Module 3 – LIMITATION OF THE TAXING POWER

Limitations on the Taxing Power

As the areas which "used to be left to private enterprise and initiative and which the government was called
upon to enter optionally, and only 'because it was better equipped to administer for the public welfare than
any private individual or group of individuals' continue to lose their well-defined boundaries and to be
absorbed within activities that the government must undertake in its sovereign capacity if it is to meet the
increasing social challenges of the times, there arises a need for more revenues in order to meet the needs
of an ever-widening scope of state activity. And with this pervasive power comes the realization that taxation
may mean the ruin or the prosperity of a nation, if no limitation for its use is exercised. Thus the power of
taxation, for all its plenitude, is not without restrictions.
· These limitations are classified as Inherent Limitations and Constitutional Limitations.

Inherent Limitations on the Taxing Power

These limitations proceed from the very nature of the taxing power itself. These are: public purpose,
international comity, territoriality, non-delegation of the power to tax, and the various tax exemptions
granted government agencies or instrumentalities.

Public Purpose of Taxes

Taxes are exacted only for a 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. 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."

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.

A revenue measure must stand the first requisite of a lawful taxation — that the purpose for which it is laid
be a public purpose. The legislature is bereft of power to appropriate revenues for anything other than a
public purpose. Where an assailed tax measure is not for a public purpose, such an act is tantamount to
confiscation of property, though done in the guise of law, and the taxpayer may rightly invoke the law for
his protection. This appeal to the law for the protection of the individual's property would then place the
issue within the ambit of the judiciary.

Justice Isagani Cruz defines 'public purpose' as embracing not merely direct public benefit or advantage
but also indirect public benefit.

Who may determine “public purpose”?

This is a legislative prerogative. The power to determine whether the purpose of taxation is public or private
resides in Congress. The independence of die Legislature is an axiom in government; to be independent,
it must act on its own good time, on its own judgment, influenced by its own reason, restrained only as the
people may have seen fit to restrain the grant of legislative power in making it.
However, this will not prevent the court from questioning the propriety of such a statute on the ground that
the law enacted is not for a public purpose; but once it is settled that the law is for a public purpose, the
court may no longer inquire into the wisdom, expediency or necessity of such tax measure.

Purpose When Deemed Public

It is the purpose which determines the public character of the tax law, not the number of persons benefited.
As long as the ultimate result favors the welfare of the public in general, the appropriation of a public
revenue is deemed done for a public purpose.

Upon this point, the 20% discount privilege (mandated by R.A. 7432, as amended by R.A. 9257) to which
senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong.
(CIR v. Central Luzon Drug Corporation, 456 SCRA 414, 444)

Cases of "Public Purpose"

1. Public Improvement

2. Unemployment relief

3. Buildings and roads / Infrastructure

4. Local police forces (subsidies) under R.A. 6141

5. Industries classified as indispensable under P.D. 1987

6. Construction of home sites

7. Promotion of science and invention

8. Upliftment of the underprivileged

9. Rehabilitation of the sugar industry

10. Pensions to deserving retirees

11. Oil industry's protection

1. Socialized housing

m. Educational subsidy

Pascual vs. Secretary of Public Works and Communications, et. al., G.R. No. L- 10405 December
29, 1960

WENCESLAO PASCUAL, in his official capacity as Provincial Governor of Rizal, petitioner

appellant,
vs.
THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET AL.,
respondents appellees.
G.R. No. L-10405 December 29, 1960
FACTS:
• On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal, instituted this
action for declaratory relief, with injunction, upon the ground that RA No. 920, entitled "An Act
 Appropriating Funds for Public Works", contained, in section 1-C (a) thereof, an item (43[h]) of
P85,000.00 "for the construction, reconstruction, repair, extension and improvement" of Pasig
feeder road terminals.
• (FEEDER ROADS: Gen. Roxas, Gen. Araneta, Gen. Lucban, Gen. Capinpin, Gen. Segundo, Gen.
Delgado, Gen. Malvar, Gen. Lim)
• That, at the time of the passage and approval of said Act, the aforementioned feeder roads were
"nothing but projected and planned subdivision roads, not yet constructed, . . . within the Antonio
Subdivision situated at Pasig, Rizal" which projected feeder roads "do not connect any government
property or any important premises to the main highway"
• That the Antonio Subdivision were private property of respondent Jose C. Zulueta, who, at
the time of the passage and approval of said Act, was a member of the Senate of the Philippines.
• That on May, 1953, respondent Zulueta, addressed a letter to the Municipal Council of
Pasig, Rizal, offering to donate said projected feeder roads to the municipality of Pasig, Rizal. •
That, on June 13, 1953, the offer was accepted by the council, subject to the condition "that
the donor would submit a plan of the said roads and agree to change the names of two of them" -
no deed of donation in favor of the municipality of Pasig was, however, executed. • On July 10,
1953, respondent Zulueta wrote another letter to said council, calling attention to the approval of
RA No. 920, and the sum of P85,000.00 appropriated therein for the construction of the projected
feeder roads in question.
• Municipal council of Pasig endorsed said letter of respondent Zulueta to the District Engineer of
Rizal, who, up to the present "has not made any endorsement thereon" that inasmuch as
the projected feeder roads in question were private property at the time of the passage
and approval of Republic Act No. 920, the appropriation of P85,000.00 therein made, for
the construction, reconstruction, repair, extension and improvement of said projected feeder
roads, was illegal and, therefore, void ab initio"
• That said appropriation of P85,000.00 was made by Congress because its members were made to
believe that the projected feeder roads in question were "public roads and not private streets of a
private subdivision”
• In order to give a semblance of legality, when there is absolutely none, to the
aforementioned appropriation", respondents Zulueta executed on December 12, 1953, while he
was a member of the Senate of the Philippines, an alleged deed of donation of the four (4) parcels
of land constituting said projected feeder roads, in favor of the Government of the Republic of
the Philippines; that said alleged deed of donation was, on the same date, accepted by the
then Executive Secretary; that being subject to an onerous condition, said donation partook of
the nature of a contract;
• Said donation violated the provision of our fundamental law prohibiting members of Congress from
being directly or indirectly financially interested in any contract with the Government, and,
hence, is unconstitutional, as well as null and void ab initio, for the construction of the projected
feeder roads in question with public funds would greatly enhance or increase the value of the
aforementioned subdivision of respondent Zulueta.
• Aside from relieving him from the burden of constructing his subdivision streets or roads at his own
expense"; that the construction of said projected feeder roads was then being undertaken by the
Bureau of Public Highways; and that, unless restrained by the court, the respondents would
continue to execute, comply with, follow and implement the aforementioned
illegal provision of law, "to the irreparable damage, detriment and prejudice not only to
the petitioner but to the Filipino nation.
• Petitioner prayed that the contested item of Republic Act No. 920 be declared null and void; that the
alleged deed of donation of the feeder roads in question be "declared unconstitutional and,
therefor, illegal"; that a writ of injunction be issued enjoining the Secretary of Public Works and
Communications, the Director of the Bureau of Public Works and Highways and Jose C. Zulueta
from ordering or allowing the continuance of the above-mentioned feeder roads project, and from
making and securing any new and further releases on the aforementioned item of Republic Act
No. 920.
• Respondent’s Contention: petitioner had "no legal capacity to sue", and the petition did "not state a
cause of action".
• Respondent Zulueta alleged that the Provincial Fiscal of Rizal, not its provincial governor, should
represent the Province of Rizal.
• That he (respondent) is " not aware of any law which makes illegal the appropriation of public funds
for the improvements of . . . private property"; and that, the constitutional provision invoked by
petitioner is inapplicable to the donation in question, the same being a pure act of liberality, not
a contract.
• Other respondents, in turn, maintained that petitioner could not assail the appropriation in question
because "there is no actual bona fide case in which the validity of Republic Act No. 920 is
necessarily involved" and petitioner "has not shown that he has a personal and substantial
interest" in said Act "and that its enforcement has caused or will cause him a direct injury."
• Zulueta’s Contention: There is public purpose for the feeder roads People living in the subdivision
will directly be benefited from the construction of the roads. The government also gains from the
donation of the land supposed to be occupied by the streets
RTC Decision:
• Since public interest is involved in this case, the Provincial Governor of Rizal (Pascual) and the
provincial fiscal thereof who represents him therein, "have the requisite personalities" to question
the constitutionality of the disputed item of RA No. 920; (On a different issue, Pascual was
dismissed by CFI for lack of legal standing) -baka lang iask hehe
• The legislature is without power appropriate public revenues for anything but a public purpose",
that the instructions and improvement of the feeder roads in question, if such roads where private
property, would not be a public purpose; that, being subject to the following condition which is
onerous, donation in question is a contract; that said donation or contract is "absolutely forbidden
by the Constitution" and consequently "illegal", for Article 1409 of the Civil Code of the
Philippines, declares in existence and void from the very beginning contracts "whose cause,
objector purpose is contrary to law, morals . . . or public policy"
• THE CONDITION: “within donation is hereby made upon the condition that the Government of the
Republic of the Philippines will use the parcels of land hereby donated for street purposes only
and for no other purposes whatsoever; it being expressly understood that should the Government
of the Republic of the Philippines violate the condition hereby imposed upon it, the title to the
land hereby donated shall, upon such violation, ipso facto revert to the DONOR, JOSE C.
ZULUETA.
• The legality of said donation may not be contested, however, by petitioner herein, because
his "interest are not directly affected" thereby; and that, accordingly, the appropriation in
question "should be upheld" and the case dismissed.
• The appropriation in question was clearly for private not public purpose.

ISSUE: WON the appropriation is valid?

HELD: NO. The appropriation is void for being an appropriation for a private purpose. The land
on which the proiected feeder roads were to be constructed belonged to Senator Zulueta at the time
RA 920 was passed by Congress. The subsequent donation of the property to the government to make
the
propertv public does not cure the constitutional defect. The fact that the law was passed when the
said propertv was still private property cannot be ignored. The validity of a statute depends on the
powers of Congress at the time of its passage or approval, not upon events occurring thereto, unless,
it is an amendment or the organic law. "The right of the legislature to appropriate funds is correlative
with its right to tax, under constitutional provisions against taxation except for public purposes
and prohibiting the collection of a tax for one purpose and the devotion thereof to another purpose,
no appropriation or state funds can be made for other than a public purpose. "In accordance with the
rule that the taxing power must be exercised tor public purposes only, money raised by taxation can
be expanded only for public purposes and not for the advantage of individuals. The test of
the constitutionality of a statute requiring the use of public funds is whether the statute is destined
to promote public interest as opposed to the furtherance of the advantage of anyone. Inasmuch as
the land on which the projected feeder roads were to be constructed belonged then to Zulueta, the
result is that said appropriation sought a private purpose, and hence, was null and void.

Non-Delegability of the Taxing Power

General rule: The power to tax is exclusively vested in the legislative
Exceptions:

Art IV Section 28 of the Constitution

The Congress, may by law, authorize the president to impose by virtue of Flexible Power Clause:
a. Tarrif rates
b. Import and import quota or ban importation of any commodity as may be necessary
c. Impose additional duty on all imports not exceeding 10% whenever necessary

Subject to the limitations that the Congress may impose.

Hence, the president, in the advice of NEDA may:

1. Increase, remove, reduce existing productive tarrif rates of import duty but in no case shall be
higher than 100%
2. Establish import quota

Article X Section 5 of the Constitution

Each local government unit shall have the power to create its own sources of revenue, fees, charges subject
to such limitations as may be provided by the Congress. Such charges shall accrue exclusively to the LGU.

Osmena v. Orbos, Etc., Et al., supra

FACTS

P.D. 1956 creating a Special Account in the General Fund, designated as the Oil Price
Stabilization Fund (OPSF). The OPSF was designed to reimburse oil companies for cost increases
in crude oil and imported petroleum products resulting from exchange rate adjustments and from
increases in the world market prices of crude oil.

Subsequently, the OPSF was reclassified into a "trust liability account," in virtue of E.O.
1024, and ordered released from the National Treasury to the Ministry of Energy. The same
7

Executive Order also authorized the investment of the fund in government securities, with the
earnings from such placements accruing to the fund.

