TAX 4DF1920 Case Digests

GENERAL PRINCIPLES
Concept and Purpose of Taxation
THE POWER TO TAX IS SOMETIMES CALLED THE POWER TO DESTROY; THEREFORE, IT

SHOULD BE EXERCISED WITH CAUTION TO MINIMIZE INJURY TO THE PROPRIETARY
RIGHTS OF A TAXPAYER.
Roxas v. Court of Tax Appeals

G.R. No. L-25043, April 26, 1968
Bengzon, J.P., J.:
FACTS:
This is an appeal filed by petitioners against the decision of the CTA sustaining the assessment made
by the Commissioner of Internal Revenue (CIR) for deficiency income taxes.
Petitioners Antonio, Eduardo and Jose Roxas inherited from their grandparents several properties
including a farmland in Nasugbu, and in order to manage the properties, they formed a partnership
called Roxas y Compania. When the tenants expressed their desire to purchase from Roxas y Cia. the
parcels which they actually occupied, the Government persuaded the petitioners to sell to it the farm
land so that it can subsequently subdivide them among the farmers at very reasonable terms and
prices. Petitioners agreed. It turned out however that the Government did not have funds to cover the
purchase price, and so a special arrangement was made where Roxas y Cia. allowed the farmers to
directly buy the lands for the same price but by installment. Roxas y Cia. derived from said installment
payments a net gain. 50% of said net gain was reported for income tax purposes as gain on the sale of
capital asset held for more than one year pursuant to Section 34 of the Tax Code. The CIR assessed
deficiency income taxes against petitioners. Petitioners protested the assessment but the same was
denied. On appeal, the Court of Tax Appeals sustained the assessment. Hence, this petition.
The CIR contends that Roxas y Cia. could be considered a real estate dealer because it engaged in
the business of selling real estate, hence, 100% of the profits derived therefrom was taxed. The
business activity alluded to was the act of subdividing the Nasugbu farm lands and selling them to the
farmers-occupants on installment.
ISSUE:
Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence 100% taxable?
RULING:
No, the gain derived from the sale of the Nasugbu fam lands is not an ordinary gain but a capital gain
taxable only to the extent of 50%.
It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them
for generations was not only in consonance with, but more in obedience to the request and pursuant to
the policy of our Government to allocate lands to the landless.
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised
with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly,
equally and uniformly, lest the tax collector kill the "hen that lays the golden egg". And, in order to
maintain the general public's trust and confidence in the Government this power must be used justly
and not treacherously. It does not conform with Our sense of justice in the instant case for the
Government to persuade the taxpayer to lend it a helping hand and later on to penalize him for duly
answering the urgent call.
In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence,
pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain
derived from the sale thereof is capital gain, taxable only to the extent of 50%.
1
GENERAL PRINCIPLES
GENERAL PRINCIPLE; COLLECTION OF TAXES MUST BE IN ACCORDANCE WITH LAW;

ALGUE, INC.’S CLAIM FOR DEDUCTION OF INCOME TAX DUE THE PROMOTIONAL FEES
Commissioner of Internal Revenue v. Algue, Inc.,

G.R. No .L-28896, February 17, 1988
Ponente: Cruz, J.
FACTS:
On January 14, 1965, Algue, Inc., a domestic corporation engaged in engineering, construction and
other allied activities, received a letter from the petitioner assessing it in the total amount of
P83,183.85 as delinquency income taxes for the years 1958 and 1959. The Philippine Sugar Estate
Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories
and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara,
Isabel Guevara, Edith O'Farell, and Pablo Sanchez worked for the formation of the Vegetable Oil
Investment Corporation, inducing other persons to invest in it. Ultimately, after its incorporation largely
through the promotion of the said persons, this new corporation purchased the PSEDC properties. For
this sale, Algue received as agent a commission of P125,000.00, and it was from this commission that
the P75,000.00 promotional fees were paid to the aforenamed individuals.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it
was not an ordinary, reasonable or necessary business expense. The CTA held that the said amount
had been legitimately paid by the private respondent for actual services rendered. The payment was in
the form of promotional fees. These were collected by the payees for their work in the creation of the
Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties
of the Philippine Sugar Estate Development Company. The petitioner claims that these payments are
fictitious because most of the payees are members of the same family in control of Algue. It is argued
that no indication was made as to how such payments were made, whether by check or in cash, and
there is not enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an
attempt to evade a legitimate assessment by involving an imaginary deduction.
ISSUE: Whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00
deduction claimed by private respondent Algue as legitimate business expenses in its income tax
returns.
RULING:
NO, the CIR erred in disallowing the 75,000 deduction. Under Sec. 30 (a) (1) of the Tax Code, In
computing net income there shall be allowed as deduction: “All the ordinary and necessary expenses
paid or incurred during the taxable year in carrying on any trade or business, including a reasonable
allowance for salaries or other compensation for personal services actually rendered.” Furthermore,
under Sec. 70 of Revenue Regulations No. 2, among the ordinary and necessary expenses paid or
incurred in carrying on any trade or business may be included a reasonable allowance for salaries or
other compensation for personal services actually rendered. The test of deductibility in the case of
compensation payments is whether they are reasonable and are, in fact, payments purely for service.
The burden is on the taxpayer to prove the validity of the claimed deduction. In the present case, the
Court find that the onus has been discharged satisfactorily. The private respondent has proved that the
payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in
inducing investors and prominent businessmen to venture in an experimental enterprise and involve
themselves in a new business requiring millions of pesos.
It is said that taxes are what we pay for civilized society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance
to surrender part of one's hard-earned income to the taxing authorities, every person who is able to
must contribute his share in the running of the government. The government for its part, is expected to
respond in the form of tangible and intangible benefits intended to improve the lives of the people and
2
enhance their moral and material values. This symbiotic relationship is the rationale of taxation and
should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of
power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure.
If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all
the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can
demonstrate, as it has here, that the law has not been observed.
The Court find that the claimed deduction by the private respondent was permitted under the Internal
Revenue Code and should therefore not have been disallowed by the petitioner.
3
GENERAL PRINCIPLES
POLICE POWER IS THE POWER INHERENT IN A GOVERNMENT TO ENACT LAWS, WITHIN

CONSTITUTIONAL LIMITS, TO PROMOTE THE ORDER, SAFETY, HEALTH, MORALS, AND
GENERAL WELFARE OF SOCIETY
Camarines Norte Electric Cooperative, Inc. vs. Hon. Ruben Torres

G.R. No. 127249, February 27, 1998
Davide, Jr., J.:
FACTS:
This is an original action for certiorari and prohibition under Rule 65 wherein petitioners seek to annul
and set aside Memorandum Order No. 409 of the Office of the President dated December 3, 1996,
constituting an Ad Hoc Committee to take over and manage the affairs of petitioner.
On March 11, 1995, the Board of Directors of petitioner approved Resolution No. 22 appointing
Reynaldo Abundo as permanent General Manager. The Board was composed of President Ruben
Barrameda, VP Elvis Espiritu, Secretary Merardo Enero, Jr., Treasurer Marcelito Abas, Directors
Antonio Obias, Luis Pascua, Norberto Ochoa and OIC GM/Ex-Officio Leonida Manalo.
On May 28 1995, Obias, Ochoa, Pascua and Felecito Illan held a special meeting of the Board of
Directors of Petitioners. The minutes showed that those present declared all positions in the board
vacant and thereafter proceeded to hold elections by secret balloting. The following won and were
declared as the newly elected officers of petitioner – President Ochoa, VP Obias, Secretary Ilan and
Treasurer Pascua.
The Barrameda group challenged the election by filing with the CDA a petition for declaration of nullity
of election. The CDA ruled in their favor and issued a cease and desist order. On June 28, 1996, the
group of Ochoa forcibly took possession of the offices of petitioner and assumed the duties as officers
thereof. On Septeber 26, the Barrameda group were able to reassume control of the petitioner and to
perform their respective functions.
On December 3, 1996, the President issued the questioned Memorandum Order.
ISSUE:
Does the President have the power to order the take over and management of petitioner cooperative?
HELD:
No, the president does not have such power.
Having registered itself with the CDA pursuant to Section 128 of R.A. No. 6938 and Section 17 of R.A.
No. 6939, CANORECO was brought under the coverage of said laws. Article 38 of R.A. No. 6938
vests upon the board of directors the conduct and management of affairs of cooperatives.
Memorandum Order No. 409 clearly removed from the Board of Directors of CANORECO the power to
manage the affairs of CANORECO and transferred such power to the Ad Hoc Committee, albeit
temporarily. It necessarily follows that the incumbent directors were, for all intents and purposes,
suspended at the least, and removed, at the most, from their office. Nothing in law supported the take-
over of the management of the affairs of CANORECO, and the “suspension,” if not “removal,” of the
Board of Directors and the officers thereof.
It must be pointed out that the controversy which resulted in the issuance of the Memorandum Order
stemmed from a struggle between two groups vying for control of the management of CANORECO.
Obviously, there was a clear case of intra-cooperative dispute.
Even granting for the sake of argument that the party aggrieved by a decision of the CDA could pursue
an administrative appeal to the Office of the President on the theory that the CDA is an agency under
its direct supervision and control, still the Office of the President could not in this case, moto proprio or
upon request of a party, supplant or overturn the decision of the CDA. Under the Administrative Code
of 1987, decisions of administrative agencies become final and executory 15 days after receipt of a
copy thereof by the party adversely affected unless within that period an administrative appeal or
4
judicial review, if proper, has been perfected. A final resolution or decision of an administrative agency
also binds the Office of the President.
Neither can police power be invoked to clothe with validity the assailed Memorandum Order. Police
power is the power inherent in a government to enact laws, within constitutional limits, to promote the
order, safety, health, morals, and general welfare of society. It is lodged primarily in the legislature. By
virtue of a valid delegation of legislative power, it may also be exercised by the President and
administrative boards, as well as the lawmaking bodies on all municipal levels, including the barangay.
Delegation of legislative powers to the President is permitted in Sections 23(2) and 28(2) of Article VI
of the Constitution. The pertinent laws on cooperatives do not provide for the President or any other
administrative body to take over the internal management of a cooperative.
5
GENERAL PRINCIPLES
TO BE CONSIDERED A PROPER EXERCISE OF POLICE POWER THE SAME MUST COMPLY

WITH THE EQUAL PROTECTION CLAUSE AND DUE PROCESS CLAUSE OF THE
CONSTITUTION
Parayno v. Javellanos
G.R. NO. 148408: July 14, 2006
CORONA
FACTS:
Petitioner was the owner of a gasoline filling station in Calasiao, Pangasinan. In 1989, some residents
of Calasiao petitioned the Sangguniang Bayan (SB) of said municipality for the closure or transfer of
the station to another location. The matter was referred to the Municipal Engineer, Chief of Police,
Municipal Health Officer and the Bureau of Fire Protection for investigation. Upon their advise, the
Sangguniang Bayan recommended to the Mayor the closure or transfer of location of petitioner's
gasoline station.
Petitioner moved for the reconsideration of the SB resolution but it was denied. Hence, she filed a
special civil action for prohibition and mandamus with the Regional Trial Court (RTC) of Dagupan City,
Branch 44 against respondents. The case, docketed as SP Civil Case No. 99-03010-D, was raffled to
the sala of Judge Crispin Laron.
Petitioner claimed that her gasoline station was not covered by Section 44 of the Official Zoning Code
since it was not a "gasoline service station" but a "gasoline filling station" governed by Section 21
thereof.
ISSUES:
1. Whether or not the term “filling station” is embraced in the term “service station”?
2. Whether or not the Municipality of Calasiao validly exercised its police power?
HELD:
I.
NO.
We hold that the zoning ordinance of respondent municipality made a clear distinction between
"gasoline service station" and "gasoline filling station." The pertinent provisions read:
xxx xxx xxx
Section 21. Filling Station. A retail station servicing automobiles and other motor vehicles with gasoline
and oil only.7
xxx xxx xxx

Section 42. Service Station. A building and its premises where gasoline oil, grease, batteries, tires and
car accessories may be supplied and dispensed at retail and where, in addition, the following services
may be rendered and sales and no other.
A. Sale and servicing of spark plugs, batteries, and distributor parts;

b. Tire servicing and repair, but not recapping or regrooving;
c. Replacement of mufflers and tail pipes, water hose, fan belts, brake fluids, light bulbs, fuses, floor
mats, seat covers, windshield wipers and wiper blades, grease retainers, wheel, bearing, mirrors and
the like;
d. Radiator cleaning and flushing;
e. Washing and polishing, and sale of automobile washing and polishing materials;
f. Grease and lubricating;
g. Emergency wiring repairs;
6
h. Minor servicing of carburators;
i. Adjusting and repairing brakes;
j. Minor motor adjustments not involving removal of the head or crankcase, or raising the motor.8
It is evident from the foregoing that the ordinance intended these two terms to be separate and distinct
from each other. Even respondent municipality's counsel admitted this dissimilarity during the hearing
on the application for the issuance of a writ of preliminary prohibitory and mandatory injunction.
Counsel in fact admitted:
1. That there exist[ed] an official zoning code of Calasiao, Pangasinan which [was] not yet amended;
2. That under Article III of said official zoning code there [were] certain distinctions made by said
municipality about the designation of the gasoline filling station and that of the gasoline service station
as appearing in Article III, Nos. 21 and 42, [respectively];
3. That the business of the petitioner [was] one of a gasoline filling station as defined in Article III,
Section 21 of the zoning code and not as a service station as differently defined under Article 42 of the
said official zoning code;
4. That under Section 44 of the official zoning code of Calasiao, the term filling station as clearly
defined under Article III, Section 21, [did] not appear in the wordings thereof;9 (emphasis supplied)
The foregoing were judicial admissions which were conclusive on the municipality, the party making
them.10 Respondent municipality thus could not find solace in the legal maxim of ejusdem generis11
which means "of the same kind, class or nature." Under this maxim, where general words follow the
enumeration of particular classes of persons or things, the general words will apply only to persons or
things of the same general nature or class as those enumerated.12
Instead, what applied in this case was the legal maxim expressio unius est exclusio alterius which
means that the express mention of one thing implies the exclusion of others.13
Hence, because of the distinct and definite meanings alluded to the two terms by the zoning
ordinance, respondents could not insist that "gasoline service station" under Section 44 necessarily
included "gasoline filling station" under Section 21. Indeed, the activities undertaken in a "gas service
station" did not automatically embrace those in a "gas filling station.
II.
Respondent municipality invalidly used its police powers in ordering the closure/transfer of petitioner's
gasoline station. While it had, under RA 7160,14 the power to take actions and enact measures to
promote the health and general welfare of its constituents, it should have given due deference to the
law and the rights of petitioner.
A local government is considered to have properly exercised its police powers only when the following
requisites are met: (1) the interests of the public generally, as distinguished from those of a particular
class, require the interference of the State and (2) the means employed are reasonably necessary for
the attainment of the object sought to be accomplished and not unduly oppressive.15 The first
requirement refers to the equal protection clause and the second, to the due process clause of the
Constitution.16
Respondent municipality failed to comply with the due process clause when it passed Resolution No.
50. While it maintained that the gasoline filling station of petitioner was less than 100 meters from the
nearest public school and church, the records do not show that it even attempted to measure the
distance, notwithstanding that such distance was crucial in determining whether there was an actual
violation of Section 44. The different local offices that respondent municipality tapped to conduct an
investigation never conducted such measurement either.
7
GENERAL PRINCIPLES
THE IMPOSITION OF A LEVY WAS AN EXERCISE BY THE STATE OF ITS TAXATION POWER
Planters Product Inc. v. Fertiphil Corp.

