year when the loss was sustained. This contention falls to the ground when it is
considered that the Philippine Rehabilitation Act which authorized the payment by the
United States Government of war losses suffered by property owners in the Philippines
was passed only on August 30, 1946, long after the losses were sustained. It cannot be
said therefore, that the property owners had any conclusive assurance during the years
said losses were sustained, that the compensation was to be paid therefor. Whatever
assurance they could have had, could have been based only on some information less
reliable and less conclusive than the passage of the Act itself. Hence, as diligent property
owners, they should adopt the safest alternative by considering such losses deductible
during the year when they were sustained."
In line with this opinion, the Secretary of Finance, through the Collector of
Internal Revenue, issued General Circular No. V-139 which not only revoked and
declared void his previous Circular No. V — 123 but laid down the rule that losses
of property which occurred during the period of World War II from fires, storms,
shipwreck or other casualty, or from robbery, theft, or embezzlement are
deductible for income tax purposes in the year of actual destruction of said
property. We can hardly argue against this opinion. Since we have already stated
that the amount claimed does not represent a "business asset" that may be
deducted as a loss in 1951, it is clear that the loss of the corresponding asset or
property could only be deducted in the year it was actually sustained. This is in
line with section 30 (d) of the National Internal Revenue Code which prescribes
that losses sustained are allowable as deduction only within the corresponding
taxable year.
Petitioner’s contention that during the last war and as a consequence of enemy occupation
in the Philippines "there was no taxable year" within the meaning of our internal revenue
laws because during that period they were unenforceable, is without merit. It is well
known that our internal revenue laws are not political in nature and as such were
continued in force during the period of enemy occupation and in effect were actually
enforced by the occupation government. As a matter of fact, income tax returns were filed
during that period and income tax payment were effected and considered valid and legal.
Such tax laws are deemed to be the laws of the occupied territory and not of the
occupying enemy.
"Furthermore, it is a legal maxim, that excepting that of a political nature, ‘Law once
established continues until changed by some competent legislative power. It is not
changed merely by change of sovereignty.’ (Joseph H. Beale, Cases on Conflict of Laws,
III, Summary section 9, citing Commonwealth v. Chapman, 13 Met., 68.) As the same
author says, in his Treatise on the Conflict of Laws (Cambridge, 1916, section 131): ‘There
can be no break or interregnun in law. From the time the law comes into existence with
the first-felt corporateness of a primitive people it must last until the final disappearance
of human society. Once created, it persists until a change takes place, and when changed
it continues in such changed condition until the next change and so forever. Conquest or
colonization is impotent to bring law to an end; inspite of change of constitution, the law
continues unchanged until the new sovereign by legislative act creates a change.’ " (Co
Kim Chan v. Valdes Tan Keh and Dizon, 75 Phil., 113, 142-143.)
It is likewise contended that the power to pass upon the validity of General Circular No. V-
123 is vested exclusively in our courts in view of the principle of separation of powers and,
therefore, the Secretary of Finance acted without valid authority in revoking it and
approving in lieu thereof General Circular No. V-139. It cannot be denied, however, that
the Secretary of Finance is vested with authority to revoke, repeal or abrogate the acts or
previous rulings of his predecessor in office because the construction of a statute by those
administering it is not binding on their successors if thereafter the latter become satisfied
that a different construction should be given. [Association of Clerical Employees v.
Brotherhood of Railways & Steamship Clerks, 85 F. (2d) 152, 109 A.L.R., 345.]
"When the Commissioner determined in 1937 that the petitioner was not exempt and
never had been, it was his duty to determine, assess and collect the tax due for all years
not barred by the statutes of limitation. The conclusion reached and announced by his
predecessor in 1924 was not binding upon him. It did not exempt the petitioner from tax,
This same point was decided in this way in Stanford University Bookstore, 29 B. T. A.,
1280; affd., 83 Fed. (2d) 710." (Southern Maryland Agricultural Fair Association v.
Commissioner of Internal Revenue, 40 B. T. A., 549, 554).
With regard to the contention that General Circular No. V-139 cannot be given retroactive
effect because that would affect and obliterate the vested right acquired by petitioner
under the previous circular, suffice it to say that General Circular No. V-123, having been
issued on a wrong construction of the law, cannot give rise to a vested right that can be
invoked by a taxpayer. The reason is obvious: a vested right cannot spring from a wrong
interpretation. This is too clear to require elaboration.
"It seems too clear for serious argument that an administrative officer can not change a
law enacted by Congress. A regulation that is merely an interpretation of the statute when
once determined to have been erroneous becomes nullity. An erroneous construction of
the law by the Treasury Department or the collector of internal revenue does not preclude
or estop the government from collecting a tax which is legally due." (Ben Stocker, et al.,
12 B. T. A., 1351.)
"Art. 2254. — No vested or acquired right can arise from acts or omissions which are
against the law or which infringe upon the rights of others." (Article 2254, New Civil
Code.)
Wherefore, the decision appealed from is affirmed Without pronouncement as to costs.
G.R. No. 166408             October 6, 2008
QUEZON CITY and THE CITY TREASURER OF QUEZON CITY, petitioners,
vs.
ABS-CBN BROADCASTING CORPORATION, respondent.
DECISION
REYES, R.T., J.:
CLAIMS for tax exemption must be based on language in law too plain to be mistaken. It
cannot be made out of inference or implication.
The principle is relevant in this petition for review on certiorari of the Decision of the Court
of Appeals (CA) and that of the Regional Trial Court (RTC) ordering the refund and
declaring invalid the imposition and collection of local franchise tax by the City Treasurer
of Quezon City on ABS-CBN Broadcasting Corporation (ABS-CBN).
The Facts
Petitioner City Government of Quezon City is a local government unit duly organized and
existing by virtue of Republic Act (R.A.) No. 537, otherwise known as the Revised Charter
of Quezon City. Petitioner City Treasurer of Quezon City is primarily responsible for the
imposition and collection of taxes within the territorial jurisdiction of Quezon City.
Under Section 31, Article 13 of the Quezon City Revenue Code of 1993, a franchise tax
was imposed on businesses operating within its jurisdiction. The provision states:
Section 31. Imposition of Tax. - Any provision of special laws or grant of tax exemption
to the contrary notwithstanding, any person, corporation, partnership or association
enjoying a franchise whether issued by the national government or local government
and, doing business in Quezon City, shall pay a franchise tax at the rate of ten percent
(10%) of one percent (1%) for 1993-1994, twenty percent (20%) of one percent (1%)
for 1995, and thirty percent (30%) of one percent (1%) for 1996 and the succeeding
years thereafter, of gross receipts and sales derived from the operation of the business
in Quezon City during the preceding calendar year.
On May 3, 1995, ABS-CBN was granted the franchise to install and operate radio and
television broadcasting stations in the Philippines under R.A. No. 7966. 4 Section 8 of R.A.
No. 7966 provides the tax liabilities of ABS-CBN which reads:
 Section 8. Tax Provisions. - The grantee, its successors or assigns, shall be liable to pay On June 25, 1997, for failure to obtain any response from the Quezon City Treasurer, ABS-
the same taxes on their real estate, buildings and personal property, exclusive of this CBN filed a complaint before the RTC in Quezon City seeking the declaration of nullity of
franchise, as other persons or corporations are now hereafter may be required by law the imposition of local franchise tax by the City Government of Quezon City for being
to pay. In addition thereto, the grantee, its successors or assigns, shall pay a unconstitutional. It likewise prayed for the refund of local franchise tax in the amount of
franchise tax equivalent to three percent (3%) of all gross receipts of the Nineteen Million Nine Hundred Forty-Four Thousand Six Hundred Seventy-Two and 66/100
radio/television business transacted under this franchise by the grantee, its centavos (P19,944,672.66) broken down as follows:
successors or assigns, and the said percentage tax shall be in lieu of all taxes
on this franchise or earnings thereof; Provided that the grantee, its successors or
O.R. No. Date Amount Paid
assigns shall continue to be liable for income taxes under Title II of the National
Internal Revenue Code pursuant to Section 2 of Executive No. 72 unless the latter 2464274 7-18-95 P 1,489,977.28
enactment is amended or repealed, in which case the amendment or repeal shall be 2484651 10-20-95 1,489,977.28
applicable thereto. (Emphasis added) 2536134 1-22-96 2,880,975.65
8354906 1-23-97 8,621,470.83
ABS-CBN had been paying local franchise tax imposed by Quezon City. However, in view
0048756 1-23-97 2,731,135.81
of the above provision in R.A. No. 9766 that it "shall pay a franchise tax x x x in lieu of all
taxes," the corporation developed the opinion that it is not liable to pay the local franchise 0067352 4-03-97     2,731,135.81
tax imposed by Quezon City. Consequently, ABS-CBN paid under protest the local Total P19,944,672.66
franchise tax imposed by Quezon City on the dates, in the amounts and under the official
receipts as follows:
Quezon City argued that the "in lieu of all taxes" provision in R.A. No. 9766 could not have
been intended to prevail over a constitutional mandate which ensures the viability and
O.R. No. Date Amount Paid self-sufficiency of local government units. Further, that taxes collectible by and payable to
2464274 7/18/1995 P 1,489,977.28 the local government were distinct from taxes collectible by and payable to the national
government, considering that the Constitution specifically declared that the taxes imposed
2484651 10/20/1995 1,489,977.28
by local government units "shall accrue exclusively to the local governments." Lastly, the
2536134 1/22/1996 2,880,975.65 City contended that the exemption claimed by ABS-CBN under R.A. No. 7966 was
8354906 1/23/1997 8,621,470.83 withdrawn by Congress when the Local Government Code (LGC) was passed. Section 193
48756 1/23/1997 2,731,135.81 of the LGC provides:
67352 4/3/1997     2,731,135.81
Section 193. Withdrawal of Tax Exemption Privileges. - Unless otherwise provided in
Total P19,944,672.665
this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or
On January 29, 1997, ABS-CBN filed a written claim for refund for local franchise tax paid -controlled corporations, except local water districts, cooperatives duly registered
to Quezon City for 1996 and for the first quarter of 1997 in the total amount of Fourteen under R.A. 6938, non-stock and non-profit hospitals and educational institutions,
Million Two Hundred Thirty-Three Thousand Five Hundred Eighty-Two and 29/100 are hereby withdrawn upon the effectivity of this Code. (Emphasis added)
centavos (P14,233,582.29) broken down as follows:
On August 13, 1997, ABS-CBN filed a supplemental complaint adding to its claim for
O.R. No. Date Amount Paid refund the local franchise tax paid for the third quarter of 1997 in the amount of Two
Million Seven Hundred Thirty-One Thousand One Hundred Thirty-Five and 81/100 centavos
2536134 1-22-96 P 2,880,975.65
(P2,731,135.81) and of other amounts of local franchise tax as may have been and will be
8354906 1-23-97 8,621,470.83 paid by ABS-CBN until the resolution of the case.
0048756 1-23-97     2,731,135.81
Total P14,233,582.29 Quezon City insisted that the claim for refund must fail because of the absence of a prior
written claim for it.
In a letter dated March 3, 1997 to the Quezon City Treasurer, ABS-CBN reiterated its claim
for refund of local franchise taxes paid. RTC and CA Dispositions
On January 20, 1999, the RTC rendered judgment declaring as invalid the imposition on
and collection from ABS-CBN of local franchise tax paid pursuant to Quezon City Ordinance
No. SP-91, S-93, after the enactment of R.A. No. 7966, and ordered the refund of all
payments made. The dispositive portion of the RTC decision reads:
WHEREFORE, judgment is hereby rendered declaring the imposition on and collection
from plaintiff ABS-CBN BROADCASTING CORPORATION of local franchise taxes
pursuant to Quezon City Ordinance No. SP-91, S-93 after the enactment of Republic
Act No. 7966 to be invalid, and, accordingly, the Court hereby orders the defendants to
refund all its payments made after the effectivity of its legislative franchise on May 3,
1995.
SO ORDERED.
In its decision, the RTC ruled that the "in lieu of all taxes" provision contained in Section 8
of R.A. No. 7966 absolutely excused ABS-CBN from the payment of local franchise tax
imposed under Quezon City Ordinance No. SP-91, S-93. The intent of the legislature to
excuse ABS-CBN from payment of local franchise tax could be discerned from the usage of
the "in lieu of all taxes" provision and from the absence of any qualification except income
taxes. Had Congress intended to exclude taxes imposed from the exemption, it would
have expressly mentioned so in a fashion similar to the proviso on income taxes.
The RTC also based its ruling on the 1990 case of Province of Misamis Oriental v. Cagayan
Electric Power and Light Company, Inc. (CEPALCO). In said case, the exemption of
respondent electric company CEPALCO from payment of provincial franchise tax was
upheld on the ground that the franchise of CEPALCO was a special law, while the Local Tax
Code, on which the provincial ordinance imposing the local franchise tax was based, was a
general law. Further, it was held that whenever there is a conflict between two laws, one
special and particular and the other general, the special law must be taken as intended to
constitute an exception to the general act.
The RTC noted that the legislative franchise of ABS-CBN was granted years after the
effectivity of the LGC. Thus, it was unavoidable to conclude that Section 8 of R.A. No.
7966 was an exception since the legislature ought to be presumed to have enacted it with
the knowledge and awareness of the existence and prior enactment of Section 137 of the
LGC.
In addition, the RTC, again citing the case of Province of Misamis Oriental v. Cagayan
Electric Power and Light Company, Inc. (CEPALCO),12 ruled that the imposition of the local
franchise tax was an impairment of ABS-CBN's contract with the government. The
imposition of another franchise on the corporation by the local authority would constitute
an impairment of the former's charter, which is in the nature of a private contract between
it and the government.
As to the amounts to be refunded, the RTC rejected Quezon City's position that a written
claim for refund pursuant to Section 196 of the LGC was a condition sine qua non before
filing the case in court. The RTC ruled that although Fourteen Million Two Hundred Thirty-
Three Thousand Five Hundred Eighty-Two and 29/100 centavos (P14,233,582.29) was the
only amount stated in the letter to the Quezon City Treasurer claiming refund, ABS-CBN
should nonetheless be also refunded of all payments made after the effectivity of R.A. No.
7966. The inaction of the City Treasurer on the claim for refund of ABS-CBN legally
rendered any further claims for refund on the part of plaintiff absurd and futile in relation
to the succeeding payments.
The City of Quezon and its Treasurer filed a motion for reconsideration which was
subsequently denied by the RTC. Thus, appeal was made to the CA. On September 1,
2004, the CA dismissed the petition of Quezon City and its Treasurer. According to the
appellate court, the issues raised were purely legal questions cognizable only by the
Supreme Court. The CA ratiocinated:
For another, the issues which appellants submit for this Court's consideration are more
of legal query necessitating a legal opinion rather than a call for adjudication on the
matter in dispute.
xxxx
The first issue has earlier been categorized in Province of Misamis Oriental v. Cagayan
Electric and Power Co., Inc. to be a legal one. There is no more argument to this.
The next issue although it may need the reexamination of the pertinent provisions of
the local franchise and the legislative franchise given to appellee, also needs no
evaluation of facts. It suffices that there may be a conflict which may need to be
reconciled, without regard to the factual backdrop of the case.
The last issue deals with a legal question, because whether or not there is a prior
written claim for refund is no longer in dispute. Rather, the question revolves on
whether the said requirement may be dispensed with, which obviously is not a factual
issue.
On September 23, 2004, petitioner moved for reconsideration. The motion was, however,
denied by the CA in its Resolution dated December 16, 2004. Hence, the present recourse.
Issues
Petitioner submits the following issues for resolution:
I.
Whether or not the phrase "in lieu of all taxes" indicated in the franchise of the
respondent appellee (Section 8 of RA 7966) serves to exempt it from the payment of
the local franchise tax imposed by the petitioners-appellants.
 II.
Whether or not the petitioners-appellants raised factual and legal issues before the
Honorable Court of Appeals.
Our Ruling
The second issue, being procedural in nature, shall be dealt with immediately. But there
are other resultant issues linked to the first.
I. The dismissal by the CA of petitioners' appeal is in order because it raised
purely legal issues, namely:
1) Whether appellee, whose franchise expressly provides that its payment of franchise
tax shall be in lieu of all taxes in this franchise or earnings thereof, is absolutely
excused from paying the franchise tax imposed by appellants;
2) Whether appellants' imposition of local franchise tax is a violation of appellee's
legislative franchise; and
3) Whether one can do away with the requirement on prior written claim for refund.
Obviously, these are purely legal questions, cognizable by this Court, to the exclusion of
all other courts. There is a question of law when the doubt or difference arises as to what
the law is pertaining to a certain state of facts.
Section 2, Rule 50 of the Rules of Court provides that an appeal taken to the CA under
Rule 41 raising only questions of law is erroneous and shall be dismissed, issues of pure
law not being within its jurisdiction. Consequently, the dismissal by the CA of petitioners'
appeal was in order.
In the recent case of Sevilleno v. Carilo, this Court ruled that the dismissal of the appeal of
petitioner was valid, considering the issues raised there were pure questions of law, viz.:
Petitioners interposed an appeal to the Court of Appeals but it was dismissed for being
the wrong mode of appeal. The appellate court held that since the issue being raised is
whether the RTC has jurisdiction over the subject matter of the case, which is a
question of law, the appeal should have been elevated to the Supreme Court under
Rule 45 of the 1997 Rules of Civil Procedure, as amended. Section 2, Rule 41 of the
same Rules which governs appeals from judgments and final orders of the RTC to the
Court of Appeals, provides:
SEC. 2. Modes of appeal. -
(a) Ordinary appeal. - The appeal to the Court of Appeals in cases decided by the
Regional Trial Court in the exercise of its original jurisdiction shall be taken by filing
a notice of appeal with the court which rendered the judgment or final order
appealed from and serving a copy thereof upon the adverse party. No record on
appeal shall be required except in special proceedings and other cases of multiple or
separate appeals where the law or these Rules so require. In such cases, the record
on appeal shall be filed and served in like manner.
(b) Petition for review. - The appeal to the Court of Appeals in cases decided by the
Regional Trial Court in the exercise of its appellate jurisdiction shall be by petition
for review in accordance with Rule 42.
(c) Appeal by certiorari. - In all cases where only questions of law are raised or
involved, the appeal shall be to the Supreme Court by petition for review on
certiorari in accordance with Rule 45.
In Macawili Gold Mining and Development Co., Inc. v. Court of Appeals, we summarized
the rule on appeals as follows:
(1) In all cases decided by the RTC in the exercise of its original jurisdiction, appeal
may be made to the Court of Appeals by mere notice of appeal where the appellant
raises questions of fact or mixed questions of fact and law;
(2) In all cases decided by the RTC in the exercise of its original jurisdiction where
the appellant raises only questions of law, the appeal must be taken to the Supreme
Court on a petition for review on certiorari under Rule 45;
(3) All appeals from judgments rendered by the RTC in the exercise of its appellate
jurisdiction, regardless of whether the appellant raises questions of fact, questions
of law, or mixed questions of fact and law, shall be brought to the Court of Appeals
by filing a petition for review under Rule 42.
It is not disputed that the issue brought by petitioners to the Court of Appeals involves
the jurisdiction of the RTC over the subject matter of the case. We have a long standing
rule that a court's jurisdiction over the subject matter of an action is conferred only by
the Constitution or by statute. Otherwise put, jurisdiction of a court over the subject
matter of the action is a matter of law. Consequently, issues which deal with the
jurisdiction of a court over the subject matter of a case are pure questions of law. As
petitioners' appeal solely involves a question of law, they should have directly taken
their appeal to this Court by filing a petition for review on certiorari under Rule 45, not
an ordinary appeal with the Court of Appeals under Rule 41. Clearly, the appellate
court did not err in holding that petitioners pursued the wrong mode of appeal.
Indeed, the Court of Appeals did not err in dismissing petitioners' appeal. Section 2,
Rule 50 of the same Rules provides that an appeal from the RTC to the Court of
Appeals raising only questions of law shall be dismissed; and that an appeal
 erroneously taken to the Court of Appeals shall be dismissed outright, x x x. (Emphasis
added)
However, to serve the demands of substantial justice and equity, the Court opts to relax
procedural rules and rule upon on the merits of the case. In Ong Lim Sing Jr. v. FEB
Leasing and Finance Corporation, this Court stated:
Courts have the prerogative to relax procedural rules of even the most mandatory
character, mindful of the duty to reconcile both the need to speedily put an end to
litigation and the parties' right to due process. In numerous cases, this Court has
allowed liberal construction of the rules when to do so would serve the demands of
substantial justice and equity. In Aguam v. Court of Appeals, the Court explained:
"The court has the discretion to dismiss or not to dismiss an appellant's appeal. It is
a power conferred on the court, not a duty. The "discretion must be a sound one, to
be exercised in accordance with the tenets of justice and fair play, having in mind
the circumstances obtaining in each case." Technicalities, however, must be
avoided. The law abhors technicalities that impede the cause of justice. The court's
primary duty is to render or dispense justice. "A litigation is not a game of
technicalities." "Lawsuits unlike duels are not to be won by a rapier's thrust.
Technicality, when it deserts its proper office as an aid to justice and becomes its
great hindrance and chief enemy, deserves scant consideration from courts."
Litigations must be decided on their merits and not on technicality. Every party
litigant must be afforded the amplest opportunity for the proper and just
determination of his cause, free from the unacceptable plea of technicalities. Thus,
dismissal of appeals purely on technical grounds is frowned upon where the policy of
the court is to encourage hearings of appeals on their merits and the rules of
procedure ought not to be applied in a very rigid, technical sense; rules of procedure
are used only to help secure, not override substantial justice. It is a far better and
more prudent course of action for the court to excuse a technical lapse and afford
the parties a review of the case on appeal to attain the ends of justice rather than
dispose of the case on technicality and cause a grave injustice to the parties, giving
a false impression of speedy disposal of cases while actually resulting in more delay,
if not a miscarriage of justice.
II. The "in lieu of all taxes" provision in its franchise does not exempt ABS-CBN
from payment of local franchise tax.
A. The present controversy essentially boils down to a dispute between the inherent taxing
power of Congress and the delegated authority to tax of local governments under the 1987
Constitution and effected under the LGC of 1991.
The power of the local government of Quezon City to impose franchise tax is based on
Section 151 in relation to Section 137 of the LGC, to wit:
Section 137. Franchise Tax. - Notwithstanding any exemption granted by any law or
other special law, the province may impose a tax on businesses enjoying a franchise, at
the rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual
receipts for the preceding calendar year based on the incoming receipt, or realized
within its territorial jurisdiction. x x x
xxxx
Section 151. Scope of Taxing Powers. - Except as otherwise provided in this Code, the
city may levy the taxes, fees and charges which the province or municipality may
impose: Provided, however, That the taxes, fees and charges levied and collected by
highly urbanized and component cities shall accrue to them and distributed in
accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for
the province or municipality by not more than fifty percent (50%) except the rates of
professional and amusement taxes. (Emphasis supplied)
Such taxing power by the local government, however, is limited in the sense that Congress
can enact legislation granting exemptions. This principle was upheld in City Government of
Quezon City, et al. v. Bayan Telecommunications, Inc. Said this Court:
This thus raises the question of whether or not the City's Revenue Code pursuant to
which the city treasurer of Quezon City levied real property taxes against Bayantel's
real properties located within the City effectively withdrew the tax exemption enjoyed
by Bayantel under its franchise, as amended.
Bayantel answers the poser in the negative arguing that once again it is only "liable to
pay the same taxes, as any other persons or corporations on all its real or personal
properties, exclusive of its franchise."
Bayantel's posture is well-taken. While the system of local government taxation has
changed with the onset of the 1987 Constitution, the power of local government units
to tax is still limited. As we explained in Mactan Cebu International Airport Authority:
"The power to tax is primarily vested in the Congress; however, in our jurisdiction, it
may be exercised by local legislative bodies, no longer merely be virtue of a valid
delegation as before, but pursuant to direct authority conferred by Section 5, Article
X of the Constitution. Under the latter, the exercise of the power may be subject to
such guidelines and limitations as the Congress may provide which, however, must
be consistent with the basic policy of local autonomy. x x x"
Clearly then, while a new slant on the subject of local taxation now prevails in the
sense that the former doctrine of local government units' delegated power to tax had
been effectively modified with Article X, Section 5 of the 1987 Constitution now in
place, the basic doctrine on local taxation remains essentially the same. For as the
Court stressed in Mactan, "the power to tax is [still] primarily vested in the Congress."
This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a
Commissioner of the 1986 Constitutional Commission which crafted the 1987
Constitution, thus:
"What is the effect of Section 5 on the fiscal position of municipal corporations?
Section 5 does not change the doctrine that municipal corporations do not possess
inherent powers of taxation. What it does is to confer municipal corporations a
general power to levy taxes and otherwise create sources of revenue. They no
longer have to wait for a statutory grant of these powers. The power of the
legislative authority relative to the fiscal powers of local governments has been
reduced to the authority to impose limitations on municipal powers. Moreover, these
limitations must be "consistent with the basic policy of local autonomy." The
important legal effect of Section 5 is thus to reverse the principle that doubts are
resolved against municipal corporations. Henceforth, in interpreting statutory
provisions on municipal fiscal powers, doubts will be resolved in favor of municipal
corporations. It is understood, however, that taxes imposed by local government
must be for a public purpose, uniform within a locality, must not be confiscatory,
and must be within the jurisdiction of the local unit to pass."
In net effect, the controversy presently before the Court involves, at bottom, a clash
between the inherent taxing power of the legislature, which necessarily includes the
power to exempt, and the local government's delegated power to tax under the
aegis of the 1987 Constitution.
Now to go back to the Quezon City Revenue Code which imposed real estate taxes
on all real properties within the city's territory and removed exemptions theretofore
"previously granted to, or presently enjoyed by all persons, whether natural or
juridical [x x x]" there can really be no dispute that the power of the Quezon City
Government to tax is limited by Section 232 of the LGC which expressly provides
that "a province or city or municipality within the Metropolitan Manila Area may levy
an annual ad valorem tax on real property such as land, building, machinery, and
other improvement not hereinafter specifically exempted." Under this law, the
Legislature highlighted its power to thereafter exempt certain realties from the
taxing power of local government units. An interpretation denying Congress such
power to exempt would reduce the phrase "not hereinafter specifically exempted" as
a pure jargon, without meaning whatsoever. Needless to state, such absurd
situation is unacceptable.
For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of
Davao, this Court has upheld the power of Congress to grant exemptions over the
power of local government units to impose taxes. There, the Court wrote:
"Indeed, the grant of taxing powers to local government units under the
Constitution and the LGC does not affect the power of Congress to grant
exemptions to certain persons, pursuant to a declared national policy. The legal
effect of the constitutional grant to local governments simply means that in
interpreting statutory provisions on municipal taxing powers, doubts must be
resolved in favor of municipal corporations." (Emphasis supplied)
In the case under review, the Philippine Congress enacted R.A. No. 7966 on March 30,
1995, subsequent to the effectivity of the LGC on January 1, 1992. Under it, ABS-CBN was
granted the franchise to install and operate radio and television broadcasting stations in
the Philippines. Likewise, Section 8 imposed on ABS-CBN the duty of paying 3% franchise
tax. It bears stressing, however, that payment of the percentage franchise tax shall be "in
lieu of all taxes" on the said franchise.
Congress has the inherent power to tax, which includes the power to grant tax
exemptions. On the other hand, the power of Quezon City to tax is prescribed by Section
151 in relation to Section 137 of the LGC which expressly provides that notwithstanding
any exemption granted by any law or other special law, the City may impose a franchise
tax. It must be noted that Section 137 of the LGC does not prohibit grant of future
exemptions. As earlier discussed, this Court in City Government of Quezon City v. Bayan
Telecommunications, Inc. sustained the power of Congress to grant tax exemptions over
and above the power of the local government's delegated power to tax.
B. The more pertinent issue now to consider is whether or not by passing R.A. No. 7966,
which contains the "in lieu of all taxes" provision, Congress intended to exempt ABS-CBN
from local franchise tax.
Petitioners argue that the "in lieu of all taxes" provision in ABS-CBN's franchise does not
expressly exempt it from payment of local franchise tax. They contend that a tax
exemption cannot be created by mere implication and that one who claims tax exemptions
must be able to justify his claim by clearest grant of organic law or statute.
Taxes are what civilized people pay for civilized society. They are the lifeblood of the
nation. Thus, statutes granting tax exemptions are construed stricissimi juris against the
taxpayer and liberally in favor of the taxing authority. A claim of tax exemption must be
clearly shown and based on language in law too plain to be mistaken. Otherwise stated,
taxation is the rule, exemption is the exception. The burden of proof rests upon the party
claiming the exemption to prove that it is in fact covered by the exemption so claimed.
The basis for the rule on strict construction to statutory provisions granting tax
exemptions or deductions is to minimize differential treatment and foster impartiality,
fairness and equality of treatment among taxpayers. He who claims an exemption from his
share of common burden must justify his claim that the legislature intended to exempt
him by unmistakable terms. For exemptions from taxation are not favored in law, nor are
they presumed. They must be expressed in the clearest and most unambiguous language
and not left to mere implications. It has been held that "exemptions are never presumed,
the burden is on the claimant to establish clearly his right to exemption and cannot be
made out of inference or implications but must be laid beyond reasonable doubt. In other
words, since taxation is the rule and exemption the exception, the intention to make an
exemption ought to be expressed in clear and unambiguous terms.
Section 8 of R.A. No. 7966 imposes on ABS-CBN a franchise tax equivalent to three (3)
percent of all gross receipts of the radio/television business transacted under the franchise
and the franchise tax shall be "in lieu of all taxes" on the franchise or earnings thereof.
The "in lieu of all taxes" provision in the franchise of ABS-CBN does not expressly provide
what kind of taxes ABS-CBN is exempted from. It is not clear whether the exemption
would include both local, whether municipal, city or provincial, and national tax. What is
clear is that ABS-CBN shall be liable to pay three (3) percent franchise tax and income
taxes under Title II of the NIRC. But whether the "in lieu of all taxes provision" would
include exemption from local tax is not unequivocal.
As adverted to earlier, the right to exemption from local franchise tax must be clearly
established and cannot be made out of inference or implications but must be laid beyond
reasonable doubt. Verily, the uncertainty in the "in lieu of all taxes" provision should be
construed against ABS-CBN. ABS-CBN has the burden to prove that it is in fact covered by
the exemption so claimed. ABS-CBN miserably failed in this regard.
ABS-CBN cites the cases Carcar Electric & Ice Plant v. Collector of Internal
Revenue, Manila Railroad v. Rafferty, Philippine Railway Co. v. Collector of Internal
Revenue, and Visayan Electric Co. v. David to support its claim that that the "in lieu of all
taxes" clause includes exemption from all taxes.
However, a review of the foregoing case law reveals that the grantees' respective
franchises expressly exempt them from municipal and provincial taxes. Said the Court
in Manila Railroad v. Rafferty:
On the 7th day of July 1906, by an Act of the Philippine Legislature, a special charter
was granted to the Manila Railroad Company. Subsection 12 of Section 1 of said Act
(No. 1510) provides that:
"In consideration of the premises and of the granting of this concession or franchise,
there shall be paid by the grantee to the Philippine Government, annually, for the
period of thirty (30) years from the date hereof, an amount equal to one-half (1/2)
of one per cent of the gross earnings of the grantee in respect of the lines covered
hereby for the preceding year; after said period of thirty (30) years, and for the fifty
(50) years thereafter, the amount so to be paid annually shall be an amount equal
to one and one-half (1 1/2) per cent of such gross earnings for the preceding year;
and after such period of eighty (80) years, the percentage and amount so to be paid
annually by the grantee shall be fixed by the Philippine Government.
Such annual payments, when promptly and fully made by the grantee, shall be in
lieu of all taxes of every name and nature - municipal, provincial or central - upon
its capital stock, franchises, right of way, earnings, and all other property owned or
operated by the grantee under this concession or franchise." (Underscoring
supplied)
In the case under review, ABS-CBN's franchise did not embody an exemption similar to
those in Carcar, Manila Railroad, Philippine Railway, and Visayan Electric. Too, the
franchise failed to specify the taxing authority from whose jurisdiction the taxing power is
withheld, whether municipal, provincial, or national. In fine, since ABS-CBN failed to justify
its claim for exemption from local franchise tax, by a grant expressed in terms "too plain
to be mistaken" its claim for exemption for local franchise tax must fail.
C. The "in lieu of all taxes" clause in the franchise of ABS-CBN has become functus officio
with the abolition of the franchise tax on broadcasting companies with yearly gross
receipts exceeding Ten Million Pesos.
In its decision dated January 20, 1999, the RTC held that pursuant to the "in lieu of all
taxes" provision contained in Section 8 of R.A. No. 7966, ABS-CBN is exempt from the
payment of the local franchise tax. The RTC further pronounced that ABS-CBN shall
instead be liable to pay a franchise tax of 3% of all gross receipts in lieu of all other taxes.
On this score, the RTC ruling is flawed. In keeping with the laws that have been passed
since the grant of ABS-CBN's franchise, the corporation should now be subject to VAT,
instead of the 3% franchise tax.
At the time of the enactment of its franchise on May 3, 1995, ABS-CBN was subject to 3%
franchise tax under Section 117(b) of the 1977 National Internal Revenue Code (NIRC), as
amended, viz.:
SECTION 117. Tax on franchises. - Any provision of general or special laws to the
contrary notwithstanding, there shall be levied, assessed and collected in respect to all
franchise, upon the gross receipts from the business covered by the law granting the
franchise, a tax in accordance with the schedule prescribed hereunder:
(a) On electric utilities, city gas, and water supplies Two (2%) percent
(b) On telephone and/or telegraph systems, radio and/or broadcasting stations
Three (3%) percent
(c) On other franchises Five (5%) percent. (Emphasis supplied)
On January 1, 1996, R.A. No. 7716, otherwise known as the Expanded Value Added Tax
Law, took effect and subjected to VAT those services rendered by radio and/or
broadcasting stations. Section 3 of R.A. No. 7716 provides:
Section 3. Section 102 of the National Internal Revenue Code, as amended is hereby
further amended to read as follows:
SEC. 102. Value-added tax on sale of services and use or lease of properties.
- (a)  Rate and base of tax. - There shall be levied, assessed and collected, as value-
 added tax equivalent to 10% of gross receipts derived from the sale or exchange of
services, including the use or lease of properties.
The phrase "sale or exchange of services" means the performance of all kinds of
services in the Philippines, for others for a fee, remuneration or consideration,
including those performed or rendered by construction and service contractors; x x
x services of franchise grantees of telephone and telegraph, radio and television
broadcasting and all other franchise grantees except those under Section 117 of this
Code; x x x (Emphasis supplied)
Notably, under the same law, "telephone and/or telegraph systems, broadcasting stations
and other franchise grantees" were omitted from the list of entities subject to franchise
tax. The impression was that these entities were subject to 10% VAT but not to franchise
tax. Only the franchise tax on "electric, gas and water utilities" remained. Section 12 of
R.A. No. 7716 provides:
Section 12. Section 117 of the National Internal Revenue Code, as amended, is hereby
further amended to read as follows:
SEC. 117. Tax on Franchises. - Any provision of general or special law to the
contrary notwithstanding there shall be levied, assessed and collected in respect to
all franchises on electric, gas and water utilities a tax of two percent (2%) on the
gross receipts derived from the business covered by the law granting the franchise.
(Emphasis added)
Subsequently, R.A. No. 8241 took effect on January 1, 1997 containing more amendments
to the NIRC. Radio and/or television companies whose annual gross receipts do not
exceed P10,000,000.00 were granted the option to choose between paying 3% national
franchise tax or 10% VAT. Section 9 of R.A. No. 8241 provides:
SECTION 9. Section 12 of Republic Act No. 7716 is hereby amended to read as follows:
"Sec. 12. Section 117 of the National Internal Revenue Code, as amended, is hereby
further amended to read as follows:
"Sec. 117. Tax on franchise. - Any provision of general or special law to the
contrary, notwithstanding, there shall be levied, assessed and collected in respect to
all franchises on radio and/or television broadcasting companies whose annual gross
receipts of the preceding year does not exceed Ten million pesos (P10,000,000.00),
subject to Section 107(d) of this Code, a tax of three percent (3%) and on electric,
gas and water utilities, a tax of two percent (2%) on the gross receipts derived from
the business covered by the law granting the franchise: Provided, however, That
radio and television broadcasting companies referred to in this section, shall have
an option to be registered as a value-added tax payer and pay the tax due thereon:
Provided, further, That once the option is exercised, it shall not be revoked.
(Emphasis supplied)
On the other hand, radio and/or television companies with yearly gross
receipts exceeding P10,000,000.00 were subject to 10% VAT, pursuant to Section 102 of
the NIRC.
On January 1, 1998, R.A. No. 8424 was passed confirming the 10% VAT liability of radio
and/or television companies with yearly gross receipts exceeding P10,000,000.00.
R.A. No. 9337 was subsequently enacted and became effective on July 1, 2005. The said
law further amended the NIRC by increasing the rate of VAT to 12%. The effectivity of the
imposition of the 12% VAT was later moved from January 1, 2006 to February 1, 2006.
In consonance with the above survey of pertinent laws on the matter, ABS-CBN is subject
to the payment of VAT. It does not have the option to choose between the payment of
franchise tax or VAT since it is a broadcasting company with yearly gross receipts
exceeding Ten Million Pesos (P10,000,000.00).
VAT is a percentage tax imposed on any person whether or not a franchise grantee, who in
the course of trade or business, sells, barters, exchanges, leases, goods or properties,
renders services. It is also levied on every importation of goods whether or not in the
course of trade or business. The tax base of the VAT is limited only to the value added to
such goods, properties, or services by the seller, transferor or lessor. Further, the VAT is
an indirect tax and can be passed on to the buyer.
The franchise tax, on the other hand, is a percentage tax imposed only on franchise
holders. It is imposed under Section 119 of the Tax Code and is a direct liability of the
franchise grantee.
The clause "in lieu of all taxes" does not pertain to VAT or any other tax. It cannot apply
when what is paid is a tax other than a franchise tax. Since the franchise tax on the
broadcasting companies with yearly gross receipts exceeding ten million pesos has been
abolished, the "in lieu of all taxes" clause has now become functus officio, rendered
inoperative.
In sum, ABS-CBN's claims for exemption must fail on twin grounds. First, the "in lieu of all
taxes" clause in its franchise failed to specify the taxes the company is sought to be
exempted from. Neither did it particularize the jurisdiction from which the taxing power is
withheld. Second, the clause has become functus officio because as the law now stands,
ABS-CBN is no longer subject to a franchise tax. It is now liable for VAT.
WHEREFORE, the petition is GRANTED and the appealed Decision REVERSED AND SET
ASIDE. The petition in the trial court for refund of local franchise tax is DISMISSED.
SO ORDERED.
G.R. No. 191761 : November 14, 2012
CAGAYAN ELECTRIC POWER AND LIGHT CO., INC., Petitioner, v. CITY OF CAGAYAN
DE ORO, Respondent.
DECISION
CARPIO, J.:
The Case
G.R. No. 191761 is a petition for review assailing the Decision promulgated on 28 May
2009 as well as the Resolution promulgated on 24 March 2010 by the Court of Appeals
(appellate court) in CA-G.R. CV No. 01105-Min. The appellate court affirmed the 8 January
2007 Decision of Branch 18 of the Regional Trial Court of Misamis Oriental (trial court) in
Civil Case No. 2005-207.
The trial court upheld the validity of the City of Cagayan de Oros Ordinance No. 9503-
2005 and denied Cagayan Electric Power and Light Co., Inc.s (CEPALCO) claim of
exemption from the said ordinance.
pursuant to the 1987 Constitution, the Local Government Code, other applicable provisions
of law, and pertinent jurisprudence; (b) non-exemption of CEPALCO because of the
express withdrawal of the exemption provided by Section 193 of the LGC; (c) the subject
ordinance is legally presumed valid and constitutional; (d) prescription of respondent-
appellees action pursuant to Section 187 of the LGC; (e) failure of respondent-appellee to
exhaust administrative remedies under the Local Government Code; (f) CEPALCOs action
for declaratory relief cannot prosper since no breach or violation of the subject ordinance
was yet committed by the City.
Ordinance No. 9503-2005 reads:
ORDINANCE IMPOSING A TAX ON THE LEASE OR RENTAL OF ELECTRIC AND/OR
TELECOMMUNICATION POSTS, POLES OR TOWERS BY POLE OWNERS TO OTHER POLE
USERS AT THE RATE OF TEN (10) PERCENT OF THE ANNUAL RENTAL INCOME DERIVED
THEREFROM AND FOR OTHER PURPOSES BE IT ORDAINED by the City Council
(Sangguniang Panlungsod) of the City of Cagayan de Oro in session assembled that:
SECTION 1. - Whenever used in this Ordinance, the following terms shall be construed as:

a. Electric companies include all public utility companies whether corporation or

The Facts
cooperative engaged in the distribution and sale of electricity;

The appellate court narrated the facts as follows:

On January 10, 2005, the Sangguniang Panlungsod of Cagayan de Oro (City Council)
passed Ordinance No. 9503-2005 imposing a tax on the lease or rental of electric and/or
telecommunication posts, poles or towers by pole owners to other pole users at ten
percent (10%) of the annual rental income derived from such lease or rental.
The City Council, in a letter dated 15 March 2005, informed appellant Cagayan Electric
Power and Light Company, Inc. (CEPALCO), through its President and Chief Operation
Manager, Ms. Consuelo G. Tion, of the passage of the subject ordinance.
On September 30, 2005, appellant CEPALCO, purportedly on pure question of law, filed a
petition for declaratory relief assailing the validity of Ordinance No. 9503-2005 before the
Regional Trial Court of Cagayan de Oro City, Branch 18, on the ground that the tax
imposed by the disputed ordinance is in reality a tax on income which appellee City of
Cagayan de Oro may not impose, the same being expressly prohibited by Section 133(a)
of Republic Act No. 7160 (R.A. 7160) otherwise known as the Local Government Code
(LGC) of 1991. CEPALCO argues that, assuming the City Council can enact the assailed
ordinance, it is nevertheless exempt from the imposition by virtue of Republic Act No.
9284 (R.A. 9284) providing for its franchise. CEPALCO further claims exemplary damages
of PhP200,000.00 alleging that the passage of the ordinance manifests malice and bad
faith of the respondent-appellee towards it.
In its Answer, appellee raised the following affirmative defenses: (a) the enactment and
implementation of the subject ordinance was a valid and lawful exercise of its powers
b. Telecommunication companies refer to establishments or entities that are holders of
franchise through an Act of Congress to engage, maintain, and operate
telecommunications, voice and data services, under existing Philippine laws, rules and
regulations;
c. Pole User includes any person, natural or juridical, including government agencies and
entities that use and rent poles and towers for the installation of any cable, wires, service
drops and other attachments;
d. Pole Owner includes electric and telecommunication company or corporation that owns
poles, towers and other accessories thereof.
SECTION 2. - There shall be imposed a tax on the lease or rental of electric and/or
telecommunication posts, poles or towers by pole owners to other pole users at the rate of
ten (10) percent of the annual rental income derived therefrom.
SECTION 3. - The tax imposed herein shall not be passed on by pole owners to the bills of
pole users in the form of added rental rates.
SECTION 4. (a) Pole owners herein defined engaged in the business of renting their posts,
poles and/or towers shall secure a separate business permit therefor as provided under
Article (P), Section 62(a) of Ordinance No. 8847-2003, otherwise known as the Cagayan
de Oro City Revenue Code of 2003.
(b) Pertinent provisions of Ordinance No. 8847-2003, covering situs of the tax, payment of
taxes and administrative provisions shall apply in the imposition of the tax under this
Ordinance.
SECTION 5. - This Ordinance shall take effect after 15 days following its publication in a
local newspaper of general circulation for at least three (3) consecutive issues.
UNANIMOUSLY APPROVED.
Ordinance No. 9503-2005 was unanimously approved by the City Council of Cagayan de
Oro on 10 January 2005.
The Trial Courts Ruling
SO ORDERED.
CEPALCO filed a brief with the appellate court and raised the following errors of the trial
court:
A. The lower court manifestly erred in concluding that the instant action is barred for non-
exhaustion of administrative remedies and by prescription.
B. The lower court gravely erred in finding that Ordinance No. 9503-2005 of the City of
Cagayan de Oro does not partake of the nature of an income tax.
C. The lower court gravely erred in finding that Ordinance No. 9503-2005 of the City of
Cagayan de Oro is valid.