President Corazon C. Aquino, amended P.D. 1956. She promulgated Executive Order No.
137 on February 27, 1987, expanding the grounds for reimbursement to oil companies for possible
cost underrecovery incurred as a result of the reduction of domestic prices of petroleum products,
the amount of the underrecovery being left for determination by the Ministry of Finance.

The petition further avers that the creation of the trust fund violates §
29(3), Article VI of the Constitution. The petitioner argues that "the monies collected pursuant to
. . P.D. 1956, as amended, must be treated as a 'SPECIAL FUND,' not as a 'trust account' or a 'trust
fund,' and that "if a special tax is collected for a specific purpose, the revenue generated therefrom
shall 'be treated as a special fund' to be used only for the purpose indicated, and not channeled to
another government objective." Petitioner further points out that since "a 'special fund' consists
10

of monies collected through the taxing power of a State, such amounts belong to the State, although
the use thereof is limited to the special purpose/objective for which it was created."

ISSUES:
1) Was the Oil Price Stabilization Fund (OSPF) a tax?
2) What are the requisites for a valid delegation of the taxation power? Was there undue
delegation of such power?

RULING

While the funds collected may be referred to as taxes, they are exacted in the exercise of
the police power of the State. Moreover, that the OPSF is a special fund is plain from the special
treatment given it by E.O. 137. It is segregated from the general fund; and while it is placed in
what the law refers to as a "trust liability account," the fund nonetheless remains subject to the
scrutiny and review of the COA. The Court is satisfied that these measures comply with the
constitutional description of a "special fund." Indeed, the practice is not without precedent.

With regard to the alleged undue delegation of legislative power, the Court finds that the
provision conferring the authority upon the ERB to impose additional amounts on petroleum
products provides a sufficient standard by which the authority must be exercised. In addition to
the general policy of the law to protect the local consumer by stabilizing and subsidizing domestic
pump rates, § 8(c) of P.D. 1956 expressly authorizes the ERB to impose additional amounts to
18

augment the resources of the Fund.

What petitioner would wish is the fixing of some definite, quantitative restriction, or "a specific
limit on how much to tax." The Court is cited to this requirement by the petitioner on the premise
19

that what is involved here is the power of taxation; but as already discussed, this is not the case.
What is here involved is not so much the power of taxation as police power. Although the provision
authorizing the ERB to impose additional amounts could be construed to refer to the power of
taxation, it cannot be overlooked that the overriding consideration is to enable the delegate to act
with expediency in carrying out the objectives of the law which are embraced by the police power
of the State.

For a valid delegation of power, it is essential that the law delegating the power must be
(1) complete in itself, that is it must set forth the policy to be executed by the delegate and (2) it
must fix a standard — limits of which
are sufficiently determinate or determinable — to which the delegate must conform.

The standard, as the Court has already stated, may even be implied. In that light, there can
be no ground upon which to sustain the petition, inasmuch as the challenged law sets forth a
determinable standard which guides the exercise of the power granted to the ERB. By the same
token, the proper exercise of the delegated power may be tested with ease. It seems obvious that
what the law intended was to permit the additional imposts for as long as there exists a need to
protect the general public and the petroleum industry from the adverse consequences of pump rate
fluctuations. "Where the standards set up for the guidance of an administrative officer and the
action taken are in fact recorded in the orders of such officer, so that Congress, the courts and the
public are assured that the orders in the judgment of such officer conform to the legislative
standard, there is no failure in the performance of the legislative functions."
Situs of Taxation

Philippine Guaranty Co., Inc. V. Commissioner of Internal Revenue, L-22074 April 30, 1965

Doctrine: The power to tax is an attribute of sovereignty. It is a power emanating

from necessity. It is a necessary burden to preserve the State's sovereignty and a means
to give the citizenry an army to resist an aggression, a navy to defend its shores
from invasion, a corps of civil servants to serve, public improvement designed for
the enjoyment of the citizenry and those which come within the State's territory, and
facilities and protection which a government is supposed to provide.

Facts: Sometime in the early '50s, local insurance company The Philippine Guaranty
Co., Inc., entered into reinsurance contracts with several foreign insurance companies
not doing business in the Philippines, namely: Imperio Compañia de Seguros, La Union
y El Fenix Español, Overseas Assurance Corp., Ltd., Socieded Anonima de
Reaseguros Alianza, Tokio Marino; Fire Insurance Co., Ltd., Union Assurance Society
Ltd., Swiss
Reinsurance Company and Tariff Reinsurance Limited. Part of the contracts was
the agreement that in consideration of the assumption of liability of the foreign
insurance companies, Philippine Guaranty will be ceding to these companies a portion
of the premiums on insurance it has originally underwritten in the Philippines. The
foreign insurers, on the other hand, agreed to compensate Philippine Guaranty in an
amount equal to 5% of the reinsurance premiums in consideration for managing or
administering their affairs in the Philippines. In 1953, Philippine Guaranty ceded
P842,466.71 to the foreign insurers. In 1954, the amount ceded was P721,471.85. In its
income tax returns for the said years, Philippine Guaranty excluded the aforecited
amounts from its gross income, neither withholding nor paying tax on them. In 1959,
following a tax assessment, the Commissioner of Revenue ordered Philippine Guaranty
to pay up P230,673 and P234, 364 representing withholding tax and surcharges on the
ceded reinsurance premiums for the years 1953 and 1954, respectively. Philippine
Guaranty protested the assessment on the ground that reinsurance premiums ceded to
foreign reinsurers not doing business in the Philippines were not subject to withholding
tax. It maintained that the reinsurance premiums in question did not constitute income
from sources within the Philippines because the foreign reinsurers did not engage in
business in the Philippines, nor did they have office here. Its protest was denied and it
appealed to the Court of Tax Appeals, which ultimately affirmed the order of the
Commissioner of Revenue but modified the sum due to P375,345. Hence, the instant
petition.

Issue: Whether the reinsurance premiums ceded by Philippine Guaranty to

foreign reinsurers not doing business in the Philippines are subject to withholding tax.
Held: Yes. Reinsurance premiums on local risks ceded by domestic insurers to
foreign reinsurers not doing business in the Philippines are subject to withholding tax.
Where the reinsurance contracts show that the activities that constituted the undertaking
to reinsure a domestic insurer against losses arising from the original insurances in the
Philippines were performed in the Philippines, the reinsurance premiums are considered
as coming from sources within the Philippines and are subject to Philippine Income Tax.
Section 24 of the Tax Code does not require a foreign corporation to engage in business
in the Philippines in subjecting its income to tax. It suffices that the activity creating the
income is performed or done in the Philippines. What is controlling, therefore, is not the
place of business but the place of activity that created an income. Section 37 of the Tax
Code is not an all-inclusive enumeration, for it merely directs that the kinds of income
mentioned therein should be treated as income from sources within the Philippines but it
does not require that other kinds of income should not be considered likewise. The
defense of reliance in good faith on rulings of the Commissioner of Internal Revenue
requiring no withholding of the tax due on reinsurance premiums may free the taxpayer
from the payment of surcharge or penalties imposed for failure to pay the
corresponding withholding tax, but it certainly would not exculpate it from liability to pay
such withholding tax. The Government is not estopped from collecting taxes by the
mistakes or errors of its agents. The withholding tax on reinsurance premiums should be
computed on the total amount ceded instead of on the amount actually remitted to foreign
reinsurers. Sections 53 and 54 of the Tax Code allow no deduction from the income
therein enumerated in determining the amount to be withheld. Accordingly, in computing
the withholding tax due on the reinsurance premiums no deduction shall be recognized.

Reagan vs. Commissioner of Internal Revenue, G.R. No. L-26379, December 27, 1969

Facts: The petitioner, a citizen of the United States and an employee of Bendix Radio, Division of Bendix
Aviation Corporation, which provides technical assistance to the United States Air Force, was assigned at
Clark Air Base, Philippines, on or about July 7, 1959. Nine (9) months thereafter and before his tour of duty
expired, petitioner imported on April 22, 1960 a tax-free 1960 Cadillac car with accessories. Then came the
following: "On July 11, 1960, more than two (2) months after the 1960 Cadillac car was imported into the
Philippines, petitioner requested the Base Commander, Clark Air Base, for a permit to sell the car, which
was granted provided that the sale was made to a member of the United States Armed Forces or a citizen
of the United States employed in the U.S. military bases in the Philippines. On the same date, July 11,
1960, petitioner sold his car for 66,600.00. On the same date, Pfc. Willie (William) Johnson, Jr. sold the car
to Fred Meneses. As a result of the transaction made, respondent Commissioner of Internal Revenue, after
deducting the landed cost of the car as well as the personal exemption to which petitioner was entitled,
fixed as his net taxable income arising from such transaction the amount of P17.912.34, rendering him
liable for income tax in the sum of P2,979.00. After paying the sum, he sought a refund from respondent
claiming that he was exempt, but pending action on his request for refund, he filed the case with the Court
of Tax Appeals seeking recovery of the sum of P2,979.00 plus the legal rate of interest.

Issue: Whether the said income tax of P2,979.00 was legally collected by respondent for petitioner.
Held: NO. This appeal predicated on a legal theory we cannot accept, Petitioner cannot make out a case
for reversal. The Philippines being independent and sovereign, its authority may be exercised over its entire
domain. There is no portion thereof that is beyond its power. Within its limits, its decrees are supreme, its
commands paramount. Its laws govern therein, and everyone to whom it applies must submit to its terms.
That is the extent of its jurisdiction, both territorial and personal. Necessarily, likewise, it has to be exclusive.
If it were not thus, there is a diminution of its sovereignty. It is to be admitted that any state may, by its
consent, express or implied, submit to a restriction of its sovereign rights, There may thus be a curtailment
of what otherwise is a power plenary in character. That is the concept of sovereignty as auto-limitation,
which, in the succinct language of Jellinek, "is the property of a state-force due to which it has the exclusive
capacity of legal self- determination and self-restriction. A state then, if it chooses to, may refrain from the
exercise of what otherwise is illimitable competence. Its laws may as to some persons found within its
territory no longer control. Nor does the matter end there. It is not precluded from allowing another power
to participate in the exercise of jurisdictional right over certain partions of its territary. If it does so, it by no
means follows that such areas become impressed with an alien character. They retain their status as native
soil. They are still subject to its authority. Its jurisdiction may be diminished, but it does not disappear. So it
is with the bases under lease to the American armed forces by virtue of the military bases agreement of
1947. They are not and cannot be foreign territory. The Clark Air Force Base is not a foreign soil or territory
for purposes of income tax legislation. There is nothing in the Military Bases Agreement that lends support
to such assertion, It has not become foreign soil or territory. The Philippine's jurisdictional rights therein,
certainly not excluding the power to tax, have been preserved. As to certain tax matters, an appropriate
exemption was provided for.

Exemption of Government from Taxes

General rule: Properties of the National Government and LGU are not subject to tax

May the government tax itself?

The Constitution is silent. Chief Justice Davide., nothing can prevent Congress from decreeing that even
instrumentalities or agencies of the government performing governmental functions may be subject to tax.

Social Security System vs. City of Bacolod et.al., G.R. No. L-35726, July 21, 1982

Doctrine: SSS exempted from realty taxation. — What is decisive is that the properties possessed by
the SSS, albeit devoted to private or proprietary purpose, are in fact owned by the government of
the Philippines. As such they are exempt from realty taxes. It is axiomatic that when public property
is involved, exemption is the rule and taxation, the exception. In connection with the issue at hand,
it would not be amiss to state that Presidential Decree No. 24, which amended the Social Security Act
of 1954, has already removed all doubts as to the exemption of the SSS from taxation.