G.R. No. 166006, March 14, 2008
Reyes, R.T., J.
FACTS:
Petitioner Planters Product Inc. and respondent Fertiphil are private corporations incorporated under
Philippine laws, both engaged in the importation and distribution of fertilizers, pesticides and
agricultural chemicals. Then President Marcos issued Letter of Instruction (LOI) 1465, imposing a
capital recovery component of Php10.00 perbag of fertilizer. The levy was to continue until adequate
capital was raised to make PPI financially viable.
Fertiphil remitted to the Fertilizer and Pesticide Authority (FPA), which was then remitted the
depository bank of PPI. Fertiphil paid P6,689,144 to FPA from 1985 to 1986. After the 1986 Edsa
Revolution, FPA voluntarily stopped the imposition of the P10 levy. Fertiphil demanded from PPI a
refund of the amount it remitted, however PPI refused. Fertiphil filed a complaint for collection and
damages, questioning the constitutionality of LOI 1465, claiming that it was unjust, unreasonable,
oppressive, invalid and an unlawful imposition that amounted to a denial of due process.
PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No. 1465 because
it does not have a “personal and substantial interest in the case or will sustain direct injury as a result
of its enforcement.” It asserts that Fertiphil did not suffer any damage from the imposition because
“incidence of the levy fell on the ultimate consumer or the farmers themselves, not on the seller
fertilizer company.
ISSUE:
Does Fertiphil have locus standi to question the constitutionality of an imposition of a levy as an
exercise of the taxation power of the State?
HELD:
YES. Fertiphil has locus standi because it suffered direct injury; doctrine of standing is a mere
procedural technicality which may be waived. The imposition of the levy was an exercise of the
taxation power of the state. While it is true that the power to tax can be used as an implement of police
power, the primary purpose of the levy was revenue generation. If the purpose is primarily revenue, or
if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a
tax.
Police power and the power of taxation are inherent powers of the State. These powers are distinct
and have different tests for validity. Police power is the power of the State to enact legislation that may
interfere with personal liberty or property in order to promote the general welfare, while the power of
taxation is the power to levy taxes to be used for public purpose. The main purpose of police power is
the regulation of a behavior or conduct, while taxation is revenue generation. The “lawful subjects” and
“lawful means” tests are used to determine the validity of a law enacted under the police power. The
power of taxation, on the other hand, is circumscribed by inherent and constitutional limitations.
Fertiphil suffered a direct injury from the enforcement of LOI No. 1465. It was required, and it did pay,
the ₱10 levy imposed for every bag of fertilizer sold on the domestic market. It may be true that
Fertiphil has passed some or all of the levy to the ultimate consumer, but that does not disqualify it
from attacking the constitutionality of the LOI or from seeking a refund. As seller, it bore the ultimate
burden of paying the levy. It faced the possibility of severe sanctions for failure to pay the levy. The
fact of payment is sufficient injury to Fertiphil.
8
GENERAL PRINCIPLES
TAXES MAY BE LEVIED WITH A REGULATORY PURPOSE TO PROVIDE MEANS FOR THE
REHABILITATION AND STABILIZATION OF A THREATENED INDUSTRY WHICH IS AFFECTED
WITH PUBLIC INTEREST AS TO BE WITHIN THE POLICE POWER OF THE STATE
Caltex v. COA
G.R. No. 92585, May 8, 1992
Davide, Jr., J.
FACTS:
This is a petition erroneously brought under Rule 44 of the Rules of Court questioning the authority of
the Commission on Audit (COA) in disallowing petitioner's claims for reimbursement from the Oil Price
Stabilization Fund (OPSF) and preventing it from exercising the right to offset its remittances against
its reimbursement vis-a-vis the OPSF.
In 1989, COA sent a letter to petitioner Caltex, directing it to remit its collection to the OPSF, excluding
that unremitted for the years 1986 and 1988, of the additional tax on petroleum products authorized
under the PD 1956. Pending such remittance, all of its claims for reimbursement from the OPSF shall
be held in abeyance. The grant total of its unremitted collections of the above tax is P1,287,668,820.
Caltex submitted a proposal to COA for the payment and the recovery of claims. COA approved the
proposal but prohibited Caltex from further offsetting remittances and reimbursements for the current
and ensuing years. Caltex moved for reconsideration but was denied.
In the present petition, petitioner contends that NCC (compensation) and the Revised Administrative
Code (Retention of Money for Satisfaction of Indebtedness to Government) allows offsetting. Amounts
due do not arise as a result of taxation since PD 1956 did not create a source of taxation, it instead
established a special fund. This lack of public purpose behind OPSF exactions distinguishes it from
tax. On the other hand, respondent contends that based on jurisprudence, there’s no offsetting of
taxes against the the claims that a taxpayer may have against the government, as taxes do not arise
from contracts or depend upon the will of the taxpayer, but are imposed by law.
ISSUE:
Whether the amounts due from Caltex to the OPSF may be offsetted against Caltex’s outstanding
claims from said funds.
HELD:
No. There is no merit in Caltex’s contention that the OPSF contributions are not for a public purpose
because they go to a special fund of the government. Taxation is no longer envisioned as a measure
merely to raise revenue to support the existence of the government; taxes may be levied with a
regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry
which is affected with public interest as to be within the police power of the State. It must be noted that
the oil industry is greatly imbued with public interest as it vitally affects the general welfare.
Moreover, PD 1956, as amended by EO No. 137 explicitly provides that the source of OPSF is
taxation. A taxpayer may not offset taxes due from the claims he may have against the government.
Taxes cannot be subject of compensation because the government and taxpayer are not mutually
creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off.
9
GENERAL PRINCIPLES
AN ORDINANCE WHICH TAKES WITHOUT COMPENSATION A CERTAIN AREA FROM A

PRIVATE CEMETERY TO BENEFIT PAUPERS WHO ARE CHARGES OF THE MUNICIPAL
CORPORATIONIS AN EXERCISE OF THE POWER OF EXPROPRIATION AND REQUIRES
PAYMENT OF JUST COMPENSATION
City Government of Quezon vs. Judge Ericta

GR No. L-34915, June 24, 1983
Gutierrez, Jr., J.
FACTS:
This is a petition for review by the City Government of Quezon City which seeks the reversal of the
decision of the Court of First Instance by Hon. Judge Vicente G. Ericta declaring Section 9 of
Ordinance No. 6118, S-64, of the Quezon City Council null and void on the ground contended by
Himlayang Pilipino, Inc., saying that the taking or confiscation of property deprives the owner of all
beneficial use of his property.
The ordinance was promulgated in Quezon City and approved the regulation of the establishment of
private cemeteries in the said city. According to the ordinance, 6% of the total area of the private
memorial park shall be set aside for charity burial of deceased persons who are paupers and have
been residents of QC. Himlayang Pilipino, a private memorial park, contends that the taking or
confiscation of property restricts the use of property such that it cannot be used for any reasonable
purpose and deprives the owner of all beneficial use of his property. It also contends that the taking is
not a valid exercise of police power, since the properties taken in the exercise of police power are
destroyed and not for the benefit of the public.
ISSUE:
Is the exercise of Section 9 of the ordinance in question a valid taking of private property by virtue of it
being a valid exercise of the police power?
HELD:
NO. The ordinance made by Quezon City is not a valid way of taking private property. The ordinance is
actually a taking without compensation of a certain area from a private cemetery to benefit paupers
who are charges of the municipal corporation. Instead of building or maintaining public cemeteries.
The State's exercise of the power of expropriation requires payment of just compensation. Passing the
ordinance without benefiting the owner of the property with just compensation or due process, would
amount to unjust taking of a real property. Since the property that is needed to be taken will be used
for the public's benefit, then the power of the state to expropriate will come forward and not the police
power of the state.
There is no reasonable relation between the setting aside of at least six (6) percent of the total area of
an private cemeteries for charity burial grounds of deceased paupers and the promotion of health,
morals, good order, safety, or the general welfare of the people. The ordinance is actually a taking
without compensation of a certain area from a private cemetery to benefit paupers who are charges of
the municipal corporation. Instead of building or maintaining a public cemetery for this purpose, the city
passes the burden to private cemeteries.
The expropriation without compensation of a portion of private cemeteries is not covered by Section
12(t) of Republic Act 537, the Revised Charter of Quezon City which empowers the city council to
prohibit the burial of the dead within the center of population of the city and to provide for their burial in
a proper place subject to the provisions of general law regulating burial grounds and cemeteries. When
the Local Government Code, Batas Pambansa Blg. 337 provides in Section 177 (q) that a
Sangguniang panlungsod may "provide for the burial of the dead in such place and in such manner as
prescribed by law or ordinance" it simply authorizes the city to provide its own city owned land or to
buy or expropriate private properties to construct public cemeteries. This has been the law and
practise in the past. It continues to the present. Expropriation, however, requires payment of just
compensation. The questioned ordinance is different from laws and regulations requiring owners of
subdivisions to set aside certain areas for streets, parks, playgrounds, and other public facilities from
the land they sell to buyers of subdivision lots. The necessities of public safety, health, and
10
convenience are very clear from said requirements which are intended to insure the development of
communities with salubrious and wholesome environments. The beneficiaries of the regulation, in turn,
are made to pay by the subdivision developer when individual lots are sold to home-owners.
11
GENERAL PRINCIPLES
THE DIFFERENTIATING FACTOR OF A TAX IS THAT THE PURPOSE TO BE SUBSERVED IS

THE RAISING OF REVENUE.
REPUBLIC OF THE PHILIPPINES vs. PHILIPPINE RABBIT BUS LINES, INC.

G.R. No. L-26862, March 30, 1970
FERNANDO, J.:
FACTS:
This is an appeal filed by petitioner from the decision of the lower court dismissing a complaint by
plaintiff-appellant Republic of the Philippines seeking the invalidation of the payment by defendant-
appellee Philippine Rabbit Bus Lines, Inc. for the registration fees of its motor vehicles in the form of
such negotiable backpay certificates of indebtedness.
Plaintiff-appellant filed a complaint alleging that defendant-appellee, as the registered owner of 238
motor vehicles, paid to the Motor Vehicles Office in Baguio, corresponding to the second installment of
registration fees for 1959, not in cash but in the form of negotiable certificate of indebtedness. The
answer by defendant-appellee alleged that what it did was in accordance with the Backpay Law. (It is
to be noted that said statute have restricted the privilege to the satisfaction of a tax.)
In the decision now on appeal, the lower court approved the acceptance of negotiable certificates of
indebtedness in payment of registration fees of motor vehicles.
ISSUE:
Is the registration fee a tax, and thus payment of which may be made in the form of negotiable
backpay certificates in accordance with Backpay Law?
HELD:
No, the registration fee is not a tax.
A tax refers to a financial obligation imposed by a state on persons, whether natural or juridical, within
its jurisdiction, for property owned, income earned, business or profession engaged in, or any such
activity analogous in character for raising the necessary revenues to take care of the responsibilities of
government. As distinguished from other pecuniary burdens, the differentiating factor is that the
purpose to be subserved is the raising of revenue. A tax then is neither a penalty that must be satisfied
or a liability arising from contract. Much less can it be confused or identified with a license or a fee as a
manifestation of an exercise of the police power. Unlike a tax, it has not for its object the raising of
revenue but looks rather to the enactment of specific measures that govern the relations not only as
between individuals but also as between private parties and the political society.
The Backpay Law, having restricted its privilege to the satisfaction of a tax, a liability for fees under the
police power is thus excluded from its benefits. Therefore, defendant-appellee cannot make use of a
backpay certificate to meet the subject obligation.
12
GENERAL PRINCIPLES
BOTH A LICENSE FEE AND A TAX MAY BE IMPOSED ON THE SAME ARTICLE WITHOUT
VIOLATING THE RULE ON DOUBLE TAXATION
Compania General de Tabacos de Filipinas v. City of Manila

G.R. No. L-16619, June 29, 1963
DIzon, J.
FACTS:
This is a case of appeal from the decision of the Court of First Instance of Manila ordering the City
Treasurer of Manila to refund the sum of P15,280.00 to petitioner Compania General de Tabacos de
Filipinas (Tabacalera).
Tabacalera, as a duly licensed first class wholesale and retail liquor dealer paid the City the fixed
license fees prescribed by Ordinance No. 3358 for the years 1954 to 1957, inclusive, and, as a
wholesale and retail dealer of general merchandise, it also paid the sales taxes required by
Ordinances Nos. 3634, 3301, and 3816.
By reason therof, the City Treasurer issued regulation, according to which “general merchandise”
includes all articles refferd to in the NIRC. Of these, included liquor among taxable articles. Pursuant to
such, Tabacalera included its sales of liquor in its sworn quarterly declaration submitted to the City
Treasurer beginning from the thirs quarter of 1954 to the second quarter of 1957 and correspondingly
paid a wholesaler’s tax and retailer’s tax.
In 1954, the City, through its treasurer, addressed a letter to Messrs. Sycip, Gorres, Velayo and Co.,
an accounting firm, expressing the view that liquor dealers paying the annual wholesale and retail fixed
tax under City Ordinance No. 3358 are not subject to the wholesale and retail dealers' taxes
prescribed by City Ordinances Nos. 3634, 3301, and 3816. Upon learning of said opinion, appellee
stopped including its sales of liquor in its quarterly sworn declarations submitted in accordance with the
aforesaid City Ordinances Nos. 3634, 3301, and 3816, and on December 3, 1957, it addressed a letter
to the City Treasurer demanding refund of the alleged overpayment. As the claim was disallowed, the
present action was instituted.
ISSUE:
Should Tabacalera pay the license fees prescribed by Ordinance 3358 and the taxes imposed by the
three other ordinances, or is it entitled to refund by reason of overpayment?
HELD:
Tabacalera should pay the license fees prescribed by Ordinance 3358 as well as the sales taxes
imposed by the three other ordinances.
The term "tax" applies — generally speaking — to all kinds of exactions which become public funds.
The term is often loosely used to include levies for revenue as well as levies for regulatory purposes.
Thus license fees are commonly called taxes. Legally speaking, however, license fee is a legal
concept quite distinct from tax; the former is imposed in the exercise of police power for purposes of
regulation, while the latter is imposed under the taxing power for the purpose of raising revenues.
Ordinance 3358 prescribes municipal license fees for the privilege to engage in the business of selling
liquor or alcoholic beverages. The license fees imposed by it are essentially for purposes of regulation,
and are justified, considering that the sale of intoxicating liquor is, potentially at least, harmful to public
health and morals, and must be subject to supervision or regulation by the state and by cities and
municipalities authorized to act in the premises. On the other hand, it is clear that Ordinances Nos.
3634, 3301, and 3816 impose taxes on the sales of general merchandise, wholesale or retail, and are
revenue measures enacted by the Municipal Board of Manila by virtue of its power to tax dealers for
the sale of such merchandise. Both a license fee and a tax may be imposed on the same business or
occupation, or for selling the same article, this not being in violation of the rule against double taxation.
13
GENERAL PRINCIPLES
TAX DISTINGUISHED FROM LICENSE FEE
Progressive Development v. Quezon City

G.R. No. L-36081, April 24, 1989
Feliciano, J.
FACTS:
The City Council of respondent Quezon City adopted Ordinance No. 7997, Series of 1969, otherwise
known as the Market Code of Quezon City, Section 3 of which provided for supervision fee against
privately owned and operated public markets. Respondent amended the Market Code through
Ordinance No. 9236 and changed the rate of the supervision fee from 10% to 5% on gross receipts on
rentals or lease of space in privately-owned public markets in Quezon City. petitioner Progressive
Development Corporation, owner and operator of a public market known as the "Farmers Market &
Shopping Center" filed a Petition for Prohibition with Preliminary Injunction against respondent before
the CFI on the ground that the supervision fee or license tax imposed by the above-mentioned
ordinances is in reality a tax on income which respondent may not impose, the same being expressly
prohibited by RA No. 2264, as amended, otherwise known as the Local Autonomy Act.
In its Answer, respondent, through the City Fiscal, contended that it had authority to enact the
questioned ordinances, maintaining that the tax on gross receipts imposed therein is not a tax on
income. The Solicitor General also filed an Answer arguing that the tax on gross receipts was not a tax
on income but one imposed for the enjoyment of the privilege to engage in a particular trade or
business which was within the power of respondent to impose.
The lower court dismissed the petition, ruling that the questioned imposition is not a tax on income, but
rather a privilege tax or license fee which local governments, like respondent, are empowered to
impose and collect.
Section 12, Article III of Republic Act No. 537, otherwise known as the Revised Charter of Quezon
City, authorizes the City Council to tax, fix the license fee, and regulate the business of certain staple
food products. Moreover, Section 2 of Local Autonomy Act, as amended provides that all chartered
cities, municipalities and municipal districts shall have authority to impose municipal license taxes or
fees upon persons engaged in any occupation or business, or exercising privileges in chartered cities,
municipalities or municipal districts by requiring them to secure licenses at rates fixed by the municipal
board or city council of the city, the municipal council of the municipality, or the municipal district
council of the municipal district.
ISSUE:
Is the supervision fee imposed by respondent on gross receipts of stall rentals is properly
characterized as partaking of the nature of an income tax and not a license fee?
HELD:
No, the supervision fee in question imposed by the respondent in the nature of a license fee and not
income tax.
The term "tax" frequently applies to all kinds of exactions of monies which become public funds. It is
often loosely used to include levies for revenue as well as levies for regulatory purposes such that
license fees are frequently called taxes although license fee is a legal concept distinguishable from tax:
the former is imposed in the exercise of police power primarily for purposes of regulation, while the
latter is imposed under the taxing power primarily for purposes of raising revenues. Thus, if the
generating of revenue is the primary purpose and regulation is merely incidental, the imposition is a
tax; but if regulation is the primary purpose, the fact that incidentally revenue is also obtained does not
make the imposition a tax.
In the case at bar, the "Farmers' Market and Shopping Center" being a public market in the' sense of a
market open to and inviting the patronage of the general public, even though privately owned,
petitioner's operation thereof required a license issued by the respondent City, the issuance of which,
14
applying the standards set forth above, was done principally in the exercise of the respondent's police
power. The SC held that the 5% tax imposed in Ordinance No. 9236 constitutes, not a tax on income,
not a city income tax (as distinguished from the national income tax imposed by the National Internal
Revenue Code) within the meaning of Section 2 (g) of the Local Autonomy Act, but rather a license tax
or fee for the regulation of the business in which the petitioner is engaged. While it is true that the
amount imposed by the questioned ordinances may be considered in determining whether the
exaction is really one for revenue or prohibition, instead of one of regulation under the police power, it
nevertheless will be presumed to be reasonable. Local governments 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 particular municipal conditions and the nature of the business being taxed as
well as other detailed factors relevant to the issue of arbitrariness or unreasonableness of the
questioned rates.
Finally, with regard the petitioner’s argument that respondent is without power to impose a gross
receipts tax for revenue purposes absent an express grant from the national government, this is
untenable. As a general rule, there must be a statutory grant for a local government unit to impose
lawfully a gross receipts tax, that unit not having the inherent power of taxation. The rule, however,
finds no application in the instant case where what is involved is an exercise of, principally, the
regulatory power of the respondent City and where that regulatory power is expressly accompanied by
the taxing power.
Hence, the City Council of respondent Quezon City properly imposed the questioned supervision fee in
the nature of a license fee.
15
GENERAL PRINCIPLES
Nature and Extent of Taxing Power
GENERAL PRINCIPLE; NAPOCOR’S CLAIM OF EXEMPTION FROM REAL PROPERTY TAX