On 8 January 2007, the trial court rendered its Decision in favor of the City of Cagayan de D. The lower court seriously erred in finding that herein appellant is not exempted from
Oro. The trial court identified three issues for its resolution: (1) whether Ordinance No. payment of said tax.
9503-2005 is valid; (2) whether CEPALCO should be exempted from tax; and (3) whether
CEPALCOs action is barred for non-exhaustion of administrative remedies and for The Appellate Courts Ruling
prescription.
On 28 May 2009, the appellate court rendered its Decision and affirmed the trial courts
In ruling for the validity of Ordinance No. 9503-2005, the trial court rejected CEPALCOs decision.
claim that the ordinance is an imposition of income tax prohibited by Section 133(a) of the
Local Government Code. The trial court reasoned that since CEPALCOs business of leasing
The appellate court stated that CEPALCO failed to file a timely appeal to the Secretary of
its posts to pole users is what is directly taxed, the tax is not upon the income but upon
Justice, and did not exhaust its administrative remedies. The appellate court agreed with
the privilege to engage in business. Moreover, Section 143(h), in relation to Section 151,
the trial courts ruling that the assailed ordinance is valid and declared that the subject tax
of the Local Government Code authorizes a city to impose taxes, fees and charges on any
is a license tax for the regulation of business in which CEPALCO is engaged. Finally, the
business which is not specified as prohibited under Section 143(a) to (g) and which the
appellate court found that CEPALCOs claim of tax exemption rests on a strained
city council may deem proper to tax.
interpretation of R.A. No. 9284.

The trial court also rejected CEPALCOs claim of exemption from tax. The trial court noted
In a Resolution dated 24 March 2010, the appellate court denied CEPALCOs motion for
that Republic Act (R.A.) Nos. 3247, 3570 and 6020, which previously granted CEPALCOs
reconsideration for lack of merit. The resolution also denied CEPALCOs 3 August 2009
franchise, expressly stated that CEPALCO would pay a three percent franchise tax in lieu of
supplemental motion for reconsideration for being filed out of time.
all assessments of whatever authority. However, there is no similar provision in R.A. No.
9284, which gave CEPALCO its current franchise.
CEPALCO filed the present petition for review before this Court on 27 May 2010.
Finally, the trial court found that CEPALCOs action is barred by prescription as it failed to
raise an appeal to the Secretary of Justice within the thirty-day period provided in Section The Issues
187 of the Local Government Code.
CEPALCO enumerated the following reasons for warranting review:
The dispositive portion of the trial courts decision reads:
1. In spite of its patent illegality, a City Ordinance passed in violation or in excess of the
WHEREFORE, it is crystal clear that Petitioner CEPALCO failed not only in proving its citys delegated power to tax was upheld;
allegations that City Ordinance 9503-2005 is illegal and contrary to law, and that [it] is
exempted from the imposition of tax, but also in convincing the Court that its action is not 2. In a case involving pure questions of law, the Court of Appeals still insisted on a useless
barred for non-exhaustion of administrative remedy [sic] and by prescription. Hence, the administrative remedy before resort to the court may be made; and
instant petition is DENIED.
3. Recent legislation affirming CEPALCOs tax exemptions was disregarded.
In a Resolution dated 6 July 2011, this Court required both parties to discuss whether the
amount of tax imposed by Section 2 of Ordinance No. 9503-2005 complies with or
violates, as the case may be, the limitation set by Section 151, in relation to Sections 137
and 143(h), of the Local Government Code.
The Courts Ruling
Failure to Exhaust Administrative Remedies
Ordinance No. 9503-2005 is a local revenue measure. As such, the Local Government
Code applies.
SEC. 187. Procedure for Approval and Effectivity of Tax Ordinances and Revenue
Measures; Mandatory Public Hearings. The procedure for approval of local tax ordinances
and revenue measures shall be in accordance with the provisions of this Code: Provided,
That public hearings shall be conducted for the purpose prior to the enactment thereof:
Provided, further, That any question on the constitutionality or legality of tax ordinances or
revenue measures may be raised on appeal within thirty (30) days from the effectivity
thereof to the Secretary of Justice who shall render a decision within sixty (60) days from
the date of receipt of the appeal: Provided, however, That such appeal shall not have the
effect of suspending the effectivity of the ordinance and the accrual and payment of the
tax, fee, or charge levied therein: Provided, finally, That within thirty (30) days after
receipt of the decision or the lapse of the sixty-day period without the Secretary of Justice
acting upon the appeal, the aggrieved party may file appropriate proceedings with a court
of competent jurisdiction.
SEC. 188. Publication of Tax Ordinances and Revenue Measures. Within ten (10) days
after their approval, certified true copies of all provincial, city, and municipal tax
ordinances or revenue measures shall be published in full for three (3) consecutive days in
a newspaper of local circulation: Provided, however, That in provinces, cities and
municipalities where there are no newspapers of local circulation, the same may be posted
in at least two (2) conspicuous and publicly accessible places.
The Sangguniang Panlungsod of Cagayan de Oro approved Ordinance No. 9503-2005 on
10 January 2005. Section 5 of said ordinance provided that the "Ordinance shall take
effect after 15 days following its publication in a local newspaper of general circulation for
at least three (3) consecutive issues." Gold Star Daily published Ordinance No. 9503-2005
on 1 to 3 February 2005. Ordinance No. 9503-2005 thus took effect on 19 February 2005.
CEPALCO filed its petition for declaratory relief before the Regional Trial Court on 30
September 2005, clearly beyond the 30-day period provided in Section 187. CEPALCO did
not file anything before the Secretary of Justice. CEPALCO ignored our ruling in Reyes v.
Court of Appeals on the mandatory nature of the statutory periods:
Clearly, the law requires that the dissatisfied taxpayer who questions the validity or
legality of a tax ordinance must file his appeal to the Secretary of Justice, within 30 days
from effectivity thereof. In case the Secretary decides the appeal, a period also of 30 days
is allowed for an aggrieved party to go to court. But if the Secretary does not act thereon,
after the lapse of 60 days, a party could already proceed to seek relief in court. These
three separate periods are clearly given for compliance as a prerequisite before seeking
redress in a competent court. Such statutory periods are set to prevent delays as well as
enhance the orderly and speedy discharge of judicial functions. For this reason the courts
construe these provisions of statutes as mandatory.
A municipal tax ordinance empowers a local government unit to impose taxes. The power
to tax is the most effective instrument to raise needed revenues to finance and support
the myriad activities of local government units for the delivery of basic services essential
to the promotion of the general welfare and enhancement of peace, progress, and
prosperity of the people. Consequently, any delay in implementing tax measures would be
to the detriment of the public. It is for this reason that protests over tax ordinances are
required to be done within certain time frames. In the instant case, it is our view that the
failure of petitioners to appeal to the Secretary of Justice within 30 days as required by
Sec. 187 of R.A. 7160 is fatal to their cause.
As in Reyes, CEPALCOs failure to appeal to the Secretary of Justice within the statutory
period of 30 days from the effectivity of the ordinance should have been fatal to its cause.
However, we relax the application of the rules in view of the more substantive matters.
City of Cagayan de Oros Power to Create Sources of Revenue vis-a-vis CEPALCOs
Claim of Exemption
Section 5, Article X of the 1987 Constitution provides that "each local government unit
shall have the power to create its own sources of revenues and to levy taxes, fees, and
charges subject to such guidelines and limitations as the Congress may provide, consistent
with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local government." The Local Government Code supplements the
Constitution with Sections 151 and 186:
SEC. 151. Scope of Taxing Powers. Except as otherwise provided in this Code, the city
may levy the taxes, fees and charges which the province or municipality may impose:
Provided, however, That the taxes, fees and charges levied and collected by highly
urbanized and independent component cities shall accrue to them and distributed in
accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the
province or municipality by not more than fifty percent (50%) except the rates of
professional and amusement taxes.
SEC. 186. Power to Levy Other Taxes, Fees or Charges. Local government units may
exercise the power to levy taxes, fees or charges on any base or subject not otherwise
specifically enumerated herein or taxed under the provisions of the National Internal
Revenue Code, as amended, or other applicable laws: Provided, That the taxes, fees, or
charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared
national policy: Provided, further, That the ordinance levying such taxes, fees, or charges
shall not be enacted without any prior public hearing conducted for the purpose.
Although CEPALCO does not question the authority of the Sangguniang Panlungsod of
Cagayan de Oro to impose a tax or to enact a revenue measure, CEPALCO insists that
Ordinance No. 9503-2005 is an imposition of an income tax which is prohibited by Section
133(a) of the Local Government Code. Unfortunately for CEPALCO, we agree with the
ruling of the trial and appellate courts that Ordinance No. 9503-2005 is a tax on business.
CEPALCOs act of leasing for a consideration the use of its posts, poles or towers to other
pole users falls under the Local Government Codes definition of business. Business is
defined by Section 131(d) of the Local Government Code as "trade or commercial activity
regularly engaged in as a means of livelihood or with a view to profit." In relation to
Section 131(d), Section 143(h) of the Local Government Code provides that the city may
impose taxes, fees, and charges on any business which is not specified in Section 143(a)
to (g) and which the sanggunian concerned may deem proper to tax.
In contrast to the express statutory provisions on the City of Cagayan de Oros power to
tax, CEPALCOs claim of tax exemption of the income from its poles relies on a strained
interpretation. Section 1 of R.A. No. 9284 added Section 9 to R.A. No. 3247, CEPALCOs
franchise:
SEC. 9. Tax Provisions. The grantee, its successors or assigns, shall be subject to the
payment of all taxes, duties, fees or charges and other impositions applicable to private
electric utilities under the National Internal Revenue Code (NIRC) of 1997, as amended,
the Local Government Code and other applicable laws: Provided, That nothing herein shall
be construed as repealing any specific tax exemptions, incentives, or privileges granted
under any relevant law: Provided, further, That all rights, privileges, benefits and
exemptions accorded to existing and future private electric utilities by their respective
franchises shall likewise be extended to the grantee.
The grantee shall file the return with the city or province where its facility is located and
pay the taxes due thereon to the Commissioner of Internal Revenue or his duly authorized
representative in accordance with the NIRC and the return shall be subject to audit by the
Bureau of Internal Revenue.
The Local Government Code withdrew tax exemption privileges previously given to natural
or juridical persons, and granted local government units the power to impose franchise
tax,
SEC. 137. Franchise Tax. Notwithstanding any exemption granted by any law or other
special law, the province may impose a tax on businesses enjoying a franchise, at a rate
not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized, within its territorial
jurisdiction.
xxx
SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code,
tax exemptions or incentives granted to, or presently enjoyed by all persons, whether
natural or juridical, including government-owned or controlled corporations, except local
water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-
profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of
this Code.
SEC. 534. Repealing Clause. x x x.
(f) All general and special laws, acts, city charters, decrees, executive orders,
proclamations and administrative regulations, or part or parts thereof which are
inconsistent with any of the provisions of this Code are hereby repealed or modified
accordingly.
It is hornbook doctrine that tax exemptions are strictly construed against the claimant. For
this reason, tax exemptions must be based on clear legal provisions. The separate opinion
in PLDT v. City of Davao is applicable to the present case, thus:
Tax exemptions must be clear and unequivocal. A taxpayer claiming a tax exemption must
point to a specific provision of law conferring on the taxpayer, in clear and plain terms,
exemption from a common burden. Any doubt whether a tax exemption exists is resolved
against the taxpayer. Tax exemptions cannot arise by mere implication, much less by an
implied re-enactment of a repealed tax exemption clause.
CEPALCOs claim of exemption under the "in lieu of all taxes" clause must fail in light of
Section 193 of the Local Government Code as well as Section 9 of its own franchise.
Ordinance No. 9503-2005s Compliance with the Local Government Code
In our Resolution dated 6 July 2011, we asked both parties to discuss whether the amount
of tax imposed by Section 2 of Ordinance No. 9503-2005 complies with or violates, as the
case may be, the limitation set by Section 151, in relation to Sections 137 and 143(h), of
the Local Government Code.
CEPALCO argues that Ordinance No. 9503-2005 should be invalidated because the City of
Cagayan de Oro exceeded its authority in enacting it. CEPALCO argued thus:
5. Thus, the taxes imposable under either Section 137 or Section 143(h) are not unbridled
but are restricted as to the amount which may be imposed. This is the first limitation.
Furthermore, if it is a city which imposes the same, it can impose only up to one-half of
what the province or municipality may impose. This is the second limitation.
6. Let us now examine Ordinance No. 9503-2005 of the respondent City of Cagayan de
Oro in the light of the twin limitations mentioned above.
7. Ordinance No. 9503-2005 of the respondent City of Cagayan de Oro imposes a tax on
the lease or rental of electric and/or telecommunication posts, poles or towers by pole
owners to other pole users "at the rate of ten (10) percent of the annual rental income
derived therefrom."
8. With respect to Section 137, considering that the tax allowed provinces "shall not
exceed fifty percent (50%) of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized, within its territorial
jurisdiction," the tax imposed by Ordinance No. 9503-2005 "at the rate of ten (10) percent
of the annual rental income derived therefrom" is too much. There is a whale of a
difference between the allowable 50% of 1% and the 10% tax imposed by the respondent.
To illustrate: assuming that the gross annual receipt is Php100, the maximum tax that a
province may impose under Section 137 (50% of 1%) shall be Php0.5 or only fifty
centavos. Therefore, the maximum tax that the City may impose shall only be one-half of
this, which is Php0.25 or only twenty-five centavos. But the questioned Ordinance imposes
a tax amounting to 10% of the gross annual receipt of Php100, which is Php10, or Ten
Pesos. This a whooping [sic] 40 times more than that allowed for the province! The
violation made by respondent city of its delegated taxing authority is all too patent.
9. With respect to Section 143(h), the rate of tax which the municipality may impose
"shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar
year." On the other hand, the tax imposed by Ordinance No. 9503-2005 is "at the rate of
ten (10) percent of the annual rental income derived therefrom." Again, it is obvious that
the respondent Citys questioned tax ordinance is way too much. Using the same tax base
of Php100 to illustrate, let us compute:
Under Section 143(h), the maximum tax that a municipality may impose is 2% of Php100,
which is Php2 or Two Pesos. Therefore, the maximum tax that the City may impose shall
be one-half of this, which is Php1 or One Peso. But the tax under Ordinance No. 9503-
2005 is Php10, or Ten Pesos. This is a whooping [sic] 10 times more than that allowed for
the municipality! As in the earlier instance discussed above, the violation made by the
respondent city of its delegated taxing authority is all too patent. (Boldfacing and
underscoring in the original)
The interpretation of the City of Cagayan de Oro is diametrically opposed to that of
CEPALCO. The City of Cagayan de Oro points out that under Section 151 of the Local
Government Code, cities not only have the power to levy taxes, fees and charges which
the provinces or municipalities may impose, but the maximum rate of taxes imposable by
cities may exceed the maximum rate of taxes imposable by provinces or municipalities by
as much as 50%. The City of Cagayan de Oro goes on to state:
6. Thus, Section 30 of City of Cagayan de Oros Ordinance No. 8847-2003, otherwise
known as the Revenue Code of Cagayan de Oro, imposes a franchise tax on the gross
receipts realized from the preceding year by a business enjoying a franchise, at the rate of
75% of 1%. The increase of 25% over that which is prescribed under Section 137 of the
LGC is in accordance with Section 151 thereof prescribing the allowable increase on the
rate of tax on the businesses duly identified and enumerated under Section 143 of the LGC
or those defined and categorized in the preceding sections thereof;
7. Section 143 of the LGC prescribes the rate of taxes on the identified categories of
business enumerated therein which were determined to be existing at the time of its
enactment. On the other hand, Section 151 of the LGC prescribes the allowable rate of
increase over the rate of taxes imposed on businesses identified under Section 143 and
the preceding sections thereof. It is [City of Cagayan de Oros humble opinion that the
allowable rate of increase provided under Section 151 of the LGC applies only to those
businesses identified and enumerated under Section 143 thereof. Thus, it is respectfully
submitted by City of Cagayan de Oro that the 2% limitation prescribed under Section
143(h) applies only to the tax rates on the businesses identified thereunder and does not
apply to those that may thereafter be deemed taxable under Section 186 of the LGC, such
as the herein assailed Ordinance No. 9503-2005. On the same vein, it is the respectful
submission of City of Cagayan de Oro that the limitation under Section 151 of the LGC
likewise does not apply in our particular instance, otherwise it will run counter to the intent
and purpose of Section 186 of the LGC;
8. Be it strongly emphasized here that CEPALCO is differently situated vis-vis the rest of
the businesses identified under Section 143 of the LGC. The imposition of a tax "xxx on
the lease or rental of electric and/or telecommunications posts, poles or towers by pole
owners to other pole users at the rate of ten (10%) of the annual rental income derived
therefrom" as provided under Section 2 of the questioned Ordinance No. 9503-2005 is
based on a reasonable classification, to wit: (a) It is based on substantial distinctions
which make a real difference; (b) these are germane to the purpose of the law; (c) the
classification applies not only to the present conditions but also to future conditions which
are substantially identical to those of the present; and (d) the classification applies only to
those belonging to the same class;
9. Furthermore, Section 186 of the LGC allow [sic] local government units to exercise their
taxing power to levy taxes, fees or charges on any base or subject not otherwise
specifically enumerated in the preceding sections, more particularly Section 143 thereof,
or under the provisions of the National Internal Revenue Code, as long as they are not
unjust, excessive, oppressive, confiscatory or contrary to declared national policy.
Moreover, a public hearing is required before the Ordinance levying such taxes, fees or
charges can be enacted;
10. It is respectfully submitted by City of Cagayan de Oro that the tax rate imposed under
Section 2 of the herein assailed Ordinance is not unjust, excessive, oppressive,
confiscatory or contrary to a declared national policy;
11. A reading of Section 143 of the LGC reveals that it has neither identified the operation
of a business engaged in leasing nor prescribed its tax rate. Moreover, a Lessor, in any
manner, is not included among those defined as Contractor under Section 131(h) of the
LGC. However, a Lessor, in its intended general application in City of Cagayan de Oro (one
who rents out real estate properties), was identified, categorized and included as one of
the existing businesses operating in the city, and thus falling under the provisions of
Ordinance No. 8847-2003 (the Revenue Code of Cagayan de Oro) and, therefore, imposed
only a tax rate of 2% on their gross annual receipts;
12. While the herein assailed Ordinance similarly identifies that the base of the tax
imposed therein are receipts and/or revenue derived from rentals of poles and posts,
CEPALCO cannot be considered under the definition of Lessor under the spirit, essence and
intent of Section 58(h) of the Revenue Code of Cagayan de Oro, because the same refers
only to "Real Estate Lessors, Real Estate Dealers and Real Estate Developers." Thus,
CEPALCO should be, as it has been, categorized as a (Distinct) Lessor where it enjoys not
only a tremendous and substantial edge but also an absolute advantage in the rental of
poles, posts and/or towers to other telecommunication and cable TV companies and the
like over and above all others in view of its apparent monopoly by allowing the use of their
poles, posts and/or towers by, leasing them out to, telecommunication and cable TV
companies operating within the city and suburbs. Furthermore, CEPALCO has neither
competition in this field nor does it expect one since there are no other persons or entities
who are engaged in this particular business activity;
xxx
CEPALCO is mistaken when it states that a city can impose a tax up to only one-half of
what the province or city may impose. A more circumspect reading of the Local
Government Code could have prevented this error. Section 151 of the Local Government
Code states that, subject to certain exceptions, a city may exceed by "not more than
50%" the tax rates allowed to provinces and municipalities. A province may impose a
franchise tax at a rate "not exceeding 50% of 1% of the gross annual receipts." Following
Section 151, a city may impose a franchise tax of up to 0.0075 (or 0.75%) of a business
gross annual receipts for the preceding calendar year based on the incoming receipt, or
realized, within its territorial jurisdiction. A municipality may impose a business tax at a
rate not exceeding "two percent of gross sales or receipts." Following Section 151, a city
may impose a business tax of up to 0.03 (or 3%) of a business gross sales or receipts of
the preceding calendar year.
CEPALCO also erred when it equates Section 137s "gross annual receipts" with Ordinance
No. 9503-2005s "annual rental income." Section 2 of Ordinance No. 9503-2005 imposes "a
tax on the lease or rental of electric and/or telecommunication posts, poles or towers by
pole owners to other pole users at the rate of ten (10) percent of the annual rental income
derived therefrom," and not on CEPALCOs gross annual receipts. Thus, although the tax
rate of 10% is definitely higher than that imposable by cities as franchise or business tax,
the tax base of annual rental income of "electric and/or telecommunication posts, poles or
towers by pole owners to other pole users" is definitely smaller than that used by cities in
the computation of franchise or business tax. In effect, Ordinance No. 9503-2005 wants a
slice of a smaller pie.
However, we disagree with the City of Cagayan de Oros submission that Ordinance No.
9503-2005 is not subject to the limits imposed by Sections 143 and 151 of the Local
Government Code. On the contrary, Ordinance No. 9503-2005 is subject to the limitation
set by Section 143(h). Section 143 recognizes separate lines of business and imposes
different tax rates for different lines of business. Let us suppose that one is a brewer of
liquor and, at the same time, a distributor of articles of commerce. The brewery business
is subject to the rates established in Section 143(a) while the distribution business is
subject to the rates established in Section 143(b). The City of Cagayan de Oros imposition
of a tax on the lease of poles falls under Section 143(h), as the lease of poles is CEPALCOs
separate line of business which is not covered by paragraphs (a) to (g) of Section 143. The
treatment of the lease of poles as a separate line of business is evident in Section 4(a) of
Ordinance No. 9503-2005. The City of Cagayan de Oro required CEPALCO to apply for a
separate business permit.
More importantly, because "any person, who in the course of trade or business x x x
leases goods or properties x x x shall be subject to the value-added tax," the imposable
tax rate should not exceed two percent of gross receipts of the lease of poles of the
preceding calendar year. Section 143(h) states that "on any business subject to x x x
value-added x x x tax under the National Internal Revenue Code, as amended, the rate of
tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar
year" from the lease of goods or properties. Hence, the 10% tax rate imposed by
Ordinance No. 9503-2005 clearly violates Section 143(h) of the Local Government Code.
Finally, in view of the lack of a separability clause, we declare void the entirety of
Ordinance No. 9503-2005. Any payment made by reason of the tax imposed by Ordinance
No. 9503-2005 should, therefore, be refunded to CEPALCO. Our ruling, however, is made
without prejudice to the enactment by the City of Cagayan de Oro of a tax ordinance that
complies with the limits set by the Local Government Code.
WHEREFORE, we GRANT the petition. The Decision of the Court of Appeals in CA-G.R. CV
No. 01105-Min promulgated on 28 May 2009 and the Resolution promulgated on 24 March
2010 are REVERSED and SET ASIDE Ordinance No. 9503-2005 is declared void.
SO ORDERED.
G.R. No. 163835               July 7, 2010
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
EASTERN TELECOMMUNICATIONS PHILIPPINES, INC., Respondent.
DECISION
BRION, J.:
Through a petition for review on certiorari, petitioner Commissioner of Internal Revenue
(CIR) seeks to set aside the decision dated October 1, 2003 and the resolution dated May
26, 2004 of the Court of Appeals (CA) in CA G.R. SP No. 61157. The assailed CA rulings
affirmed the decision dated July 17, 2000 of the Court of Tax Appeals (CTA) in CTA Case
No. 5551, partially granting respondent Eastern Telecommunications Philippines, Inc.’s
(Eastern’s) claim for refund of unapplied input tax from its purchase and importation of
capital goods.
THE FACTUAL ANTECEDENTS
Eastern is a domestic corporation granted by Congress with a telecommunications
franchise under Republic Act (RA) No. 7617 on June 25, 1992. Under its franchise, Eastern
is allowed to install, operate, and maintain telecommunications system throughout the
Philippines.
From July 1, 1995 to December 31, 1996, Eastern purchased various imported equipment,
machineries, and spare parts necessary in carrying out its business activities. The
importations were subjected to a 10% value-added tax (VAT) by the Bureau of Customs,
which was duly paid by Eastern.
On September 19, 1997, Eastern filed with the CIR a written application for refund or
credit of unapplied input taxes it paid on the imported equipment during the taxable years
1995 and 1996 amounting to ₱22,013,134.00. In claiming for the tax refund, Eastern
principally relied on Sec. 10 of RA No. 7617, which allows Eastern to pay 3% of its gross
receipts in lieu of all taxes on this franchise or earnings thereof. In the alternative, Eastern
cited Section 106(B) of the National Internal Revenue Code of 1977 (Tax Code) which
authorizes a VAT-registered taxpayer to claim for the issuance of a tax credit certificate or
a tax refund of input taxes paid on capital goods imported or purchased locally to the
extent that such input taxes have not been applied against its output taxes.
To toll the running of the two-year prescriptive period under the same provision, Eastern
filed an appeal with the CTA on September 25, 1997 without waiting for the CIR’s decision
on its application for refund. The CIR filed an Answer to Eastern’s appeal in which it raised
the following special and affirmative defenses:
6. [Eastern’s] claim for refund/tax credit is pending administrative investigation;
xxxx
8. [Eastern’s] exempting clause under its legislative franchise x x x should be
understood or interpreted as written, meaning, the 3% franchise tax shall be collected
as substitute for any internal revenue taxes x x x imposed on its franchise or gross
receipts/earnings thereof x x x;
9. The [VAT] on importation under Section 101 of the [1977] Tax Code is neither a tax
on franchise nor on gross receipts or earnings thereof. It is a tax on the privilege of
importing goods whether or not the taxpayer is engaged in business, and regardless of
whether the imported goods are intended for sale, barter or exchange;
10. The VAT under Section 101(A) of the Tax Code x x x replaced the advance sales tax
and compensating tax x x x. Accordingly, the 3% franchise tax did not substitute the
10% [VAT] on [Eastern’s] importation of equipment, machineries and spare parts for
the use of its telecommunication system;
11. Tax refunds are in the nature of tax exemptions. As such, they are regarded in
derogation of sovereign authority and to be construed in strictissimi juris against the
person or entity claiming the exemption. The burden is upon him who claims the
exemption in his favour and he must be able to justify his claim by the clearest grant of
organic or statute law and cannot be permitted to exist upon vague implication x x x;
12. Taxes paid and collected are presumed to have been made in accordance with the
laws and regulations; and
13. It is incumbent upon the taxpayer to establish its right to the refund and failure to
sustain the burden is fatal to the claim for refund.
Ruling in favor of Eastern, the CTA found that Eastern has a valid claim for the
refund/credit of the unapplied input taxes, not on the basis of the "in lieu of all taxes"
provision of its legislative franchise, but rather, on Section 106(B) of the Tax Code, which
states:
SECTION 106. Refunds or tax credits of input tax.
xxxx
(b) Capital goods. - A VAT-registered person may apply for the issuance of a tax credit
certificate or refund of input taxes paid on capital goods imported or locally purchased, to
the extent that such input taxes have not been applied against output taxes. The
application may be made only within two (2) years after the close of the taxable quarter
when the importation or purchase was made. [Emphases supplied.]
The CTA ruled that Eastern had satisfactorily shown that it was entitled to the claimed
refund/credit as all the elements of the above provision were present: (1) Eastern was a
VAT-registered entity which paid 10% input taxes on its importations of capital equipment;
(2) this input VAT remained unapplied as of the first quarter of 1997; and (3) Eastern
seasonably filed its application for refund/credit within the two-year period stated in the
law. However, the CTA noted that Eastern was able to substantiate only ₱21,487,702.00 of
its claimed amount of ₱22,013,134.00. The difference represented input taxes that were
allegedly paid but were not supported by the corresponding receipts, as found by an
independent auditor. Moreover, it excluded ₱5,360,634.00 in input taxes on imported
equipment for the year 1995, even when these were properly documented as they were
already booked by Eastern as part of the cost. Once input tax becomes part of the cost of
capital equipment, it necessarily forms part of depreciation. Thus, to grant the refund of
the 1995 creditable input tax amounts to twice giving Eastern the tax benefit. Thus, in its
July 17, 2000 decision, the CTA granted in part Eastern’s appeal by declaring it entitled to
a tax refund of ₱16,229,100.00, representing unapplied input taxes on imported capital 1st Quarter 820,673.70 --- ---
goods for the taxable year 1996.
2nd
3,361,618.59 225,088,899.07 140,111,655.85
The CIR filed, on August 3, 2000, a motion for reconsideration of the CTA’s decision. About Quarter
a month and a half later, it filed a supplemental motion for reconsideration dated
3rd Quarter 2,607,168.96 169,821,537.80 187,712,657.16
September 15, 2000. The CTA denied the CIR’s motion for reconsideration in its resolution
dated September 20, 2000. The CIR then elevated the case to the CA through a petition 4th Quarter 1,134,942.71 162,530,947.40 147,717,028.53
for review under Rule 43 of the Rules of Court. The CA affirmed the CTA ruling through its
decision dated October 1, 2003 and its resolution dated May 26, 2004, denying the motion TOTAL 7,924,403.96 557,441,384.27 475,541,341.54
for reconsideration. Hence, the present petition.
Total Amount of Sales 1,040,907,129.77

THE PETITIONER’S ARGUMENTS

The taxable sales and zero-rated sales are considered transactions subject to VAT, while
exempt sales refer to transactions not subject to VAT.
The CIR takes exception to the CA’s ruling that Eastern is entitled to the full amount of
unapplied input taxes paid for its purchase of imported capital goods that were
substantiated by the corresponding receipts and invoices. The CIR posits that, applying Since the VAT returns clearly reflected income from exempt sales, the CIR asserts that this
Section 104(A) of the Tax Code on apportionment of tax credits, Eastern is entitled to a constitutes as an admission on Eastern’s part that it engaged in transactions not subject to
tax refund of only ₱8,814,790.15, instead of the ₱16,229,100.00 adjudged by the CTA and VAT. Hence, the proportionate allocation of the tax credit to VAT and non-VAT transactions
the CA. Section 104(A) of the Tax Code states: provided in Section 104(A) of the Tax Code should apply. Eastern is then entitled to only
₱8,814,790.15 as the ratable portion of the tax credit, computed in the following manner:
SEC. 104. Tax Credits. –
Taxable Sales + Zero-rated Sales
x Input Tax as found
(a)  Creditable Input tax.  - = Refundable input tax
by the CTA
Total Sales
xxxx
7,924,403.96 + 557,445,384.97
x 16,229,100.00 = P8,814,790.15
A VAT-registered person who is also engaged in transactions not subject to the value-
1,040,907,129.77
added tax shall be allowed input tax credit as follows:

(A) Total input tax which can be directly attributed to transactions subject to value-
added tax; and
(B) A ratable portion of any input tax which cannot be directly attributed to either
activity. [Emphases supplied.]
To be entitled to a tax refund of the full amount of ₱16,229,100.00, the CIR asserts that
Eastern must prove that (a) it was engaged in purely VAT taxable transactions and (b) the
unapplied input taxes it claims as refund were directly attributable to transactions subject
to VAT. The VAT returns of Eastern for the 1st, 2nd, 3rd, and 4th quarters of 1996,
however, showed that it earned income from both transactions subject to VAT and
transactions exempt from VAT; the returns reported income earned from taxable sales,
zero-rated sales, and exempt sales in the following amounts:
THE RESPONDENT’S ARGUMENTS
Eastern objects to the arguments raised in the petition, alleging that these have not been
raised in the Answer filed by the CIR before the CTA. In fact, the CIR only raised the
applicability of Section 104(A) of the Tax Code in his supplemental motion for
reconsideration of the CTA’s ruling which, notably, was filed a month and a half after the
original motion was filed, and thus beyond the 15-day reglementary period. Accordingly,
the applicability of Section 104(A) was never validly presented as an issue before the CTA;
this, Eastern presumes, is the reason why it was not discussed in the CTA’s resolution
denying the motion for reconsideration. Eastern claims that for the CIR to raise such an
issue now would constitute a violation of its right to due process; following settled rules of
procedure and fair play, the CIR should not be allowed at the appeal level to change his
theory of the case.