Facts:

∙ Petitioner Social Security System is a government agency created under Republic Act No. 1161, whose
primary function is to “develop, establish gradually and perfect a social security system which shall
be suitable to the needs of the people throughout the Philippines, and shall provide protection
against the hazards of disability, sickness, old age, and death.
∙ petitioner maintains a number of regional offices, one of which is the five-storey building, known as
SSS Building in Bacolod City, occupying four parcels of land. In 1970, said lands and building were
assessed for taxation at P1,744,840.00.
∙ For petitioner’s failure to pay the realty taxes for the years 1968, 1969 and 1970 which, including
penalties, amounted to P104,956.06, respondent city sometime in early 1970 levied upon said
lands and building; and on April 3, 1970, it declared said properties forfeited in its favor.
∙ In protest thereto, petitioner addressed a letter dated July 27, 1970 to the City Mayor
of Bacolod, through respondent city treasurer, seeking reconsideration of the
forfeiture proceedings on the ground that petitioner, being a government-owned and
controlled corporation, is exempt from payment of real estate taxes.
∙ The lower Court declared that the properties of the Social Security System not exempt from
the payment of real property tax inasmuch as the SSS does not fall under the provisions of Section 29
of the Charter of the City of Bacolod, and considering further that there is no law which exempts
said entity from taxes, the same should therefore be subject to taxation like any other corporation
in accordance with Section 27 of the City Charter of Bacolod City.
Issue: WON the properties in question, which are concededly owned by government are exempt
from realty taxes? (yes)
Held: the court ruled that under Section 29 of the Charter of the City of Bacolod, they are so exempt.

It bears emphasis that the said section does not contain any qualification whatsoever in providing
for the exemption from real estate taxes of “lands and buildings owned by the Commonwealth or
Republic of Philippines.” Hence, when the legislature exempted lands and buildings owned by the
government from payment of said taxes, what it intended was a broad and comprehensive application
of such mandate, regardless of whether such property is devoted to governmental or proprietary
purpose.
What is decisive is that the properties possessed by the SSS, albeit devoted to private or
proprietary purpose, are in fact owned by the government of the Philippines. As such they are exempt
from realty taxes. It is axiomatic that when public property is involved, exemption is the rule and
taxation, the exception.

International Comity

Section 2 Art II of the Constitution provides that the Philippines adopts the generally accepted principles
of international law as part of the law of the land and adheres to the policy of peace, equality, justice,
freedom, cooperation, and amity with all nations.

Principle of Sovereign Equality Among States – states are juridically equal, enjoy the same rights, have
equal capacity in their exercise. The rights of each one fo not depend upon the power which it possesses
to assure its exercise but upon the simple factof its existence as a person.
· This principle finds its roots in the rule of par in parem non habet imperium where even the strongest
state cannot assume jurisdiction over another state, no matter how weak. All states are entitled to
their dignity and the protection of their honor and reputation.

Example: If a taxes are imposed on the income of foreign ambassadors, such law is not valid because
under international law, foreign embassies are considered extensions of the territoriality of the foreign
states; to impose tax upon them would be tantamount to an exercise of jurisdiction over these states.

Section 159, Local Government Code

SECTION 159. Exemption. - The following are exempt from the community tax:

1. (1) Diplomatic and consular representatives; and

2. (2) Transient visitors when their stay in the Philippines does not exceed three (3) months.

Constitutional Limitations on Taxing Power

Due Process of Law (SEC 1 ART 3 1987 CONSTI)

General rule: No person shall be deprived of life, liberty, or property without due process. One may only
be deprived of due process if the requirement of notice and hearing has been complied with.
Violation of Due Process
a. The tax imposed is for a private purpose, as distinguished from a public purpose
b. Imposed on property outside of the state (extra-territorial taxation)
c. Arbitrary and oppressive methods used in assessing and collecting taxes

Exception: A tax does not violate the Due Process as applied to a particular tax payer although the purpose
of the tax will result in injury rather than a benefit to such.

When Due Process may be invoked –

a. Statute is so arbitrary that it finds no support in the Constitution as it amounts to confiscation of
property

To justify the nullification of a tax law, there should be:

a. Clear breach of the Constitution
b. Proof of arbitrariness
c. The law must be unreasonable and unjust not merely hypothetical, argumentative or of doubtful
implication

The following are violations of due process:

a. Tax amounts to confiscatory of property
b. Subject of confiscation is outside the jurisdication of the taxing authority
c. The law imposed for a purpose other than a public purpose
d. The law which is applied retroactively imposes ubjust and oppressive taxes
e. In violation of inherent limitations

Sec. 1, Art. Ill, 1987 Constitution

SECTION 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall
any person be denied the equal protection of the laws.

Equal Protection of the Law

Sec. 1, Art. Ill, 1987 Constitution

No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be
denied the equal protection of the laws.

General rule: The Constitution requires uniformity not equality in taxation

Equal protection is accomplished

· When the burden of the tax falls equally and impartially upon all persons and property subject to it;
so that no higher rate or greater levy in proportion to value is imposed upon one person or species
or property than upon others similarly situated or of like character.

Uniformity
· Requires all taxable property subjected to the tax shall be alike and this requirement is violated if
particular kinds, species, or items of property are selected to bear the whole burden of the tax,
while others are left untaxed.
· Tax shall be uniform throughout the taxing district involved
· A state tax must be apportioned uniformly throughout a state, a country tax throughout the country,
and as city throughout the city.
Equal Protection Clause as applied to Taxation
· Does not require equal rates of taxation on different classes of property nor prohibit unequal
taxation so long as the inequality is not based upon arbitrary classification
 · Legislation is limited in its application does not violate the provisions if within the sphere of its
operation it affects alike all persons similarly situation
· Does not prohibit special legislation or legislation that is limited either in the objects to which it is
directed or by the territory within which it is operate, it merely requires that all persons subjected to
such legislation shall be treated alike, under like circumstances and conditions both in the privileges
conferred and in the liabilities imposed
Absolute Inequality Impossible
Inequality of taxes means substantial differences. Practical equality is constitutional equality. There is no
requirement that taxation shall be absolutely equal, only that tax laws be framed with a view to apportioning
the burdens of government so that each person enjoying government protection shall be required to
contribute so much as is his reasonable proportion, and no more.

Universal Application Not Required

The equal protection clause does not require the universal application of the laws on all persons or things
without distinction. By classification is meant the grouping of persons or things similar to each other in
certain particulars and different from all others in these particulars.

Classification; when proper

The power to select the subjects of taxation includes the power to make classifications. In order for the
classification to be valid:

a. It must be based on substantial distinction

b. Apply to both present and future conditions
c. Germane to the purposes of the law
d. Apply equally to all members of the same class
The principle of equality – admits of classification or distinction as long as they are based upon real and
substantial differences between the persons, property or privileges and those not taxed must bear some
reasonable relation to the object of purpose of legislation or to some permissible governmental policy or
legitimate end of government

Tiu v Court of Appeals, G.R. No. 127410, January 20, 1999

Facts: On March 13, 1992, Congress, with the approval of the President, passed into law RA 7227 entitled
“An Act Accelerating the Conversion of Military Reservations Into Other Productive Uses, Creating the
Bases Conversion and Development Authority for this Purpose, Providing Funds Therefor and for Other
Purposes.” Section 12 thereof created the Subic Special Economic Zone and granted thereto special
privileges within the framework and subject to the mandate and limitations of the Constitution and the
pertinent provisions of the Local Government Code, the Subic Special Economic Zone shall be developed
into a self-sustaining, industrial, commercial, financial and investment center to generate employment
opportunities in and around the zone and to attract and promote productive foreign investments, the Subic
Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow
or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as
well as provide incentives such as tax and duty-free importations of raw materials, capital and equipment.
However, exportation or removal of goods from the territory of the Subic Special Economic Zone to the
other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and
Tariff Code and other relevant tax laws of the Philippines; The provision of existing laws, rules and
regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within the Subic
Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all
businesses and enterprises within the Subic Special Economic Zone shall be remitted to the National
Government, one percent (1%) each to the local government units affected by the declaration of the zone
in proportion to their population area, and other factors. In addition, there is hereby established a
development fund of one percent (1%) of the gross income earned by all businesses and enterprises within
the Subic Special Economic Zone to be utilized for the development of municipalities outside the City of
Olongapo and the Municipality of Subic, and other municipalities contiguous to the base areas. In case of
conflict between national and local laws with respect to tax exemption privileges in the Subic Special
Economic Zone, the same shall be resolved in favor of the latter. Nine days after, on June 19, 1993, the
President issued Executive Order No. 97-A (EO 97-A), specifying the area within which the tax-and-duty-
free privilege was operative, to wit: “Section 1.1. The Secured Area consisting of the presently fenced —in
former Subic Naval Base shall be the only completely tax and duty-free area in the SSEFPZ [Subic Special
Economic and Free Port Zone]. Business enterprises and individuals (Filipinos and foreigners) residing
within the Secured Area are free to import raw materials, capital goods, equipment, and consumer items
tax and duty-free. Consumption items, however, must be consumed within the area. On October 26, 1994,
the petitioners challenged before this Court the constitutionality of EO 97-A for allegedly being violative of
their right to equal protection of the laws. This Court referred the matter to the Court of Appeals.
Ruling of CA: There is no substantial difference between the provisions of EO 97-A and Section 12 of RA
7227. In both, the ‘Secured Area’ is precise and well-defined as the lands occupied by the Subic Naval
Base and its contiguous extensions as embraced, covered and defined by the 1947 Military Bases
Agreement between the Philippines and the United States of America. The appellate court concluded that
such being the case, petitioners could not claim that EO 97-A is unconstitutional, while at the same time
maintaining the validity of RA 7227. The Court of Appeals further justified the limited application of the tax
incentives as being within the prerogative of the legislature, pursuant to its “avowed purpose [of serving]
some public benefit or interest.” It ruled that “EO 97-A merely implements the legislative purpose of [RA
7227].
Issue: Whether the Executive Order No. 97-A violates the equal protection clause of the Constitution.
Held: NO. Citing Section 12 of RA 7227, petitioners contend that the SSEZ encompasses (1) the City of
Olongapo, (2) the Municipality of Subic in Zambales, and (3) the area formerly occupied by the Subic Naval
Base. However, EO 97-A, according to them, narrowed down the area within which the special privileges
granted to the entire zone would apply to the present “fenced-in former Subic Naval Base” only. It has
thereby excluded the residents of the first two components of the zone from enjoying the benefits granted
by the law. It has effectively discriminated against them without reasonable or valid standards, in
contravention of the equal protection guarantee. We rule in favor of the constitutionality and validity of the
assailed EO. Said Order is not violative of the equal protection clause; neither is it discriminatory. Rather,
we find real nd substantive distinctions between the circumstances obtaining inside and those outside the
Subic Naval Base, thereby justifying a valid and reasonable classification. The fundamental right of equal
protection of the laws is not absolute, but is subject to reasonable classification. If the groupings are
characterized by substantial distinctions that make real differences, one class may be treated and regulated
differently from another. The classification must also be germane to the purpose of the law and must apply
to all those belonging to the same class. Explaining the nature of the equal protection guarantee. For the
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. It
can easily be deduced that the real concern of RA 7227 is to convert the lands formerly occupied by the
US military bases into economic or industrial areas. In furtherance of such objective, Congress deemed it
necessary to extend economic incentives to attract and encourage investors, both local and foreign. Among
such enticements are: (1) a separate customs territory within the zone, (2) tax-and-duty-free importations,
(3) restructured income tax rates on business enterprises within the zone, (4) no foreign exchange control,
(5) liberalized regulations on banking and finance, and (6) the grant of resident status to certain investors
and of working visas to certain foreign executives and workers. It is well-settled that the equal-protection
guarantee does not require territorial uniformity of laws. As long as there are actual and material differences
between territories, there is no violation of the constitutional clause. And of course, anyone, including the
petitioners, possessing the requisite investment capital can always avail of the same benefits by channeling
his or her resources or business operations into the fenced-off free port zone.

Sison vs. Ancheta, G.R. No. L-59431, July 25, 1984

ANTERO M. SISON, JR., petitioner,

vs.
RUBEN B. ANCHETA et. Al, respondents.
G.R. No. L-59431 July 25, 1984
 Note in this case:
• The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support
in the Constitution.
• Where the assailed tax measure is beyond the jurisdiction of the state, or it is not for public purpose,
or, in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on due
process grounds.