IMPOSED BY PROVINCIAL GOV’T OF ALBAY
National Power Corporation v. Province of Albay

G.R. No. 87479, June 4, 1990
Ponente: Sarmiento, J.
FACTS:
On March 14 and 15, 1989, the respondents caused the publication of a notice of auction sale
involving the properties of NAPOCOR and the Philippine Geothermal Inc. consisting of buildings,
machines, and similar improvements standing on their offices at Tiwi, Albay. The amounts to be
realized from this advertised auction sale are supposed to be applied to the tax delinquencies or back
taxes of NAPOCOR supposedly accumulated at P214,845,184.76.
NAPOCOR under its Charter (C.A. No. 120, as amended) was exempt from all taxes, duties, fees,
imposts and other charges imposed by government but this was withdrawn by the promulgation of P.D.
1931 on June 11, 1984.
NAPOCOR opposes the auction sale and interposed its non-liability under Resolution No. 17-87, of the
Fiscal Incentives Review Board (FIRB), which provides “..That the tax and duty exemption privileges of
the National Power Corporation, including those pertaining to its domestic purchases of petroleum and
petroleum products, granted under the terms and conditions of Commonwealth Act No. 120 (Creating
the National Power Corporation, defining its powers, objectives and functions, and for other purposes),
as amended, are restored effective March 10, 1987”.
The Provincial Government of Albay defends the auction sale in question on the theory that the various
FIRB issuances constitute an undue delegation of the taxing power and hence, null and void, under
the Constitution. It pointed out that under Presidential Decree No. 776, the power of the FIRB was
merely to "recommend to the President of the Philippines and for reasons of compatibility with the
declared economic policy, the withdrawal, modification, revocation or suspension of the enforceability
of any of the above-cited statutory subsidies or tax exemption grants, except those granted by the
Constitution." It has no authority to impose taxes or revoke existing ones, which, after all, under the
Constitution, only the legislature may accomplish.
ISSUE:
Whether or not NAPOCOR is exempt from real property tax by virtue of FIRB issuances
HELD:
NO, NAPOCOR is not exempted from its tax liability. FIRB, under its charter, Presidential Decree No.
776, had been empowered merely to "recommend" tax exemptions. By itself, it could not have validly
prescribed exemptions or restore taxability. Hence, as of June 11, 1984 (promulgation of Presidential
Decree No. 1931), NAPOCOR had ceased to enjoy tax exemption privileges.
To all intents and purposes, real property taxes are funds taken by the State with one hand and given
to the other. As a rule, claims of tax exemption are construed strongly against the claimant. They must
also be shown to exist clearly and categorically, and supported by clear legal provisions. Taxes are the
lifeblood of the nation. Their primary purpose is to generate funds for the State to finance the needs of
the citizenry and to advance the common weal. The auction sale of the properties of NAPOCOR is
valid.
16
GENERAL PRINCIPLES
Inherent and Constitutional Limitations on the Taxing Power
TAXATION MAY BE USED AS AN EXERCISE OF THE POLICE POWER OF THE STATE
Virgilio Gaston v Republic Planters Bank

G.R. No. 77194. March 15, 1988.
MELENCIO-HERRERA, J.
FACTS:
Respondent Philippine Sugar Commission (PHILSUCOM, for short) was formerly the government
office tasked with the function of regulating and supervising the sugar industry until it was superseded
by its co-respondent Sugar Regulatory Administration (SRA, for brevity)
Angel H. Severino, Jr., Et Al., who are sugarcane planters planting and milling their sugarcane in
different mill districts of Negros Occidental
Petitioners and Intervenors have come to this Court praying for a Writ of Mandamus commanding
respondents:
"TO IMPLEMENT AND ACCOMPLISH THE PRIVATIZATION OF REPUBLIC PLANTERS BANK BY

THE TRANSFER AND DISTRIBUTION OF THE SHARES OF STOCK IN THE SAID BANK, NOW
HELD BY AND STILL CARRIED IN THE NAME OF THE PHILIPPINE SUGAR COMMISSION, TO
THE SUGAR PRODUCERS, PLANTERS AND MILLERS, WHO ARE THE TRUE BENEFICIAL
OWNERS THE SAID INVESTMENT HAVING BEEN FUNDED BY THE DEDUCTION OF P1.00 PER
PICUL FROM SUGAR PROCEEDS OF THE SUGAR PRODUCERS COMMENCING THE YEAR
1978-79 UNTIL THE PRESENT AS STABILIZATION FUND PURSUANT TO P.D. #388.
Respondents PHILSUCOM and SRA, for their part, squarely traverse the petition arguing that no trust
results from Section 7 of P.D. No. 388; that the stabilization fees collected are considered government
funds under the Government Auditing Code; that the transfer of shares of stock from PHILSUCOM to
the sugar producers would be irregular, if not illegal; and that this suit is barred by laches.
ISSUE:
Whether or not there is an implied trust in favor of the sugar producers?
HELD:
NO.
The government, PHILSUCOM or its successor-in-interest, Sugar Regulatory Administration, in
particular, owns and stocks. While it is true that the collected stabilization fees were set aside by
PHILSUCOM to pay its subscription to RPB, it did not collect said fees for the account of the sugar
producers. That stabilization fees are charges/levies on sugar produced and milled which accrued to
PHILSUCOM under PD 338, as amended. . . ."
The stabilization fees collected are in the nature of a tax, which is within the power of the State to
impose for the promotion of the sugar industry (Lutz v. Araneta, 98 Phil. 148). They constitute sugar
liens (Sec. 7[b], P.D. No. 388). The collections made accrue to a "Special Fund," a "Development and
Stabilization Fund," almost identical to the "Sugar Adjustment and Stabilization Fund" created under
Section 6 of Commonwealth Act 567. 1 The tax collected is not in a pure exercise of the taxing power.
It is levied with a regulatory purpose, to provide means for the stabilization of the sugar industry. The
levy is primarily in the exercise of the police power of the State (Lutz v. Araneta, supra.).
"The protection of a large industry constituting one of the great sources of the state’s wealth and
therefore directly or indirectly affecting the welfare of so great a portion of the population of the State is
affected to such an extent by public interests as to be within the police power of the sovereign."
(Johnson v. State ex rel. Marey, 128 So. 857, cited in Lutz v. Araneta, supra).
17
GENERAL PRINCIPLES
CONSTRUCTION OF APPLICABLE LAW TO ORDINANCES; SPECIAL STATUTE THAT REFERS

TO A SUBJECT IN GENERAL YIELDS TO THE GENERAL STATUTE WHICH TREATS IN
PARTICULAR.
Bagatsing v. Ramirez
G.R. No. L-41631, December 17, 1976
Martin, J.
FACTS:
The Municipal Board of Manila enacted Ordinance No. 7522, "AN ORDINANCE REGULATING THE
OPERATION OF PUBLIC MARKETS AND PRESCRIBING FEES FOR THE RENTALS OF STALLS
AND PROVIDING PENALTIES FOR VIOLATION THEREOF AND FOR OTHER PURPOSES." The
petitioner City Mayor, Ramon D. Bagatsing, approved the ordinance. Ordinance No. 7522 was enacted
without being published at all in two (2) daily newspapers of general circulation in the City of Manila. It
was, however, posted in the legislative hall and in all city public markets and city public libraries.
Respondent Federation of Manila Market Vendors, Inc. commenced a civil case before the CFI of
Manila presided over by respondent Judge, seeking the declaration of nullity of Ordinance No. 7522 for
the reason, among others, that the publication requirement under the Revised Charter of the City of
Manila has not been complied with
After due hearing on the merits, respondent Judge rendered its decision declaring the nullity of
Ordinance No. 7522 of the City of Manila on the primary ground of non-compliance with the
requirement of publication under the Revised City Charter. Petitioners moved for reconsideration of the
adverse decision, stressing that (a) only a post-publication is required by the Local Tax Code, among
others. Respondent Judge denied the motion.
The Revised Charter of the City of Manila requires publication before the enactment of the ordinance
and after the approval thereof in two daily newspapers of general circulation in the city whole the Local
Tax Code only prescribes for publication after the approval of ordinances levying or imposing taxes,
fees or other charges either in a newspaper or publication widely circulated within the jurisdiction of the
local government or by posting the ordinance in the local legislative hall or premises and in two other
conspicuous places within the territorial jurisdiction of the local government.
ISSUE:
Should the Revised City Charter (R.A. 409, as amended), instead of the Local Tax Code (P.D. No
231), govern the publication of Ordinance No. 7522 enacted by the Municipal Board of Manila?
HELD:
No, the Local Tax Code should apply with regard the publication of Ordinance No. 7522.
The rule commonly said is that a prior special law is not ordinarily repealed by a subsequent general
law. The fact that one is special and the other general creates a presumption that the special is to be
considered as remaining an exception of the general, one as a general law of the land, the other as
the law of a particular case. However, the rule readily yields to a situation where the special statute
refers to a subject in general, which the general statute treats in particular.
There is no question that the Revised Charter of the City of Manila is a special act since it relates only
to the City of Manila, whereas the Local Tax Code is a general law because it applies universally to all
local governments.
The Revised Charter of the City of Manila speaks of "ordinance" in general, i.e., irrespective of the
nature and scope thereof, whereas, the Local Tax Code relates to "ordinances levying or imposing
taxes, fees or other charges" in particular. In regard, therefore, to ordinances in general, the Revised
Charter of the City of Manila is doubtless dominant, but, that dominant force loses its continuity when it
approaches the realm of "ordinances levying or imposing taxes, fees or other charges" in particular.
Thus, the Local Tax Code controls.
18
GENERAL PRINCIPLES
PRESIDENTIAL DECREES PROVIDING FOR FINES, FORFEITURES OR TAX AND REVENUE

MEASURES ARE OF PUBLIC NATURE OR OF GENERAL APPLICABILITY, WHICH REQUIRE
THEM TO BE PUBLISHED.
Tañada vs. Tuvera

G.R. No. L-63915, April 24, 1985
Escolin, J.
FACTS:
Petition to review the decision of the Executive Assistant to the President.
Invoking the people’s right to be informed on matters of public concern, a right recognized in Section 6,
Article IV of the 1973 Philippine Constitution, as well as the principle that laws to be valid and
enforceable must be published in the Official Gazette or otherwise effectively promulgated, petitioners
seek a writ of mandamus to compel respondent public officials to publish, and/or cause the publication
in the Official Gazette of various presidential decrees, letters of instructions, general orders,
proclamations, executive orders, letter of implementation and administrative orders.
ISSUE:
Whether or not PD regarding imposition of taxes and revenues need be published.
HELD:
YES, there is a need to be published because it is of public nature and general applicability.
The clear object of the above-quoted provision is to give the general public adequate notice of the
various laws which are to regulate their actions and conduct as citizens. Without such notice and
publication, there would be no basis for the application of the maxim “ignorantia legis non excusat.
Thus, without publication, the people have no means of knowing what presidential decrees have
actually been promulgated, much less a definite way of informing themselves of the specific contents
and texts of such decrees.
The law itself makes a list of what should be published in the Official Gazette. Such listing, to our mind,
leaves respondents with no discretion whatsoever as to what must be included or excluded from such
publication.
The publication of all presidential issuances “of a public nature” or “of general applicability” is
mandated by law.
In this case, obviously, presidential decrees that provide for fines, forfeitures or penalties for their
violation or otherwise impose a burden on the people, such as tax and revenue measures, fall within
this category.
Other presidential issuances which apply only to particular persons or class of persons such as
administrative and executive orders need not be published on the assumption that they have been
circularized to all concerned.
Therefore, PD regarding tax and revenue measures should be published.
19
GENERAL PRINCIPLES
REMIT DEFINED
Juan Luna Subdivision v. M. Sarmiento

G.R. No. L-3538, May 28, 1952
Tuason, J.
FACTS:
This is an appeal by the defendant City Treasurer of the City of Manila which ordered him to refund to
the plaintiff Juan Luna Subdivision Inc. the whole amount of the check amounting to P2, 210.52
On December 29, 1941, the plaintiff issued to the City Treasurer of Manila a check in the amount
P2,210.52 drawn upon the Philippine Trust Company. The check was to be applied to plaintiff's land
tax for the second semester of 1941. After the exact amount had been verified on February 20, 1942
which was P341.60, the balance of P1,868.92, covered by voucher No. 1487 of the City Treasure's
office, was noted in the ledger as a credit to the plaintiff. However, the records of the City Treasurer’s
office do not show what was done with the check except that it was deposited with the Philippine
National Bank, the City Treasurer's sole depository and was cashed by the drawee. The City Treasurer
refused after liberation to refund the plaintiff's deposit or apply it to such future taxes as might be found
due as his office was not benefited by the check and denied that the said check was encashed while
the Philippine Trust Company was unwilling to reverse its debit entry against the Juan Luna
Subdivision, Inc. Thus, plaintiff filed a suit against the City Treasurer and the Philippine Trust Company
as defendants in the alternative to determine which of the two defendants is liable for plaintiff's check.
The plaintiff claims for the whole amount of the check contending that taxes for the last semester of
1941 have been remitted by Commonwealth Act (CA) No. 703.
ISSUE:
Whether or not Section 1 of CA No. 703 covers taxes paid before its enactment as the plaintiff
maintains.
HELD:
No. Section 1 of Commonwealth Act No. 703, which was approved on November 1, 1945, provides:
All land taxes and penalties due and payable for the years nineteen hundred and forty-two nineteen
hundred and forty-three nineteen hundred and forty-four and fifty per cent of the tax due for nineteen
hundred and forty-five, are hereby remitted. The land taxes and penalties due and payable for the
second semester of the year nineteen hundred and forty-one shall also be remitted the if the remaining
fifty per cent corresponding to the year nineteen hundred and forty-five shall been paid on or before
December thirty-first, nineteen hundred and forty-five.
There is no ambiguity in the language of the law. It says "taxes and penalties due and payable," the
literal meaning of which taxes owned or owing. Note that the provision speaks of penalties, and note
that penalties accrue only when taxes are not paid on time. The word "remit" underlined by the
appellant does not help its theory, for to remit to desist or refrain from exacting, inflicting, or enforcing
something as well as to restore what has already been taken. The remission of taxes due and payable
to the exclusion of taxes already collected does not constitute unfair discrimination. Each set of taxes
is a class by itself, and the law would be open to attack as class legislation only if all taxpayers
belonging to one class were not treated alike.
Where the plaintiff issued a check for a sum to the City Treasurer of Manila and the latter accepted the
check drawn upon the Philippine Trust Company and this was to be applied to plaintiffs’ land tax which
is yet to be determined and the exact amount had been later verified, the balance was in the nature of
deposit held in trust by the City Treasurer and for this reason, plaintiff’s taxes are to be regarded as
still due and payable only to the extent of the balance. The amount which had been verified later on
had been applied to the second half of plaintiff’s tax and becomes part of the general funds of the city
treasurer. Thus, defendant City Treasurer shall refund to the plaintiff the sum of P1,868.92 instead of
P2,210.52, without costs.
20
GENERAL PRINCIPLES
A VALID CLASSIFICATION MUST BE BASED ON REAL AND SUBSTANTIAL DIFFERENCES