Moreover, in raising the question of whether Eastern was in fact engaged in transactions
1996 Taxable Sales Zero-Rated Sales Exempt Sales not subject to VAT and whether the unapplied input taxes can be directly attributable to
transactions subject to VAT, Eastern posits that the CIR is effectively raising factual
questions that cannot be the subject of an appeal by certiorari before the Court.
Even if the CIR’s arguments were considered, Eastern insists that the petition should
nevertheless be denied since the CA found that there was no evidence in the claim that it
was engaged in non-VAT transactions. The CA has ruled that:
The following requirements must be present before [Section 104(A)] of the [1977 Tax
Code] can be applied, to wit:
1. The person claiming the creditable input tax must be VAT-registered;
2. Such person is engaged in a transaction subject to VAT;
3. The person is also engaged in other transactions not subject to VAT; and
4. The ratable portion of any input tax cannot be directly attributed to either activity.
In the case at bar, the third and fourth requisites are not extant. It is undisputed that
[Eastern] is VAT-registered and the importation of [Eastern’s] telecommunications
equipment, machinery, spare parts, fiber optic cables, and the like, as found by the CTA, is
a transaction subject to VAT. However, there is no evidence on record that would evidently
show that respondent is also engaged in other transactions that are not subject to VAT.
[Emphasis supplied.]
Given the parties’ arguments, the issue for resolution is whether the rule in Section 104(A)
of the Tax Code on the apportionment of tax credits can be applied in appreciating
Eastern’s claim for tax refund, considering that the matter was raised by the CIR only
when he sought reconsideration of the CTA ruling?
THE COURT’S RULING
We find the CIR’s petition meritorious.
The Rules of Court prohibits raising new issues on appeal; the question of the applicability
of Section 104(A) of the Tax Code was already raised but the tax court did not rule on it
Section 15, Rule 44 of the Rules of Court embodies the rule against raising new issues on
appeal:
SEC. 15. Questions that may be raised on appeal. – Whether or not the appellant has filed
a motion for new trial in the court below, he may include in his assignment of errors any
question of law or fact that has been raised in the court below and which is within the
issues framed by the parties.
The general rule is that appeals can only raise questions of law or fact that (a) were raised
in the court below, and (b) are within the issues framed by the parties therein. An issue
which was neither averred in the pleadings nor raised during trial in the court below
cannot be raised for the first time on appeal. The rule was made for the benefit of the
adverse party and the trial court as well. Raising new issues at the appeal level is offensive
to the basic rules of fair play and justice and is violative of a party’s constitutional right to
due process of law. Moreover, the trial court should be given a meaningful opportunity to
consider and pass upon all the issues, and to avoid or correct any alleged errors before
those issues or errors become the basis for an appeal.
Eastern posits that since the CIR raised the applicability of Section 104(A) of the Tax Code
only in his supplemental motion for reconsideration of the CTA decision (which was even
belatedly filed), the issue was not properly and timely raised and, hence, could not be
considered by the CTA. By raising the issue in his appeal before the CA, the CIR has
violated the above-cited procedural rule.
Contrary to Eastern’s claim, we find that the CIR has previously questioned the nature of
Eastern’s transactions insofar as they affected the claim for tax refund in his motion for
reconsideration of the CTA decision, although it did not specifically refer to Section 104(A)
of the Tax Code. We quote relevant portions of the motion:
[W]e maintain that [Eastern’s] claims are not creditable input taxes under [Section 104(A)
of the Tax Code]. What the law contemplates as creditable input taxes are only those paid
on purchases of goods and services specifically enumerated under [Section 104 (A)] and
that such input tax must have been paid by a VAT[-]registered person/entity in the course
of trade or business. It must be noted that [Eastern] failed to prove that such purchases
were used in their VAT[-]taxable business. [Eastern’s pieces of] evidence are not
purchases of capital goods and do not fall under the enumeration x x x.
It is significant to point out here that refund of input taxes on capital goods shall be
allowed only to the extent that such capital goods are used in VAT[-]taxable business. x x
x a perusal of the evidence submitted before [the CTA] does not show that the alleged
capital goods were used in VAT[-]taxable business of [Eastern] x x x. [Emphases
supplied.]
In raising these matters in his motion for reconsideration, the CIR put forward the
applicability of Section 104(A) because, essentially, the applicability of the provision boils
down to the question of whether the purchased capital goods which a taxpayer paid input
taxes were also used in a VAT-taxable business, i.e., transactions that were subject to
VAT, in order for them to be refundable/creditable. Once proved that the taxpayer used
the purchased capital goods in a both VAT taxable and non-VAT taxable business, the
proportional allocation of tax credits stated in the law necessarily applies. This rule is also
embodied in Section 4.106-1 of Revenue Regulation No. 7-95, entitled Consolidated Value-
Added Tax Regulations, which states:
SEC. 4.106-1. Refunds or tax credits of input tax. – x x x x
(b) Capital Goods. – Only a VAT-registered person may apply for issuance of a tax credit
certificate or refund of input taxes paid on capital goods imported or locally purchased.
The refund shall be allowed to the extent that such input taxes have not been applied
against output taxes. The application should be made within two (2) years after the close
of the taxable quarter when the importation or purchase was made.
Refund of input taxes on capital goods shall be allowed only to the extent that such capital
goods are used in VAT taxable business. If it is also used in exempt operations, the input
tax refundable shall only be the ratable portion corresponding to the taxable operations.
[Emphasis supplied.]
That the CTA failed to rule on this question when it resolved the CIR’s motion for
reconsideration should not be taken against the CIR. It was the CTA which committed an
error when it failed to avail of that "meaningful opportunity to avoid or correct any alleged
errors before those errors become the basis for an appeal."
Exceptions to the general rule; Eastern’s VAT returns reporting income from exempt sales
are matters of record that the tax court should have considered
The rule against raising new issues on appeal is not without exceptions; it is a procedural
rule that the Court may relax when compelling reasons so warrant or when justice requires
it. What constitutes good and sufficient cause that would merit suspension of the rules is
discretionary upon the courts. Former Senator Vicente Francisco, a noted authority in
procedural law, cites an instance when the appellate court may take up an issue for the
first time:
The appellate court may, in the interest of justice, properly take into consideration in
deciding the case matters of record having some bearing on the issue submitted which the
parties failed to raise or the lower court ignored, although they have not been specifically
raised as issues by the pleadings. This is in consonance with the liberal spirit that pervades
the Rules of Court, and the modern trend of procedure which accord the courts broad
discretionary power, consistent with the orderly administration of justice, in the decision of
cases brought before them. [Emphasis supplied.]
As applied in the present case, even without the CIR raising the applicability of Section
104(A), the CTA should have considered it since all four of Eastern’s VAT returns
corresponding to each taxable quarter of 1996 clearly stated that it earned income from
exempt sales, i.e., non-VAT taxable sales. Eastern’s quarterly VAT returns are matters of
record. In fact, Eastern included them in its formal offer of evidence before the CTA "to
prove that [it is] engaged in VAT taxable, VAT exempt, and VAT zero-rated sales." By
declaring income from exempt sales, Eastern effectively admitted that it engaged in
transactions not subject to VAT. In VAT-exempt sales, the taxpayer/seller shall not bill any
output tax on his sales to his customers and, corollarily, is not allowed any credit or refund
of the input taxes he paid on his purchases. This non-crediting of input taxes in exempt
transactions is the underlying reason why the Tax Code adopted the rule on
apportionment of tax credits under Section 104(A) whenever a VAT-registered taxpayer
engages in both VAT taxable and non-VAT taxable sales. In the face of these disclosures
by Eastern, we thus find the CA’s the conclusion that "there is no evidence on record that
would evidently show that [Eastern] is also engaged in other transactions that are not
subject to VAT" to be questionable.
Also, we disagree with the CA’s declaration that:
The mere fact that [Eastern’s] Quarterly VAT Returns confirm that [Eastern’s] transactions
involved zero-rated sales and exempt sales do not sufficiently establish that the same
were derived from [Eastern’s] transactions that are not subject to VAT. On the contrary,
the transactions from which [Eastern’s] sales were derived are subject to VAT but are
either zero[-]rated (0%) or otherwise exempted for falling within the transactions
enumerated in [Section 102(B) or Section 103] of the Tax Code. [Emphasis supplied.]
Section 103 of the Tax Code is an enumeration of transactions exempt from VAT.
Explaining the relation between exempt transactions in Section 103 and claims for tax
refunds, the Court declared in CIR v. Toshiba Equipment (Phils.), Inc. that:
Section 103 x x x of the Tax Code of 1977, as amended, relied upon by petitioner CIR,
relates to VAT-exempt transactions. These are transactions exempted from VAT by special
laws or international agreements to which the Philippines is a signatory. Since such
transactions are not subject to VAT, the sellers cannot pass on any output VAT to the
purchasers of goods, properties, or services, and they may not claim tax credit/refund of
the input VAT they had paid thereon.
The mere declaration of exempt sales in the VAT returns, whether based on Section 103 of
the Tax Code or some other special law, should have prompted the CA to apply Section
104(A) of the Tax Code to Eastern’s claim. It was thus erroneous for the appellate court to
rule that the declaration of exempt sales in Eastern’s VAT return, which may correspond to
exempt transactions under Section 103, does not indicate that Eastern was also involved
in non-VAT transactions.
Exception to general rule; taxpayer claiming refund has the duty to prove entitlement
thereto
Another exemption from the rule against raising new issues on appeal is when the
question involves matters of public importance.
The power of taxation is an inherent attribute of sovereignty; the government chiefly relies
on taxation to obtain the means to carry on its operations. Taxes are essential to its very
existence; hence, the dictum that "taxes are the lifeblood of the government." For this
reason, the right of taxation cannot easily be surrendered; statutes granting tax
exemptions are considered as a derogation of the sovereign authority and are strictly
construed against the person or entity claiming the exemption. Claims for tax refunds,
when based on statutes granting tax exemption or tax refund, partake of the nature of an
exemption; thus, the rule of strict interpretation against the taxpayer-claimant similarly
applies.
The taxpayer is charged with the heavy burden of proving that he has complied with and
satisfied all the statutory and administrative requirements to be entitled to the tax refund.
This burden cannot be offset by the non-observance of procedural technicalities by the
government’s tax agents when the non-observance of the remedial measure addressing it
does not in any manner prejudice the taxpayer’s due process rights, as in the present
case.
Eastern cannot validly claim to have been taken by surprise by the CIR’s arguments on the
relevance of Section 104(A) of the Tax Code, considering that the arguments were based
on the reported exempt sales in the VAT returns that Eastern itself prepared and formally
offered as evidence. Even if we were to consider the CIR’s act as a lapse in the observance
of procedural rules, such lapse does not work to entitle Eastern to a tax refund when the
established and uncontested facts have shown otherwise. Lapses in the literal observance
of a rule of procedure may be overlooked when they have not prejudiced the adverse
party and especially when they are more consistent with upholding settled principles in
taxation.
WHEREFORE, we GRANT the petitioner’s petition for review on certiorari, and REVERSE
the decision of the Court of Appeals in CA G.R. SP No. 61157, promulgated on October 1,
2003, as well as its resolution of May 26, 2004. We order the REMAND of the case to the
Court of Tax Appeals to determine the proportionate amount of tax credit that respondent
is entitled to, consistent with our ruling above. Costs against the respondent.
SO ORDERED.
G.R. No. 184450, January 24, 2017
JAIME N. SORIANO, MICHAEL VERNON M. GUERRERO, MARY ANN L. REYES,
MARAH SHARYN M. DE CASTRO AND CRIS P. TENORIO, Petitioners, v. SECRETARY
OF FINANCE AND THE COMMISSIONER OF INTERNAL REVENUE, Respondents.
G.R. No. 184508
SENATOR MANUEL A. ROXAS, Petitioner, v. MARGARITO B. TEVES, IN HIS
CAPACITY AS SECRETARY OF THE DEPARTMENT OF FINANCE AND LILIAN B.
HEFTI, IN HER CAPACITY AS COMMISSIONER OF THE BUREAU OF INTERNAL
REVENUE, Respondents.
G.R. No. 184538
TRADE UNION CONGRESS OF THE PHILIPPINES (TUCP), REPRESENTED BY ITS
PRESIDENT, DEMOCRITO T. MENDOZA, Petitioner, v. MARGARITO B. TEVES, IN HIS
CAPACITY AS SECRETARY OF THE DEPARTMENT OF FINANCE AND LILIAN B.
HEFTI, IN HER CAPACITY AS COMMISSIONER OF THE BUREAU OF INTERNAL
REVENUE Respondents.
G.R. No. 185234
.SENATOR FRANCIS JOSEPH G. ESCUDERO, TAX MANAGEMENT ASSOCIATION OF
THE PHILIPPINES, INC. AND ERNESTO G. EBRO, Petitioners, v. MARGARITO B.
TEVES, IN HIS CAPACITY AS SECRETARY OF THE DEPARTMENT OF FINANCE AND
SIXTO S. ESQUIVIAS IV, IN HIS CAPACITY AS COMMISSIONER OF THE BUREAU
OF INTERNAL REVENUE, Respondents.
DECISION
SERENO, C.J.:
Before us are consolidated Petitions for Certiorari, Prohibition and Mandamus, under Rule
65 of the 1997 Revised Rules of Court. These Petitions seek to nullify certain provisions of
Revenue Regulation No. (RR) 10-2008. The RR was issued by the Bureau of Internal
Revenue (BIR) on 24 September 2008 to implement the provisions of Republic Act No.
(R.A.) 9504. The law granted, among others, income tax exemption for minimum wage
earners (MWEs), as well as an increase in personal and additional exemptions for
individual taxpayers.
Petitioners assail the subject RR as an unauthorized departure from the legislative intent
of R.A. 9504. The regulation allegedly restricts the implementation of the MWEs' income
tax exemption only to the period starting from 6 July 2008, instead of applying the
exemption to the entire year 2008. They further challenge the BIR's adoption of the
prorated application of the new set of personal and additional exemptions for taxable year
2008. They also contest the validity of the RR's alleged imposition of a condition for the
availment by MWEs of the exemption provided by R.A. 9504. Supposedly, in the event
they receive other benefits in excess of P30,000, they can no longer avail themselves of
that exemption. Petitioners contend that the law provides for the unconditional exemption
of MWEs from income tax and, thus, pray that the RR be nullified.
ANTECEDENT FACTS
R.A. 9504
On 19 May 2008, the Senate filed its Senate Committee Report No. 53 on Senate Bill No.
(S.B.) 2293. On 21 May 2008, former President Gloria M. Arroyo certified the passage of
the bill as urgent through a letter addressed to then Senate President Manuel Villar. On
the same day, the bill was passed on second reading IN the Senate and, on 27 May 2008,
on third reading. The following day, 28 May 2008, the Senate sent S.B. 2293 to the House
of Representatives for the latter's concurrence.
On 04 June 2008, S.B. 2293 was adopted by the House of Representatives as an
amendment to House Bill No. (H.B.) 3971.
On 17 June 2008, R.A. 9504 entitled "An Act Amending Sections 22, 24, 34, 35, 51, and
79 of Republic Act No. 8424, as Amended, Otherwise Known as the National Internal
Revenue Code of 1997," was approved and signed into law by President Arroyo. The
following are the salient features of the new law:
 1. It increased the basic personal exemption from P20,000 for a single individual,
P25,000 for the head of the family, and P32,000 for a married individual to P50,000
for each individual.
2. It increased the additional exemption for each dependent not exceeding four from
P8,000 to P25,000.
3. It raised the Optional Standard Deduction (OSD) for individual taxpayers from
10% of gross income to 40% of the gross receipts or gross sales.
4. It introduced the OSD to corporate taxpayers at no more than 40% of their gross
income.
5. It granted MWEs exemption from payment of income tax on their minimum wage,
holiday pay, overtime pay, night shift differential pay and hazard pay.
Section 9 of the law provides that it shall take effect 15 days following its publication in
the Official Gazette or in at least two newspapers of general circulation. Accordingly, R.A.
9504 was published in the Manila Bulletin and Malaya on 21 June 2008. On 6 July 2008,
the end of the 15-day period, the law took effect.
RR 10-2008
On 24 September 2008, the BIR issued RR 10-2008, dated 08 July 2008, implementing
the provisions of R.A. 9504. The relevant portions of the said RR read as follows:
SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read
as follows:
Sec. 2.78.1. Withholding of Income Tax on Compensation Income.
xxxx
The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not
be considered in determining the P30,000.00 ceiling of 'other benefits' excluded from
gross income under Section 32 (b) (7) (e) of the Code. Provided that, the excess of the
'de minimis' benefits over their respective ceilings prescribed by these regulations shall be
considered as part of 'other benefits' and the employee receiving it will be subject to tax
only on the excess over the P30,000.00 ceiling. Provided, further, that MWEs
receiving 'other benefits' exceeding the P30,000.00 limit shall be taxable on the
excess benefits, as well as on his salaries, wages and allowances, just like an
employee receiving compensation income beyond the SMW.
xxxx
(B) Exemptions from Withholding Tax on Compensation. - The following income payments
are exempted from the requirements of withholding tax on compensation:
xxxx
(13) Compensation income of MWEs who work in the private sector and being paid the
Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity
Board (RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the
place where he/she is assigned.
The aforesaid income shall likewise be exempted from income tax.
'Statutory Minimum Wage' (SMW) shall refer to the rate fixed by the Regional Tripartite
Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and
Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). The
RTWPB of each region shall determine the wage rates in the different regions based on
established criteria and shall be the basis of exemption from income tax for this purpose.
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided,
however, that an employee who receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable
statutory amount of P30,000.00, taxable allowances and other taxable income
other than the SMW, holiday pay, overtime pay, hazard pay and night shift
differential pay shall not enjoy the privilege of being a MWE and, therefore,
his/her entire earnings are not exempt from income tax, and consequently, from
withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year. This rule, notwithstanding, the SMW, holiday pay, overtime pay, night
shift differential pay and hazard pay shall still be exempt from withholding tax.
For purposes of these regulations, hazard pay shall mean the amount paid by the
employer to MWEs who were actually assigned to danger or strife-torn areas, disease-
infested places, or in distressed or isolated stations and camps, which expose them to
great danger of contagion or peril to life. Any hazard pay paid to MWEs which does not
satisfy the above criteria is deemed subject to income tax and consequently, to
withholding tax.
xxxx
SECTION 3. Section 2.79 of RR 2-98, as amended, is hereby further amended to read as
follows:
Sec. 2.79. Income Tax Collected at Source on Compensation Income.-
(A) Requirement of Withholding. - Every employer must withhold from compensation paid
an amount computed in accordance with these Regulations. Provided, that no withholding
of tax shall be required on the SMW, including holiday pay, overtime pay, night shift
differential and hazard pay of MWEs in the private/public sectors as defined in these
Regulations. Provided, further, that an employee who receives additional
compensation such as commissions, honoraria, fringe benefits, benefits in excess
of the allowable statutory amount of P30,000.00, taxable allowances and other
taxable income other than the SMW, holiday pay, overtime pay, hazard pay and
night shift differential pay shall not enjoy the privilege of being a MWE and,
therefore, his/her entire earnings are not exempt from income tax and,
consequently, shall be subject to withholding tax.
xxxx
For the year 2008, however, being the initial year of implementation of R.A. 9504, there
shall be a transitory withholding tax table for the period from July 6 to December 31, 2008
(Annex "D") determined by prorating the annual personal and additional exemptions under
R.A. 9504 over a period of six months. Thus, for individuals, regardless of personal status,
the prorated personal exemption is P25,000. and for each qualified dependent child (QDC),
P12,500.
xxxx
SECTION 9. Effectivity. -
These Regulations shall take effect beginning July 6, 2008. (Emphases supplied)
The issuance and effectivity of RR 10-2008 implementing R.A. 9504 spawned the present
Petitions.
G.R. No. 184450
Petitioners Jaime N. Soriano et al. primarily assail Section 3 of RR 10-2008 providing for
the prorated application of the personal and additional exemptions for taxable year 2008
to begin only effective 6 July 2008 for being contrary to Section 4 of Republic Act No.
9504.
Petitioners argue that the prorated application of the personal and additional exemptions
under RR 10-2008 is not "the legislative intendment in this jurisdiction." They stress that
Congress has always maintained a policy of "full taxable year treatment" as regards the
application of tax exemption laws. They allege further that R.A. 9504 did not provide for a
prorated application of the new set of personal and additional exemptions.
G.R. No. 184508
Then Senator Manuel Roxas, as principal author of R.A. 9504, also argues for a full taxable
year treatment of the income tax benefits of the new law. He relies on what he says is
clear legislative intent In his "Explanatory Note of Senate Bill No. 103," he stresses "the
very spirit of enacting the subject tax exemption law" as follows:
With the poor, every little bit counts, and by lifting their burden of paying income tax, we
give them opportunities to put their money to daily essentials as well as savings.
Minimum wage earners can no longer afford to be taxed and to be placed in the
cumbersome income tax process in the same manner as higher-earning
employees. It is our obligation to ease their burdens in any way we can. (Emphasis
Supplied)
Apart from raising the issue of legislative intent, Senator Roxas brings up the following
legal points to support his case for the full-year application of R.A. 9504's income tax
benefits. He says that the pro rata application of the assailed RR deprives MWEs of the
financial relief extended to them by the law; that Umali  v. Estanislao serves as
jurisprudential basis for his position that R.A. 9504 should be applied on a full-year basis
to taxable year 2008; and that the social justice provisions of the 1987 Constitution,
particularly Articles II and XIII, mandate a full application of the law according to the spirit
of R.A. 9504.
On the scope of exemption of MWEs under R.A. 9504, Senator Roxas argues that the
exemption of MWEs is absolute, regardless of the amount of the other benefits they
receive. Thus, he posits that the Department of Finance (DOF) and the BIR committed
grave abuse of discretion amounting to lack and/or excess of jurisdiction. They supposedly
did so when they provided in Section 1 of RR 10-2008 the condition that an MWE who
receives "other benefits" exceeding the P30,000 limit would lose the tax exemption. He
further contends that the real intent of the law is to grant income tax exemption to the
MWE without any limitation or qualification, and that while it would be reasonable to tax
the benefits in excess of P30,000, it is unreasonable and unlawful to tax both the excess
benefits and the salaries, wages and allowances.
G.R. No. 184538
Petitioner Trade Union Congress of the Philippine contends that the provisions of R.A. 9504
provide for the application of the tax exemption for the full calendar year 2008. It also
espouses the interpretation that R.A. 9504 provides for the unqualified tax exemption of
the income of MWEs regardless of the other benefits they receive. In conclusion, it says
that RR 10-2008, which is only an implementing rule, amends the original intent of R.A.
9504, which is the substantive law, and is thus null and void.
G.R. No. 185234
Petitioners Senator Francis Joseph Escudero, the Tax Management Association of the
Philippines, Inc., and Ernesto Ebro allege that R.A. 9504 unconditionally grants MWEs
exemption from income tax on their taxable income, as wel1 as increased personal and
additional exemptions for other individual taxpayers, for the whole year 2008. They note
that the assailed RR 10-2008 restricts the start of the exemptions to 6 July 2008 and
provides that those MWEs who received "other benefits" in excess of P30,000 are not
exempt from income taxation. Petitioners believe this RR is a "patent nullity" and therefore
void.
Comment of the OSG
The Office of the Solicitor General (OSG) filed a Consolidated Comment and took the
position that the application of R.A. 9504 was intended to be prospective, and not
retroactive. This was supposedly the general rule under the rules of statutory
construction: law will only be applied retroactively if it clearly provides for retroactivity,
which is not provided in this instance.
The OSG contends that Umali  v. Estanislao is not applicable to the present case. It
explains that R.A. 7167, the subject of that case, was intended to adjust the personal
exemption levels to the poverty threshold prevailing in 1991. Hence, the Court in that case
held that R.A. 7167 had been given a retroactive effect. The OSG believes that the grant
of personal exemptions no longer took into account the poverty threshold level under R.A.
9504, because the amounts of personal exemption far exceeded the poverty threshold
levels.
The OSG further argues that the legislative intent of non-retroactivity was effectively
confirmed by the "Conforme" of Senator Escudero, Chairperson of the Senate Committee
on Ways and Means, on the draft revenue regulation that became RR 10-2008.
ISSUES
Assailing the validity of RR 10-2008, all four Petitions raise common issues, which may be
distilled into three major ones:
First, whether the increased personal and additional exemptions provided by R.A. 9504
should be applied to the entire taxable year 2008 or prorated, considering that R.A. 9504
took effect only on 6 July 2008.
Second, whether an MWE is exempt for the entire taxable year 2008 or from 6 July 2008
only.
Third, whether Sections 1 and 3 of RR 10-2008 are consistent with the law in providing
that an MWE who receives other benefits in excess of the statutory limit of P30,000 is no
longer entitled to the exemption provided by R.A. 9504.
THE COURT'S RULING
I.
Whether the increased personal and additional exemptions provided by R.A.
9504 should be applied to the entire taxable year 2008 or prorated, considering
that the law took effect only on 6 July 2008
The personal and additional exemptions established by R.A. 9504 should be applied to the
entire taxable year 2008.
Umali  is applicable.
Umali  v. Estanislao supports this Court's stance that R.A. 9504 should be applied on a full-
year basis for the entire taxable year 2008. In Umali, Congress enacted R.A. 7167
amending the 1977 National Internal Revenue Code (NIRC). The amounts of basic
personal and additional exemptions given to individual income taxpayers were adjusted to
the poverty threshold level. R.A. 7167 came into law on 30 January 1992. Controversy
arose when the Commission of Internal Revenue (CIR) promulgated RR 1-92 stating that
the regulation shall take effect on compensation income earned beginning 1 January 1992.
The issue posed was whether the increased personal and additional exemptions could be
applied to compensation income earned or received during calendar year 1991, given that
R.A. 7167 came into law only on 30 January 1992, when taxable year 1991 had already
closed.
This Court ruled in the affirmative, considering that the increased exemptions were already
available on or before 15 April 1992, the date for the filing of individual income tax
returns. Further, the law itself provided that the new set of personal and additional
exemptions would be immediately available upon its effectivity. While R.A. 7167 had not
yet become effective during calendar year 1991, the Court found that it was a piece of
social legislation that was in part intended to alleviate the economic plight of the lower-
income taxpayers. For that purpose, the new law provided for adjustments "to the poverty
threshold level" prevailing at the time of the enactment of the law. The relevant discussion
is quoted below:
[T]he Court is of the considered view that Rep. Act 7167 should cover or extend to
compensation income earned or received during calendar year 1991.
Sec. 29, par.(L), Item No. 4 of the National Internal Revenue Code, as amended,
provides:
Upon the recommendation of the Secretary of Finance, the President shall automatically
adjust not more often than once every three years, the personal and additional
exemptions taking into account, among others, the movement in consumer price indices,
levels of minimum wages, and bare subsistence levels.
As the personal and additional exemptions of individual taxpayers were last adjusted in
1986, the President, upon the recommendation of the Secretary of Finance, could have
adjusted the personal and additional exemptions in 1989 by increasing the same even
without any legislation providing for such adjustment. But the President did not.
However, House Bill 28970, which was subsequently enacted by Congress as Rep. Act
7167, was introduced in the House of Representatives in 1989 although its passage was
delayed and it did not become effective law until 30 January 1992. A perusal, however, of
the sponsorship remarks of Congressman Hernando B. Perez, Chairman of the House
Committee on Ways and Means, on House Bill 28970, provides an indication of the intent
of Congress in enacting Rep. Act 7167. The pertinent legislative journal contains the
following:
At the outset, Mr. Perez explained that the Bill Provides for increased personal additional
exemptions to individuals in view of the higher standard of living.
The Bill, he stated, limits the amount of income of individuals subject to income tax to
enable them to spend for basic necessities and have more disposable income.
xxxx

Mr. Perez added that inflation has raised the basic necessities and that it had been three
years since the last exemption adjustment in 1986.
xxxx
Subsequently, Mr. Perez stressed the necessity of passing the measure to mitigate the
effects of the current inflation and of the implementation of the salary standardization law.
Stating that it is imperative for the government to take measures to ease the burden of
the individual income tax tilers, Mr. Perez then cited specific examples of how the measure
can help assuage the burden to the taxpayers.
He then reiterated that the increase in the prices of commodities has eroded the
purchasing power of the peso despite the recent salary increases and emphasized that the
Bill will serve to compensate the adverse effects of inflation on the taxpayers. xxx (Journal
of the House of Representatives, May 23, 1990, pp. 32-33).
It will also be observed that Rep. Act 7167 speaks of the adjustments that it provides for,
as adjustments "to the poverty threshold level." Certainly, "the poverty threshold level" is
the poverty threshold level at the time Rep. Act 7167 was enacted by Congress, not
poverty threshold levels in futuro, at which time there may be need of further adjustments
in personal exemptions. Moreover, the Court can not lose sight of the fact that
these personal and additional exemptions are fixed amounts to which an
individual taxpayer is entitled, as a means to cushion the devastating effects of
high prices and a depreciated purchasing power of the currency. In the end, it is
the lower-income and the middle-income groups of taxpayers (not the high-
income taxpayers) who stand to benefit most from the increase of personal and
additional exemptions provided for by Rep. Act 7167. To that extent, the act is a
social legislation intended to alleviate in part the present economic plight of the
lower income taxpayers. It is intended to remedy the inadequacy of the
heretofore existing personal and additional exemptions for individual taxpayers.
And then, Rep. Act 7167 says that the increased personal exemptions that it provides for
shall be available thenceforth, that is, after Rep. Act 7167 shall have become
effective. In other words, these exemptions are available upon the filing of
personal income tax returns which is, under the National Internal Revenue Code,
done not later than the 15th day of April after the end of a calendar year. Thus,
under Rep. Act 7167, which became effective, as aforestated, on 30 January
1992, the increased exemptions are literally available on or before 15 April 1992
(though not before 30 January 1992). But these increased exemptions can be
available on 15 April 1992 only in respect of compensation income earned or received
during the calendar year 1991.
The personal exemptions as increased by Rep. Act 7167 cannot be regarded as available in
respect of compensation income received during the 1990 calendar year; the tax due in
respect of said income had already accrued, and been presumably paid, by 15 April 1991
and by 15 July 1991, at which time Rep. Act 7167 had not been enacted. To make Rep.
Act 7167 refer back to income received during 1990 would require language explicitly
retroactive in purport and effect, language that would have to authorize the payment of
refunds of taxes paid on 15 April 1991 and 15 July 1991: such language is simply not
found in Rep. Act 7167.
The personal exemptions as increased by Rep. Act 7167 cannot be regarded as
available only in respect of compensation income received during 1992, as the
implementing Revenue Regulations No. 1-92 purport to provide. Revenue
Regulations No. 1-92 would in effect postpone the availability of the increased
exemptions to 1 January-15 April 1993, and thus literally defer the effectivity of
Rep. Act 7167 to 1 January 1993. Thus, the implementing regulations collide frontally
with Section 3 of Rep. Act 7167 which states that the statute "shall take effect upon its
approval." The objective of the Secretary of Finance and the Commissioner of Internal
Revenue in postponing through Revenue Regulations No. 1-92 the legal effectivity of Rep.
Act 7167 is, of course, entirely understandable-to defer to 1993 the reduction of
governmental tax revenues which irresistibly follows from the application of Rep. Act 7167.
But the law-making authority has spoken and the Court can not refuse to apply the law-
maker's words. Whether or not the government can afford the drop in tax revenues
resulting from such increased exemptions was for Congress (not this Court) to decide.
(Emphases supplied)
In this case, Senator Francis Escudero's sponsorship speech for Senate Bill No. 2293
reveals two important points about R.A. 9504: (1) it is a piece of social legislation; and (2)
its intent is to make the proposed law immediately applicable, that is, to taxable year
2008:
Mr. President, distinguished colleagues, Senate Bill No. 2293 seeks, among others, to
exempt minimum wage earners from the payment of income and/or withholding tax. It is
an attempt to help our people cope with the rising costs of commodities that
seem to be going up unhampered these past few months.
Mr. President, a few days ago, the Regional Tripartite and Wages Productivity Board
granted an increase of P20 per day as far as minimum wage earners are concerned. By
way of impact, Senate Bill No. 2293 would grant our workers an additional salary or take-
home pay of approximately P34 per day, given the exemption that will be granted to all
minimum wage earners. It might be also worthy of note that on the part of the public
sector, the Senate Committee on Ways and Means included, as amongst those who will be
exempted from the payment of income tax and/or withholding tax. government workers
receiving Salary Grade V. We did not make any distinction so as to include Steps 1 to 8 of
Salary Grade V as long as one is employed in the public sector or in government.
In contradistinction with House Bill No. 3971 approved by the House of Representatives
pertaining to a similar subject matter, the House of Representatives, very much like the
Senate, adopted the same levels of exemptions which are:
From an allowable personal exemption for a single individual of P20,000, to a head of
family of P25,000, to a married individual of P32,000, both the House and the Senate
versions contain a higher personal exemption of P50,000.
Also, by way of personal additional exemption as far as dependents are concerned, up to
four, the House, very much like the Senate, recommended a higher ceiling of P25,000 for
each dependent not exceeding four, thereby increasing the maximum additional wage earners. Given that, we were able to increase their take-home pay by the
exemptions and personal additional exemptions to as high as P200,000, depending on amount equivalent to the tax exemption we have granted.
one's status in life.
We urge our colleagues, Mr. President, to pass this bill in earnest so that we can
The House also, very much like the Senate, recommended by way of trying to address the immediately grant relief to our people.
revenue loss on the part of the government, an optional standard deduction (OSD) on
gross sales, and/or gross receipts as far as individual taxpayers are concerned. However, Thank you, Mr. President. (Emphases Supplied)
the House, unlike the Senate, recommended a Simplified Net Income Tax Scheme (SNITS)
Clearly, Senator Escudero expressed a sense of urgency for passing what would
in order to address the remaining balance of the revenue loss.
subsequently become R.A. 9504. He was candid enough to admit that the bill needed
improvement, but because time was of the essence, he urged the Senate to pass the bill
By way of contrast, the Senate Committee on Ways and Means recommended, in lieu of
immediately. The idea was immediate tax relief to the individual taxpayers, particularly
SNITS, an optional standard deduction of 40% for corporations as far as their gross
low compensation earners, and an increase in their take-home pay.
income is concerned.
Senator Miriam Defensor-Santiago also remarked during the deliberations that "the
Mr. President, if we total the revenue loss as well as the gain brought about by the 40%
increase in personal exemption from P20,000 to P50,000 is timely and appropriate given
OSD on individuals on gross sales and receipts and 40% on gross income as far as
the increased cost of living. Also, the increase in the additional exemption for dependent
corporations are concerned, with a conservative availment rate as computed by the
children is necessary and timely."
Department of Finance, the government would still enjoy a gain of P.78 billion or P780
million if we use the high side of the computation however improbable it may be.
Finally, we consider the President's certification of the necessity of e immediate enactment
of Senate Bill No. 2293. That certification became e basis for the Senate to dispense with
For the record, we would like to state that if the availment rate is computed at 15% for
the three-day rule for passing a bill. It evinced the intent of the President to afford wage
individuals and 10% for corporations, the potential high side of a revenue gain would
earners immediate tax relief from the impact of a worldwide increase in the prices of
amount to approximately P18.08 billion.
commodities. Specifically, the certification stated that the purpose was to "address the
urgent need to cushion the adverse impact of the global escalation of commodity prices
Mr. President, we have received many suggestions increasing the rate of personal
upon the most vulnerable within the low income group by providing expanded income tax
exemptions and personal additional exemptions. We have likewise received various
relief."
suggestions pertaining to the expansion of the coverage of the tax exemption granted to
minimum wage earners to encompass as well other income brackets.
In sum, R.A. 9504, like R.A. 7167 in Umali, was a piece of social legislation clearly
intended to afford immediate tax relief to individual taxpayers, particularly low-income
However, the only suggestion other than or outside the provisions contained in House Bill
compensation earners. Indeed, if R.A. 9504 was to take effect beginning taxable year
No. 3971 that the Senate Committee on Ways and Means adopted, was an expansion of
2009 or half of the year 2008 only, then the intent of Congress to address the increase in
the exemption to cover overtime, holiday, nightshirt differential, and hazard pay also
the cost of living in 2008 would have been negated.
being enjoyed by minimum wage earners. It entailed an additional revenue loss of P1
billion approximately on the part of the government. However, Mr. President, that was
Therefore, following Umali, the test is whether the new set of personal and additional
taken into account when I stated earlier that there will still be a revenue gain on the
exemptions was available at the time of the filing of the income tax return. In other words,
conservative side on the part of government of P780 million.
while the status of the individual taxpayers is determined at the close of the taxable
year, their personal and additional exemptions - and consequently the computation of
Mr. President, [my distinguished colleagues in the Senate,  we wish to provide a higher
their taxable income - are reckoned when the tax becomes due, and not while the income
exemption for our countrymen because of the incessant and constant increase in
is being earned or received.
the price of goods. Nonetheless, not only Our Committee, but also the Senate and
Congress, must act responsibly in recognizing that much as we would like to give all forms
The NIRC is clear on these matters. The taxable income of an individual taxpayer shall be
of help that we can and must provide to our people, we also need to recognize the need of
computed on the basis of the calendar year. The taxpayer is required to fi1e an income tax
the government to defray its expenses in providing services to the public. This is the most
return on the 15th of April of each year covering income of the preceding taxable year. The
that we can give at this time because the government operates on a tight budget and is
tax due thereon shall be paid at the time the return is filed.
short on funds when it comes to the discharge of its main expenses.]
It stands to reason that the new set of personal and additional exemptions, adjusted as a
Mr. President, time will perhaps come and we can improve on this version, but at
form of social legislation to address the prevailing poverty threshold, should be given
present, this is the best, I believe, that we can give our people. But by way of
effect at the most opportune time as the Court ruled in Umali.
comparison, it is still P10 higher than what the wage boards were able to give minimum