FACTS:
Success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1. Petitioners
challenged the validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of its
constitutional infirmity. The assailed provision further amends Section 21 of the National Internal
Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a) taxable
compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest
from bank deposits and yield or any other monetary benefit from deposit substitutes and from trust
fund and similar arrangements, (e) dividends and share of individual partner in the net profits of
taxable partnership, (f) adjusted gross income. 2. Petitioner as taxpayer alleges that by virtue thereof
"he would be unduly discriminated against by the imposition of higher rates of tax upon his income
arising from the exercise of his profession in relation to those which are imposed upon fixed income
or salaried individual taxpayers.
3. He characterizes the above section as arbitrary amounting to class legislation, oppressive
and capricious in character. For petitioner, there is a transgression of both the equal
protection and due process clauses of the Constitution as well as of the rule requiring uniformity
in taxation.
4. The OSG prayed for dismissal of the petition due to lack of merit.

Quick Ruling: "Batas Pambansa Big. 135 is a valid exercise of the State's power to tax. The
authorities and cases cited while correctly quoted or paragraph do not support petitioner's stand." The
prayer is for the dismissal of the petition for lack of merit.

ISSUE: WON the assailed provision violates the equal protection and due process clause of
the Constitution while also violating the rule that taxes must be uniform and equitable.

HELD:
• Negative. The petition is without merit. The Supreme Court ruled against Sison. • The power to
tax, an inherent prerogative, has to be availed of to assure the performance of vital state functions.
It is the source of the bulk of public funds.
• To paraphrase a recent decision, taxes being the lifeblood of the government, their prompt
and certain availability is of the essence.
• On due process: it is undoubted that it may be invoked where a taxing statute is so arbitrary that it
finds no support in the Constitution. An obvious example is where it can be shown to amount to
the confiscation of property from abuse of power.
• Petitioner alleges arbitrariness but his mere allegation does not suffice and there must be a factual
foundation of such unconstitutional taint.
• On equal protection: it suffices that the laws operate equally and uniformly on all persons under
similar circumstances, both in the privileges conferred and the liabilities imposed. • On the matter
that the rule of taxation shall be uniform and equitable- this requirement is met when the tax
operates with the same force and effect in every place where the subject may
be found. "Also, the rule of uniformity does not call for perfect uniformity or perfect
equality, because this is hardly attainable. "Equality and uniformity in taxation mean that
all taxable articles or kinds of property of the same class shall be taxed at the same rate.
• The taxing power has the authority to make reasonable and natural classifications for purposes of
taxation. The taxing power has the authority to make reasonable and natural classifications for
purposes of taxation.
• Where "the differentiation" complained of "conforms to the practical dictates of justice and equity"
it "is not discriminatory within the meaning of this clause and is therefore uniform." There is
quite a similarity then to the standard of equal protection for all that is required is that the tax
"applies equally to all persons, firms and corporations placed in similar situation WHEREFORE,
the petition is dismissed. Costs against petitioner.

Ormoc Sugar vs. Treasurer of Ormoc City, G.R. No. L-23794, February 17, 1968
Petitioner: ORMOC SUGAR COMPANY, INC
Respondent: THE TREASURER OF ORMOC CITY, THE MUNICIPAL BOARD OF
ORMOC CITY, HON. ESTEBAN C. CONEJOS as Mayor of Ormoc City and ORMOC CITY
Topic: Constitutional Limitations on Taxing Power: Equal Protection of the Law

Doctrine:
• Section 2 of Rep. Act 2264 which became effective on June 19, 1959, gave chartered cities,
municipalities and municipal districts authority to levy for public purposes just and uniform
taxes, licenses or fees. This provision of law has repealed Sec. 2287 of the Revised
Administrative Code (Nin Bay Mining Co. v. Municipality of Roxas, L-20125, July 20,
1965), which withheld from municipalities the power to impose an import or export tax
upon such goods in the guise of an unreasonable charge for wharfage.
• The equal protection clause applies only to persons or things identically situated and does
not bar a reasonable classification of the subject of legislation. A classification is
reasonable where (1) it is based on substantial distinctions which make real differences;
(2) these are germane to the purpose of the law; (3) the classification applies not only to
present conditions but also to future conditions which are substantially identical to those
of the present; (4) the classification applies only to those who belong to the same class.
• When the taxing ordinance was enacted, Ormoc Sugar Co,, Inc. was the only sugar central
in the City. A reasonable classification should be in terms applicable to future conditions
as well. The taxing ordinance should not be singular and exclusive as to exclude any
subsequently established sugar central.
• Ormoc Sugar Co. is not entitled to interest on the refund because the taxes were not
arbitrarily collected. There is sufficient basis to preclude arbitrariness. The constitutionality
of the statute is presumed until declared otherwise.

Facts:
• On January 29, 1964, the Municipal Board of Ormoc City passed 1 Ordinance No. 4, Series
of 1964, imposing "on any and all productions of centrifugal sugar milled at the Ormoc
Sugar Company, Inc., in Ormoc City a municipal tax equivalent to one per centum (1%)
per export sale to the United States of America and other foreign countries."
• Payments for said tax were made, under protest, by Ormoc Sugar Company, Inc. a total of
P12,087.50.
• On June 1, 1964, Ormoc Sugar Company, Inc. filed before the Court of First Instance of
Leyte a complaint against the City of Ormoc as well as its Treasurer, Municipal Board and
Mayor, alleging that the afore-stated ordinance is unconstitutional for being violative of
 the equal protection clause (Sec. 1[1], Art. III, Constitution) and the rule of uniformity of
taxation (Sec. 22[1], Art. VI, Constitution)
• Petitioner’s contention: An export tax forbidden under Section 2287 of the Revised
Administrative Code. It further alleged that the tax is neither a production nor a license tax
which Ormoc City under Section 15-kk of its charter and under Section 2 of Republic Act
2264, otherwise known as the Local Autonomy Act, is authorized to impose; and that the
tax amounts to a customs duty, fee or charge in violation of paragraph 1 of Section 2 of
Republic Act 2264 because the tax is on both the sale and export of sugar.
• Defendant’s contention: Tax ordinance was within defendant city’s power to enact under
the Local Autonomy Act and that the same did not violate the afore-cited constitutional
limitations.

Issue:
• Whether constitutional limits on the power of taxation, specifically the equal
protection clause and rule of uniformity of taxation, were violated.

Ruling:
• Yes. Section 2287 of the Revised Administrative Code denies the municipal councils the
power to impose an export tax. Section 2287 in part states: "It shall not be in the power of
the municipal council to impose a tax in any form whatever, upon goods and merchandise
carried into the municipality, or out of the same, and any attempt to impose an import or
export tax upon such goods in the guise of an unreasonable charge for wharfage, use of
bridges or otherwise, shall be void.
• The equal protection clause applies only to persons or things identically situated and does
not bar a reasonable classification of the subject of legislation. A classification is
reasonable where (1) it is based on substantial distinctions which make real differences;
(2) these are germane to the purpose of the law; (3) the classification applies not only to
present conditions but also to future conditions which are substantially identical to those
of the present; (4) the classification applies only to those who belong to the same class.
• When the taxing ordinance was enacted, Ormoc Sugar Co,, Inc. was the only sugar central
in the City. A reasonable classification should be in terms applicable to future conditions
as well. The taxing ordinance should not be singular and exclusive as to exclude any
subsequently established sugar central.
• At the time of collection, the ordinance provided a sufficient basis to preclude arbitrariness,
the same being then presumed constitutional until declared otherwise.

1935 Consti 1987 Consti

"Cemeteries, churches, and parsonages or convents

added "charitable institutions, mosques, and non-profit
appurtenant thereto, and all lands, buildings, and
cemeteries"
improvements used exclusively for religious, charitable, or
educational purposes shall be exempt from taxation."
 required that for the exemption of ":lands, buildings, and
improvements," they should not only be "exclusively" but
also "actually and "directly" used for religious or charitable
purposes.

Second Issue
● YES. There is a lack of procedural due process for Judge Hernando’s immediate decision in favor of the
Roman Catholic Bishop, and failure to hear the side of the petitioner assailing the lack of jurisdiction
and lack of cause of action regarding the validity of a tax assessment before the Local Board of
Assessment Appeals and not with a court.
● Sec. 1 of the Bill of Rights provides that No person shall be deprived of life, liberty, or property without
due process of law, nor shall any person be denied the equal protection of the laws.

HELD:
● Petition is granted
● Judge Hernando is ordered to hear the case on the merits

Freedom of Speech and of the Press

American Bible Society v. City of Manila, April 30, 1957

American Bible Society v. City of Manila, April 30, 1957

DOCTRINE:

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".

It may be true that in the case at bar the price asked for the bibles and other religious pamphlets was in some instances a
little bit higher than the actual cost of the same but this cannot mean that appellant was engaged in the business
or occupation of selling said "merchandise" for profit. For this reason We believe that the provisions of City of
Manila Ordinance No. 2529, as amended, cannot be applied to appellant, for in doing so it would impair its free
exercise and enjoyment of its religious profession and worship as well as its rights of dissemination of religious
beliefs.

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. 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.
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, 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.

ISSUE:

Whether American Bible Society liable to pay sales tax for the distribution and sale of bibles (NO)

RULING:

SIMULTANEOUS REPEAL AND RE-ENACTMENT; EFFECT OF REPEAL UPON RIGHTS

AND LIABILITIES WHICH ACCRUED UNDER THE ORIGINAL STATUTE.—Where the old statute is
repealed in its entirety and by the same enactment re-enacts all or certain portions of the pre-existing law, the
majority view holds that the rights and liabilities which. have accrued under the original statute are preserved and
may be enforced, since the re-enactment neutralizes the repeal, therefore continuing the law in force without
interruption.

In the case at bar, Ordinances Nos. 2529 and 3000 of the City of Manila were enacted by the Municipal Board of
the City of Manila by virtue of the power granted to it by section 2444, Subsection (m-2) of the Revised
Administrative Code, superseded on June 18, 1949, by section 18, Subsection (o) of Republic Act No. 409, known as
the Revised Charter of the City of Manila. The only essential difference between these two provisions is that while
Subsection (m 2) prescribes that the combined total tax of any dealer or manufacturer, or both, enumerated under
Subsections (m-1) and (m-2), whether dealing in one or all of the articles mentioned therein, shall not be in excess of
P500 per annum, the corresponding Section 18, subsection (o) of Republic Act No. 409, does not contain any
limitation as to the amount of tax or license fee that the retail dealer has to pay per annum. Hence, and in accordance
with the weight of authorities aforementioned, City ordinances Nos. 2529 and 3000 are still in force and effect.
MUNICIPAL TAX; RETAIL DEALERS IN GENERAL MERCHANDISE; ORDINANCE
PRESCRIBING TAX NEED NOT BE APPROVED BY THE' PRESIDENT TO BE EFFECTIVE.—The
business of "retail dealers in general merchandise" is expressly enumerated in subsection (o), section 18 of Republic
Act No. 409: hence. an ordinance prescribing a municipal tax on said business does not have to be approved by the
President to be effective, as it is not among those businesses referred to in subsection (ii) Section 18 of the same Act
subject to the approval of the President.
RELIGIOUS FREEDOM; DISSEMINATION OF RELIGIOUS INFORMATION, WHEN MAY
BE RESTRAINED; PAYMENT OF LlCENSE FEE, IMPAIRS FREE EXERCISE OF RELIGION.—
The constitutional guaranty of the free exercise and enjoyment of religious profession and worship carries with it the
right to disseminate religious information. Any restraint 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." (Tañada and Fernando on the Constitution of the Philippines, Vol. I, 4th ed., p. 297).