HAVING A REASONABLE RELATION TO THE SUBJECT OF THE PARTICULAR LEGISLATION
MAYOR ANTONIO J. VILLEGAS, Petitioner, v. HIU CHIONG TSAI PAO HO and JUDGE
FRANCISCO ARCA, Respondents.
G.R. No. L-29646. November 10, 1978
FERNANDEZ, J.
FACTS:
The controverted Ordinance No. 6537 was passed by the Municipal Board of Manila and signed by the
herein petitioner Mayor Antonio J. Villegas of Manila
City Ordinance No. 6537 is entitled:
"AN ORDINANCE MAKING IT UNLAWFUL FOR ANY PERSON NOT A CITIZEN OF THE
PHILIPPINES TO BE EMPLOYED IN ANY PLACE OF EMPLOYMENT OR TO BE ENGAGED IN ANY
KIND OF TRADE, BUSINESS OR OCCUPATION WITHIN THE CITY OF MANILA WITHOUT FIRST
SECURING AN EMPLOYMENT PERMIT FROM THE MAYOR OF MANILA; AND FOR OTHER
PURPOSES." 3
Section 1 of said Ordinance No. 6537 4 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 except 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.
Private respondent Hiu Chiong Tsai Pao Ho, who was employed in Manila, filed a petition with the
Court of First Instance, praying for the issuance of the writ of preliminary injunction and restraining
order to stop the enforcement of Ordinance No. 6637 as well as for a judgment declaring said
Ordinance No. 6537 null and void.
In this petition, Hiu Chiong Tsai Pao Ho assigned the following as his grounds for wanting the
ordinance declared null and void:
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;
Petitioner 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.
ISSUE:
Whether or not the ordinance is invalid for being discriminatory?
HELD:
YES
The contention that Ordinance No. 6537 is not a purely tax or revenue measure because its principal
purpose is regulatory in nature has no merit. 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
21
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.
The P50.00 fee is unreasonable not only because it is excessive but 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.
22
GENERAL PRINCIPLES
REPUBLIC ACT NO. 7716, OTHERWISE KNOWN AS THE EXPANDED VALUE-ADDED TAX LAW
IS CONSTITUTIONAL
Tolentino et.al, v. Secretary of Finance

G.R. No. 115455, October 30,1995
MENDOZA, J.;
FACTS:
The present case involves motions seeking reconsideration of the Court’s decision dismissing the
petitions for the declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded
Value-Added Tax Law. The motions, of which there are 10 in all, have been filed by the several
petitioners.
The value-added tax (VAT) is levied on the sale, barter or exchange of goods and properties as well as
on the sale or exchange of services. RA 7716 seeks to widen the tax base of the existing VAT system
and enhance its administration by amending the National Internal Revenue Code.
Contention of the petitioners:
1. R.A. No. 7716 violates Art. VI, §24 of the Constitution because it does not “originate
exclusively” in the House of Representatives. Although they admit that H. No. 11197 was filed in the
House of Representatives, they complain that the Senate did not pass it on second and third readings.
Instead what the Senate did was to pass its own version (S. No. 1630), and in effect results to the
consolidation of 2 distinct bills. (H. No. 11197 and S. No. 1630) Petitioners contended that it should
have amended the House Bill by striking out the text of the bill and substituting it with the text of its
own bill so that "the bill remains a House bill and the Senate version just becomes the text (only the
text) of the House bill."
2. Senate Bill No. 1630 did not pass 3 readings on separate days as required by the Constitution
because the second and third readings were done on the same day.
Petitioner
3. PAL contends that R.A. No. 7716 violates Art. VI, §26 (1) of the Constitution (one title, one
subject rule) because the amendment of its franchise by the withdrawal of its exemption from the VAT
is not expressed in the title of the law.
4. Petitioner Philippine Press Institute, Inc. (PPI) contends that the law violates their press
freedom, by removing the exemption of the press from the VAT while maintaining those granted to
others. At any rate, it is averred, "even nondiscriminatory taxation of constitutionally guaranteed
freedom is unconstitutional."
5. Lastly, petitioners Chamber of Real Estate and Builders Associations, Invc., (CREBA) asserts
that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies transactions as covered or
exempt without reasonable basis and (3) violates Art. VI, § 28 (1) which provides that taxes should be
uniform and equitable and that Congress shall “evolve a progressive system of taxation”.
ISSUE:
Is R.A. No. 7716 otherwise known as the Expanded Value-Added Tax Law unconstitutional based on
the aforementioned contentions of the petitioners?
HELD:
NO, the Supreme Court upheld the constitutionality of R.A No. 7716.
First Contention: The E-VAT law did not violate Art. VI, §24 of the Constitution. It is provided that all
appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills must "originate exclusively in the House of Representatives. However it
also provides that the Senate may propose or concur with amendments, hence in the exercise of this
power, the Senate may propose an entirely new bill as a substitute measure.
To begin with, it is not the law but the revenue bill which is required by the Constitution to originate
exclusively in the House of Representatives. What the Constitution provides that that the initiative for
23
filing revenue, tariff or tax bills, bills authorizing an increase of the public debt, private bills and bills of
local application must come from the House of Representatives on the theory that, elected as they are
from the districts, the members of the House can be expected to be more sensitive to the local needs
and problems. The Constitution neither prohibits the filing in the Senate of a substitute bill in
anticipation of its receipt of the bill from the House, so long as action by the Senate as a body is
withheld pending receipt of the House bill.
Second Contention: The reading of the bill on 3 separate days was dispensed because the president
certified it as urgency and for its immediate enactment.
Art. VI, §26 (2) of the present Constitution provides that no bill passed by either House shall become a
law unless it has passed three readings on separate days except when the President certifies to the
necessity of its immediate enactment to meet a public calamity or emergency. The purpose for which
three readings on separate days is required is said to be two-fold: (1) to inform the members of
Congress of what they must vote on and (2) to give them notice that a measure is progressing through
the enacting process, thus enabling them and others interested in the measure to prepare their
positions with reference to it.
In this case, the President had earlier certified it as urgent and for immediate enactment because it
was the one which at that time was being considered by the Congress. As a result of this presidential
certification, it dispensed with the requirement not only of printing, but also of the reading of the bill on
3 separate days.
Third Contention: It did not violate Art. VI, §26 (1) of the Constitution which provides that "Every bill
passed by Congress shall embrace only one subject which shall be expressed in the title thereof."
(One Title, One Subject Rule). The title of the statute in controversy clearly states that its purpose is to
expand the Value Added Tax System
The purpose of the rule is to prevent surprise upon Congress members of the contents and aim of
such bill, and to inform the public of such bill pending legislation.
In this case, the Court said that the title of the statute in controversy clearly states that its purpose is to
expand the Value Added Tax System and the Congress thereby clearly expresses its intention to
amend any provision of the NIRC which stands in the way of accomplishing the purpose of the law. In
the case of PAL, it did not know of their situation not because of any defect in title but because it might
have not noticed the publication until some event calls attention to its existence.
Fourth Contention: E-VAT Law does not violate the press freedom of the petitioners.
As a general proposition, the press is not exempt from the taxing power of the State and that what the
constitutional guarantee of free press prohibits are laws which single out the press or target a group
belonging to the press for special treatment or which in any way discriminate against the press on the
basis of the content of the publication, and R.A. No. 7716 is none of these.
It would suffice to say that since the law granted the press a privilege, the law could take back the
privilege anytime without offense to the Constitution. The reason is simple: by granting exemptions, the
State does not forever waive the exercise of its sovereign prerogative. Indeed, in withdrawing the
exemption, the law merely subjects the press to the same tax burden to which other businesses have
long ago been subject.
Last Contention: E-VAT Law did not violate the Constitutional provisions regarding due process, equal
protection, contract clauses and the rule on taxation.
The contention of CREBA that the imposition of the VAT on the sales and leases of real estate by
virtue of contracts entered into prior to the effectivity of the law would violate the constitutional
provision of non-impairment of contracts, is only slightly less abstract but nonetheless hypothetical. It is
enough to say that the parties to a contract cannot, through the exercise of prophetic discernment,
fetter the exercise of the taxing power of the State. For not only are existing laws read into contracts in
order to fix obligations as between parties, but the reservation of essential attributes of sovereign
power is also read into contracts as a basic postulate of the legal order. The policy of protecting
24
contracts against impairment presupposes the maintenance of a government which retains adequate
authority to secure the peace and good order of society. In truth, the Contract Clause has never been
thought as a limitation on the exercise of the State's power of taxation save only where a tax
exemption has been granted for a valid consideration.
Lastly, equality and uniformity of taxation mean that all taxable articles or kinds of property of the same
class be taxed at the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation. To satisfy this requirement, it is enough that the statute or
ordinance applies equally to all persons, firms, and corporations placed in similar situation.
Furthermore, the Constitution does not really prohibit the imposition of indirect taxes which, like the
VAT, are regressive. What it simply provides is that Congress shall “evolve a progressive system of
taxation.” The constitutional provision has been interpreted to mean simply that “direct taxes are . . . to
be preferred [and] as much as possible, indirect taxes should be minimized.” The mandate to
Congress is not to prescribe, but to evolve, a progressive tax system.
25
GENERAL PRINCIPLES
A LICENSE TAX MAY BE LEVIED UPON A BUSINESS OR OCCUPATION ALTHOUGH THE LAND
OR PROPERTY USED IN CONNECTION THEREWITH IS SUBJECT TO PROPERTY TAX.
Villanueva vs. City of Iloilo

G.R. No. L-26521, December 28, 1968
Castro, J.
FACTS:
Defendant appeals the decision of the CFI declaring illegal Ordinance No. 11, which imposes
Municipal License Tax on Persons engaged in the Business of Operating Tenement Houses, and
ordering the City to refund to the plaintiffs-appellees the sums collected from them under the said
ordinance.
On September 30, 1946 the municipal board of Iloilo City enacted Ordinance 86, imposing license tax
fees as follows: (1) tenement house (casa de vecindad), P25.00 annually; (2) tenement house, partly
or wholly engaged in or dedicated to business in the streets of J.M. Basa, Iznart and Aldeguer, P24.00
per apartment; (3) tenement house, partly or wholly engaged in business in any other streets, P12.00
per apartment. The validity and constitutionality of this ordinance were challenged by the spouses
Eusebio Villanueva and Remedies Sian Villanueva, owners of four tenement houses containing 34
apartments. On January 15, 1960 the municipal board of Iloilo City, believing, obviously, that with the
passage of Republic Act 2264, otherwise known as the Local Autonomy Act, it had acquired the
authority or power to enact an ordinance similar to that previously declared by this Court as ultra vires,
thus enacted an “Ordinance Imposing Municipal License Tax on Persons Engaged in the Business of
Operating Tenement-Houses”.
ISSUE:
Is the tax imposed by the ordinance amounts to double taxation.
HELD:
No, as the tax imposed under the said ordinance is not a real estate or property tax.
A real estate tax is a direct tax on the ownership of lands and buildings or other improvements thereon
and is payable regardless of whether the property is used or not. The tax is usually single or indivisible,
although the land and building or improvements erected thereon are assessed separately, except
when the land and building or improvements belong to separate owners. It is a fixed proportion of the
assessed value of the property taxed, and requires, therefore, the intervention of assessors. It is
collected or payable at appointed times, and it constitutes a superior lien on and is enforceable against
the property subject to such taxation, and not by imprisonment of the owner. The tax imposed by the
ordinance in question does not possess the aforestated attributes. Clearly, therefore, the tax in
question is not a real estate tax. “The spirit, rather than the letter, or an ordinance determines the
construction thereof, and the court looks less to its words and more to the context, subject-matter,
consequence, and effect.
Accordingly, what is within the spirit is within the ordinance although it is not within the letter thereof,
while that which is in the letter, although not within the spirit, is not within the ordinance.” It is within
neither the letter nor the spirit of the ordinance that an additional real estate tax is being imposed,
otherwise, the subject-matter would have been not merely tenement houses. It is plain from the
context of the ordinance that the intention is to impose a license tax on the operation of tenement
houses, which is a form of business or calling. Thus, there is no double taxation.
26
GENERAL PRINCIPLES
PROPERTY TAX EXEMPTION UNDER THE CONSTITUTION, EXEMPTS NOT THE INSTITUTION
BUT THE BUILDINGS AND IMPROVEMENTS, ACTUALLY, DIRECTLY AND EXCLUSIVELY USED
FOR RELIGIOUS, CHARITABLE OR EDUCATIONAL PURPOSES
Lung Center of the Philippines v. Quezon City

G.R. No. 144104, June 29, 2004
Callejo, Sr., J.
FACTS:
This is a petition for review on certiorari under Rule 45 of the ROC of the decision of the Court of
Appeals which affirmed the decision of the Central Board of Assessment Appeals holding that the lot
owned by the petitioner and its hospital building constructed thereon are subject to assessment for
purposes of real property tax.
The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established by virtue
of Presidential Decree No. 1823. It owns a piece of land, in the middle of which is a hospital stands. A
big space at the ground floor is being leased to private parties for canteen and small stores and to
medical and to professional practitioners. A big portion of the lot is being leased for commercial
purposes to a private enterprise. In 1993, both land and the hospital building were assessed for real
property taxes in the amount of about Php 4.5 Million. The petitioner avers that it is a charitable
institution within the context of Section 28(3), Article VI of the 1987 Constitution. It asserts that its
character as a charitable institution is not altered by the fact that it admits paying patients and renders
medical services to them, leases portions of the land to private parties, and rents out portions of the
hospital to private medical practitioners from which it derives income to be used for operational
expenses.
ISSUE:
Does the petitioner enjoy property tax exemption privileges for its real properties?
HELD:
No, petitioner does not enjoy any property tax exemption privileges for its real properties as well as the
building constructed thereon. The tax exemption under Section 28(3), Article VI of the 1987 Philippine
Constitution covers property taxes only. What is exempted is not the institution itself, those exempted
from real estate taxes are lands, buildings and improvements, actually, directly and exclusively used
for religious, charitable or educational purposes.
On order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal
proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and
EXCLUSIVELY used for charitable purposes. "Exclusive" is defined as possessed and enjoyed to the
exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a
manner to exclude; as enjoying a privilege exclusively." If real property is used for one or more
commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation.
The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively"
without doing violence to the Constitutions and the law. Solely is synonymous with exclusively. What is
meant by actual, direct and exclusive use of the property for charitable purposes is the direct and
immediate and actual application of the property itself to the purposes for which the charitable
institution is organized. It is not the use of the income from the real property that is determinative of
whether the property is used for tax-exempt purposes.
The petitioner failed to discharge its burden to prove that the entirety of its real property is actually,
directly and exclusively used for charitable purposes.
27
GENERAL PRINCIPLES
IMPOSITION OF GIFT TAX IS NOT A VIOLATION OF THE CONSTITUTIONAL PROVISION

EXEMPTING CHURCHES, PARSONAGES OR CONVENTS FROM PROPERTY TAX
Rev. Fr. Casimiro Lladoc. v. CIR and CTA

G.R. No. L-19201, June 16, 1965
Paredes, J.
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.
Petitioner lodged a protest to the assessment and requested the withdrawal thereof. The protest and
the motion for reconsideration presented to the Commissioner of Internal Revenue were denied. The
petitioner appealed to the Court of Tax Appeals. Petitioner asserted that the assessment of the gift tax,
even against the Roman Catholic Church, would not be valid, for such would be a clear violation of the
provisions of the Constitution.
ISSUE:
Is petitioner liable for the assessed donee’s gift tax on the donation for the construction of the Victorias
Parish Church?
HELD:
No, petitioner is not personally liable for the assessed gift tax; however, the Head of the Diocese, to
which the parish Victorias pertains is liable. 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 excise upon the use made
of the properties, upon the exercise of the privilege of receiving the properties. Manifestly, gift tax is not
within the exempting provisions of the section just mentioned. A gift tax is not a property tax, but an
excise tax imposed on the transfer of property by way of gift inter vivos, the imposition of which on
property used exclusively for religious purposes, does not constitute an impairment of the Constitution.
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.
28
GENERAL PRINCIPLES
A HOSPITAL ORGANIZED AS A CHARITABLE INSTITUTION IS PRESUMED TO BE OPERATING

AS SUCH
Hospital De San Juan De Dion, Inc. v. Pasay City

G.R. No. L-19371, February 28, 1966
Dizon, J.
FACTS:
This is an appeal taken by the Hospital de San Juan de Dios, Inc. from the decision of the CFI of Rizal
dismissing its complaint against the City of Pasay - hereinafter referred to as the City - Pablo Cuneta,
R. N. Ascano and Ceferino Fuentes, in their capacities as Mayor, City Engineer and City Treasurer,
respectively, of said city.
A paid, under protest, to the City the amounts of P829.60 and P879.90, respectively, representing
electrical inspection fees allegedly due it from appellant under its city ordinances. Although appellant
claimed that, as a charitable institution, it was exempt from the payment of the inspection fees
provided for in the above-quoted section, it found itself compelled to pay the amounts mentioned
heretofore by reason of the refusal of appellees Pablo Cuneta, as Mayor, and R. N. Ascaño, as City
Engineer, to issue a building permit to make additional constructions applied for by appellant until after
the full payment of the electrical inspection fees.
The trial court, while admitting that appellant was organized for charitable purposes, held that it "is not
actually being managed and operated as a charitable institution but one for profit" and, as such, "is not
entitled to the relief sought in the present action."
ISSUE:
Is Hospital de San Juan de Dion a charitable institution and, as such exempt
HELD:
Yes, Hospital de San Juan de Dion is exempt. It not being disputed that appellant was organized as a
charitable institution, the presumption is that it is operating as such, the burden of proof being on
appellees to show that it is operating otherwise. The record does not show that they have satisfactorily
discharged this burden.
The general rule is that a charitable institution does not lose its charitable character and its consequent
exemption from taxation merely because recipients of its benefits who are able to pay are required to
do so, where funds derived in this manner are devoted to the charitable purposes of the institution,
applies to hospitals. A hospital owned and conducted by a charitable organization, devoted for the
most part to the gratuitous care of charity patients, is exempt from taxation as a building used for
"purposes purely charitable", notwithstanding it receives and cares for pay patients, where any profit
thus derived is applied to the purposes of the institution.
An institution established, maintained, and operated for the purpose of taking care of the sick, without
any profit or view to profit, but at a loss, which is made up by benevolent contributions, the benefits of
which are open to the public generally, is a purely public charity within the meaning of a statute
exempting the property of institutions of purely public charity from taxation; the fact that patients who
are able to pay are charged for services rendered, according to their ability, being of no importance
upon the question of the character of the institution.
29
GENERAL PRINCIPLES
Stages or Aspects, Processes, and Phases of Taxation
DETAILS AS TO THE ENFORCEMENT AND ADMINISTRATION OF THE POWER TO TAX MAY BE

