Planters Products, Inc. vs. Fertiphil Corporation, G.R. No.

66006, 14 March 2008

Facts:

Petitioner PPI and private respondent Fertiphil are private corporations incorporated under
Philippine laws.3 They are both engaged in the importation and distribution of fertilizers,
pesticides and agricultural chemicals.

On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI
No. 1465 which provided, among others, for the imposition of a capital recovery component
(CRC) on the domestic sale of all grades of fertilizers in the Philippines. 4 The LOI provides:

3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula
a capital contribution component of not less than ₱10 per bag. This capital contribution shall be
collected until adequate capital is raised to make PPI viable. Such capital contribution shall be
applied by FPA to all domestic sales of fertilizers in the Philippines. 5 (Underscoring supplied)

Pursuant to the LOI, Fertiphil paid ₱10 for every bag of fertilizer it sold in the domestic market to
the Fertilizer and Pesticide Authority (FPA). FPA then remitted the amount collected to the Far
East Bank and Trust Company, the depositary bank of PPI. Fertiphil paid ₱6,689,144 to FPA
from July 8, 1985 to January 24, 1986. 6

After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the ₱10 levy. With the
return of democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No.
1465, but PPI refused to accede to the demand. 7

Fertiphil filed a complaint for collection and damages 8 against FPA and PPI with the RTC in
Makati. It questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable,
oppressive, invalid and an unlawful imposition that amounted to a denial of due process of
law.9 Fertiphil alleged that the LOI solely favored PPI, a privately owned corporation, which used
the proceeds to maintain its monopoly of the fertilizer industry.

In its Answer,10 FPA, through the Solicitor General, countered that the issuance of LOI No. 1465
was a valid exercise of the police power of the State in ensuring the stability of the fertilizer
industry in the country. It also averred that Fertiphil did not sustain any damage from the LOI
because the burden imposed by the levy fell on the ultimate consumer, not the seller.

Issue:

II

LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE
FERTILIZER SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING A
FOUNDATION CREATED BY LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR
STOCK OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT TO THE
EXERCISE OF TAXATION AND POLICE POWER FOR PUBLIC PURPOSES.

1
Ruling:

PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of
taxation. It claims that the LOI was implemented for the purpose of assuring the fertilizer supply
and distribution in the country and for benefiting a foundation created by law to hold in trust for
millions of farmers their stock ownership in PPI.

Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit to a
private company. The levy was imposed to pay the corporate debt of PPI. Fertiphil also argues
that, even if the LOI is enacted under the police power, it is still unconstitutional because it did
not promote the general welfare of the people or public interest.

Police power and the power of taxation are inherent powers of the State. These powers are
distinct and have different tests for validity. Police power is the power of the State to enact
legislation that may interfere with personal liberty or property in order to promote the general
welfare,39 while the power of taxation is the power to levy taxes to be used for public purpose.
The main purpose of police power is the regulation of a behavior or conduct, while taxation is
revenue generation. The "lawful subjects" and "lawful means" tests are used to determine the
validity of a law enacted under the police power. 40 The power of taxation, on the other hand, is
circumscribed by inherent and constitutional limitations.

We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation
power. While it is true that the power of taxation can be used as an implement of police
power,41 the primary purpose of the levy is revenue generation. If the purpose is primarily
revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is
properly called a tax.

The ₱10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The levy,
no doubt, was a big burden on the seller or the ultimate consumer. It increased the price of a bag
of fertilizer by as much as five percent.45 A plain reading of the LOI also supports the conclusion
that the levy was for revenue generation. The LOI expressly provided that the levy was imposed
"until adequate capital is raised to make PPI viable."

Taxes are exacted only for a public purpose. The ₱10 levy is unconstitutional because it was not
for a public purpose. The levy was imposed to give undue benefit to PPI.

An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a
public purpose. They cannot be used for purely private purposes or for the exclusive benefit of
private persons.46 The reason for this is simple. The power to tax exists for the general welfare;
hence, implicit in its power is the limitation that it should be used only for a public purpose. It
would be a robbery for the State to tax its citizens and use the funds generated for a private
purpose. As an old United States case bluntly put it: "To lay with one hand, the power of the
government on the property of the citizen, and with the other to bestow it upon favored
individuals to aid private enterprises and build up private fortunes, is nonetheless a robbery
because it is done under the forms of law and is called taxation." 47

The term "public purpose" is not defined. It is an elastic concept that can be hammered to fit
modern standards. Jurisprudence states that "public purpose" should be given a broad
interpretation. It does not only pertain to those purposes which are traditionally viewed as
essentially government functions, such as building roads and delivery of basic services, but also
includes those purposes designed to promote social justice. Thus, public money may now be
used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform.

2
While the categories of what may constitute a public purpose are continually expanding in light of
the expansion of government functions, the inherent requirement that taxes can only be exacted
for a public purpose still stands. Public purpose is the heart of a tax law. When a tax law is only a
mask to exact funds from the public when its true intent is to give undue benefit and advantage to
a private enterprise, that law will not satisfy the requirement of "public purpose."

The purpose of a law is evident from its text or inferable from other secondary sources. Here, We
agree with the RTC and that CA that the levy imposed under LOI No. 1465 was not for a public
purpose.

First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company. The
purpose is explicit from Clause 3 of the law, thus:

It is a basic rule of statutory construction that the text of a statute should be given a literal
meaning. In this case, the text of the LOI is plain that the levy was imposed in order to raise
capital for PPI. The framers of the LOI did not even hide the insidious purpose of the law. They
were cavalier enough to name PPI as the ultimate beneficiary of the taxes levied under the LOI.
We find it utterly repulsive that a tax law would expressly name a private company as the
ultimate beneficiary of the taxes to be levied from the public. This is a clear case of crony
capitalism.

Second, the LOI provides that the imposition of the ₱10 levy was conditional and dependent
upon PPI becoming financially "viable." This suggests that the levy was actually imposed to
benefit PPI. The LOI notably does not fix a maximum amount when PPI is deemed financially
"viable." Worse, the liability of Fertiphil and other domestic sellers of fertilizer to pay the levy is
made indefinite. They are required to continuously pay the levy until adequate capital is raised for
PPI.

Third, the RTC and the CA held that the levies paid under the LOI were directly remitted and
deposited by FPA to Far East Bank and Trust Company, the depositary bank of PPI. 49 This
proves that PPI benefited from the LOI. It is also proves that the main purpose of the law was to
give undue benefit and advantage to PPI.

Fourth, the levy was used to pay the corporate debts of PPI. A reading of the Letter of
Understanding50 dated May 18, 1985 signed by then Prime Minister Cesar Virata reveals that PPI
was in deep financial problem because of its huge corporate debts. There were pending petitions
for rehabilitation against PPI before the Securities and Exchange Commission. The government
guaranteed payment of PPI’s debts to its foreign creditors.

It is clear from the Letter of Understanding that the levy was imposed precisely to pay the
corporate debts of PPI. We cannot agree with PPI that the levy was imposed to ensure the
stability of the fertilizer industry in the country. The letter of understanding and the plain text of
the LOI clearly indicate that the levy was exacted for the benefit of a private corporation.

All told, the RTC and the CA did not err in holding that the levy imposed under LOI No. 1465 was
not for a public purpose. LOI No. 1465 failed to comply with the public purpose requirement for
tax laws.

3
Gomez vs. Palomar, G.R. No. L-23645, 29 October 1968

Facts:

This appeal puts in issue the constitutionality of Republic Act 1635, 1 as amended by Republic Act
2631,2 which provides as follows:

To help raise funds for the Philippine Tuberculosis Society, the Director of Posts shall
order for the period from August nineteen to September thirty every year the printing and
issue of semi-postal stamps of different denominations with face value showing the
regular postage charge plus the additional amount of five centavos for the said purpose,
and during the said period, no mail matter shall be accepted in the mails unless it bears
such semi-postal stamps: Provided, That no such additional charge of five centavos shall
be imposed on newspapers. The additional proceeds realized from the sale of the semi-
postal stamps shall constitute a special fund and be deposited with the National Treasury
to be expended by the Philippine Tuberculosis Society in carrying out its noble work to
prevent and eradicate tuberculosis.

On September l5, 1963 the petitioner Benjamin P. Gomez mailed a letter at the post office in San
Fernando, Pampanga. Because this letter, addressed to a certain Agustin Aquino of 1014
Dagohoy Street, Singalong, Manila did not bear the special anti-TB stamp required by the
statute, it was returned to the petitioner.

In view of this development, the petitioner brough suit for declaratory relief in the Court of First
Instance of Pampanga, to test the constitutionality of the statute, as well as the implementing
administrative orders issued, contending that it violates the equal protection clause of the
Constitution as well as the rule of uniformity and equality of taxation. The lower court declared
the statute and the orders unconstitutional; hence this appeal by the respondent postal
authorities.

Ruling:

2. The petitioner further argues that the tax in question is invalid, first, because it is not levied for
a public purpose as no special benefits accrue to mail users as taxpayers, and second, because
it violates the rule of uniformity in taxation.

The eradication of a dreaded disease is a public purpose, but if by public purpose the petitioner
means benefit to a taxpayer as a return for what he pays, then it is sufficient answer to say that
the only benefit to which the taxpayer is constitutionally entitled is that derived from his
enjoyment of the privileges of living in an organized society, established and safeguarded by the
devotion of taxes to public purposes. Any other view would preclude the levying of taxes except
as they are used to compensate for the burden on those who pay them and would involve the
abandonment of the most fundamental principle of government — that it exists primarily to
provide for the common good.15

Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat rate rather
than a graduated tax. A tax need not be measured by the weight of the mail or the extent of the
service rendered. We have said that considerations of administrative convenience and cost
afford an adequate ground for classification. The same considerations may induce the legislature
to impose a flat tax which in effect is a charge for the transaction, operating equally on all
persons within the class regardless of the amount involved.

4
Lutz vs. Araneta, G.R. No. L-7859, 22 December 1955

Facts:

Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due
to the threat to our industry by the imminent imposition of export taxes upon sugar as provided in
the Tydings-McDuffe Act, and the "eventual loss of its preferential position in the United States
market"; wherefore, the national policy was expressed "to obtain a readjustment of the benefits
derived from the sugar industry by the component elements thereof" and "to stabilize the sugar
industry so as to prepare it for the eventuality of the loss of its preferential position in the United
States market and the imposition of the export taxes."

In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the
manufacture of sugar, on a graduated basis, on each picul of sugar manufactured; while section
3 levies on owners or persons in control of lands devoted to the cultivation of sugar cane and
ceded to others for a consideration, on lease or otherwise —

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio
Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40
paid by the estate as taxes, under section 3 of the Act, for the crop years 1948-1949 and 1949-
1950; alleging that such tax is unconstitutional and void, being levied for the aid and support of
the sugar industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax
may be constitutioally levied. The action having been dismissed by the Court of First Instance,
the plaintifs appealed the case directly to this Court (Judiciary Act, section 17).

Ruling:

This Court can take judicial notice of the fact that sugar production is one of the great industries
of our nation, sugar occupying a leading position among its export products; that it gives
employment to thousands of laborers in fields and factories; that it is a great source of the state's
wealth, is one of the important sources of foreign exchange needed by our government, and is
thus pivotal in the plans of a regime committed to a policy of currency stability. Its promotion,
protection and advancement, therefore redounds greatly to the general welfare. Hence it was
competent for the legislature to find that the general welfare demanded that the sugar industry
should be stabilized in turn; and in the wide field of its police power, the lawmaking body could
provide that the distribution of benefits therefrom be readjusted among its components to enable
it to resist the added strain of the increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237
U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc.
vs. Mayo, 103 Fla. 552, 139 So. 121).

Once it is conceded, as it must, that the protection and promotion of the sugar industry is a
matter of public concern, it follows that the Legislature may determine within reasonable bounds
what is necessary for its protection and expedient for its promotion. Here, the legislative
discretion must be allowed fully play, subject only to the test of reasonableness; and it is not
contended that the means provided in section 6 of the law (above quoted) bear no relation to the
objective pursued or are oppressive in character. If objective and methods are alike
constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their
prosecution and attainment. Taxation may be made the implement of the state's police power
(Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U.
S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed. 579).

5
That the tax to be levied should burden the sugar producers themselves can hardly be a ground
of complaint; indeed, it appears rational that the tax be obtained precisely from those who are to
be benefited from the expenditure of the funds derived from it. At any rate, it is inherent in the
power to tax that a state be free to select the subjects of taxation, and it has been repeatedly
held that "inequalities which result from a singling out of one particular class for taxation, or
exemption infringe no constitutional limitation" (Carmichael vs. Southern Coal & Coke Co., 301
U. S. 495, 81 L. Ed. 1245, citing numerous authorities, at p. 1251).

From the point of view we have taken it appears of no moment that the funds raised under the
Sugar Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry,
since it is that very enterprise that is being protected. It may be that other industries are also in
need of similar protection; that the legislature is not required by the Constitution to adhere to a
policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84
L. Ed. 744, "if the law presumably hits the evil where it is most felt, it is not to be overthrown
because there are other instances to which it might have been applied;" and that "the legislative
authority, exerted within its proper field, need not embrace all the evils within its reach" (N. L. R.
B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).

Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of
tax money to experimental stations to seek increase of efficiency in sugar production, utilization
of by-products and solution of allied problems, as well as to the improvements of living and
working conditions in sugar mills or plantations, without any part of such money being channeled
directly to private persons, constitutes expenditure of tax money for private purposes, (compare
Everson vs. Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400).

6
Tio vs. Videogram Regulatory Board, GR No. L-75697, 18 June 1997

Facts:

On November 5, 1985, a month after the promulgation of the abovementioned decree,

Presidential Decree No. 1994 amended the National Internal Revenue Code providing, inter alia:

SEC. 134. Video Tapes. — There shall be collected on each processed video-tape

cassette, ready for playback, regardless of length, an annual tax of five pesos; Provided,
That locally manufactured or imported blank video tapes shall be subject to sales tax.

On October 23, 1986, the Greater Manila Theaters Association, Integrated Movie Producers,
Importers and Distributors Association of the Philippines, and Philippine Motion Pictures
Producers Association, hereinafter collectively referred to as the Intervenors, were permitted by
the Court to intervene in the case, over petitioner's opposition, upon the allegations that
intervention was necessary for the complete protection of their rights and that their "survival and
very existence is threatened by the unregulated proliferation of film piracy."

Petitioner's attack on the constitutionality of the DECREE rests on the following grounds:

1. Section 10 thereof, which imposes a tax of 30% on the gross receipts payable to the
local government is a RIDER and the same is not germane to the subject matter thereof;

2. The tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint of trade
in violation of the due process clause of the Constitution;

3. There is no factual nor legal basis for the exercise by the President of the vast powers
conferred upon him by Amendment No. 6;

4. There is undue delegation of power and authority;

5. The Decree is an ex-post facto law; and

6. There is over regulation of the video industry as if it were a nuisance, which it is not

Ruling:

2. Petitioner also submits that the thirty percent (30%) tax imposed is harsh and oppressive,
confiscatory, and in restraint of trade. However, it is beyond serious question that a tax does not
cease to be valid merely because it regulates, discourages, or even definitely deters the activities
taxed.   The power to impose taxes is one so unlimited in force and so searching in extent, that
8

the courts scarcely venture to declare that it is subject to any restrictions whatever, except such
as rest in the discretion of the authority which exercises it.   In imposing a tax, the legislature acts
9

upon its constituents. This is, in general, a sufficient security against erroneous and oppressive
taxation.  10

7
The tax imposed by the DECREE is not only a regulatory but also a revenue measure prompted
by the realization that earnings of videogram establishments of around P600 million per annum
have not been subjected to tax, thereby depriving the Government of an additional source of
revenue. It is an end-user tax, imposed on retailers for every videogram they make available for
public viewing. It is similar to the 30% amusement tax imposed or borne by the movie industry
which the theater-owners pay to the government, but which is passed on to the entire cost of the
admission ticket, thus shifting the tax burden on the buying or the viewing public. It is a tax that is
imposed uniformly on all videogram operators.

The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for
regulating the video industry, particularly because of the rampant film piracy, the flagrant violation
of intellectual property rights, and the proliferation of pornographic video tapes. And while it was
also an objective of the DECREE to protect the movie industry, the tax remains a valid
imposition.

The public purpose of a tax may legally exist even if the motive which impelled the
legislature to impose the tax was to favor one industry over another.  11

It is inherent in the power to tax that a state be free to select the subjects of taxation, and
it has been repeatedly held that "inequities which result from a singling out of one
particular class for taxation or exemption infringe no constitutional limitation".   Taxation
12

has been made the implement of the state's police power. 13

At bottom, the rate of tax is a matter better addressed to the taxing legislature.

4. Neither can it be successfully argued that the DECREE contains an undue delegation of
legislative power. The grant in Section 11 of the DECREE of authority to the BOARD to "solicit
the direct assistance of other agencies and units of the government and deputize, for a fixed and
limited period, the heads or personnel of such agencies and units to perform enforcement
functions for the Board" is not a delegation of the power to legislate but merely a conferment of
authority or discretion as to its execution, enforcement, and implementation. "The true distinction
is between the delegation of power to make the law, which necessarily involves a discretion as to
what it shall be, and conferring authority or discretion as to its execution to be exercised under
and in pursuance of the law. The first cannot be done; to the latter, no valid objection can be
made."   Besides, in the very language of the decree, the authority of the BOARD to solicit such
14

assistance is for a "fixed and limited period" with the deputized agencies concerned being
"subject to the direction and control of the BOARD." That the grant of such authority might be the
source of graft and corruption would not stigmatize the DECREE as unconstitutional. Should the
eventuality occur, the aggrieved parties will not be without adequate remedy in law.

8
Citizen’s Alliance for Consumer Protection vs. ERB, G.R. Nos. 78888- 90, 23 June 1988

Facts:
On 19 June 1987, private respondent Caltex Philippines, Inc. filed with the public respondent
Energy Regulatory Board (ERB) an Application   ERB Case No. 87-01) formally seeking a
1

provisional increase in the places of its petroleum products. Similar applications for provisional
price increases were submitted on 22 June 1987 by private respondents Petrophil
Corporation   (ERB Case No. 87-02) and Pilipinas Shell Petroleum Corporation   (ERB Case No.
2 3

87-03).

On 24 August 1987, petitioner Ricardo C. Valmonte, suing in his capacity as taxpayer and citizen
of the Republic, filed with this Court a Petition with Preliminary Injunction (G.R. Nos. 79501-03)
seeking to enjoin enforcement of that portion of public respondent Board's order directing the
private respondent oil companies to pay the amount of thirty-one point one centavos (P0.311)
per liter out of the price increases granted to the Oil Price Stabilization Fund (OPSF). Petitioner
Valmonte in essence assailed as unconstitutional both the OPSF and the laws establishing said
Fund — i. e., Presidential Decree No. 1956 dated 10 October 1984, as amended by Executive
Order No. 137 dated 27 February 1987 — and moved that private respondents be ordered to
remit back to the government amounts withdrawn therefrom since January of 1987.

On 2 September 1987, petitioner KMU filed with this Court a Petition for certiorari and Prohibition
with Preliminary Injunction and/or Restraining Order (G.R. Nos. 79590-92) assailing the validity
of the 14 August 1987 Order of public respondent Board, reiterating in essence the arguments of
petitioner CACP in the latter's own Petition for Certiorari. Petitioner KMU additionally alleged,
among other things, that the order granting the applications for provisional price increases was
not supported by the evidence and was based merely on the results of "secret studies"
conducted by public respondent Board; that the issues in ERB Cases Nos. 87-01, 87-02 and
8703 had not yet been joined at the time of issuance of said order by respondent Board, which
"kept its arbitrary action in complete secrecy;" that there was no basis for respondent Boards
"imagined fear" that the oil companies would cease business operations in the Philippines in the
event that their applications for price increases would not be favorably acted upon; and that
public respondent Board's finding that the OPSF had then already been depleted was erroneous.
Finally, petitioner KMU questioned the constitutionality of (1) the laws establishing and creating
the OPSF, and (2) the President's August 1987 directive ordering a partial cut-back in the prices
of petroleum products and "appropriating" (i.e., releasing) the amount of P300,000.000.00 from
PAGCOR revenues to replenish the OPSF.

Issue:

Ruling:

6. Petitioner Valmonte in G.R. Nos. 79501-03 argues that the Oil Price Stabilization Fund (OPSF)
is a tax imposed on consumers which is "not intended for public purpose or for government
operations but to answer for the losses of oil companies.' Petitioner Valmonte not only condemns
the OPSF as "arbitrary and oppressive" but claims also that through said Fund, "all oil
consumers are being made to pay not only for their present oil consumption but also for a portion
of future consumption which may or may not come." Finally, it is alleged that the OPSF provides
"a fertile ground for unchecked graft and corruption" and "triggers the rise not only [of] the prices
of petroleum products but also [of] the prime commodities [sic]."

9
The foregoing arguments suggest the presence of misconceptions about the nature and
functions of the OPSF. The OPSF is a trust Account" which was established "for the purpose of
minimizing frequent price changes brought about by exchange rate adjustment and/or changes
in World market prices of crude oil and imported petroleum products ."   Under P.D. No. 1956, as
17

amended by Executive Order No. 137 dated 27 February 1987, this Trust Account may be
funded from any of the following sources:

a) Any increase in the tax collection from ad valorem tax or customs duty
imposed on petroleum products subject to tax under this Decree arising from
exchange rate adjustment, as may be determined by the Minister of Finance in
consultation with the Board of Energy;

b) Any increase in the tax collection as a result of the lifting of tax exemptions of
government corporations, as may be determined by the Minister of Finance in
consultation with the Board of Energy;

c) Any additional amount to be imposed on petroleum products to augment the

resources of the Fund through an appropriate Order that may be issued by the
Board of Energy requiring payment of persons or companies engaged in the
business of importing, manufacturing and/or marketing petroleum products;

d) Any resulting peso costs differentials in case the actual peso costs paid by oil
companies in the importation of crude oil and petroleum products is less than the
peso costs computed using the reference foreign exchange rate as fixed by the
Board of Energy. (Emphasis supplied)

Upon the other hand, funds may be drawn from said Trust Account only for the following
purposes:

l) To reimburse the oil companies for cost increases in crude oil and imported
petroleum products resulting from exchange rate adjustment and/or increase in
world market prices of crude oil;

2) To reimburse the oil companies for possible cost underrecovery incurred as a
result of the reduction of domestic prices of petroleum products. The magnitude
of the underrecovery, if any, shall be determined by the Ministry of Finance. 'Cost
underrecovery' shall include the following:

i. Reduction in oil company take as directed by the Board of

Energy without the corresponding reduction in the landed cost of
oil inventories in the possession of the oil companies at the time
of the price change,

ii. Reduction in internal ad valorem taxes as a result of foregoing

government mandated price reductions,

iii. Other factors as may be determined by the Ministry of Finance

to result in cost underrecovery.