In the case at bar, plaintiff is engaged in the distribution and sales of bibles and religious articles. The City Treasurer of
Manila informed the plaintiff that it was conducting the business of general merchandise without providing itself with
the necessary Mayor's permit and municipal license, in violation of Ordinance No. 3000, as amended, and
Ordinance No. 2529, as amended, and required plaintiff to secure the corresponding permit and license. Plaintiff
protested against this requirement and claimed that it never made any profit from the sale of its bibles.
Held: It is true the price asked for the religious articles was in some instances a little bit higher than the actual cost of
the same, but this cannot mean that plaintiff was engaged in the business or occupation of selling said "merchandise"
for profit. For this reasons, the provisions of City Ordinance No. 2529, as amended, which requires the payment
of license fee for conducting the business of general merchandise, cannot be applied to plaintiff society, for in doing
so, it would impair its free exercise and enjoyment of its religious profession and worship, as well as its rights
of dissemination of religious beliefs. Upon the other hand, City Ordinance No. 3000, as amended, which requires
the obtention of the Mayor's permit before any person can engage in any of the businesses, trades or
occupations enumerated therein, does not impose any charge upon the enjoyment of a right granted by the
Constitution, nor tax the exercise of religious practices. Hence, it cannot be considered unconstitutional, even if
applied to plaintiff Society. But as Ordinance No. 2529 is not applicable to plaintiff and the City of Manila is
powerless to license or tax the business of plaintiff society involved herein, for the reasons above stated, Ordinance
No. 3000 is also inapplicable to said business, trade or occupation of the plaintiff.

Lladoc vs. Commissioner of Internal Revenue, June 16, 1965

Lladoc vs. Commissioner of Internal Revenue, June 16, 1965

DOCTRINE:

Section 22 (3), Art. VI of the Constitution of the Philippines, exempts from taxation cemeteries, churches
and parsonages or convents, appurtenant thereto, and all lands, buildings, and improvements used exclusively for
religious purposes. The exemption is only from the payment of taxes assessed on such properties enumerated, as
property taxes, as contra distinguished from excise taxes. In the present case, what the Collector assessed was a
donee's gift tax; the assessment was not on the properties themselves. It did not rest upon general ownership; it was
an exercise upon the use made of the properties, upon the exercise of the privilege of receiving the properties.

FACTS:

Sometime in 1957, the M.B. Estate, Inc., of Bacolod City, donated P10,000.00 in cash to Rev. Fr. Crispin Ruiz,
then parish priest of Victorias, Negros Occidental, and predecessor of herein petitioner, for the construction of a
new Catholic Church in the locality. The total amount was actually spent for the purpose intended.
On March 3, 1958, the donor M.B. Estate, Inc., filed the donor's gift tax return. Under date of April 29, 1960,
the respondent Commissioner of Internal Revenue issued an assessment for donee's gift tax against the Catholic Parish
of Victorias, Negros Occidental, of which petitioner was the priest. The tax amounted to P1,370.00 including
surcharges, interests of 1% monthly from May 15, 1958 to June 15, 1960, and the compromise for the late filing of
the return.

Petitioner lodged a protest to the assessment and requested the withdrawal thereof.

ISSUE:

Whether petitioner should be liable for the assessed donee's gift tax on the P10,000.00 donated for the construction
of the Victorias Parish Church. (YES)

RULING:

Taxation; Constitutional exemption for religious purpose refers only to property taxes.—
Section 22(3), Art. VI of the Constitution of the Philippines, exempts from taxation cemeteries, churches
and parsonages or convents, appurtenant thereto, and all lands, buildings, and improvements used
exclusively for religious purposes. The exemption is only from the payment of taxes assessed on such
properties enumerated, as property taxes, as contra-distinguished from excise taxes.
Imposition of gift tax on property used for religious purposes not violation of Constitution.—A gift
tax is not a property tax, but an excise tax imposed on the transfer of property by way of gift inter
vivos, the imposition of which on property used exclusively for religious purposes, does not constitute
an impairment of the Constitution.
Head of diocese real party in interest in gift tax on church property.—The head of the diocese and
not the parish priest is the real party in interest in the imposition of a donee’s tax on property donated to
the church for religious purposes.
As well observed by the learned respondent Court, the phrase "exempt from taxation," as employed in
the Constitution, should not be interpreted to mean exemption from all kinds of taxes. And there being no
clear, positive or express grant of such privilege by law, in favor of petitioner, the exemption herein must
be denied.

Uniformity in Taxation
Taxation shall be uniform and equitable (Art 6 Sec 28 (1) of the Constitution))

Uniformity in Taxation – all taxable articles of kinds of property of the same class shall be taxed at the
same rate. It does not mean that lands, chattels, securities, occupations, franchises, privileges, necessities,
and luxuries shall all be taxed or assessed at the same rate. Different articles may be taxaed at different
amounts provided that the rate is uniform on the same class everywhere.

Uniformity is required not equality

Equality and Uniformity Distinguished

Equality Uniformity

Accomplished when the burden of the tax falls equally
and impartially upon all the persons and property
subject to it so that no higher rate or greater levy in
proportion to value is imposed upon one person or
species of property than upon others similarly situated
or of like character
Requires that all taxable property shall be alike
subjected to tax and this requirement is violated
if particular kinds, species or items of property
are selected to bear the whole burden of tax
while others, which should be equally subject to
it are left untaxed

Strictly proportional to the relative value of the Persons or things belonging to the same class
property shall be taxed at the same rate

Non-Infringement of Religious Freedom

Sec. 5, Art. Ill, 1987 Constitution
No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof.
The free exercise and enjoyment of religious profession and worship, without discrimination or
preference, shall forever be allowed. No religious test shall be required for the exercise of civil or political
rights.

Non-Impairment of Contracts
(Sec. 10, Art. Ill & Sec. 11, Art XII, 1987 Constitution)
No law shall be passed impairing the obligation of contracts.
A contract is the law between contracting parties. This law must govern and control the contract in every
shape in which it is intended. Any law that enlarges or changes the intention of the parties impairs the
contract.

The prohibition applies only where it is claimed that the obligation of a contract is impaired by a law of the
state – a statute or constitutional provision of the state. It does not apply to mere decisions of courts
construing contracts.

Is a tax exemption revocable? Depends.

Revocable if the grant of an exemption does not constitute a contract but is merely a spontaneous
concession by the legislature, not connected with any service or duty imposed. It is revocable by the power
which made the grant. A statute passed after a corporation has been created and exempting it wholly or
partially from taxation, without any consideration or assumption of any new burden to the corporation, it is
a mere act of gratuity and may be revoked.
· If the basis of the tax exemption is by virtue of a franchise granted by the Congress, it may be
revoked.

Cannot be revoked if the exemption constitutes a binding contract and for valuable consideration, the
government cannot revoke the exemption.
Casanovas v. Hord, 8 Phil. 125, March 22, 1907

Doctrine: Our conclusion is that the concessions granted by the Government of Spain to the plaintiff,
constitute contracts between the parties; that section 134 of the Internal Revenue Law impairs the
obligation of these contracts, and is therefore void as to them.

Facts:

● In January, 1897, the Spanish Government, in accordance with the provisions of the royal decree of the
14th of May, 1867, granted to the plaintiff certain mines in the said Province of Ambos Camarines, of
which mines the plaintiff is now the owner.
● That there were valid perfected mining concessions granted prior to the 11th of April, 1899, is conceded.
They were so considered by the Collector of Internal Revenue and were by him said to fall within the
provisions of section 134 of Act No. 1189, known as the Internal Revenue Act.
● The defendant accordingly imposed upon these properties the tax mentioned in section 134, which tax,
as has before been stated, the plaintiff paid under protest.

Issue: Whether section 134 is valid. (NO)

Held:

The royal decree and regulation for its enforcement provided that the deeds granted by the Government
should be in a particular form, which form was inserted in the regulations. It must be presumed that the
deeds granted to the plaintiff were made as provided by law, and, in fact, one of such concessions was
exhibited during the argument in this court, and was found to be in exact conformity with the form prescribed
by law.

It seems very clear to us that this deed constituted a contract between the Spanish Government and the
plaintiff, the obligation of which contract was impaired by the enactment of section 134 of the Internal
Revenue Law above cited, thereby infringing the provisions above quoted from section 5 of the act of
Congress of July 1, 1902. This conclusion seems necessarily to result from the decisions of the Supreme
Court of the United States in similar cases. In the case of McGee vs. Mathis (4 Wallace, 143), it appeared
that the State of Arkansas, by an act of the legislature of 1851, provided for the sale of certain swamp lands
granted to it by the United States; for the issue of transferable scrip receivable for any lands not already
taken up at the time of selection by the holder; for contracts for the making of levees and drains, and for
the payment of contractors in scrip and otherwise.

The fact that this concession was made by the Government of Spain, and not by the Government of the
United States, is not important. (Trustees of Dartmouth College vs. Woodward, 4 Wheaton, 518.)

Our conclusion is that the concessions granted by the Government of Spain to the plaintiff, constitute
contracts between the parties; that section 134 of the Internal Revenue Law impairs the obligation of these
contracts, and is therefore void as to them.

Meralco v. Province of Laguna, G.R. No. 131359, May 5, 1999

Facts:
MERALCO was granted franchise for the supply of electric light, heat and power
by certain municipalities of the Province of Laguna including, Biñan, Sta Rosa,
San Pedro, Luisiana, Calauan and Cabuyao. On 19 January 1983, MERALCO was
likewise granted
a franchise by the National Electrification Administration to operate an electric light and
power service in the Municipality of Calamba, Laguna. On 12 September 1991, Republic
Act No. 7160, otherwise known as the “Local Government Code of 1991,” was enacted to
take effect on 01 January 1992 enjoining local government units to create their own
sources of revenue and to levy taxes, fees and charges, subject to the limitations expressed
therein, consistent with the basic policy of local autonomy. Pursuant to the provisions of
the Code, respondent province enacted Laguna Provincial Ordinance providing for
franchise tax at a rate of 50% of 1% of the gross annual receipts. Provincial Treasurer,
then sent a demand letter to MERALCO for the corresponding tax payment. Petitioner
MERALCO paid the tax, which then amounted to P19,520,628.42, under protest. A formal
claim for refund was thereafter sent by MERALCO to the Provincial Treasurer of Laguna
claiming that the franchise tax it had paid and continued to pay to the National Government
pursuant to P.D. 551 already included the franchise tax imposed by the Provincial Tax
Ordinance. MERALCO contended that the imposition of a franchise tax under Section 2.09
of Laguna Provincial Ordinance No. 01-92, insofar as it concerned
MERALCO, contravened the provisions of Section 1 of P.D. 551 which provides “Any
provision of law or local ordinance to the contrary notwithstanding, the franchise tax
payable by all grantees of franchises to generate, distribute and sell electric current for
light, heat and power shall be two per cent (2%) of their gross receipts received from
the sale of electric current and from transactions incident to the generation, distribution
and sale of electric current. Such franchise tax shall be payable to the Commissioner of
Internal Revenue or his duly authorized representative.”

On 28 August 1995, the claim for refund of petitioner was denied in a letter signed by
Governor Jose D. Lina. In denying the claim, respondents relied on a more recent law, i.e.,
Republic Act No. 7160 or the Local Government Code of 1991, than the old decree
invoked by petitioner. On 14 February 1996, petitioner MERALCO filed with the RTC a
complaint for refund against the Province of Laguna and also Benito R. Balazo in his
capacity as the Provincial Treasurer of Laguna. RTC dismissed the complaint holding that
the power to tax exercised by the province of Laguna was valid.

ISSUE: Whether or not the power to tax was validly exercised.

HELD:

NO, there is no violation. Prefatorily, it might be well to recall that local governments do
not have the inherent power to tax except to the extent that such power might be delegated
to them either by the basic law or by statute. Presently, under Article X of the 1987
Constitution, a general delegation of that power has been given in favor of local
government units. Under the regime of the 1935 Constitution no similar delegation of tax
powers was provided, and local government units instead derived their tax powers under
a limited statutory authority. Whereas, then, the delegation of tax powers granted at that
time by statute to local governments was confined and defined (outside of which the power
was deemed withheld), the present constitutional rule (starting with the 1973
Constitution), however, would broadly confer such tax powers subject only to specific
exceptions that the law might prescribe.
Under the now prevailing Constitution, where there is neither a grant nor a prohibition
by statute, the tax power must be deemed to exist although Congress may provide
statutory limitations and guidelines. The basic rationale for the current rule is to safeguard
the viability and self-sufficiency of local government units by directly granting them
general
and broad tax powers. Nevertheless, the fundamental law did not intend the delegation
to be absolute and unconditional; the constitutional objective obviously is to ensure
that, while the local government units are being strengthened and made more
autonomous, the legislature must still see to it that

(a) the taxpayer will not be over-burdened or saddled with multiple and
unreasonable impositions; (b) each local government unit will have its fair share of
available resources; (c) the resources of the national government will not be unduly
disturbed; and (d) local taxation will be fair, uniform, and just. The 1991 Code
explicitly authorizes provincial governments, notwithstanding “any exemption
granted by any law or other special law, to impose a tax on businesses enjoying a
franchise.” Indicative of the legislative intent to carry out the Constitutional mandate
of vesting broad tax powers to local government units, the Local Government Code
has effectively withdrawn under Section 193 thereof, tax exemptions or incentives
theretofore enjoyed by certain entities. The Code, in addition, contains a general
repealing clause in its Section 534 which states that “All general and special laws,
acts, city charters, decrees, executive orders, proclamations and administrative
regulations, or part or parts thereof which are inconsistent with any of the provisions
of this Code are hereby repealed or modified accordingly.” The petition is hereby
DISMISSED.