DELEGATED TO EXECUTIVE AGENCIES
ABAKADA Guro Partylist v. Ermita

G.R. No. 168056, September 1, 2005
Austria-Martinez, J.
FACTS:
This is a consolidation of various petitions questioning the constitutionality of R.A. No. 9337, an Act
amending several sections of the NIRC.
Petitioners question the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending Sections
106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC).
a.) Section 4 imposes a 10% VAT on sale of goods and properties.
b.) Section 5 imposes a 10% VAT on importation of goods
c.) Section 6 imposes a 10% VAT on sale of services and use or lease of properties
These questioned provisions contain a uniform proviso authorizing the President, upon
recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006:
a.) 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
b.) National government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 %)
Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its
exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine
Constitution. They argue that VAT is a tax levied on the sale or exchange of goods and services which
can’t be included within the purview of tariffs under the exemption delegation since this refers to
customs duties, tolls or tribute payable upon merchandise to the government and usually imposed on
imported/exported goods. They also said that the President has powers to cause, influence or create
the conditions provided by law to bring about the conditions precedent. Moreover, they allege that no
guiding standards are made by law as to how the Secretary of Finance will make the recommendation.
Delegating to the President the legislative power to tax is contrary to republicanism. The law also
effectively nullified the Presidents power of control, which includes the authority to set aside and nullify
the acts of her subordinates like the Secretary of Finance, by mandating the fixing of the tax rate by
the President upon the recommendation of the Secretary of Finance.
ISSUE:
Whether or not the RA 9337's stand-by authority to the Executive to increase the VAT rate, especially
on account of the recommendatory power granted to the Secretary of Finance, constitutes undue
delegation of legislative power?
HELD:
NO. For the delegation to be valid, it must be complete and it must fix a standard. A sufficient standard
is one which defines legislative policy, marks its limits, maps out its boundaries and specifies the public
agency to apply it.
In this case, it is not a delegation of legislative power BUT a delegation of ascertainment of facts upon
which enforcement and administration of the increased 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.
30
The use of the word SHALL connotes a mandatory order. Its use in a statute denotes an imperative
obligation and is inconsistent with the idea of discretion.
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. It is a clear directive to impose the 12% VAT rate when the specified conditions are present.
Congress just granted the Secretary of Finance the authority to ascertain the existence of a fact---
whether by December 31, 2005, the VAT collection as a percentage of GDP of the previous year
exceeds 2 4/5 % or the national government deficit as a percentage of GDP of the previous year
exceeds one and 1½%. If either of these two instances has occurred, the Secretary of Finance, by
legislative mandate, must submit such information to the President.
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 did not delegate the power to tax but the mere
implementation of the law.
31
GENERAL PRINCIPLES
Tax Statutes
A STATUTE WILL NOT BE CONSTRUED AS IMPOSING A TAX UNLESS DOES SO CLEARLY,

EXPRESSLY AND IT UNAMBIGUOUSLY.
MARINDUQUE IRON MINES AGENTS V. MUNICIPAL COUNCIL OF HINABANGAN

G.R. No. L-18924, June 30, 1964
Reyes, J.B.L., J.
FACTS:
The Municipality of Hinabangan enacted Ordinance No. 7 imposing a municipal license tax on the
gross outputs of the mines and other business. Petitioner, a corporation organized under the laws of
the Philippines and operating the only mine within the jurisdiction of the municipality of Hinabangan,
filed a case for declaratory relief in the CFI of Manila questioning the validity of the ordinance as
enacted without authority and in violation of law. Respondents answered averring the ordinance's
validity. The case was tried by the Court and rendered its decision declaring the ordinance in question
illegal, from which judgment respondents in due time perfected their appeal to this Court.
Respondents-appellants maintain in its appeal that the Court a quo erred in finding that Ordinance No.
7 does impose a tax; that Ordinance No. 7 was intended to impose a tax on sales; that Ordinance No.
7 is illegal because it is an imposition of a double taxation, and that Ordinance No. 7 is null and void.
On the petitioner-appellee's side, they maintain that Section 2 of Municipal Ordinance No. 7 does not
impose a tax or levy, and there is no clear and express imposition of a charge in the other provisions of
the ordinance.
ISSUE:
Whether or not the municipal ordinance is valid.
HELD:
NO. A mere reading of the ordinance discloses that not only are there no words therein imposing a tax
but that the peruser is left in doubt as to whether the intention is to levy a tax for revenue or charge a
fee for permitting the business to be carried on; for section 2 declares that the law "empowers the
Municipal Council of Hinabangan, Samar to impose graduated Municipal License Fecs." Since the
validity of taxes and license fees are governed by different principles, the taxpayer is left in doubt as to
the true nature of the charge and whether he must bear it or not. The rule is that taxes may not be
imposed by implication, and "a tax statute is to be construed strictly and against the subjection to a tax
liability where the question is whether a matter, property or person is subject to the tax". Considering
the avoidability of taxes by the citizen, it seems that the least he is entitled to is to be expressly
required to pay a tax, which the words of the questioned ordinance do not state. This is particularly
true where the ordinance, as in this case, carries penal provisions.
We further agree with the judgment appealed from that Ordinance No. 7 is invalid because the same
infringes upon the express restrictions placed by the legislature upon the taxing power delegated to
city and municipal councils. Section 2, paragraph 1, of Republic Act No. 2264, after conferring power
to cities, municipalities, and municipal districts to impose license taxes and service fees or charges on
business and occupations, expressly limited said powers by the following proviso: “Provided that
municipalities and municipal districts shall, in no case, impose any percentage tax on sales or other
taxes in any form based thereon..”
Even granting that it does impose a tax, the ordinance in question, while not providing for a percentage
tax, but a graduated tax (the progressive tax therein imposed not being calculated on a percentage of
the sales made by the taxpayer), nevertheless, it prescribes a tax based on sales, contrary to the
statute (R.A. 2264). It is true that the ordinance purports to base the tax on either "gross output or
sales but the only standard provided for measuring the gross output is its peso value, as determined
from "true copies of receipts and/or invoices (which are precisely the evidence of sales) that the
taxpayer is required to submit to the municipal treasurer (section 3), without deduction being provided
for freight insurance, or incidental costs. Directly or indirectly, the amount of payable tax under this
32
ordinance is determined by the gross sales of the taxpayer, and violates the explicit prohibition that the
municipality must not levy, or impose, "taxes in any form based on sales."
33
GENERAL PRINCIPLES
Kinds of Taxes
BY THE VERY NATURE OF INDIRECT TAXATION, THE ECONOMIC BURDEN OF SUCH

TAXATION IS EXPECTED TO BE PASSED ON THROUH THE CHANNELS OF COMMERCE TO
THE USER OR CONSUMER OF THE GOODS SOLD.
Ernesto Maceda vs. Hon. Catalino Macaraig, Jr.

G.R. No. 88291, June 8, 1993
Nocon, J.:
FACTS:
This matter of indirect tax exemption of private respondent National Power Corporation is brought to
this Court a second time.
On November 3, 1936, Commonwealth Act No. 120 was enacted creating the NPC, a public
corporation mainly to develop hydraulic power from all water sources in the Philippines. The main
source of funds for the NPC was the flotation of bonds in the capital markets and these bonds
… issued under the authority of this Act shall be exempt from the payment of all taxes by the
Commonwealth of the Philippines, or any authority, branch, division or political subdivision thereof xxx.
On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC’s tax exemption for real
estate taxes.
On June 18, 1960, R.A. No. 2641 was enacted converting the NPC from a public corporation into a
stock corporation. No tax exemption was incorporated in said Act.
A new section was added to the charter, now known as Section 13, R.A. No. 6395 which declared the
non-profit character and tax exemptions of NPC.
On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC with regards to
imports.
On May 27, 1976, P.D. No. 938 was issued declaring the corporation exempt from payment of all
forms of taxes, duties, fees, imposts as well as costs and services including filing fees, appeal bonds,
supersedeas bonds, in any court or administrative proceedings.
On July 30, 1976, P.D. 177 decreed that: All units of government, including GOCCs, shall pay income
taxes, customs duties and other taxes and fees are imposed under revenue laws
On December 17, 1986, E.O. No. 93 was issued with a view to correct presidential restoration or rant
of tax exemption to other government and private entities without benefit of review by the Fiscal
Incentives Review Board.
Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC as the phrase “all
forms of taxes, etc.” does not expressly include “indirect taxes.”
ISSUE:
Is NPC exempt from indirect taxes? If there are indirect taxes, who should pay the same?
HELD:
A chronological review of the NPC laws will show that it has been the lawmaker’s intention that the
NPC was to be completely tax exempt from all forms of taxes – direct and indirect.
NPC’s tax exemption from real estate taxes was, however, specifically withdrawn by R.A. No. 987 as
above stated. The exemption was, however, restored by R.A. No. 6395.
One common them in all these laws is that the NPC must be enable to pa its indebtedness which, as
of P.D. 938, was P12 Billion in total domestic indebtedness, at any one time, and U$4 Billion in total
foreign loans at any one time. The NPC must be and has to be exempt from all forms of taxes if this
goal is to be achieved.
It must be remembered that to pay the government share in its capital stock P.D. No. 758 was issued
mandating that P200 Million would be appropriated annually to cover the said unpaid subscription of
the Government in NPC’s authorized capital stock. IT does not stand to reason then that former
President Marcos would order P200 Million to be taken from tax money to be used to pay the
Government subscription in the NPC, on one hand, and then order NPC to pay all its indirect taxes, on
the other.
In view of all the foregoing, the Court rules and declares that the oil companies which supply bunker
fuel oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to NPC. By the very
34
nature of indirect taxation, the economic burden of such taxation is expected to be passed on through
the channels of commerce to the user or consumer of the goods sold. Because, however, the NPC has
been exempted from both direct and indirect taxation, the NPC must beheld exempted from absorbing
the economic burden of indirect taxation. This means, on the one hand, that the oil companies which
wish to sell to NPC absorb all or part of the economic burden of the taxes previously paid to BIR, which
could they shift to NPC if NPC did not enjoy exemption from indirect taxes. This means also, on the
other hand, that the NPC may refuse to pay the part of the "normal" purchase price of bunker fuel oil
which represents all or part of the taxes previously paid by the oil companies to BIR. If NPC
nonetheless purchases such oil from the oil companies — because to do so may be more convenient
and ultimately less costly for NPC than NPC itself importing and hauling and storing the oil from
overseas — NPC is entitled to be reimbursed by the BIR for that part of the buying price of NPC which
verifiably represents the tax already paid by the oil company-vendor to the BIR.
35
GENERAL PRINCIPLES
Kinds of Taxes
TAX EXEMPTIONS ARE STRICTLY CONSTRUED AGAINST THE TAXPAYER
Meralco vs. Vera

G.R. No. L-29987, October 22, 1975
Muñoz Palma, J.
FACTS:
This a petition against the ruling of the Court of Appeals, which states that Meralco is not exempt from
paying compensating tax provided for in Sec. 190 of the National Internal Revenue Code.
Meralco is the holder of a franchise to construct, maintain, and operate an electric, light, heat, and
power system in the City of Manila and its suburbs. In 1962 and 1963, Meralco imported and received
from abroad copper wires, transformers and insulators for use in the operation of its business. The
Collector of Customs, as Deputy of the Commissioner of Internal Revenue (CIR), levied and collected
compensating tax for the imports of Meralco. Meralco filed a claim for refund with the CIR, but because
of its inaction, it appealed to the CTA through a petition for review. The CTA denied Meralco’s claim.
Hence, it elevated to the Court of Appeals said CTA decision.
The CTA held that, based on jurisprudence, Meralco is not exempt from paying the compensating tax
provided for in Sec. 190 of the NIRC, the purpose of which is to “place casual importers, who are not
merchants on equal footing with established merchants who pay sales tax on articles imported by
them. The court also stated that Meralco’s claim for exemption from the payment of the compensating
tax is not clear or expressed, contrary to the cardinal rule in taxation that “exemptions from taxation are
highly disfavored in law, and he who claims exemption must be able to justify his claim by the clearest
grant of organic or statute law.”
As a defense, Meralco claims that their franchise exempts them from paying compensation tax.
Specifically, par. 9 of its franchise provides that the percentage tax payable by it shall be in lieu of all
taxes and assessments of whatsoever nature, and by whatsoever authority upon the privileges,
earnings, income, franchise, and poles, wires, transformers and insulators of the grantee from which
taxes and assessments the grantee is hereby expressly exempted.
ISSUE:
Is Meralco exempted from paying compensating tax?
HELD:
No, Meralco is not exempted from paying compensating tax.
Meralco’s claim for exemption from payment of the compensating tax is not clear or expressed,
contrary to the rule that “exemptions from taxation are highly disfavored in law, and he who claims
exemption must be able to justify his claim by the clearest grant of organic or statute of law.”
What paragraph 9 of the provision exempts petition from is the payment of property, tax on its poles,
wires, transformers, and insulators; it does not exempt it from payment of taxes like the one in question
which, by mere necessity or consequence alone, fall upon property. Moreover, compensating tax is not
a property tax but is an excise tax. An excise tax is one that is imposed on the performance of an act,
the engaging in an occupation or the enjoyment of a privilege. The compensating tax is imposed not
because of the act of importation, but due of the use of imported goods not subjected to sales.
36
GENERAL PRINCIPLES
Forms of Escape from Taxation
"TAX EVASION" IS A TERM THAT CONNOTES FRAUD THRU THE USE OF PRETENSES AND
FORBIDDEN DEVICES TO LESSEN OR DEFEAT TAXES
Yutivo Sons Hardware v. CTA

G.R. No. L-13203., January 28, 1961
Gutierrez David, J
FACTS:
Yutivo Sons Hardware Co., (Yutivo), was engaged in the importation and sale of hardware supplies
and equipment. In 1946 it bought a number of cars and trucks from General Motors Overseas
Corporation (GM). As importer, GM paid sales tax Code on the basis of its selling price to Yutivo. Said
tax being collected only once on original sales, Yutivo paid no further sales tax on its sales to the
public. In year 1946, Southern Motors, Inc. was organized to engage in the business of selling cars,
trucks and spare parts. It was alleged that 2,500 shares worth of P250,000 appear to have been
subscribed by the founders of Yutivo. After the incorporation of SM and until the withdrawal of GM from
the Philippines in the middle of 1947, the cars and tracks purchased by Yutivo from GM were sold by
Yutivo to SM which, in turn, sold them to the public in the Visayas and Mindanao. When GM withdraw
from the Philippines, it appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo
continued its previous arrangement of selling exclusively to SM. Yutivo as importer, paid sales tax
prescribed on the basis of its selling price to SM. , SM paid no sales tax on its sales to the public.
Therefater, the collector of Internal Revenue made an assessment upon Yutivo and demanded from
the latter P1,804,769.85 as deficiency sales tax plus surcharge covering the period from the third
quarter of 1947 to the fourth quarter of 1949 claiming that the taxable sales were the retail sales by SM
to the public and not the sales at wholesale made by, Yutivo to the latter inasmuch as SM and Yutivo
were one and the same corporation. It further alleged that SM was organized for no other purpose than
to defraud the Government of its lawful revenues.
ISSUE:
Is petitioner herein liable for tax evasion?
HELD:
NO. "Tax evasion" is a term that connotes fraud thru the use of pretenses and forbidden devices to
lessen or defeat taxes. It should be stated that the intention to minimize taxes, when used in the
context of fraud, must be proved to exist by clear and convincing evidence amounting to more than
mere preponderance, and cannot be justified by a mere speculation. This is because fraud is never
lightly to be presumed.
After going over the voluminous record of the present case, we are inclined to rule that the Court of
Tax Appeals was not justified in finding that SM was organized for no other purpose than to defraud
the Government of its lawful revenues. In the first place, this corporation was organized in June, 1946
when it could not have caused Yutivo any tax savings. From that date up to June 30, 1947, or a period
of more than one year, GM was the importer of the cars and trucks sold to Yutivo, which, in turn resold
them to SM. During that period, it is not disputed that GM as importer, was the one solely liable for
sales taxes. Neither Yutivo or SM was subject to the sales taxes on their sales of cars and trucks. The
sales tax liability of Yutivo did not arise until July 1, 1947 when it became the importer and simply
continued its practice of selling to SM.
The decision, therefore, of the Tax Court that SM was organized purposely as a tax evasion device
runs counter to the fact that there was no tax to evade.
37
GENERAL PRINCIPLES
PERIOD TO ASSESS TAX
CIR VS Estate of Benigno Toda Jr.