10
The fact that the world market prices of oil, measured by the spot market in Rotterdam, vary from
day to day is of judicial notice. Freight rates for hauling crude oil and petroleum products from
sources of supply to the Philippines may also vary from time to time. The exchange rate of the
peso vis-a-vis the U.S. dollar and other convertible foreign currencies also changes from day to
day. These fluctuations in world market prices and in tanker rates and foreign exchange rates
would in a completely free market translate into corresponding adjustments in domestic prices of
oil and petroleum products with sympathetic frequency. But domestic prices which vary from day
to day or even only from week to week would result in a chaotic market with unpredictable effects
upon the country's economy in general. The OPSF was established precisely to protect local
consumers from the adverse consequences that such frequent oil price adjustments may have
upon the economy. Thus, OPSF serves as a pocket, as it were, into which a portion of the
purchase price of oil and petroleum products paid by consumers as well as some tax revenues
are inputted and from which amounts are drawn from time to time to reimburse oil companies,
when appropriate situations arise, for increases in, as well as underrecovery of, costs of crude
importation. The OPSF is thus a buffer mechanism through which the domestic consumer prices
of oil and petroleum products are stabilized, instead of fluctuating every so often, and oil
companies are allowed to recover those portions of their costs which they would not otherwise
recover given the level of domestic prices existing at any given time. To the extent that some tax
revenues are also put into it, the OPSF is in effect a device through which the domestic prices of
petroleum products are subsidized in part. It appears to the Court that the establishment and
maintenance of the OPSF is well within that pervasive and non-waivable power and responsibility
of the government to secure the physical and economic survival and well-being of the
community, that comprehensive sovereign authority we designate as the police power of the
state. The stabilization and subsidy of domestic prices of petroleum products and fuel oil —
clearly critical in importance considering, among other things, the continuing high level of
dependence of the country on imported crude oil — are appropriately regarded as public
purposes.

Presidential Decree No. 1956, as amended by Executive Order No. 137 has, in any case, in its
favor the presumption of validity and constitutionality   which petitioners Valmonte and the KMU
18

have not overturned. Petitioners have not undertaken to Identify the provisions in the Constitution
which they claim to have been violated by that statute. This Court, however, is not compelled to
speculate and to imagine how the assailed legislation may possibly offend some provision of the
Constitution.   The Court notes, further, in this respect that petitioners have in the main put in
19

question the wisdom, justice and expediency of the establishment of the OPSF, issues which are
not properly addressed to this Court and which this Court may not constitutionally pass upon.
Those issues should be addressed rather to the political departments of government: the
President and the Congress. 

11
ABAKADA Guro Party List vs. Ermita, GR No. 168056, 1 September 2005

Facts:

Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition
for prohibition on May 27, 2005. They question the constitutionality of Sections 4, 5 and 6 of R.A.
No. 9337, amending Sections 106, 107 and 108, respectively, of the National Internal Revenue
Code (NIRC). Section 4 imposes a 10% VAT on sale of goods and properties, Section 5 imposes
a 10% VAT on importation of goods, and Section 6 imposes a 10% VAT on sale of services and
use or lease of properties. These questioned provisions contain a uniform proviso authorizing the
President, upon recommendation of the Secretary of Finance, to raise the VAT rate to 12%,
effective January 1, 2006, after any of the following conditions have been satisfied, to wit:

. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 ½%).

Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of

its exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine
Constitution.

On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise
assailing the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.

Aside from questioning the so-called stand-by authority of the President to increase the VAT rate
to 12%, on the ground that it amounts to an undue delegation of legislative power, petitioners
also contend that the increase in the VAT rate to 12% contingent on any of the two conditions
being satisfied violates the due process clause embodied in Article III, Section 1 of the
Constitution, as it imposes an unfair and additional tax burden on the people, in that: (1) the 12%
increase is ambiguous because it does not state if the rate would be returned to the original 10%
if the conditions are no longer satisfied; (2) the rate is unfair and unreasonable, as the people are
unsure of the applicable VAT rate from year to year; and (3) the increase in the VAT rate, which
is supposed to be an incentive to the President to raise the VAT collection to at least 2 4/5 of the
GDP of the previous year, should only be based on fiscal adequacy.

Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI,
Section 28(1) of the Constitution, and that it is the smaller businesses with higher input tax to
output tax ratio that will suffer the consequences thereof for it wipes out whatever meager
margins the petitioners make.

1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power,
in violation of Article VI, Section 28(2) of the Constitution;

12
Issue:

1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the
NIRC, violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)

2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC;
and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following
provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

Ruling:

Petitioners allege that the grant of the stand-by authority to the President to increase the VAT
rate is a virtual abdication by Congress of its exclusive power to tax because such delegation is
not within the purview of Section 28 (2), Article VI of the Constitution, which provides:

The Congress may, by law, authorize the President to fix within specified limits, and may impose,
tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts
within the framework of the national development program of the government.

They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties
as well as on the sale or exchange of services, which cannot be included within the purview of
tariffs under the exempted delegation as the latter refers to customs duties, tolls or tribute
payable upon merchandise to the government and usually imposed on goods or merchandise
imported or exported.

Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President
the legislative power to tax is contrary to republicanism. They insist that accountability,
responsibility and transparency should dictate the actions of Congress and they should not pass
to the President the decision to impose taxes. They also argue that the law also effectively
nullified the President’s power of control, which includes the authority to set aside and nullify the
acts of her subordinates like the Secretary of Finance, by mandating the fixing of the tax rate by
the President upon the recommendation of the Secretary of Finance.

Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or
create the conditions provided by the law to bring about either or both the conditions precedent.

On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the
imposition of the 12% rate would be subject to the whim of the Secretary of Finance, an
unelected bureaucrat, contrary to the principle of no taxation without representation. They submit
that the Secretary of Finance is not mandated to give a favorable recommendation and he may
not even give his recommendation. Moreover, they allege that no guiding standards are provided
in the law on what basis and as to how he will make his recommendation. They claim,
nonetheless, that any recommendation of the Secretary of Finance can easily be brushed aside
by the President since the former is a mere alter ego of the latter, such that, ultimately, it is the
President who decides whether to impose the increased tax rate or not.

13
A brief discourse on the principle of non-delegation of powers is instructive.

The principle of separation of powers ordains that each of the three great branches of
government has exclusive cognizance of and is supreme in matters falling within its own
constitutionally allocated sphere.37 A logical

corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as

expressed in the Latin maxim: potestas delegata non delegari potest which means "what has
been delegated, cannot be delegated."38 This doctrine is based on the ethical principle that such
as delegated power constitutes not only a right but a duty to be performed by the delegate
through the instrumentality of his own judgment and not through the intervening mind of
another.39

With respect to the Legislature, Section 1 of Article VI of the Constitution provides that "the
Legislative power shall be vested in the Congress of the Philippines which shall consist of a
Senate and a House of Representatives." The powers which Congress is prohibited from
delegating are those which are strictly, or inherently and exclusively, legislative. Purely legislative
power, which can never be delegated, has been described as the authority to make a complete
law – complete as to the time when it shall take effect and as to whom it shall be
applicable – and to determine the expediency of its enactment.40 Thus, the rule is that in
order that a court may be justified in holding a statute unconstitutional as a delegation of
legislative power, it must appear that the power involved is purely legislative in nature – that is,
one appertaining exclusively to the legislative department. It is the nature of the power, and not
the liability of its use or the manner of its exercise, which determines the validity of its delegation.

Nonetheless, the general rule barring delegation of legislative powers is subject to the following
recognized limitations or exceptions:

(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the
Constitution;

(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the
Constitution;

(3) Delegation to the people at large;

(4) Delegation to local governments; and

(5) Delegation to administrative bodies.

In every case of permissible delegation, there must be a showing that the delegation itself is
valid. It is valid only if the law (a) is complete in itself, setting forth therein the policy to be
executed, carried out, or implemented by the delegate; 41 and (b) fixes a standard — the limits of
which are sufficiently determinate and determinable — to which the delegate must conform in the
performance of his functions.42 A sufficient standard is one which defines legislative policy, marks
its limits, maps out its boundaries and specifies the public agency to apply it. It indicates the
circumstances under which the legislative command is to be effected. 43 Both tests are intended to
prevent a total transference of legislative authority to the delegate, who is not allowed to step into
the shoes of the legislature and exercise a power essentially legislative.

14
It is contended, however, that a legislative act may be made to the effect as law after it leaves
the hands of the legislature. It is true that laws may be made effective on certain contingencies,
as by proclamation of the executive or the adoption by the people of a particular community. In
Wayman vs. Southard, the Supreme Court of the United States ruled that the legislature may
delegate a power not legislative which it may itself rightfully exercise. The power to ascertain
facts is such a power which may be delegated. There is nothing essentially legislative in
ascertaining the existence of facts or conditions as the basis of the taking into effect of a
law. That is a mental process common to all branches of the government. Notwithstanding
the apparent tendency, however, to relax the rule prohibiting delegation of legislative authority on
account of the complexity arising from social and economic forces at work in this modern
industrial age, the orthodox pronouncement of Judge Cooley in his work on Constitutional
Limitations finds restatement in Prof. Willoughby's treatise on the Constitution of the United
States in the following language — speaking of declaration of legislative power to administrative
agencies: The principle which permits the legislature to provide that the administrative
agent may determine when the circumstances are such as require the application of a law
is defended upon the ground that at the time this authority is granted, the rule of public
policy, which is the essence of the legislative act, is determined by the legislature. In
other words, the legislature, as it is its duty to do, determines that, under given
circumstances, certain executive or administrative action is to be taken, and that, under
other circumstances, different or no action at all is to be taken. What is thus left to the
administrative official is not the legislative determination of what public policy demands,
but simply the ascertainment of what the facts of the case require to be done according to
the terms of the law by which he is governed. The efficiency of an Act as a declaration of
legislative will must, of course, come from Congress, but the ascertainment of the
contingency upon which the Act shall take effect may be left to such agencies as it may
designate. The legislature, then, may provide that a law shall take effect upon the
happening of future specified contingencies leaving to some other person or body the
power to determine when the specified contingency has arisen. (Emphasis supplied).46

In Edu vs. Ericta,47 the Court reiterated:

What cannot be delegated is the authority under the Constitution to make laws and to alter and
repeal them; the test is the completeness of the statute in all its terms and provisions when it
leaves the hands of the legislature. To determine whether or not there is an undue delegation of
legislative power, the inquiry must be directed to the scope and definiteness of the measure
enacted. The legislative does not abdicate its functions when it describes what job must
be done, who is to do it, and what is the scope of his authority. For a complex economy,
that may be the only way in which the legislative process can go forward. A distinction has
rightfully been made between delegation of power to make the laws which necessarily
involves a discretion as to what it shall be, which constitutionally may not be done, and
delegation of authority or discretion as to its execution to be exercised under and in
pursuance of the law, to which no valid objection can be made. The Constitution is thus not
to be regarded as denying the legislature the necessary resources of flexibility and practicability.
(Emphasis supplied).48

Clearly, the legislature may delegate to executive officers or bodies the power to determine
certain facts or conditions, or the happening of contingencies, on which the operation of a statute
is, by its terms, made to depend, but the legislature must prescribe sufficient standards, policies
or limitations on their authority.49 While the power to tax cannot be delegated to executive
agencies, details as to the enforcement and administration of an exercise of such power may be
left to them, including the power to determine the existence of facts on which its operation
depends.50

15
The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of
legislation is not of itself a legislative function, but is simply ancillary to legislation. Thus, the duty
of correlating information and making recommendations is the kind of subsidiary activity which
the legislature may perform through its members, or which it may delegate to others to perform.
Intelligent legislation on the complicated problems of modern society is impossible in the
absence of accurate information on the part of the legislators, and any reasonable method of
securing such information is proper.51 The Constitution as a continuously operative charter of
government does not require that Congress find for itself

every fact upon which it desires to base legislative action or that it make for itself detailed
determinations which it has declared to be prerequisite to application of legislative policy to
particular facts and circumstances impossible for Congress itself properly to investigate.

The case before the Court is not a delegation of legislative power. It is simply a delegation of
ascertainment of facts upon which enforcement and administration of the increase rate under the
law is contingent. The legislature has made the operation of the 12% rate effective January 1,
2006, contingent upon a specified fact or condition. It leaves the entire operation or non-
operation of the 12% rate upon factual matters outside of the control of the executive.

No discretion would be exercised by the President. Highlighting the absence of discretion is the
fact that the word shall is used in the common proviso. The use of the word shall connotes a
mandatory order. Its use in a statute denotes an imperative obligation and is inconsistent with the
idea of discretion.53 Where the law is clear and unambiguous, it must be taken to mean exactly
what it says, and courts have no choice but to see to it that the mandate is obeyed. 54

Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the
existence of any of the conditions specified by Congress. This is a duty which cannot be evaded
by the President. Inasmuch as the law specifically uses the word shall, the exercise of discretion
by the President does not come into play. It is a clear directive to impose the 12% VAT rate when
the specified conditions are present. The time of taking into effect of the 12% VAT rate is based
on the happening of a certain specified contingency, or upon the ascertainment of certain facts or
conditions by a person or body other than the legislature itself.

In the present case, in making his recommendation to the President on the existence of either of
the two conditions, the Secretary of Finance is not acting as the alter ego of the President or
even her subordinate. In such instance, he is not subject to the power of control and direction of
the President. He is acting as the agent of the legislative department, to determine and declare
the event upon which its expressed will is to take effect. 56 The Secretary of Finance becomes the
means or tool by which legislative policy is determined and implemented, considering that he
possesses all the facilities to gather data and information and has a much broader perspective to
properly evaluate them. His function is to gather and collate statistical data and other pertinent
information and verify if any of the two conditions laid out by Congress is present. His personality
in such instance is in reality but a projection of that of Congress. Thus, being the agent of
Congress and not of the President, the President cannot alter or modify or nullify, or set aside the
findings of the Secretary of Finance and to substitute the judgment of the former for that of the
latter.

Congress simply granted the Secretary of Finance the authority to ascertain the existence of a
fact, namely, whether by December 31, 2005, the value-added tax collection as a percentage of
Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%) or
the national government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1½%). If either of these two instances has occurred, the Secretary of Finance,
by legislative mandate, must submit such information to the President. Then the 12% VAT rate
must be imposed by the President effective January 1, 2006. There is no undue delegation of
legislative power but only of the discretion as to the execution of a law. This is
constitutionally permissible.57 Congress does not abdicate its functions or unduly delegate

16
power when it describes what job must be done, who must do it, and what is the scope of his
authority; in our complex economy that is frequently the only way in which the legislative process
can go forward.

B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax
Burden

B. Uniformity and Equitability of Taxation

Article VI, Section 28(1) of the Constitution reads:

The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
system of taxation.

Uniformity in taxation means that all taxable articles or kinds of property of the same class shall
be taxed at the same rate. Different articles may be taxed at different amounts provided that the
rate is uniform on the same class everywhere with all people at all times. 86

In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all
goods and services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the NIRC, provide for a rate of 10% (or 12%) on sale of goods and properties,
importation of goods, and sale of services and use or lease of properties. These same sections
also provide for a 0% rate on certain sales and transaction.

Neither does the law make any distinction as to the type of industry or trade that will bear the
70% limitation on the creditable input tax, 5-year amortization of input tax paid on purchase of
capital goods or the 5% final withholding tax by the government. It must be stressed that the rule
of uniform taxation does not deprive Congress of the power to classify subjects of taxation, and
only demands uniformity within the particular class.87

R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of
0% or 10% (or 12%) does not apply to sales of goods or services with gross annual sales or
receipts not exceeding ₱1,500,000.00. 88 Also, basic marine and agricultural food products in their
original state are still not subject to the tax,89 thus ensuring that prices at the grassroots level will
remain accessible. As was stated in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas,
Inc. vs. Tan:90

The disputed sales tax is also equitable. It is imposed only on sales of goods or services by
persons engaged in business with an aggregate gross annual sales exceeding ₱200,000.00.
Small corner sari-sari stores are consequently exempt from its application. Likewise exempt from
the tax are sales of farm and marine products, so that the costs of basic food and other
necessities, spared as they are from the incidence of the VAT, are expected to be relatively lower
and within the reach of the general public.

It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and
unduly favors those with high profit margins. Congress was not oblivious to this. Thus, to
equalize the weighty burden the law entails, the law, under Section 116, imposed a 3%
percentage tax on VAT-exempt persons under Section 109(v), i.e., transactions with gross
annual sales and/or receipts not exceeding ₱1.5 Million. This acts as a equalizer because in
effect, bigger businesses that qualify for VAT coverage and VAT-exempt taxpayers stand on
equal-footing.

17
Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the
tax on those previously exempt. Excise taxes on petroleum products 91 and natural gas92 were
reduced. Percentage tax on domestic carriers was removed. 93 Power producers are now exempt
from paying franchise tax.94

Aside from these, Congress also increased the income tax rates of corporations, in order to
distribute the burden of taxation. Domestic, foreign, and non-resident corporations are now
subject to a 35% income tax rate, from a previous 32%. 95 Intercorporate dividends of non-
resident foreign corporations are still subject to 15% final withholding tax but the tax credit
allowed on the corporation’s domicile was increased to 20%. 96 The Philippine Amusement and
Gaming Corporation (PAGCOR) is not exempt from income taxes anymore. 97 Even the sale by
an artist of his works or services performed for the production of such works was not spared.

All these were designed to ease, as well as spread out, the burden of taxation, which would
otherwise rest largely on the consumers. It cannot therefore be gainsaid that R.A. No. 9337 is
equitable.

C. Progressivity of Taxation

Lastly, petitioners contend that the limitation on the creditable input tax is anything but
regressive. It is the smaller business with higher input tax-output tax ratio that will suffer the
consequences.

Progressive taxation is built on the principle of the taxpayer’s ability to pay. This principle was
also lifted from Adam Smith’s Canons of Taxation, and it states:

I. The subjects of every state ought to contribute towards the support of the government, as
nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue
which they respectively enjoy under the protection of the state.

Taxation is progressive when its rate goes up depending on the resources of the person
affected.98

The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle
of progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the
consumer or business for every goods bought or services enjoyed is the same regardless of
income. In

other words, the VAT paid eats the same portion of an income, whether big or small. The
disparity lies in the income earned by a person or profit margin marked by a business, such that
the higher the income or profit margin, the smaller the portion of the income or profit that is eaten
by VAT. A converso, the lower the income or profit margin, the bigger the part that the VAT eats
away. At the end of the day, it is really the lower income group or businesses with low-profit
margins that is always hardest hit.

Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the
VAT. What it simply provides is that Congress shall "evolve a progressive system of taxation."
The Court stated in the Tolentino case, thus:

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are
regressive. What it simply provides is that Congress shall ‘evolve a progressive system of
taxation.’ The constitutional provision has been interpreted to mean simply that ‘direct taxes
are . . . to be preferred [and] as much as possible, indirect taxes should be minimized.’ (E.
FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977)) Indeed, the
mandate to Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise,

18
sales taxes, which perhaps are the oldest form of indirect taxes, would have been prohibited with
the proclamation of Art. VIII, §17 (1) of the 1973 Constitution from which the present Art. VI, §28
(1) was taken. Sales taxes are also regressive.

Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not
impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In
the case of the VAT, the law minimizes the regressive effects of this imposition by providing for
zero rating of certain transactions (R.A. No. 7716, §3, amending §102 (b) of the NIRC), while
granting exemptions to other transactions. (R.A. No. 7716, §4 amending §103 of the NIRC) 99

CONCLUSION

It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a
first-aid measure to resuscitate an economy in distress. The Court is neither blind nor is it turning
a deaf ear on the plight of the masses. But it does not have the panacea for the malady that the
law seeks to remedy. As in other cases, the Court cannot strike down a law as unconstitutional
simply because of its yokes.

Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the
judiciary should stand ready to afford relief. There are undoubtedly many wrongs the judicature
may not correct, for instance, those involving political questions. . . .

Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies
for all political or social ills; We should not forget that the Constitution has judiciously allocated
the powers of government to three distinct and separate compartments; and that judicial
interpretation has tended to the preservation of the independence of the three, and a zealous
regard of the prerogatives of each, knowing full well that one is not the guardian of the others
and that, for official wrong-doing, each may be brought to account, either by impeachment, trial
or by the ballot box.100

The words of the Court in Vera vs. Avelino101 holds true then, as it still holds true now. All things
considered, there is no raison d'être for the unconstitutionality of R.A. No. 9337.

19
Gerochi vs. Department of Energy, G.R. No. 159796, 17 July 2007

Facts:
Petitioners Romeo P. Gerochi, Katulong Ng Bayan (KB), and Environmentalist Consumers
Network, Inc. (ECN) (petitioners), come before this Court in this original action praying that
Section 34 of Republic Act (RA) 9136, otherwise known as the "Electric Power Industry Reform
Act of 2001" (EPIRA), imposing the Universal Charge, 1 and Rule 18 of the Rules and Regulations
(IRR)2 which seeks to implement the said imposition, be declared unconstitutional. Petitioners
also pray that the Universal Charge imposed upon the consumers be refunded and that a
preliminary injunction and/or temporary restraining order (TRO) be issued directing the
respondents to refrain from implementing, charging, and collecting the said charge.

On April 5, 2002, respondent National Power Corporation-Strategic Power Utilities Group 8 (NPC-
SPUG) filed with respondent Energy Regulatory Commission (ERC) a petition for the availment
from the Universal Charge of its share for Missionary Electrification, docketed as ERC Case No.
2002-165.9

On May 7, 2002, NPC filed another petition with ERC, docketed as ERC Case No. 2002-194,
praying that the proposed share from the Universal Charge for the Environmental charge of
₱0.0025 per kilowatt-hour (/kWh), or a total of ₱119,488,847.59, be approved for withdrawal from
the Special Trust Fund (STF) managed by respondent Power Sector Assets and

Liabilities Management Group (PSALM)10 for the rehabilitation and management of watershed

areas.11

On December 20, 2002, the ERC issued an Order 12 in ERC Case No. 2002-165 provisionally
approving the computed amount of ₱0.0168/kWh as the share of the NPC-SPUG from the
Universal Charge for Missionary Electrification and authorizing the National Transmission
Corporation (TRANSCO) and Distribution Utilities to collect the same from its end-users on a
monthly basis.

On the basis of the said ERC decisions, respondent Panay Electric Company, Inc. (PECO)
charged petitioner Romeo P. Gerochi and all other end-users with the Universal Charge as
reflected in their respective electric bills starting from the month of July 2003. 17

Hence, this original action.