The test provided by Umali is consistent with Ingalls v. Trinidad, in which the Court dealt
with the matter of a married person's reduced exemption. As early as 1923, the Court
already provided the reference point for determining the taxable income:
[T]hese statutes dealing with the manner of collecting the income tax and with the
deductions to be made in favor of the taxpayer have reference to the time when the return
is filed and the tax assessed. If Act No. 2926 took, as it did take, effect on January 1,
1921, its provisions must be applied to income tax returns filed, and assessments made
from that date. This is the reason why Act No. 2833, and Act No. 2926, in their respective
first sections, refer to income received during the preceding civil year. (Italics in the
original)
There, the exemption was reduced, not increased, and the Court effectively ruled that
income tax due from the individual taxpayer is properly determined upon the filing of the
return. This is done after the end of the taxable year, when all the incomes for the
immediately preceding taxable year and the corresponding personal exemptions and/or
deductions therefor have been considered. Therefore, the taxpayer was made to pay a
higher tax for his income earned during 1920, even if the reduced exemption took effect
on 1 January 1921.
In the present case, the increased exemptions were already available much earlier than
the required time of filing of the return on 15 April 2009. R.A. 9504 came into law on 6
July 2008, more than nine months before the deadline for the filing of the income tax
return for taxable year 2008. Hence, individual taxpayers were entitled to claim the
increased amounts for the entire year 2008. This was true despite the fact that incomes
were already earned or received prior to the law's effectivity on 6 July 2008.
Even more compelling is the fact that R.A. 9504 became effective during the taxable year
in question. In Umali, the Court ruled that the application of the law was prospective, even
if the amending law took effect after the close of the taxable year in question, but before
the deadline for the filing of the return and payment of the taxes due for that year. Here,
not only did R.A. 9504 take effect before the deadline for the filing of the return and
payment for the taxes due for taxable year 2008, it took effect way before the close of
that taxable year. Therefore, the operation of the new set of personal and additional
exemption in the present case was all the more prospective.
Additionally, as will be discussed later, the rule of full taxable year treatment for the
availment of personal and additional exemptions was established, not by the amendments
introduced by R.A. 9504, but by the provisions of the 1997 Tax Code itself. The new law
merely introduced a change in the amounts of the basic and additional personal
exemptions. Hence, the fact that R.A. 9504 took effect only on 6 July 2008 is irrelevant.
The present case is substantially identical with Umali and not with Pansacola.
Respondents argue that Umali is not applicable to the present case. They contend that the
increase in personal and additional exemptions were necessary in that case to conform to
the 1991 poverty threshold level; but that in the present case, the amounts under R.A.
9504 far exceed the poverty threshold level. To support their case, respondents cite
figures allegedly coming from the National Statistical Coordination Board. According to
those figures, in 2007, or one year before the effectivity of R.A. 9504, the poverty
threshold per capita was P14,866 or P89,196 for a family of six.
We are not persuaded.
The variance raised by respondents borders on the superficial. The message of Umali is
that there must be an event recognized by Congress that occasions the immediate
application of the increased amounts of personal and additional exemptions. In Umali, that
event was the failure to adjust the personal and additional exemptions to the prevailing
poverty threshold level. In this case, the legislators specified the increase in the price of
commodities as the basis for the immediate availability of the new amounts of personal
and additional exemptions.
We find the facts of this case to be substantially identical to those of Umali.
First, both cases involve an amendment to the prevailing tax code. The present petitions
call for the interpretation of the effective date of the increase in personal and additional
exemptions. Otherwise stated, the present case deals with an amendment (R.A. 9504) to
the prevailing tax code (R.A. 8424 or the 1997 Tax Code). Like the present case, Umali
involved an amendment to the then prevailing tax code - it interpreted the effective date
of R.A. 7167, an amendment to the 1977 NIRC, which also increased personal and
additional exemptions.
Second, the amending law in both cases reflects an intent to make the new set of
personal and additional exemptions immediately available after the effectivity of the law.
As already pointed out, in Umali, R.A. 7167 involved social legislation intended to adjust
personal and additional exemptions. The adjustment was made in keeping with the
poverty threshold level prevailing at the time.
Third, both cases involve social legislation intended to cure a social evil - R.A. 7167 was
meant to adjust personal and additional exemptions in relation to the poverty threshold
level, while R.A. 9504 was geared towards addressing the impact of the global increase in
the price of goods.
Fourth, in both cases, it was clear that the intent of the legislature was to hasten the
enactment of the law to make its beneficial relief immediately available.
Pansacola is not applicable.
In lieu of Umali, the OSG relies on our ruling in Pansacola  v. Commissioner of Internal
Revenue. In that case, the 1997 Tax Code (R.A. 8424) took effect on 1 January 1998, and
the petitioner therein pleaded for the application of the new set of personal and additional
exemptions provided thereunder to taxable year 1997. R.A. 8424 explicitly provided for its
effectivity on 1 January 1998, but it did not provide for any retroactive application.
We ruled against the application of the new set of personal and additional exemptions to
the previous taxable year 1997, in which the filing and payment of the income tax was due
on 15 April 1998, even if the NIRC had already taken effect on 1 January 1998. This court
explained that the NIRC could not be given retroactive application, given the specific
mandate of the law that it shall take effect on 1 January 1998; and given the absence of
any reference to the application of personal and additional exemptions to income earned
prior to 1 January 1998. We further stated that what the law considers for the purpose of
determining the income tax due is the status at the close of the taxable year, as opposed
to the time of filing of the return and payment of the corresponding tax.
The facts of this case are not identical with those of Pansacola.
First, Pansacola interpreted the effectivity of an entirely new tax code - R.A. 8424, the
Tax Reform Act of 1997. The present case, like Umali, involves a mere amendment of
some specific provisions of the prevailing tax code: R.A. 7167 amending then P.D. 1158
(the 1977 NIRC) in Umali and R.A. 9504 amending R.A. 8424 herein.
Second, in Pansacola, the new tax code specifically provided for an effective date - the
beginning of the following year - that was to apply to all its provisions, including new tax
rates, new taxes, new requirements, as well as new exemptions. The tax code did not
make any exception to the effectivity of the subject exemptions, even if transitory
provisions specifically provided for different effectivity dates for certain provisions.
Hence, the Court did not find any legislative intent to make the new rates of personal and
additional exemptions available to the income earned in the year previous to R.A. 8424's
effectivity. In the present case, as previously discussed, there was a clear intent on the
part of Congress to make the new amounts of personal and additional exemptions
immediately available for the entire taxable year 2008. R.A. 9504 does not even need a
provision providing for retroactive application because, as mentioned above, it is actually
prospective - the new law took effect during the taxable year in question.
Third, in Pansacola, the retroactive application of the new rates of personal and additional
exemptions would result in an absurdity - new tax rates under the new law would not
apply, but a new set of personal and additional exemptions could be availed of. This
situation does not obtain in this case, however, precisely because the new law does not
involve an entirely new tax code. The new law is merely an amendment to the rates of
personal and additional exemptions.
Nonetheless, R.A. 9504 can still be made applicable to taxable year 2008, even if we apply
the Pansacola test. We stress that Pansacola considers the close of the taxable year as the
reckoning date for the effectivity of the new exemptions. In that case, the Court refused
the application of the new set of personal exemptions, since they were not yet available at
the close of the taxable year. In this case, however, at the close of the taxable year, the
new set of exemptions was already available. In fact, it was already available during the
taxable year - as early as 6 July 2008 - when the new law took effect.
There may appear to be some dissonance between the Court's declarations in Umali and
those in Pansacola, which held:
Clearly from the above-quoted provisions, what the law should consider for the purpose of
determining the tax due from an individual taxpayer is his status and qualified dependents
at the close of the taxable year and not at the time the return is filed and the tax due
thereon is paid. Now comes Section 35(C) of the NIRC which provides,
xxxx
Emphasis must be made that Section 35(C) of the NIRC allows a taxpayer to still claim the
corresponding full amount of exemption for a taxable year, e.g. if he marries; have
additional dependents; he, his spouse, or any of his dependents die; and if any of his
dependents marry, turn 21 years old; or become gainfully employed. It is as if the
changes in his or his dependents status took place at the close of the taxable year.
Consequently, his correct taxable income and his corresponding allowable
deductions e.g. personal and additional deductions, if any, had already been
determined as of the end of the calendar year.
xxx. Since the NIRC took effect on January 1, 1998, the increased amounts of personal
and additional exemptions under Section 35, can only be allowed as deductions from the
individual taxpayers gross or net income, as the case maybe, for the taxable year 1998 to
be filed in 1999. The NIRC made no reference that the personal and additional exemptions
shall apply on income earned before January 1, 1998.
It must be remembered, however, that the Court therein emphasized that Umali was
interpreting a social legislation:
In Umali, we noted that despite being given authority by Section 29(1)(4) of the National
Internal Revenue Code of 1977 to adjust these exemptions, no adjustments were made to
cover 1989. Note that Rep. Act No. 7167 is entitled "An Act Adjusting the Basic Personal
and Additional Exemptions Allowable to Individuals for Income Tax Purposes to the
Poverty Threshold Level, Amending for the Purpose Section 29, Paragraph (L), Items (1)
and (2) (A), of the National Internal Revenue Code, As Amended, and For Other
Purposes." Thus, we said in Umali, that the adjustment provided by Rep. Act No. 7167
effective 1992, should consider the poverty threshold level in 1991, the time it was
enacted. And we observed therein that since the exemptions would especially benefit
lower and middle-income taxpayers, the exemption should be made to cover the past year
1991. To such an extent, Rep. Act No. 7167 was a social legislation intended to remedy
the non-adjustment in 1989. And as cited in Umali, this legislative intent is also clear in
the records of the House of Representatives Journal.
This is not so in the case at bar. There is nothing in the NIRC that expresses any such
intent. The policy declarations in its enactment do not indicate it was a social
legislation that adjusted personal and additional exemptions according to the
poverty threshold level nor is there any indication that its application should
retroact. xxx (Emphasis Supplied)
Therefore, the seemingly inconsistent pronouncements in Umali and Pansacola are more
apparent than real. The circumstances of the cases and the laws interpreted, as well as
the legislative intents thereof, were different.
The policy in this jurisdiction is full taxable year treatment.
We have perused R.A. 9504, and we see nothing that expressly provides or even suggests
a prorated application of the exemptions for taxable year 2008. On the other hand, the
policy of full taxable year treatment, especially of the personal and additional exemptions,
is clear under Section 35, particularly paragraph C of R.A. 8424 or the 1997 Tax Code:
SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -
(A) In General. - For purposes of determining the tax provided in Section 24(A) of this
Title, there shall be allowed a basic personal exemption as follows:
xxxx
(B) Additional Exemption for Dependents. - There shall be allowed an additional exemption
of... for each dependent not exceeding four (4).
xxxx
(C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as
defined above during the taxable year, the taxpayer may claim the corresponding
additional exemption, as the case may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependent(s) as if he died at the close of
such year.
If the spouse or any of the dependents dies or if any of such dependents marries, becomes
twenty-one (21) years old or becomes gainfully employed during the taxable year,
the taxpayer may still claim the same exemptions as if the spouse or any of the
dependents died, or as if such dependents married, became twenty-one (21) years old or
became gainfully employed at the close of such year. (Emphases supplied)
Note that paragraph C does not allow the prorating of the personal and additional
exemptions provided in paragraphs A and B, even in case a status changing event occurs
during the taxable year. Rather, it allows the fullest benefit to the individual taxpayer. This
manner of reckoning the taxpayer's status for purposes of the personal and additional
exemptions clearly demonstrates the legislative intention; that is, for the state to give the
taxpayer the maximum exemptions that can be availed, notwithstanding the fact that the
latter's actual status would qualify only for a lower exemption if prorating were employed.
We therefore see no reason why we should make any distinction between the income
earned prior to the effectivity of the amendment (from 1 January 2008 to 5 July 2008) and
that earned thereafter (from 6 July 2008 to 31 December 2008) as none is indicated in the
law. The principle that the courts should not distinguish when the law itself does not
distinguish squarely applies to this case.
We note that the prorating of personal and additional exemptions was employed in the
1939 Tax Code. Section 23(d) of that law states:
Change of status. - If the status of the taxpayer insofar as it affects the personal and
additional exemptions for himself or his dependents, changes during the taxable year, the
amount of the personal and additional exemptions shall be apportioned, under
rules and regulations prescribed by the Secretary of Finance, in accordance with
the number of months before and after such change. For the purpose of such
apportionment a fractional part of a month shall be disregarded unless it amounts to more
than half a month, in which case it shall be considered as a month. (Emphasis supplied)
On 22 September 1950, R.A. 590 amended Section 23(d) of the 1939 Tax Code by
restricting the operation of the prorating of personal exemptions. As amended, Section
23(d) reads:
(d) Change of status. - If the status of the taxpayer insofar as it affects the personal and
additional exemption for himself or his dependents, changes during the taxable year by
reason of his death, the amount of the personal and additional exemptions shall be
apportioned, under rules and regulations prescribed by the Secretary of Finance, in
accordance with the number of months before and after such change. For the purpose of
such apportionment a fractional part of a month shall be disregarded unless it amounts to
more than half a month, in which case it shall be considered as a month. (Emphasis
supplied)
Nevertheless, in 1969, R. A. 6110 ended the operation of the prorating scheme in our
jurisdiction when it amended Section 23(d) of the 1939 Tax Code and adopted a full
taxable year treatment of the personal and additional exemptions. Section 23(d), as
amended, reads:
(d) Change of status.
If the taxpayer married or should have additional dependents as defined in subsection (c)
above during the taxable year the taxpayer may claim the corresponding personal
exemptions in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the personal
and additional deductions for himself and his dependents as if he died at the close of such
year.
If the spouse or any of the dependents should die during the year, the taxpayer may still
claim the same deductions as if they died at the close of such year.
P.D. 69 followed in 1972, and it retained the full taxable year scheme. Section 23(d)
thereof reads as follows:
(d) Change of status. - If the taxpayer marries or should have additional dependents as
defined in subsection (c) above during the taxable year the taxpayer may claim the
corresponding personal exemptions in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the personal
and additional deductions for himself and his dependents as if he died at the close of such
year.
If the spouse or any of the dependents should die or become twenty-one years old during
the taxable year, the taxpayer may still claim the same exemptions as if they died, or as if
such dependents became twenty-one years old at the close of such year.
The 1977 Tax Code continued the policy of full taxable year treatment. Section 23(d)
thereof states:
(d) Change of status. - If the taxpayer married or should have additional dependents as
defined in subsection (c) above during the taxable year, the taxpayer may claim the
corresponding personal exemption in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the personal
and additional exemptions for himself and his dependents as if he died at the close of such
year.
If the spouse or any of the dependents should die or become twenty-one years old during
the taxable year, the taxpayer may still claim the same exemptions as if they died, or as if
such dependents became twenty-one years old at the close of such year.
While Section 23 of the 1977 Tax Code underwent changes, the provision on full taxable
year treatment in case of the taxpayer's change of status was left untouched. Executive
Order No. 37, issued on 31 July 1986, retained the change of status provision verbatim.
The provision appeared under Section 30(1)(3) of the NIRC, as amended:
(3) Change of status. - If the taxpayer married or should have additional dependents as
defined above during the taxable year, the taxpayer may claim the corresponding personal
and additional exemptions, as the case may be, in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the personal
and additional exemptions for himself and his dependents as if he died at the close of such
year.
If the spouse or any of the dependents should die or if any of such dependents becomes
twenty-one years old during the taxable year, the taxpayer may still claim the same
exemptions as if they died, or if such dependents become twenty-one years old at the
close of such year.
Therefore, the legislative policy of full taxable year treatment of the personal and
additional exemptions has been in our jurisdiction continuously since 1969. The prorating
approach has long since been abandoned. Had Congress intended to revert to that
scheme, then it should have so stated in clear and unmistakeable terms. There is nothing,
however, in R.A. 9504 that provides for the reinstatement of the prorating scheme. On the
contrary, the change-of-status provision utilizing the full-year scheme in the 1997 Tax
Code was left untouched by R.A. 9504.
We now arrive at this important point: the policy of full taxable year treatment is
established, not by the amendments introduced by R.A. 9504, but by the provisions of the
1997 Tax Code, which adopted the policy from as early as 1969.
There is, of course, nothing to prevent Congress from again adopting a policy that
prorates the effectivity of basic personal and additional exemptions. This policy, however,
must be explicitly provided for by law to amend the prevailing law, which provides for full-
year treatment. As already pointed out, R.A. 9504 is totally silent on the matter. This
silence cannot be presumed by the BIR as providing for a half-year application of the new
exemption levels. Such presumption is unjust, as incomes do not remain the same from
month to month, especially for the MWEs.
Therefore, there is no legal basis for the BIR to reintroduce the prorating of the new
personal and additional exemptions. In so doing, respondents overstepped the bounds of
their rule-making power. It is an established rule that administrative regulations are valid
only when these are consistent with the law. Respondents cannot amend, by mere
regulation, the laws they administer. To do so would violate the principle of non-
delegability of legislative powers.
The prorated application of the new set of personal and additional exemptions for the year
2008, which was introduced by respondents, cannot even be justified under the exception
to the canon of non-delegability; that is, when Congress makes a delegation to the
executive branch. The delegation would fail the two accepted tests for a valid delegation of
legislative power; the completeness test and the sufficient standard test. The first test
requires the law to be complete in all its terms and conditions, such that the only thing the
delegate will have to do is to enforce it. The sufficient standard test requires adequate
guidelines or limitations in the law that map out the boundaries of the delegate's authority
and canalize the delegation.
In this case, respondents went beyond enforcement of the law, given the absence of a
provision in R.A. 9504 mandating the prorated application of the new amounts of personal
and additional exemptions for 2008. Further, even assuming that the law intended a
prorated application, there are no parameters set forth in R.A. 9504 that would delimit the
legislative power surrendered by Congress to the delegate. In contrast, Section 23(d) of
the 1939 Tax Code authorized not only the prorating of the exemptions in case of change
of status of the taxpayer, but also authorized the Secretary of Finance to prescribe the
corresponding rules and regulations.
II.
Whether an MWE is exempt for the entire taxable year 2008 or from 6 July 2008
only
The MWE is exempt for the entire taxable year 2008.
As in the case of the adjusted personal and additional exemptions, the MWE exemption
should apply to the entire taxable year 2008, and not only from 6 July 2008 onwards.
We see no reason why Umali cannot be made applicable to the MWE exemption, which is
undoubtedly a piece of social legislation. It was intended to alleviate the plight of the
working class, especially the low income earners. In concrete terms, the exemption
translates to a P34 per day benefit, as pointed out by Senator Escudero in his sponsorship
speech.
As it stands, the calendar year 2008 remained as one taxable year for an individual
taxpayer. Therefore, RR 10-2008 cannot declare the income earned by a minimum wage
earner from 1 January 2008 to 5 July 2008 to be taxable and those earned by him for the
rest of that year to be tax-exempt. To do so would be to contradict the NIRC and
jurisprudence, as taxable income would then cease to be determined on a yearly basis.
Respondents point to the letter of former Commissioner of Internal Revenue Lilia B. Hefti
dated 5 July 2008 and petitioner Sen. Escudero's signature on the Conforme portion
thereof. This letter and the conforme supposedly establish the legislative intent not to
make the benefits of R.A. 9504 effective as of 1 January 2008.
We are not convinced. The conforme is irrelevant in the determination of legislative intent.
We quote below the relevant portion of former Commissioner Hefti's letter:
Attached herewith are salient features of the proposed regulations to implement RA 9504
xxx. We have tabulated critical issues raised during the public hearing and comments
received from the public which we need immediate written resolution based on the
inten[t]ion of the law more particularly the effectivity clause. Due to the expediency and
clamor of the public for its immediate implementation, may we request your confirmation
on the proposed recommendation within five (5) days from receipt hereof. Otherwise, we
shall construe your affirmation.
We observe that a Matrix of Salient Features of Proposed Revenue Regulations per R.A.
9504 was attached to the letter. The Matrix had a column entitled "Remarks" opposite the
Recommended Resolution. In that column, noted was a suggestion coming from petitioner
TMAP:
TMAP suggested that it should be retroactive considering that it was [for] the benefit of
the majority and to alleviate the plight of workers. Exemption should be applied for the
whole taxable year as provided in the NIRC. xxx Umali v. Estanislao [ruled] that the
increase[d] exemption in 1992 [was applicable] [to] 1991.
Majority issues raised during the public hearing last July 1, 2008 and emails received
suggested [a] retroactive implementation. Italics in the original)
The above remarks belie the claim that the conforme is evidence of the legislative intent to
make the benefits available only from 6 July 2008 onwards. There would have been no
need to make the remarks if the BIR had merely wanted to confirm was the availability of
the law's benefits to income earned starting 6 July 2008. Rather, the implication is that the
BIR was requesting the conformity of petitioner Senator Escudero to the proposed
implementing rules, subject to the remarks contained in the Matrix. Certainly, it cannot be
said that Senator Escudero's conforme is evidence of legislative intent to the effect that
the benefits of the law would not apply to income earned from 1 January 2008 to 5 July
2008.
Senator Escudero himself states in G.R. No. 185234:
In his bid to ensure that the BIR would observe the effectivity dates of the grant of tax
exemptions and increased basic personal and additional exemptions under Republic Act
No. 9504, Petitioner Escudero, as Co-Chairperson of the Congressional Oversight
Committee on Comprehensive Tax Reform Program, and his counterpart in the House of
Representatives, Hon. Exequiel B. Javier, conveyed through a letter, dated 16 September
2008, to Respondent Teves the legislative intent that "Republic Act (RA) No. 9504 must be
made applicable to the entire taxable year 2008" considering that it was "a social
legislation intended to somehow alleviate the plight of minimum wage earners or low
income taxpayers". They also jointly expressed their "fervent hope that the corresponding
Revenue Regulations that will be issued reflect the true legislative intent and rightful
statutory interpretation of R.A. No. 9504."
Senator Escudero repeats in his Memorandum:
On 16 September 2008, the Chairpersons (one of them being herein Petitioner Sen.
Escudero) of the Congressional Oversight Committee on Comprehensive Tax Reform
Program of both House of Congress wrote Respondent DOF Sec. Margarito Teves, and
requested that the revenue regulations (then yet still to be issued) to implement Republic
Act No. 9504 reflect the true intent and rightful statutory interpretation thereof,
specifically that the grant of tax exemption and increased basic personal and additional
exemptions be made available for the entire taxable year 2008. Yet, the DOF promulgated
Rev. Reg. No. 10-2008 in contravention of such legislative intent. xxx.
We have gone through the records and we do not see anything that would to suggest that
respondents deny the senator's assertion.
Clearly, Senator Escudero's assertion is that the legislative intent is to make the MWE's tax
exemption and the increased basic personal and additional exemptions available for the
entire year 2008. In the face of his assertions, respondents' claim that his conforme to
Commissioner Hefti's letter was evidence of legislative intent becomes baseless and
specious. The remarks described above and the subsequent letter sent to DOF Secretary
Teves, by no less than the Chairpersons of the Bi-cameral Congressional Oversight
Committee on Comprehensive Tax Reform Program, should have settled for respondents
the matter of what the legislature intended for R.A. 9504's exemptions.
Accordingly, we agree with petitioners that RR 10-2008, insofar as it allows the availment
of the MWE's tax exemption and the increased personal and additional exemptions
beginning only on 6 July 2008 is in contravention of the law it purports to implement.
A clarification is proper at this point. Our ruling that the MWE exemption is available for
the entire taxable year 2008 is premised on the fact of one's status as an MWE; that is,
whether the employee during the entire year of 2008 was an MWE as defined by R.A.
9504. When the wages received exceed the minimum wage anytime during the taxable
year, the employee necessarily loses the MWE qualification. Therefore, wages become
taxable as the employee ceased to be an MWE. But the exemption of the employee from
tax on the income previously earned as an MWE remains.
This rule reflects the understanding of the Senate as gleaned from the exchange between
Senator Miriam Defensor-Santiago and Senator Escudero:
Asked by Senator Defensor-Santiago on how a person would be taxed if, during the year,
he is promoted from Salary Grade 5 to Salary Grade 6 in July and ceases to be a minimum
wage employee, Senator Escudero said that the tax computation would be based starting
on the new salary in July.
As the exemption is based on the employee's status as an MWE, the operative phrase is
when the employee ceases to be an MWE. Even beyond 2008, it is therefore possible for
one employee to be exempt early in the year for being an MWE for that period, and
subsequently become taxable in the middle of the same year with respect to the
compensation income, as when the pay is increased higher than the minimum wage. The
improvement of one's lot, however, cannot justly operate to make the employee liable for
tax on the income earned as an MWE.
Additionally, on the question of whether one who ceases to be an MWE may still be
entitled to the personal and additional exemptions, the answer must necessarily be yes.
The MWE exemption is separate and distinct from the personal and additional exemptions.
One's status as an MWE does not preclude enjoyment of the personal and additional
exemptions. Thus, when one is an MWE during a part of the year and later earns higher
than the minimum wage and becomes a non-MWE, only earnings for that period when one
is a non-MWE is subject to tax. It also necessarily follows that such an employee is entitled
to the personal and additional exemptions that any individual taxpayer with taxable gross
income is entitled.
A different interpretation will actually render the MWE exemption a totally oppressive
legislation. It would be a total absurdity to disqualify an MWE from enjoying as much as
P150,000 in personal and additional exemptions just because sometime in the year, he or
she ceases to be an MWE by earning a little more in wages. Laws cannot be interpreted
with such absurd and unjust outcome. It is axiomatic that the legislature is assumed to
intend right and equity in the laws it passes.
Critical, therefore, is how an employee ceases to become an MWE and thus ceases to be
entitled to an MWE's exemption.
III.
Whether Sections 1 and 3 of RR 10-2008 are consistent with the law in declaring
that an MWE who receives other benefits in excess of the statutory limit of
P30,000 is no longer entitled to the exemption provided by R.A. 9504, is
consistent with the law.
Sections 1 and 3 of RR 10-2008 add a requirement not found in the law by effectively
declaring that an MWE who receives other benefits in excess of the statutory limit of
P30,000 is no longer entitled to the exemption provided by R.A. 9504.
The BIR added a requirement not found in the law.
The assailed Sections 1 and 3 of RR 10-2008 are reproduced hereunder for easier
reference.
SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read
as follows:
Sec. 2.78.1. Withholding of Income Tax on Compensation Income. -
(A) Compensation Income Defined. - xxx
xxxx
(3) Facilities and privileges of relatively small value. - Ordinarily, facilities, and privileges
(such as entertainment. medical services, or so-called "courtesy" discounts on purchases),
otherwise known as "de minimis benefits," furnished or offered by an employer to his
employees, are not considered as compensation subject to income tax and consequently
to withholding tax, if such facilities or privileges are of relatively small value and are
offered or furnished by the employer merely as means of promoting the health, goodwill,
contentment, or efficiency of his employees.
The following shall be considered as "de minimis" benefits not subject to income tax,
hence, not subject to withholding tax on compensation income of both managerial and
rank and file employees:
(a) Monetized unused vacation leave credits of employees not exceeding ten (10) days
during the year and the monetized value of leave credits paid to government officials and
employees;
(b) Medical cash allowance to dependents of employees not exceedingP750.00 per
employee per semester or P125 per month;
(c) Rice subsidy of P1,500.00 or one (1) sack of 50-kg. rice per month amounting to not
more than P1,500.00;
(d) Uniforms and clothing allowance not exceeding P4,000.00 per annum;
(e) Actual yearly medical benefits not exceeding P10,000.00 per annum;
(f) Laundry allowance not exceeding P300.00 per month;
(g) Employees achievement awards, e.g., for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding P10,000.00 received by the
employee under an established written plan which does not discriminate in favor of highly
paid employees;
(h) Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000.00 per employee per annum;
(i) Flowers, fruits, books, or similar items given to employees under special circumstances,
e.g., on account of illness, marriage, birth of a baby, etc.; and
(j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the
basic minimum wage.
The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not
be considered in determining the P30,000.00 ceiling of 'other benefits' excluded from
gross income under Section 32(b)(7)(e) of the Code. Provided that, the excess of the 'de
minimis' benefits over their respective ceilings prescribed by these regulations shall be
considered as part of 'other benefits' and the employee receiving it will be subject to tax
only on the excess over the P30,000.00 ceiling. Provided, further, that MWEs
rece1vmg 'other benefits' exceeding the P30,000.00 limit shall be taxable on the
excess benefits, as well as on his salaries, wages and allowances, just like an
employee receiving compensation income beyond the SMW.
Any amount given by the employer as benefits to its employees, whether classified as 'de
minimis' benefits or fringe benefits, shall constitute [a] deductible expense upon such
employer.
Where compensation is paid in property other than money, the employer shall make
necessary arrangements to ensure that the amount of the tax required to be withheld is
available for payment to the Bureau of Internal Revenue.
xxxx
(B) Exemptions from Withholding Tax on Compensation. - The following income
payments are exempted from the requirements of withholding tax on compensation:
xxxx
(13) Compensation income of MWEs who work in the private sector and being
paid the Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and
Productivity Board (RTWPB)/National Wages and Productivity Commission (NWPC),
applicable to the place where he/she is assigned.
The aforesaid income shall likewise be exempted from income tax.
"Statutory Minimum Wage" (SMW) shall refer to the rate fixed by the Regional Tripartite
Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and
Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). The
RTWPB of each region shall determine the wage rates in the different regions based on
established criteria and shall be the basis of exemption from income tax for this purpose.
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided,
however, that an employee who receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable
statutory amount of P30,000.00, taxable allowances and other taxable income
other than the SMW, holiday pay, overtime pay, hazard pay and night shift
differential pay shall not enjoy the privilege of being a MWE and, therefore,
his/her entire earnings are not exempt form income tax, and consequently, from
withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business,
or practice of profession, except income subject to final tax, in addition to
compensation income are not exempted from income tax on their entire income earned
during the taxable year. This rule, notwithstanding, the [statutory minimum wage],
[h]oliday pay, overtime pay, night shift differential pay and hazard pay shall still
be exempt from withholding tax.
For purposes of these regulations, hazard pay shall mean xxx.
In case of hazardous employment, xxx
The NWPC shall officially submit a Matrix of Wage Order by region xxx
Any reduction or diminution of wages for purposes of exemption from income tax shall
constitute misrepresentation and therefore, shall result to the automatic disallowance of
expense, i.e. compensation and benefits account, on the part of the employer. The
offenders may be criminally prosecuted under existing laws.
(14) Compensation income of employees in the public sector with compensation
income of not more than the SMW in the non-agricultural sector, as fixed by
RTWPB/NWPC, applicable to the place where he/she is assigned.
The aforesaid income shall likewise be exempted from income tax.
The basic salary of MWEs in the public sector shall be equated to the SMW in the non-
agricultural sector applicable to the place where he/she is assigned. The determination of
the SMW in the public sector shall likewise adopt the same procedures and consideration
as those of the private sector.
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE in the public sector shall likewise be covered by the above
exemption. Provided, however, that a public sector employee who receives
additional compensation such as commissions, honoraria, fringe benefits,
benefits in excess of the allowable statutory amount of P30,000.00, taxable
allowances and other taxable income other than the SMW, holiday pay, overtime pay,
night shift differential pay and hazard pay shall not enjoy the privilege of being a
MWE and, therefore, his/her entire earnings are not exempt from income tax and,
consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade,
business, or practice of profession, except income subject to final tax, in addition to
compensation income are not exempted from income tax on their entire income earned
during the taxable year. This rule, notwithstanding, the SMW, Holiday pay, overtime
pay, night shift differential pay and hazard pay shall still be exempt from
withholding tax.
For purposes of these regulations, hazard pay shall mean xxx
In case of hazardous employment, xxx
xxxx
SECTION 3. Section 2.79 of RR 2-98, as amended, is hereby further amended to read as
follows:
Sec. 2.79. Income Tax Collected at Source on Compensation Income.-
(A) Requirement of Withholding. - Every employer must withhold from compensation paid
an amount computed in accordance with these Regulations. Provided, that no withholding
of tax shall be required on the SMW, including holiday pay, overtime pay, night shift
differential and hazard pay of MWEs in the private/public sectors as defined in these
Regulations. Provided, further, that an employee who receives additional
compensation such as commissions, honoraria, fringe benefits, benefits in excess
of the allowable statutory amount of P30,000.00, taxable allowances and other
taxable income other than the SMW, holiday pay, overtime pay, hazard pay and
night shift differential pay shall not enjoy the privilege of being a MWE and,
therefore, his/her entire earnings are not exempt from income tax and,
consequently, shall be subject to withholding tax.
xxxx
For the year 2008, however, being the initial year of implementation of R.A. 9504, there
shall be a transitory withholding tax table for the period from July 6 to December 31, 2008
(Annex "D") determined by prorating the annual personal and additional exemptions under
R.A. 9504 over a period of six months. Thus, for individuals, regardless of personal status,
the prorated personal exemption is P25,000, and for each qualified dependent child (QDC),
P12,500.
On the other hand, the pertinent provisions of law, which are supposed to be implemented
by the above-quoted sections of RR 10-2008, read as follows:
SECTION 1. Section 22 of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended by adding the
following definitions after Subsection (FF) to read as follows:
Section 22. Definitions. - when used in this Title:
(A) xxx
(FF) xxx
(GG) The term 'statutory minimum wage' shall refer to the rate fixed by the
Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor
and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE).
(HH) The term 'minimum wage earner' shall refer to a worker in the private
sector paid the statutory minimum wage, or to an employee in the public sector
with compensation income of not more than the statutory minimum wage in the
non-agricultural sector where he/she is assigned.
SECTION 2. Section 24(A) of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended to read as follows:
SEC. 24. Income Tax Rates. -
(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the
Philippines. -
(1) xxx
xxxx; and
(c) On the taxable income defined in Section 31 of this Code, other than income subject to
tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from
all sources within the Philippines by an individual alien who is a resident of the Philippines.
(2) Rates of Tax on Taxable Income of Individuals.
The tax shall be computed in accordance with and at the rates established in the following
schedule:
xxxx
For married individuals, the husband and wife, subject to the provision of Section 51 (D)
hereof, shall compute separately their individual income tax based on their respective total
taxable income: Provided, That if any income cannot be definitely attributed to or
identified as income exclusively earned or realized by either of the spouses, the same shall
be divided equally between the spouses for the purpose of determining their respective
taxable income.
Provided, That minimum wage earners as defined in Section 22(HH) of this Code
shall be exempt from the payment of income tax on their taxable income:
Provided, further, That the holiday pay, overtime pay, night shift differential pay
and hazard pay received by such minimum wage earners shall likewise be
exempt from income tax.
xxxx
SECTION 5. Section 51(A)(2) of Republic Act No. 8424, as amended, otherwise known as
the National Internal Revenue Code of 1997, is hereby further amended to read as follows:
SEC. 51. Individual Return. -
(A) Requirements. -

(1) Except as provided in paragraph (2) of this Subsection, the following individuals are
required to file an income tax return:
(a) xxx
xxxx
(2) The following individuals shall not be required to file an income tax return:
(a) xxx
(b) An individual with respect to pure compensation income, as defined in Section 32(A)
(1), derived from sources within the Philippines, the income tax on which has been
correctly withheld under the provisions of Section 79 of this Code:
Provided, That an individual deriving compensation concurrently from two or more
employers at any time during the taxable year shall file an income tax return;
(c) xxx; and
(d) A minimum wage earner as defined in Section 22(HH) of this Code or an
individual who is exempt from income tax pursuant to the provisions of this Code and
other laws, general or special.
xxxx
SECTION 6. Section 79(A) of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended to read as follows:
SEC. 79. Income Tax Collected at Source. -
(A) Requirement of Withholding. - Except in the case of a minimum wage earner
as defined in Section 22(HH) of this Code, every employer making payment of wages
shall deduct and withhold upon such wages a tax determined in accordance with the rules
and regulations to be prescribed by the Secretary of Finance, upon recommendation of the
Commissioner. (Emphases supplied)
Nowhere in the above provisions of R.A. 9504 would one find the qualifications prescribed
by the assailed provisions of RR 10-2008. The provisions of the law are clear and precise;
they leave no room for interpretation - they do not provide or require any other
qualification as to who are MWEs.
To be exempt, one must be an MWE, a term that is clearly defined. Section 22(HH) says
he/she must be one who is paid the statutory minimum wage if he/she works in the
private sector, or not more than the statutory minimum wage in the non-agricultural
sector where he/she is assigned, if he/she is a government employee. Thus, one is either
an MWE or he/she is not. Simply put, MWE is the status acquired upon passing the litmus
test - whether one receives wages not exceeding the prescribed minimum wage.
The minimum wage referred to in the definition has itself a clear and definite meaning.
The law explicitly refers to the rate fixed by the Regional Tripartite Wage and Productivity
Board, which is a creation of the Labor Code. The Labor Code clearly describes wages and
Minimum Wage under Title II of the Labor Code. Specifically, Article 97 defines "wage" as
follows:
(f) "Wage" paid to any employee shall mean the remuneration or earnings, however
designated, capable of being expressed in terms of money, whether fixed or ascertained
on a time, task, piece, or commission basis, or other method of calculating the same,
which is payable by an employer to an employee under a written or unwritten contract of
employment for work done or to be done, or for services rendered or to be rendered and
includes the fair and reasonable value, as determined by the Secretary of Labor and
Employment, of board, lodging, or other facilities customarily furnished by the employer to
the employee. "Fair and reasonable value" shall not include any profit to the employer, or
to any person affiliated with the employer.
While the Labor Code's definition of "wage" appears to encompass any payments of any
designation that an employer pays his or her employees, the concept of minimum wage is
distinct. "Minimum wage" is wage mandated; one that employers may not freely choose
on their own to designate in any which way.
In Article 99, minimum wage rates are to be prescribed by the Regional Tripartite Wages
and Productivity Boards. In Articles 102 to 105, specific instructions are given in relation to
the payment of wages. They must be paid in legal tender at least once every two weeks,
or twice a month, at intervals not exceeding 16 days, directly to the worker, except in
case of force majeure or death of the worker.
These are the wages for which a minimum is prescribed. Thus, the minimum wage
exempted by R.A. 9504 is that which is referred to in the Labor Code. It is distinct and
different from other payments including allowances, honoraria, commissions, allowances
or benefits that an employer may pay or provide an employee.
Likewise, the other compensation incomes an MWE receives that are also exempted by
R.A. 9504 are all mandated by law and are based on this minimum wage.
Additional compensation in the form of overtime pay is mandated for work beyond the
normal hours based on the employee's regular wage.
Those working between ten o'clock in the evening and six o'clock in the morning are
required to be paid a night shift differential based on their regular wage. Holiday/premium
pay is mandated whether one works on regular holidays or on one's scheduled rest days
and special holidays. In all of these cases, additional compensation is mandated, and
computed based on the employee's regular wage.
R.A. 9504 is explicit as to the coverage of the exemption: the wages that are not in excess
of the minimum wage as determined by the wage boards, including the corresponding
holiday, overtime, night differential and hazard pays.
In other words, the law exempts from income taxation the most basic compensation an
employee receives - the amount afforded to the lowest paid employees by the mandate of
law. In a way, the legislature grants to these lowest paid employees additional income by
no longer demanding from them a contribution for the operations of government. This is
the essence of R.A. 9504 as a social legislation. The government, by way of the tax
exemption, affords increased purchasing power to this sector of the working class.
This intent is reflected in the Explanatory Note to Senate Bill No. 103 of Senator Roxas:
This bill seeks to exempt minimum wage earners in the private sector and government
workers in Salary Grades 1 to 3, amending certain provisions of Republic Act 8424,
otherwise known as the National Internal Revenue Code of 1997, as amended.
As per estimates by the National Wages and Productivity Board, there are 7
million workers earning the minimum wage and even below. While these workers
are in the verge of poverty, it is unfair and unjust that the Government, under
the law, is taking away a portion of their already subsistence-level income.
Despite this narrow margin from poverty, the Government would still be
mandated to take a slice away from that family's meager resources. Even if the
Government has recently exempted minimum wage earners from withholding
taxes, they are still liable to pay income taxes at the end of the year. The law
must be amended to correct this injustice. (Emphases supplied)
The increased purchasing power is estimated at about P9,500 a year. RR 10-2008,
however, takes this away. In declaring that once an MWE receives other forms of taxable
income like commissions, honoraria, and fringe benefits in excess of the non-taxable
statutory amount of P30,000, RR 10-2008 declared that the MWE immediately becomes
ineligible for tax exemption; and otherwise non-taxable minimum wage, along with the
other taxable incomes of the MWE, becomes taxable again.
Respondents acknowledge that R.A. 9504 is a social legislation meant for social
justice, but they insist that it is too generous, and that consideration must be given to the
fiscal position and financial capability of the government. While they acknowledge that the
intent of the income tax exemption of MWEs is to free low-income earners from the burden
of taxation, respondents, in the guise of clarification, proceed to redefine which incomes
may or may not be granted exemption. These respondents cannot do without encroaching
on purely legislative prerogatives.
By way of review, this P30,000 statutory ceiling on benefits has its beginning in 1994
under R. A. 7833, which amended then Section 28(b)(8) of the 1977 NIRC. It is
substantially carried over as Section 32(B) (Exclusion from Gross Income) of Chapter VI
(Computation of Gross Income) of Title II (Tax on Income) in the 1997 NIRC (R.A. 8424).
R.A. 9504 does not amend that provision of R.A. 8424, which reads:
SEC. 32. Gross Income. -
(A) General Definition. - xxx
(B) Exclusions from Gross Income. - The following items shall not be included in gross
income and shall be exempt from taxation under this title:
(1) xxx
xxxx
(7) Miscellaneous Items. -
(a) xxx
xxxx
(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and
employees of public and private entities: Provided, however, That the total exclusion
under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall
cover:
(i) Benefits received by officials and employees of the national and local government
pursuant to Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended
by Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential decree No.
851, as amended by Memorandum Order No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further,
That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and
regulations issued by the Secretary of Finance, upon recommendation of the
Commissioner, after considering among others, the effect on the same of the inflation rate
at the end of the taxable year.
(f) xxx
The exemption granted to MWEs by R.A. 9504 reads:
Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall be
exempt from the payment of income tax on their taxable income: Provided, further,
That the holiday pay, overtime pay, night shift differential pay and hazard pay received by
such minimum wage earners shall likewise be exempt from income tax.
"Taxable income" is defined as follows:
SEC. 31. Taxable Income Defined. - The term taxable income means the pertinent items
of gross income specified in this Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income by this Code or other
special laws.
A careful reading of these provisions will show at least two distinct groups of items of
compensation. On one hand are those that are further exempted from tax by R.A. 9504;
on the other hand are items of compensation that R.A. 9504 does not amend and are thus
unchanged and in no need to be disturbed.
First are the different items of compensation subject to tax prior to R.A. 9504. These are
included in the pertinent items of gross income in Section 31. "Gross income" in
Section 32 includes, among many other items, "compensation for services in whatever
form paid, including, but not limited to salaries, wages, commissions, and similar items."
R.A. 9504 particularly exempts the minimum wage and its incidents; it does not provide
exemption for the many other forms of compensation.
Second are the other items of income that, prior to R.A. 9504, were excluded from gross
income and were therefore not subject to tax. Among these are other payments that
employees may receive from employers pursuant to their employer-employee relationship,
such as bonuses and other benefits. These are either mandated by law (such as the
13th month pay) or granted upon the employer's prerogative or are pursuant to collective
bargaining agreements (as productivity incentives). These items were not changed by R.A.
9504.
It becomes evident that the exemption on benefits granted by law in 1994 are now
extended to wages of the least paid workers under R.A. 9504. Benefits not beyond
P30,000 were exempted; wages not beyond the SMW are now exempted as well.
Conversely, benefits in excess of P30,000 are subject to tax and now, wages in excess of
the SMW are still subject to tax.
What the legislature is exempting is the MWE's minimum wage and other forms statutory
compensation like holiday pay, overtime pay, night shift differential pay, and hazard pay.
These are not bonuses or other benefits; these are wages. Respondents seek to frustrate
this exemption granted by the legislature.
In respondents' view, anyone rece1vmg 13th month pay and other benefits in excess of
P30,000 cannot be an MWE. They seek to impose their own definition of "MWE" by arguing
thus:
It should be noted that the intent of the income tax exemption of MWEs is to free the low-
income earner from the burden of tax. R.A. No. 9504 and R.R. No. 10-2008 define who are
the low-income earners. Someone who earns beyond the incomes and benefits above-
enumerated is definitely not a low-income earner.
We do not agree.
As stated before, nothing to this effect can be read from R.A. 9504. The amendment is
silent on whether compensation-related benefits exceeding the P30,000 threshold would
make an MWE lose exemption. R.A. 9504 has given definite criteria for what constitutes an
MWE, and R.R. 10-2008 cannot change this.
An administrative agency may not enlarge, alter or restrict a provision of law. It cannot
add to the requirements provided by law. To do so constitutes lawmaking, which is
generally reserved for Congress. In CIR v. Fortune Tobacco, we applied the plain
meaning rule when the Commissioner of Internal Revenue ventured into unauthorized
administrative lawmaking:
[A]n administrative agency issuing regulations may not enlarge, alter or restrict the
provisions of the law it administers, and it cannot engraft additional requirements not
contemplated by the legislature. The Court emphasized that tax administrators are
not allowed to expand or contract the legislative mandate and that the "plain
meaning rule" or verba legis in statutory construction should be applied such
that where the words of a statute are clear, plain and free from ambiguity, it
must be given its literal meaning and applied without attempted interpretation.
As we have previously declared, rule-making power must be confined to details for
regulating the mode or proceedings in order to carry into effect the law as it has been
enacted, and it cannot be extended to amend or expand the statutory
requirements or to embrace matters not covered by the statute. Administrative
regulations must always be in harmony with the provisions of the law because any
resulting discrepancy between the two will always be resolved in favor of the basic
law. (Emphases supplied)
We are not persuaded that RR 10-2008 merely clarifies the law. The CIR's clarification is
not warranted when the language of the law is plain and clear.
The deliberations of the Senate reflect its understanding of the outworking of this MWE
exemption in relation to the treatment of benefits, both those for the P30,000 threshold
and the de minimis benefits:
Senator Defensor Santiago. Thank you. Next question: How about employees who are
only receiving a minimum wage as base pay, but are earning significant amounts of
income from sales, commissions which may be even higher than their base pay? Is their
entire income from commissions also tax-free? Because strictly speaking, they are
minimum wage earners. For purposes of ascertaining entitlement to tax exemption, is
the basis only the base pay or should it be the aggregate compensation that is being
received, that is, inclusive of commissions, for example?
Senator Escudero. Mr. President, what is included would be only the base pay and, if
any, the hazard pay, holiday pay, overtime pay and night shift differential received by a
minimum wage earner. As far as commissions are concerned, only to the extent of
P30,000 would be exempted. Anything in excess of P30,000 would already be
taxable if it is being received by way of commissions. Add to that de minimis
benefits being received by an employee, such as rice subsidy or clothing allowance or
transportation allowance would also be exempted; but they are exempted already under
the existing law.
Senator Defensor Santiago. I would like to thank the sponsor. That makes it clear.
(Emphases supplied)
Given the foregoing, the treatment of bonuses and other benefits that an employee
receives from the employer in excess of the P30,000 ceiling cannot but be the same as the
prevailing treatment prior to R.A. 9504 - anything in excess of P30,000 is taxable; no
more, no less.