G.R. No. 147188, September 14, 2004
Davide Jr., CJ.
FACTS:
On March 2, 1989, Cibeles Insurance Corp. (CIC) authorized Benigno P. Toda Jr., President and
Owner of 99.991% of outstanding capital stock, to sell the Cibeles Building and 2 parcels of land which
he sold to Rafael A. Altonaga on August 30, 1987 for P 100M who then sold it on the same day to
Royal Match Inc. for P 200M.
CIC included gains from sale of real property of P 75,728.021 in its annual income tax return while
Altonaga paid a 5% capital gains tax of P 10M.
On July 12, 1990, Toda sold his shares to Le Hun T. Choa for P 12.5M evidenced by a deed of ale of
shares of stock which provides that the buyer is free from all income tax liabilities for 1987, 1988 and
1989. Toda Jr. then died 3 years later. On March 29, 1994, BIR sent an assessment notice and
demand letter to CIC for deficiency of income tax amounting to P 79,099, 999.22. On January 27,
1995, BIR sent the same to the estate of Toda Jr. The Estate filed a protest which was dismissed -
fraudulent sale to evade the 35% corporate income tax for the additional gain of P 100M and that there
is in fact only 1 sale. Since it is falsity or there is fraud, the prescription period is 10 years from the
discovery of the falsity or fraud as prescribed under Sec. 223 (a) of the NIRC.
CTA held that there is no proof of fraudulent transaction so the applicable period is 3 years after the
last day prescribed by law for filing the return.
ISSUES:
1) Is there tax evasion or tax avoidance?
2) Has the period for assessment prescribed?
HELD:
1. Tax evasion connotes the integration of three factors: (1) payment of tax less than legally due;
(2) a state of mind being evil, in bad faith, willful, or deliberate and not accidental; and (3) unlawful
course of action. Generally, a sale or exchange of assets will have an income tax incidence only when
it is consummated. The incidence of taxation depends upon the substance of a transaction. The tax
consequences arising from gains from a sale of property are not finally to be determined solely by the
means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each
step from the commencement of negotiations to the consummation of the sale is relevant. A sale by
one person cannot be transformed for tax purposes into a sale by another by using the latter as a
conduit through which to pass title. To allow a taxpayer to deny tax liability on the ground that the sale
was made through another and distinct entity when it is proved that the latter was merely a conduit is
to sanction a circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for
income tax purposes. The intermediary transaction, i.e., the sale of Altonaga, which was prompted
more on the mitigation of tax liabilities than for legitimate business purposes, constitutes one of tax
evasion.
2. According to the Tax Code, in cases of (1) fraudulent returns; (2) false returns with intent to
evade tax; and (3) failure to file a return, the period within which to assess tax is ten years from
discovery of the fraud, falsification or omission, as the case may be.
In this case, the false return was filed on 15 April 1990, and the falsity thereof was claimed to have
been discovered only on 8 March 1991. The assessment for the 1989 deficiency income tax of CIC
was issued on 9 January 1995. Clearly, the issuance of the correct assessment for deficiency income
tax was well within the prescriptive period.
38
GENERAL PRINCIPLES
ELEMENT OF WILFULLNESS TO SUPPLY CORRECT AND ACCURATE INFORMATION
People VS Judy Anne Santos

CTA Crim Case No. 0-012, January 16, 2013
Bautista, J.
FACTS:
Accused Judy Anne Santos is charged for filing a false and fraudulent Income Tax Return (ITR) for the
taxable year 2002 indicating therein a gross income of P8, 003, 332.70 when in truth and in fact her
correct income for that taxable year is P16, 396, 234. 70. She is prosecuted for violation of Section 255
of the 1997 NIRC as amended for failure to supply correct and accurate information, which resulted to
an income tax deficiency in the amount of P1, 395, 116. 24 excluding interest and penalties thereon in
the amount of P1, 319, 500. 94 or in the aggregate income tax deficiency of P2, 714, 617. 18.
ISSUES:
Whether or not the accused may be held liable to violation of Section 255 of NIRC.
HELD:
Section 255 of NIRC enumerates the following offenses: a) Willful failure to pay tax; b) Willful failure to
make return; c) Willful failure to keep any record; d) Willful failure to supply correct and accurate
informationl; e) Willful failureto withhold or remit taxes withheld; or f) Willful failure to refund excess
taxes witheheld on compensation.
The offense being attributed to the accused is the wilful failure to supply correct and accurate
information with elements as follows:
1) That a person is required to supply correct and accurate information;
2) That there is failure to supply correct and accurate information at the time or times required by
law or rules and regulations; and
3) That such failure to supply correct and accurate information is done wilfully.
The prosecution was able to prove that the accused failed to supply the correct and accurate
information in her ITR for the year 2002 for her failure to declare her other income payments received
from other sources.
However, it is well settled that mere understatement of a tax is not a proof of fraud for the purpose of
tax evasion. Based on the record of the case, the accused denied the signature appearing on top of
the name “Judy Anne Santos” in the ITR for 2002 and that the Certified Public Accountant, whose
participation is limited to the preparation of the Financial Statement likewise denied signing it on behalf
of the accused.
The Court finds the records bereft of any evidence to establish the element of wilfulness on the part of
the accused to supply the correct and accurate information on her subject return. The Court finds the
accused negligent and such is not enough to convict her.
Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax
contemplated by law. Fraud must amount to intentional wrong-doing with the sole object of avoiding
the tax.
39
GENERAL PRINCIPLES
VIOLATION OF SECTION 255 OF NIRC (FAILURE TO SUPPLY CORRECT AND ACCURATE

INFORMATION)
Joel Mendez VS People of the Philippines

CTA EB CRIM No. 014-015, December 11, 2012
Palanca-Enriquez, J.
FACTS:
In two separate Amended Informations, both dated October 10, 2005, Joel C. Mendez was charged
with violation of Section 255 of RA No. 8424.
On about 15th day of April 2004, at Dagupan City, and within the jurisdiction of this Honorable Court,
the above name-accused, a duly registered taxpayer and sole proprietor of “Weigh Less Center”,
“Mendez Body and face Salon and Spa” and “Mendez Body and Face Skin Clinic” with several
branches in Quezon City, Makati City, San Fernando and Dagupan City, Engaged in the business of
cosmetic surgery and dermatology, willfully, unlawfully and feloniously did then and there, fail to supply
the orrect and accurate information in his ITR for taxable year 2003 filed with the Revenue District of
Calasiao, Pangasinan by making it appear under oath that his income for that year was derived mainly
from his branch in Dagupan City and dialing to declare consolidated income from his other branches.
ISSUES:
Whether or not Mendez was guilty of violation of Section 255 of NIRC as amended.
HELD:
Yes. The element of violation of Section 255 of the NIRC of 1997, as amended, for failure to supply
correct and accurate information, are, as follows;
1) The accused is a person required to supply correct and accurate information;\
2) The accused failed to supply correct and accurate information, at the time or times required by
law or rules and regulations; and
3) That failure to supply correct and accurate information was wilful.
Mendez was proven to be required by law to file a return and to declare all his income from all sources.
Section 51 C of NIRC provides that an individual subject to income tax is required to make and file a
declaration of income on or before April 15 of each year covering the income for proceeding taxable
year. A careful examination of the documentary evidence presented by the prosecution shows that
petitioner filed his ITR for taxable year 2003 with RDO No. 4-Calasiao , Pangasinan. It is not enough
however, that a taxpayer files his income tax return at the time required by law, but more importantly,
Section 255 of the NIRC provides that the information therein must be correct and accurate
considering that it is the basis for computation of one’s annual income tax.
With the third element, after a careful review of the evidence on record, the Court finds prosecution
was able to show proof beyond reasonable doubt that petitioner wilfully failed to supply correct and
accurate information in his 2003 ITR.
40
GENERAL PRINCIPLES
Tax Exemption
THE CONSTITUTION MAY PROVIDE FOR SPECIFIC TAX EXEMPTIONS: LOCAL

GOVERNMENTS MAY PASS ORDINANCES OF TAX EXEMPTION BUT ONLY FOR LOCAL
TAXES
JOHN HAY PEOPLE’S ALTERNATIVE COALITION V. VICTOR LIM

G.R. No. 119775, October 24, 2003
Carpio-Morales, J:
FACTS:
This is a petition assailing the constitutionality of Presidential Proclamation No. 420 (Proc. 420)
creating and designating a portion of the area covered by Camp John Hay into a special economic
zone (SEZ). In particular, petitioners challenge the validity of Proc. 420 on the grounds that it infringes
on Sec. 28(4), Art. 6 of the Constitution and that it diminishes the local autonomy of Baguio City.
In 1992, Congress enacted Republic Act No. 7227, or the Bases Conversion and Development Act
where it accelerates the conversion of the military reservations into other productive uses and creates
the Bases Conversion and Development Authority (BCDA. It primarily created the Subic Special
Economic Zone (Subic SEZ), delineated its metes and bounds, and granted the Subic SEZ incentives
like tax and duty-free importations, and exemptions of businesses from local and national taxes. It also
also gave an express authority to the President to create via Executive Proclamation, subject to the
concurrence of the LGUs to be affected, other SEZs in areas covered by Clark, Wallace Station in San
Fernando, and Camp John Hay (CJH).
BCDA entered into a Memorandum of Agreement (MOA) and Escrow Agreement with Tuntex and
Asiaworld (British Virgin Islands corporations). They agreed on a joint venture agreement (JVA), thus
creating the Baguio International Development Management Corporation to LEASE areas within CJH
in Baguio and Poro Point in La Union.
On July 5, 1994 then President Ramos issued Proclamation No. 420 which established a SEZ on a
portion of Camp John Hay, and in effect, granted tax exemptions pursuant to R.A. No. 7227 to Subic
SEZ extends to other SEZs.
In 1995, petitioners filed instant petition challenging the constitutionality and validity of the MOA and
JVA between BCDA, Tuntex, and Asiaworld. They now allege that nowhere in R. A. No. 7227 is there
a grant of tax exemption to SEZs yet to be established in base areas, unlike the grant under Section
12 thereof of tax exemption and investment incentives to the therein established Subic SEZ. The grant
of tax exemption to the John Hay SEZ, petitioners conclude, thus contravenes Article VI, Section 28
(4) of the Constitution which provides that "No law granting any tax exemption shall be passed without
the concurrence of a majority of all the members of Congress."
On the other hand, respondents contend that by extending to the John Hay SEZ economic incentives
similar to those enjoyed by the Subic SEZ which was established under R.A. No. 7227, the
proclamation is merely implementing the legislative intent of said law to turn the US military bases into
hubs of business activity or investment. According to them, government's policy of bases conversion
cannot be achieved without extending the same tax exemptions granted by R.A. No. 7227 to Subic
SEZ to other SEZs.
ISSUE:
Is Section 3 of Proclamation No. 420 unconstitutional for it provides for national and local tax
exemption and grants other economic incentives to the John Hay SEZ?
RULING:
Yes. Section 12 of R.A. No. 7227 provides that it is only the Subic SEZ which was granted by
Congress with tax exemption, investment incentives and the like. There is no express extension of the
aforesaid benefits to other SEZs still to be created at the time via presidential proclamation.
41
While the grant of economic incentives may be essential to the creation and success of SEZs, free
trade zones and the like, the grant thereof to the John Hay SEZ cannot be sustained. The incentives
under R.A. No. 7227 are exclusive only to the Subic SEZ, hence, the extension of the same to the
John Hay SEZ finds no support therein. Neither does the same grant of privileges to the John Hay SEZ
find support in the other laws specified under Section 3 of Proclamation No. 420, which laws were
already extant before the issuance of the proclamation or the enactment of R.A. No. 7227.
More importantly, the nature of most of the assailed privileges is one of tax exemption. It is the
legislature, unless limited by a provision of the state constitution, that has full power to exempt any
person or corporation or class of property from taxation, its power to exempt being as broad as its
power to tax. Other than Congress, the Constitution may itself provide for specific tax exemptions, or
local governments may pass ordinances on exemption only from local taxes.
The challenged grant of tax exemption would circumvent the Constitution's imposition that a law
granting any tax exemption must have the concurrence of a majority of all the members of Congress.
In the same vein, the other kinds of privileges extended to the John Hay SEZ are by tradition and
usage for Congress to legislate upon. If it were the intent of the legislature to grant to the John Hay
SEZ the same tax exemption and incentives given to the Subic SEZ, it would have so expressly
provided in the R.A. No. 7227.
Therefore the second sentence of Section 3 of Proclamation No. 420 is hereby declared NULL AND
VOID since it extends the tax exemption contemplated in RA 7227 to other economic zones and
constitutes an infringement of RA 7227 and Sec. 28(4), Art. 6 of the Constitution.
42
GENERAL PRINCIPLES
Tax Exemption
TAX EXEMPTION MUST BE EXPRESSED IN CLEAR LANGUAGE; BLGF IS NOT A HIGHLY

SPECIALIZED COURT FOR REVIEW OF TAX CASES
PLDT v. City of Davao

G.R. No. 143867, August 22, 2001
Mendoza, J.
FACTS:
On January 1999, petitioner Philippine Long Distance Telephone Co., Inc. (PLDT) applied for a
Mayor's Permit to operate its Davao Metro Exchange. Respondent City of Davao withheld action on
the application pending payment by petitioner of the local franchise tax for the first to the fourth quarter
of 1999. In a letter, petitioner protested the assessment of the local franchise tax and requested a
refund of the franchise tax paid by it for the year 1997 and the first to the third quarters of 1998.
Petitioner contended that it was exempt from the payment of franchise tax based on an opinion of the
Bureau of Local Government Finance (BLGF). In a letter, Adelaida B. Barcelona, City Treasurer of
Davao, denied the protest and claim for tax refund of petitioner, citing the legal opinion of the City
Legal Officer of Davao and Art. 10, §1 of Ordinance No. 230, Series of 1991, as amended by
Ordinance No. 519, Series of 1992.
Petitioner then filed a petition in the RTC of Davao seeking a reversal of respondent City Treasurer's
denial of petitioner's protest and the refund of the franchise tax paid by it for the year 1998. The
petition was filed pursuant to §§195 and 196 of the LGC (R.A. No. 7160). Petitioner cites R.A. No.
7925, otherwise known as the Public Telecommunications Policy Act of the Philippines, §23 of which
provides for equality of treatment in the telecommunications industry. Petitioner then claims that Smart
and Globe enjoy exemption from the payment of the franchise tax by virtue of their legislative
franchises per opinion of the BLGF. Finally, it argues that because Smart and Globe are exempt from
the franchise tax, it follows that it must likewise be exempt from the tax being collected by the City of
Davao because the grant of tax exemption to Smart and Globe ipso facto extended the same
exemption to it.
The trial court denied petitioner's appeal and affirmed the City Treasurer's decision, ruling that the LGC
withdrew all tax exemptions previously enjoyed by all persons and authorized local government units
to impose a tax on businesses enjoying a franchise notwithstanding the grant of tax exemption to
them. The trial court likewise denied petitioner's claim for exemption under R.A. No. 7925, otherwise
known as the Public Telecommunications Policy Act of the Philippines for the following reasons: (1) it
is clear from the wording of §193 of the Local Government Code that Congress did not intend to
exempt any franchise holder from the payment of local franchise and business taxes; (2) the opinion of
the Executive Director of the BLGF to the contrary is not binding on respondents; and (3) petitioner
failed to present any proof that Globe Telecom (Globe) and Smart Communications, Inc. (Smart) were
enjoying local franchise and business tax exemptions.
ISSUE:
Despite the withdrawal of its exemption and by virtue of §137 of the LGC, allowing a city to impose a
franchise tax, is the petitioner again entitled to exemption from local franchise tax in light of §23 of R.A.
No. 7925, in relation to the exemption from local franchise taxes of Globe and Smart?
HELD:
No, the petitioner is no longer entitled to exemption from local franchise tax.
The tax exemption must be expressed in the statute in clear language that leaves no doubt of the
intention of the legislature to grant such exemption. And, even if it is granted, the exemption must be
interpreted in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. In the
present case, petitioner justifies its claim of tax exemption by strained inferences. There is nothing in
the language of §23 nor in the proceedings of both the House of Representatives and the Senate in
43
enacting R.A. No. 7925 which shows that it contemplates the grant of tax exemptions to all
telecommunications entities, including those whose exemptions had been withdrawn by the LGC.
What the SC said in Asiatic Petroleum Co. v. Llanes applies mutatis mutandis to this case: "When
exemption is claimed, it must be shown indubitably to exist. At the outset, every presumption is against
it. A well-founded doubt is fatal to the claim. It is only when the terms of the concession are too explicit
to admit fairly of any other construction that the proposition can be supported." In this case, the word
"exemption" in §23 of R.A. No. 7925 could contemplate exemption from certain regulatory or reporting
requirements, bearing in mind the policy of the law. It is noteworthy that, in holding Smart and Globe
exempt from local taxes, the BLGF did not base its opinion on §23 but on the fact that the franchises
granted to them after the effectivity of the LGC exempted them from the payment of local franchise and
business taxes.
To be sure, the BLGF is not an administrative agency whose findings on questions of fact are given
weight and deference in the courts. The authorities cited by petitioner pertain to the Court of Tax
Appeals, a highly specialized court which performs judicial functions as it was created for the review of
tax cases. In contrast, the BLGF was created merely to provide consultative services and technical
assistance to local governments and the general public on local taxation, real property assessment,
and other related matters, among others. The question raised by petitioner is a legal question, to wit,
the interpretation of §23 of R.A. No. 7925. There is, therefore, no basis for claiming expertise for the
BLGF that administrative agencies are said to possess in their respective fields.
In sum, it does not appear that, in approving §23 of R.A. No. 7925, Congress intended it to operate as
a blanket tax exemption to all telecommunications entities. Applying the rule of strict construction of
laws granting tax exemptions and the rule that doubts should be resolved in favor of municipal
corporations in interpreting statutory provisions on municipal taxing powers, we hold that §23 of R.A.
No. 7925 cannot be considered as having amended petitioner's franchise so as to entitle it to
exemption from the imposition of local franchise taxes. Consequently, the SC held that petitioner is
liable to pay local franchise taxes for the period covering the first to the fourth quarter of 1999 and that
it is not entitled to a refund of taxes paid by it for the period covering the first to the third quarter of
1998.
44
GENERAL PRINCIPLES
Tax Exemption
THE “IN LIEU OF ALL TAXES” CLAUSE IN A LEGISLATIVE FRANCHISE SHOULD