Petitioners submit that the assailed provision of law and its IRR which sought to implement the
same are unconstitutional on the following grounds:

1) The universal charge provided for under Sec. 34 of the EPIRA and sought to be
implemented under Sec. 2, Rule 18 of the IRR of the said law is a tax which is to be
collected from all electric end-users and self-generating entities. The power to tax is
strictly a legislative function and as such, the delegation of said power to any executive or
administrative agency like the ERC is unconstitutional, giving the same unlimited
authority. The assailed provision clearly provides that the Universal Charge is to be
determined, fixed and approved by the ERC, hence leaving to the latter complete
discretionary legislative authority.

2) The ERC is also empowered to approve and determine where the funds collected
should be used.

20
 3) The imposition of the Universal Charge on all end-users is oppressive and confiscatory
and amounts to taxation without representation as the consumers were not given a
chance to be heard and represented.

Petitioners contend that the Universal Charge has the characteristics of a tax and is collected to
fund the operations of the NPC. They argue that the cases 19 invoked by the respondents clearly
show the regulatory purpose of the charges imposed therein, which is not so in the case at
bench. In said cases, the respective funds 20 were created in order to balance and stabilize the
prices of oil and sugar, and to act as buffer to counteract the changes and adjustments in prices,
peso devaluation, and other variables which cannot be adequately and timely monitored by the
legislature. Thus, there was a need to delegate powers to administrative bodies. 21 Petitioners
posit that the Universal Charge is imposed not for a similar purpose.

On the other hand, respondent PSALM through the Office of the Government Corporate Counsel
(OGCC) contends that unlike a tax which is imposed to provide income for public purposes, such
as support of the government, administration of the law, or payment of public expenses, the
assailed Universal Charge is levied for a specific regulatory purpose, which is to ensure the
viability of the country's electric power industry. Thus, it is exacted by the State in the exercise of
its inherent police power. On this premise, PSALM submits that there is no undue delegation of
legislative power to the ERC since the latter merely exercises a limited authority or discretion as
to the execution and implementation of the provisions of the EPIRA.

Issue:

1) Whether or not, the Universal Charge imposed under Sec. 34 of the EPIRA is a tax; and

2) Whether or not there is undue delegation of legislative power to tax on the part of the ERC.

Ruling:

The principle of separation of powers ordains that each of the three branches of government has
exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated
sphere. A logical corollary to the doctrine of separation of powers is the principle of non-
delegation of powers, as expressed in the Latin maxim potestas delegata non delegari
potest (what has been delegated cannot be delegated). This is based on the ethical principle that
such delegated power constitutes not only a right but a duty to be performed by the delegate
through the instrumentality of his own judgment and not through the intervening mind of
another. 47

In the face of the increasing complexity of modern life, delegation of legislative power to various
specialized administrative agencies is allowed as an exception to this principle. 48 Given the
volume and variety of interactions in today's society, it is doubtful if the legislature can
promulgate laws that will deal adequately with and respond promptly to the minutiae of everyday
life. Hence, the need to delegate to administrative bodies - the principal agencies tasked to
execute laws in their specialized fields - the authority to promulgate rules and regulations to
implement a given statute and effectuate its policies. All that is required for the valid exercise of
this power of subordinate legislation is that the regulation be germane to the objects and
purposes of the law and that the regulation be not in contradiction to, but in conformity with, the

21
standards prescribed by the law. These requirements are denominated as the completeness test
and the sufficient standard test.

Under the first test, the law must be complete in all its terms and conditions when it leaves the
legislature such that when it reaches the delegate, the only thing he will have to do is to enforce
it. The second test mandates adequate guidelines or limitations in the law to determine the
boundaries of the delegate's authority and prevent the delegation from running riot. 49

The Court finds that the EPIRA, read and appreciated in its entirety, in relation to Sec. 34 thereof,
is complete in all its essential terms and conditions, and that it contains sufficient standards.

Although Sec. 34 of the EPIRA merely provides that "within one (1) year from the effectivity
thereof, a Universal Charge to be determined, fixed and approved by the ERC, shall be imposed
on all electricity end-users," and therefore, does not state the specific amount to be paid as
Universal Charge, the amount nevertheless is made certain by the legislative parameters
provided in the law itself.

Moreover, contrary to the petitioners’ contention, the ERC does not enjoy a wide latitude of
discretion in the determination of the Universal Charge. Sec. 51(d) and (e) of the EPIRA 50 clearly
provides:

SECTION 51. Powers. — The PSALM Corp. shall, in the performance of its functions and for the
attainment of its objective, have the following powers:

xxxx

(d) To calculate the amount of the stranded debts and stranded contract costs of NPC
which shall form the basis for ERC in the determination of the universal charge;

(e) To liquidate the NPC stranded contract costs, utilizing the proceeds from sales and
other property contributed to it, including the proceeds from the universal charge.

Thus, the law is complete and passes the first test for valid delegation of legislative power.

As to the second test, this Court had, in the past, accepted as sufficient standards the following:
"interest of law and order;"51 "adequate and efficient instruction;" 52 "public interest;"53 "justice and
equity;"54 "public convenience and welfare;" 55 "simplicity, economy and
efficiency;"56 "standardization and regulation of medical education;" 57 and "fair and equitable
employment practices."58 Provisions of the EPIRA such as, among others, "to ensure the total
electrification of the country and the quality, reliability, security and affordability of the supply of
electric power"59 and "watershed rehabilitation and management"60 meet the requirements for
valid delegation, as they provide the limitations on the ERC’s power to formulate the IRR. These
are sufficient standards.

In his Concurring and Dissenting Opinion62 in the same case, then Associate Justice, now Chief
Justice, Reynato S. Puno described the immensity of police power in relation to the delegation of
powers to the ERC and its regulatory functions over electric power as a vital public utility, to wit:

Over the years, however, the range of police power was no longer limited to the preservation of
public health, safety and morals, which used to be the primary social interests in earlier
times. Police power now requires the State to "assume an affirmative duty to eliminate the
excesses and injustices that are the concomitants of an unrestrained industrial economy." Police
power is now exerted "to further the public welfare — a concept as vast as the good of society
itself." Hence, "police power is but another name for the governmental authority to further the
welfare of society that is the basic end of all government." When police power is delegated to

22
administrative bodies with regulatory functions, its exercise should be given a wide latitude.
Police power takes on an even broader dimension in developing countries such as ours, where
the State must take a more active role in balancing the many conflicting interests in society. The
Questioned Order was issued by the ERC, acting as an agent of the State in the exercise of
police power. We should have exceptionally good grounds to curtail its exercise. This approach
is more compelling in the field of rate-regulation of electric power rates. Electric power
generation and distribution is a traditional instrument of economic growth that affects not only a
few but the entire nation. It is an important factor in encouraging investment and promoting
business. The engines of progress may come to a screeching halt if the delivery of electric power
is impaired. Billions of pesos would be lost as a result of power outages or unreliable electric
power services. The State thru the ERC should be able to exercise its police power with great
flexibility, when the need arises.

As a penultimate statement, it may be well to recall what this Court said of EPIRA:

One of the landmark pieces of legislation enacted by Congress in recent years is the EPIRA. It
established a new policy, legal structure and regulatory framework for the electric power industry.
The new thrust is to tap private capital for the expansion and improvement of the industry as the
large government debt and the highly capital-intensive character of the industry itself have long
been acknowledged as the critical constraints to the program. To attract private investment,
largely foreign, the jaded structure of the industry had to be addressed. While the generation and
transmission sectors were centralized and monopolistic, the distribution side was fragmented
with over 130 utilities, mostly small and uneconomic. The pervasive flaws have caused a low
utilization of existing generation capacity; extremely high and uncompetitive power rates; poor
quality of service to consumers; dismal to forgettable performance of the government power
sector; high system losses; and an inability to develop a clear strategy for overcoming these
shortcomings.

Thus, the EPIRA provides a framework for the restructuring of the industry, including the
privatization of the assets of the National Power Corporation (NPC), the transition to a
competitive structure, and the delineation of the roles of various government agencies and the
private entities. The law ordains the division of the industry into four (4) distinct sectors, namely:
generation, transmission, distribution and supply.

23
CIR vs. San Miguel Corporation, G.R. No. 184428, 23 November 2011

Facts:

Respondent San Miguel Corporation, a domestic corporation engaged in the

manufacture and sale of fermented liquor, produces as one of its products “Red
Horse” beer which is sold in 500-ml. and 1-liter bottle variants.

On January 1, 1998, Republic Act (R.A.) No. 8424 or the Tax Reform Act of
1997 took effect.  It reproduced, as Section 143 thereof, the provisions of Section
140 of the old National Internal Revenue Code as amended by R.A. No.
8240[2] which became effective on January 1, 1997.  Section 143 of the Tax Reform
Act of 1997 reads:

SEC. 143. Fermented Liquor. - There shall be levied, assessed and collected an

excise tax on beer, lager beer, ale, porter and other fermented liquors except tuba,
basi, tapuy and similar domestic fermented liquors in accordance with the following
schedule:

(a) If the net retail price (excluding the excise tax and value-added tax) per liter of
volume capacity is less than Fourteen pesos and fifty centavos (P14.50), the tax
shall be Six pesos and fifteen centavos (P6.15) per liter;

(b) If the net retail price (excluding the excise tax and the value-added tax) per liter
of volume capacity is Fourteen pesos and fifty centavos (P14.50) up to Twenty-two
pesos (P22.00), the tax shall be Nine pesos and fifteen centavos (P9.15) per liter;

(c) If the net retail price (excluding the excise tax and the value-added tax) per liter
of volume capacity is more than Twenty-two pesos (P22.00), the tax shall be Twelve
pesos and fifteen centavos (P12.15) per liter.

Variants of existing brands which are introduced in the domestic market after the
effectivity of Republic Act No. 8240 shall be taxed under the highest classification of
any variant of that brand.

Fermented liquor which are brewed and sold at micro-breweries or small

establishments such as pubs and restaurants shall be subject to the rate in
paragraph (c) hereof.

The excise tax from any brand of fermented liquor within the next three (3)
years from the effectivity of Republic Act No. 8240 shall not be lower than
the tax which was due from each brand on October 1, 1996.

The rates of excise tax on fermented liquor under paragraphs (a), (b) and
(c) hereof shall be increased by twelve percent (12%) on January 1, 2000.`

24
This increase, however, was qualified by the last paragraph of Section 1 of Revenue
Regulations No. 17-99 which reads:

Provided, however, that the new specific tax rate for any existing brand of cigars,
cigarettes packed by machine, distilled spirits, wines and fermented liquors shall
not be lower than the excise tax that is actually being paid prior to January
1, 2000. (Emphasis and underscoring supplied.)

Now, for the period June 1, 2004 to December 31, 2004, respondent was assessed
and paid excise taxes amounting to P2,286,488,861.58 [3] for the 323,407,194 liters
of Red Horse beer products removed from its plants. Said amount was computed
based on the tax rate of P7.07/liter or the tax rate which was being applied to its
products prior to January 1, 2000, as the last paragraph of Section 1 of Revenue
Regulations No. 17-99 provided that the new specific tax rate for fermented liquors
"shall not be lower than the excise tax that is actually being paid prior to January 1,
2000."[4]   Respondent, however, later contended that the said qualification in the
last paragraph of Section 1 of Revenue Regulations No. 17-99 has no basis in the
plain wording of Section 143.  Respondent argued that the applicable tax rate was
only the P 6.89/liter tax rate stated in Revenue Regulations No. 17-99, and that
accordingly, its excise taxes should have been only P2,228,275,566.66.

On May 22, 2006, respondent filed before the BIR a claim for refund or tax credit of
the amount of P60,778,519.56[5] as erroneously paid excise taxes for the period of
May 22, 2004 to December 31, 2004.  Later, said amount was reduced to
P58,213,294.92 because of prescription.  As the petitioner Commissioner of Internal
Revenue (CIR) failed to act on the claim, respondent filed a petition for review with
the CTA.

Issue:

Petitioner further points out that Section 143 of the Tax Reform Act of 1997 provides
that for 3 years after the effectivity of R.A. No. 8240, i.e., from January 1, 1997 to
December 31, 1999, the excise tax from any brand of fermented liquor shall not be
lower than the tax due on October 1, 1996.  In the case of respondent's Red Horse
beer brand, the applicable tax rate was the applicable tax rate as of October 1,
1996, i.e., P7.07/liter, which was higher than the rate of P6.15/liter imposed under
Section 143 of the Tax Reform Act of 1997.  However, the CTA ruled that after the
3-year transition period, the 12% increase in the excise tax on fermented liquors
should be based on the rates stated in paragraphs (a), (b), and (c) of Section 143. 
Applying this interpretation, the rate of excise tax that may be collected on
respondent's Red Horse beer brand after the 3-year period would only be
P6.89/liter, the figure arrived at after adding 12% to the rate of P6.15/liter imposed
in paragraph (a) of Section 143. Petitioner argues that said literal interpretation of
Section 143 defeats the legislative intent behind the shift from the ad valorem
system to the specific tax system, i.e., to raise more revenues from the collection of
taxes on the so-called “sin” products like alcohol and cigarettes.

25
Ruling:

Section 143 of the Tax Reform Act of 1997 is clear and unambiguous.  It provides
for two periods: the first is the 3-year transition period beginning January 1, 1997,
the date when R.A. No. 8240 took effect, until December 31, 1999; and the second
is the period thereafter.  During the 3-year transition period, Section 143 provides
that "the excise tax from any brand of fermented liquor"¦shall not be lower than the
tax which was due from each brand on October 1, 1996." After the transitory
period, Section 143 provides that the excise tax rate shall be the figures provided
under paragraphs (a), (b) and (c) of Section 143 but increased by 12%, without
regard to whether such rate is lower or higher than the tax rate that is actually
being paid prior to January 1, 2000 and therefore, without regard to whether the
revenue collection starting January 1, 2000 may turn out to be lower than that
collected prior to said date.  Revenue Regulations No. 17-99, however, created a
new tax rate when it added in the last paragraph of Section 1 thereof, the
qualification that the tax due after the 12% increase becomes effective “shall not
be lower than the tax actually paid prior to January 1, 2000."  As there is nothing
in Section 143 of the Tax Reform Act of 1997 which clothes the BIR with the power
or authority to rule that the new specific tax rate should not be lower than the excise
tax that is actually being paid prior to January 1, 2000, such interpretation is clearly
an invalid exercise of the power of the Secretary of Finance to interpret tax laws and
to promulgate rules and regulations necessary for the effective enforcement of
the Tax Reform Act of 1997.[15]  Said qualification must, perforce, be struck down as
invalid and of no effect.[16]

It bears reiterating that tax burdens are not to be imposed, nor presumed to be
imposed beyond what the statute expressly and clearly imports, tax statutes being
construed strictissimi juris against the government.[17]  In case of discrepancy
between the basic law and a rule or regulation issued to implement said law, the
basic law prevails as said rule or regulation cannot go beyond the terms and
provisions of the basic law.[18]  It must be stressed that the objective of issuing BIR
Revenue Regulations is to establish parameters or guidelines within which our tax
laws should be implemented, and not to amend or modify its substantive meaning
and import.  As held in Commissioner of Internal Revenue v. Fortune Tobacco
Corporation,[19]

x x x The rule in the interpretation of tax laws is that a statute will not be construed
as imposing a tax unless it does so clearly, expressly, and unambiguously.  A tax
cannot be imposed without clear and express words for that purpose.  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.  x x x As burdens, taxes should not be unduly exacted nor
assumed beyond the plain meaning of the tax laws.[20]

Hence, while it may be true that the interpretation advocated by petitioner CIR is in
furtherance of its desire to raise revenues for the government, such noble objective
must yield to the clear provisions of the law, particularly since, in this case, the
terms of the said law are clear and leave no room for interpretation.

26
American Bible Society vs. City of Manila, GR No. L-9637, 30 April 1997

Facts:

Plaintiff-appellant is a foreign, non-stock, non-profit, religious, missionary

corporation duly registered and doing business in the Philippines through its
Philippine agency established in Manila in November, 1898, with its principal office at
636 Isaac Peral in said City. The defendant appellee is a municipal corporation with
powers that are to be exercised in conformity with the provisions of Republic Act No.
409, known as the Revised Charter of the City of Manila.   chanroblesvirtualawlibrary chanrobles virtual law library

In the course of its ministry, plaintiff's Philippine agency has been distributing and
selling bibles and/or gospel portions thereof (except during the Japanese
occupation) throughout the Philippines and translating the same into several
Philippine dialects. On May 29 1953, the acting City Treasurer of the City of Manila
informed plaintiff that it was conducting the business of general merchandise since
November, 1945, without providing itself with the necessary Mayor's permit and
municipal license, in violation of Ordinance No. 3000, as amended, and Ordinances
Nos. 2529, 3028 and 3364, and required plaintiff to secure, within three days, the
corresponding permit and license fees, together with compromise covering the
period from the 4th quarter of 1945 to the 2nd quarter of 1953, in the total sum of
P5,821.45 (Annex A).   chanroblesvirtualawlibrary chanrobles virtual law library

Plaintiff protested against this requirement, but the City Treasurer demanded that
plaintiff deposit and pay under protest the sum of P5,891.45, if suit was to be taken
in court regarding the same (Annex B). To avoid the closing of its business as well
as further fines and penalties in the premises on October 24, 1953, plaintiff paid to
the defendant under protest the said permit and license fees in the aforementioned
amount, giving at the same time notice to the City Treasurer that suit would be
taken in court to question the legality of the ordinances under which, the said fees
were being collected (Annex C), which was done on the same date by filing the
complaint that gave rise to this action. In its complaint plaintiff prays that judgment
be rendered declaring the said Municipal Ordinance No. 3000, as amended, and
Ordinances Nos. 2529, 3028 and 3364 illegal and unconstitutional, and that the
defendant be ordered to refund to the plaintiff the sum of P5,891.45 paid under
protest, together with legal interest thereon, and the costs, plaintiff further praying
for such other relief and remedy as the court may deem just equitable. chanrobles

Issue:

(1) whether or not the ordinances of the City of Manila, Nos. 3000, as amended,
and 2529, 3028 and 3364, are constitutional and valid; 

27
Ruling:

Predicated on this constitutional mandate, plaintiff-appellant contends that

Ordinances Nos. 2529 and 3000, as respectively amended, are unconstitutional and
illegal in so far as its society is concerned, because they provide for religious
censorship and restrain the free exercise and enjoyment of its religious profession,
to wit: the distribution and sale of bibles and other religious literature to the people
of the Philippines.

Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted,
guarantees the freedom of religious profession and worship. "Religion has been
spoken of as a profession of faith to an active power that binds and elevates man to
its Creator" (Aglipay vs. Ruiz, 64 Phil., 201).It has reference to one's views of his
relations to His Creator and to the obligations they impose of reverence to His being
and character, and obedience to His Will (Davis vs. Beason, 133 U.S., 342). The
constitutional guaranty of the free exercise and enjoyment of religious profession
and worship carries with it the right to disseminate religious information. Any
restraints of such right can only be justified like other restraints of freedom of
expression on the grounds that there is a clear and present danger of any
substantive evil which the State has the right to prevent". (Ta�ada and Fernando on
the Constitution of the Philippines, Vol. 1, 4th ed., p. 297). In the case at bar the
license fee herein involved is imposed upon appellant for its distribution and sale of
bibles and other religious literature:

In the case of Murdock vs. Pennsylvania, it was held that an ordinance requiring that
a license be obtained before a person could canvass or solicit orders for goods,
paintings, pictures, wares or merchandise cannot be made to apply to members of
Jehovah's Witnesses who went about from door to door distributing literature and
soliciting people to "purchase" certain religious books and pamphlets, all published
by the Watch Tower Bible & Tract Society. The "price" of the books was twenty-five
cents each, the "price" of the pamphlets five cents each. It was shown that in
making the solicitations there was a request for additional "contribution" of twenty-
five cents each for the books and five cents each for the pamphlets. Lesser sum
were accepted, however, and books were even donated in case interested persons
were without funds.  
chanroblesvirtualawlibrary chanrobles virtual law library

On the above facts the Supreme Court held that it could not be said that petitioners
were engaged in commercial rather than a religious venture. Their activities could
not be described as embraced in the occupation of selling books and pamphlets.
Then the Court continued: chanrobles virtual law library

"We do not mean to say that religious groups and the press are free from all
financial burdens of government. See Grosjean vs. American Press Co., 297 U.S.,
233, 250, 80 L. ed. 660, 668, 56 S. Ct. 444. We have here something quite
different, for example, from a tax on the income of one who engages in religious
activities or a tax on property used or employed in connection with activities. It is
one thing to impose a tax on the income or property of a preacher. It is quite
another to exact a tax from him for the privilege of delivering a sermon. The tax
imposed by the City of Jeannette is a flat license tax, payment of which is a
condition of the exercise of these constitutional privileges. The power to tax the

28
exercise of a privilege is the power to control or suppress its enjoyment. . . . Those
who can tax the exercise of this religious practice can make its exercise so costly as
to deprive it of the resources necessary for its maintenance. Those who can tax the
privilege of engaging in this form of missionary evangelism can close all its doors to
all those who do not have a full purse. Spreading religious beliefs in this ancient and
honorable manner would thus be denied the needy. . . .   chanroblesvirtualawlibrary chanrobles virtual law library

It is contended however that the fact that the license tax can suppress or control
this activity is unimportant if it does not do so. But that is to disregard the nature of
this tax. It is a license tax - a flat tax imposed on the exercise of a privilege granted
by the Bill of Rights . . . The power to impose a license tax on the exercise of these
freedom is indeed as potent as the power of censorship which this Court has
repeatedly struck down. . . . It is not a nominal fee imposed as a regulatory
measure to defray the expenses of policing the activities in question. It is in no way
apportioned. It is flat license tax levied and collected as a condition to the pursuit of
activities whose enjoyment is guaranteed by the constitutional liberties of press and
religion and inevitably tends to suppress their exercise. That is almost uniformly
recognized as the inherent vice and evil of this flat license tax." chanrobles virtual law library

Nor could dissemination of religious information be conditioned upon the approval of

an official or manager even if the town were owned by a corporation as held in the
case of Marsh vs. State of Alabama (326 U.S. 501), or by the United States itself as
held in the case of Tucker vs. Texas (326 U.S. 517). In the former case the Supreme
Court expressed the opinion that the right to enjoy freedom of the press and religion
occupies a preferred position as against the constitutional right of property
owners.  
chanroblesvirtualawlibrary chanrobles virtual law library

"When we balance the constitutional rights of owners of property against those of

the people to enjoy freedom of press and religion, as we must here, we remain
mindful of the fact that the latter occupy a preferred position. . . . In our view the
circumstance that the property rights to the premises where the deprivation of
property here involved, took place, were held by others than the public, is not
sufficient to justify the State's permitting a corporation to govern a community of
citizens so as to restrict their fundamental liberties and the enforcement of such
restraint by the application of a State statute." (Ta�ada and Fernando on the
Constitution of the Philippines, Vol. 1, 4th ed., p. 304-306).

Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted,
guarantees the freedom of religious profession and worship. "Religion has been
spoken of as a profession of faith to an active power that binds and elevates man to
its Creator" (Aglipay vs. Ruiz, 64 Phil., 201).It has reference to one's views of his
relations to His Creator and to the obligations they impose of reverence to His being
and character, and obedience to His Will (Davis vs. Beason, 133 U.S., 342). The
constitutional guaranty of the free exercise and enjoyment of religious profession
and worship carries with it the right to disseminate religious information. Any
restraints of such right can only be justified like other restraints of freedom of
expression on the grounds that there is a clear and present danger of any
substantive evil which the State has the right to prevent". (Ta�ada and Fernando on
the Constitution of the Philippines, Vol. 1, 4th ed., p. 297). In the case at bar the
license fee herein involved is imposed upon appellant for its distribution and sale of
bibles and other religious literature:

29
In the case of Murdock vs. Pennsylvania, it was held that an ordinance requiring that
a license be obtained before a person could canvass or solicit orders for goods,
paintings, pictures, wares or merchandise cannot be made to apply to members of
Jehovah's Witnesses who went about from door to door distributing literature and
soliciting people to "purchase" certain religious books and pamphlets, all published
by the Watch Tower Bible & Tract Society. The "price" of the books was twenty-five
cents each, the "price" of the pamphlets five cents each. It was shown that in
making the solicitations there was a request for additional "contribution" of twenty-
five cents each for the books and five cents each for the pamphlets. Lesser sum
were accepted, however, and books were even donated in case interested persons
were without funds.   chanroblesvirtualawlibrary chanrobles virtual law library

On the above facts the Supreme Court held that it could not be said that petitioners
were engaged in commercial rather than a religious venture. Their activities could
not be described as embraced in the occupation of selling books and pamphlets.
Then the Court continued: chanrobles virtual law library

"We do not mean to say that religious groups and the press are free from all
financial burdens of government. See Grosjean vs. American Press Co., 297 U.S.,
233, 250, 80 L. ed. 660, 668, 56 S. Ct. 444. We have here something quite
different, for example, from a tax on the income of one who engages in religious
activities or a tax on property used or employed in connection with activities. It is
one thing to impose a tax on the income or property of a preacher. It is quite
another to exact a tax from him for the privilege of delivering a sermon. The tax
imposed by the City of Jeannette is a flat license tax, payment of which is a
condition of the exercise of these constitutional privileges. The power to tax the
exercise of a privilege is the power to control or suppress its enjoyment. . . . Those
who can tax the exercise of this religious practice can make its exercise so costly as
to deprive it of the resources necessary for its maintenance. Those who can tax the
privilege of engaging in this form of missionary evangelism can close all its doors to
all those who do not have a full purse. Spreading religious beliefs in this ancient and
honorable manner would thus be denied the needy. . . .   chanroblesvirtualawlibrary chanrobles virtual law library

It is contended however that the fact that the license tax can suppress or control
this activity is unimportant if it does not do so. But that is to disregard the nature of
this tax. It is a license tax - a flat tax imposed on the exercise of a privilege granted
by the Bill of Rights . . . The power to impose a license tax on the exercise of these
freedom is indeed as potent as the power of censorship which this Court has
repeatedly struck down. . . . It is not a nominal fee imposed as a regulatory
measure to defray the expenses of policing the activities in question. It is in no way
apportioned. It is flat license tax levied and collected as a condition to the pursuit of
activities whose enjoyment is guaranteed by the constitutional liberties of press and
religion and inevitably tends to suppress their exercise. That is almost uniformly
recognized as the inherent vice and evil of this flat license tax." chanrobles virtual law library

Nor could dissemination of religious information be conditioned upon the approval of

an official or manager even if the town were owned by a corporation as held in the
case of Marsh vs. State of Alabama (326 U.S. 501), or by the United States itself as
held in the case of Tucker vs. Texas (326 U.S. 517). In the former case the Supreme
Court expressed the opinion that the right to enjoy freedom of the press and religion
occupies a preferred position as against the constitutional right of property
owners.  
chanroblesvirtualawlibrary chanrobles virtual law library

30
"When we balance the constitutional rights of owners of property against those of
the people to enjoy freedom of press and religion, as we must here, we remain
mindful of the fact that the latter occupy a preferred position. . . . In our view the
circumstance that the property rights to the premises where the deprivation of
property here involved, took place, were held by others than the public, is not
sufficient to justify the State's permitting a corporation to govern a community of
citizens so as to restrict their fundamental liberties and the enforcement of such
restraint by the application of a State statute." (Ta�ada and Fernando on the
Constitution of the Philippines, Vol. 1, 4th ed., p. 304-306).

31
Tolentino vs. Sec. of Finance, GR No. 115455, 25 Aug 1994

Facts:
The value-added tax (VAT) is levied on the sale, barter or exchange of goods and properties as
well as on the sale or exchange of services. It is equivalent to 10% of the gross selling price or
gross value in money of goods or properties sold, bartered or exchanged or of the gross receipts
from the sale or exchange of services. Republic Act No. 7716 seeks to widen the tax base of the
existing VAT system and enhance its administration by amending the National Internal Revenue
Code.

These are various suits for certiorari and prohibition, challenging the constitutionality of Republic
Act No. 7716 on various grounds summarized in the resolution of July 6, 1994 of this Court, as
follows:

The Philippine Press Institute (PPI), petitioner in G.R. No. 115544, is a nonprofit organization of
newspaper publishers established for the improvement of journalism in the Philippines. On the
other hand, petitioner in G.R. No. 115781, the Philippine Bible Society (PBS), is a nonprofit
organization engaged in the printing and distribution of bibles and other religious articles. Both
petitioners claim violations of their rights under § § 4 and 5 of the Bill of Rights as a result of the
enactment of the VAT Law.

The PPI questions the law insofar as it has withdrawn the exemption previously granted to the
press under § 103 (f) of the NIRC. Although the exemption was subsequently restored by
administrative regulation with respect to the circulation income of newspapers, the PPI presses
its claim because of the possibility that the exemption may still be removed by mere revocation of
the regulation of the Secretary of Finance. On the other hand, the PBS goes so far as to question
the Secretary's power to grant exemption for two reasons: (1) The Secretary of Finance has no
power to grant tax exemption because this is vested in Congress and requires for its exercise the
vote of a majority of all its members   and (2) the Secretary's duty is to execute the law.
26

The PPI does not dispute this point, either.

What it contends is that by withdrawing the exemption previously granted to print media
transactions involving printing, publication, importation or sale of newspapers, Republic Act No.
7716 has singled out the press for discriminatory treatment and that within the class of mass
media the law discriminates against print media by giving broadcast media favored treatment.
We have carefully examined this argument, but we are unable to find a differential treatment of
the press by the law, much less any censorial motivation for its enactment. If the press is now
required to pay a value-added tax on its transactions, it is not because it is being singled out,
much less targeted, for special treatment but only because of the removal of the exemption
previously granted to it by law. The withdrawal of exemption is all that is involved in these cases.
Other transactions, likewise previously granted exemption, have been delisted as part of the
scheme to expand the base and the scope of the VAT system. The law would perhaps be open
to the charge of discriminatory treatment if the only privilege withdrawn had been that granted to
the press. But that is not the case.

The situation in the case at bar is indeed a far cry from those cited by the PPI in support of its
claim that Republic Act No. 7716 subjects the press to discriminatory taxation. In the cases cited,
the discriminatory purpose was clear either from the background of the law or from its operation.
For example, in Grosjean v. American Press Co.,   the law imposed a license tax equivalent to
28

2% of the gross receipts derived from advertisements only on newspapers which had a

32
circulation of more than 20,000 copies per week. Because the tax was not based on the volume
of advertisement alone but was measured by the extent of its circulation as well, the law applied
only to the thirteen large newspapers in Louisiana, leaving untaxed four papers with circulation of
only slightly less than 20,000 copies a week and 120 weekly newspapers which were in serious
competition with the thirteen newspapers in question. It was well known that the thirteen
newspapers had been critical of Senator Huey Long, and the Long-dominated legislature of
Louisiana respondent by taxing what Long described as the "lying newspapers" by imposing on
them "a tax on lying." The effect of the tax was to curtail both their revenue and their circulation.
As the U.S. Supreme Court noted, the tax was "a deliberate and calculated device in the guise of
a tax to limit the circulation of information to which the public is entitled in virtue of the
constitutional guaranties."   The case is a classic illustration of the warning that the power to tax
29

is the power to destroy.

In the other case   invoked by the PPI, the press was also found to have been singled out
30

because everything was exempt from the "use tax" on ink and paper, except the press.
Minnesota imposed a tax on the sales of goods in that state. To protect the sales tax, it enacted
a complementary tax on the privilege of "using, storing or consuming in that state tangible
personal property" by eliminating the residents' incentive to get goods from outside states where
the sales tax might be lower. The Minnesota Star Tribune was exempted from both taxes from
1967 to 1971. In 1971, however, the state legislature amended the tax scheme by imposing the
"use tax" on the cost of paper and ink used for publication. The law was held to have singled out
the press because (1) there was no reason for imposing the "use tax" since the press was
exempt from the sales tax and (2) the "use tax" was laid on an "intermediate transaction rather
than the ultimate retail sale." Minnesota had a heavy burden of justifying the differential treatment
and it failed to do so. In addition, the U.S. Supreme Court found the law to be discriminatory
because the legislature, by again amending the law so as to exempt the first $100,000 of paper
and ink used, further narrowed the coverage of the tax so that "only a handful of publishers pay
any tax at all and even fewer pay any significant amount of tax."   The discriminatory purpose
31

was thus very clear.

These cases come down to this: that unless justified, the differential treatment of the press
creates risks of suppression of expression. In contrast, in the cases at bar, the statute applies to
a wide range of goods and services. The argument that, by imposing the VAT only on print media
whose gross sales exceeds P480,000 but not more than P750,000, the law discriminates   is 33

without merit since it has not been shown that as a result the class subject to tax has been
unreasonably narrowed. The fact is that this limitation does not apply to the press along but to all
sales. Nor is impermissible motive shown by the fact that print media and broadcast media are
treated differently. The press is taxed on its transactions involving printing and publication, which
are different from the transactions of broadcast media. There is thus a reasonable basis for the
classification.

The cases canvassed, it must be stressed, eschew any suggestion that "owners of newspapers
are immune from any forms of ordinary taxation." The license tax in the Grosjean case was
declared invalid because it was "one single in kind, with a long history of hostile misuse against
the freedom of the
press."   On the other hand, Minneapolis Star acknowledged that "The First Amendment does
34

not prohibit all regulation of the press [and that] the States and the Federal Government can
subject newspapers to generally applicable economic regulations without creating constitutional
problems."  35

What has been said above also disposes of the allegations of the PBS that the removal of the
exemption of printing, publication or importation of books and religious articles, as well as their
printing and publication, likewise violates freedom of thought and of conscience. For as the U.S.
Supreme Court unanimously held in Jimmy Swaggart Ministries v. Board of Equalization,   the 36

Free Exercise of Religion Clause does not prohibit imposing a generally applicable sales and use
tax on the sale of religious materials by a religious organization.

33
This brings us to the question whether the registration provision of the law,   although of general
37

applicability, nonetheless is invalid when applied to the press because it lays a prior restraint on
its essential freedom. The case of American Bible Society v. City of Manila   is cited by both the
38

PBS and the PPI in support of their contention that the law imposes censorship. There, this Court
held that an ordinance of the City of Manila, which imposed a license fee on those engaged in
the business of general merchandise, could not be applied to the appellant's sale of bibles and
other religious literature. This Court relied on Murdock v. Pennsylvania,   in which it was held
39

that, as a license fee is fixed in amount and unrelated to the receipts of the taxpayer, the license
fee, when applied to a religious sect, was actually being imposed as a condition for the exercise
of the sect's right under the Constitution. For that reason, it was held, the license fee "restrains in
advance those constitutional liberties of press and religion and inevitably tends to suppress their
exercise." 40

But, in this case, the fee in § 107, although a fixed amount (P1,000), is not imposed for the
exercise of a privilege but only for the purpose of defraying part of the cost of registration. The
registration requirement is a central feature of the VAT system. It is designed to provide a record
of tax credits because any person who is subject to the payment of the VAT pays an input tax,
even as he collects an output tax on sales made or services rendered. The registration fee is
thus a mere administrative fee, one not imposed on the exercise of a privilege, much less a
constitutional right.

For the foregoing reasons, we find the attack on Republic Act No. 7716 on the ground that it
offends the free speech, press and freedom of religion guarantees of the Constitution to be
without merit. For the same reasons, we find the claim of the Philippine Educational Publishers
Association (PEPA) in G.R. No. 115931 that the increase in the price of books and other
educational materials as a result of the VAT would violate the constitutional mandate to the
government to give priority to education, science and technology (Art. II, § 17) to be untenable.

B. Claims of Regressivity, Denial of Due Process, Equal Protection, and Impairment

of Contracts

There is, however, no justification for passing upon the claims that the law also violates the rule
that taxation must be progressive and that it denies petitioners' right to due process and that
equal protection of the laws. The reason for this different treatment has been cogently stated by
an eminent authority on constitutional law thus: "[W]hen freedom of the mind is imperiled by law,
it is freedom that commands a momentum of respect; when property is imperiled it is the
lawmakers' judgment that commands respect. This dual standard may not precisely reverse the
presumption of constitutionality in civil liberties cases, but obviously it does set up a hierarchy of
values within the due process clause."  41

Indeed, the absence of threat of immediate harm makes the need for judicial intervention less
evident and underscores the essential nature of petitioners' attack on the law on the grounds of
regressivity, denial of due process and equal protection and impairment of contracts as a mere
academic discussion of the merits of the law. For the fact is that there have even been no notices
of assessments issued to petitioners and no determinations at the administrative levels of their
claims so as to illuminate the actual operation of the law and enable us to reach sound judgment
regarding so fundamental questions as those raised in these suits.

Thus, the broad argument against the VAT is that it is regressive and that it violates the
requirement that "The rule of taxation shall be uniform and equitable [and] Congress shall evolve
a progressive system of taxation."   Petitioners in G.R. No. 115781 quote from a paper, entitled
42

"VAT Policy Issues: Structure, Regressivity, Inflation and Exports" by Alan A. Tait of the
International Monetary Fund, that "VAT payment by low-income households will be a higher
proportion of their incomes (and expenditures) than payments by higher-income households.

34
That is, the VAT will be regressive." Petitioners contend that as a result of the uniform 10% VAT,
the tax on consumption goods of those who are in the higher-income bracket, which before were
taxed at a rate higher than 10%, has been reduced, while basic commodities, which before were
taxed at rates ranging from 3% to 5%, are now taxed at a higher rate.

Just as vigorously as it is asserted that the law is regressive, the opposite claim is pressed by
respondents that in fact it distributes the tax burden to as many goods and services as possible
particularly to those which are within the reach of higher-income groups, even as the law
exempts basic goods and services. It is thus equitable. The goods and properties subject to the
VAT are those used or consumed by higher-income groups. These include real properties held
primarily for sale to customers or held for lease in the ordinary course of business, the right or
privilege to use industrial, commercial or scientific equipment, hotels, restaurants and similar
places, tourist buses, and the like. On the other hand, small business establishments, with
annual gross sales of less than P500,000, are exempted. This, according to respondents,
removes from the coverage of the law some 30,000 business establishments. On the other hand,
an occasional paper   of the Center for Research and Communication cities a NEDA study that
43

the VAT has minimal impact on inflation and income distribution and that while additional
expenditure for the lowest income class is only P301 or 1.49% a year, that for a family earning
P500,000 a year or more is P8,340 or 2.2%.

Lacking empirical data on which to base any conclusion regarding these arguments, any
discussion whether the VAT is regressive in the sense that it will hit the "poor" and middle-
income group in society harder than it will the "rich," as the Cooperative Union of the Philippines
(CUP) claims in G.R. No. 115873, is largely an academic exercise. On the other hand, the CUP's
contention that Congress' withdrawal of exemption of producers cooperatives, marketing
cooperatives, and service cooperatives, while maintaining that granted to electric cooperatives,
not only goes against the constitutional policy to promote cooperatives as instruments of social
justice (Art. XII, § 15) but also denies such cooperatives the equal protection of the law is actually
a policy argument. The legislature is not required to adhere to a policy of "all or none" in
choosing the subject of taxation. 44

Nor is the contention of the Chamber of Real Estate and Builders Association (CREBA),
petitioner in G.R. 115754, that the VAT will reduce the mark up of its members by as much as
85% to 90% any more concrete. It is a mere allegation. On the other hand, the claim of the
Philippine Press Institute, petitioner in G.R. No. 115544, that the VAT will drive some of its
members out of circulation because their profits from advertisements will not be enough to pay
for their tax liability, while purporting to be based on the financial statements of the newspapers
in question, still falls short of the establishment of facts by evidence so necessary for adjudicating
the question whether the tax is oppressive and confiscatory.

Indeed, regressivity is not a negative standard for courts to enforce. What Congress is required
by the Constitution to do is to "evolve a progressive system of taxation." This is a directive to
Congress, just like the directive to it to give priority to the enactment of laws for the enhancement
of human dignity and the reduction of social, economic and political inequalities (Art. XIII, § 1), or
for the promotion of the right to "quality education" (Art. XIV, § 1). These provisions are put in the
Constitution as moral incentives to legislation, not as judicially enforceable rights.

At all events, our 1988 decision in Kapatiran   should have laid to rest the questions now raised
45

against the VAT. There similar arguments made against the original VAT Law (Executive Order
No. 273) were held to be hypothetical, with no more basis than newspaper articles which this
Court found to be "hearsay and [without] evidentiary value." As Republic Act No. 7716 merely
expands the base of the VAT system and its coverage as provided in the original VAT Law,
further debate on the desirability and wisdom of the law should have shifted to Congress.

Only slightly less abstract but nonetheless hypothetical is the contention of CREBA that the
imposition of the VAT on the sales and leases of real estate by virtue of contracts entered into

35
prior to the effectivity of the law would violate the constitutional provision that "No law impairing
the obligation of contracts shall be passed." It is enough to say that the parties to a contract
cannot, through the exercise of prophetic discernment, fetter the exercise of the taxing power of
the State. For not only are existing laws read into contracts in order to fix obligations as between
parties, but the reservation of essential attributes of sovereign power is also read into contracts
as a basic postulate of the legal order. The policy of protecting contracts against impairment
presupposes the maintenance of a government which retains adequate authority to secure the
peace and good order of society.  46

In truth, the Contract Clause has never been thought as a limitation on the exercise of the State's
power of taxation save only where a tax exemption has been granted for a valid
consideration.   Such is not the case of PAL in G.R. No. 115852, and we do not understand it to
47

make this claim. Rather, its position, as discussed above, is that the removal of its tax exemption
cannot be made by a general, but only by a specific, law.

The substantive issues raised in some of the cases are presented in abstract, hypothetical form
because of the lack of a concrete record. We accept that this Court does not only adjudicate
private cases; that public actions by "non-Hohfeldian"   or ideological plaintiffs are now
48

cognizable provided they meet the standing requirement of the Constitution; that under Art. VIII,
§ 1, ¶ 2 the Court has a "special function" of vindicating constitutional rights. Nonetheless the
feeling cannot be escaped that we do not have before us in these cases a fully developed factual
record that alone can impart to our adjudication the impact of actuality   to insure that decision-
49

making is informed and well grounded. Needless to say, we do not have power to render
advisory opinions or even jurisdiction over petitions for declaratory judgment. In effect we are
being asked to do what the Conference Committee is precisely accused of having done in these
cases — to sit as a third legislative chamber to review legislation.

36
CREBA vs. Sec. Romulo, GR No. 160756, 9 March 2010;

Facts:

Petitioner is an association of real estate developers and builders in the Philippines. It impleaded
former Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D.
Amatong and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.

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

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by
RR 9-98. Petitioner argues that the MCIT violates the due process clause because it levies
income tax even if there is no realized gain.

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

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

Issues:

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

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

Ruling:

Concept and Rationale of the MCIT

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

Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of
reporting constantly a loss in their operations to avoid the payment of taxes, and thus avoid

37
sharing in the cost of government. In this regard, the Tax Reform Act introduces for the first time
a new concept called the [MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation
in the country and for administrative convenience. … This will go a long way in ensuring that
corporations will pay their just share in supporting our public life and our economic
advancement.22

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

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

Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy, that is why they have
proposed the [MCIT]. Because from experience too, you have corporations which have been
losing year in and year out and paid no tax. So, if the corporation has been losing for the past
five years to ten years, then that corporation has no business to be in business. It is dead. Why
continue if you are losing year in and year out? So, we have this provision to avoid this type of
tax shelters, Your Honor.24

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

To further emphasize the corrective nature of the MCIT, the following safeguards were
incorporated into the law:

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

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

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

Even before the legislature introduced the MCIT to the Philippine taxation system, several other
countries already had their own system of minimum corporate income taxation. Our lawmakers
noted that most developing countries, particularly Latin American and Asian countries, have the
same form of safeguards as we do. As pointed out during the committee hearings:

[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room
for underdeclaration of gross receipts have this same form of safeguards.

38
In the case of Thailand, half a percent (0.5%), there’s a minimum of income tax of half a percent
(0.5%) of gross assessable income. In Korea a 25% of taxable income before deductions and
exemptions. Of course the different countries have different basis for that minimum income tax.