Cagayan Electric Power and Light Co. V. Commissioner of Internal Revenue, G.R. No. 60126,

FACTS:

1. Petitioner Cagayan Electric Power and Light Co., Inc (CEPALCO) is the holder of
a legislative franchise, Republic Act 3247 under which, it is exempted from “taxes,
and assessments of whatever authority upon privileges, earnings, income, franchise,
and poles, wires transformers, and insulators”.

2. On June 27, 1968, Republic Act 5431 amended Section 24 of the Tax Code,
making the petitioner liable for income tax in addition to franchise tax. On August 4,
1969, Republic Act 6020 was enacted under which, the petitioner was again tax
exempted.

3. The Commissioner of Internal Revenue (CIR) sent a demand letter on February

15, 1973, requiring petitioner to pay the deficiency for income taxes for 1968-1971.
Upon petitioner's contention, the CIR cancelled the assessments for 1970 but insisted
those for 1968 and 1969.

4. Petitioner filed a petition for review with the tax court which held petitioner responsible
only for the period from January 1 to August 3, 1969, or before the passage of Republic
Act 6420 which reiterated its tax exemption. Thus, the appeal.

ISSUE:

Whether petitioner's franchise is a contract which can be impaired by an implied

appeal. RULING:

Yes. Congress could impair petitioner's franchise by making it liable for income tax
from which heretofore it was exempted by virtue of the exemption provided in its
franchise. The Constitution provides that a franchise is subject to amendment, alteration,
or repeal by Congress when public interest so requires. Petitioner's franchise, under
Republic Act 3247 also provide it is subject to the Constitution.
Republic Act 5431 withdrew petitioner's exemption but was restored by
subsequent enactment. Thus, it is only liable for the period of January 1 to August 3,
1969 when its tax exemption was modified.

Non-Imprisonment for Debt or Non- Payment of Poll Tax

(Sec. 20, Art. Ill, 1987 Constitution)
While a person may not be imprisoned for non payment of cedula/poll tax, he may be imprisoned for non
payment of other kinds of taxes where the law so provides.

Origin of Appropriation, Revenue and Tariff Bills

Uniformity, Equitability and Progressivity of Taxation (page 108-109)

Sec. 28(1), Art. VI, 1987 Constitution

SECTION 28. (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
system of taxation.

Villegas vs. Hiu Chiong Tsai Pao Hao, G.R. No. L-29646, November 10, 1978
Villegas vs. Hiu Chiong Tsai Pao Hao
G.R. No. L-29646, November 10, 1978

Facts:

On February 22, 1968, the Municipal Board of Manila passed Ordinance No. 6537. The
ordinance was signed by Mayor Antonio Villegas.

Section 1 of said Ordinance prohibits aliens from being employed or to engage

or participate in any position or occupation or business enumerated therein,
whether permanent, temporary or casual, without first securing an employment permit
from the Mayor of Manila and paying the permit fee of P50.00. Exempted are persons
employed in the diplomatic or consular missions of foreign countries, or in the technical
assistance programs of both the Philippine Government and any foreign government,
and those working in their respective households, and members of religious orders
or congregations, sect or denomination, who are not paid monetarily or in kind.

In May 1968, Hiu Chiong Tsai Pao Ho, who was employed in Manila, filed a petition
for the issuance of the writ of preliminary injunction and restraining order to stop
the enforcement of Ordinance No. 6537 as well as for a judgment declaring said
Ordinance No. 6537 null and void. He cited the following grounds:

1. As a revenue measure imposed on aliens employed in the City of

Manila, Ordinance No. 6537 is discriminatory and violative of the rule of the
uniformity in taxation;

2. As a police power measure, it makes no distinction between useful and non-

useful occupations, imposing a fixed P50.00 employment permit, which is out
of proportion to the cost of registration and that it fails to prescribe
any standard to guide and/or limit the action of the Mayor, thus, violating
the fundamental principle on illegal delegation of legislative powers:
 3. It is arbitrary, oppressive and unreasonable, being applied only to aliens who
are thus, deprived of their rights to life, liberty and property and
therefore, violates the due process and equal protection clauses of the
Constitution.

The trial court ruled in Hiu Chiong Tsai Pao Ho's favor, declaring Ordinance No.
6537 null and void.

Hence, the instant petition.

Issue:

Whether Ordinance No. 6537 is unconstitutional. -- YES.

Held:
The SC upheld the ruling of the trial court that Ordinance No. 6537 is null and void,
for the following reasons:

Ordinance No. 6537 is a tax measure.

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

But the SC said tha while it is true that the first part which requires that the alien
shall secure an employment permit from the Mayor involves the exercise of discretion
and judgment in the processing and approval or disapproval of applications for
employment permits and therefore is regulatory in character the second part which
requires the payment of P50.00 as employee's fee is not regulatory but a revenue
measure. There is no logic or justification in exacting P50.00 from aliens who have been
cleared for employment. It is obvious that the purpose of the ordinance is to raise money
under the guise of regulation.

Ordinance No. 6537 is unreasonable.

The Ordinance is excessive because it fails to consider valid substantial differences

in situation among individual aliens who are required to pay it. Although the
equal protection clause of the Constitution does not forbid classification, it is imperative
that the classification should be based on real and substantial differences having
a reasonable relation to the subject of the particular legislation. The same amount
of P50.00 is being collected from every employed alien whether he is casual or
permanent, part time or full time or whether he is a lowly employee or a highly paid
executive
Ordinance No. 6537 does not contain or suggest any standard or criterion to guide
the mayor in the exercise of the power which has been granted to him by the ordinance.

Ordinance No. 6537 does not lay down any criterion or standard to guide the Mayor
in the exercise of his discretion. It has been held that where an ordinance of a
municipality fails to state any policy or to set up any standard to guide or limit the
mayor's action, expresses no purpose to be attained by requiring a permit, enumerates
no conditions for its grant or refusal, and entirely lacks standard, thus conferring upon
the Mayor arbitrary and unrestricted power to grant or deny the issuance of building
permits, such ordinance is invalid, being an undefined and unlimited delegation of
power to allow or prevent an activity per se lawful.

Ordinance o. 6537 violates the due process of law and equal protection rule of
the Constitution.

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

Association of Customs Brokers, Inc. Vs. Municipal Board of Manila et. al., G.R. No. L-4376, May 22,
1953

ASSOCIATION OF CUSTOMS BROKERS, INC. and G. MANLAPIT, INC., petitioners-appellants,

vs.
THE MUNICIPALITY BOARD, THE CITY TREASURER, THE CITY ASSESSOR and THE
CITY MAYOR, all of the City of Manila, respondents-appellees.
G.R. No. L-4376 May 22, 1953

Uniformity of Taxation.—The said ordinance infringes also the rule of uniformity of taxation ordained by
our Constitution. It exacts the tax upon all motor vehicles operating within the City of Manila. It does not
distinguish between a motor vehicle for hire and one which is purely for private use. Neither does it
distinguish between a motor vehicle registered in the City of Manila and one registered in another place
but occasionally comes to Manila and uses its streets and public highways. There is no pretense that the
ordinance equally applies to motor vehicles which come to Manila fora temporary stay or for short errands,
and it cannot be denied that they contribute in no small degree to the deterioration of the streets and public
highways. As they are benefited by their use they should also be made to share the corresponding burden.
This is an inequality which is found in the ordinance in question and which renders it offensive to the
Constitution.
Facts:
The Association of Customs Brokers, Inc., which is composed of all brokers and public service operators
of motor vehicles in the City of Manila, and G. Manlapit, Inc., a member of said association and a public
service operator of trucks in said City, challenge the validity of said ordinance on the grounds that (1) it
levies a so-called property tax, but it is actually a license tax, which is beyond the power of the Municipal
Board of Manila; and (2) said ordinance offends against the rule of uniformity of taxation ; and (3) it
constitutes double taxation.

The respondents, represented by the city fiscal, argue that the challenged law imposes a property tax that is
within the City of Manila's authority under its Revised Charter [Section 18 (p) of Republic Act No. 409]
and does not violate uniformity taxation or double taxation.

Issue/s:

1. Whether Ordinance No. 3379 passed by the Municipal Board of the City of Manila is deemed to
be valid.

2. Whether the said ordinance offends against the rule of uniformity of taxation

Ruling:

1. No, it is not valid since it violates the uniformity rule and also because it imposes an exercise tax
that is beyond the city's authority

“No further fees than those fixed in this Act shall be executed or demanded by any public highway,
bridge or ferry, or for the exercise of the profession of chauffeur, or for the operation of any motor
vehicle by the owner thereofe Provided, however, That nothing in this Act shall be construed to
exempt any motor vehicle from the payment of any lawful and equitable insular, local or municipal
property tax imposed thereupon.

This ordinance follows the above rules. The property tax is fixed ad valorem, but it is levied on
motor vehicles operating in Manila to generate capital for the repair, maintenance, and development
of the city's streets and bridges. The Motor Vehicle Law (Act No. 3992) prohibits this since
municipal corporations currently distribute revenues raised to repair, maintain, and improve bridges
and public roadways (section 73 of the Motor Vehicle Law). Therefore, this prohibition prevents
duplicate fees for the same purpose. The court believe that the law in question imposes a license
fee under the pretense of an ad valorem tax to avoid the said prohibition.

2. Yes, The ordinance violates our Constitution's uniform taxation rule. The ordinance taxes all
Manila motor vehicles but it does not distinguish between individual and commercial motor vehicles. It
doesn't distinguish between a Manila-registered vehicle and one from outside that occasionally uses
Manila's streets and highways. The distinction is important if we note that the ordinance intends to burden
with the tax only those registered in the City of Manila as may be inferred from the word "operating" used
therein. The word "operating" denotes a connotation which is akin to a registration, for under the Motor
Vehicle Law no motor vehicle can be operated without previous payment of the registration fees. Motor
vehicles that visit Manila for a short time to run errands contribute to the deterioration of the streets and
public roadway, and the ordinance applies to them. They should share the burden since they benefit from
their usage. This imbalance makes the ordinance unconstitutional.

Non-delegation of legislative power

General rule: The power to tax is exclusively vested in the legislative
Exceptions:

Abakada Guro Party List v. Ermita, G.R.168056, October 30, 1995

Doctrine: There is no undue delegation of legislative power but only of the discretion as to the execution
of a law. This is constitutionally permissible. Congress does not abdicate its functions or unduly delegate
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.

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.

Facts:

● Petitioners assail sections 4 to 6 of Republic Act No. 9337 as violative of the principle of non- delegation
of legislative power. These sections authorize the President, upon recommendation of the Secretary
of Finance, to raise the value-added tax (VAT) rate to 12% effective January 1, 2006, upon satisfaction
of the following conditions: viz:

(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 1⁄2%).

● On the other hand, respondents contend that there is no undue delegation of legislative power since the
law is complete and leaves no discretion to the President but to increase the rate to 12% once any of
the two conditions provided therein arise.

Issue: Whether sections 4 to 6 of Republic Act No. 9337 are unconstitutional for being violative of the
principle of non delegation of legislative power. (NO)

Held:

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 connote a mandatory order. Its
use in a statute denotes an imperative obligation and is inconsistent with the idea of discretion. 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.

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.