CATEGORICALLY STATE THAT THE EXEMPTION APPLIES TO BOTH LOCAL AND NATIONAL
TAXES
Smart Communications Inc. v. The City of Davao

G.R. No. 155491 July 21, 2009
Nachura, J.
FACTS:
Before the Court is a Motion for Reconsideration filed by Smart Communications, Inc. of the Decision
of the Court dated September 16, 2008.
Smart filed a special civil action for declaratory relief for the ascertainment of its rights and obligations
under the Tax Code of the City of Davao, which imposes a franchise tax on businesses enjoying a
franchise within the territorial jurisdiction of Davao. Smart avers that its telecenter in Davao City is
exempt from payment of franchise tax to the City.
The RTC rendered a Decision denying the petition. Smart filed a motion for reconsideration, which was
denied by the trial court. Smart filed an appeal before this Court, but the same was denied in a
decision dated September 16, 2008. Hence, the instant motion for reconsideration raising the following
grounds: (1) the "in lieu of all taxes" clause in Smart’s franchise, (RA 7294), covers local taxes; the rule
of strict construction against tax exemptions is not applicable; (2) the "in lieu of all taxes" clause is not
rendered ineffective by the Expanded VAT Law; (3) Section 23 of (RA 7925) includes a tax exemption;
and (4) the imposition of a local franchise tax on Smart would violate the constitutional prohibition
against impairment of the obligation of contracts.
Section 9 of RA 7294 and Section 23 of RA 7925 are once again put in issue. Section 9 of Smart’s
legislative franchise contains the contentious "in lieu of all taxes" clause.
ISSUE:
WON the "in lieu of all taxes" clause exempts the petitioner from paying the taxes due.
HELD:
No. jurisprudence suggests that aside from the national franchise tax, the franchisee is still liable to
pay the local franchise tax, unless it is expressly and unequivocally exempted from the payment
thereof under its legislative franchise. The "in lieu of all taxes" clause in a legislative franchise should
categorically state that the exemption applies to both local and national taxes; otherwise, the
exemption claimed should be strictly construed against the taxpayer and liberally in favor of the taxing
authority.
Republic Act No. 7716, otherwise known as the "Expanded VAT Law," did not remove or abolish the
payment of local franchise tax. It merely replaced the national franchise tax that was previously paid by
telecommunications franchise holders and in its stead imposed a ten percent (10%) VAT in
accordance with Section 108 of the Tax Code. VAT replaced the national franchise tax, but it did not
prohibit nor abolish the imposition of local franchise tax by cities or municipalities.
The power to tax by local government units emanates from Section 5, Article X of the Constitution
which empowers them to create their own sources of revenues and to levy taxes, fees and charges
subject to such guidelines and limitations as the Congress may provide. The imposition of local
franchise tax is not inconsistent with the advent of the VAT, which renders functus officio the franchise
tax paid to the national government. VAT inures to the benefit of the national government, while a local
franchise tax is a revenue of the local government unit.
45
GENERAL PRINCIPLES
Tax Exemption
“IN LIEU OF ALL TAXES” CLAUSE’S EXTENT MUST BE CLEARLY ESTABLISHED
Quezon City and The City Treasurer Of Quezon City vs. ABS-CBN Broadcasting Corporation
G.R. No 166408., October 6, 2008
Reyes, R.T., J.
FACTS:
On May 3, 1995, ABS-CBN was granted the franchise to install and operate radio and television
broadcasting stations in the Philippines under R.A. No. 7966. Section 8 of R.A. No. 7966 provides the
tax liabilities of ABS-CBN where it contained an “in lieu of all taxes clause”, i.e. a franchise tax
equivalent to three (3) percent of all gross receipts of the radio/television business transacted under
the franchise and the franchise tax shall be "in lieu of all taxes" on the franchise or earnings thereof.
ABS-CBN had been paying local franchise tax imposed by Quezon City. However, in view of the above
provision in R.A. No. 9766 that it "shall pay a franchise tax x x x in lieu of all taxes," the corporation
developed the opinion that it is not liable to pay the local franchise tax imposed by Quezon City. ABS-
CBN claimed for refund of local franchise taxes paid. The Quezon City Treasurer failed to reply so
ABS-CBN filed a complaint.
Quezon City argued that the "in lieu of all taxes" provision in R.A. No. 9766 could not have been
intended to prevail over a constitutional mandate which ensures the viability and self-sufficiency of
local government units. The City contended that the exemption claimed by ABS-CBN under R.A. No.
7966 was withdrawn by Congress when the Local Government Code (LGC) was passed.
The RTC rendered judgment declaring as invalid the imposition on and collection from ABS-CBN of
local franchise tax paid. The CA affirmed the same. Hence, this case.
ISSUE:
Whether or not the “in lieu of all taxes” clause bars Quezon City from making ABS-CBN pay local taxes
HELD:
No. ABS-CBN must pay local taxes to Quezon City. The "in lieu of all taxes" clause in its franchise
failed to specify the taxes the company is sought to be exempted from. Neither did it particularize the
jurisdiction from which the taxing power is withheld..
The "in lieu of all taxes" provision in the franchise of ABS-CBN does not expressly provide what kind of
taxes ABS-CBN is exempted from. It is not clear whether the exemption would include both local,
whether municipal, city or provincial, and national tax. What is clear is that ABS-CBN shall be liable to
pay three (3) percent franchise tax and income taxes under Title II of the NIRC. But whether the "in
lieu of all taxes provision" would include exemption from local tax is not unequivocal.
The right to exemption from local franchise tax must be clearly established and cannot be made out of
inference or implications but must be laid beyond reasonable doubt. Verily, the uncertainty in the "in
lieu of all taxes" provision should be construed against ABS-CBN. ABS-CBN has the burden to prove
that it is in fact covered by the exemption so claimed. ABS-CBN miserably failed in this regard.
Note: The clause has become functus officio because as the law now stands, ABS-CBN is no longer
subject to a franchise tax. It is liable for VAT.
46
GENERAL PRINCIPLES
Tax Exemption
“IN LIEU OF ALL TAXES” CLAUSE PRIOR TO LGC ARE WITHDRAWN
Manila Electric Company vs. Province Of Laguna And Benito R. Balazo, In His Capacity As
Provincial Treasurer of Laguna
G.R. No. 131359, May 5, 1999
Vitug, J.
FACTS:
On 19 January 1983, MERALCO was 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 January 1, 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 imposed a local tax on MERALCO which the latter contested due to the “in lieu of all taxes”
clause.
MERALCO paid but it later claimed for tax refund. When the Laguna Government failed to do so, the
former filed a complaint before the RTC. The RTC dismissed the complaint. Hence, this case.
ISSUE:
Whether or not MERALCO is exempt from paying local taxes due to the “in lieu of all taxes” clause
HELD:
No. 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 phrase in lieu of all taxes "have to give way to the peremptory language of the Local Government
Code specifically providing for the withdrawal of such exemptions, privileges," and that "upon the
effectivity of the Local Government Code all exemptions except only as provided therein can no longer
be invoked by MERALCO to disclaim liability for the local tax." In fine, the Court has viewed its
previous rulings as laying stress more on the legislative intent of the amendatory law - whether the tax
exemption privilege is to be withdrawn or not - rather than on whether the law can withdraw, without
violating the Constitution, the tax exemption or not.
While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as
being in the nature of contracts and a part of the inducement for carrying on the franchise, these
exemptions, nevertheless, are far from being strictly contractual in nature. Contractual tax exemptions,
in the real sense of the term and where the non-impairment clause of the Constitution can rightly be
invoked, are those agreed to by the taxing authority in contracts, such as those contained in
government bonds or debentures, lawfully entered into by them under enabling laws in which the
government, acting in its private capacity, sheds its cloak of authority and waives its governmental
immunity. Truly, tax exemptions of this kind may not be revoked without impairing the obligations of
contracts.[14] These contractual tax exemptions, however, are not to be confused with tax exemptions
granted under franchises. A franchise partakes the nature of a grant which is beyond the purview of
the non-impairment clause of the Constitution.
47
GENERAL PRINCIPLES
Tax Exemption
REAL PROPERTY TAX EXEMPTION OF GOCC
Mactan Cebu International Airport Authority v. City of Lapu-Lapu

G.R. No. 181756, June 25 2015
Leonardo-De Castro, J.
FACTS:
The Supreme Court is to decide a case on review for certiorari against the Court of Appeals which
denied the motion for reconsideration. The Regional Trial Court issued a TRO against the government
for levy on the property for unpaid real property taxes.
Petitioner is Mactan Cebu International Airport Authority which was granted a tax exemption by law.
(Republic Act No. 6958) Respondent on the other hand is the City of Lapu Lapu.
Petitioner enjoyed exemption from paying tax as provided by Republic Act No. 6958. However upon
approval of the Local Government Code, the tax exemption for real property taxes was revoked. In the
computation by the City of Lapu Lapu it included real property such as the airport runway which was
used directly for a public purpose owned by the government.
Petitioner contends that the assesment of the City is erroneous as to having included those which
were used for a public purpose and that the City has not yet passed an ordinance enabling it to collect
real property taxes. Respondent on the other hand avers that the Petitioner is not a government
owned and controlled corporation hence not exempt from tax and that there alreaedy exists an
ordinance for the collection of real property tax.
ISSUE:
Is the Petitioner exempt from real property tax as it is an alleged governmenat owned and controlled
corporation?
HELD:
Yes. Petitioner is a Government Owned and Controlled Corporation and as such is exempt from Real
Property Taxation.
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a government-
owned or controlled corporation.MIAA is a government instrumentality vested with corporate powers to
perform efficiently its governmental functions.
MIAA is like any other government instrumentality, the only difference is that MIAA is vested with
corporate power
MIAA or the petitioner therefore is exempted from real property tax.
48
GENERAL PRINCIPLES
Other Concepts
A TAXPAYER NEED NOT BE A PARTY TO THE CONTRACT TO CHALLENGE ITS VALIDITY
Vivencio Jumamil v Jose J. Cafe

G.R. No. 144570, September 21, 2005
GARCIA, JJ.
FACTS:
This is a petition for review on certiorari under Rule 45 of the Rules of Court
In 1989, petitioner Jumamil [4] filed before the Regional Trial Court (RTC) of Panabo, Davao del Norte
a petition for declaratory relief with prayer for preliminary injunction and writ of restraining order against
public respondents Mayor Jose J. Cafe and the members of the Sangguniang Bayan of Panabo,
Davao del Norte. He questioned the constitutionality of Municipal Resolution No. 7, Series' of 1989
(Resolution No. 7).
Resolution No. 7, enacting Appropriation Ordinance No. 111, provided for an initial appropriation of
P765,000 for the construction of stalls around a proposed terminal fronting the Panabo Public Market
[5] which was destroyed by fire.
Subsequently, the petition was amended due to the passage of Resolution No. 49, series of 1989
(Resolution No. 49), denominated as Ordinance No. 10, appropriating a further amount of P1,515,000
for the construction of additional stalls in the same public market. [6]
Prior to the passage of these resolutions, respondent Mayor Cafe had already entered into contracts
with those who advanced and deposited (with the municipal treasurer) from their personal funds the
sum of P40,000 each. Some of the parties were close friends and/or relatives of the public
respondents. [7] The construction of the stalls which petitioner sought to stop through the preliminary
injunction in the RTC was nevertheless finished, rendering the prayer therefor moot and academic.
The leases of the stalls were then awarded by public raffle which, however, was limited to those who
had deposited P40,000 each. [8] Thus, the petition was amended anew to include the 57 awardees of
the stalls as private respondents.
The RTC and CA thereafter dismissed the case for lack of locus standi.
ISSUE:
Whether or not petitioner has locus standi?
HELD:
NO.
There is an unbending rule that courts will not assume jurisdiction over a constitutional question unless
the following requisites are satisfied: (1) there must be an actual case calling for the exercise of judicial
review; (2) the question before the Court must be ripe for adjudication; (3) the person challenging the
validity of the act must have standing to do so; (4) the question of constitutionality must have been
raised at the earliest opportunity, and (5) the issue of constitutionality must be the very lis mota of the
case. [21]
Legal standing or locus standi is a party's personal and substantial interest in a case such that he has
sustained or will sustain direct injury as a result of the governmental act being challenged. It calls for
more than just a generalized grievance. The term 'interest means a material interest, an interest in
issue affected by the decree, as distinguished from mere interest in the question involved, or a mere
incidental interest. [22] Unless a person's constitutional rights are adversely affected by the statute or
ordinance, he has no legal standing.
Petitioner brought the petition in his capacity as taxpayer of the Municipality of Panabo, Davao del
Norte. He was questioning the official acts of the public respondents in passing the ordinances and
entering into the lease contracts with private respondents.. [24] Atlas Consolidated Mining &
Development Corporation v. Court of Appeals [25] cited by the CA does not apply because it involved
contracts between two private parties.
Parties suing as taxpayers must specifically prove sufficient interest in preventing the illegal
expenditure of money raised by taxation. [26] The expenditure of public funds by an officer of the State
49
for the purpose of executing an unconstitutional act constitutes a misapplication of such funds. [27]
The resolutions being assailed were appropriations ordinances. Petitioner alleged that these
ordinances were 'passed for the business, occupation, enjoyment and benefit of private respondents'
[28] (that is, allegedly for the private benefit of respondents) because even before they were passed,
respondent Mayor Cafe and private respondents had already entered into lease contracts for the
construction and award of the market stalls. [29] Private respondents admitted they deposited P40,000
each with the municipal treasurer, which amounts were made available to the municipality during the
construction of the stalls. The deposits, however, were needed to ensure the speedy completion of the
stalls after the public market was gutted by a series of fires. [30] Thus, the award of the stalls was
necessarily limited only to those who advanced their personal funds for their construction. [31]
Petitioner did not seasonably allege his interest in preventing the illegal expenditure of public funds or
the specific injury to him as a result of the enforcement of the questioned resolutions and contracts. It
was only in the 'Remark to Comment he filed in this Court did he first assert that 'he (was) willing to
engage in business and (was) interested to occupy a market stall. [32] Such claim was obviously an
afterthought.
Be that as it may, we have on several occasions relaxed the application of these rules on legal
standing:
In not a few cases, the Court has liberalized the locus standi requirement when a petition raises an
issue of transcendental significance or paramount importance to the people. Recently, after holding
that the IBP had no locus standi to bring the suit, the Court in IBP v. Zamora nevertheless entertained
the Petition therein. It noted that "the IBP has advanced constitutional issues which deserve the
attention of this Court in view of their seriousness, novelty and weight as precedents." [33]
―oOo―
Objections to a taxpayer's suit for lack of sufficient personality, standing or interest are procedural
matters. Considering the importance to the public of a suit assailing the constitutionality of a tax law,
and in keeping with the Court's duty, specially explicated in the 1987 Constitution, to determine
whether or not the other branches of the Government have kept themselves within the limits of the
Constitution and the laws and that they have not abused the discretion given to them, the Supreme
Court may brush aside technicalities of procedure and take cognizance of the suit. [34]
―oOo―
There being no doctrinal definition of transcendental importance, the following determinants formulated
by former Supreme Court Justice Florentino P. Feliciano are instructive: (1) the character of the funds
or other assets involved in the case; (2) the presence of a clear case of disregard of a constitutional or
statutory prohibition by the public respondent agency or instrumentality of the government; and (3) the
lack of any other party with a more direct and specific interest in raising the questions being raised.
[35]
But, even if we disregard petitioner's lack of legal standing, this petition must still fail.
Petitioner failed to prove the subject ordinances and agreements to be discriminatory.
50
GENERAL PRINCIPLES
Other Concepts
EXPROPRIATION PAYMENT CANNOT COMPENSATE FO REAL TAXES DUE
Engracio Francia vs. Intermediate Appellate Court and Ho Fernandez