The treatment of this excess cannot operate to disenfranchise the MWE from enjoying the
exemption explicitly granted by R.A. 9504.
The government's argument that the RR avoids a tax distortion has no merit.
The government further contends that the "clarification" avoids a situation akin to wage
distortion and discourages tax evasion. They claim that MWE must be treated equally as
other individual compensation income earners "when their compensation does not warrant
exemption under R.A. No. 9504. Otherwise, there would be gross inequity between and
among individual income taxpayers." For illustrative purposes, respondents present three
scenarios:
37.1. In the first scenario, a minimum wage earner in the National Capital Region
receiving P382.00 per day has an annual salary of P119,566.00, while a non-minimum
wage earner with a basic pay of P385.00 per day has an annual salary of P120,505.00.
The difference in their annual salaries amounts to only P939.00, but the non-minimum
wage earner is liable for a tax of P8,601.00, while the minimum wage earner is tax-
exempt?
37.2. In the second scenario, the minimum wage earner's "other benefits" exceed the
threshold of P30,000.00 by P20,000.00. The nonminimum wage earner is liable for
P8,601.00, while the minimum wage earner is still tax-exempt.
37.3. In the third scenario, both workers earn "other benefits" at P50,000.00 more than
the P30,000 threshold. The non-minimum wage earner is liable for the tax of P18,601.00,
while the minimum wage earner is still tax-exempt. (Underscoring in the original)
Again, respondents are venturing into policy-making, a function that properly belongs to
Congress. In British American Tobacco v. Camacho, we explained:
We do not sit in judgment as a supra-legislature to decide, after a law is passed by
Congress, which state interest is superior over another, or which method is better suited
to achieve one, some or all of the state's interests, or what these interests should be in
the first place. This policy-determining power, by constitutional fiat, belongs to Congress
as it is its function to determine and balance these interests or choose which ones to
pursue. Time and again we have ruled that the judiciary does not settle policy issues.
The Court can only declare what the law is and not what the law should be. Under our
system of government, policy issues are within the domain of the political branches of
government and of the people themselves as the repository of all state power. Thus, the
legislative classification under the classification freeze provision, after having been shown
to be rationally related to achieve certain legitimate state interests and done in good faith,
must. perforce, end our inquiry.
Concededly, the finding that the assailed law seems to derogate, to a limited extent, one
of its avowed objectives (i.e. promoting fair competition among the players in the
industry) would suggest that, by Congress's own standards, the current excise tax system
on sin products is imperfect. But, certainly, we cannot declare a statute unconstitutional
merely because it can be improved or that it does not tend to achieve all of its stated
objectives. This is especially true for tax legislation which simultaneously addresses and
impacts multiple state interests. Absent a clear showing of breach of constitutional
limitations, Congress, owing to its vast experience and expertise in the field of taxation,
must be given sufficient leeway to formulate and experiment with different tax systems to
address the complex issues and problems related to tax administration. Whatever
imperfections that may occur, the same should be addressed to the democratic
process to refine and evolve a taxation system which ideally will achieve most, if
not all, of the state's objectives.
In fine, petitioner may have valid reasons to disagree with the policy decision of
Congress and the method by which the latter sought to achieve the same. But its
remedy is with Congress and not this Court. (Emphases supplied and citations
deleted)
Respondents cannot interfere with the wisdom of R.A. 9504. They must respect and
implement it as enacted.
Besides, the supposed undesirable "income distortion" has been addressed in the Senate
deliberations. The following exchange between Senators Santiago and Escudero reveals
the view that the distortion impacts only a few - taxpayers who are single and have no
dependents:
Senator Santiago ....It seems to me awkward that a person is earning just P1 above the
minimum wage is already taxable to the full extent simply because he is earning PI more
each day, or o more than P30 a month, or P350 per annum. Thus, a single individual
earning P362 daily in Metro Manila pays no tax but the same individual if he earns P363 a
day will be subject to tax, under the proposed amended provisions, in the amount of
P4,875 - I no longer took into account the deductions of SSS, e cetera - although that
worker is just P360 higher than the minimum wage.
xxxx
I repeat, I am raising respectfully the point that a person who is earning just P1 above the
minimum wage is already taxable to the full extent just for a mere P1. May I please have
the Sponsor's comment.
Senator Escudero...I fully subscribe and accept the analysis and computation of the
distinguished Senator, Mr. President, because this was the very concern of this
representation when we were discussing the bill. It will create wage distortions up to the
extent wherein a person is paying or rather receiving a salary which is only higher by
P6,000 approximately from that of a minimum wage earner. So anywhere between P1 to
approximately P6,000 higher, there will be a wage distortion, although distortions
disappears as the salary goes up.
However, Mr. President, as computed by the distinguished Senator, the distortion is
only made apparent if the taxpayer is single or is not married and has no
dependents. Because at two dependents, the distortion would already disappear;
at three dependents, it would not make a difference anymore because the
exemption would already cover approximately the wage distortion that would be
created as far as individual or single taxpayers are concerned. (Emphases in the
original)
Indeed, there is a distortion, one that RR 10-2008 actually engenders. While respondents
insist that MWEs who are earning purely compensation income will lose their MWE
exemption the moment they receive benefits in excess of P30,000, RR 10-2008 does not
withdraw the MWE exemption from those who are earning other income outside of their
employer employee relationship. Consider the following provisions of RR 10-2008:
Section 2.78.1 (B):
(B) Exemptions from Withholding Tax on Compensation. - The following income
payments are exempted from the requirements of withholding tax on compensation:
xxxx
(13) Compensation income of MWEs who work in the private sector and being
paid the Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and
Productivity Board (RTWPB)/National Wages and Productivity Commission (NWPC),
applicable to the place where he/she is assigned.
xxxx
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided,
however, that an employee who receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of P30,000.00, taxable allowances and other taxable income other than the SMW,
holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the
privilege of being a MWE and, therefore, his/her entire earnings are not exempt from
income tax, and consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business,
or practice of profession, except income subject to final tax, in addition to
compensation income are not exempted from income tax on their entire income earned
during the taxable year. This rule, notwithstanding, the SMW, Holiday pay, overtime
pay, night shift differential pay and hazard pay shall still be exempt from
withholding tax.
xxxx
(14) Compensation income of employees in the public sector with compensation
income of not more than the SMW in the non agricultural sector, as fixed by
RTWPB/NWPC, applicable to the place where he/she is assigned.
xxxx
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE in the public sector shall likewise be covered by the above
exemption. Provided, however, that a public sector employee who receives additional
compensation such as commissions, honoraria, fringe benefits, benefits in excess of the
allowable statutory amount of P30,000.00, taxable allowances and other taxable income
other than the SMW, holiday pay, overtime pay, night shift differential pay and hazard pay
shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not
exempt from income tax and, consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade,
business, or practice of profession, except income subject to final tax, in addition to
compensation income are not exempted from income tax on their entire income earned
during the taxable year. This rule, notwithstanding, the SMW, Holiday pay, overtime
pay, night shift differential pay and hazard pay shall still be exempt from
withholding tax.
These provisions of RR 10-2008 reveal a bias against those who are purely compensation
earners. In their consolidated comment, respondents reason:
Verily, the interpretation as to who is a minimum wage earner as petitioners
advance will open the opportunity for tax evasion by the mere expedient of pegging
the salary or wage of a worker at the minimum and reflecting a worker's other incomes as
some other benefits. This situation will not only encourage tax evasion, it will
likewise discourage able employers from paying salaries or wages higher than
the statutory minimum. This should never be countenanced.
Again, respondents are delving into policy-making they presume bad faith on the part of
the employers, and then shift the burden of this presumption and lay it on the backs of the
lowest paid workers. This presumption of bad faith does not even reflect pragmatic reality.
It must be remembered that a worker's holiday, overtime and night differential pays are
all based on the worker's regular wage. Thus, there will always be pressure from the
workers to increase, not decrease, their basic pay.
What is not acceptable is the blatant inequity between the treatment that RR 10-2008
gives to those who earn purely compensation income and that given to those who have
other sources of income. Respondents want to tax the MWEs who serve their employer
well and thus receive higher bonuses or performance incentives; but exempts the MWEs
who serve, in addition to their employer, their other business or professional interests.
We cannot sustain respondents’ position.
In sum, the proper interpretation of R.A. 9504 is that it imposes taxes only on the taxable
income received in excess of the minimum wage, but the MWEs will not lose their
exemption as such. Workers who receive the statutory minimum wage their basic pay
remain MWEs. The receipt of any other income during the year does not disqualify them as
MWEs. They remain MWEs, entitled to exemption as such, but the taxable income they
receive other than as MWEs may be subjected to appropriate taxes.
R.A. 9504 must be liberally construed.
We are mindful of the strict construction rule when it comes to the interpretation of tax
exemption laws. The canon, however, is tempered by several exceptions, one of which is
when the taxpayer falls within the purview of the exemption by clear legislative intent. In
this situation, the rule of liberal interpretation applies in favor of the grantee and against
the government.
In this case, there is a clear legislative intent to exempt the minimum wage received by an
MWE who earns additional income on top of the minimum wage. As previously discussed,
this intent can be seen from both the law and the deliberations.
Accordingly, we see no reason why we should not liberally interpret R.A. 9504 in favor of
the taxpayers.
R.A. 9504 is a grant of tax relief long overdue.
Over the years, as the minimum wage increased, the tax burden of the MWE likewise
increased. In 1997, the MWE's tax burden was about 5.3%. When R.A. 8424 became
effective in 1998, some relief in the MWE's tax burden was seen as it was reduced to
4.0%. This was mostly due to the increase in personal exemptions, which were increased
from P18,000 to P32,000 for a married individual without dependents. It may be noted
that while the tax table was revised, a closer scrutiny of Table 3 below would show that
the rates actually increased for those who were earning less.
As the minimum wage continued to increase, the MWE's tax burden likewise did - by
August 2007, it was 9.5%. This means that in 2007, of the P362 minimum wage, the
MWE's take-home pay was only P327.62, after a tax of P34.38.

We do not lose sight of the fact that R.A. 9504 is a tax relief that is long overdue. This scenario does not augur well for the wage earners. Over the years, even with the
occasional increase in the basic personal and additional exemptions, the contribution the
Table 1 below shows the tax burden of an MWE over the years. We use as example one government exacts from its MWEs continues to increase as a portion of their income. This
who is a married individual without dependents and is working in the National Capital is a serious social issue, which R.A. 9504 partly addresses. With the P20 increase in
Region (NCR). For illustration purposes, R.A. 9504 is applied as if the worker being paid minimum wage from P362 to P382 in 2008, the tax due thereon would be about P30. As
the statutory minimum wage is not tax exempt: seen in their deliberations, the lawmakers wanted all of this amount to become additional
take-home pay for the MWEs in 2008.
Table 1 - Tax Burden of MWE over the years
The foregoing demonstrates the effect of inflation. When tax tables do not get adjusted,
inflation has a profound impact in terms of tax burden. "Bracket creep," "the process by
NCR Minimum Daily Wage which inflation pushes individuals into higher tax brackets," occurs, and its deleterious
Taxable Tax Due Tax
Law Effective results may be explained as follows:
Income (Annual) Burden
   

WO 3 (1993 [A]n individual whose dollar income increases from one year to the next might be obliged
RA 7167 P135.00 P24,255 P1,343.05 3.2% to pay tax at a higher marginal rate (say 25% instead of 15%) on the increase, this being
Dec)
1992 a natural consequence of rate progression. If, however, due to inflation the benefit of the
RA 7496 WO 5 (1997 increase is wiped out by a corresponding increase in the cost of living, the effect would
P185.00 P39,905 P3,064.55 5.3%
May) be a heavier tax burden with no real improvement in the taxpayer's economic
position. Wage and salary-earners are especially vulnerable. Even if a worker
WO 6 (1998 gets a raise in wages this year, the raise will be illusory if the prices of consumer
P198.00 P29,974 P2,497.40 4.0%
Feb) goods rise in the same proportion. If her marginal tax rate also increased, the
RA 8424
WO 13 (2007 result would actually be a decrease in the taxpayer's real disposable income.
1998 P362.00 P81,306 P10,761.20 9.5%
    (1997 Aug) Table 2 shows how MWEs get pushed to higher tax brackets with higher tax rates due only
NIRC) to the periodic increases in the minimum wage. This unfortunate development illustrates
WO 14 (2008 how "bracket creep" comes about and how inflation alone increases their tax burden:
P382.00 P87,566 P12,013.20 10.0%
June)

WO 14 (2008 Table 2
P382.00 P69,566 P8,434.90 7.1%
Aug)
RA 9504 2008
WO 20 (2016 Highest
P491.00 P103,683 P15,236.60 9.9% Applicable Tax
June)
NCR Minimum Daily Rate Tax Due Tax
As shown on Table 1, we note that in 1992, the tax burden upon an MWE was just about Law Effective
Wage (Annual) Burden
3.2%, when Congress passed R.A. 7167, which increased the personal exemptions for a     (Bracket
married individual without dependents from P12,000 to P18,000; and R.A. 7496, which Creep)
revised the table of graduated tax rates (tax table).
 WO 3 more, depending on the other benefits they receive including overtime, holiday, night
(1993 P135.00 11% P1,343.05 3.2% shift, and hazard pays.
RA 7167 Dec)
1992 Table 3 - Tax Tables: Comparison of Tax Brackets and Rates
RA 7496 WO 5
(1997 P185.00 11% P3,064.55 5.3% Rates under R.A. Rates under R.A. Rates under R.A.
May) Taxable Income Bracket
7496(1992) 8424 (1998) 9504 (2008)
WO 6
1998 P198.00 10% P2,497.40 4.0% Not Over P2,500 0%
(1998 Feb)
Over P2.500 but not over 5% 5%
RA 8424 WO 13 1%
P5,000            
(2007 P362.00 20% P10,761.20 9.5%            
    (1997 Aug) Over P5,000 but not over
3%
NIRC) P10,000
WO 14
(2008 P382.00 20% P12,013.20 10.0% Over P10,000 but not over
7%
June) P20,000 10% 10%
WO 14 Over P20,000 but not over            
(2008 P382.00 15% P8,434.90 7.1% P30,000 11%
RA Aug)
2008 Over P30,000 but not over      
9504100 WO 20 P40,000
(2016 P491.00 20% P15,236.60 9.9%            
June) Over P40,000 but not over
15% 15% 15%
P60,000
The overall effect is the diminution, if not elimination, of the progressivity of the rate            
structure under the present Tax Code. We emphasize that the graduated tax rate schedule Over P60,000 but not over
for individual taxpayers, which takes into account the ability to pay, is intended to breathe P70,000 19%
life into the constitutional requirement of equity.
Over P70,000 but not over      
R.A. 9504 provides relief by declaring that an MWE, one who is paid the statutory P100,000 20% 20%
minimum wage (SMW), is exempt from tax on that income, as well as on the associated            
Over P100,000 but not over
statutory payments for hazardous, holiday, overtime and night work.
P140,000 24%
R.R. 10-2008, however, unjustly removes this tax relief. While R.A. 9504 grants MWEs Over P140,000 but not over      
zero tax rights from the beginning or for the whole year 2008, RR 10-2008 declares that 25% 25%
P250,000
certain workers - even if they are being paid the SMW, "shall not enjoy the privilege."
Over P250,000 but not over
29% 30% 30%
Following RR10-2008's "disqualification" injunction, the MWE will continue to be pushed P500,000
towards the higher tax brackets and higher rates. As Table 2 shows, as of June 2016, an
Over P500,000 35% 34% 32%
MWE would already belong to the 4th highest tax bracket of 20% (see also Table 3),
resulting in a tax burden of 9.9%. This means that for every P100 the MWE earns, the The relief afforded by R.A.9504 is thus long overdue. The law must be now given full effect
government takes back P9.90. for the entire taxable year 2008, and without the qualification introduced by RR 10-2008.
The latter cannot disqualify MWEs from exemption from taxes on SMW and on their on his
Further, a comparative view of the tax tables over the years (Table 3) shows that while SMW, holiday, overtime, night shift differential, and hazard pay.
the highest tax rate was reduced from as high as 70% under the 1977 NIRC, to 35% in
1992, and 32% presently, the lower income group actually gets charged higher taxes. CONCLUSION
Before R.A. 8424, one who had taxable income of less than P2,500 did not have to pay
any income tax; under R.A. 8424, he paid 5% thereof. The MWEs now pay 20% or even The foregoing considered, we find that respondents committed grave abuse of discretion in
promulgating Sections 1 and 3 of RR 10-2008, insofar as they provide for (a) the prorated
application of the personal and additional exemptions for taxable year 2008 and for the
period of applicability of the MWE exemption for taxable year 2008 to begin only on 6 July
2008; and (b) the disqualification of MWEs who earn purely compensation income,
whether in the private or public sector, from the privilege of availing themselves of the
MWE exemption in case they receive compensation related benefits exceeding the
statutory ceiling of P30,000.
As an aside, we stress that the progressivity of the rate structure under the present Tax
Code has lost its strength. In the main, it has not been updated since its revision in 1997,
or for a period of almost 20 years. The phenomenon of "bracket creep" could be prevented
through the inclusion of an indexation provision, in which the graduated tax rates are
adjusted periodically without need of amending the tax law. The 1997 Tax Code, however,
has no such indexation provision. It should be emphasized that indexation to inflation is
now a standard feature of a modern tax code.
We note, however, that R.A. 8424 imposes upon respondent Secretary of Finance and
Commissioner of Internal Revenue the positive duty to periodically review the other
benefits, in consideration of the effect of inflation thereon, as provided under Section
32(B)(7)(e) entitled "13th  Month Pay and Other Benefits":
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further,
That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and
regulations issued by the Secretary of Finance, upon recommendation of the
Commissioner, after considering among others, the effect on the same of the inflation rate
at the end of the taxable year.
This same positive duty, which is also imposed upon the same officials regarding the de
minimis benefits provided under Section 33(C)(4), is a duty that has been exercised
several times. The provision reads:
(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this
Section:
(1) xxx
xxxx
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.
WHEREFORE, the Court resolves to
(a) GRANT the Petitions for Certiorari, Prohibition, and Mandamus; and
(b) DECLARE NULL and VOID the following provisions of Revenue Regulations No. 10-
2008:
(i) Sections 1 and 3, insofar as they disqualify MWEs who earn purely compensation
income from the privilege of the MWE exemption in case they receive bonuses and
other compensation-related benefits exceeding the statutory ceiling of P30,000;
(ii) Section 3 insofar as it provides for the prorated application of the personal and
additional exemptions under R.A. 9504 for taxable year 2008, and for the period of
applicability of the MWE exemption to begin only on 6 July 2008.
(c) DIRECT respondents Secretary of Finance and Commissioner of Internal Revenue to
grant a refund, or allow the application of the refund by way of withholding tax
adjustments, or allow a claim for tax credits by (i) all individual taxpayers whose incomes
for taxable year 2008 were the subject of the prorated increase in personal and additional
tax exemption; and (ii) all MWEs whose minimum wage incomes were subjected to tax for
their receipt of the 13th month pay and other bonuses and benefits exceeding the
threshold amount under Section 32(B)(7)(e) of the 1997 Tax Code.
SO ORDERED.
G.R. No. 148191               November 25, 2003
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
SOLIDBANK CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
Under the Tax Code, the earnings of banks from "passive" income are subject to a twenty
percent final withholding tax (20% FWT). This tax is withheld at source and is thus not
actually and physically received by the banks, because it is paid directly to the
government by the entities from which the banks derived the income. Apart from the 20%
FWT, banks are also subject to a five percent gross receipts tax (5% GRT) which is
imposed by the Tax Code on their gross receipts, including the "passive" income.
Since the 20% FWT is constructively received by the banks and forms part of their gross
receipts or earnings, it follows that it is subject to the 5% GRT. After all, the amount
withheld is paid to the government on their behalf, in satisfaction of their withholding
taxes. That they do not actually receive the amount does not alter the fact that it is
remitted for their benefit in satisfaction of their tax obligations.
Stated otherwise, the fact is that if there were no withholding tax system in place in this
country, this 20 percent portion of the "passive" income of banks would actually be paid to
the banks and then remitted by them to the government in payment of their income tax.
The institution of the withholding tax system does not alter the fact that the 20 percent
portion of their "passive" income constitutes part of their actual earnings, except that it is
paid directly to the government on their behalf in satisfaction of the 20 percent final [a] tax credit certificate in the aggregate amount of ₱3,508,078.75, representing allegedly
income tax due on their "passive" incomes. overpaid gross receipts tax for the year 1995, computed as follows:

The Case
Gross Receipts Subjected to the Final Tax
Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to annul the
July 18, 2000 Decision and the May 8, 2001 Resolution of the Court of Appeals (CA) in CA- Derived from Passive [Income] ₱ 350,807,875.15
GR SP No. 54599. The decretal portion of the assailed Decision reads as follows: Multiply by Final Tax rate 20%

"WHEREFORE, we AFFIRM in toto the assailed decision and resolution of the Court of Tax 20% Final Tax Withheld at Source ₱ 70,161,575.03
Appeals."
Multiply by [Gross Receipts Tax] rate 5%

The challenged Resolution denied petitioner’s Motion for Reconsideration. Overpaid [Gross Receipts Tax] ₱ 3,508,078.75

The Facts "Without waiting for an action from the [petitioner], [respondent] on the same day filed
[a] petition for review [with the Court of Tax Appeals] in order to toll the running of the
Quoting petitioner, the CA summarized the facts of this case as follows: two-year prescriptive period to judicially claim for the refund of [any] overpaid internal
revenue tax[,] pursuant to Section 230 [now 229] of the Tax Code [also ‘National Internal
"For the calendar year 1995, [respondent] seasonably filed its Quarterly Percentage Tax Revenue Code’] x x x.
Returns reflecting gross receipts (pertaining to 5% [Gross Receipts Tax] rate) in the total
amount of ₱1,474,691,693.44 with corresponding gross receipts tax payments in the sum x x x           x x x          x x x
of ₱73,734,584.60, broken down as follows:
"After trial on the merits, the [Court of Tax Appeals], on August 6, 1999, rendered its
Period Covered Gross Receipts Gross Receipts Tax decision ordering x x x petitioner to refund in favor of x x x respondent the reduced
amount of ₱1,555,749.65 as overpaid [gross receipts tax] for the year 1995. The legal
January to March 1994 ₱ 188,406,061.95 ₱ 9,420,303.10 issue x x x was resolved by the [Court of Tax Appeals], with Hon. Amancio Q. Saga
dissenting, on the strength of its earlier pronouncement in x x x Asian Bank Corporation
April to June 1994 370,913,832.70 18,545,691.63 vs. Commissioner of Internal Revenue x x x, wherein it was held that the 20% [final
withholding tax] on [a] bank’s interest income should not form part of its taxable gross
July to September 1994 481,501,838.98 24,075,091.95
receipts for purposes of computing the [gross receipts tax]."
October to December 1994 433,869,959.81 21,693,497.98
Ruling of the CA
Total ₱ 1,474,691,693.44 ₱ 73,734,584.60

"[Respondent] alleges that the total gross receipts in the amount of ₱1,474,691,693.44
included the sum of ₱350,807,875.15 representing gross receipts from passive income
which was already subjected to 20% final withholding tax.
"On January 30, 1996, [the Court of Tax Appeals] rendered a decision in CTA Case No.
4720 entitled Asian Bank Corporation vs. Commissioner of Internal Revenue[,] wherein it
was held that the 20% final withholding tax on [a] bank’s interest income should not form
part of its taxable gross receipts for purposes of computing the gross receipts tax.
"On June 19, 1997, on the strength of the aforementioned decision, [respondent] filed
with the Bureau of Internal Revenue [BIR] a letter-request for the refund or issuance of
The CA held that the 20% FWT on a bank’s interest income did not form part of the
taxable gross receipts in computing the 5% GRT, because the FWT was not actually
received by the bank but was directly remitted to the government. The appellate court
curtly said that while the Tax Code "does not specifically state any exemption, x x x the
statute must receive a sensible construction such as will give effect to the legislative
intention, and so as to avoid an unjust or absurd conclusion."
Hence, this appeal.
Issue
Petitioner raises this lone issue for our consideration:
"Whether or not the 20% final withholding tax on [a] bank’s interest income forms part of
the taxable gross receipts in computing the 5% gross receipts tax."
The Court’s Ruling
The Petition is meritorious.
Sole Issue:
Whether the 20% FWT Forms Part of the Taxable Gross Receipts
Petitioner claims that although the 20% FWT on respondent’s interest income was not
actually received by respondent because it was remitted directly to the government, the
fact that the amount redounded to the bank’s benefit makes it part of the taxable gross
receipts in computing the 5% GRT. Respondent, on the other hand, maintains that the CA
correctly ruled otherwise.
We agree with petitioner. In fact, the same issue has been raised recently in China
Banking Corporation v. CA, where this Court held that the amount of interest income
withheld in payment of the 20% FWT forms part of gross receipts in computing for the
GRT on banks.
The FWT and the GRT:
Two Different Taxes
The 5% GRT is imposed by Section 119 of the Tax Code, which provides:
"SEC. 119. Tax on banks and non-bank financial intermediaries. – There shall be collected
a tax on gross receipts derived from sources within the Philippines by all banks and non-
bank financial intermediaries in accordance with the following schedule:
"(a) On interest, commissions and discounts from lending activities as well as income from
financial leasing, on the basis of remaining maturities of instruments from which such
receipts are derived.
Short-term maturity not in excess of two (2) years……………………5%
Medium-term maturity – over two (2) years
but not exceeding four (4) years………………………………….…...3%
Long-term maturity:
(i) Over four (4) years but not exceeding
seven (7) years……………………………………………1%
(ii) Over seven (7) years………………………………….….0%
"(b) On dividends……………………………….……..0%
"(c) On royalties, rentals of property, real or personal, profits from exchange and all
other items treated as gross income under Section 28 of this Code.........................5%
Provided, however, That in case the maturity period referred to in paragraph (a) is
shortened thru pretermination, then the maturity period shall be reckoned to end as of the
date of pretermination for purposes of classifying the transaction as short, medium or long
term and the correct rate of tax shall be applied accordingly.
"Nothing in this Code shall preclude the Commissioner from imposing the same tax herein
provided on persons performing similar banking activities."
The 5% GRT is included under "Title V. Other Percentage Taxes" of the Tax Code and is
not subject to withholding. The banks and non-bank financial intermediaries liable therefor
shall, under Section 125(a)(1), file quarterly returns on the amount of gross receipts and
pay the taxes due thereon within twenty (20) days after the end of each taxable quarter.
The 20% FWT, on the other hand, falls under Section 24(e)(1) of "Title II. Tax on
Income." It is a tax on passive income, deducted and withheld at source by the payor-
corporation and/or person as withholding agent pursuant to Section 50, and paid in the
same manner and subject to the same conditions as provided for in Section 51.
A perusal of these provisions clearly shows that two types of taxes are involved in the
present controversy: (1) the GRT, which is a percentage tax; and (2) the FWT, which is an
income tax. As a bank, petitioner is covered by both taxes.
A percentage tax is a national tax measured by a certain percentage of the gross selling
price or gross value in money of goods sold, bartered or imported; or of the gross receipts
or earnings derived by any person engaged in the sale of services. It is not subject to
withholding.
An income tax, on the other hand, is a national tax imposed on the net or the gross
income realized in a taxable year. It is subject to withholding.
In a withholding tax system, the payee is the taxpayer, the person on whom the tax is
imposed; the payor, a separate entity, acts as no more than an agent of the government
for the collection of the tax in order to ensure its payment. Obviously, this amount that is
used to settle the tax liability is deemed sourced from the proceeds constitutive of the tax
base. These proceeds are either actual or constructive. Both parties herein agree that
there is no actual receipt by the bank of the amount withheld. What needs to be
determined is if there is constructive receipt thereof. Since the payee -- not the payor -- is
the real taxpayer, the rule on constructive receipt can be easily rationalized, if not made
clearly manifest.
Constructive Receipt Versus Actual Receipt
Applying Section 7 of Revenue Regulations (RR) No. 17-84, petitioner contends that there
is constructive receipt of the interest on deposits and yield on deposit substitutes.
Respondent, however, claims that even if there is, it is Section 4(e) of RR 12-80 that
nevertheless governs the situation.
Section 7 of RR 17-84 states:
"SEC. 7. Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes. –
‘(a) The interest earned on Philippine Currency bank deposits and yield from deposit
substitutes subjected to the withholding taxes in accordance with these regulations
need not be included in the gross income in computing the depositor’s/investor’s
income tax liability in accordance with the provision of Section 29(b), (c) and (d) of the
National Internal Revenue Code, as amended.
‘(b) Only interest paid or accrued on bank deposits, or yield from deposit substitutes
declared for purposes of imposing the withholding taxes in accordance with these
regulations shall be allowed as interest expense deductible for purposes of computing
taxable net income of the payor.
‘(c) If the recipient of the above-mentioned items of income are financial institutions,
the same shall be included as part of the tax base upon which the gross receipt[s] tax
is imposed.’"
Section 4(e) of RR 12-80, on the other hand, states that the tax rates to be imposed on
the gross receipts of banks, non-bank financial intermediaries, financing companies, and
other non-bank financial intermediaries not performing quasi-banking activities shall be
based on all items of income actually received. This provision reads:
"SEC. 4. x x x x x x x x x
"(e) Gross receipts tax on banks, non-bank financial intermediaries, financing companies,
and other non-bank financial intermediaries not performing quasi-banking activities. – The
rates of tax to be imposed on the gross receipts of such financial institutions shall be
based on all items of income actually received. Mere accrual shall not be considered, but
once payment is received on such accrual or in cases of prepayment, then the amount
actually received shall be included in the tax base of such financial institutions, as provided
hereunder x x x."
Respondent argues that the above-quoted provision is plain and clear: since there is no
actual receipt, the FWT is not to be included in the tax base for computing the GRT. There
is supposedly no pecuniary benefit or advantage accruing to the bank from the FWT,
because the income is subjected to a tax burden immediately upon receipt through the
withholding process. Moreover, the earlier RR 12-80 covered matters not falling under the
later RR 17-84.
We are not persuaded.
By analogy, we apply to the receipt of income the rules on actual and constructive
possession provided in Articles 531 and 532 of our Civil Code.
Under Article 531:
"Possession is acquired by the material occupation of a thing or the exercise of a right, or
by the fact that it is subject to the action of our will, or by the proper acts and legal
formalities established for acquiring such right."
Article 532 states:
"Possession may be acquired by the same person who is to enjoy it, by his legal
representative, by his agent, or by any person without any power whatever; but in the last
case, the possession shall not be considered as acquired until the person in whose name
the act of possession was executed has ratified the same, without prejudice to the juridical
consequences of negotiorum gestio in a proper case."
The last means of acquiring possession under Article 531 refers to juridical acts -- the
acquisition of possession by sufficient title – to which the law gives the force of acts of
possession. Respondent argues that only items of income actually received should be
included in its gross receipts. It claims that since the amount had already been withheld at
source, it did not have actual receipt thereof.
We clarify. Article 531 of the Civil Code clearly provides that the acquisition of the right of
possession is through the proper acts and legal formalities established therefor. The
withholding process is one such act. There may not be actual receipt of the income
withheld; however, as provided for in Article 532, possession by any person without any
power whatsoever shall be considered as acquired when ratified by the person in whose
name the act of possession is executed.
In our withholding tax system, possession is acquired by the payor as the withholding
agent of the government, because the taxpayer ratifies the very act of possession for the
government. There is thus constructive receipt. The processes of bookkeeping and
accounting for interest on deposits and yield on deposit substitutes that are subjected to
FWT are indeed -- for legal purposes -- tantamount to delivery, receipt or remittance.
Besides, respondent itself admits that its income is subjected to a tax burden immediately
upon "receipt," although it claims that it derives no pecuniary benefit or advantage
through the withholding process. There being constructive receipt of such income -- part
of which is withheld -- RR 17-84 applies, and that income is included as part of the tax
base upon which the GRT is imposed.
RR 12-80 Superseded by RR 17-84
implied repeal of an earlier one; and (2) if the later regulation covers the whole subject of
an earlier one and is clearly intended as a substitute, it will similarly operate as a repeal of
the earlier one. There is no implied repeal of an earlier RR by the mere fact that its subject
matter is related to a later RR, which may simply be a cumulation or continuation of the
earlier one.

We now come to the effect of the revenue regulations on interest income constructively Where a part of an earlier regulation embracing the same subject as a later one may not
received. be enforced without nullifying the pertinent provision of the latter, the earlier regulation is
deemed impliedly amended or modified to the extent of the repugnancy. The unaffected
provisions or portions of the earlier regulation remain in force, while its omitted portions
In general, rules and regulations issued by administrative or executive officers pursuant to
are deemed repealed. An exception therein that is amended by its subsequent elimination
the procedure or authority conferred by law upon the administrative agency have the force
shall now cease to be so and instead be included within the scope of the general rule.
and effect, or partake of the nature, of a statute. The reason is that statutes express the
policies, purposes, objectives, remedies and sanctions intended by the legislature in
general terms. The details and manner of carrying them out are oftentimes left to the Section 4(e) of the earlier RR 12-80 provides that only items of income actually received
administrative agency entrusted with their enforcement. shall be included in the tax base for computing the GRT, but Section 7(c) of the later RR
17-84 makes no such distinction and provides that all interests earned shall be included.
The exception having been eliminated, the clear intent is that the later RR 17-84 includes
In the present case, it is the finance secretary who promulgates the revenue regulations,
the exception within the scope of the general rule.
upon recommendation of the BIR commissioner. These regulations are the consequences
of a delegated power to issue legal provisions that have the effect of law.
Repeals by implication are not favored and will not be indulged, unless it is manifest that
the administrative agency intended them. As a regulation is presumed to have been made
A revenue regulation is binding on the courts as long as the procedure fixed for its
with deliberation and full knowledge of all existing rules on the subject, it may reasonably
promulgation is followed. Even if the courts may not be in agreement with its stated policy
be concluded that its promulgation was not intended to interfere with or abrogate any
or innate wisdom, it is nonetheless valid, provided that its scope is within the statutory
earlier rule relating to the same subject, unless it is either repugnant to or fully inclusive
authority or standard granted by the legislature. Specifically, the regulation must (1) be
of the subject matter of an earlier one, or unless the reason for the earlier one is "beyond
germane to the object and purpose of the law; (2) not contradict, but conform to, the
peradventure removed." Every effort must be exerted to make all regulations stand -- and
standards the law prescribes; and (3) be issued for the sole purpose of carrying into effect
a later rule will not operate as a repeal of an earlier one, if by any reasonable construction,
the general provisions of our tax laws.
the two can be reconciled.

In the present case, there is no question about the regularity in the performance of official
RR 12-80 imposes the GRT only on all items of income actually received, as opposed to
duty. What needs to be determined is whether RR 12-80 has been repealed by RR 17-84.
their mere accrual, while RR 17-84 includes all interest income in computing the GRT. RR
12-80 is superseded by the later rule, because Section 4(e) thereof is not restated in RR
A repeal may be express or implied. It is express when there is a declaration in a 17-84. Clearly therefore, as petitioner correctly states, this particular provision was
regulation -- usually in its repealing clause -- that another regulation, identified by its impliedly repealed when the later regulations took effect.
number or title, is repealed. All others are implied repeals. An example of the latter is a
general provision that predicates the intended repeal on a substantial conflict between the
Reconciling the Two Regulations
existing and the prior regulations.