The other thing you’ll notice is the preponderance of Latin American countries that employed this
method. Okay, those are additional Latin American countries. 29

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have
their own versions of the MCIT.30

MCIT Is Not Violative of Due Process

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is
highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without
due process of law. It explains that gross income as defined under said provision only considers
the cost of goods sold and other direct expenses; other major expenditures, such as
administrative and interest expenses which are equally necessary to produce gross income,
were not taken into account. 31 Thus, pegging the tax base of the MCIT to a corporation’s gross
income is tantamount to a confiscation of capital because gross income, unlike net income, is not
"realized gain."32

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor
endure. The exercise of taxing power derives its source from the very existence of the State
whose social contract with its citizens obliges it to promote public interest and the common
good.33

Taxation is an inherent attribute of sovereignty.34 It is a power that is purely

legislative.35 Essentially, this means that in the legislature primarily lies the discretion to
determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place)
of taxation.36 It has the authority to prescribe a certain tax at a specific rate for a particular public
purpose on persons or things within its jurisdiction. In other words, the legislature wields the
power to define what tax shall be imposed, why it should be imposed, how much tax shall be
imposed, against whom (or what) it shall be imposed and where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very
nature no limits, so that the principal check against its abuse is to be found only in the
responsibility of the legislature (which imposes the tax) to its constituency who are to pay
it.37 Nevertheless, it is circumscribed by constitutional limitations. At the same time, like any other
statute, tax legislation carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived
of life, liberty or property without due process of law." In Sison, Jr. v. Ancheta, et al.,38 we held
that the due process clause may properly be invoked to invalidate, in appropriate cases, a
revenue measure39 when it amounts to a confiscation of property.40 But in the same case, we also
explained that we will not strike down a revenue measure as unconstitutional (for being violative
of the due process clause) on the mere allegation of arbitrariness by the taxpayer. 41 There must
be a factual foundation to such an unconstitutional taint. 42 This merely adheres to the
authoritative doctrine that, where the due process clause is invoked, considering that it is not a
fixed rule but rather a broad standard, there is a need for proof of such persuasive character. 43

Petitioner is correct in saying that income is distinct from capital. 44 Income means all the wealth
which flows into the taxpayer other than a mere return on capital. Capital is a fund or property
existing at one distinct point in time while income denotes a flow of wealth during a definite

39
period of time.45 Income is gain derived and severed from capital.46 For income to be taxable, the
following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

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

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

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost of goods48 and other direct expenses from gross
sales. Clearly, the capital is not being taxed.

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

Besides, there is no legal objection to a broader tax base or taxable income by eliminating all
deductible items and at the same time reducing the applicable tax rate. 49

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

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

The United States has a similar alternative minimum tax (AMT) system which is generally
characterized by a lower tax rate but a broader tax base. 51 Since our income tax laws are of
American origin, interpretations by American courts of our parallel tax laws have persuasive
effect on the interpretation of these laws.52 Although our MCIT is not exactly the same as the
AMT, the policy behind them and the procedure of their implementation are comparable. On the
question of the AMT’s constitutionality, the United States Court of Appeals for the Ninth Circuit
stated in Okin v. Commissioner:53

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the
system growing from large numbers of taxpayers with large incomes who were yet paying no
taxes.

x x x           x x x          x x x

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a
rational means of obtaining a broad-based tax, and therefore is constitutional. 54

The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would
contribute a minimum amount of taxes was a legitimate governmental end to which the AMT bore
a reasonable relation.55

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

40
Absent any other valid objection, the assignment of gross income, instead of net income, as the
tax base of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not
constitutionally objectionable.

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

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is
arbitrary and confiscatory. The Court cannot strike down a law as unconstitutional simply
because of its yokes.58 Taxation is necessarily burdensome because, by its nature, it adversely
affects property rights.59 The party alleging the law’s unconstitutionality has the burden to
demonstrate the supposed violations in understandable terms.

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

Again, we disagree.

The equal protection clause under the Constitution means that "no person or class of persons
shall be deprived of the same protection of laws which is enjoyed by other persons or other
classes in the same place and in like circumstances." 85 Stated differently, all persons belonging
to the same class shall be taxed alike. It follows that the guaranty of the equal protection of the
laws is not violated by legislation based on a reasonable classification. Classification, to be valid,
must (1) rest on substantial distinctions; (2) be germane to the purpose of the law; (3) not be
limited to existing conditions only and (4) apply equally to all members of the same class. 86

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

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

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

Petitioner counters that there are other businesses wherein expensive items are also sold
infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other capital goods yet
these are not similarly subjected to the CWT.89 As already discussed, the Secretary may adopt
any reasonable method to carry out its functions.90 Under Section 57(B), it may choose what to
subject to CWT.

41
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner’s argument is not
accurate. The sales of manufacturers who have clients within the top 5,000 corporations, as
specified by the BIR, are also subject to CWT for their transactions with said 5,000 corporations

No Deprivation of Property Without Due Process

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

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

Petitioner protests that the refund remedy does not make the CWT less burdensome because
taxpayers have to wait years and may even resort to litigation before they are granted a
refund.81 This argument is misleading. The practical problems encountered in claiming a tax
refund do not affect the constitutionality and validity of the CWT as a method of collecting the
tax.
1avvphi1

Petitioner complains that the amount withheld would have otherwise been used by the enterprise
to pay labor wages, materials, cost of money and other expenses which can then save the entity
from having to obtain loans entailing considerable interest expense. Petitioner also lists the
expenses and pitfalls of the trade which add to the burden of the realty industry: huge
investments and borrowings; long gestation period; sudden and unpredictable interest rate
surges; continually spiraling development/construction costs; heavy taxes and prohibitive "up-
front" regulatory fees from at least 20 government agencies. 82

Petitioner’s lamentations will not support its attack on the constitutionality of the CWT.
Petitioner’s complaints are essentially matters of policy best addressed to the executive and
legislative branches of the government. Besides, the CWT is applied only on the amounts
actually received or receivable by the real estate entity. Sales on installment are taxed on a per-
installment basis.83 Petitioner’s desire to utilize for its operational and capital expenses money
earmarked for the payment of taxes may be a practical business option but it is not a
fundamental right which can be demanded from the court or from the government.

42
PAGCOR vs. BIR, GR No. 172087, 15 March 2011

Facts:

PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A 2 on January 1, 1977.
Simultaneous to its creation, P.D. No. 1067-B3 (supplementing P.D. No. 1067-A) was issued
exempting PAGCOR from the payment of any type of tax, except a franchise tax of five percent
(5%) of the gross revenue.4 Thereafter, on June 2, 1978, P.D. No. 1399 was issued expanding
the scope of PAGCOR's exemption.5

To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No. 1869 6 was
issued. Section 13 thereof reads as follows:

PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later
restored by Letter of Instruction No. 1430, which was issued in September 1984.

On January 1, 1998, R.A. No. 8424, 8 otherwise known as the National Internal Revenue Code of
1997, took effect. Section 27 (c) of R.A. No. 8424 provides that government-owned and
controlled corporations (GOCCs) shall pay corporate income tax, except petitioner PAGCOR, the
Government Service and Insurance Corporation, the Social Security System, the Philippine
Health Insurance Corporation, and the Philippine Charity Sweepstakes Office, thus:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The

provisions of existing special general laws to the contrary notwithstanding, all corporations,
agencies or instrumentalities owned and controlled by the Government, except the Government
Service and Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine
Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO),
and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax
upon their taxable income as are imposed by this Section upon corporations or associations
engaged in similar business, industry, or activity.9

With the enactment of R.A. No. 933710 on May 24, 2005, certain sections of the National Internal
Revenue Code of 1997 were amended. The particular amendment that is at issue in this case is
Section 1 of R.A. No. 9337, which amended Section 27 (c) of the National Internal Revenue
Code of 1997 by excluding PAGCOR from the enumeration of GOCCs that are exempt from
payment of corporate income tax, thus:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The

provisions of existing special general laws to the contrary notwithstanding, all corporations,
agencies, or instrumentalities owned and controlled by the Government, except the Government
Service and Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine
Health Insurance Corporation (PHIC), and the Philippine Charity Sweepstakes Office (PCSO),
shall pay such rate of tax upon their taxable income as are imposed by this Section upon
corporations or associations engaged in similar business, industry, or activity.

Different groups came to this Court via petitions for certiorari and prohibition11 assailing the
validity and constitutionality of R.A. No. 9337, in particular:

1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods and
properties; Section 5, which imposes a 10% VAT on importation of goods; and Section 6,
which imposes a 10% VAT on sale of services and use or lease of properties, all contain
a uniform proviso authorizing the President, upon the recommendation of the Secretary
of Finance, to raise the VAT rate to 12%. The said provisions were alleged to be violative
of Section 28 (2), Article VI of the Constitution, which section vests in Congress the
exclusive authority to fix the rate of taxes, and of Section 1, Article III of the Constitution

43
 on due process, as well as of Section 26 (2), Article VI of the Constitution, which section
provides for the "no amendment rule" upon the last reading of a bill;

2) Sections 8 and 12 were alleged to be violative of Section 1, Article III of the

Constitution, or the guarantee of equal protection of the laws, and Section 28 (1), Article
VI of the Constitution; and

3) other technical aspects of the passage of the law, questioning the manner it was
passed.

Issue:

 whether or not PAGCOR is still exempt from corporate income tax and VAT with the enactment
of R.A. No. 9337.

Ruling:
After a careful study of the positions presented by the parties, this Court finds the petition partly
meritorious.

Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal Revenue
Code of 1977, petitioner is no longer exempt from corporate income tax as it has been effectively
omitted from the list of GOCCs that are exempt from it. Petitioner argues that such omission is
unconstitutional, as it is violative of its right to equal protection of the laws under Section 1,
Article III of the Constitution:

Legislative bodies are allowed to classify the subjects of legislation. If the classification is
reasonable, the law may operate only on some and not all of the people without violating the
equal protection clause. The classification must, as an indispensable requisite, not be arbitrary.
To be valid, it must conform to the following requirements:

1) It must be based on substantial distinctions.

2) It must be germane to the purposes of the law.

3) It must not be limited to existing conditions only.

4) It must apply equally to all members of the class.18

It is not contested that before the enactment of R.A. No. 9337, petitioner was one of the five
GOCCs exempted from payment of corporate income tax as shown in R.A. No. 8424, Section 27
(c) of which, reads:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities. - The

provisions of existing special or general laws to the contrary notwithstanding, all corporations,
agencies or instrumentalities owned and controlled by the Government, except the Government
Service and Insurance Corporation (GSIS), the Social Security System (SSS), the Philippine
Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO), and
the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon
their taxable income as are imposed by this Section upon corporations or associations engaged
in similar business, industry, or activity.19

44
A perusal of the legislative records of the Bicameral Conference Meeting of the Committee on
Ways on Means dated October 27, 1997 would show that the exemption of PAGCOR from the
payment of corporate income tax was due to the acquiescence of the Committee on Ways on
Means to the request of PAGCOR that it be exempt from such tax.

The discussion above bears out that under R.A. No. 8424, the exemption of PAGCOR from
paying corporate income tax was not based on a classification showing substantial distinctions
which make for real differences, but to reiterate, the exemption was granted upon the request of
PAGCOR that it be exempt from the payment of corporate income tax.

With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424, PAGCOR has been
excluded from the enumeration of GOCCs that are exempt from paying corporate income tax.
The records of the Bicameral Conference Meeting dated April 18, 2005, of the Committee on the
Disagreeing Provisions of Senate Bill No. 1950 and House Bill No. 3555, show that it is the
legislative intent that PAGCOR be subject to the payment of corporate income tax, thus:

Taxation is the rule and exemption is the exception. 23 The burden of proof rests upon the party
claiming exemption to prove that it is, in fact, covered by the exemption so claimed. 24 As a rule,
tax exemptions are construed strongly against the claimant. 25 Exemptions must be shown to exist
clearly and categorically, and supported by clear legal provision. 26

In this case, PAGCOR failed to prove that it is still exempt from the payment of corporate income
tax, considering that Section 1 of R.A. No. 9337 amended Section 27 (c) of the National Internal
Revenue Code of 1997 by omitting PAGCOR from the exemption. The legislative intent, as
shown by the discussions in the Bicameral Conference Meeting, is to require PAGCOR to pay
corporate income tax; hence, the omission or removal of PAGCOR from exemption from the
payment of corporate income tax. It is a basic precept of statutory construction that the express
mention of one person, thing, act, or consequence excludes all others as expressed in the
familiar maxim expressio unius est exclusio alterius.27 Thus, the express mention of the GOCCs
exempted from payment of corporate income tax excludes all others. Not being excepted,
petitioner PAGCOR must be regarded as coming within the purview of the general rule that
GOCCs shall pay corporate income tax, expressed in the maxim: exceptio firmat regulam in
casibus non exceptis.28

PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative
records of the Bicameral Conference Meeting dated October 27, 1997, of the Committee on
Ways and Means, show that PAGCOR’s exemption from payment of corporate income tax, as
provided in Section 27 (c) of R.A. No. 8424, or the National Internal Revenue Code of 1997, was
not made pursuant to a valid classification based on substantial distinctions and the other
requirements of a reasonable classification by legislative bodies, so that the law may operate
only on some, and not all, without violating the equal protection clause. The legislative records
show that the basis of the grant of exemption to PAGCOR from corporate income tax was
PAGCOR’s own request to be exempted.

Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio for
violating the non-impairment clause of the Constitution. Petitioner avers that laws form part of,
and is read into, the contract even without the parties expressly saying so. Petitioner states that
the private parties/investors transacting with it considered the tax exemptions, which inure to
their benefit, as the main consideration and inducement for their decision to transact/invest with
it. Petitioner argues that the withdrawal of its exemption from corporate income tax by R.A. No.
9337 has the effect of changing the main consideration and inducement for the transactions of
private parties with it; thus, the amendatory provision is violative of the non-impairment clause of
the Constitution.

Petitioner’s contention lacks merit.

45
The non-impairment clause is contained in Section 10, Article III of the Constitution, which
provides that no law impairing the obligation of contracts shall be passed. The non-impairment
clause is limited in application to laws that derogate from prior acts or contracts by enlarging,
abridging or in any manner changing the intention of the parties. 29 There is impairment if a
subsequent law changes the terms of a contract between the parties, imposes new conditions,
dispenses with those agreed upon or withdraws remedies for the enforcement of the rights of the
parties.30

As regards franchises, Section 11, Article XII of the Constitution 31 provides that no franchise or
right shall be granted except under the condition that it shall be subject to amendment, alteration,
or repeal by the Congress when the common good so requires. 32

In Manila Electric Company v. Province of Laguna, 33 the Court held that a franchise partakes the
nature of a grant, which is beyond the purview of the non-impairment clause of the
Constitution.34 The pertinent portion of the case states:

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. 35

In this case, PAGCOR was granted a franchise to operate and maintain gambling casinos, clubs
and other recreation or amusement places, sports, gaming pools, i.e., basketball, football,
lotteries, etc., whether on land or sea, within the territorial jurisdiction of the Republic of the
Philippines.36 Under Section 11, Article XII of the Constitution, PAGCOR’s franchise is subject to
amendment, alteration or repeal by Congress such as the amendment under Section 1 of R.A.
No. 9377. Hence, the provision in Section 1 of R.A. No. 9337, amending Section 27 (c) of R.A.
No. 8424 by withdrawing the exemption of PAGCOR from corporate income tax, which may
affect any benefits to PAGCOR’s transactions with private parties, is not violative of the non-
impairment clause of the Constitution.

Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to
10% VAT is invalid for being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided
that petitioner can be subjected to VAT. R.A. No. 9337 is clear only as to the removal of
petitioner's exemption from the payment of corporate income tax, which was already addressed
above by this Court.

Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax liability and
not to indirect taxes, like the VAT.

We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with
no distinction on whether the taxes are direct or indirect. We are one with the CA ruling that
PAGCOR is also exempt from indirect taxes, like VAT, as follows:

46
Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator
refers to PAGCOR. Although the law does not specifically mention PAGCOR's exemption from
indirect taxes, PAGCOR is undoubtedly exempt from such taxes because the law exempts from
taxes persons or entities contracting with PAGCOR in casino operations. Although, differently
worded, the provision clearly exempts PAGCOR from indirect taxes. In fact, it goes one step
further by granting tax exempt status to persons dealing with PAGCOR in casino operations. The
unmistakable conclusion is that PAGCOR is not liable for the P30, 152,892.02 VAT and neither is
Acesite as the latter is effectively subject to zero percent rate under Sec. 108 B (3), R.A. 8424.
(Emphasis supplied.)

Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the
legislature clearly granted exemption also from indirect taxes. It must be noted that the indirect
tax of VAT, as in the instant case, can be shifted or passed to the buyer, transferee, or lessee of
the goods, properties, or services subject to VAT. Thus, by extending the tax exemption to
entities or individuals dealing with PAGCOR in casino operations, it is exempting
PAGCOR from being liable to indirect taxes.

WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337,

amending Section 27 (c) of the National Internal Revenue Code of 1997, by excluding petitioner
Philippine Amusement and Gaming Corporation from the enumeration of government-owned and
controlled corporations exempted from corporate income tax is valid and constitutional, while
BIR Revenue Regulations No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is null and
void for being contrary to the National Internal Revenue Code of 1997, as amended by Republic
Act No. 9337.

47
CIR vs. Fortune Tobacco Corporation, G.R. No. 180006, 28 September 2011

Facts:

Under our tax laws, manufacturers of cigarettes are subject to pay excise taxes on their products.
Prior to January 1, 1997, the excises taxes on these products were in the form of ad valorem
taxes, pursuant to Section 142 of the 1977 National Internal Revenue Code (1977 Tax Code).

Beginning January 1, 1997, Republic Act No. (RA) 8240 3 took effect and a shift from ad valorem
to specific taxes was made. Section 142(c) of the 1977 Tax Code, as amended by RA 8240,
reads in part:

The rates of specific tax on cigars and cigarettes under paragraphs (1), (2), (3) and (4) hereof,
shall be increased by twelve percent (12%) on January 1, 2000. [emphases ours]

To implement RA 8240 and pursuant to its rule-making powers, the CIR issued Revenue
Regulation No. (RR) 1-97 whose Section 3(c) and (d) echoed the above-quoted portion of
Section 142 of the 1977 Tax Code, as amended. 4

The 1977 Tax Code was later repealed by RA 8424, or the National Internal Revenue Code of
1997 (1997 Tax Code), and Section 142, as amended by RA 8240, was renumbered as Section
145.

This time, to implement the 12% increase in specific taxes mandated under Section 145 of the
1997 Tax Code and again pursuant to its rule-making powers, the CIR issued RR 17-99, which
reads:

Pursuant to these laws, respondent Fortune Tobacco Corporation (Fortune Tobacco) paid in
advance excise taxes for the year 2003 in the amount of ₱11.15 billion, and for the period
covering January 1 to May 31, 2004 in the amount of ₱4.90 billion. 5

In June 2004, Fortune Tobacco filed an administrative claim for tax refund with the CIR for
erroneously and/or illegally collected taxes in the amount of ₱491 million. 6 Without waiting for the
CIR’s action on its claim, Fortune Tobacco filed with the CTA a judicial claim for tax refund. 7

In its decision dated May 26, 2006, the CTA First Division ruled in favor of Fortune Tobacco and
granted its claim for refund.8 The CTA First Division’s ruling was upheld on appeal by the CTA en
banc in its decision dated July 12, 2007. 9 The CIR’s motion for reconsideration of the CTA en
banc’s decision was denied in a resolution dated October 4, 2007.

Issue:

Fortune Tobacco’s claim for refund of overpaid excise taxes is based primarily on what it
considers as an "unauthorized administrative legislation" on the part of the CIR. Specifically, it
assails the proviso in Section 1 of RR 17-99 that requires the payment of the "excise tax actually
being paid prior to January 1, 2000" if this amount is higher than the new specific tax rate, i.e.,
the rates of specific taxes imposed in 1997 for each category of cigarette, plus 12%. It claimed
that by including the proviso, the CIR went beyond the language of the law and usurped
Congress’ power.

48
Ruling:

Following the principle of stare decisis,17 our ruling in the present case should no longer come as
a surprise. The proviso in Section 1 of RR 17-99 clearly went beyond the terms of the law it was
supposed to implement, and therefore entitles Fortune Tobacco to claim a refund of the overpaid
excise taxes collected pursuant to this provision.

The amount involved in the present case and the CIR’s firm insistence of its arguments
nonetheless compel us to take a second look at the issue, but our findings ultimately lead us to
the same conclusion. Indeed, we find more reasons to disagree with the CIR’s construction of the
law than those stated in our 2008 Fortune Tobacco ruling, which was largely based on the
application of the rules of statutory construction.

Raising government revenue is not the sole objective of RA 8240

That RA 8240 (incorporated as Section 145 of the 1997 Tax Code) was enacted to raise
government revenues is a given fact, but this is not the sole and only objective of the
law.18 Congressional deliberations show that the shift from ad valorem to specific taxes
introduced by the law was also intended to curb the corruption that became endemic to the
imposition of ad valorem taxes.19 Since ad valorem taxes were based on the value of the goods,
the prices of the goods were often manipulated to yield lesser taxes. The imposition of specific
taxes, which are based on the volume of goods produced, would prevent price manipulation and
also cure the unequal tax treatment created by the skewed valuation of similar goods.

Rule of uniformity of taxation violated by the proviso in Section 1, RR 17-99

The Constitution requires that taxation should be uniform and equitable. 20 Uniformity in taxation
requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in
privileges and liabilities.21 This requirement, however, is unwittingly violated when the proviso in
Section 1 of RR 17-99 is applied in certain cases. To illustrate this point, we consider three
brands of cigarettes, all classified as lower-priced cigarettes under Section 145(c)(4) of the 1997
Tax Code, since their net retail price is below ₱5.00 per pack:

Although the brands all belong to the same category, the proviso in Section 1, RR 17-99
authorized the imposition of different (and grossly disproportionate) tax rates (see column [D]). It
effectively extended the qualification stated in the third paragraph of Section 145(c) of the 1997
Tax Code that was supposed to apply only during the transition period:

The excise tax from any brand of cigarettes within the next three (3) years from the effectivity of
R.A. No. 8240 shall not be lower than the tax, which is due from each brand on October 1,
1996[.]

In the process, the CIR also perpetuated the unequal tax treatment of similar goods that was
supposed to be cured by the shift from ad valorem to specific taxes.

The omission in the law in fact reveals the legislative intent not to adopt the "higher tax rule"

The CIR claims that the proviso in Section 1 of RR 17-99 was patterned after the third paragraph
of Section 145(c) of the 1997 Tax Code. Since the law’s intent was to increase revenue, it found
no reason not to apply the same "higher tax rule" to excise taxes due after the transition period
despite the absence of a similar text in the wording of Section 145(c). What the CIR misses in his
argument is that he applied the rule not only for cigarettes, but also for cigars, distilled spirits,
wines and fermented liquors:

49
Provided, however, that the new specific tax rate for any existing brand of cigars [and] cigarettes
packed by machine, distilled spirits, wines and fermented liquors shall not be lower than the
excise tax that is actually being paid prior to January 1, 2000.