The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the law
effectively nullified the President’s power of control over the Secretary of Finance by mandating the fixing
of the tax rate by the President upon the recommendation of the Secretary of Finance.
When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that as
head of the Department of Finance he is the assistant and agent of the Chief Executive. The multifarious
executive and administrative functions of the Chief Executive are performed by and through the executive
departments, and the acts of the secretaries of such departments, such as the Department of Finance,
performed and promulgated in the regular course of business, are, unless disapproved or reprobated by
the Chief Executive, presumptively the acts of the Chief Executive. The Secretary of Finance, as such,
occupies a political position and holds office in an advisory capacity, and, in the language of Thomas
Jefferson, "should be of the President's bosom confidence" and, in the language of Attorney
General Cushing, is "subject to the direction of the President."

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. 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 (24/5%) or the national government deficit
as a percentage of GDP of the previous year exceeds one and one-half percent (11⁄2%). 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. Congress does not abdicate its functions or unduly delegate
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.

Art IV Section 28 of the Constitution

The Congress, may by law, authorize the president to impose by virtue of Flexible Power Clause:
d. Tarrif rates
e. Import and import quota or ban importation of any commodity as may be necessary
f. Impose additional duty on all imports not exceeding 10% whenever necessary

Subject to the limitations that the Congress may impose.

Hence, the president, in the advice of NEDA may:
3. Increase, remove, reduce existing productive tarrif rates of import duty but in no case shall be
higher than 100%
4. Establish import quota

Article X Section 5 of the Constitution

Each local government unit shall have the power to create its own sources of revenue, fees, charges subject
to such limitations as may be provided by the Congress. Such charges shall accrue exclusively to the LGU.

Delegation of Legislative Authority to Fix Tariff Rates, Import and Export Quotas (page 122
dagdag)

Art IV Section 28 of the Constitution

The Congress, may by law, authorize the president to impose by virtue of Flexible Power Clause:
g. Tarrif rates
h. Import and import quota or ban importation of any commodity as may be necessary
i. Impose additional duty on all imports not exceeding 10% whenever necessary

Subject to the limitations that the Congress may impose.

Hence, the president, in the advice of NEDA may:

5. Increase, remove, reduce existing productive tarrif rates of import duty but in no case shall be
higher than 100%
6. Establish import quota

Tax Exemption of Properties Actually, Directly and Exclusively Used for Religious, Charitable and
Educational Purposes
(Sec. 28(3), Art. VI, 1987 Constitution)
General rule: The free exercise and enjoyment of religious profession and worship without discrimination
or preference shall forever be allowed

American Bible Society vs City of Manila: A municipal license tax on the sale of bibles by a non-stock,
non-profit missionary organization at minimal profit constitutes a curtailment of religious freedom and
worship which is guaranteed by the Constitution.

Exception: Income of such organizations conducted by profit or from any of their property, real or
personal, regardless of the disposition made of such income is taxable.

Charitable Institutions, churches, parsonages or convents appurtenant thereto, mosques, non-

profit cemeteries, all lands, buildings and improvements – which are actually, directly and exclusively
used for religious, charitable, or educational purposes shall be exempt from taxation

Ratio Decidendi:
· Cemeteries – It is difficult to collect tax and the reason of impropriety selling of the graves of the
dead to defray the expenses of carrying on the government of the living
· Churches and personages or convents, etc – such institutions perform work which would have
to be carried on by the public at the expense of the taxpayers and that the expenses of such
institutions from taxation lessens rather than increases the burden upon other taxpayers
Meaning of Charitable Institution – an organization must meet the substantive test of charity. In a
legal sense, a charity may be fully defined as a gift 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.
· Thus, as a matter of efficiency, the government forgoes taxes which should have been
spent to address public needs, because certain private entities already assume a part of the
burden. The loss of taxes is compensated by its relief from doing public works which would
have been funded by appropriations from the Treasury (govt).
Actually, Directly and Exclusively Used
To be entitled to the exemption, lands, buildings and improvements of religious and charitable
institutions should be actually directly and exclusively used for religious and charitable purposes.
· Test of exemption from taxation – the use of the property for the purposes mentioned in
the Constitution

Exclusive but Not Absolute Use

The term “exclusively used” does not mean total/absolute use for religious, charitable and
educational purposes. Even if the property is incidentally used for said purposes, exemption will
apply.
· Exception: If the property although actually owned by a religious, charitable and
educational institution is used for a non-exempt purpose, the exemption shall not attach.

Controlling Doctrine on Exemption From Taxation of Real Property of Religious, Charitable and
Educational Institutions – Granting tax exemption of properties shall be actually, directly and
exclusively used for religious, charitable and educational purposes.
· Hence, what is exempted are lands, buildings, and improvements actually, directly and
exclusively used for religious, charitable or educational purposes.

Meaning of Actually, Directly and Exclusively

Actually – truly in fact

Directly – Direct way without anything intervening, but by direct means
Exclusively – apart from all others, in a manner to exclude

Abra Valley College v. Aquino, June 15, 1988 Commissioner of Internal Revenue v. Court of Tax
Appeals and YMCA, G.R. No. 124043, October 14, 1998

Voting Requirements in Connection with the Legislative Grant of Tax Exemption (Sec. 24, Art. VI,
1987 Constitution Sec. 28(4), Art. VI, 1987 Constitution
Sec 24, Art VI, 1987 Constitution
SECTION 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of
local application, and private bills shall originate exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.

Sec 28 (4) Art VI, 1987 Constitution

No law granting any tax exemption shall be passed without the concurrence of a majority of all
the Members of the Congress.

Tax Exemption of Revenues and Assets, including Grants, Endowments, Donations or

Contributions to Educational Institutions (Sec. 4(3), Art. XIV, 1987 Constitution)
Revenues and assets actually, directly and exclusively used for educational purposes shall be exempt from
taxes and duties.

Sec 4(3), Art XIV, 1987 Constitution

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.

Sec. 28(3), Art. VI, 1987 Constitution

(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious,
charitable, or educational purposes shall be exempt from taxation.
(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.
(4) Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used
actually, directly, and exclusively for educational purposes shall be exempt from tax.

Donor’s Tax
Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually,
directly, and exclusively for educational purposes shall be exempt from tax. (Art 16 Sec 4(4))
· This is not self-executing as it requires a legislative enactment providing certain conditions for
exemption. However, RA 8242 has declared these donations tax exempt.

Estate Tax
Non stock, non profit educational institutions are not included under the coverage of RA 8284, hence, they
are not tax exempt.

Value Added Tax

General rule: Once non-stock, non-profit, educational institutions engage in business, they are subject to
VAT (Revenue Regulations). Private educational institutions may be subject only provided they are
accredited by DepEd and CHED. And this exemption does not extend to other activities involving the sale
of goods and services.

Exception: They shall be subject to internal revenue taxes on income from trade, business or other activity,
the conduct of which is not related to the exercise or performance by such educational institutions of their
educational purposes or functions. (dagdag page 140)

Note: The exemption does not cover withholding taxes. In order to monitor the activities by these
institutions, it is mandatory that they maintain their respective books of accounts. a

Double Taxation and Tax Exemptions (page 168 and 174)

Double Taxation Defined - where one tax is imposed by the State and the other is imposed by the city

a. Double Taxation Defined

· Taxing the same subject or object twice by the same taxing power within the same taxable
period for the same purpose.
 · Constitutionality: No constitutional prohibition against double taxation in the PH. It is
something not favored but nevertheless permissible. It becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the same governmental entity or by the same jurisdiction
for the same purpose. Despite the lack of prohibition, double taxation will not be allowed if it
results in a violation of the equal protection clause. Hence, if certain properties are subjected to
an additional tax whereas others similarly situated are not similarly taxed, the owners of the first
properties would have a right to complain.

Victorias Milling Co., Inc. V. Municipality of Victorias, G.R. No. L-21183, September 27, 1968

Elements of Double Taxation

a. Subject matter is taxed twice when it should be taxed only once

b. Both taxes are levied for the same purpose

c. Imposed by the same taxing authority within the same jursidiction, during the same taxing
period and covering the same kind of tax

Villanueva v. City of Iloilo, G.R. No. L-26521, December 28, 1968

Villanueva v. City of Iloilo, G.R. No. L-26521, December 28,

1968 Facts:

On September 30, 1946, the Municipal Board of Iloilo City enacted Ordinance 86 imposing license tax
fees upon tenement houses. The validity of such ordinance was challenged by Eusebio and Remedios
Villanueva, owners of four tenement houses containing 34 apartments. The Supreme Court held the
ordinance to be ultra views. On January 15, 1960, however, the municipal board, believing that it acquired
authority to enact an ordinance of the same nature pursuant to the Local Autonomy Act, enacted
Ordinance 11, Eusebio and Remedios Villanueva assailed the ordinance anew.
Issue:
Does Ordinance 11 violate the rule of uniformity of taxation?
Ruling:
NO. The Court has ruled the tenement houses constitute a distinct class of property and that taxes are
uniform and equal when imposed upon all property of the same class or character within the taxing
authority. The fact that the owners of the other classes of buildings in Iloilo are not imposed upon by the
ordinance, or that tenement taxes are imposed in other cities do not violate the rule of equality and
uniformity. The rule does not require that taxes for the same purpose should be imposed in different
territorial subdivisions at the same time. So long as the burden of tax falls equally and impartially on all
owners or operators of tenement houses similarly classified or situated, equality and uniformity is
accomplished. The presumption that tax statutes are intended to operate uniformly and equally was not
overthrown therein.

Procter and Gamble Philippines Manufacturing Corp. V. Municipality of

 Jagna, G.R. No. L-24265, December 28, 1979

Procter and Gamble Philippines Manufacturing Corp. V. Municipality of Jagna, G.R. No. L-
24265, December 28, 1979
FACTS
Plaintiff-appellant is a domestic corporation with principal offices in Manila. It is a consolidated
corporation of Procter & Gamble Trading Company and Philippine Manufacturing Company, which later
became Procter & Gamble Trading Company, Philippines. It is engaged in the manufacture of soap,
edible oil, margarine and other similar products, and for this purpose maintains a “bodega” in defendant
Municipality where it stores copra purchased in the municipality and therefrom ships the same for its
manufacturing and other operations.
December 1957, Municipal Council of Jagna, enacted Municipal Ordinance No. 4, Series of 1957. AN
ORDINANCE IMPOSING STORAGE FEES OF ALL EXPORTABLE COPRA DEPOSITED IN THE
BODEGA WITHIN THE JURISDlCTI0N OF THE MUNICIPALITY OF JAGNA BOHOL.
For a period of six years, from 1958 to 1963, plaintiff paid defendant Municipality, allegedly under
protest, storage fees in the total sum of 1142,265.13. March 1964, plaintiff filed this suit in the CFI
Manila, Branch VI, wherein it prayed that:
1) Ordinance be declared inapplicable to it, or in the alter. native, that it be pronounced ultra-vires and
void for being beyond the power of the Municipality to enact; and
2) that defendant Municipality be ordered to refund to it the amount of P42,265.13 which it had paid
under protest; and costs.
Defendant Municipality upheld its power to enact the Ordinance in question questioned the jurisdiction
of the trial Court to take cognizance of the action; and pleaded prescription and laches for plaintiff's
failure to timely question the validity of the said Ordinance.
TRIAL COURT: upheld the validity of the ordinance and declared that plaintiff's right of action had
prescribed under the 5-year period provided for by Article 1149 of the Civil Code.
ISSUE:
Whether or not defendant municipality was authorized to impose and collect the storage fee provided for
in the challenged ordinance under the laws then prevailing.