Granting that the two regulations can be reconciled, respondent’s reliance on Section 4(e)
As stated in Section 11 of RR 17-84, all regulations, rules, orders or portions thereof that
of RR 12-80 is misplaced and deceptive. The "accrual" referred to therein should not be
are inconsistent with the provisions of the said RR are thereby repealed. This declaration
equated with the determination of the amount to be used as tax base in computing the
proceeds on the premise that RR 17-84 clearly reveals such an intention on the part of the
GRT. Such accrual merely refers to an accounting method that recognizes income as
Department of Finance. Otherwise, later RRs are to be construed as a continuation of, and
earned although not received, and expenses as incurred although not yet paid.
not a substitute for, earlier RRs; and will continue to speak, so far as the subject matter is
the same, from the time of the first promulgation.
Accrual should not be confused with the concept of constructive possession or receipt as
earlier discussed. Petitioner correctly points out that income that is merely accrued --
There are two well-settled categories of implied repeals: (1) in case the provisions are in
earned, but not yet received -- does not form part of the taxable gross receipts; income
irreconcilable conflict, the later regulation, to the extent of the conflict, constitutes an
that has been received, albeit constructively, does.
The word "actually," used confusingly in Section 4(e), will be clearer if removed entirely.
Besides, if actually is that important, accrual should have been eliminated for being a mere
surplusage. The inclusion of accrual stresses the fact that Section 4(e) does not distinguish
between actual and constructive receipt. It merely focuses on the method of accounting
known as the accrual system.
Under this system, income is accrued or earned in the year in which the taxpayer’s right
thereto becomes fixed and definite, even though it may not be actually received until a
later year; while a deduction for a liability is to be accrued or incurred and taken when the
liability becomes fixed and certain, even though it may not be actually paid until later.
Under any system of accounting, no duty or liability to pay an income tax upon a
transaction arises until the taxable year in which the event constituting the condition
precedent occurs. The liability to pay a tax may thus arise at a certain time and the tax
paid within another given time.
In reconciling these two regulations, the earlier one includes in the tax base for GRT all
income, whether actually or constructively received, while the later one includes
specifically interest income. In computing the income tax liability, the only exception cited
in the later regulations is the exclusion from gross income of interest income, which is
already subjected to withholding. This exception, however, refers to a different tax
altogether. To extend mischievously such exception to the GRT will certainly lead to results
not contemplated by the legislators and the administrative body promulgating the
regulations.
Manila Jockey Club Inapplicable
In Commissioner of Internal Revenue v. Manila Jockey Club, we held that the term "gross
receipts" shall not include money which, although delivered, has been especially
earmarked by law or regulation for some person other than the taxpayer.
To begin, we have to nuance the definition of gross receipts to determine what it is
exactly. In this regard, we note that US cases have persuasive effect in our jurisdiction,
because Philippine income tax law is patterned after its US counterpart.
"‘[G]ross receipts’ with respect to any period means the sum of: (a) The total amount
received or accrued during such period from the sale, exchange, or other disposition of x x
x other property of a kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of its trade or business, and (b) The
gross income, attributable to a trade or business, regularly carried on by the taxpayer,
received or accrued during such period x x x."
"x x x [B]y gross earnings from operations x x x was intended all operations xxx including
incidental, subordinate, and subsidiary operations, as well as principal operations."
"When we speak of the ‘gross earnings’ of a person or corporation, we mean the entire
earnings or receipts of such person or corporation from the business or operations to
which we refer."
From these cases, "gross receipts" refer to the total, as opposed to the net, income. These
are therefore the total receipts before any deduction for the expenses of management.
Webster’s New International Dictionary, in fact, defines gross as "whole or entire."
Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are
found in many jurisdictions. Tax thereon is generally held to be within the power of a state
to impose; or constitutional, unless it interferes with interstate commerce or violates the
requirement as to uniformity of taxation.
Moreover, we have emphasized that the BIR has consistently ruled that "gross receipts"
does not admit of any deduction. Following the principle of legislative approval by
reenactment, this interpretation has been adopted by the legislature throughout the
various reenactments of then Section 119 of the Tax Code.
Given that a tax is imposed upon total receipts and not upon net earnings, shall the
income withheld be included in the tax base upon which such tax is imposed? In other
words, shall interest income constructively received still be included in the tax base for
computing the GRT?
We rule in the affirmative.
Manila Jockey Club does not apply to this case. Earmarking is not the same as withholding.
Amounts earmarked do not form part of gross receipts, because, although delivered or
received, these are by law or regulation reserved for some person other than the
taxpayer. On the contrary, amounts withheld form part of gross receipts, because these
are in constructive possession and not subject to any reservation, the withholding agent
being merely a conduit in the collection process.
The Manila Jockey Club had to deliver to the Board on Races, horse owners and jockeys
amounts that never became the property of the race track. Unlike these amounts, the
interest income that had been withheld for the government became property of the
financial institutions upon constructive possession thereof. Possession was indeed
acquired, since it was ratified by the financial institutions in whose name the act of
possession had been executed. The money indeed belonged to the taxpayers; merely
holding it in trust was not enough.
The government subsequently becomes the owner of the money when the financial
institutions pay the FWT to extinguish their obligation to the government. As this Court
has held before, this is the consideration for the transfer of ownership of the FWT from
these institutions to the government. It is ownership that determines whether interest
income forms part of taxable gross receipts. Being originally owned by these financial
institutions as part of their interest income, the FWT should form part of their taxable
gross receipts.
Besides, these amounts withheld are in payment of an income tax liability, which is
different from a percentage tax liability. Commissioner of Internal Revenue v. Tours
Specialists, Inc. aptly held thus:
"x x x [G]ross receipts subject to tax under the Tax Code do not include monies or receipts
entrusted to the taxpayer which do not belong to them and do not redound to the
taxpayer’s benefit; and it is not necessary that there must be a law or regulation which
would exempt such monies and receipts within the meaning of gross receipts under the
Tax Code."
In the construction and interpretation of tax statutes and of statutes in general, the
primary consideration is to ascertain and give effect to the intention of the legislature. We
ought to impute to the lawmaking body the intent to obey the constitutional mandate, as
long as its enactments fairly admit of such construction. In fact, "x x x no tax can be
levied without express authority of law, but the statutes are to receive a reasonable
construction with a view to carrying out their purpose and intent."
Looking again into Sections 24(e)(1) and 119 of the Tax Code, we find that the first
imposes an income tax; the second, a percentage tax. The legislature clearly intended two
different taxes. The FWT is a tax on passive income, while the GRT is on business. The
withholding of one is not equivalent to the payment of the other.
Non-Exemption of FWT from GRT: Neither Unjust nor Absurd
Taxing the people and their property is essential to the very existence of government.
Certainly, one of the highest attributes of sovereignty is the power of taxation, which may
legitimately be exercised on the objects to which it is applicable to the utmost extent as
the government may choose. Being an incident of sovereignty, such power is coextensive
with that to which it is an incident. The interest on deposits and yield on deposit
substitutes of financial institutions, on the one hand, and their business as such, on the
other, are the two objects over which the State has chosen to extend its sovereign power.
Those not so chosen are, upon the soundest principles, exempt from taxation.
While courts will not enlarge by construction the government’s power of taxation, neither
will they place upon tax laws so loose a construction as to permit evasions, merely on the
basis of fanciful and insubstantial distinctions. When the legislature imposes a tax on
income and another on business, the imposition must be respected. The Tax Code should
be so construed, if need be, as to avoid empty declarations or possibilities of crafty tax
evasion schemes. We have consistently ruled thus:
"x x x [I]t is upon taxation that the [g]overnment chiefly relies to obtain the means to
carry on its operations, and it is of the utmost importance that the modes adopted to
enforce the collection of the taxes levied should be summary and interfered with as little
as possible. x x x."
"Any delay in the proceedings of the officers, upon whom the duty is devolved of collecting
the taxes, may derange the operations of government, and thereby cause serious
detriment to the public."
"No government could exist if all litigants were permitted to delay the collection of its
taxes."
A taxing act will be construed, and the intent and meaning of the legislature ascertained,
from its language. Its clarity and implied intent must exist to uphold the taxes as against a
taxpayer in whose favor doubts will be resolved. No such doubts exist with respect to the
Tax Code, because the income and percentage taxes we have cited earlier have been
imposed in clear and express language for that purpose.
This Court has steadfastly adhered to the doctrine that its first and fundamental duty is
the application of the law according to its express terms -- construction and interpretation
being called for only when such literal application is impossible or inadequate without
them. In Quijano v. Development Bank of the Philippines, we stressed as follows:
"No process of interpretation or construction need be resorted to where a provision of law
peremptorily calls for application."
A literal application of any part of a statute is to be rejected if it will operate unjustly, lead
to absurd results, or contradict the evident meaning of the statute taken as a whole.
Unlike the CA, we find that the literal application of the aforesaid sections of the Tax Code
and its implementing regulations does not operate unjustly or contradict the evident
meaning of the statute taken as a whole. Neither does it lead to absurd results. Indeed,
our courts are not to give words meanings that would lead to absurd or unreasonable
consequences. We have repeatedly held thus:
"x x x [S]tatutes should receive a sensible construction, such as will give effect to the
legislative intention and so as to avoid an unjust or an absurd conclusion."
"While it is true that the contemporaneous construction placed upon a statute by executive
officers whose duty is to enforce it should be given great weight by the courts, still if such
construction is so erroneous, x x x the same must be declared as null and void."
It does not even matter that the CTA, like in China Banking Corporation, relied erroneously
on Manila Jockey Club. Under our tax system, the CTA acts as a highly specialized body
specifically created for the purpose of reviewing tax cases. Because of its recognized
expertise, its findings of fact will ordinarily not be reviewed, absent any showing of gross
error or abuse on its part. Such findings are binding on the Court and, absent strong
reasons for us to delve into facts, only questions of law are open for determination.
Respondent claims that it is entitled to a refund on the basis of excess GRT payments. We
disagree.
Tax refunds are in the nature of tax exemptions. Such exemptions are strictly construed
against the taxpayer, being highly disfavored and almost said "to be odious to the law."
Hence, those who claim to be exempt from the payment of a particular tax must do so
under clear and unmistakable terms found in the statute. They must be able to point to
some positive provision, not merely a vague implication, of the law creating that right.
The right of taxation will not be surrendered, except in words too plain to be mistaken.
The reason is that the State cannot strip itself of this highest attribute of sovereignty -- its
most essential power of taxation -- by vague or ambiguous language. Since tax refunds
are in the nature of tax exemptions, these are deemed to be "in derogation of sovereign
authority and to be construed strictissimi juris against the person or entity claiming the
exemption."
No less than our 1987 Constitution provides for the mechanism for granting tax
exemptions. They certainly cannot be granted by implication or mere administrative
regulation. Thus, when an exemption is claimed, it must indubitably be shown to exist, for
every presumption is against it, and a well-founded doubt is fatal to the claim. In the
instant case, respondent has not been able to satisfactorily show that its FWT on interest
income is exempt from the GRT. Like China Banking Corporation, its argument creates a
tax exemption where none exists.
No exemptions are normally allowed when a GRT is imposed. It is precisely designed to
maintain simplicity in the tax collection effort of the government and to assure its steady
source of revenue even during an economic slump.
No Double Taxation
We have repeatedly said that the two taxes, subject of this litigation, are different from
each other. The basis of their imposition may be the same, but their natures are different,
thus leading us to a final point. Is there double taxation?
The Court finds none.
Double taxation means taxing the same property twice when it should be taxed only once;
that is, "x x x taxing the same person twice by the same jurisdiction for the same thing." It
is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise
described as "direct duplicate taxation," the two taxes must be imposed on the same
subject matter, for the same purpose, by the same taxing authority, within the same
jurisdiction, during the same taxing period; and they must be of the same kind or
character.
First, the taxes herein are imposed on two different subject matters. The subject matter of
the FWT is the passive income generated in the form of interest on deposits and yield on
deposit substitutes, while the subject matter of the GRT is the privilege of engaging in the
business of banking.
A tax based on receipts is a tax on business rather than on the property; hence, it is an
excise rather than a property tax. It is not an income tax, unlike the FWT. In fact, we have
already held that one can be taxed for engaging in business and further taxed differently
for the income derived therefrom. Akin to our ruling in Velilla v. Posadas, these two taxes
are entirely distinct and are assessed under different provisions.
Second, although both taxes are national in scope because they are imposed by the same
taxing authority -- the national government under the Tax Code -- and operate within the
same Philippine jurisdiction for the same purpose of raising revenues, the taxing periods
they affect are different. The FWT is deducted and withheld as soon as the income is
earned, and is paid after every calendar quarter in which it is earned. On the other hand,
the GRT is neither deducted nor withheld, but is paid only after every taxable quarter in
which it is earned.
Third, these two taxes are of different kinds or characters. The FWT is an income tax
subject to withholding, while the GRT is a percentage tax not subject to withholding.
In short, there is no double taxation, because there is no taxing twice, by the same taxing
authority, within the same jurisdiction, for the same purpose, in different taxing periods,
some of the property in the territory. Subjecting interest income to a 20% FWT and
including it in the computation of the 5% GRT is clearly not double taxation.
WHEREFORE, the Petition is GRANTED. The assailed Decision and Resolution of the Court
of Appeals are hereby REVERSED and SET ASIDE. No costs.
SO ORDERED.
G.R. No. 154068             August 3, 2007
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ROSEMARIE ACOSTA, as represented by Virgilio A. Abogado, respondent.
DECISION
QUISUMBING, J.:
Assailed in this petition for review are the Decision and Resolution dated February 13,
2002 and May 29, 2002, respectively, of the Court of Appeals in CA-G.R. SP No. 55572
which had reversed the Resolution dated August 4, 1999 of the Court of Tax Appeals in
C.T.A. Case No. 5828 and ordered the latter to resolve respondent’s petition for review.
The facts are as follows:
Respondent is an employee of Intel Manufacturing Phils., Inc. (Intel). For the period WHETHER OR NOT THE 1997 TAX REFORM ACT CAN BE APPLIED RETROACTIVELY.
January 1, 1996 to December 31, 1996, respondent was assigned in a foreign country.
During that period, Intel withheld the taxes due on respondent’s compensation income and II.
remitted to the Bureau of Internal Revenue (BIR) the amount of P308,084.56.
WHETHER OR NOT THE CTA HAS JURISDICTION TO TAKE [COGNIZANCE] OF
On March 21, 1997, respondent and her husband filed with the BIR their Joint Individual RESPONDENT’S PETITION FOR REVIEW.
Income Tax Return for the year 1996. Later, on June 17, 1997, respondent, through her
representative, filed an amended return and a Non-Resident Citizen Income Tax Return,
While the main concern in this controversy is the CTA’s jurisdiction, we must first resolve
and paid the BIR P17,693.37 plus interests in the amount of P14,455.76. On October 8,
two issues. First, does the amended return filed by respondent indicating an overpayment
1997, she filed another amended return indicating an overpayment of P358,274.63.
constitute the written claim for refund required by law, thereby vesting the CTA with
jurisdiction over this case? Second, can the 1997 NIRC be applied retroactively?
Claiming that the income taxes withheld and paid by Intel and respondent resulted in an
overpayment of P340,918.92, respondent filed on April 15, 1999 a petition for review
Petitioner avers that an amended return showing an overpayment does not constitute the
docketed as C.T.A. Case No. 5828 with the Court of Tax Appeals (CTA). The Commissioner
written claim for refund required under Section 230 of the 1993 NIRC (old Tax Code). He
of Internal Revenue (CIR) moved to dismiss the petition for failure of respondent to file
claims that an actual written claim for refund is necessary before a suit for its recovery
the mandatory written claim for refund before the CIR.
may proceed in any court.

In its Resolution dated August 4, 1999, the CTA dismissed respondent’s petition. For one,
On the other hand, respondent contends that the filing of an amended return indicating an
the CTA ruled that respondent failed to file a written claim for refund with the CIR, a
overpayment of P358,274.63 constitutes a written claim for refund pursuant to the clear
condition precedent to the filing of a petition for review before the CTA. Second, the CTA
proviso stated in the last sentence of Section 204(c) of the 1997 NIRC (new Tax Code), to
noted that respondent’s omission, inadvertently or otherwise, to allege in her petition the
wit:
date of filing the final adjustment return, deprived the court of its jurisdiction over the
subject matter of the case. The decretal portion of the CTA’s resolution states:
xxxx
WHEREFORE, in view of all the foregoing, Respondent’s Motion to Dismiss
is GRANTED. Accordingly[,] the Petition for Review is hereby DISMISSED. …Provided, however, That a return filed showing an overpayment shall be considered
as a written claim for credit or refund.
SO ORDERED.
xxxx
Upon review, the Court of Appeals reversed the CTA and directed the latter to resolve
respondent’s petition for review. Applying Section 204(c) of the 1997 National Internal Along the same vein, respondent invokes the liberal application of technicalities in tax
Revenue Code (NIRC), the Court of Appeals ruled that respondent’s filing of an amended refund cases, conformably with our ruling in BPI-Family Savings Bank, Inc. v. Court of
return indicating an overpayment was sufficient compliance with the requirement of a Appeals. We are, however, unable to agree with respondent’s submission on this score.
written claim for refund. The decretal portion of the Court of Appeals’ decision reads:
The applicable law on refund of taxes pertaining to the 1996 compensation income is
WHEREFORE, finding the petition to be meritorious, this Court GRANTS it due course Section 230 of the old Tax Code, which was the law then in effect, and not Section 204(c)
and REVERSES the appealed Resolutions and DIRECTS the Court of Tax Appeal[s] to of the new Tax Code, which was effective starting only on January 1, 1998.
resolve the petition for review on the merits.
Noteworthy, the requirements under Section 230 for refund claims are as follows:
SO ORDERED.
1. A written claim for refund or tax credit must be filed by the taxpayer with the
Petitioner sought reconsideration, but it was denied. Hence, the instant petition raising the Commissioner;
following questions of law:
2. The claim for refund must be a categorical demand for reimbursement;
I.
 3. The claim for refund or tax credit must be filed, or the suit or proceeding therefor
must be commenced in court within two (2) years from date of payment of the
tax or penalty regardless of any supervening cause. (Emphasis ours.)
In our view, the law is clear. A claimant must first file a written claim for refund,
categorically demanding recovery of overpaid taxes with the CIR, before resorting to an
action in court. This obviously is intended, first, to afford the CIR an opportunity to correct
the action of subordinate officers; and second, to notify the government that such taxes
have been questioned, and the notice should then be borne in mind in estimating the
revenue available for expenditure.
Thus, on the first issue, we rule against respondent’s contention. Entrenched in our
jurisprudence is the principle that tax refunds are in the nature of tax exemptions which
are construed strictissimi juris against the taxpayer and liberally in favor of the
government. As tax refunds involve a return of revenue from the government, the
claimant must show indubitably the specific provision of law from which her right arises; it
cannot be allowed to exist upon a mere vague implication or inference nor can it be
extended beyond the ordinary and reasonable intendment of the language actually
used by the legislature in granting the refund. To repeat, strict compliance with the
conditions imposed for the return of revenue collected is a doctrine consistently applied in
this jurisdiction.
Under the circumstances of this case, we cannot agree that the amended return filed by
respondent constitutes the written claim for refund required by the old Tax Code, the law
prevailing at that time. Neither can we apply the liberal interpretation of the law based on
our pronouncement in the case of BPI-Family Savings Bank, Inc. v. Court of Appeals, as
the taxpayer therein filed a written claim for refund aside from presenting other evidence
to prove its claim, unlike this case before us.
On the second issue, petitioner argues that the 1997 NIRC cannot be applied retroactively
as the instant case involved refund of taxes withheld on a 1996 income. Respondent,
however, points out that when the petition was filed with the CTA on April 15, 1999, the
1997 NIRC was already in effect, hence, Section 204(c) should apply, despite the fact that
the refund being sought pertains to a 1996 income tax. Note that the issue on the
retroactivity of Section 204(c) of the 1997 NIRC arose because the last paragraph of
Section 204(c) was not found in Section 230 of the old Code. After a thorough
consideration of this matter, we find that we cannot give retroactive application to Section
204(c) abovecited. We have to stress that tax laws are prospective in operation, unless
the language of the statute clearly provides otherwise.
Moreover, it should be emphasized that a party seeking an administrative remedy must
not merely initiate the prescribed administrative procedure to obtain relief, but also pursue
it to its appropriate conclusion before seeking judicial intervention in order to give the
administrative agency an opportunity to decide the matter itself correctly and prevent
unnecessary and premature resort to court action. This the respondent did not follow
through. Additionally, it could not escape notice that at the time respondent filed her
amended return, the 1997 NIRC was not yet in effect. Hence, respondent had no reason at
that time to think that the filing of an amended return would constitute the written claim
for refund required by applicable law.
Furthermore, as the CTA stressed, even the date of filing of the Final Adjustment Return
was omitted, inadvertently or otherwise, by respondent in her petition for review. This
omission was fatal to respondent’s claim, for it deprived the CTA of its jurisdiction over the
subject matter of the case.
Finally, we cannot agree with the Court of Appeals’ finding that the nature of the instant
case calls for the application of remedial laws. Revenue statutes are substantive laws and
in no sense must their application be equated with that of remedial laws. As well said in a
prior case, revenue laws are not intended to be liberally construed. Considering that taxes
are the lifeblood of the government and in Holmes’s memorable metaphor, the price we
pay for civilization, tax laws must be faithfully and strictly implemented.
WHEREFORE, the petition is GRANTED. Both the assailed Decision and Resolution dated
February 13, 2002 and May 29, 2002, respectively, of the Court of Appeals in CA-G.R. SP
No. 55572 are REVERSED and SET ASIDE. The Resolution dated August 4, 1999 of the
Court of Tax Appeals in C.T.A. Case No. 5828 is hereby REINSTATED.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 163653               July 19, 2011
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
FILINVEST DEVELOPMENT CORPORATION, Respondent.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 167689
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
FILINVEST DEVELOPMENT CORPORATION, Respondent.
DECISION
PEREZ, J.:
Assailed in these twin petitions for review on certiorari filed pursuant to Rule 45 of the
1997 Rules of Civil Procedure are the decisions rendered by the Court of Appeals (CA) in
the following cases: (a) Decision dated 16 December 2003 of the then Special Fifth
Division in CA-G.R. SP No. 72992; and, (b) Decision dated 26 January 2005 of the then Project). With their equity participation in FAC respectively pegged at 60% and 40% in the
Fourteenth Division in CA-G.R. SP No. 74510. Shareholders’ Agreement, FDC subscribed to ₱500.7 million worth of shares in said joint
venture company to RHPL’s subscription worth ₱433.8 million. Having paid its subscription
The Facts by executing a Deed of Assignment transferring to FAC a portion of its rights and interest
in the Project worth ₱500.7 million, FDC eventually reported a net loss of ₱190,695,061.00
in its Annual Income Tax Return for the taxable year 1996.
The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI),
respondent Filinvest Development Corporation (FDC) is a holding company which also
owned 67.42% of the outstanding shares of Filinvest Land, Inc. (FLI). On 29 November On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to pay
1996, FDC and FAI entered into a Deed of Exchange with FLI whereby the former both deficiency income and documentary stamp taxes, plus interests and compromise
transferred in favor of the latter parcels of land appraised at ₱4,306,777,000.00. In penalties, covered by the following Assessment Notices, viz.: (a) Assessment Notice No.
exchange for said parcels which were intended to facilitate development of medium-rise SP-INC-96-00018-2000 for deficiency income taxes in the sum of ₱150,074,066.27 for
residential and commercial buildings, 463,094,301 shares of stock of FLI were issued to 1996; (b) Assessment Notice No. SP-DST-96-00020-2000 for deficiency documentary
FDC and FAI. As a result of the exchange, FLI’s ownership structure was changed to the stamp taxes in the sum of ₱10,425,487.06 for 1996; (c) Assessment Notice No. SP-INC-
extent reflected in the following tabular précis, viz.: 97-00019-2000 for deficiency income taxes in the sum of ₱5,716,927.03 for 1997; and (d)
Assessment Notice No. SP-DST-97-00021-2000 for deficiency documentary stamp taxes in
the sum of ₱5,796,699.40 for 1997. The foregoing deficiency taxes were assessed on the
Number and Percentage of Number of Number and Percentage taxable gain supposedly realized by FDC from the Deed of Exchange it executed with FAI
Stockholder Shares Held Prior to the Additional of Shares Held After the and FLI, on the dilution resulting from the Shareholders’ Agreement FDC executed with
Exchange Shares Issued Exchange RHPL as well as the "arm’s-length" interest rate and documentary stamp taxes imposable
on the advances FDC extended to its affiliates.
FDC 2,537,358,000 67.42% 42,217,000 2,579,575,000 61.03%