When the pertinent provisions of the 1997 Tax Code imposing excise taxes on these products
are read, however, there is nothing similar to the third paragraph of Section 145(c) that can be
found in the provisions imposing excise taxes on distilled spirits (Section 141 23 ) and wines
(Section 14224 ). In fact, the rule will also not apply to cigars as these products fall under Section
145(a).25

Evidently, the 1997 Tax Code’s provisions on excise taxes have omitted the adoption of certain
tax measures. To our mind, these omissions are telling indications of the intent of Congress not
to adopt the omitted tax measures; they are not simply unintended lapses in the law’s wording
that, as the CIR claims, are nevertheless covered by the spirit of the law. Had the intention of
Congress been solely to increase revenue collection, a provision similar to the third paragraph of
Section 145(c) would have been incorporated in Sections 141 and 142 of the 1997 Tax Code.
This, however, is not the case.

We note that Congress was not unaware that the "higher tax rule" is a proviso that should ideally
apply to the increase after the transition period (as the CIR embodied in the proviso in Section 1
of RR 17-99). During the deliberations for the law amending Section 145 of the 1997 Tax Code
(RA 9334), Rep. Jesli Lapuz adverted to the "higher tax rule" after December 31, 1999 when he
stated:

This bill serves as a catch-up measure as government attempts to collect additional revenues
due it since 2001. Modifications are necessary indeed to capture the loss proceeds and prevent
further erosion in revenue base. x x x. As it is, it plugs a major loophole in the ambiguity of the
law as evidenced by recent disputes resulting in the government being ordered by the courts to
refund taxpayers.  This bill clarifies that the excise tax due on the products shall not be lower
1âwphi1

than the tax due as of the date immediately prior to the effectivity of the act or the excise tax due
as of December 31, 1999.26

This remark notwithstanding, the final version of the bill that became RA 9334 contained no
provision similar to the proviso in Section 1 of RR 17-99 that imposed the tax due as of
December 31, 1999 if this tax is higher than the new specific tax rates. Thus, it appears that
despite its awareness of the need to protect the increase of excise taxes to increase government
revenue, Congress ultimately decided against adopting the "higher tax rule.

50
CIR vs. CA,YMCA Gr NO. 123043

Is the income derived from rentals of real property owned by the Young Men's Christian
Association of the Philippines, Inc. (YMCA) — established as "a welfare, educational and
charitable non-profit corporation" — subject to income tax under the National Internal Revenue
Code (NIRC) and the Constitution?

Facts:

The facts are undisputed.  Private Respondent YMCA is a non-stock, non-profit institution,
4

which conducts various programs and activities that are beneficial to the public,
especially the young people, pursuant to its religious, educational and charitable
objectives.

In 1980, private respondent earned, among others, an income of P676,829.80 from leasing
out a portion of its premises to small shop owners, like restaurants and canteen
operators, and P44,259.00 from parking fees collected from non-members. On July 2,
1984, the commissioner of internal revenue (CIR) issued an assessment to private
respondent, in the total amount of P415,615.01 including surcharge and interest, for
deficiency income tax, deficiency expanded withholding taxes on rentals and professional
fees and deficiency withholding tax on wages. Private respondent formally protested the
assessment and, as a supplement to its basic protest, filed a letter dated October 8, 1985.
In reply, the CIR denied the claims of YMCA.

Contesting the denial of its protest, the YMCA filed a petition for review at the Court of Tax
Appeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor of the
YMCA:

Issue:

II

In affirming the conclusion of Respondent Court of Tax Appeals that the income of private
respondent from rentals of small shops and parking fees [is] exempt from taxation. 

Ruling:

We now come to the crucial issue: Is the rental income of the YMCA from its real estate
subject to tax? At the outset, we set forth the relevant provision of the NIRC:

Sec. 27. Exemptions from tax on corporations. — The following

organizations shall not be taxed under this Title in respect to income
received by them as such —

x x x           x x x          x x x

(g) Civic league or organization not organized for profit but operated
exclusively for the promotion of social welfare;

(h) Club organized and operated exclusively for pleasure, recreation, and
other non-profitable purposes, no part of the net income of which inures to
the benefit of any private stockholder or member;

51
 x x x           x x x          x x x

Notwithstanding the provisions in the preceding paragraphs, the income of

whatever kind and character of the foregoing organizations from any of
their properties, real or personal, or from any of their activities conducted
for profit, regardless of the disposition made of such income, shall be
subject to the tax imposed under this Code. (as amended by Pres. Decree
No. 1457)

Petitioner argues that while the income received by the organizations enumerated in
Section 27 (now Section 26) of the NIRC is, as a rule, exempted from the payment of tax
"in respect to income received by them as such," the exemption does not apply to income
derived ". . . from any of their properties, real or personal, or from any of their activities
conducted for profit, regardless of the disposition made of such income . . . ."

Petitioner adds that "rental income derived by a tax-exempt organization from the lease of
its properties, real or personal, [is] not, therefore, exempt from income taxation, even if
such income [is] exclusively used for the accomplishment of its objectives."   We agree
17

with the commissioner.

Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of
strict in interpretation in construing tax exemptions.   Furthermore, a claim of statutory
18

exemption from taxation should be manifest. and unmistakable from the language of the
law on which it is based. Thus, the claimed exemption "must expressly be granted in a
statute stated in a language too clear to be mistaken."  19

In the instant case, the exemption claimed by the YMCA is expressly disallowed by the
very wording of the last paragraph of then Section 27 of the NIRC which mandates that the
income of exempt organizations (such as the YMCA) from any of their properties, real or
personal, be subject to the tax imposed by the same Code. Because the last paragraph of
said section unequivocally subjects to tax the rent income of the YMCA from its real
property,   the Court is duty-bound to abide strictly by its literal meaning and to refrain
20

from resorting to any convoluted attempt at construction.

It is axiomatic that where the language of the law is clear and unambiguous, its express
terms must be applied.   Parenthetically, a consideration of the question of construction
21

must not even begin, particularly when such question is on whether to apply a strict
construction or a liberal one on statutes that grant tax exemptions to "religious, charitable
and educational propert[ies] or institutions."  22

The last paragraph of Section 27, the YMCA argues, should be "subject to the
qualification that the income from the properties must arise from activities 'conducted for
profit' before it may be considered taxable."   This argument is erroneous. As previously
23

stated, a reading of said paragraph ineludibly shows that the income from any property of
exempt organizations, as well as that arising from any activity it conducts for profit, is
taxable. The phrase "any of their activities conducted for profit" does not qualify the word
"properties." This makes from the property of the organization taxable, regardless of how
that income is used — whether for profit or for lofty non-profit purposes.

Verba legis non est recedendum. Hence, Respondent Court of Appeals committed
reversible error when it allowed, on reconsideration, the tax exemption claimed by YMCA
on income it derived from renting out its real property, on the solitary but unconvincing
ground that the said income is not collected for profit but is merely incidental to its
operation. The law does not make a distinction. The rental income is taxable regardless of
whence such income is derived and how it is used or disposed of. Where the law does not
distinguish, neither should we.

52
 Constitutional Provisions

On Taxation

Invoking not only the NIRC but also the fundamental law, private respondent submits that
Article VI, Section 28 of par. 3 of the 1987 Constitution,   exempts "charitable institutions"
24

from the payment not only of property taxes but also of income tax from any source.   In 25

support of its novel theory, it compares the use of the words "charitable institutions,"
"actually" and "directly" in the 1973 and the 1987 Constitutions, on the one hand; and in
Article VI, Section 22, par. 3 of the 1935 Constitution, on the other hand. 26

Private respondent enunciates three points. First, the present provision is divisible into
two categories: (1) "[c]haritable institutions, churches and parsonages or convents
appurtenant thereto, mosques and non-profit cemeteries," the incomes of which are, from
whatever source, all tax-exempt;   and (2) "[a]ll lands, buildings and improvements
27

actually and directly used for religious, charitable or educational purposes," which are
exempt only from property taxes.   Second, Lladoc v. Commissioner of Internal
28

Revenue,   which limited the exemption only to the payment of property taxes, referred to
29

the provision of the 1935 Constitution and not to its counterparts in the 1973 and the 1987
Constitutions.   Third, the phrase "actually, directly and exclusively used for religious,
30

charitable or educational purposes" refers not only to "all lands, buildings and
improvements," but also to the above-quoted first category which includes charitable
institutions like the private respondent.  31

The Court is not persuaded. The debates, interpellations and expressions of opinion of
the framers of the Constitution reveal their intent which, in turn, may have guided the
people in ratifying the Charter.   Such intent must be effectuated.
32

Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is

now a member of this Court, stressed during the Concom debates that ". . . what is
exempted is not the institution itself . . .; those exempted from real estate taxes are lands,
buildings and improvements actually, directly and exclusively used for religious,
charitable or educational
purposes."   Father Joaquin G. Bernas, an eminent authority on the Constitution and also
33

a member of the Concom, adhered to the same view that the exemption created by said
provision pertained only to property taxes.  34

In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax
exemption covers property taxes only."   Indeed, the income tax exemption claimed by
35

private respondent finds no basis in Article VI, Section 26, par. 3 of the Constitution.

Private respondent also invokes Article XIV, Section 4, par. 3 of the Character,   claiming
36

that the YMCA "is a non-stock, non-profit educational institution whose revenues and
assets are used actually, directly and exclusively for educational purposes so it is exempt
from taxes on its properties and income."   We reiterate that private respondent is exempt
37

from the payment of property tax, but not income tax on the rentals from its property. The
bare allegation alone that it is a non-stock, non-profit educational institution is insufficient
to justify its exemption from the payment of income tax.

As previously discussed, laws allowing tax exemption are construed strictissimi juris.

Hence, for the YMCA to be granted the exemption it claims under the aforecited provision,
it must prove with substantial evidence that (1) it falls under the classification non-stock,
non-profit educational institution; and (2) the income it seeks to be exempted from
taxation is used actually, directly, and exclusively for educational purposes. However, the
Court notes that not a scintilla of evidence was submitted by private respondent to prove
that it met the said requisites.

53
Is the YMCA an educational institution within the purview of Article XIV, Section 4, par. 3
of the Constitution? We rule that it is not. The term "educational institution" or "institution
of learning" has acquired a well-known technical meaning, of which the members of the
Constitutional Commission are deemed cognizant.   Under the Education Act of 1982,
38

such term refers to schools.   The school system is synonymous with formal
39

education,   which "refers to the hierarchically structured and chronologically graded

40

learnings organized and provided by the formal school system and for which certification
is required in order for the learner to progress through the grades or move to the higher
levels."   The Court has examined the "Amended Articles of Incorporation" and "By-
41

Laws"  of the YMCA, but found nothing in them that even hints that it is a school or an
43

educational institution.  44

Furthermore, under the Education Act of 1982, even non-formal education is understood
to be school-based and "private auspices such as foundations and civic-spirited
organizations" are ruled out.   It is settled that the term "educational institution," when
45

used in laws granting tax exemptions, refers to a ". . . school seminary, college or
educational establishment . . . ."   Therefore, the private respondent cannot be deemed
46

one of the educational institutions covered by the constitutional provision under

consideration.

. . . Words used in the Constitution are to be taken in their ordinary

acceptation. While in its broadest and best sense education embraces all
forms and phases of instruction, improvement and development of mind
and body, and as well of religious and moral sentiments, yet in the common
understanding and application it means a place where systematic
instruction in any or all of the useful branches of learning is given by
methods common to schools and institutions of learning. That we conceive
to be the true intent and scope of the term [educational institutions,] as
used in the
Constitution. 
47

Moreover, without conceding that Private Respondent YMCA is an educational institution,

the Court also notes that the former did not submit proof of the proportionate amount of
the subject income that was actually, directly and exclusively used for educational
purposes. Article XIII, Section 5 of the YMCA by-laws, which formed part of the evidence
submitted, is patently insufficient, since the same merely signified that "[t]he net income
derived from the rentals of the commercial buildings shall be apportioned to the
Federation and Member Associations as the National Board may decide."   In sum, we
48

find no basis for granting the YMCA exemption from income tax under the constitutional
provision invoked.

In deliberating on this petition, the Court expresses its sympathy with private respondent.
It appreciates the nobility of its cause. However, the Court's power and function are
limited merely to applying the law fairly and objectively. It cannot change the law or bend
it to suit its sympathies and appreciations. Otherwise, it would be overspilling its role and
invading the realm of legislation.

We concede that private respondent deserves the help and the encouragement of the
government. It needs laws that can facilitate, and not frustrate, its humanitarian tasks. But
the Court regrets that, given its limited constitutional authority, it cannot rule on the
wisdom or propriety of legislation. That prerogative belongs to the political departments
of government. Indeed, some of the members of the Court may even believe in the
wisdom and prudence of granting more tax exemptions to private respondent. But such
belief, however well-meaning and sincere, cannot bestow upon the Court the power to
change or amend the law.

54
CIR VS. DLSU, GR NO,196596, 9 Nov 2016

Facts:

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority

(LOA) No. 2794 authorizing its revenue officers to examine the latter's books of accounts and
other accounting records for all internal revenue taxes for the period Fiscal Year Ending 2003
and Unverified Prior Years. 5

On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU. 6

Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU
the following deficiency taxes: (1) income tax on rental earnings from restaurants/canteens and
bookstores operating within the campus; (2) value-added tax (VAI) on business income; and
(3) documentary stamp tax (DSI) on loans and lease contracts. The BIR demanded the payment
of ₱17,303,001.12, inclusive of surcharge, interest and penalty for taxable years 2001, 2002
and 2003. 7

DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed
on August 3, 2005 a petition for review with the CTA Division. 8

DLSU, a non-stock, non-profit educational institution, principally anchored its petition on Article

XIV, Section 4 (3) of the Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes shall be exempt from taxes and duties. xxx.

The Commissioner submits the following arguments:

First, DLSU's rental income is taxable regardless of how such income is derived, used or
disposed of.  DLSU's operations of canteens and bookstores within its campus even though
35

exclusively serving the university community do not negate income tax liability. 36

The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be
harmonized with Section 30 (H) of the Tax Code, which states among others, that the income of
whatever kind and character of [a non-stock and non-profit educational institution] from any of
[its] properties, real or personal, or from any of [its] activities conducted for profit regardless of
the disposition made of such income, shall be subject to tax imposed by this Code.

On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is exempt
only from property tax but not from income tax on the rentals earned from property.  Thus,
40

DLSU's income from the leases of its real properties is not exempt from taxation even if the
income would be used for educational purposes.

Second, DLSU invokes the principle of uniformity in taxation, which mandates that for similarly
situated parties, the same set of evidence should be appreciated and weighed in the same
manner.  The CTA En Banc erred when it did not similarly appreciate DLSU' s evidence as it did
49

to the pieces of evidence submitted by Ateneo, also a non-stock, non-profit educational institution

Issue:

I. Whether DLSU' s income and revenues proved to have been used actually, directly
and exclusively for educational purposes are exempt from duties and taxes;

55
Ruling:

I. The revenues and assets of non-stock,

non-profit educational institutions
proved to have been used actually,
directly, and exclusively for educational
purposes are exempt from duties and
taxes.

DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually,

directly, and exclusively for educational purposes shall
be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence
of such institutions, their assets shall be disposed of in the manner provided by law.

Proprietary educational institutions, including those cooperatively owned, may likewise be

entitled to such exemptions subject to the limitations provided by law including restrictions
on dividends and provisions for reinvestment. [underscoring and emphasis supplied]

Before fully discussing the merits of the case, we observe that:

First, the constitutional provision refers to two kinds of educational institutions: (1) non-stock,
non-profit educational institutions and (2) proprietary educational institutions.69

Second, DLSU falls under the first category. Even the Commissioner admits the status of DLSU
as a non-stock, non-profit educational institution.70

Third, while DLSU's claim for tax exemption arises from and is based on the Constitution, the
Constitution, in the same provision, also imposes certain conditions to avail of the exemption. We
discuss below the import of the constitutional text vis-a-vis the Commissioner's counter-
arguments.

Fourth, there is a marked distinction between the treatment of non-stock, non-profit educational

institutions and proprietary educational institutions. The tax exemption granted to non-stock, non-
profit educational institutions is conditioned only on the actual, direct and exclusive use of their
revenues and assets for educational purposes. While tax exemptions may also be granted to
proprietary educational institutions, these exemptions may be subject to limitations imposed by
Congress.

As we explain below, the marked distinction between a non-stock, non-profit and a proprietary
educational institution is crucial in determining the nature and extent of the tax exemption
granted to non-stock, non-profit educational institutions.

The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30 (H) of the
Tax Code. The relevant text reads:

Did the 1997 Tax Code qualify the tax exemption constitutionally-granted to non-stock, non-
profit educational institutions?

We answer in the negative.

While the present petition appears to be a case of first impression,  the Court in the YMCA case
71

had in fact already analyzed and explained the meaning of Article XIV, Section 4 (3) of the

56
Constitution. The Court in that case made doctrinal pronouncements that are relevant to the
present case.

The issue in YMCA was whether the income derived from rentals of real property owned by the
YMCA, established as a "welfare, educational and charitable non-profit corporation," was subject
to income tax under the Tax Code and the Constitution. 72

The Court denied YMCA's claim for exemption on the ground that as a charitable
institution falling under Article VI, Section 28 (3) of the Constitution,  the YMCA is not tax-
73

exempt per se; " what is exempted is not the institution itself... those exempted from real estate
taxes are lands, buildings and improvements actually, directly and exclusively used for religious,
charitable or educational purposes." 74

The Court held that the exemption claimed by the YMCA is expressly disallowed by the last
paragraph of then Section 27 (now Section 30) of the Tax Code, which mandates that the
income of exempt organizations from any of their properties, real or personal, are subject to the
same tax imposed by the Tax Code, regardless of how that income is used. The Court ruled that
the last paragraph of Section 27 unequivocally subjects to tax the rent income of the YMCA from
its property.
75

In short, the YMCA is exempt only from property tax but not from income tax.

The Court then significantly laid down the requisites for availing the tax exemption under Article
XIV, Section 4 (3), namely: (1) the taxpayer falls under the classification non-stock, non-profit
educational institution; and (2) the income it seeks to be exempted from taxation is used
actually, directly and exclusively for educational purposes.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions is conditioned only
on the actual, direct and exclusive use of
their assets, revenues and income  for78

educational purposes.

We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable
institutions, churches, parsonages or convents, mosques, and non-profit cemeteries), which
exempts from tax only the assets, i.e., "all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational purposes ... ," Article XIV,
Section 4 (3) categorically states that "[a]ll revenues and assets ... used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and duties."

The addition and express use of the word revenues in Article XIV, Section 4 (3) of the
Constitution is not without significance.

We find that the text demonstrates the policy of the 1987 Constitution, discernible from the
records of the 1986 Constitutional Commission  to provide broader tax privilege to non-stock,
79

non-profit educational institutions as recognition of their role in assisting the State provide a
public good. The tax exemption was seen as beneficial to students who may otherwise be
charged unreasonable tuition fees if not for the tax exemption extended to all revenues and
assets of non-stock, non-profit educational institutions.80

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not
require that the revenues and income must have also been sourced from educational activities or
activities related to the purposes of an educational institution. The phrase all revenues is
unqualified by any reference to the source of revenues. Thus, so long as the revenues and

57
income are used actually, directly and exclusively for educational purposes, then said revenues
and income shall be exempt from taxes and duties. 81

We find it helpful to discuss at this point the taxation of revenues versus the taxation of assets.

Revenues consist of the amounts earned by a person or entity from the conduct of business
operations.  It may refer to the sale of goods, rendition of services, or the return of an
82

investment. Revenue is a component of the tax base in income tax,  VAT,  and local business
83 84

tax (LBT). 85

Assets, on the other hand, are the tangible and intangible properties owned by a person or
entity.  It may refer to real estate, cash deposit in a bank, investment in the stocks of a
86

corporation, inventory of goods, or any property from which the person or entity may derive
income or use to generate the same. In Philippine taxation, the fair market value of real property
is a component of the tax base in real property tax (RPT).  Also, the landed cost of imported
87

goods is a component of the tax base in VAT on importation  and tariff duties.
88 89

Thus, when a non-stock, non-profit educational institution proves that it uses

its revenues actually, directly, and exclusively for educational purposes, it shall be exempted
from income tax, VAT, and LBT. On the other hand, when it also shows that it uses its assets in
the form of real property for educational purposes, it shall be exempted from RPT.

To be clear, proving the actual use of the taxable item will result in an exemption, but the specific
tax from which the entity shall be exempted from shall depend on whether the item is an item of
revenue or asset.

To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria, the
leased portion is not actually, directly and exclusively used for educational purposes, even if the
bookstore or canteen caters only to university students, faculty and staff.

The leased portion of the building may be subject to real property tax, as held in Abra Valley
College, Inc. v. Aquino.  We ruled in that case that the test of exemption from taxation is the use
90

of the property for purposes mentioned in the Constitution. We also held that the exemption
extends to facilities which are incidental to and reasonably necessary for the accomplishment of
the main purposes.

In concrete terms, the lease of a portion of a school building for commercial purposes, removes
such asset from the property tax exemption granted under the Constitution.  There is no
91

exemption because the asset is not used actually, directly and exclusively for educational
purposes. The commercial use of the property is also not incidental to and reasonably necessary
for the accomplishment of the main purpose of a university, which is to educate its students.

However, if the university actually, directly and exclusively uses for educational

purposes the revenues earned from the lease of its school building, such revenues shall be
exempt from taxes and duties. The tax exemption no longer hinges on the use of the asset from
which the revenues were earned, but on the actual, direct and exclusive use of the revenues for
educational purposes.

Parenthetically, income and revenues of non-stock, non-profit educational institution not used

actually, directly and exclusively for educational purposes are not exempt from duties and taxes.
To avail of the exemption, the taxpayer must factually prove that it used actually, directly and
exclusively for educational purposes the revenues or income sought to be exempted.

58
The crucial point of inquiry then is on the use of the assets or on the use of the
revenues. These are two things that must be viewed and treated separately. But so long as the
assets or revenues are used actually, directly and exclusively for educational purposes, they are
exempt from duties and taxes.

The tax exemption granted by the

Constitution to non-stock, non-profit
educational institutions, unlike the exemption
that may be availed of by proprietary
educational institutions, is not subject to
limitations imposed by law.

That the Constitution treats non-stock, non-profit educational institutions differently from
proprietary educational institutions cannot be doubted. As discussed, the privilege granted to the
former is conditioned only on the actual, direct and exclusive use of their revenues and assets for
educational purposes. In clear contrast, the tax privilege granted to the latter may be subject to
limitations imposed by law.

By the Tax Code's clear terms, a proprietary educational institution is entitled only to the reduced
rate of 10% corporate income tax. The reduced rate is applicable only if: (1) the proprietary
educational institution is nonprofit and (2) its gross income from unrelated trade, business or
activity does not exceed 50% of its total gross income.

Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not apply to
non-stock, non-profit educational institutions.

Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect for
being contrary to the Constitution insofar as it subjects to tax the income and revenues of non-
stock, non-profit educational institutions used actually, directly and exclusively for educational
purpose. We make this declaration in the exercise of and consistent with our duty  to uphold the
93

primacy of the Constitution.94

Finally, we stress that our holding here pertains only to non-stock, non-profit educational
institutions and does not cover the other exempt organizations under Section 30 of the Tax
Code.

For all these reasons, we hold that the income and revenues of DLSU proven to have been used
actually, directly and exclusively for educational purposes are exempt from duties and taxes.

59
La Sallian Educational Innovators Foundation vs. CIR,GR No. 202792, 27 Feb 2019

Facts:

Petitioner La Sallian Educational Innovators Foundation, Inc. (De La Salle University-College of

St. Benilde Foundation)/for brevity) is a non-stock, non-profit domestic corporation duly
organized and existing under the laws of the Philippines.  Respondent is the Commissioner of
4

Internal Revenue who has the power to decide, cancel, and abate tax liabilities pursuant to
Section 204(B) of the Tax Code, as amended. 5

On June 17, 2005, respondent issued two (2) Assessment Notices, both numbered 33-FY 05-31-
02, for fiscal year ending May 31, 2002.  The notices have demand letters against petitioner for
1âшphi1

deficiency income tax.

To contest the deficiency taxes assessed, petitioner Foundation filed a Protest or Request for
Reconsideration to respondent on July 20, 2005.  After the petitioner Foundation has submitted
9

all the documents in support of its protest, and in view of respondent's inaction thereto, petitioner
Foundation filed a Petition for Review before the Special First Division of the CTA Division. It was
sent through registered mail on April 17, 2006, the last day of filing the appeal.  However,
10

petitioner was only able to pay the docket and other legal fees nine days after or on April 26,
2006. 11

Notably, petitioner Foundation executed an Agreement Form with the Bureau of Internal
Revenue (BIR) on April 21, 2006, and paid the deficiency VAT liability of P601,487.70 on May 9,
2006. 12

However, respondent alleged that the petitioner Foundation has already lost its tax-exempt
status, malting it liable to deficiency income tax. The Details of Discrepancies issued by the BIR
enumerated the following findings, to wit: 13

a. The foundation may be a non-stock entity but it is definitely a profit-oriented organization

wherein majority of its revenue-operating activities are generating huge amount of profit
amounting to P643 million that earned from expensive tuition fees collected from its students,
mostly belong to a [sic] upper class family.

b. The foundation's Cash in Bank in the amount of P775 million comprise of investing activities
and has significant movement in relation to its charitable purposes, which mean that the
foundation are [sic] not giving sufficient donations which is the main reasons [sic] for its
qualification[s] [sic] for exemption. During the school year the foundations [sic] has a total cash
receipts of approximately 1.222 Billion out of which only 77 Million goes to the revolving fund.

c. Based on the Cash Flow of the foundation activities the taxpayer has used 583 Million for
operating activities, 54 Million interest/settlement of loan and 203 Million for investing activities or
70% of foundation's earnings goes to the administrative purposes and improvement of the school
to increase number of its enrollees and increase further its profit and not to further its charitable
purposes.

Pursuant to section 30 of the NIRC, "Notwithstanding the provisions in the preceding

Paragraphs, the income of whatever kind and character of the foregoing organizations from any
of their properties, real or personal, or from any of their activities conducted for profit [r]egardless
of the disposition made by such income, shall be subject to tax imposed under this Code."

d. The taxpayer's Ruling for exemption from the BIR was obtained in 1988, hence, all Ruling
issued before the implementations or RA No. 8424 or CTRP was repealed, thereby, requiring the

60
taxpayer to apply for new Revenue Ruling for exemption taking consideration of its income
earning activities.

On the other hand, petitioner Foundation consistently argued that it enjoys a tax-exempt status
from all taxes as a non-stock, non-profit educational institution as expressly provided under
Paragraph 4, Section 4, Article XIV of the 1987 Constitution, which reads:

Issue:

I. WHETHER THE PETITIONER FOUNDATION HAS LOST ITS TAX-EXEMPT STATUS

UNDER THE 1987 CONSTITUTION

Ruling:

The petition is meritorious.

No less than the 1987 Constitution expressly exempt all revenues and assets of non-stock, non-
profit educational institutions from taxes provided that they are actually, directly and exclusively
used for educational purposes, to wit: 42

Section 4.(1) The State recognizes the complementary roles of public and private institutions in
the educational system and shall exercise reasonable supervision and regulation of all
educational institutions.

xxxx

(3) All revenues and assets of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes shall be exempt from taxes and
duties. (Emphasis and underscoring supplied)

This constitutional exemption is reiterated in Section 30 (H) of the 1997 Tax Code, as amended,
which provides as follows:

Sec. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed
under this Title in respect to income received by them as such:

xxxx

(H) A non[-]stock and non[-]profit educational institution[.]

Clearly, non-stock, non-profit educational institutions are not required to pay taxes on all their
revenues and assets if they are used actually, directly and exclusively for educational purposes.

According to the BIR, petitioner Foundation has failed to comply with the constitutional
requirements for being a profit-oriented educational institution. Hence, it is no longer a tax-
exempt entity, and is subject to a 10% income tax rate as a taxable proprietary educational
institution.
43

The Court disagrees.

61
Petitioner Foundation has presented adequate legal and factual basis to prove that it remains as
a tax exempt entity under Article XIV, Section 4, Paragraph 3 of the 1987 Constitution.

Based on jurisprudence and tax rulings, a taxpayer shall be granted with this tax exemption after
proving that: (1) it falls under the classification of non-stock, non-profit educational
institution; and (2) the income it seeks to be exempted from taxation is used actually,
directly and exclusively for educational purposes. 44

Petitioner Foundation has fulfilled both of the abovementioned requirements.

For the first requirement, there is no contest as both the parties have stipulated that petitioner
Foundation is a non-stock, non-profit educational institution. 45

Nonetheless, the Petitioner Foundation's primary and secondary purposes in its Amended
Articles of Incorporation clearly provide that it is a non-stock, non-profit educational entity, to wit: 46

SECOND: That the purposes and objectives for which such corporation is incorporated are:

That the primary purpose for which said corporation is formed is to establish a school that will
offer elementary, secondary, collegiate and post graduate courses of study, as well as technical,
vocational and special courses under one campus with emphasis on its being innovative in its
approach to undergraduate education through self-learning devices, kits, individually guided
teaching, credit by equivalence, credited internships, and practicism, as the Board of Trustees
may determine, the primary intention being to form the whole man through integration of a liberal
Christian education with professional competence for participation in Philippine development.

AND IN THE FURTHERANCE OF THE FOREGOING, the institution shall:

xxxx

8. Any profits derived from activities and undertakings described in paragraph 2, 3, 5 and 6
immediately preceding shall not inure to any of the members, trustees or officers but shall be
used exclusively for the maintenance of the Corporation.

Moreover, petitioner Foundation has no capital divided into shares.  No part of its income can be
47

distributed as dividends to its members, trustees and officers.  The members of the Board of
48

Trustees do not receive any compensation for the performance of their duties, including
attendance in meetings. 49

It is also important to mention that in BIR Ruling No. 176-88 dated August 23, 1988, the BIR
already declared that petitioner Foundation is a non-stock, non-profit educational institution that
is exempt from certain taxes. 50

As pointed out by respondent, petitioner Foundation did not secure a new BIR Ruling on its claim
for exemption after the Tax Code has been amended. However, this Court finds such fact
insignificant. The application for a new BIR Ruling is unnecessary considering that the BIR
Ruling was never revoked, and the primary purpose of petitioner Foundation remained the same.
Notably, respondent also failed to mention any legal basis that will require petitioner Foundation
to secure a new BIR Ruling to confirm its tax exempt status.

Furthermore, the respondent claimed that petitioner Foundation is not a non-profit educational
institution anymore due to its alleged enormous profits. Respondent accused it of operating
contrary to the nature of a non-profit educational institution by generating massive profits in the
amount of P643,000,000.00 from tuition fees, and having cash worth P775,000,000 in its bank. 51

62
However, these allegations were completely unsupported by facts and evidence.

Based on the evidence presented, the P643,000,000.00 is not petitioner Foundation's profit as it
is just the gross receipt from school year 2002.  Unfortunately, respondent easily overlooked
52

petitioner Foundation's administrative and non-administrative expenses amounting to

P582,903,965.00.  This sum constituted the total operating expenses of petitioner Foundation for
53

the fiscal year ended May 31, 2002.  Thus, the income of petitioner Foundation is only
54

P60,375,183.00 or 9.38% of its operating receipts.  This is way below the average gross profit
55

margin rate of 20% for most business enterprises. 56

Furthermore, the alleged P775,000,000 cash of petitioner Foundation is in reality a part of its
Cash and Cash Equivalents account. The amount of P575,700,000.00 therein constitutes Funds
Held in Trust to finance capital improvements, scholarship, faculty development, retirement and
for other restricted uses.  The rest of the account consists of highly liquidated debt instruments
57

purchased with a short term maturity.  Clearly, there is nothing in the petitioner Foundation's
58

books that will indicate that it is driven by profit or that its income is used for anything but in
pursuit of its primary purpose.

In several cases, this Court has ruled that a non-profit institution will not be considered profit
driven simply because of generating profits.  The reason behind this was explained by this Court
59

in its earlier ruling in Jesus Sacred Heart College v. Collector of Internal Revenue,  to wit:
60

To hold that an educational Institution is subject to income tax whenever it is so administered as

to reasonably assure that it will not incur in deficit, is to nullify and defeat the aforementioned
exemption. Indeed, the effect, in general, of the interpretation advocated by appellant would be
to deny the exemption whenever there is net income, contrary to the tenor of said section 27(e)
which positively exempts from taxation those corporations or associations which, otherwise,
would be subject thereto, because of the existence of said net income.

Needless to say, every responsible organization must be so run as to, at least insure its
existence by operating within the limits of its own resources, especially its regular
income. In other words, it should always strive, whenever possible, to have a
surplus.  (Emphasis and underscoring supplied)
61

Considering the clear explanation of the nature of the money involved, it is evident that all of
petitioner Foundation's income is actually, directly and exclusively used or earmarked for
promoting its educational purpose.  To reiterate, respondent never argued that the income of
62

petitioner Foundation was used in any manner other than for promoting its purpose as a non-
stock, non-profit educational institution, hi fact, there is not even a single argument or evidence
presented to cast a doubt in the proper usage of petitioner Foundation's income.

Furthermore, a simple reading of the Constitution would show that Article XIV, Section 4 (3) does
not require that the revenues and income must have also been earned from educational activities
or activities related to the purposes of an educational institution. The phrase "all revenues" is
unqualified by any reference to the source of revenues.  Thus, so long as the revenues and
63

income are used actually, directly and exclusively for educational purposes, then said revenues
and income shall be exempt from taxes and duties. 64

In the instant case, petitioner Foundation firmly and adequately argued that none of its income
inured to the benefit of any officer or entity. Instead, its income has been actually, exclusively and
directly used for performing its purpose as an educational institution. Undoubtedly, petitioner
Foundation has also proven this second requisite.

Thus, the tax exempt status of petitioner Foundation under the 1987 Constitution is clear.

63
Abra Valley College Inc. vs. Aquino, GR No. L-39086, June 15, 1988

Facts:
This is a petition for review on certiorari of the decision * of the defunct Court of First Instance of Abra, Branch I, dated June 14, 1974,
rendered in Civil Case No. 656, entitled "Abra Valley Junior College, Inc., represented by Pedro V. Borgonia, plaintiff vs. Armin M.
Cariaga as Provincial Treasurer of Abra, Gaspar V. Bosque as Municipal Treasurer of Bangued, Abra and Paterno Millare, defendants,"
the decretal portion of which reads:

IN VIEW OF ALL THE FOREGOING, the Court hereby declares:

That the distraint seizure and sale by the Municipal Treasurer of Bangued, Abra,
the Provincial Treasurer of said province against the lot and building of the Abra
Valley Junior College, Inc., represented by Director Pedro Borgonia located at
Bangued, Abra, is valid;

That since the school is not exempt from paying taxes, it should therefore pay all
back taxes in the amount of P5,140.31 and back taxes and penalties from the
promulgation of this decision;

That the amount deposited by the plaintaff him the sum of P60,000.00 before the
trial, be confiscated to apply for the payment of the back taxes and for the
redemption of the property in question, if the amount is less than P6,000.00, the
remainder must be returned to the Director of Pedro Borgonia, who represents
the plaintiff herein;

That the deposit of the Municipal Treasurer in the amount of P6,000.00 also
before the trial must be returned to said Municipal Treasurer of Bangued, Abra;

Petitioner, an educational corporation and institution of higher learning duly incorporated with the
Securities and Exchange Commission in 1948, filed a complaint (Annex "1" of Answer by the
respondents Heirs of Paterno Millare; Rollo, pp. 95-97) on July 10, 1972 in the court a quo to
annul and declare void the "Notice of Seizure' and the "Notice of Sale" of its lot and building
located at Bangued, Abra, for non-payment of real estate taxes and penalties amounting to
P5,140.31. Said "Notice of Seizure" of the college lot and building covered by Original Certificate
of Title No. Q-83 duly registered in the name of petitioner, plaintiff below, on July 6, 1972, by
respondents Municipal Treasurer and Provincial Treasurer, defendants below, was issued for the
satisfaction of the said taxes thereon. The "Notice of Sale" was caused to be served upon the
petitioner by the respondent treasurers on July 8, 1972 for the sale at public auction of said
college lot and building, which sale was held on the same date. Dr. Paterno Millare, then
Municipal Mayor of Bangued, Abra, offered the highest bid of P6,000.00 which was duly
accepted. The certificate of sale was correspondingly issued to him.

1. That the personal circumstances of the parties as stated in paragraph 1 of the complaint is
admitted; but the particular person of Mr. Armin M. Cariaga is to be substituted, however, by
anyone who is actually holding the position of Provincial Treasurer of the Province of Abra;

2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and buildings thereon
located in Bangued, Abra under Original Certificate of Title No. 0-83;

3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued, Abra caused to be
served upon the Abra Valley Junior College, Inc. a Notice of Seizure on the property of said

64
school under Original Certificate of Title No. 0-83 for the satisfaction of real property taxes
thereon, amounting to P5,140.31; the Notice of Seizure being the one attached to the complaint
as Exhibit A;

4. That on June 8, 1972 the above properties of the Abra Valley Junior College, Inc. was sold at
public auction for the satisfaction of the unpaid real property taxes thereon and the same was
sold to defendant Paterno Millare who offered the highest bid of P6,000.00 and a Certificate of
Sale in his favor was issued by the defendant Municipal Treasurer.

Aside from the Stipulation of Facts, the trial court among others, found the following: (a) that the
school is recognized by the government and is offering Primary, High School and College
Courses, and has a school population of more than one thousand students all in all; (b) that it is
located right in the heart of the town of Bangued, a few meters from the plaza and about 120
meters from the Court of First Instance building; (c) that the elementary pupils are housed in a
two-storey building across the street; (d) that the high school and college students are housed in
the main building; (e) that the Director with his family is in the second floor of the main building;
and (f) that the annual gross income of the school reaches more than one hundred thousand
pesos.

Issue:

whether or not the lot and building in question are used exclusively for educational purposes.

Ruling:

Due to its time frame, the constitutional provision which finds application in the case at bar is
Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, which expressly
grants exemption from realty taxes for "Cemeteries, churches and parsonages or convents
appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious,
charitable or educational purposes ...

Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by Republic
Act No. 409, otherwise known as the Assessment Law, provides:

The following are exempted from real property tax under the Assessment Law:

xxx xxx xxx

(c) churches and parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious, charitable, scientific
or educational purposes.

xxx xxx xxx

In this regard petitioner argues that the primary use of the school lot and building is the basic and
controlling guide, norm and standard to determine tax exemption, and not the mere incidental
use thereof.

As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil. 217 [1916], this
Court ruled that while it may be true that the YMCA keeps a lodging and a boarding house and
maintains a restaurant for its members, still these do not constitute business in the ordinary

65
acceptance of the word, but an institution used exclusively for religious, charitable and
educational purposes, and as such, it is entitled to be exempted from taxation.

In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil. 352 [1972],
this Court included in the exemption a vegetable garden in an adjacent lot and another lot
formerly used as a cemetery. It was clarified that the term "used exclusively" considers incidental
use also. Thus, the exemption from payment of land tax in favor of the convent includes, not only
the land actually occupied by the building but also the adjacent garden devoted to the incidental
use of the parish priest. The lot which is not used for commercial purposes but serves solely as a
sort of lodging place, also qualifies for exemption because this constitutes incidental use in
religious functions.

The phrase "exclusively used for educational purposes" was further clarified by this Court in the
cases of Herrera vs. Quezon City Board of assessment Appeals, 3 SCRA 186 [1961]
and Commissioner of Internal Revenue vs. Bishop of the Missionary District, 14 SCRA 991
[1965], thus —

Moreover, the exemption in favor of property used exclusively for charitable or

educational purposes is 'not limited to property actually indispensable' therefor
(Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are incidental
to and reasonably necessary for the accomplishment of said purposes, such as in
the case of hospitals, "a school for training nurses, a nurses' home, property use
to provide housing facilities for interns, resident doctors, superintendents, and
other members of the hospital staff, and recreational facilities for student nurses,
interns, and residents' (84 CJS 6621), such as "Athletic fields" including "a firm
used for the inmates of the institution. (Cooley on Taxation, Vol. 2, p. 1430).

The test of exemption from taxation is the use of the property for purposes mentioned in the
Constitution (Apostolic Prefect v. City Treasurer of Baguio, 71 Phil, 547 [1941]).

It must be stressed however, that while this Court allows a more liberal and non-restrictive
interpretation of the phrase "exclusively used for educational purposes" as provided for in Article
VI, Section 22, paragraph 3 of the 1935 Philippine Constitution, reasonable emphasis has always
been made that exemption extends to facilities which are incidental to and reasonably necessary
for the accomplishment of the main purposes. Otherwise stated, the use of the school building or
lot for commercial purposes is neither contemplated by law, nor by jurisprudence. Thus, while the
use of the second floor of the main building in the case at bar for residential purposes of the
Director and his family, may find justification under the concept of incidental use, which is
complimentary to the main or primary purpose—educational, the lease of the first floor thereof to
the Northern Marketing Corporation cannot by any stretch of the imagination be considered
incidental to the purpose of education.

Petitioner contends that the primary use of the lot and building for educational purposes, and not
the incidental use thereof, determines and exemption from property taxes under Section 22 (3),
Article VI of the 1935 Constitution. Hence, the seizure and sale of subject college lot and
building, which are contrary thereto as well as to the provision of Commonwealth Act No. 470,
otherwise known as the Assessment Law, are without legal basis and therefore void.

On the other hand, private respondents maintain that the college lot and building in question
which were subjected to seizure and sale to answer for the unpaid tax are used: (1) for the
educational purposes of the college; (2) as the permanent residence of the President and
Director thereof, Mr. Pedro V. Borgonia, and his family including the in-laws and grandchildren;
and (3) for commercial purposes because the ground floor of the college building is being used
and rented by a commercial establishment, the Northern Marketing Corporation (See photograph
attached as Annex "8" (Comment; Rollo, p. 90]).

66
Herrera vs. QC BOAA

Facts:
On July 24, 1952, the Director of the Bureau of Hospitals authorized the petitioners to establish
and operate the "St. Catherine's Hospital", located at 58 D. Tuazon, Sta. Mesa Heights, Quezon
City (Exhibit "F-1", p. 7, BIR rec.). On or about January 3, 1953, the petitioners sent a letter to the
Quezon City Assessor requesting exemption from payment of real estate tax on the lot, building
and other improvements comprising the hospital stating that the same was established for
charitable and humanitarian purposes and not for commercial gain (Exhibit "F-2", pp. 8-9, BIR
rec.). After an inspection of the premises in question and after a careful study of the case, the
exemption from real property taxes was granted effective the years 1953, 1954 and 1955.

Subsequently, however, in a letter dated August 10, 1955 (Exhibit "E", p. 65, CTA rec.) the
Quezon City Assessor notified the petitioners that the aforesaid properties were re-classified
from exempt to "taxable" and thus assessed for real property taxes effective 1956, enclosing
therewith copies of Tax Declarations Nos. 19321 to 19322 covering the said properties. The
petitioners appealed the assessment to the Quezon City Board of Assessment Appeals, which, in
a decision dated March 31, 1956 and received by the former on May 17, 1956, affirmed the
decision of the City Assessor. A motion for reconsideration thereof was denied on March 8, 1957.
From this decision, the petitioners instituted the instant appeal.1awphîl.nèt

The building involved in this case is principally used as a hospital. It is mainly a surgical and
orthopedic hospital with emphasis on obstetrical cases, the latter constituting 90% of the total
number of cases registered therein. The hospital has thirty-two (32) beds, of which twenty (20)
are for charity-patients and twelve (12) for pay-patients. From the evidence presented by
petitioners, it is made to appear that there are two kinds of charity patients — (a) those who
come for consultation only ("out-charity patients"); and (b) those who remain in the hospital for
treatment ("lying-in-patients"). The out-charity patients are given free consultation and
prescription, although sometimes they are furnished with free medicines which are not costly like
aspirin, sulfatiazole, etc. The charity lying-in-patients are given free medical service and medicine
although the food served to the pay-patients is very much better than that given to the former.
Although no condition is imposed by the hospital on the admission of charity lying-in-patients,
they however, usually give donations to the hospital. On the other hand, the pay-patients are
required to pay for hospital services ranging from the minimum charge of P5.00 to the maximum
of P40.00 for each day of stay in the hospital. The income realized from pay-patients is spent for
the improvement of the charity wards. The hospital personnel is composed of three nurses, two
graduate midwives, a resident physician receiving a salary of P170.00 a month and the
petitioner, Dr. Ester Ochangco Herrera, as directress. As such directress, the latter does not
receive any salary.

Petitioners also operate within the premises of the hospital the "St. Catherine's School of
Midwifery" which was granted government recognition by the Secretary of Education on February
1, 1955 (Exhibit "F-3", p. 10, BIR rec.) This school has an enrollment of about two hundred
students. The students are charged a matriculation fee of P300.00 for 1-½ years, plus P50.00 a
month for board and lodging, which includes transportation to the St. Mary's Hospital. The
students practice in the St. Catherine's Hospital, as well as in the St. Mary's Hospital, which is
also owned by the petitioners. A separate set of accounting books is maintained by the school for
midwifery distinct from that kept by the hospital. The petitioners alleged that the accounts of the
school are not included in Exhibits "A", "A-1", "A-2", "B", "B-1", "B-2", "C", "C-1" and "C-2" which
relate to the hospital only. However, the petitioners have refused to submit a separate statement
of accounts of the school. 