RULING:
YES. Pursuant to the Commonwealth Act No. 472, approved on June 16, 1939, which was the prevailing
law when the Ordinance was enacted the validity of the Ordinance must be upheld. Under the foregoing
provision, a municipality is authorized to impose three kinds of licenses: (1) a license for regulation of
useful occupation or enterprises; (2) license for restriction or regulation of non-useful occupations or
enterprises; and (3) license for revenue. The storage fee imposed under the question Ordinance is a
municipal license tax or fee on persons, firms and corporations, like plaintiff, exercising the privilege of
storing copra in a bodega within the Municipality's territorial jurisdiction.
Plaintiff's argument that the imposition of P0.10 per 100 kilos of copra stored in a bodega within
defendant's territory is beyond the cost of regulation and surveillance is not well taken. Municipal
corporations are allowed wide discretion in determining the rates of imposable license fees even in cases
 of purely police power measures. In the absence of proof as to municipal conditions and the nature of the
business being

taxed as well as other factors relevant to the issue of arbitrariness or unreasonableness of the questioned
rates, Courts will go slow in writing off an Ordinance. 8 In the case at bar, appellant has not sufficiently
shown that the rate imposed by the questioned Ordinance is oppressive, excessive and prohibitive.
Thus, it can be said that plaintiff's payment of storage fees imposed by the Ordinance in question does
not amount to double taxation. For double taxation to exist, the same property must be taxed twice, when
it should be taxed but once. Double taxation has also been defined as taxing the same person twice by
the same jurisdiction for the same thing. Surely, a tax on plaintiff's products is different from a tax on the
privilege of storing copra in a bodega situated within the territorial boundary of defendant municipality.

Kinds of Double Taxation

Direct Double Taxation Indirect Double Taxation

Double taxation in its strict sense. Double taxation in its broad sense.

Objectionable kind of double taxation since it This arises in the absence of one or more
violates the equal protection clause of the of the elements of direct double taxation.
Constitution.

Elements: Allowed as long as there is no violation of

1. Same property or subject matter is equal protection and uniformity clauses of
taxed twice when it should be taxed the Constitution.
only once
2. Both taxes are levied for the
same purpose
3. Imposed w/i the same taxing authority:
i. W/i the same Jurisdiction
ii. During same taxing Period
iii. Covering same Kind or
character of tax

Direct Double Taxation – occurs when the property is taxed twice when it should be taxed once. Both
taxes must be imposed on the same property or subject matter, for the same purpose by the same State,
Government or Taxing Authority, within the same jurisdiction or taxing district, during the same taxing period
and they must be of the same kind or character of tax.

Indirect Double Taxation – permissible double taxation. This is allowed if the taxes are of different nature
or character imposed by different taxing authorities.
International Juridical Double Taxation – refers to the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject matter and for identical periods. This usually
takes place when a person is a resident of a contracting state and derives income from or owns capital in,
the other contracting state and both states impose tax on income or capital.

· A double taxation may arise when an individual or an entity is tax resident of a State and
derives income from another State and both States levy taxes on that income.
· When two or more States subject the same person to tax on income derived from
their territories.
· Arise when a person is considered as resident by two different States.
· Arise when the same circumstances are qualified differently in two different States.

Domestic – arises when the taxes are imposed by the LGU within the same state

Means Employed to Avoid Double Taxation

1. Tax Credits
· An amount subtracted from an individual’s or entity’s tax liability to arrive at the
total tax liability; A tax credit reduces the tax due, including whenever applicable, the
income tax that is determined after applying the corresponding tax rates to taxable
income.
2. Tax Deductions

· The amount of tax is written off or treated as deduction from an individual’s or

entity’s gross income on which resulting amount the tax liability is calculated.
2. Tax Exemptions
· An immunity or privilege; it is freedom from a charge or burden to which
others are subjected.
3. Tax Treaties
· Agreement between two countries specifying what items of income will be taxed
by the authorities of the country where the income is earned.

Tax Avoidance Tax Evasion Tax Fraud

It is legal. It involves Tax dodging. It is illegal Willful Blindness Doctrine: A

saving on taxes using
legal means.
means of escaping taxation.
It involves the use of
forbidden and illegal
devices to lessen and
minimize tax. It usually
subjects the taxpayer to
civil or criminal liabilities.
taxpayer can no longer raise
the defense that the errors on
their tax returns are not their
responsibility or that it is the
fault of the accountants the
hired.
 Tax maximization. It is
the exploitation by the
taxpayer of legally
permissible alternative
tax rates or methods of
assessing taxable
property income in
order to avoid or
reduce tax liability.
Elements: Intent to defraud need not
1. Ends to be achieved be shown for a conviction of
2. An accompanying tax evasion.
State of mind which
is described as evil,
in bad faith, willful
or deliberate and
not coincidental
3. Course of action
which is unlawful

Common devices wherein the taxpayer can escape the effects of

taxation.

Tax Avoidance, Tax Evasion and Tax Fraud

Tax Evasion – connotes fraud through the use of pretenses and forbidden devices to lessen or defeat
taxes
Tax Avoidance – legal means used by the taxpayer to reduce taxes

Difference Between Exemption Method vs Credit Method

Exemption Method – the focus is on the income or capital
Credit Method – focuses upon the tax

In order to eliminate double taxation, a tax treaty resorts to 2 methods of relief:

a. Exemption Method – the income or capital which is taxable in the state of source or situs is
exempted in the state of residence, although in some instances it may be taken into account in
determining the rate of tax applicable to the taxpayer’s remaining income or capital.
b. Credit Method – tax paid in the state of source is credited against the tax levied in the state of
residence

Tax Avoidance, Tax Evasion and Tax Fraud

Tax Evasion – connotes fraud through the use of pretenses and forbidden devices to lessen or defeat
taxes
Tax Avoidance – legal means used by the taxpayer to reduce taxes

The intention to minimize taxes – when used in the context of fraud, must be proved by clear and
convincing evidence amounting to more than mere preponderance.

Note: A taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or
altogether avoid them by means which the law permits.

Delpher Trades Corp v IAC

DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.
G.R. No. L-69259 January 26, 1988

Taxation; Tax Avoidance; The legal right of a taxpayer to decrease the amount of what otherwise could be
his taxes or altogether avoid them, by means which the law permits, cannot be doubted. —The records do
not point to anything wrong or objectionable about this “estate planning” scheme resorted to by the
Pacheco’s. “The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or
altogether avoid them, by means which the law permits, cannot be doubted.”

Facts:
Delfin Pacheco and his sister Pelagia owned 27,169 square meters of land in Lot. No. 1095, Malinta Estate,
in Polo (now Valenzuela), Bulacan (now Metro Manila) in 1974, documented by Transfer Certificate of
Title No. T-4240 of the Bulacan land registry.
On April 3, 1974, the co-owners leased the same property to Construction Components International Inc.,
stating that if the lessor decides to sell the property, the lessee has the priority to buy under similar
conditions. With the signed approval of lessors Delfin Pacheco and Pelagia Pacheco, lessee Construction
Components International, Inc. surrendered its rights and duties under the lease to Hydro Pipes Philippines,
Inc. on August 3, 1974. The contract of lease, as well as the assignment of lease were annotated at he back
of the title, as per stipulation of the parties
On January 3, 1976, lessors Delfin and Pelagia Pacheco conveyed to defendant Delpher Trades Corporation
the leased property (TCT No.T-4240) and another parcel of land in Malinta Estate, Valenzuela, Metro
Manila (TCT No. 4273) for 2,500 shares of defendant corporation stock worth P1,500,000.00.

Respondent Hydro Pipes Philippines, Inc. filed an amended complaint for reconveyance of Lot. No. 1095
in its favor under conditions similar to those under which Delpher Trades Corporation bought the property
from Pelagia and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff.
The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate court's
decision.
The petition was initially denied but upon motion for reconsideration, the resolution was set aside denying
the petition and gave it due course.
Issue/s:
Whether the Pachecos' "Deed of Exchange" of the properties with the Delpher Trades Corporation was
meant to constitute a contract of sale that prejudiced the private respondent's right of first preference over
the leased property.
Ruling:

No, In exchange for their properties, the Pachecos received 2,500 original unissued no par value of Delpher
Trades Corporation shares. The Pachecos became stockholders by subscription "The essence of the stock
subscription is an agreement to take and pay for original unissued shares of a corporation, formed or to be
formed." It is to be stressed that by their ownership of the 2,500no par shares of stock, the Pachecos have
control of the corporation. Their equity capital is 55% as against 45% of the other stockholders, who also
belong to the same family group. In effect, the Delpher Trades Corporation is a business conduit of the
Pachecos. What they really did was to invest their properties and change the nature of their ownership from
unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their
properties and at the same time save on inheritance taxes. The records do not point to anything wrong or
objectionable about this "estate planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer
to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the
law permits, cannot be doubted."

WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution of the
then Intermediate Appellate Court are REVERSED and SET ASIDE. The amended complaint in Civil
Case No. 885-V-79 of the then Court of First Instance of Bulacan is DISMISSED.

CIR vs Estate of Benigno Toda Jr.

Commissioner of Internal Revenue vs Estate of Benigno Toda Jr.

G.R. NO. 147188
FACTS
March 1989, Cibeles Insurance Corporation (CIC) authorized Benigno P. Toda, Jr., President and
owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and the
two parcels of land on which the building stands for an amount of not less than ₱90 million.
After sometime, Toda purportedly sold the property for ₱100 million to Rafael A. Altonaga, who,
in turn, sold the same property on the same day to Royal Match Inc. (RMI) for ₱200 million. These
two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same
notary public. In which, Altonaga paid capital gains tax in the amount of ₱10 million.
April 1990, CIC filed its corporate annual income tax return for the year 1989, declaring, among
other things, its gain from the sale of real property in the amount of ₱75,728.021. After crediting
withholding taxes of ₱254,497.00, it paid ₱26,341,207 for its net taxable income of ₱75,987,725.
July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for ₱12.5 million, as
evidenced by a Deed of Sale of Shares of Stocks. Three and a half years later, or on 16 January
1994, Toda died.
March 1994, BIR sent an assessment notice and demand letter to the CIC for deficiency income
tax for the year 1989 in the amount of ₱79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should be directed against
the old CIC, and not against the new CIC, which is owned by an entirely different set of
stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC
free from all tax liabilities for the fiscal years 1987-1989.
January 1995, the Estate of Toda, represented by special co-administrators Lorna Kapunan and
Mario Luza Bautista, received a Notice of Assessment from the Commissioner of Internal Revenue
for deficiency income tax for the year 1989 in the amount of ₱79,099,999.22.
The estate thereafter filed a letter of protest, in which the Commissioner dismissed the protest,
stating that a fraudulent scheme was deliberately perpetuated by the CIC wholly owned and
controlled by Toda by covering up the additional gain of ₱100 million, thus evading the higher
corporate income tax rate of 35%.
The estate then filed a petition for review, alleging that the Commissioner erred in holding the
Estate liable for income tax deficiency; that the inference of fraud of the sale of the properties is
unreasonable and unsupported; and that the right of the Commissioner to assess CIC had already
prescribed.
CTA: the Commissioner failed to prove that CIC committed fraud to deprive the government of
the taxes due it. It ruled that even assuming that a pre-conceived scheme was adopted by CIC, the
same constituted mere tax avoidance, and not tax evasion. It also ruled that the mere ownership by
Toda of 99.991% of the capital stock of CIC was not in itself sufficient ground for piercing the
separate corporate personality of CIC. Hence, the CTA declared that the Estate is not liable for
deficiency income tax of ₱79,099,999.22

ISSUE: Whether or not the tax planning scheme adopted by CIC constitutes tax evasion

RULING: YES, Tax evasion, is a scheme used outside of those lawful means and when availed
of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. Tax evasion
connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than
that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a
tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad faith,"
"willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which
is unlawful. All these factors are present in the instant case. It is significant to note that as early as
4 May 1989, prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August
1989, CIC received ₱40 million from RMI,25 and not from Altonaga. That ₱40 million was
debited by RMI and reflected in its trial balance26 as "other inv. – Cibeles Bldg." Also, as of 31
July 1989, another ₱40 million was debited and reflected in RMI’s trial balance as "other inv. –
Cibeles Bldg." This would show that the real buyer of the properties was RMI, and not the
intermediary Altonaga.
The scheme resorted to by CIC in making it appear that there were two sales of the subject
properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a
legitimate tax planning. Such scheme is tainted with fraud.
The objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the
transfer from him to RMI would then subject the income to only 5% individual capital gains tax,
and not the 35% corporate income tax. Altonaga’s sole purpose of acquiring and transferring title
of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the
property and did not enjoy the normal benefits and burdens of ownership. The sale to him was
merely a tax ploy, a sham, and without business purpose and economic substance.