FAI 0 0 420,877,000 420,877,000 9.96%
OTHERS 1,226,177,000 32.58% 0 1,226,177,000 29.01%
  3,763,535,000 100% 463,094,301 4,226,629,000 (100%)
On 13 January 1997, FLI requested a ruling from the Bureau of Internal Revenue (BIR) to
the effect that no gain or loss should be recognized in the aforesaid transfer of real
properties. Acting on the request, the BIR issued Ruling No. S-34-046-97 dated 3
February 1997, finding that the exchange is among those contemplated under Section 34
(c) (2) of the old National Internal Revenue Code (NIRC) which provides that "(n)o gain or
loss shall be recognized if property is transferred to a corporation by a person in exchange
for a stock in such corporation of which as a result of such exchange said person, alone or
together with others, not exceeding four (4) persons, gains control of said corporation."
With the BIR’s reiteration of the foregoing ruling upon the 10 February 1997 request for
clarification filed by FLI, the latter, together with FDC and FAI, complied with all the
requirements imposed in the ruling.
On various dates during the years 1996 and 1997, in the meantime, FDC also extended
advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar Central Corporation
(DSCC) and Filinvest Capital, Inc. (FCI). Duly evidenced by instructional letters as well as
cash and journal vouchers, said cash advances amounted to ₱2,557,213,942.60 in
1996 and ₱3,360,889,677.48 in 1997. On 15 November 1996, FDC also entered into a
Shareholders’ Agreement with Reco Herrera PTE Ltd. (RHPL) for the formation of a
Singapore-based joint venture company called Filinvest Asia Corporation (FAC), tasked to
develop and manage FDC’s 50% ownership of its PBCom Office Tower Project (the
On 3 January 2000, FAI similarly received from the BIR a Formal Letter of Demand for
deficiency income taxes in the sum of ₱1,477,494,638.23 for the year 1997. Covered by
Assessment Notice No. SP-INC-97-0027-2000, said deficiency tax was also assessed on
the taxable gain purportedly realized by FAI from the Deed of Exchange it executed with
FDC and FLI. On 26 January 2000 or within the reglementary period of thirty (30) days
from notice of the assessment, both FDC and FAI filed their respective requests for
reconsideration/protest, on the ground that the deficiency income and documentary stamp
taxes assessed by the BIR were bereft of factual and legal basis. Having submitted the
relevant supporting documents pursuant to the 31 January 2000 directive from the BIR
Appellate Division, FDC and FAI filed on 11 September 2000 a letter requesting an early
resolution of their request for reconsideration/protest on the ground that the 180 days
prescribed for the resolution thereof under Section 228 of the NIRC was going to expire on
20 September 2000.
In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to resolve their
request for reconsideration/protest within the aforesaid period, FDC and FAI filed on 17
October 2000 a petition for review with the Court of Tax Appeals (CTA) pursuant to
Section 228 of the 1997 NIRC. Docketed before said court as CTA Case No. 6182, the
petition alleged, among other matters, that as previously opined in BIR Ruling No. S-34-
046-97, no taxable gain should have been assessed from the subject Deed of Exchange
since FDC and FAI collectively gained further control of FLI as a consequence of the
exchange; that correlative to the CIR's lack of authority to impute theoretical interests on
the cash advances FDC extended in favor of its affiliates, the rule is settled that interests
cannot be demanded in the absence of a stipulation to the effect; that not being
promissory notes or certificates of obligations, the instructional letters as well as the cash
and journal vouchers evidencing said cash advances were not subject to documentary
stamp taxes; and, that no income tax may be imposed on the prospective gain from the
supposed appreciation of FDC's shareholdings in FAC. As a consequence, FDC and FAC
both prayed that the subject assessments for deficiency income and documentary stamp
taxes for the years 1996 and 1997 be cancelled and annulled.
On 4 December 2000, the CIR filed its answer, claiming that the transfer of property in
question should not be considered tax free since, with the resultant diminution of its
shares in FLI, FDC did not gain further control of said corporation. Likewise calling
attention to the fact that the cash advances FDC extended to its affiliates were interest
free despite the interest bearing loans it obtained from banking institutions, the CIR
invoked Section 43 of the old NIRC which, as implemented by Revenue Regulations No. 2,
Section 179 (b) and (c), gave him "the power to allocate, distribute or apportion income or
deductions between or among such organizations, trades or business in order to prevent
evasion of taxes." The CIR justified the imposition of documentary stamp taxes on the
instructional letters as well as cash and journal vouchers for said cash advances on the
strength of Section 180 of the NIRC and Revenue Regulations No. 9-94 which provide that
loan transactions are subject to said tax irrespective of whether or not they are evidenced
by a formal agreement or by mere office memo. The CIR also argued that FDC realized
taxable gain arising from the dilution of its shares in FAC as a result of its Shareholders'
Agreement with RHPL.
At the pre-trial conference, the parties filed a Stipulation of Facts, Documents and
Issues which was admitted in the 16 February 2001 resolution issued by the CTA. With the
further admission of the Formal Offer of Documentary Evidence subsequently filed by FDC
and FAI and the conclusion of the testimony of Susana Macabelda anent the cash
advances FDC extended in favor of its affiliates, the CTA went on to render the Decision
dated 10 September 2002 which, with the exception of the deficiency income tax on the
interest income FDC supposedly realized from the advances it extended in favor of its
affiliates, cancelled the rest of deficiency income and documentary stamp taxes assessed
against FDC and FAI for the years 1996 and 1997, thus:
WHEREFORE, in view of all the foregoing, the court finds the instant petition partly
meritorious. Accordingly, Assessment Notice No. SP-INC-96-00018-2000 imposing
deficiency income tax on FDC for taxable year 1996, Assessment Notice No. SP-DST-96-
00020-2000 and SP-DST-97-00021-2000 imposing deficiency documentary stamp tax on
FDC for taxable years 1996 and 1997, respectively and Assessment Notice No. SP-INC-97-
0027-2000 imposing deficiency income tax on FAI for the taxable year 1997 are hereby
CANCELLED and SET ASIDE. However, [FDC] is hereby ORDERED to PAY the amount of
₱5,691,972.03 as deficiency income tax for taxable year 1997. In addition, petitioner is
also ORDERED to PAY 20% delinquency interest computed from February 16, 2000 until
full payment thereof pursuant to Section 249 (c) (3) of the Tax Code.
Finding that the collective increase of the equity participation of FDC and FAI in FLI
rendered the gain derived from the exchange tax-free, the CTA also ruled that the
increase in the value of FDC's shares in FAC did not result in economic advantage in the
absence of actual sale or conversion thereof. While likewise finding that the documents
evidencing the cash advances FDC extended to its affiliates cannot be considered as loan
agreements that are subject to documentary stamp tax, the CTA enunciated, however,
that the CIR was justified in assessing undeclared interests on the same cash advances
pursuant to his authority under Section 43 of the NIRC in order to forestall tax evasion.
For persuasive effect, the CTA referred to the equivalent provision in the Internal Revenue
Code of the United States (IRC-US), i.e., Sec. 482, as implemented by Section 1.482-2 of
1965-1969 Regulations of the Law of Federal Income Taxation.
Dissatisfied with the foregoing decision, FDC filed on 5 November 2002 the petition for
review docketed before the CA as CA-G.R. No. 72992, pursuant to Rule 43 of the 1997
Rules of Civil Procedure. Calling attention to the fact that the cash advances it extended to
its affiliates were interest-free in the absence of the express stipulation on interest
required under Article 1956 of the Civil Code, FDC questioned the imposition of an arm's-
length interest rate thereon on the ground, among others, that the CIR's authority under
Section 43 of the NIRC: (a) does not include the power to impute imaginary interest on
said transactions; (b) is directed only against controlled taxpayers and not against mother
or holding corporations; and, (c) can only be invoked in cases of understatement of
taxable net income or evident tax evasion. Upholding FDC's position, the CA's then Special
Fifth Division rendered the herein assailed decision dated 16 December 2003, the decretal
portion of which states:
WHEREFORE, premises considered, the instant petition is hereby GRANTED. The assailed
Decision dated September 10, 2002 rendered by the Court of Tax Appeals in CTA Case No.
6182 directing petitioner Filinvest Development Corporation to pay the amount of
₱5,691,972.03 representing deficiency income tax on allegedly undeclared interest income
for the taxable year 1997, plus 20% delinquency interest computed from February 16,
2000 until full payment thereof is REVERSED and SET ASIDE and, a new one entered
annulling Assessment Notice No. SP-INC-97-00019-2000 imposing deficiency income tax
on petitioner for taxable year 1997. No pronouncement as to costs.
With the denial of its partial motion for reconsideration of the same 11 December 2002
resolution issued by the CTA, the CIR also filed the petition for review docketed before the
CA as CA-G.R. No. 74510. In essence, the CIR argued that the CTA reversibly erred in
cancelling the assessment notices: (a) for deficiency income taxes on the exchange of
property between FDC, FAI and FLI; (b) for deficiency documentary stamp taxes on the
documents evidencing FDC's cash advances to its affiliates; and (c) for deficiency income
tax on the gain FDC purportedly realized from the increase of the value of its
shareholdings in FAC. The foregoing petition was, however, denied due course and
dismissed for lack of merit in the herein assailed decision dated 26 January 2005 rendered
by the CA's then Fourteenth Division, upon the following findings and conclusions, to wit:
1. As affirmed in the 3 February 1997 BIR Ruling No. S-34-046-97, the 29 November
1996 Deed of Exchange resulted in the combined control by FDC and FAI of more than
51% of the outstanding shares of FLI, hence, no taxable gain can be recognized from
the transaction under Section 34 (c) (2) of the old NIRC;
2. The instructional letters as well as the cash and journal vouchers evidencing the
advances FDC extended to its affiliates are not subject to documentary stamp taxes
pursuant to BIR Ruling No. 116-98, dated 30 July 1998, since they do not partake the
nature of loan agreements;
 3. Although BIR Ruling No. 116-98 had been subsequently modified by BIR Ruling No.
108-99, dated 15 July 1999, to the effect that documentary stamp taxes are imposable
on inter-office memos evidencing cash advances similar to those extended by FDC, said
latter ruling cannot be given retroactive application if to do so would be prejudicial to
the taxpayer;
4. FDC's alleged gain from the increase of its shareholdings in FAC as a consequence of
the Shareholders' Agreement it executed with RHPL cannot be considered taxable
income since, until actually converted thru sale or disposition of said shares, they
merely represent unrealized increase in capital.
Respectively docketed before this Court as G.R. Nos. 163653 and 167689, the CIR's
petitions for review on certiorari assailing the 16 December 2003 decision in CA-G.R. No.
72992 and the 26 January 2005 decision in CA-G.R. SP No. 74510 were consolidated
pursuant to the 1 March 2006 resolution issued by this Court’s Third Division.
The Issues
In G.R. No. 163653, the CIR urges the grant of its petition on the following ground:
THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE COURT OF TAX
APPEALS AND IN HOLDING THAT THE ADVANCES EXTENDED BY RESPONDENT TO ITS
AFFILIATES ARE NOT SUBJECT TO INCOME TAX.
In G.R. No. 167689, on the other hand, petitioner proffers the following issues for
resolution:
I interests, the Commissioner of Internal Revenue is authorized to distribute, apportion or
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION IN
HOLDING THAT THE EXCHANGE OF SHARES OF STOCK FOR PROPERTY AMONG
FILINVEST DEVELOPMENT CORPORATION (FDC), FILINVEST ALABANG, INCORPORATED
(FAI) AND FILINVEST LAND INCORPORATED (FLI) MET ALL THE REQUIREMENTS FOR
THE NON-RECOGNITION OF TAXABLE GAIN UNDER SECTION 34 (c) (2) OF THE OLD
NATIONAL INTERNAL REVENUE CODE (NIRC) (NOW SECTION 40 (C) (2) (c) OF THE
NIRC.
II
THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING
THAT THE LETTERS OF INSTRUCTION OR CASH VOUCHERS EXTENDED BY FDC TO ITS
AFFILIATES ARE NOT DEEMED LOAN AGREEMENTS SUBJECT TO DOCUMENTARY STAMP
TAXES UNDER SECTION 180 OF THE NIRC.
III
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT GAIN ON
DILUTION AS A RESULT OF THE INCREASE IN THE VALUE OF FDC’S SHAREHOLDINGS
IN FAC IS NOT TAXABLE.
The Court’s Ruling
While the petition in G.R. No. 163653 is bereft of merit, we find the CIR’s petition in G.R.
No. 167689 impressed with partial merit.
In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTA’s finding that
theoretical interests can be imputed on the advances FDC extended to its affiliates in 1996
and 1997 considering that, for said purpose, FDC resorted to interest-bearing fund
borrowings from commercial banks. Since considerable interest expenses were deducted
by FDC when said funds were borrowed, the CIR theorizes that interest income should
likewise be declared when the same funds were sourced for the advances FDC extended to
its affiliates. Invoking Section 43 of the 1993 NIRC in relation to Section 179(b) of
Revenue Regulation No. 2, the CIR maintains that it is vested with the power to allocate,
distribute or apportion income or deductions between or among controlled organizations,
trades or businesses even in the absence of fraud, since said power is intended "to prevent
evasion of taxes or clearly to reflect the income of any such organizations, trades or
businesses." In addition, the CIR asseverates that the CA should have accorded weight
and respect to the findings of the CTA which, as the specialized court dedicated to the
study and consideration of tax matters, can take judicial notice of US income tax laws and
regulations.
Admittedly, Section 43 of the 1993 NIRC provides that, "(i)n any case of two or more
organizations, trades or businesses (whether or not incorporated and whether or not
organized in the Philippines) owned or controlled directly or indirectly by the same
allocate gross income or deductions between or among such organization, trade or
business, if he determines that such distribution, apportionment or allocation is necessary
in order to prevent evasion of taxes or clearly to reflect the income of any such
organization, trade or business." In amplification of the equivalent provision under
Commonwealth Act No. 466, Sec. 179 (b) of Revenue Regulation No. 2 states as follows:
Determination of the taxable net income of controlled taxpayer. – (A) DEFINITIONS. –
When used in this section –
(1) The term "organization" includes any kind, whether it be a sole proprietorship, a
partnership, a trust, an estate, or a corporation or association, irrespective of the place
where organized, where operated, or where its trade or business is conducted, and
regardless of whether domestic or foreign, whether exempt or taxable, or whether
affiliated or not.
(2) The terms "trade" or "business" include any trade or business activity of any kind,
regardless of whether or where organized, whether owned individually or otherwise,
and regardless of the place where carried on.
(3) The term "controlled" includes any kind of control, direct or indirect, whether legally income or deductions. The authority to determine true net income extends to any
enforceable, and however exercisable or exercised. It is the reality of the control which case in which either by inadvertence or design the taxable net income in whole or in
is decisive, not its form or mode of exercise. A presumption of control arises if income part, of a controlled taxpayer, is other than it would have been had the taxpayer in
or deductions have been arbitrarily shifted. the conduct of his affairs been an uncontrolled taxpayer dealing at arm’s length with
another uncontrolled taxpayer.
(4) The term "controlled taxpayer" means any one of two or more organizations,
trades, or businesses owned or controlled directly or indirectly by the same interests. As may be gleaned from the definitions of the terms "controlled" and "controlled taxpayer"
under paragraphs (a) (3) and (4) of the foregoing provision, it would appear that FDC and
(5) The term "group" and "group of controlled taxpayers" means the organizations, its affiliates come within the purview of Section 43 of the 1993 NIRC. Aside from owning
trades or businesses owned or controlled by the same interests. significant portions of the shares of stock of FLI, FAI, DSCC and FCI, the fact that FDC
extended substantial sums of money as cash advances to its said affiliates for the purpose
of providing them financial assistance for their operational and capital expenditures
(6) The term "true net income" means, in the case of a controlled taxpayer, the net
seemingly indicate that the situation sought to be addressed by the subject provision
income (or as the case may be, any item or element affecting net income) which would
exists. From the tenor of paragraph (c) of Section 179 of Revenue Regulation No. 2, it
have resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as the
may also be seen that the CIR's power to distribute, apportion or allocate gross income or
case may be, any item or element affecting net income) which would have resulted to
deductions between or among controlled taxpayers may be likewise exercised whether or
the controlled taxpayer, had it in the conduct of its affairs (or, as the case may be, in
not fraud inheres in the transaction/s under scrutiny. For as long as the controlled
the particular contract, transaction, arrangement or other act) dealt with the other
taxpayer's taxable income is not reflective of that which it would have realized had it been
members or members of the group at arm’s length. It does not mean the income, the
dealing at arm's length with an uncontrolled taxpayer, the CIR can make the necessary
deductions, or the item or element of either, resulting to the controlled taxpayer by
rectifications in order to prevent evasion of taxes.
reason of the particular contract, transaction, or arrangement, the controlled taxpayer,
or the interest controlling it, chose to make (even though such contract, transaction, or
arrangement be legally binding upon the parties thereto). Despite the broad parameters provided, however, we find that the CIR's powers of
distribution, apportionment or allocation of gross income and deductions under Section 43
of the 1993 NIRC and Section 179 of Revenue Regulation No. 2 does not include the power
(B) SCOPE AND PURPOSE. - The purpose of Section 44 of the Tax Code is to place a
to impute "theoretical interests" to the controlled taxpayer's transactions. Pursuant to
controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining,
Section 28 of the 1993 NIRC, after all, the term "gross income" is understood to mean all
according to the standard of an uncontrolled taxpayer, the true net income from the
income from whatever source derived, including, but not limited to the following items:
property and business of a controlled taxpayer. The interests controlling a group of
compensation for services, including fees, commissions, and similar items; gross income
controlled taxpayer are assumed to have complete power to cause each controlled
derived from business; gains derived from dealings in property;" interest; rents; royalties;
taxpayer so to conduct its affairs that its transactions and accounting records truly
dividends; annuities; prizes and winnings; pensions; and partner’s distributive share of the
reflect the net income from the property and business of each of the controlled
gross income of general professional partnership. While it has been held that the phrase
taxpayers. If, however, this has not been done and the taxable net income are
"from whatever source derived" indicates a legislative policy to include all income not
thereby understated, the statute contemplates that the Commissioner of Internal
expressly exempted within the class of taxable income under our laws, the term "income"
Revenue shall intervene, and, by making such distributions, apportionments, or
has been variously interpreted to mean "cash received or its equivalent", "the amount of
allocations as he may deem necessary of gross income or deductions, or of any item
money coming to a person within a specific time" or "something distinct from principal or
or element affecting net income, between or among the controlled taxpayers
capital." Otherwise stated, there must be proof of the actual or, at the very least, probable
constituting the group, shall determine the true net income of each controlled
receipt or realization by the controlled taxpayer of the item of gross income sought to be
taxpayer. The standard to be applied in every case is that of an uncontrolled
distributed, apportioned or allocated by the CIR.
taxpayer. Section 44 grants no right to a controlled taxpayer to apply its provisions
at will, nor does it grant any right to compel the Commissioner of Internal Revenue
to apply its provisions. Our circumspect perusal of the record yielded no evidence of actual or possible showing
that the advances FDC extended to its affiliates had resulted to the interests subsequently
assessed by the CIR. For all its harping upon the supposed fact that FDC had resorted to
(C) APPLICATION – Transactions between controlled taxpayer and another will be
borrowings from commercial banks, the CIR had adduced no concrete proof that said
subjected to special scrutiny to ascertain whether the common control is being used
funds were, indeed, the source of the advances the former provided its affiliates. While
to reduce, avoid or escape taxes. In determining the true net income of a controlled
admitting that FDC obtained interest-bearing loans from commercial banks, Susan
taxpayer, the Commissioner of Internal Revenue is not restricted to the case of
Macabelda - FDC's Funds Management Department Manager who was the sole witness
improper accounting, to the case of a fraudulent, colorable, or sham transaction, or
presented before the CTA - clarified that the subject advances were sourced from the
to the case of a device designed to reduce or avoid tax by shifting or distorting
corporation's rights offering in 1995 as well as the sale of its investment in Bonifacio Land
in 1997. More significantly, said witness testified that said advances: (a) were extended to
give FLI, FAI, DSCC and FCI financial assistance for their operational and capital
expenditures; and, (b) were all temporarily in nature since they were repaid within the
duration of one week to three months and were evidenced by mere journal entries, cash
vouchers and instructional letters."
Even if we were, therefore, to accord precipitate credulity to the CIR's bare assertion that
FDC had deducted substantial interest expense from its gross income, there would still be
no factual basis for the imputation of theoretical interests on the subject advances and
assess deficiency income taxes thereon. More so, when it is borne in mind that, pursuant
to Article 1956 of the Civil Code of the Philippines, no interest shall be due unless it has
been expressly stipulated in writing. Considering that taxes, being burdens, are not to be
presumed beyond what the applicable statute expressly and clearly declares, the rule is
likewise settled that tax statutes must be construed strictly against the government and
liberally in favor of the taxpayer. Accordingly, the general rule of requiring adherence to
the letter in construing statutes applies with peculiar strictness to tax laws and the
provisions of a taxing act are not to be extended by implication. While it is true that taxes
are the lifeblood of the government, it has been held that their assessment and collection
should be in accordance with law as any arbitrariness will negate the very reason for
government itself.
In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence on the
imposition of deficiency income taxes on the transfer FDC and FAI effected in exchange for
the shares of stock of FLI. With respect to the Deed of Exchange executed between FDC,
FAI and FLI, Section 34 (c) (2) of the 1993 NIRC pertinently provides as follows:
Sec. 34. Determination of amount of and recognition of gain or loss.-
xxxx
(c) Exception – x x x x
No gain or loss shall also be recognized if property is transferred to a corporation by a
person in exchange for shares of stock in such corporation of which as a result of such
exchange said person, alone or together with others, not exceeding four persons, gains
control of said corporation; Provided, That stocks issued for services shall not be
considered as issued in return of property.
As even admitted in the 14 February 2001 Stipulation of Facts submitted by the
parties, the requisites for the non-recognition of gain or loss under the foregoing provision
are as follows: (a) the transferee is a corporation; (b) the transferee exchanges its shares
of stock for property/ies of the transferor; (c) the transfer is made by a person, acting
alone or together with others, not exceeding four persons; and, (d) as a result of the
exchange the transferor, alone or together with others, not exceeding four, gains control
of the transferee. Acting on the 13 January 1997 request filed by FLI, the BIR had, in fact,
acknowledged the concurrence of the foregoing requisites in the Deed of Exchange the
former executed with FDC and FAI by issuing BIR Ruling No. S-34-046-97. With the BIR's
reiteration of said ruling upon the request for clarification filed by FLI, there is also no
dispute that said transferee and transferors subsequently complied with the requirements
provided for the non-recognition of gain or loss from the exchange of property for tax, as
provided under Section 34 (c) (2) of the 1993 NIRC.
Then as now, the CIR argues that taxable gain should be recognized for the exchange
considering that FDC's controlling interest in FLI was actually decreased as a result
thereof. For said purpose, the CIR calls attention to the fact that, prior to the exchange,
FDC owned 2,537,358,000 or 67.42% of FLI's 3,763,535,000 outstanding capital stock.
Upon the issuance of 443,094,000 additional FLI shares as a consequence of the exchange
and with only 42,217,000 thereof accruing in favor of FDC for a total of 2,579,575,000
shares, said corporation’s controlling interest was supposedly reduced to 61%.03 when
reckoned from the transferee's aggregate 4,226,629,000 outstanding shares. Without
owning a share from FLI's initial 3,763,535,000 outstanding shares, on the other hand,
FAI's acquisition of 420,877,000 FLI shares as a result of the exchange purportedly
resulted in its control of only 9.96% of said transferee corporation's 4,226,629,000
outstanding shares. On the principle that the transaction did not qualify as a tax-free
exchange under Section 34 (c) (2) of the 1993 NIRC, the CIR asseverates that taxable
gain in the sum of ₱263,386,921.00 should be recognized on the part of FDC and in the
sum of ₱3,088,711,367.00 on the part of FAI.
The paucity of merit in the CIR's position is, however, evident from the categorical
language of Section 34 (c) (2) of the 1993 NIRC which provides that gain or loss will not
be recognized in case the exchange of property for stocks results in the control of the
transferee by the transferor, alone or with other transferors not exceeding four persons.
Rather than isolating the same as proposed by the CIR, FDC's 2,579,575,000 shares or
61.03% control of FLI's 4,226,629,000 outstanding shares should, therefore, be
appreciated in combination with the 420,877,000 new shares issued to FAI which
represents 9.96% control of said transferee corporation. Together FDC's 2,579,575,000
shares (61.03%) and FAI's 420,877,000 shares (9.96%) clearly add up to 3,000,452,000
shares or 70.99% of FLI's 4,226,629,000 shares. Since the term "control" is clearly
defined as "ownership of stocks in a corporation possessing at least fifty-one percent of
the total voting power of classes of stocks entitled to one vote" under Section 34 (c) (6)
[c] of the 1993 NIRC, the exchange of property for stocks between FDC FAI and FLI clearly
qualify as a tax-free transaction under paragraph 34 (c) (2) of the same provision.
Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the CIR cites then Supreme
Court Justice Jose Vitug and CTA Justice Ernesto D. Acosta who, in their book Tax Law and
Jurisprudence, opined that said provision could be inapplicable if control is already vested
in the exchangor prior to exchange. Aside from the fact that that the 10 September 2002
Decision in CTA Case No. 6182 upholding the tax-exempt status of the exchange between
FDC, FAI and FLI was penned by no less than Justice Acosta himself, FDC and FAI
significantly point out that said authors have acknowledged that the position taken by the
BIR is to the effect that "the law would apply even when the exchangor already has control
of the corporation at the time of the exchange." This was confirmed when, apprised in
FLI's request for clarification about the change of percentage of ownership of its
outstanding capital stock, the BIR opined as follows:
Please be informed that regardless of the foregoing, the transferors, Filinvest Development
Corp. and Filinvest Alabang, Inc. still gained control of Filinvest Land, Inc. The term
'control' shall mean ownership of stocks in a corporation by possessing at least 51% of the
total voting power of all classes of stocks entitled to vote. Control is determined by the
amount of stocks received, i.e., total subscribed, whether for property or for services by
the transferor or transferors. In determining the 51% stock ownership, only those persons
who transferred property for stocks in the same transaction may be counted up to the
maximum of five (BIR Ruling No. 547-93 dated December 29, 1993.
At any rate, it also appears that the supposed reduction of FDC's shares in FLI posited by
the CIR is more apparent than real. As the uncontested owner of 80% of the outstanding
shares of FAI, it cannot be gainsaid that FDC ideally controls the same percentage of the
420,877,000 shares issued to its said co-transferor which, by itself, represents 7.968% of
the outstanding shares of FLI. Considered alongside FDC's 61.03% control of FLI as a
consequence of the 29 November 1996 Deed of Transfer, said 7.968% add up to an
aggregate of 68.998% of said transferee corporation's outstanding shares of stock which is
evidently still greater than the 67.42% FDC initially held prior to the exchange. This much
was admitted by the parties in the 14 February 2001 Stipulation of Facts, Documents and
Issues they submitted to the CTA. Inasmuch as the combined ownership of FDC and FAI of
FLI's outstanding capital stock adds up to a total of 70.99%, it stands to reason that
neither of said transferors can be held liable for deficiency income taxes the CIR assessed
on the supposed gain which resulted from the subject transfer.
On the other hand, insofar as documentary stamp taxes on loan agreements and
promissory notes are concerned, Section 180 of the NIRC provides follows:
Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts,
instruments and securities issued by the government or any of its instrumentalities,
certificates of deposit bearing interest and others not payable on sight or demand. – On all
loan agreements signed abroad wherein the object of the contract is located or used in the
Philippines; bill of exchange (between points within the Philippines), drafts, instruments
and securities issued by the Government or any of its instrumentalities or certificates of
deposits drawing interest, or orders for the payment of any sum of money otherwise than
at sight or on demand, or on all promissory notes, whether negotiable or non-negotiable,
except bank notes issued for circulation, and on each renewal of any such note, there shall
be collected a documentary stamp tax of Thirty centavos (₱0.30) on each two hundred
pesos, or fractional part thereof, of the face value of any such agreement, bill of exchange,
draft, certificate of deposit or note: Provided, That only one documentary stamp tax shall
be imposed on either loan agreement, or promissory notes issued to secure such loan,
whichever will yield a higher tax: Provided however, That loan agreements or promissory
notes the aggregate of which does not exceed Two hundred fifty thousand pesos
(₱250,000.00) executed by an individual for his purchase on installment for his personal
use or that of his family and not for business, resale, barter or hire of a house, lot, motor
vehicle, appliance or furniture shall be exempt from the payment of documentary stamp
tax provided under this Section.
When read in conjunction with Section 173 of the 1993 NIRC, the foregoing provision
concededly applies to "(a)ll loan agreements, whether made or signed in the Philippines,
or abroad when the obligation or right arises from Philippine sources or the property or
object of the contract is located or used in the Philippines." Correlatively, Section 3 (b) and
Section 6 of Revenue Regulations No. 9-94 provide as follows:
Section 3. Definition of Terms. – For purposes of these Regulations, the following term
shall mean:
(b) 'Loan agreement' – refers to a contract in writing where one of the parties delivers to
another money or other consumable thing, upon the condition that the same amount of
the same kind and quality shall be paid. The term shall include credit facilities, which may
be evidenced by credit memo, advice or drawings.
The terms 'Loan Agreement" under Section 180 and "Mortgage' under Section 195, both of
the Tax Code, as amended, generally refer to distinct and separate instruments. A loan
agreement shall be taxed under Section 180, while a deed of mortgage shall be taxed
under Section 195."
"Section 6. Stamp on all Loan Agreements. – All loan agreements whether made or signed
in the Philippines, or abroad when the obligation or right arises from Philippine sources or
the property or object of the contract is located in the Philippines shall be subject to the
documentary stamp tax of thirty centavos (₱0.30) on each two hundred pesos, or
fractional part thereof, of the face value of any such agreements, pursuant to Section 180
in relation to Section 173 of the Tax Code.
In cases where no formal agreements or promissory notes have been executed to cover
credit facilities, the documentary stamp tax shall be based on the amount of drawings or
availment of the facilities, which may be evidenced by credit/debit memo, advice or
drawings by any form of check or withdrawal slip, under Section 180 of the Tax Code.
Applying the aforesaid provisions to the case at bench, we find that the instructional
letters as well as the journal and cash vouchers evidencing the advances FDC extended to
its affiliates in 1996 and 1997 qualified as loan agreements upon which documentary
stamp taxes may be imposed. In keeping with the caveat attendant to every BIR Ruling to
the effect that it is valid only if the facts claimed by the taxpayer are correct, we find that
the CA reversibly erred in utilizing BIR Ruling No. 116-98, dated 30 July 1998 which,
strictly speaking, could be invoked only by ASB Development Corporation, the taxpayer
who sought the same. In said ruling, the CIR opined that documents like those evidencing
the advances FDC extended to its affiliates are not subject to documentary stamp tax, to
wit:
On the matter of whether or not the inter-office memo covering the advances granted by
an affiliate company is subject to documentary stamp tax, it is informed that nothing in
Regulations No. 26 (Documentary Stamp Tax Regulations) and Revenue Regulations No.
9-94 states that the same is subject to documentary stamp tax. Such being the case, said
inter-office memo evidencing the lendings or borrowings which is neither a form of
promissory note nor a certificate of indebtedness issued by the corporation-affiliate or a
certificate of obligation, which are, more or less, categorized as 'securities', is not subject
to documentary stamp tax imposed under Section 180, 174 and 175 of the Tax Code of
1997, respectively. Rather, the inter-office memo is being prepared for accounting
purposes only in order to avoid the co-mingling of funds of the corporate affiliates.
In its appeal before the CA, the CIR argued that the foregoing ruling was later modified in
BIR Ruling No. 108-99 dated 15 July 1999, which opined that inter-office memos
evidencing lendings or borrowings extended by a corporation to its affiliates are akin to
promissory notes, hence, subject to documentary stamp taxes. In brushing aside the
foregoing argument, however, the CA applied Section 246 of the 1993 NIRC from which
proceeds the settled principle that rulings, circulars, rules and regulations promulgated by
the BIR have no retroactive application if to so apply them would be prejudicial to the
taxpayers. Admittedly, this rule does not apply: (a) where the taxpayer deliberately
misstates or omits material facts from his return or in any document required of him by
the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau
of Internal Revenue are materially different from the facts on which the ruling is based; or
(c) where the taxpayer acted in bad faith. Not being the taxpayer who, in the first
instance, sought a ruling from the CIR, however, FDC cannot invoke the foregoing
principle on non-retroactivity of BIR rulings.
Viewed in the light of the foregoing considerations, we find that both the CTA and the CA
erred in invalidating the assessments issued by the CIR for the deficiency documentary
stamp taxes due on the instructional letters as well as the journal and cash vouchers
evidencing the advances FDC extended to its affiliates in 1996 and 1997. In Assessment
Notice No. SP-DST-96-00020-2000, the CIR correctly assessed the sum of ₱6,400,693.62
for documentary stamp tax, ₱3,999,793.44 in interests and ₱25,000.00 as compromise
penalty, for a total of ₱10,425,487.06. Alongside the sum of ₱4,050,599.62 for
documentary stamp tax, the CIR similarly assessed ₱1,721,099.78 in interests and
₱25,000.00 as compromise penalty in Assessment Notice No. SP-DST-97-00021-2000 or a
total of ₱5,796,699.40. The imposition of deficiency interest is justified under Sec. 249 (a)
and (b) of the NIRC which authorizes the assessment of the same "at the rate of twenty
percent (20%), or such higher rate as may be prescribed by regulations", from the date
prescribed for the payment of the unpaid amount of tax until full payment. The imposition
of the compromise penalty is, in turn, warranted under Sec. 250 of the NIRC which
prescribes the imposition thereof "in case of each failure to file an information or return,
statement or list, or keep any record or supply any information required" on the date
prescribed therefor.
To our mind, no reversible error can, finally, be imputed against both the CTA and the CA
for invalidating the Assessment Notice issued by the CIR for the deficiency income taxes
FDC is supposed to have incurred as a consequence of the dilution of its shares in FAC.
Anent FDC’s Shareholders’ Agreement with RHPL, the record shows that the parties were
in agreement about the following factual antecedents narrated in the 14 February 2001
Stipulation of Facts, Documents and Issues they submitted before the CTA, viz.:
"1.11. On November 15, 1996, FDC entered into a Shareholders’ Agreement (‘SA’) with
Reco Herrera Pte. Ltd. (‘RHPL’) for the formation of a joint venture company named
Filinvest Asia Corporation (‘FAC’) which is based in Singapore (pars. 1.01 and 6.11,
Petition, pars. 1 and 7, Answer).
1.12. FAC, the joint venture company formed by FDC and RHPL, is tasked to develop
and manage the 50% ownership interest of FDC in its PBCom Office Tower Project
(‘Project’) with the Philippine Bank of Communications (par. 6.12, Petition; par. 7,
Answer).
1.13. Pursuant to the SA between FDC and RHPL, the equity participation of FDC and
RHPL in FAC was 60% and 40% respectively.
1.14. In accordance with the terms of the SA, FDC subscribed to ₱500.7 million worth
of shares of stock representing a 60% equity participation in FAC. In turn, RHPL
subscribed to ₱433.8 million worth of shares of stock of FAC representing a 40% equity
participation in FAC.
1.15. In payment of its subscription in FAC, FDC executed a Deed of Assignment
transferring to FAC a portion of FDC’s right and interests in the Project to the extent of
₱500.7 million.
1.16. FDC reported a net loss of ₱190,695,061.00 in its Annual Income Tax Return for
the taxable year 1996."
Alongside the principle that tax revenues are not intended to be liberally construed, the
rule is settled that the findings and conclusions of the CTA are accorded great respect and
are generally upheld by this Court, unless there is a clear showing of a reversible error or
an improvident exercise of authority. Absent showing of such error here, we find no strong
and cogent reasons to depart from said rule with respect to the CTA's finding that no
deficiency income tax can be assessed on the gain on the supposed dilution and/or
increase in the value of FDC's shareholdings in FAC which the CIR, at any rate, failed to
establish. Bearing in mind the meaning of "gross income" as above discussed, it cannot be
gainsaid, even then, that a mere increase or appreciation in the value of said shares
cannot be considered income for taxation purposes. Since "a mere advance in the value of
the property of a person or corporation in no sense constitute the ‘income’ specified in the
revenue law," it has been held in the early case of Fisher vs. Trinidad, that it "constitutes
and can be treated merely as an increase of capital." Hence, the CIR has no factual and
legal basis in assessing income tax on the increase in the value of FDC's shareholdings in
FAC until the same is actually sold at a profit.
WHEREFORE, premises considered, the CIR's petition for review on certiorari in G.R. No.
163653 is DENIED for lack of merit and the CA’s 16 December 2003 Decision in G.R. No.
72992 is AFFIRMED in toto. The CIR’s petition in G.R. No. 167689 is PARTIALLY GRANTED
and the CA’s 26 January 2005 Decision in CA-G.R. SP No. 74510 is MODIFIED.
Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-DST-97-00021-
2000 issued for deficiency documentary stamp taxes due on the instructional letters as
well as journal and cash vouchers evidencing the advances FDC extended to its affiliates
are declared valid.
The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SP-INC-97-00019-
2000 and SP-INC-97-0027-2000 issued for deficiency income assessed on (a) the "arms-
length" interest from said advances; (b) the gain from FDC’s Deed of Exchange with FAI
and FLI; and (c) income from the dilution resulting from FDC’s Shareholders’ Agreement
with RHPL is, however, upheld.
[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 the refund of
P963,266.00 was computed as follows:

SO ORDERED. Gross 25% 10% Month/ Royalty Withholding Withholding

YEAR FEE TAX PAID TAX BALANCE

July 1992 559, 878 139, 970 55, 988 83, 982
[G.R. No. 127105. June 25, 1999.] August 567, 935 141, 984 56, 794 85, 190
September 595, 956 148. 989 59, 596 89, 393
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. S.C. JOHNSON AND SON,
October 634, 405 158, 601 63, 441 95, 161
INC., and COURT OF APPEALS, Respondents.
November 620, 885 155, 221 62, 089 93, 133
December 383, 276 95, 819 36, 328 57, 491
DECISION
January 1993 602, 451 170, 630 68, 245 102, 368
GONZAGA-REYES, J.: February 565, 845 141, 461 56, 585 84, 877
March 547, 253 136, 813 54, 725 82, 088
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set April 660, 810 165, 203 66, 081 99, 122
aside the decision of the Court of Appeals dated November 7, 1996 in CA-GR SP No. May 603, 076 150, 769 60, 308 90, 461
40802 affirming the decision of the Court of Tax Appeals in CTA Case No. 5136. P 6, 421, 770 P 1, 605, 443 P 642, 177 P 963, 266

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
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.
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.
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.
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 : . . .
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, 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
(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
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
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
dd) royalties, as defined in paragraph 3 of Article 12;
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
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
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."
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 cursory reading of
the various tax treaties will show that there is no similarity in the provisions on relief from
or avoidance of double taxation as this is a matter of negotiation between the contracting
parties. As will be shown later, this dissimilarity is true particularly in the treaties between
the Philippines and the United States and between the Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines
has entered into for the avoidance of double taxation. The purpose of these international
agreements is to reconcile the national fiscal legislations of the contracting parties in order
to help the taxpayer avoid simultaneous taxation in two different jurisdictions. More
precisely, the tax conventions are drafted with a view towards the elimination of
international juridical double taxation, which is defined as the imposition of comparable
taxes in two or more states on the same taxpayer in respect of the same subject matter
and for identical periods. The apparent rationale for doing away with double taxation is to
encourage the free flow of goods and services and the movement of capital, technology
and persons between countries, conditions deemed vital in creating robust and dynamic
economies. Foreign investments will only thrive in a fairly predictable and reasonable
international investment climate and the protection against double taxation is crucial in
creating such a climate.
Double taxation usually takes place when a person is resident of a contracting state and
derives income from, or owns capital in, the other contracting state and both states
impose tax on that income or capital. In order to eliminate double taxation, a tax treaty
resorts to several methods. First, it sets out the respective rights to tax of the state of
source or situs and of the state of residence with regard to certain classes of income or
capital. In some cases, an exclusive right to tax is conferred on one of the contracting
states; however, for other items of income or capital, both states are given the right to
tax, although the amount of tax that may be imposed by the state of source is limited.
The second method for the elimination of double taxation applies whenever the state of
source is given a full or limited right to tax together with the state of residence. In this
case, the treaties make it incumbent upon the state of residence to allow relief in order to
avoid double taxation. There are two methods of relief — the exemption method and the
credit method. In the exemption method, the income or capital which is taxable in the
state of source or situs is exempted in the state of residence, although in some instances
it may be taken into account in determining the rate of tax applicable to the taxpayer’s
remaining income or capital. On the other hand, in the credit method, although the income
or capital which is taxed in the state of source is still taxable in the state of residence, the
tax paid in the former is credited against the tax levied in the latter. The basic difference
between the two methods is that in the exemption method, the focus is on the income or
capital itself, whereas the credit method focuses upon the tax.
In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the
Philippines will give up a part of the tax in the expectation that the tax given up for this
particular investment is not taxed by the other country. Thus the petitioner correctly
opined that the phrase "royalties paid under similar circumstances" in the most favored
nation clause of the US-RP Tax Treaty necessarily contemplated "circumstances that are
tax-related."
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 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 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, 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 accomplished, the evils to be remedied, or the purpose to be
subserved, and should give the law a reasonable or liberal construction which will best
effectuate its purpose. The Vienna Convention on the Law of Treaties states that a treaty
shall be interpreted in good faith in accordance with the ordinary meaning to be given to
the terms of the treaty in their context and in the light of its object and purpose.
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 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 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 international treatment by providing that the citizens or subjects of
the contracting nations may enjoy the privileges accorded by either party to those of the
most favored nation. The essence of the principle is to allow the taxpayer in one state to
avail of more liberal provisions granted in another tax treaty to which the country of
residence of such taxpayer is also a party provided that the subject matter of taxation, in
this case royalty income, is the same as that in the tax treaty under which the taxpayer is
liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West
Germany Tax Treaty, above-quoted, speaks of tax on royalties for the use of trademark,
patent, and technology. The entitlement of the 10% rate by U.S. firms despite the absence
of a matching credit (20% for royalties) would derogate from the design behind the most
favored nation clause to grant equality of international treatment since the tax burden laid
upon the income of the investor is not the same in the two countries. The similarity in the
circumstances of payment of taxes is a condition for the enjoyment of most favored nation
treatment precisely to underscore the need for equality of treatment.
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 he must be able to justify his claim by the clearest
grant of organic or statute law. Private respondent is claiming for a refund of the alleged
overpayment of tax on royalties; however, there is nothing on record to support a claim
that the tax on royalties under the RP-US Tax Treaty is paid under similar circumstances
as the tax on royalties under the RP-West Germany Tax Treaty.
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.
G.R. No. 180651               July 30, 2014
NURSERY CARE CORPORATION; SHOEMART, INC.; STAR APPLIANCE CENTER,
INC.; H&B, INC.; SUPPLIES STATION, INC.; and HARDWARE WORKSHOP,
INC., Petitioners,
 vs.
ANTHONY ACEVEDO, in his capacity as THE TREASURER OF MANILA; and THE
CITY OF MANILA, Respondents.
DECISION
BERSAMIN, J.:
The issue here concerns double taxation. There is double taxation when the same taxpayer
is taxed twice when he should be taxed only once for the same purpose by the same
taxing authority within the same jurisdiction during the same taxing period, and the taxes
are of the same kind or character. Double taxation is obnoxious.
The Case
Under review are the resolution promulgated in CA-G.R. SP No. 72191 on June 18,
2007, whereby the Court of Appeals (CA) denied petitioners' appeal for lack of jurisdiction;
and the resolution promulgated on November 14, 2007, whereby the CA denied their
motion for reconsideration for its lack of merit.
Antecedents
The City of Manila assessed and collected taxes from the individual petitioners pursuant to
Section 15 (Tax on Wholesalers, Distributors, or Dealers) and Section 17 (Tax on
Retailers) of the Revenue Code of Manila. At the same time, the City of Manila imposed
additional taxes upon the petitioners pursuant to Section 21 ofthe Revenue Code of
Manila, as amended, as a condition for the renewal of their respective business licenses for
the year 1999. Section 21 of the Revenue Code of Manila stated:
Section 21. Tax on Business Subject to the Excise, Value-Added or Percentage Taxes
under the NIRC - On any of the following businesses and articles of commerce subject to
the excise, value-added or percentage taxes under the National Internal Revenue Code,
hereinafter referred to as NIRC, as amended, a tax of FIFTY PERCENT (50%) OF ONE
PERCENT (1%) per annum on the gross sales or receipts of the preceding calendar year is
hereby imposed:
A) On person who sells goods and services in the course of trade or businesses; x x x
PROVIDED, that all registered businesses in the City of Manila already paying the
aforementioned tax shall be exempted from payment thereof.
To comply with the City of Manila’s assessment of taxes under Section 21, supra, the
petitioners paid under protest the following amounts corresponding to the first quarter of
1999, to wit:
(a) Nursery Care Corporation ₱595,190.25
(b) Shoemart Incorporated ₱3,283,520.14
(c) Star Appliance Center ₱236,084.03
(d) H & B, Inc. ₱1,271,118.74
(e) Supplies Station, Inc. ₱239,501.25
(f) Hardware Work Shop, Inc. ₱609,953.24
By letter dated March 1, 1999, the petitioners formally requested the Office of the City
Treasurer for the tax credit or refund of the local business taxes paid under protest.
However, then City Treasurer Anthony Acevedo (Acevedo) denied the request through his
letter of March 10, 1999.
On April 8, 1999, the petitioners, through their representative, Cecilia R. Patricio, sought
the reconsideration of the denial of their request. Still, the City Treasurer did not
reconsider. In the meanwhile, Liberty Toledo succeeded Acevedo as the City Treasurer of
Manila.
On April 29, 1999, the petitioners filed their respective petitions for certiorariin the
Regional Trial Court (RTC) in Manila. The petitions, docketed as Civil Cases Nos. 99-93668
to 99-93673, were initially raffled to different branches, but were soon consolidated in
Branch 34. After the presiding judge of Branch 34 voluntarily inhibited himself, the
consolidated cases were transferred to Branch 23, but were again re-raffled to Branch 19
upon the designation of Branch 23 as a special drugs court.
The parties agreed on and jointly submitted the following issues for the consideration and
resolution of the RTC, namely:
(a) Whether or not the collection of taxes under Section 21 of Ordinance No. 7794, as
amended, constitutes double taxation.
(b) Whether or not the failure of the petitioners to avail of the statutorily provided
remedy for their tax protest on the ground of unconstitutionality, illegality and
oppressiveness under Section 187 of the Local Government Code renders the present
action dismissible for non-exhaustion of administrative remedy.
Decision of the RTC
On April 26, 2002, the RTC rendered its decision, holding thusly:
The Court perceives of no instance of the constitutionally proscribed double taxation, in
the strict, narrow or obnoxious sense, imposed upon the petitioners under Section 15 and
17, on the one hand, and under Section 21, on the other, of the questioned Ordinance.
The tax imposed under Section 15 and 17, as against that imposed under Section 21, are
levied against different tax objects or subject matter. The tax under Section 15 is imposed
upon wholesalers, distributors or dealers, while that under Section 17 is imposed upon
retailers. In short, taxes imposed under Section 15 and 17 is a tax on the business of
wholesalers, distributors, dealers and retailers. On the other hand, the tax imposed upon
herein petitioners under Section 21 is not a tax against the business of the petitioners (as
wholesalers, distributors, dealers or retailers)but is rather a tax against consumers or end-
users of the articles sold by petitioners. This is plain from a reading of the modifying
paragraph of Section 21 which says:
"The tax shall be payable by the person paying for the services rendered and shall be paid
to the person rendering the services who is required to collect and pay the tax within
twenty (20) days after the end of each quarter." (Underscoring supplied)
In effect, the petitioners only act as the collection or withholding agent of the City while
the ones actually paying the tax are the consumers or end-users of the articles being sold
by petitioners. The taxes imposed under Sec. 21 represent additional amounts added by
the business establishment to the basic prices of its goods and services which are paid by
the end-users to the businesses. It is actually not taxes on the business of petitioners but
on the consumers. Hence, there is no double taxation in the narrow, strict or obnoxious
sense, involved in the imposition of taxes by the City of Manila under Sections 15, 17 and
21 of the questioned Ordinance. This in effect resolves in favor of the constitutionality of
the assailed sections of Ordinance No. 7807 of the City of Manila.
Petitioners, likewise, pray the Court to direct respondents to cease and desist from
implementing Section 21 of the questioned Ordinance. That the Court cannot do, without
doing away with the mandatory provisions of Section 187 of the Local Government Code
which distinctly commands that an appeal questioning the constitutionality or legality of a
tax ordinance shall not have the effect of suspending the effectivity of the ordinance and
the accrual and payment of the tax, fee or charge levied therein. This is so because an
ordinance carries with it the presumption of validity.
xxx
With the foregoing findings, petitioners’ prayer for the refund of the amounts paid by them
under protest must, likewise, fail.
Wherefore, the petitions are dismissed. Without pronouncement as to costs.
SO ORDERED.
The petitioners appealed to the CA.
Ruling of the CA
On June 18, 2007, the CA denied the petitioners’ appeal, ruling as follows:
The six (6) cases were consolidated on a common question of fact and law, that is,
whether the act of the City Treasurer of Manila of assessing and collecting business taxes
under Section 21of Ordinance 7807, on top of other business taxes also assessed and
collected under the previous sections of the same ordinance is a violation of the provisions
of Section 143 of the Local Government Code.
Clearly, the disposition of the present appeal in these consolidated cases does not
necessitate the calibration of the whole evidence as there is no question or doubt as to the
truth or the falsehood of the facts obtaining herein, as both parties agree thereon. The
present case involves a question of law that would not lend itself to an examination or
evaluation by this Court of the probative value of the evidence presented.
Thus the Court is constrained to dismiss the instant petition for lack of jurisdiction under
Section 2, Rule 50 of the 1997 Rules on Civil Procedure which states:
"Sec. 2. Dismissal of improper appeal to the Court of Appeals. – An appeal under Rule 41
taken from the Regional Trial Court to the Court of Appeals raising only questions of law
shall be dismissed, issues purely of law not being reviewable by said court. similarly, an
appeal by notice of appeal instead of by petition for review from the appellate judgment of
a Regional Trial Court shall be dismissed.
An appeal erroneously taken to the Court of Appeals shall not be transferred to the
appropriate court but shall be dismissed outright.
WHEREFORE, the foregoing considered, the appeal is DISMISSED.
SO ORDERED.
The petitioners moved for reconsideration, but the CA denied their motion through the
resolution promulgated on November 14, 2007.
Issues
The petitioners now appeal, raising the following grounds, to wit:
A.
THE COURT OF APPEALS, IN DISMISSING THE APPEAL OF THE PETITIONERS AND
DENYING THEIR MOTION FOR RECONSIDERATION, ERRED INRULING THAT THE ISSUE
INVOLVED IS A PURELY LEGAL QUESTION.
B.
THE COURT OF APPEALS ERRED IN NOT REVERSING THE DECISION OF BRANCH 19 OF
THE REGIONAL TRIAL COURT OF MANILA DATED 26 APRIL 2002 DENYING PETITIONERS’
PRAYER FOR REFUND OF THE AMOUNTS PAID BY THEM UNDER PROTEST AND
DISMISSING THE PETITION FOR CERTIORARI FILED BY THE PETITIONERS.
C.
THE COURT OF APPEALS ERRED IN NOT RULING THAT THE ACT OF THE CITY TREASURER
OF MANILA IN IMPOSING, ASSESSING AND COLLECTING THE ADDITIONAL BUSINESS TAX
UNDER SECTION 21 OFORDINANCE NO. 7794, AS AMENDED BY ORDINANCE NO. 7807,
ALSO KNOWN AS THE REVENUE CODE OF THE CITY OFMANILA, IS CONSTITUTIVE OF
DOUBLE TAXATION AND VIOLATIVE OF THE LOCAL GOVERNMENT CODE OF 1991.
The main issues for resolution are, therefore, (1) whether or not the CA properly denied
due course to the appeal for raising pure questions of law; and (2) whether or not the
petitioners were entitled to the tax credit or tax refund for the taxes paid under Section
21, supra.
Ruling
The appeal is meritorious.
1. The CA did not err in dismissing the appeal; but the rules should be liberally
applied for the sake of justice and equity
The Rules of Court provides three modes of appeal from the decisions and final orders of
the RTC, namely: (1) ordinary appeal or appeal by writ of error under Rule 41, where the
decisions and final orders were rendered in civil or criminal actions by the RTC in the
exercise of original jurisdiction; (2) petition for review under Rule 42, where the decisions
and final orders were rendered by the RTC in the exercise of appellate jurisdiction; and (3)
petition for review on certiorari to the Supreme Court under Rule 45. The first mode of
appeal is taken to the CA on questions of fact, or mixed questions of fact and law. The
second mode of appeal is brought to the CA on questions of fact, of law, or mixed
questions of fact and law. The third mode of appeal is elevated to the Supreme Court only
on questions of law.
The distinction between a question of law and a question of fact is well established. On the
one hand, a question of law arises when there is doubt as to what the law is on a certain
state of facts; on the other, there is a question of fact when the doubt arises as to the
truth or falsity of the alleged facts. According to Leoncio v. De Vera:
x x x For a question to be one of law, the same must not involve an examination of the
probative value of the evidence presented by the litigants or any of them. The resolution
of the issue must rest solely on what the law provides on the given set of circumstances.
Once it is clear that the issue invites a review of the evidence presented, the question
posed is one of fact. Thus, the test of whether a question is one of law or of fact is not the
appellation given to such question by the party raising the same; rather, it is whether the
appellate court can determine the issue raised without reviewing or evaluating the
evidence, in which case, it is a question of law; otherwise it is a question of fact.
The nature of the issues to be raised on appeal can be gleaned from the appellant’s notice
of appeal filed in the trial court, and from the appellant’s brief submitted to the appellate
court. In this case, the petitioners filed a notice of appeal in which they contended that the
April 26, 2002 decision and the order of July 17, 2002 issued by the RTC denying their
consolidated motion for reconsideration were contrary to the facts and law obtaining in the
consolidated cases. In their consolidated memorandum filed in the CA, they essentially
assailed the RTC’s ruling that the taxes imposed on and collected from the petitioners
under Section 21 of the Revenue Code of Manila constituted double taxation in the strict,
narrow or obnoxious sense. Considered together, therefore, the notice of appeal and
consolidated memorandum evidently did not raise issues that required the reevaluation of
evidence or the relevance of surrounding circumstances.
The CA rightly concluded that the petitioners thereby raised only a question of law. The
dismissal of their appeal was proper, strictly speaking, because Section 2, Rule 50 of the
Rules of Court provides that an appeal from the RTC to the CA raising only questions of
law shall be dismissed; and that an appeal erroneously taken to the CA shall be outrightly
dismissed.
2. Collection of taxes pursuant to Section 21 of the Revenue Code of Manila
constituted double taxation
The foregoing notwithstanding, the Court, given the circumstances obtaining herein and in
light of jurisprudence promulgated subsequent to the filing of the petition, deems it fitting
and proper to adopt a liberal approach in order to render a just and speedy disposition of
the substantive issue at hand. Hence, we resolve, bearing in mind the following
pronouncement in Go v. Chaves:
Our rules of procedure are designed to facilitate the orderly disposition of cases and permit
the prompt disposition of unmeritorious cases which clog the court dockets and do little
more than waste the courts’ time. These technical and procedural rules, however, are
intended to ensure, rather than suppress, substantial justice. A deviation from their rigid
enforcement may thus be allowed, as petitioners should be given the fullest opportunity to
establish the merits of their case, rather than lose their property on mere technicalities.
We held in Ong Lim Sing, Jr. v. FEB Leasing and Finance Corporation that:
Courts have the prerogative to relax procedural rules of even the most mandatory
character, mindful of the duty to reconcile both the need to speedily put an end to
litigation and the parties' right to due process. In numerous cases, this Court has allowed
liberal construction of the rules when to do so would serve the demands of substantial
justice and equity.
The petitioners point out that although Section 21 of the Revenue Code of Manila was not
itself unconstitutional or invalid, its enforcement against the petitioners constituted double
taxation because the local business taxes under Section 15 and Section 17 of the Revenue
Code of Manila were already being paid by them. They contend that the proviso in Section
21 exempted all registered businesses in the City of Manila from paying the tax imposed
under Section 21; and that the exemption was more in accord with Section 143 of the
Local Government Code, the law that vested in the municipal and city governments the
power to impose business taxes.
The respondents counter, however, that double taxation did not occur from the imposition
and collection of the tax pursuant to Section 21 of the Revenue Code of Manila; that the
taxes imposed pursuant to Section 21 were in the concept of indirect taxes upon the
consumers of the goods and services sold by a business establishment; and that the
petitioners did not exhaust their administrative remedies by first appealing to the
Secretary of Justice to challenge the constitutionality or legality of the tax ordinance.
In resolving the issue of double taxation involving Section 21 of the Revenue Code of
Manila, the Court is mindful of the ruling in City of Manila v. Coca-Cola Bottlers Philippines,
Inc., which has been reiterated in Swedish Match Philippines, Inc. v. The Treasurer of the
City of Manila. In the latter, the Court has held:
x x x [T]he issue of double taxation is not novel, as it has already been settled by this
Court in The City of Manila v. Coca-Cola Bottlers Philippines, Inc.,in this wise:
Petitioners obstinately ignore the exempting proviso in Section 21 of Tax Ordinance No.
7794, to their own detriment. Said exempting proviso was precisely included in said
section so as to avoid double taxation.
Double taxation means taxing the same property twice when it should be taxed only once;
that is, "taxing the same person twice by the same jurisdiction for the same thing." It is
obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise
described as "direct duplicate taxation," the two taxes must be imposed on the same
subject matter, for the same purpose, by the same taxing authority, within the same
jurisdiction, during the same taxing period; and the taxes must be of the same kind or
character.
Using the aforementioned test, the Court finds that there is indeed double taxation if
respondent is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No.
7794, since these are being imposed: (1) on the same subject matter – the privilege of
doing business in the City of Manila; (2) for the same purpose – to make persons
conducting business within the City of Manila contribute to city revenues; (3) by the same
taxing authority – petitioner City of Manila; (4) within the same taxing jurisdiction – within
the territorial jurisdiction of the City of Manila; (5) for the same taxing periods – per
calendar year; and (6) of the same kind or character – a local business tax imposed on
gross sales or receipts of the business.
The distinction petitioners attempt to make between the taxes under Sections 14 and 21
of Tax Ordinance No. 7794 is specious. The Court revisits Section 143 of the LGC, the very
source of the power of municipalities and cities to impose a local business tax, and to
which any local business tax imposed by petitioner City of Manila must conform. It is
apparent from a perusal thereof that when a municipality or city has already imposed a
business tax on manufacturers, etc. of liquors, distilled spirits, wines, and any other article
of commerce, pursuant to Section 143(a) of the LGC, said municipality or city may no
longer subject the same manufacturers, etc.to a business tax under Section 143(h) of the
same Code. Section 143(h) may be imposed only on businesses that are subject to excise
tax, VAT, or percentage tax under the NIRC, and that are "not otherwise specified in
preceding paragraphs." In the same way, businesses such as respondent’s, already
subject to a local business tax under Section 14 of Tax Ordinance No. 7794 [which is
based on Section 143(a) of the LGC], can no longer be made liable for local business tax
under Section 21 of the same Tax Ordinance [which is based on Section 143(h) of the
LGC].
Based on the foregoing reasons, petitioner should not have been subjected to taxes under
Section 21 of the Manila Revenue Code for the fourth quarter of 2001, considering that it
had already been paying local business tax under Section 14 of the same ordinance.
xxxx
Accordingly, respondent’s assessment under both Sections 14 and 21 had no basis.
Petitioner is indeed liable to pay business taxes to the City of Manila; nevertheless,
considering that the former has already paid these taxes under Section 14 of the Manila
Revenue Code, it is exempt from the same payments under Section 21 of the same code.
Hence, payments made under Section 21 must be refunded in favor of petitioner.
It is undisputed that petitioner paid business taxes based on Sections 14 and 21 for the
fourth quarter of 2001 in the total amount of ₱470,932.21. Therefore, it is entitled to a
refund of ₱164,552.04 corresponding to the payment under Section 21 of the Manila
Revenue Code.
On the basis of the rulings in Coca-Cola Bottlers Philippines, Inc. and Swedish Match
Philippines, Inc., the Court now holds that all the elements of double taxation concurred
upon the City of Manila’s assessment on and collection from the petitioners of taxes for the
first quarter of 1999 pursuant to Section 21 of the Revenue Code of Manila.
Firstly, because Section 21 of the Revenue Code of Manila imposed the tax on a person
who sold goods and services in the course of trade or business based on a certain
percentage of his gross sales or receipts in the preceding calendar year, while Section 15
and Section 17 likewise imposed the tax on a person who sold goods and services in the
course of trade or business but only identified such person with particularity, namely, the
wholesaler, distributor or dealer (Section 15), and the retailer (Section 17), all the taxes –
being imposed on the privilege of doing business in the City of Manila in order to make the
taxpayers contribute to the city’s revenues – were imposed on the same subject matter
and for the same purpose.
Secondly, the taxes were imposed by the same taxing authority (the City of Manila) and
within the same jurisdiction in the same taxing period (i.e., per calendar year).
Thirdly, the taxes were all in the nature of local business taxes.
We note that although Coca-Cola Bottlers Philippines, Inc. and Swedish Match Philippines,
Inc. involved Section 21 vis-à-vis Section 14 (Tax on Manufacturers, Assemblers and
Other Processors) of the Revenue Code of Manila, the legal principles enunciated therein
should similarly apply because Section 15 (Tax on Wholesalers, Distributors, or
Dealers)and Section 17 (Tax on Retailers) of the Revenue Code of Manila imposed the
same nature of tax as that imposed under Section 14, i.e., local business tax, albeit on a
different subject matter or group of taxpayers.
Etheria Trading in 2010 amounting to P4,942,937,053.82. The petitioner replied to the
PAN through its letter dated August 30, 2013.
On September 23, 2013, the petitioner received from the BIR a Formal Letter of Demand
assessing it with deficiency taxes for the taxable year ending December 31, 2010
amounting to P4,697,696,275.25, inclusive of surcharge and interest. It filed a protest
against the formal letter of demand. Respondent Commissioner of Internal Revenue (CIR)
required the petitioner to submit additional documents in support of its protest, and the
petitioner complied.