67
Aside from the St. Catherine and St. Mary hospitals, the petitioners declared that they also own
lands and coconut plantations in Quezon Province, and other real estate in the City of Manila
consisting of apartments for rent. The petitioner, Jose V. Herrera, is an architect, actively
engaged in the practice of his profession, with office at Tuason Building, Escolta, Manila. He was
formerly Chairman, Board of Examiners for Architects and Chairman, Board of Architects
connected with the United Nations. He was also connected with the Allied Technologists which
constructed the Veterans Hospital in Quezon City.

Issue:

whether or not the lot, building and other improvements occupied by the St. Catherine Hospital
are exempt from the real property tax.

Ruling:

It should be noted, however, that, according to the very statement of facts made in the decision
appealed from, of the thirty-two (32) beds in the hospital, twenty (20) are for charity-patients; that
"the income realized from pay-patients is spent for improvement of the charity wards;" and that
"petitioners, Dr. Ester Ochangco Herrera, as directress" of said hospital, "does not receive any
salary," although its resident physician gets a monthly salary of P170.00. It is well settled, in this
connection, that the admission of pay-patients does not detract from the charitable character of a
hospital, if all its funds are devoted "exclusively to the maintenance of the institution" as a "public
charity" (84 C.J.S., 617; see, also, 51 Am. Jur. 607; Cooley on Taxation, Vol. 2, p. 1562; 144
A.L.R., 1489-1492). "In other words, where rendering charity is its primary object, and the funds
derived from payments made by patients able to pay are devoted to the benevolent purposes of
the institution, the mere fact that a profit has been made will not deprive the hospital of its
benevolent character" (Prairie Du Chien Sanitarium Co. vs. City of Prairie Du Chien, 242 Wis.
262, 7 NW [2d] 832, 144 A.L.R. 1480).

Thus, we have held that the U.S.T. Hospital was not established for profit-making purposes,
although it had 140 paying beds maintained only to partly finance the expenses of the free
wards, containing 203 beds for charity patients (U.S.T. Hospital Employees Association vs. Sto.
Tomas University Hospital, L-6988, May 24, 1954), that St. Paul's Hospital of Iloilo, a corporation
organized for "charitable educational and religious purposes" can not be considered as engaged
in business merely because its pharmacy department charges paying patients the cost of their
medicine, plus 10% thereof, to partly offset the cost of medicines supplied free of charge to
charity patients (Collector of Internal Revenue vs. St. Paul's Hospital of Iloilo, L-12127, May 25,
1959), and that the amendment of the original articles of incorporation of the University of
Visayas to convert it from a non-stock to a stock corporation and the increase of its assets from
P9,000 to P50,000, distributed among the members of the original non-stock corporation in terms
of shares of stock, as well as the subsequent move of its board of trustees to double the stock
dividends of the corporation, in view of a gain of P200,000.00 in property, besides good-will,
which was not carried out, does not justify the inference that the corporation has become one for
business and profit, none of its profits having inured to the benefit of any stockholder or individual
(Collector of Internal Revenue vs. University of Visayas, L-13554, February 28, 1961).

68
Moreover, the exemption in favor of property used exclusively for charitable or educational
purposes is "not limited to property actually indispensable" therefor (Cooley on Taxation, Vol. 2,
p. 1430), but extends to facilities which are "incidental to and reasonably necessary for" the
accomplishment of said purposes, such as, in the case of hospitals, "a school for training nurses,
a nurses' home, property use to provide housing facilities for interns, resident doctors,
superintendents, and other members of the hospital staff, and recreational facilities for student
nurses, interns and residents" (84 C.J.S., 621), such as "athletic fields," including "a farm used
for the inmates of the institution" (Cooley on Taxation, Vol. 2, p. 1430).

Within the purview of the Constitutional exemption from taxation, the St. Catherine's Hospital is,
therefore, a charitable institution, and the fact that it admits pay-patients does not bar it from
claiming that it is devoted exclusively to benevolent purposes, it being admitted that the income
derived from pay-patients is devoted to the improvement of the charity wards, which represent
almost two-thirds (2/3) of the bed capacity of the hospital, aside from "out-charity patients" who
come only for consultation.

Again, the existence of "St. Catherine's School of Midwifery", with an enrollment of about 200
students, who practice partly in St. Catherine's Hospital and partly in St. Mary's Hospital, which,
likewise, belongs to petitioners herein, does not, and cannot, affect the exemption to which St.
Catherine's Hospital is entitled under our fundamental law. On the contrary, it furnishes another
ground for exemption. Seemingly, the Court of Tax Appeals was impressed by the fact that the
size of said enrollment and the matriculation fee charged from the students of midwifery, aside
from the amount they paid for board and lodging, including transportation to St. Mary's Hospital,
warrants the belief that petitioners derive a substantial profit from the operation of the school
aforementioned. Such factor is, however, immaterial to the issue in the case at bar, for "all lands,
building and improvements used exclusively for religious, charitable or educational purposes
shall be exempt from taxation," pursuant to the Constitution, regardless of whether or not
material profits are derived from the operation of the institutions in question. In other words,
Congress may, if it deems fit to do so, impose taxes upon such "profits", but said "lands,
buildings and improvements" are beyond its taxing power.

Similarly, the garage in the building above referred to — which was obviously essential to the
operation of the school of midwifery, for the students therein enrolled practiced, not only in St.
Catherine's Hospital, but, also, in St. Mary's Hospital, and were entitled to transportation thereto
— for Mrs. Herrera received no compensation as directress of St. Catherine's Hospital — were
incidental to the operation of the latter and of said school, and, accordingly, did not affect the
charitable character of said hospital and the educational nature of said school.

WHEREFORE, the decision of the Court of Tax Appeals, as well as that of the Assessment
Board of Appeals of Quezon City, are hereby reversed and set aside, and another one entered
declaring that the lot, building and improvements constituting the St. Catherine's Hospital are
exempt from taxation under the provisions of the Constitution, without special pronouncement as
to costs. It is so ordered.

69
Lung Center of the Philippines vs. QC, G.R. No. 144104. June 29, 2004

Facts:

The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established on
January 16, 1981 by virtue of Presidential Decree No. 1823. 2 It is the registered owner of a parcel
of land, particularly described as Lot No. RP-3-B-3A-1-B-1, SWO-04-000495, located at Quezon
Avenue corner Elliptical Road, Central District, Quezon City. The lot has an area of 121,463
square meters and is covered by Transfer Certificate of Title (TCT) No. 261320 of the Registry of
Deeds of Quezon City. Erected in the middle of the aforesaid lot is a hospital known as the Lung
Center of the Philippines. A big space at the ground floor is being leased to private parties, for
canteen and small store spaces, and to medical or professional practitioners who use the same
as their private clinics for their patients whom they charge for their professional services. Almost
one-half of the entire area on the left side of the building along Quezon Avenue is vacant and
idle, while a big portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is
being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and
Garden Center.

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

On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real
property taxes in the amount of ₱4,554,860 by the City Assessor of Quezon City. 3 Accordingly,
Tax Declaration Nos. C-021-01226 (16-2518) and C-021-01231 (15-2518-A) were issued for the
land and the hospital building, respectively.4 On August 25, 1993, the petitioner filed a Claim for
Exemption5 from real property taxes with the City Assessor, predicated on its claim that it is a
charitable institution. The petitioner’s request was denied, and a petition was, thereafter, filed
before the Local Board of Assessment Appeals of Quezon City (QC-LBAA, for brevity) for the
reversal of the resolution of the City Assessor. The petitioner alleged that under Section 28,
paragraph 3 of the 1987 Constitution, the property is exempt from real property taxes. It averred
that a minimum of 60% of its hospital beds are exclusively used for charity patients and that the
major thrust of its hospital operation is to serve charity patients. The petitioner contends that it is
a charitable institution and, as such, is exempt from real property taxes. The QC-LBAA rendered
judgment dismissing the petition and holding the petitioner liable for real property taxes. 6

The QC-LBAA’s decision was, likewise, affirmed on appeal by the Central Board of Assessment
Appeals of Quezon City (CBAA, for brevity)7 which ruled that the petitioner was not a charitable
institution and that its real properties were not actually, directly and exclusively used for
charitable purposes; hence, it was not entitled to real property tax exemption under the
constitution and the law. The petitioner sought relief from the Court of Appeals, which rendered
judgment affirming the decision of the CBAA.8

Undaunted, the petitioner filed its petition in this Court contending that:

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

70
Ruling:

On the first issue, we hold that the petitioner is a charitable institution within the context of the
1973 and 1987 Constitutions. To determine whether an enterprise is a charitable institution/entity
or not, the elements which should be considered include the statute creating the enterprise, its
corporate purposes, its constitution and by-laws, the methods of administration, the nature of the
actual work performed, the character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties. 11

In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing
laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts
under the influence of education or religion, by assisting them to establish themselves in life or
otherwise lessening the burden of government. 12 It may be applied to almost anything that tend to
promote the well-doing and well-being of social man. It embraces the improvement and
promotion of the happiness of man. 13 The word "charitable" is not restricted to relief of the poor or
sick.14 The test of a charity and a charitable organization are in law the same. The test whether
an enterprise is charitable or not is whether it exists to carry out a purpose reorganized in law as
charitable or whether it is maintained for gain, profit, or private advantage.

Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to
the provisions of the decree, is to be administered by the Office of the President of the
Philippines with the Ministry of Health and the Ministry of Human Settlements. It was organized
for the welfare and benefit of the Filipino people principally to help combat the high incidence of
lung and pulmonary diseases in the Philippines.

Hence, the medical services of the petitioner are to be rendered to the public in general in any
and all walks of life including those who are poor and the needy without discrimination. After all,
any person, the rich as well as the poor, may fall sick or be injured or wounded and become a
subject of charity.17

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether out-
patient, or confined in the hospital, or receives subsidies from the government, so long as the
money received is devoted or used altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the persons managing or operating the
institution.

The money received by the petitioner becomes a part of the trust fund and must be devoted to
public trust purposes and cannot be diverted to private profit or benefit. 23

Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose
its character as a charitable institution simply because the gift or donation is in the form of
subsidies granted by the government.

Even as we find that the petitioner is a charitable institution, we hold, anent the second issue,
that those portions of its real property that are leased to private entities are not exempt from real
property taxes as these are not actually, directly and exclusively used for charitable purposes.

The settled rule in this jurisdiction is that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation
is the rule and exemption is the exception. The effect of an exemption is equivalent to an
appropriation. Hence, a claim for exemption from tax payments must be clearly shown and based
on language in the law too plain to be mistaken.

71
The tax exemption under this constitutional provision covers property taxes only.33 As Chief
Justice Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission, explained:
". . . what is exempted is not the institution itself . . .; those exempted from real estate taxes are
lands, buildings and improvements actually, directly and exclusively used for religious, charitable
or educational purposes

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the
exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a
charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is
defined as possessed and enjoyed to the exclusion of others; debarred from participation or
enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege
exclusively."40 If real property is used for one or more commercial purposes, it is not exclusively
used for the exempted purposes but is subject to taxation. 41 The words "dominant use" or
"principal use" cannot be substituted for the words "used exclusively" without doing violence to
the Constitutions and the law.42 Solely is synonymous with exclusively.43

What is meant by actual, direct and exclusive use of the property for charitable purposes is the
direct and immediate and actual application of the property itself to the purposes for which the
charitable institution is organized. It is not the use of the income from the real property that is
determinative of whether the property is used for tax-exempt purposes. 44

The petitioner failed to discharge its burden to prove that the entirety of its real property is
actually, directly and exclusively used for charitable purposes. While portions of the hospital are
used for the treatment of patients and the dispensation of medical services to them, whether
paying or non-paying, other portions thereof are being leased to private individuals for their
clinics and a canteen. Further, a portion of the land is being leased to a private individual for her
business enterprise under the business name "Elliptical Orchids and Garden Center." Indeed, the
petitioner’s evidence shows that it collected ₱1,136,483.45 as rentals in 1991 and ₱1,679,999.28
for 1992 from the said lessees.

72
Mandanas, et al. v. Executive Secretary, et al., GR Nos. 199802

Facts:

One of the key features of the 1987 Constitution is its push towards decentralization of
government and local autonomy. Local autonomy has two facets, the administrative and the
fiscal. Fiscal autonomy means that local governments have the power to create their own
sources of revenue in addition to their equitable share in the national taxes released by the
National Government, as well as the power to allocate their resources in accordance with their
own priorities.  Such autonomy is as indispensable to the viability of the policy of decentralization
1

as the other.

Implementing the constitutional mandate for decentralization and local autonomy, Congress
enacted Republic Act No. 7160, otherwise known as the Local Government Code (LGC), in order
to guarantee the fiscal autonomy of the LGUs by specifically providing that:

SECTION 284. Allotment of Internal Revenue Taxes. - Local government units shall have a
share in the national internal revenue taxes based on the collection of the third fiscal year
preceding the current fiscal year as follows:

(a) On the first year of the effectivity of this Code, thirty percent (30%); (b) On the second year,
thirty-five percent (35%); and

(c) On the third year and thereafter, forty percent (40%).

Provided, That in the event that the National Government incurs an unmanageable public sector
deficit, the President of the Philippines is hereby authorized, upon the recommendation of
Secretary of Finance, Secretary of Interior and Local Government, and Secretary of Budget and
Management, and subject to consultation with the presiding officers of both Houses of Congress
and the presidents of the "liga", to make the necessary adjustments in the internal revenue
allotment of local government units but in no case shall the allotment be less than thirty percent
(30%) of the collection of national internal revenue taxes of the third fiscal year preceding the
current fiscal year: Provided, further, That in the first year of the effectivity of this Code, the local
government units shall, in addition to the thirty percent (30%) internal revenue allotment which
shall include the cost of devolved functions for essential public services, be entitled to receive the
amount equivalent to the cost of devolved personal services.

The share of the LGUs, heretofore known as the Internal Revenue Allotment (IRA), has been
regularly released to the LGUs. According to the implementing rules and regulations of the LGC,
the IRA is determined on the basis of the actual collections of the National Internal Revenue
Taxes (NIRTs) as certified by the Bureau of Internal Revenue (BIR). 2

On the substantive considerations, the OSG avers that Article 284 of the LGC is consistent with
the mandate of Section 6, Article X of the 1987 Constitution to the effect that the LGUs shall have
a just share in the national taxes; that the determination of the just share is within the discretion
of Congress; that the limitation under the LGC of the basis for the just share in the NIRTs was
within the powers granted to Congress by the 1987 Constitution; that the LGUs have been
receiving their just share in the national taxes based on the correct base amount; that Congress
has the authority to exclude certain taxes from the base amount in computing the IRA; that there
is a distinction between the VA Ts, excise taxes and DSTs collected by the BIR, on one hand,
and the VA Ts, excise taxes and DSTs collected by the BOC, on the other, thereby warranting
their different treatment; and that Development Budget Coordination Committee (DBCC)
Resolution No. 2003-02 dated September 4, 2003 has limited the base amount for the
computation of the IRA to the "cash collections based on the BIR data as reconciled with the

73
Bureau of Treasury;" and that the collection of such national taxes by the BOC should be
excluded.

Issue:

whether or not the exclusion of certain national taxes from the base amount for the computation
of the just share of the LGUs in the national taxes is constitutional.

Ruling:

III.
The extent of local autonomy in the Philippines

The 1987 Constitution has surely encouraged decentralization by mandating that a system of
decentralization be instituted through the LGC in order to enable a more responsive and
accountable local government structure.  It has also delegated the power to tax to the LGUs by
28

authorizing them to create their own sources of income that would make them self-reliant.  It 29

further ensures that each and every LGU will have a just share in national taxes as well in the
development of the national wealth.

Fiscal decentralization means that the LGUs have the power to create their own sources of
revenue in addition to their just share in the national taxes released by the National Government.
It includes the power to allocate their resources in accordance with their own priorities. It thus
extends to the preparation of their budgets, so that the local officials have to work within the
constraints of their budgets. The budgets are not formulated at the national level and imposed on
local governments, without regard as to whether or not they are relevant to local needs and
resources. Hence, the necessity of a balancing of viewpoints and the harmonization of proposals
from both local and national officials, who in any case are partners in the attainment of national
goals, is recognized and addressed. 41

Fiscal decentralization emanates from a specific constitutional mandate that is expressed in

several provisions of Article X (Local Government) of the 1987 Constitution, specifically: Section
5;  Section 6;  and Section 7.
42 43 44

The constitutional authority extended to each and every LGU to create its own sources of income
and revenue has been formalized from Section 128 to Section 133 of the LGC. To implement the
LGUs' entitlement to the just share in the national taxes, Congress has enacted Section 284 to
Section 288 of the LGC. Congress has further enacted Section 289 to Section 294 of the LGC to
define the share of the LGUs in the national wealth. Indeed, the requirement for the automatic
release to the LGUs of their just share in the national taxes is but the consequence of the
constitutional mandate for fiscal decentralization. 45

For sure, fiscal decentralization does not signify the absolute freedom of the LGUs to create their
own sources of revenue and to spend their revenues unrestrictedly or upon their individual whims
and caprices. Congress has subjected the LGUs' power to tax to the guidelines set in Section
130 of the LGC and to the limitations stated in Section 133 of the LGC. The concept of local
fiscal autonomy does not exclude any manner of intervention by the National Government in the
form of supervision if only to ensure that the local programs, fiscal and otherwise, are consistent
with the national goals.46

Lastly, policy- or decision-making decentralization exists if at least one sub-national tier of

government has exclusive authority to make decisions on at least one policy issue. 47

In fine, certain limitations are and can be imposed by Congress in all the forms of
decentralization, for local autonomy, whether as to power or as to administration, is not absolute.

74
The LGUs remain to be the tenants of the will of Congress subject to the guarantees that the
Constitution itself imposes.

Section 6, Article X the 1987 Constitution textually commands the allocation to the LGUs of a just
share in the national taxes, viz.:

Section 6. Local government units shall have a just share, as determined by law, in the national
taxes which shall be automatically released to them.

Section 6, when parsed, embodies three mandates, namely: (1) the LGUs shall have a just
share in the national taxes; (2) the just share shall be determined by law; and (3) the just
share shall be automatically released to the LGUs.

Although the power of Congress to make laws is plenary in nature, congressional lawmaking
remains subject to the limitations stated in the 1987 Constitution.  The phrase national internal
49

revenue taxes engrafted in Section 284 is undoubtedly more restrictive than the term national
taxes written in Section 6. As such, Congress has actually departed from the letter of the 1987
Constitution stating that national taxes should be the base from which the just share of the LGU
comes. Such departure is impermissible. Verba legis non est recedendum (from the words of a
statute there should be no departure).   Equally impermissible is that Congress has also thereby
50

curtailed the guarantee of fiscal autonomy in favor of the LGUs under the 1987 Constitution.

Taxes are the enforced proportional contributions exacted by the State from persons and
properties pursuant to its sovereignty in order to support the Gove1nment and to defray all the
public needs. Every tax has three elements, namely: (a) it is an enforced proportional
contribution from persons and properties; (b) it is imposed by the State by virtue of its
sovereignty; and (c) it is levied for the support of the Government.  Taxes are classified into
51

national and local. National taxes are those levied by the National Government, while local taxes
are those levied by the LGUs. 52

What the phrase national internal revenue taxes as used in Section 284 included are all the taxes
enumerated in Section 21 of the National Internal Revenue Code (NIRC), as amended by R.A.
No. 8424, viz.:

Section 21. Sources of Revenue. - The following taxes, fees and charges are deemed to be
national internal revenue taxes:

(a) Income tax;

(b) Estate and donor's taxes;

(c) Value-added tax;

(d) Other percentage taxes;

(e) Excise taxes;

(f) Documentary stan1p taxes; and

(g) Such other taxes as arc or hereafter may be imposed and collected by the Bureau of
Internal Revenue.

75
In view of the foregoing enumeration of what are the national internal revenue taxes, Section 284
has effectively deprived the LGUs from deriving their just share from other national taxes, like the
customs duties.

Strictly speaking, customs duties are also taxes because they are exactions whose proceeds
become public funds. According to Garcia v. Executive Secretary,  customs duties is the
53

nomenclature given to taxes imposed on the importation and exportation of commodities and
merchandise to or from a foreign country. Although customs duties have either or both the
generation of revenue and the regulation of economic or social activity as their moving purposes,
it is often difficult to say which of the two is the principal objective in a particular instance, for,
verily, customs duties, much like internal revenue taxes, are rarely designed to achieve only one
policy objective.  We further note that Section 102(00) of R.A. No. 10863 (Customs
54

Modernization and Tariff Act) expressly includes all fees and charges imposed under the Act
under the blanket term of taxes.

It is clear from the foregoing clarification that the exclusion of other national taxes like customs
duties from the base for determining the just share of the LG Us contravened the express
constitutional edict in Section 6, Article X the 1987 Constitution.

Still, the OSG posits that Congress can manipulate, by law, the base of the allocation of the just
share in the national taxes of the LGUs.

The position of the OSG cannot be sustained. Although it has the primary discretion to determine
and fix the just share of the LGUs in the national taxes (e.g., Section 284 of the LGC), Congress
cannot disobey the express mandate of Section 6, Article X of the 1987 Constitution for the just
share of the LGUs to be derived from the national taxes. The phrase as determined by law in
Section 6 follows and qualifies the phrase just share, and cannot be construed as qualifying the
succeeding phrase in the national taxes. The intent of the people in respect of Section 6 is really
that the base for reckoning the just share of the LGUs should includes all national taxes. To read
Section 6 differently as requiring that the just share of LGUs in the national taxes shall be
determined by law is tantamount to the unauthorized revision of the 1987 Constitution.

It is clear from the foregoing clarification that the exclusion of other national taxes like customs
duties from the base for determining the just share of the LG Us contravened the express
constitutional edict in Section 6, Article X the 1987 Constitution.

Still, the OSG posits that Congress can manipulate, by law, the base of the allocation of the just
share in the national taxes of the LGUs.

The position of the OSG cannot be sustained. Although it has the primary discretion to determine
and fix the just share of the LGUs in the national taxes (e.g., Section 284 of the LGC), Congress
cannot disobey the express mandate of Section 6, Article X of the 1987 Constitution for the just
share of the LGUs to be derived from the national taxes. The phrase as determined by law in
Section 6 follows and qualifies the phrase just share, and cannot be construed as qualifying the
succeeding phrase in the national taxes. The intent of the people in respect of Section 6 is really
that the base for reckoning the just share of the LGUs should includes all national taxes. To read
Section 6 differently as requiring that the just share of LGUs in the national taxes shall be
determined by law is tantamount to the unauthorized revision of the 1987 Constitution.

76