On February 28, 2014, the petitioner received a Final Decision on Disputed Assessment
In fine, the imposition of the tax under Section 21 of the Revenue Code of Manila
worth P4,473,228,667.87, computed as follows:
constituted double taxation, and the taxes collected pursuant thereto must be refunded.

WHEREFORE, the Court GRANTS the petition for review on certiorari; REVERSES and SETS Tax Type Basic Tax Surcharge Interest Total
ASIDE the resolutions promulgated on June 18, 2007 and November 14, 2007 in CA-G.R. 1. IT 1,527,100,903.98 763,550,451.99 878,605,999.55 P3,169,257,355.52
SP No. 72191; and DIRECTS the City of Manila to refund the payments made by the
petitioners of the taxes assessed and collected for the first quarter of 1999 pursuant to 2. VAT 612,723,525.25 306,361,762.63 379,049,238.36 1,298,134,526.24
Section 21 of the Revenue Code of Manila.
3. WHT 1,679,413.14 1,048,137.84 2,727,550.98

No pronouncement on costs of suit. 4. DST 534,493.40 336,511.18 871,004.58

5. EWT 1,378,127.78 860,102.76 2,238,230.54

SO ORDERED.
TOTAL 2,143,416,463.55 1,069,912,214.62 1,259,899,989.69 4,473,228,667.87

G.R. No. 215950, June 20, 2016 The petitioner filed with the CIR a protest through a Request for Reconsideration.
However, the CIR rendered a decision dated May 26, 2014 denying the request for
reconsideration.
TRIDHARMA MARKETING CORPORATION, Petitioner, v. COURT OF TAX APPEALS,
SECOND DIVISION, AND THE COMMISSIONER OF INTERNAL Prior to the CIR's decision, the petitioner paid the assessments corresponding to the WTC,
REVENUE, Respondents. DST and EWT deficiency assessments, inclusive of interest, amounting to P5,836,786.10.
It likewise reiterated its offer to compromise the alleged deficiency assessments on IT and
DECISION VAT.

BERSAMIN, J.: On June 13, 2014, the petitioner appealed the CIR's decision to the CTA via its so-called
Petition for Review with Motion to Suspend Collection of Tax, which was docketed as CTA
Case No. 8833 and raffled to the CTA Second Division.
In this special civil action for certiorari, the taxpayer assails the resolutions issued on July
8, 2014 and December 22, 2014 in CTA Case No. 8833 whereby the Court of Tax Appeals
The CTA in Division issued the first assailed resolution on July 8, 2014, stating thusly:
(CTA), Second Division, granted its motion for suspension of the collection of tax but
required it to post a surety bond amounting to P4,467,391,881.76.
In the instant case, petitioner's Financial Statements and Independent Auditor's Report for
December 31, 2013 and 2012, as identified by its witness, indicate that the company's
The relevant facts follow.
total equity for the year 2012 and 2013 was P955,095,301 and P916,768,767,
respectively. To yield to respondent's alleged assessment and collection in the amount of
On August 16, 2013, the petitioner received a Preliminary Assessment Notice (PAN) from
P4,467,391,881.76 would definitely jeopardize the normal business operations of
the Bureau of Internal Revenue (BIR) assessing it with various deficiency taxes - income
petitioner thereby causing irreparable injury to its ability to continue.
tax (IT), value-added tax (VAT), withholding tax on compensation (WTC), expanded
withholding tax (EWT) and documentary stamp tax (DST) - totalling P4,640,394,039.97,
Moreover, considering petitioner's willingness to post bond, as manifested during the June
inclusive of surcharge and interest. A substantial portion of the deficiency income tax and
19, 2014 hearing, in such reasonable amount as may be fixed by this Court, pursuant to
VAT arose from the complete disallowance by the BIR of the petitioner's purchases from
Section 11 of R.A. No. 1125, as amended, this Court in the interest of substantial justice,
resolves to grant petitioner's Motion.
xxxx
WHEREFORE, considering the urgency of the action to be enjoined, petitioner's Motion for
Suspension of Collection of Tax in the amount of P4,467,391,881.76 allegedly representing
its deficiency Income Tax and Value Added Tax for taxable year 2010 is GRANTED.
Provided, however, that petitioner deposits with this Court an acceptable surety bond
equivalent to 150% of the assessment or in the amount of SIX BILLION SEVEN
HUNDRED ONE MILLION EIGHTY SEVEN THOUSAND EIGHT HUNDRED TWENTY
TWO and 64/100 PESOS (P6,701,087,822.64) within fifteen (15) days from notice
hereof.
Moreover, pursuant to Supreme Court Circular A.M. No. 04-7-02-SC, otherwise known as
the "Proposed Guidelines on Corporate Surety Bonds", petitioner is hereby ORDERED to
submit the following documents with the surety bond stated above:
1. Certified copy of a valid Certificate of Accreditation and Authority issued by the Office of
the Court Administrator;
2. Copy of the Certificate of Compliance with Circular No. 66 of the Insurance Commission
duly certified by the Insurance Commission;
3. Proof of payment of legal fees under the Rules of Court and the documentary stamp tax
(thirty centavos [P0.30J on each four pesos [P4.00] or fractional part thereof, of the
premium charged, pursuant to Section 187 Title VII of Rep. Act No. 8424) and Value
Added Tax (VAT) under the National Internal Revenue Code;
4. Photocopy of the Certificate of Accreditation and Authority issued by the Court
Administrator containing the photograph of the authorized agent (after presentation to the
Clerk of Court of the original copy thereof as Copy of the Certificate of Accreditation and
Authority containing the photograph of the agent); and
5. Secretary Certificate containing the specimen signatures of the agents authorized to
transact business with the courts.
In addition, the said bond must be a continuing bond which shall remain effective until the
above-captioned case is finally decided, resolved or terminated by this Court without
necessity of renewal on a yearly basis, or its validity being dependent on the payment of a
renewal premium pursuant to Section 177 of the Insurance Code.
Failure to comply with the above requirements will cause the setting aside of this
Resolution granting petitioner's motion for the suspension of the collection of the tax
liability.
xxxx
SO ORDERED.
The petitioner filed its Motion for Partial Reconsideration praying, among others, for the
reduction of the bond to an amount it could obtain.
On December 22, 2014, the CTA in Division issued its second assailed resolution reducing
the amount of the petitioner's surety bond to P4,467,391,881.76, which was the
equivalent of the BIR's deficiency assessment for IT and VAT.
Hence, the petitioner has commenced this special civil action for certiorari, asserting:
I.
WITH ALL DUE RESPECT, THE CTA SECOND DIVISION COMMITTED GRAVE ABUSE
OF DISCRETION IN REFUSING TO CONSIDER, AND IN COMPLETELY IGNORING,
THE PATENT ILLEGALITY OF THE ASSESSMENT THAT, UNDER LAW AND
JURISPRUDENCE, FULLY JUSTIFIED DISPENSING WITH THE REQUIREMENT OF
POSTING A BOND.
II.
WITH ALL DUE RESPECT, THE CTA SECOND DIVISION COMMITTED GRAVE ABUSE
OF DISCRETION IN IMPOSING A GARGANTUAN BOND IN THE AMOUNT OF
P4,467,391,881.76 THAT PETITIONER HAS DEMONSTRATED BY UNREFUTED
EVIDENCE TO BE FACTUALLY AND LEGALLY IMPOSSIBLE TO PROCURE.
III.
WITH ALL DUE RESPECT, THE CTA SECOND DIVISION COMMITTEED GRAVE
ABUSE OF DISCRETION IN GRANTING AN ILLUSORY RELIEF, AND IN
EFFECTIVELY DENYING PETITIONER ACCESS TO THE REMEDY PROVIDED BY LAW.
UPON UNCONTRADICTED EVIDENCE, THE IMPOSITION OF A BOND IS NOT ONLY
UNJUST, BUT WILL CAUSE IRREPARABLE INJURY UPON PETITIONER EVEN
BEFORE IT IS HEARD.
On February 9, 2015, the Court issued a temporary restraining order enjoining the
implementation of July 8, 2014 and December 22, 2014 resolutions of the CTA in Division,
and the collection of the deficiency assessments.
Issue
Did the CTA in Division commit grave abuse of discretion in requiring the petitioner to file
a surety bond despite the supposedly patent illegality of the assessment that was beyond
the petitioner's net worth but equivalent to the deficiency assessment for IT and VAT?
Ruling of the Court
The petition for certiorari is meritorious.
Section 11 of Republic Act No. 1125 (R.A. No. 1125), as amended by Republic Act No.
9282 (RA 9282) it is stated that:
Sec. 11. Who may appeal; effect of appeal. — x x x
xxxx
No appeal taken to the Court of Tax Appeals from the decision of the Collector of Internal
Revenue or the Collector of Customs shall suspend the payment, levy, distraint, and/or
sale of any property of the taxpayer for the satisfaction of his tax liability as provided by
existing law: Provided, however,  That when in the opinion of the Court the
collection by the Bureau of Internal Revenue or the Commissioner of Customs
may jeopardize the interest of the Government and/or the taxpayer the Court at
any stage of the proceeding may suspend the said collection and require the
taxpayer either to deposit the amount claimed or to file a surety bond for not
more than double the amount with the Court. (bold Emphasis supplied.)
Clearly, the CTA may order the suspension of the collection of taxes provided that the
taxpayer either: (1) deposits the amount claimed; or (2) files a surety bond for not more
than double the amount.
The petitioner argues that the surety bond amounting to P4,467,391,881.76 greatly
exceeds its net worth and makes it legally impossible to procure the bond from bonding
companies that are limited in their risk assumptions. As shown in its audited financial
statements for the year ending December 31, 2013, its net worth only amounted to
P916,768,767.00, making the amount of P4,467,391,881.76 fixed for the bond nearly five
times greater than such net worth.
The surety bond amounting to P4,467,391,881.76 imposed by the CTA was within the
parameters delineated in Section 11 of R.A. 1125, as amended. The Court holds, however,
that the CTA in Division gravely abused its discretion under Section 11 because it fixed the
amount of the bond at nearly five times the net worth of the petitioner without conducting
a preliminary hearing to ascertain whether there were grounds to suspend the collection of
the deficiency assessment on the ground that such collection would jeopardize the
interests of the taxpayer. Although the amount of P4,467,391,881.76 was itself the
amount of the assessment, it behoved the CTA in Division to consider other factors
recognized by the law itself towards suspending the collection of the assessment, like
whether or not the assessment would jeopardize the interest of the taxpayer, or whether
the means adopted by the CIR in determining the liability of the taxpayer was legal and
valid. Simply prescribing such high amount of the bond like the initial 150% of the
deficiency assessment of P4,467,391,881.76 (or P6,701,087,822.64), or later on even
reducing the amount of the bond to equal the deficiency assessment would practically
deny to the petitioner the meaningful opportunity to contest the validity of the
assessments, and would likely even impoverish it as to force it out of business.
At this juncture, it becomes imperative to reiterate the principle that the power to tax is
not the power to destroy. In Philippine Health Care Providers, Inc. v. Commissioner of
Internal Revenue, the Court has stressed that:
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its
range, acknowledging in its very nature no limits, so that security against its abuse is to
be found only in the responsibility of the legislature which imposes the tax on the
constituency who is to pay it. So potent indeed is the power that it was once opined that
the power to tax involves the power to destroy.
Petitioner claims that the assessed DST to date which amounts to P376 million is way
beyond its net worth of P259 million. Respondent never disputed these assertions. Given
the realities on the ground, imposing the DST on petitioner would be highly oppressive. It
is not the purpose of the government to throttle private business. On the contrary, the
government ought to encourage private enterprise. Petitioner, just like any concern
organized for a lawful economic activity, has a right to maintain a legitimate business. As
aptly held in Roxas, et al. v. CTA, et al.:
The power of taxation is sometimes called also the power to destroy. Therefore it should
be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It
must be exercised fairly, equally and uniformly, lest the tax collector "kill the hen that lays
the golden egg."
Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence.
Incurring losses because of a tax imposition may be an acceptable consequence but killing
the business of an entity is another matter and should not be allowed. It is counter-
productive and ultimately subversive of the nation's thrust towards a better economy
which will ultimately benefit the majority of our people.
Moreover, Section 11 of R.A. 1125, as amended, indicates that the requirement of the
bond as a condition precedent to suspension of the collection applies only in cases where
the processes by which the collection sought to be made by means thereof are carried out
in consonance with the law, not when the processes are in plain violation of the law that
they have to be suspended for jeopardizing the interests of the taxpayer.
The petitioner submits that the patent illegality of the assessment was sufficient ground to
dispense with the bond requirement because the CIR was essentially taxing its sales
revenues without allowing the deduction of the cost of goods sold by virtue of the CIR
refusing to consider evidence showing that it had really incurred costs. However, the Court
is not in the position to rule on the correctness of the deficiency assessment, which is a
matter still pending in the CTA. Conformably with the pronouncement in Pacquiao v. Court
of Tax Appeals, First Division, and the Commissioner of Internal Revenue, a ruling that has
precedential value herein, the Court deems it best to remand the matter involving the
petitioner's plea against the correctness of the deficiency assessment to the CTA for the
conduct of a preliminary hearing in order to determine whether the required surety bond
should be dispensed with or reduced.
In Pacquiao, the petitioners were issued deficiency IT and VAT assessments for 2008 and
2009 in the aggregate amount of P2,261,217,439.92, which amount was above their net
worth of P1,185,984,697.00 as reported in their joint Statement of Assets, Liabilities and
Net Worth (SALN). They had paid the VAT assessments but appealed to the CTA the IT
assessments. Notwithstanding their appeal, the CIR still initiated collection proceedings
against them by issuing warrants of distraint or levy against their properties, and warrants
of garnishment against their bank accounts. As a consequence, they went to the CTA
through an urgent motion to lift the warrants and to suspend the collection of taxes. The
CTA in Division found the motion to suspend tax collection meritorious, and lifted the
warrant of distraint or levy and garnishment on the condition that they post a cash bond of
P3,298,514,894.35, or surety bond of P4,947,772,341.53. They thus came to the Court to
challenge the order to post the cash or surety bond as a condition for the suspension of
collection of their deficiency taxes. In resolving their petition, the Court held and disposed:
Absent any evidence and preliminary determination by the CTA, the Court cannot make
any factual finding and settle the issue of whether the petitioners should comply with the
security requirement under Section 11, R.A. No. 1125. The determination of whether the
methods, employed by the CIR in its assessment, jeopardized the interests of a taxpayer
for being patently in violation of the law is a question of fact that calls for the
reception of evidence which would serve as basis. In this regard, the CTA is in a better
position to initiate this given its time and resources. The remand of the case to the CTA on
this question is, therefore, more sensible and proper.
For the Court to make any finding of fact on this point would be premature. As stated
earlier, there is no evidentiary basis. All the arguments are mere allegations from both
sides. Moreover, any finding by the Court would pre-empt the CTA from properly
exercising its jurisdiction and settle the main issues presented before it, that is, whether
the petitioners were afforded due process; whether the CIR has valid basis for its
assessment; and whether the petitioners should be held liable for the deficiency taxes.
xxxx
In the conduct of its preliminary hearing, the CTA must balance the scale between the
inherent power of the State to tax and its right to prosecute perceived transgressors of the
law, on one side; and the constitutional rights of petitioners to due process of law and the
equal protection of the laws, on the other. In case of doubt, the tax court must remember
that as in all tax cases, such scale should favor the taxpayer, for a citizen's right to due
process and equal protection of the law is amply protected by the Bill of Rights under the
Constitution.
Consequently, to prevent undue and irreparable damage to the normal business
operations of the petitioner, the remand to the CTA of the questions involving the
suspension of collection and the correct amount of the bond is the proper course of action.
WHEREFORE, the Court GRANTS the petition for certiorari; ANNULS and SETS
ASIDE the resolutions issued on July 8, 2014 and December 22, 2014 in CTA Case No.
8833 requiring the petitioner to post a surety bond of P4,467,391,881.76 as a condition to
restrain the collection of the deficiency taxes assessed against it; PERMANENTLY
ENJOINS the enforcement of the resolutions issued on July 8, 2014 and December 22,
2014 in CTA Case No. 8833; and REQUIRES the Court of Tax Appeals, Second Division, to
forthwith conduct a preliminary hearing in CTA Case No. 8833 to determine and rule on
whether the bond required under Section 11 of Republic Act No. 1125 may be dispensed
with or reduced to restrain the collection of the deficiency taxes assessed against the
petitioner.
No pronouncement on costs of suit.
SO ORDERED.
G.R. No. 173594             February 6, 2008
SILKAIR (SINGAPORE) PTE, LTD., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
CARPIO MORALES, J.:
Petitioner, Silkair (Singapore) Pte. Ltd. (Silkair), a corporation organized under the laws of
Singapore which has a Philippine representative office, is an online international air carrier
operating the Singapore-Cebu-Davao-Singapore, Singapore-Davao-Cebu-Singapore, and
Singapore-Cebu-Singapore routes.
On December 19, 2001, Silkair filed with the Bureau of Internal Revenue (BIR) a written
application for the refund of P4,567,450.79 excise taxes it claimed to have paid on its
purchases of jet fuel from Petron Corporation from January to June 2000.
As the BIR had not yet acted on the application as of December 26, 2001, Silkair filed a
Petition for Review before the CTA following Commissioner of Internal Revenue v. Victorias
Milling Co., Inc., et al.
Opposing the petition, respondent Commissioner on Internal Revenue (CIR) alleged in his
Answer that, among other things,
Petitioner failed to prove that the sale of the petroleum products was directly made
from a domestic oil company to the international carrier. The excise tax on petroleum
products is the direct liability of the manufacturer/producer, and when added to the
cost of the goods sold to the buyer, it is no longer a tax but  part of the price which
the buyer has to pay to obtain the article. (Emphasis and underscoring supplied)
By Decision of May 27, 2005, the Second Division of the CTA denied Silkair’s petition on
the ground that as the excise tax was imposed on Petron Corporation as the manufacturer
of petroleum products, any claim for refund should be filed by the latter; and where the
burden of tax is shifted to the purchaser, the amount passed on to it is no longer a tax but
becomes an added cost of the goods purchased. Thus the CTA discoursed:
The liability for excise tax on petroleum products that are being removed from its
refinery is imposed on the manufacturer/producer (Section 130 of the NIRC of 1997). x x
 xxxx
While it is true that in the case of excise tax imposed on petroleum products, the seller
thereof may shift the tax burden to the buyer, the latter is the proper party to claim for
the refund in the case of exemption from excise tax. Since the excise tax was
imposed upon Petron Corporation as the manufacturer of petroleum products,
pursuant to Section 130(A)(2), and that the corresponding excise taxes were indeed,
paid by it, . . . any claim for refund of the subject excise taxes should be filed by
Petron Corporation as the taxpayer contemplated under the law. Petitioner cannot be
considered as the taxpayer because it merely shouldered the burden of the excise tax
and not the excise tax itself.
Therefore, the right to claim for the refund of excise taxes paid on petroleum products
lies with Petron Corporation who paid and remitted the excise tax to the BIR.
Respondent, on the other hand, may only claim from Petron Corporation the
reimbursement of the tax burden shifted to the former by the latter. The excise tax
partaking the nature of an indirect tax, is clearly the liability of the manufacturer or seller
who has the option whether or not to shift the burden of the tax to the purchaser.
Where the burden of the tax is shifted to the [purchaser], the amount passed
on to it is no longer a tax but becomes an added cost on the goods
purchased which constitutes a part of the purchase price . The incidence of taxation or
the person statutorily liable to pay the tax falls on Petron Corporation though the impact
of taxation or the burden of taxation falls on another person, which in this case is
petitioner Silkair. (Italics in the original; emphasis and underscoring supplied)
Silkair filed a Motion for Reconsideration during the pendency of which or on September
12, 2005 the Bengzon Law Firm entered its appearance as counsel, without Silkair’s then-
counsel of record (Jimenez Gonzales Liwanag Bello Valdez Caluya & Fernandez or "JGLaw")
having withdrawn as such.
By Resolution of September 22, 2005, the CTA Second Division denied Silkair’s motion for
reconsideration. A copy of the Resolution was furnished Silkair’s counsel JGLaw which
received it on October 3, 2005.
On October 13, 2005, JGLaw, with the conformity of Silkair, filed its Notice of Withdrawal
of Appearance. On even date, Silkair, through the Bengzon Law Firm, filed a
Manifestation/Motion stating:
Petitioner was formerly represented xxx by JIMENEZ GONZALES LIWANAG BELLO
VALDEZ CALUYA & FERNANDEZ (JGLaw).
1. On 24 August 2005, petitioner served notice to JGLaw of its decision to cease all
legal representation handled by the latter on behalf of the petitioner. Petitioner also
requested JGLaw to make arrangements for the transfer of all files relating to its
legal representation on behalf of petitioner to the undersigned counsel. x x x
2. The undersigned counsel was engaged to act as counsel for the petitioner in the
above-entitled case; and thus, filed its entry of appearance on 12 September 2005.
3. The undersigned counsel, through petitioner, has received information that the
Honorable Court promulgated a Resolution on petitioner’s Motion for
Reconsideration. To date, the undersigned counsel has yet to receive an official copy
of the above-mentioned Resolution. In light of the foregoing, undersigned counsel
hereby respectfully requests for an official copy of the Honorable Court’s Resolution
on petitioner’s Motion for Reconsideration x x x. (Underscoring supplied)
On October 14, 2005, the Bengzon Law Firm received its requested copy of the September
22, 2005 CTA Second Division Resolution. Thirty-seven days later or on October 28, 2005,
Silkair, through said counsel, filed a Motion for Extension of Time to File Petition for
Review before the CTA En Banc which gave it until November 14, 2005 to file a petition for
review.
On November 11, 2005, Silkair filed another Motion for Extension of Time. On even date,
the Bengzon Law Firm informed the CTA of its withdrawal of appearance as counsel for
Silkair with the information, that Silkair would continue to be represented by Atty. Teodoro
A. Pastrana, who used to be with the firm but who had become a partner of the Pastrana
and Fallar Law Offices.
The CTA En Banc granted Silkair’s second Motion for Extension of Time, giving Silkair until
November 24, 2005 to file its petition for review. On November 17, 2005, Silkair filed its
Petition for Review before the CTA En Banc.
By Resolution of May 19,2006, the CTA En Banc dismissed Silkair’s petition for review for
having been filed out of time in this wise:
A petitioner is given a period of fifteen (15) days from notice of award, judgment, final
order or resolution, or denial of motion for new trial or reconsideration to appeal to the
proper forum, in this case, the CTA En Banc. This is clear from both Section 11 and
Section 9 of Republic Act No. 9282 x x x.
xxxx
The petitioner, through its counsel of record Jimenez, Gonzalez, L[iwanag], Bello,
Valdez, Caluya & Fernandez Law Offices, received the Resolution dated September 22,
2005 on October 3, 2005. At that time, the petitioner had two counsels of record,
namely, Jimenez, Gonzales, L[iwanag], Bello, Valdez, Caluya & Fernandez Law Offices
and The Bengzon Law Firm which filed its Entry of Appearance on September 12, 2005.
However, as of said date, Atty. Mary Jane B. Austria-Delgado of Jimenez, Gonzales,
L[iwanag], Bello, Valdez, Caluya & Fernandez Law Offices was still the counsel of record
considering that the Notice of Withdrawal of Appearance signed by Atty. Mary Jane B.
Austria-Delgado was filed only on October 13, 2005 or ten (10) days after receipt of the
September 22, 2005 Resolution of the Court’s Second Division. This
notwithstanding, Section 2 of Rule 13 of the Rules of Court provides that if any
 party has appeared by counsel, service upon him shall be made upon his counsel or
one of them, unless service upon the party himself is ordered by the Court. Where a
party is represented by more than one counsel of record, "notice to any one of the
several counsel on record is equivalent to notice to all the counsel (Damasco vs.
Arrieta, et. al., 7 SCRA 224)." Considering that petitioner, through its counsel of
record, had received the September 22, 2005 Resolution as early as October 3, 2005, it
had only until October 18, 2005 within which to file its Petition for Review. Petitioner
only managed to file the Petition for Review with the Court  En Banc  on November 17,
2005 or [after] thirty (30) days had lapsed from the final date of October 18, 2005 to
appeal.
The argument that it requested Motions for Extension of Time on October 28, 2005 or
ten (10) days from the appeal period and the second Motion for Extension of Time to
file its Petition for Review on November 11, 2005 and its allowance by the CTA En
Banc notwithstanding, the questioned Decision is no longer appealable for failure to
timely file the necessary Petition for Review. (Emphasis in the original)
In a Separate Concurring Opinion, CTA Associate Justice Juanito C. Castañeda, Jr. posited
that Silkair is not the proper party to claim the tax refund.
Silkair filed a Motion for Reconsideration which the CTA En Banc denied. Hence, the
present Petition for Review which raises the following issues:
I. WHETHER OR NOT THE PETITION FOR REVIEW FILED WITH THE HONORABLE COURT
OF TAX APPEALS EN BANC WAS TIMELY FILED.
II. APPEAL BEING AN ESSENTIAL PART OF OUR JUDICIAL SYSTEM, WHETHER OR NOT
PETITIONER SHOULD BE DEPRIVED OF ITS RIGHT TO APPEAL ON THE BASIS OF
TECHNICALITY.
III. ASSUMING THE HONORABLE SUPREME COURT WOULD HOLD THAT THE FILING OF
THE PETITITON FOR REVIEW WITH THE HONORABLE COURT OF TAX APPEALS EN BANC
WAS TIMELY, WHETHER OR NOT THE PETITIONER IS THE PROPER PARTY TO CLAIM
FOR REFUND OR TAX CREDIT. (Underscoring supplied)
Silkair posits that "the instant case does not involve a situation where the petitioner was
represented by two (2) counsels on record, such that notice to the former counsel would
be held binding on the petitioner, as in the case of Damasco v. Arrieta, etc., et al. x x x
heavily relied upon by the respondent"; and that "the case of Dolores De Mesa Abad v.
Court of Appeals has more appropriate application to the present case."
In Dolores De Mesa Abad, the trial court issued an order of November 19, 1974 granting
the therein private respondents’ Motion for Annulment of documents and titles. The order
was received by the therein petitioner’s counsel of record, Atty. Escolastico R. Viola, on
November 22, 1974 prior to which or on July 17, 1974, Atty. Vicente Millora of the Millora,
Tobias and Calimlim Law Office had filed an "Appearance and Manifestation." Atty. Millora
received a copy of the trial court’s order on December 9, 1974. On January 4, 1975, the
therein petitioners, through Atty. Ernesto D. Tobias also of the Millora, Tobias and
Calimlim Law Office, filed their Notice of Appeal and Cash Appeal Bond as well as a Motion
for Extension of the period to file a Record on Appeal. They filed the Record on Appeal on
January 24, 1975. The trial court dismissed the appeal for having been filed out of time,
which was upheld by the Court of Appeals on the ground that the period within which to
appeal should be counted from November 22, 1974, the date Atty. Viola received a copy of
the November 19, 1974 order. The appellate court held that Atty. Viola was still the
counsel of record, he not having yet withdrawn his appearance as counsel for the therein
petitioners. On petition for certiorari, this Court held
x x x [R]espondent Court reckoned the period of appeal from the time petitioners’
original counsel, Atty. Escolastico R. Viola, received the Order granting the Motion for
Annulment of documents and titles on November 22, 1974. But as petitioners stress,
Atty. Vicente Millora of the Millora, Tobias and Calimlim Law Office had filed an
"Appearance and Manifestation" on July 16, 1974. Where there may have been no
specific withdrawal by Atty. Escolastico R. Viola, for which he should be admonished, by
the appearance of a new counsel, it can be said that Atty. Viola had ceased as counsel
for petitioners. In fact, Orders subsequent to the aforesaid date were already sent by
the trial Court to the Millora, Tobias and Calimlim Law Office and not to Atty. Viola.
Under the circumstances, December 9, 1974 is the controlling date of receipt by
petitioners’ counsel and from which the period of appeal from the Order of November
19, 1974 should be reckoned. That being the case, petitioner’s x x x appeal filed on
January 4, 1975 was timely filed. (Underscoring supplied)
The facts of Dolores De Mesa Abad are not on all fours with those of the present case. In
any event, more recent jurisprudence holds that in case of failure to comply with the
procedure established by Section 26, Rule 138 of the Rules of Court re the withdrawal of a
lawyer as a counsel in a case, the attorney of record is regarded as the counsel who
should be served with copies of the judgments, orders and pleadings. Thus, where no
notice of withdrawal or substitution of counsel has been shown, notice to counsel of record
is, for all purposes, notice to the client. The court cannot be expected to itself ascertain
whether the counsel of record has been changed.
In the case at bar, JGLaw filed its Notice of Withdrawal of Appearance on October 13,
2005 after the Bengzon Law Firm had entered its appearance. While Silkair claims it
dismissed JGLaw as its counsel as early as August 24, 2005, the same was communicated
to the CTA only on October 13, 2005. Thus, JGLaw was still Silkair’s counsel of record as of
October 3, 2005 when a copy of the September 22, 2005 resolution of the CTA Second
Division was served on it. The service upon JGLaw on October 3, 2005 of the September
22, 2005 resolution of CTA Second Division was, therefore, for all legal intents and
purposes, service to Silkair, and the CTA correctly reckoned the period of appeal from such
date.
TECHNICALITY ASIDE, on the merits, the petition just the same fails.
Silkair bases its claim for refund or tax credit on Section 135 (b) of the NIRC of 1997
which reads
Sec. 135. Petroleum Products sold to International Carriers and Exempt
Entities of Agencies. – Petroleum products sold to the following are exempt from
excise tax:
xxxx
(b) Exempt entities or agencies covered by tax treaties, conventions, and other
international agreements for their use and consumption: Provided, however, That the
country of said foreign international carrier or exempt entities or agencies exempts
from similar taxes petroleum products sold to Philippine carriers, entities or agencies; x
x x x x,
and Article 4(2) of the Air Transport Agreement between the Government of the Republic
of the Philippines and the Government of the Republic of Singapore (Air Transport
Agreement between RP and Singapore) which reads
Fuel, lubricants, spare parts, regular equipment and aircraft stores introduced into, or
taken on board aircraft in the territory of one Contracting party by, or on behalf of, a
designated airline of the other Contracting Party and intended solely for use in the
operation of the agreed services shall, with the exception of charges corresponding to
the service performed, be exempt from the same customs duties, inspection fees and
other duties or taxes imposed in the territories of the first Contracting Party , even when
these supplies are to be used on the parts of the journey performed over the territory of
the Contracting Party in which they are introduced into or taken on board. The materials
referred to above may be required to be kept under customs supervision and control.
The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer,
the person on whom the tax is imposed by law and who paid the same even if he shifts
the burden thereof to another. Section 130 (A) (2) of the NIRC provides that "[u]nless
otherwise specifically allowed, the return shall be filed and the excise tax paid by the
manufacturer or producer before removal of domestic products from place of production."
Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a
refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport
Agreement between RP and Singapore.
Even if Petron Corporation passed on to Silkair the burden of the tax, the additional
amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to
pay as a purchaser.
Silkair nevertheless argues that it is exempt from indirect taxes because the Air Transport
Agreement between RP and Singapore grants exemption "from the same customs duties,
inspection fees and other duties or taxes imposed in the territory of the first Contracting
Party." It invokes Maceda v. Macaraig, Jr. which upheld the claim for tax credit or refund
by the National Power Corporation (NPC) on the ground that the NPC is exempt even from
the payment of indirect taxes.
Silkairs’s argument does not persuade. In Commissioner of Internal Revenue v. Philippine
Long Distance Telephone Company, this Court clarified the ruling in Maceda v. Macaraig,
Jr., viz:
It may be so that in Maceda vs. Macaraig, Jr., the Court held that an exemption from "all
taxes" granted to the National Power Corporation (NPC) under its charter includes both
direct and indirect taxes. But far from providing PLDT comfort, Maceda in fact supports
the case of herein petitioner, the correct lesson of Maceda being that an exemption from
"all taxes" excludes indirect taxes, unless the exempting statute, like NPC’s charter, is so
couched as to include indirect tax from the exemption. Wrote the Court:
x x x However, the amendment under Republic Act No. 6395 enumerated the details
covered by the exemption. Subsequently, P.D. 380, made even more specific the
details of the exemption of NPC to cover, among others, both direct and indirect
taxes on all petroleum products used in its operation. Presidential Decree No. 938
[NPC’s amended charter] amended the tax exemption by simplifying the same law in
general terms. It succinctly exempts NPC from "all forms of taxes, duties[,] fees…"
The use of the phrase "all forms" of taxes demonstrates the intention of the law to
give NPC all the tax exemptions it has been enjoying before…
xxxx
It is evident from the provisions of P.D. No. 938 that its purpose is to maintain the
tax exemption of NPC from all forms of taxes including indirect taxes as provided
under R.A. No. 6395 and P.D. 380 if it is to attain its goals. (Italics in the original;
emphasis supplied)
The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the
Air Transport Agreement between RP and Singapore cannot, without a clear showing of
legislative intent, be construed as including indirect taxes. Statutes granting tax
exemptions must be construed in strictissimi juris against the taxpayer and liberally in
favor of the taxing authority, and if an exemption is found to exist, it must not be enlarged
by construction.
WHEREFORE, the petition is DENIED.
Costs against petitioner.
SO ORDERED.