G.R. No. L-67649 June 28, 1988
Gutierrez, Jr., J.
FACTS:
This is a petition for review where Engracio Francia invokes legal and equitable grounds to reverse the
questioned decision of the Intermediate Appellate Court, to set aside the auction sale of his property
and to allow him to recover a 203 square meter lot which was, sold at public auction to Ho Fernandez
and ordered titled in the latter's name.
Francia owned a 328 square meter land in Pasay City. In October 1977, a portion of his land (125
square meter) was expropriated by the government for P4,116.00 to give way to the expansion of a
nearby road. It also appears that Francia failed to pay his real estate taxes since 1963 amounting to
P2,400.00. So in December 1977, the remaining 203 square meters of his land was sold at a public
auction (after due notice was given him). The highest bidder was a certain Ho Fernandez who paid the
purchase price of P2,400.00 (which was lesser than the price of the portion of his land that was
expropriated).
Later, Francia filed a complaint to annul the auction sale on the ground that the selling price was
grossly inadequate. He further argued that his land should have never been auctioned because the
P2,400.00 he owed the government in taxes should have been set-off by the debt the government
owed him (legal compensation). He alleged that he was not paid by the government for the
expropriated portion of his land because though he knew that the payment therefor was deposited in
the Philippine National Bank, he never withdrew it.
ISSUE:
Was the tax owed by Francia should be set-off by the “debt” owed him by the government?
HELD:
NO. As a rule, set-off of taxes is not allowed. There is no legal basis for the contention. By legal
compensation, obligations of persons, who in their own right are reciprocally debtors and creditors of
each other, are extinguished (Art. 1278, Civil Code). This is not applicable in taxes. There can be no
off-setting of taxes against the claims that the taxpayer may have against the government. A person
cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater
than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the
government.
Internal revenue taxes cannot be the subject of compensation. The Government and the taxpayer are
not mutually creditors and debtors of each other under Article 1278 of the CC and a claim of taxes is
not such a debt, demand, contract or judgment as is allowed to be set-off.
Moreover, the amount of P4,116 paid by the national government for the 125 square meter portion of
his lot was deposited with the PNB long before the sale at public auction of his remaining property. It
would have been an easy matter to withdraw P2,400 from the deposit so that he could pay the tax
obligation thus aborting the sale at public auction. Thus, the petition for review is dismissed.
51
GENERAL PRINCIPLES
Other Concepts
INTERNAL REVENUE TAXES, SUCH AS FOREST CHARGES, CANNOT BE THE SUBJECT OF

SET-OFF OR COMPENSATION
Republic v Mambulao Lumber Company

G.R. No. L-17725. February 28, 1962
Barrera, J.
FACTS:
The defendant, Mambulao Lumber Company interposed the present appeal because of the decision of
the CFI-Manila, ordering it to pay to plaintiff Republic of the Philippines the sum of P4,802.37 with 6%
interest.
Under the first cause of action, for forest charges covering the period from September 10, 1952 to May
24, 1953, defendants admitted that they have a liability of P587.37. Under the second cause of action,
both defendants admitted a joint and several liability in favor of plaintiff in the sum of P286.70, also
covered by a bond dated November 27, 1953; and Under the third cause of action, both defendants
admitted a joint and several liability in favor of plaintiff for P3,928.30, also covered by a bond dated
July 20, 1954. These three liabilities aggregate to P4,802.37.
It appears that from July 21, 1948 to December 29, 1956, defendant Mambulao Lumber Company paid
to the Republic of the Philippines P8,200.52 for `reforestation charges' and for the period commencing
from April 30, 1947 to June 24, 1948, said defendant paid P927.08 to the Republic of the Philippines
for `reforestation charges'. The total amount of the reforestation charges paid by Mambulao Lumber
Company is P9,127.50, and it is the company’s contention that said sum of 9,127.50, not having been
used in the reforestation of the area covered by its license, the same is refundable to it or may be
applied in compensation of P 4,802.37 due from it as forest charges.
Thus, the present appeal.
ISSUE:
Whether the set-off or compensation is proper.
HELD:
No. The set-off or compensation in this case is not proper.
There is nothing in the law which requires that the amount collected as reforestation charges should be
used exclusively for the reforestation of the area covered by the license of a licensee or
concessionaire, and that if not so used, the same shall be refunded to him. The conclusion seems to
be that the amount paid by a licensee as reforestation charges is in the nature of a tax which forms
part of the Forestation Fund, payable by him irrespective of whether the area covered by his license is
reforested or not. Said fund, as the law expressly provides, shall be expended in carrying out the
purposes provided for thereunder, namely, the reforestation or afforestation, among others, of
denuded areas needing reforestation or afforestation.
Under Article 1278, NCC, compensation should take place when two persons in their own right are
creditors and debtors of each other. With respect to the forest charges which the defendant Mambulao
Lumber Company has paid to the government, they are in the coffers of the government as taxes
collected, and the government does not owe anything to defendant Mambulao Lumber Company. So,
it is crystal clear that the Republic of the Philippines and the Mambulao Lumber Company are not
creditors and debtors of each other, because compensation refers to mutual debts.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the
statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in
an action or any indebtedness of the state or municipality to one who is liable to the state or
52
municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of
the contract or transaction sued on.
The weight of authority is to the effect that internal revenue taxes such as the forest charges in
question is not subject to set-off or compensation. Taxes are not in the nature of contracts between the
parties but grow out of a duty to, and are positive acts of the government, to the making and enforcing
of which, the personal consent of the individual taxpayers is not required.
With respect to the forest charges which the company has paid to the government, they are in the
coffers of the government as tax collected, and the government does not owe anything. It is crystal
clear that the Republic of the Philippines and the Mambulao Lumber Company are not creditors and
debtors of each other, because compensation refers to mutual debts.
Where appellant and appellee are not mutually creditors and debtors of each other, the law on
compensation is inapplicable.
53
NATIONAL TAXATION
Income Tax
INCOME TAX BENEFITS; ALLOWANCES BY EMPLOYER
Henderson v. Commissioner of Internal Revenue

G.R. No. L-12954, February 28, 1961
Padilla, J.
FACTS:
These are petitions filed by the CIR and by Arthur Henderson under the provisions of Section 18,
Republic Act No. 1125, for review of a judgment and a resolution rendered and adopted by the CTA.
The spouses Arthur Henderson, who is President of American International Underwriters for the
Philippines, Inc, and Marie Henderson (later referred to as the taxpayers) filed with the BIR returns of
annual net income for the years 1948 to 1952. After investigation and verification, the BIR reassessed
the taxpayers’ income for said years and demanded payment of the deficiency taxes. In the foregoing
assessments, the Bureau of Internal Revenue considered as part of their taxable income the taxpayer-
husband’s allowances for rental, residential expenses, subsistence, water, electricity and telephone;
bonus paid to him; withholding tax and entrance fee to the Marikina Gun and Country Club paid by his
employer for his account and travelling allowance of his wife.
The taxpayers asked for reconsideration of the said assessments claiming that as regards the
husband-taxpayer’s allowances for rental and utilities such as water, electricity and telephone, he did
not receive the money for said allowances, but that they lived in the apartment furnished and paid for
by his employer for its convenience; that they had no choice but live in the said apartment furnished by
his employer, otherwise they would have lived in a less expensive one. They claim also that the
Marikina Country Club should not be considered as part of their income for it was an expense of his
employer and his membership therein was merely incidental to his duties of increasing and sustaining
the business of his employer; and that as regards the wife-taxpayer’s travelling allowance, it should not
be considered as part of their income because she merely accompanied him in his business trip to
New York as his secretary.
ISSUE:
Are the allowances for rental of the apartment furnished by the husband-taxpayer’s employer-
corporation, including utilities such as light, water, telephone, etc. and the allowance for travel
expenses given by his employer-corporation to his wife in 1952 part of taxable income?
HELD:
No, The said allowances are not part of the taxpayers’ taxable income. The taxpayers are childless
and are the only two in the family. The quarters, therefore, that they occupied at the Embassy
Apartments consisting of a large sala, three bedrooms, dining room, two bathrooms, kitchen and a
large porch, and at the Rosaria Apartments consisting of a kitchen, sala, dining room, two bedrooms
and a bathroom, exceeded their personal needs. But the exigencies of the husband-taxpayer’s high
executive position, not to mention social standing, demanded and compelled them to live in a more
spacious and pretentious quarters like the ones they had occupied. Although entertaining and putting
up houseguests and guests of the husband-taxpayer’s employer-corporation were not his predominant
occupation as president, yet he and his wife had to entertain and put up houseguests in their
apartments. That is why his employer-corporation had to grant him allowances for rental and utilities in
addition to his annual basic salary to take care of those extra expenses for rentals and utilities in
excess of their personal needs. Hence, the fact that the taxpayers had to live or did not have to live in
the apartments chosen by the husband-taxpayer’s employer-corporation is of no moment, for no part
of the allowances in question redounded to their personal benefit or was retained by them. Their bills
for rental and utilities were paid directly by the employer- corporation to the creditors. Only the
reasonable amount they would [spent] for house rental and utilities such as light, water, telephone,
etc., should be subject to tax. The excess should be considered as expenses of the corporation.
54
NATIONAL TAXATION
Income Tax
STOCK DIVIDENDS AS TAXABLE INCOME
Commissioner of Internal Revenue v. Manning

G.R. No. L-28398, August 6, 1975
Castro, J.
FACTS:
This is a petition for review of the decision of the CTA which set aside the income tax assessments
issued by the CIR against John Manning, W.D. McDonald and E.E. Simmons (hereinafter referred to
as the respondents), for alleged undeclared stock dividends received in 1958 from the Manila Trading
and Supply Co. (MANTRASCO).
MANTRASCO had an authorized capital stock of P2,500,000 divided into 25,000 common shares;
24,700 of these were owned by Julius S. Reese, and the rest, at 100 shares each, by the three
respondents. In view of Reese’s desire that upon his death MANTRASCO and its two subsidiaries,
MANTRASCO (Guam), Inc. and the Port Motors, Inc., would continue under the management of the
respondents, a trust agreement on his and the respondents’ interests in MANTRASCO was executed.
Reese died and all his shares were purchased by Mantrasco. Thereafter a Board Resolution was
passed which resolved that Reese’s shares be reverted back to the capital account of the company as
a stock dividend to be distributed to shareholders of record.
Meanwhile an examination of MANTRASCO’s books was ordered by the BIR which disclosed that
Reese’s shares declared as dividends had been proportionately distributed to the respondents and
that the respondents failed to declare the said stock dividends as part of their taxable income. On the
basis of their examination, the BIR examiners concluded that the distribution of Reese’s shares as
stock dividends was in effect a distribution of the "asset or property of the corporation as may be
gleaned from the payment of cash for the redemption of said stock and distributing the same as stock
dividend." Hence, the CIR issued notices of assessment for deficiency income taxes to respondents.
The respondents unsuccessfully challenged the foregoing assessments and, failing to secure a
favorable judgment, appealed to the CTA. The CTA rendered judgment absolving the respondents
from any liability for receiving the questioned stock dividends on the ground that their respective one-
third interest in MANTRASCO remained the same before and after the declaration of stock dividends
and only the number of shares held by each of them had changed. Hence, the present recourse.
ISSUE:
Should respondents be made liable to pay deficiency income taxes on account of the distributed stock
dividends?
HELD:
Yes, respondents are liable for deficiency income tax. A stock dividend is a conversion of surplus or
undivided profits into capital stock, which is distributed to stockholders in lieu of a cash dividend.
The distinctions between a stock dividend which does not and one which does constitute taxable
income to the shareholders is that a stock dividend constitutes income if it gives the shareholder an
interest different from that which his former stockholdings represented. On the other hand, it does
constitute income if the new shares confer no different rights or interests than did the old shares.
Therefore, whenever the companies involved parted with a portion of their earnings to buy the
corporate holdings of Reese, they were making a distribution of such earnings to respondents. These
amounts are thus subject to income tax as a flow of cash benefits to respondents. Hence, respondents
are liable for deficiency income taxes.
The declaration by the respondents of MANTRASCO’s stock dividends in favor of the former aimed to
make the respondents the sole owners of Reese’s interest in MANTRASCO by utilizing the periodic
earnings of that company and its subsidiaries to directly subsidize their purchase of the said interests.
55
Such package device, obviously not designed to carry out the usual stock dividend purpose of
corporate expansion reinvestment, e.g. the acquisition of additional facilities and other capital budget
items, but exclusively for expanding the capital base of the respondents in MANTRASCO, cannot be
allowed to deflect the respondents’ responsibilities toward our income tax laws. The conclusion is thus
ineluctable that whenever the companies involved herein parted with a portion of their earnings "to
buy" the corporate holdings of Reese, they were in ultimate effect and result making a distribution of
such earnings to the respondents. All these amounts are consequently subject to income tax as being,
in truth and in fact, a flow of cash benefits to the respondents.
56
NATIONAL TAXATION
Income Tax
STOCK DIVIDENDS ARE NOT INCOME
Fisher v. Trinidad
G.R. No. L-17518, October 30, 1922
Johnson, J.:
FACTS:
That during the year 1919 the Philippine American Drug Company was a corporation duly organized
and existing under the laws of the Philippine Islands, doing business in the City of Manila; that he
appellant was a stockholder in said corporation; that said corporation, as result of the business for that
year, declared a "stock dividend"; that the proportionate share of said stock divided of the appellant
was P24,800; that the stock dividend for that amount was issued to the appellant; that thereafter, in the
month of March, 1920, the appellant, upon demand of the appellee, paid under protest, and voluntarily,
unto the appellee the sum of P889.91 as income tax on said stock dividend. For the recovery of that
sum (P889.91) the present action was instituted. The defendant demurred to the petition upon the
ground that it did not state facts sufficient to constitute cause of action. The demurrer was sustained
and the plaintiff appealed.
ISSUE:
Are the "stock dividends" in the present case "income" and taxable as such under the provisions of
section 25 of Act No. 2833?
HELD:
No, "stock dividends" are not "income," the same cannot be taxes under that provision of Act No. 2833
which provides for a tax upon income.
The stockholder who receives a stock dividend has received nothing but a representation of his
increased interest in the capital of the corporation. There has been no separation or segregation of his
interest. All the property or capital of the corporation still belongs to the corporation. There has been no
separation of the interest of the stockholder from the general capital of the corporation. The
stockholder, by virtue of the stock dividend, has no separate or individual control over the interest
represented thereby, further than he had before the stock dividend was issued. He cannot use it for the
reason that it is still the property of the corporation and not the property of the individual holder of stock
dividend. A certificate of stock represented by the stock dividend is simply a statement of his
proportional interest or participation in the capital of the corporation. For bookkeeping purposes, a
corporation, by issuing stock dividend, acknowledges a liability in form to the stockholders, evidenced
by a capital stock account. The receipt of a stock dividend in no way increases the money received of
a stockholder nor his cash account at the close of the year. It simply shows that there has been an
increase in the amount of the capital of the corporation during the particular period, which may be due
to an increased business or to a natural increase of the value of the capital due to business, economic,
or other reasons.
Under the guise of an income tax, property which is not an income cannot be taxed. When the assets
of a corporation have increased so as to justify the issuance of a stock dividend, the increase of the
assets should be taken account of the Government in the ordinary tax duplicates for the purposes of
assessment and collection of an additional tax.
57
NATIONAL TAXATION
Income Tax
GAINS RESULTING FROM DISTRIBUTIONS MADE IN COMPLETE LIQUIDATION OR

DISSOLUTION OF A CORPORATION ARE TAXABLE AS INCOME, WHETHER THE
STOCKHOLDER HAPPENS TO BE AN INDIVIDUAL OR A CORPORATION
Wise & Co., Inc., et al. v. Bibiano Meer, Collector of Internal Revenue
G.R. No. 48231, June 30, 1947
Hilado, J.
FACTS:
On May 27, 1937, the Board of Directors of Manila Wine Merchants, Ltd., (Hongkong Company),
recommended to the stockholders of the company that they adopt the resolutions necessary to enable
the company to sell its business and assets to Manila Wine Merchants, Inc., a Philippine corporation
(Manila Company). The contract of sale was signed on July 22, 1937; it contains in its paragraph 4 of
the express provision that the transfer "will take effect as on and from the first day of June, One
thousand nine hundred and thirty-seven, and until completion thereof, the Company shall stand
possessed of the property hereby agreed to be transferred and shall carry on its business in trust for
the Corporation". "The Company" was the Hongkong Company and "the Corporation" was the Manila
Company. The Honkong Company then made a distribution from its earnings for the year 1937 to its
stockholders on June 8, 1937. It has paid Philippine income tax on the entire earnings from which the
said distributions were paid. After deducting the said dividend of June 8, 1937, the surplus of the
Hongkong Company resulting from the active conduct of its business was P74,182.12. As a result of
the sale of its business and assets to the Manila Company, the surplus of the Hongkong Company was
increased to a total of P270,116.59. The Hongkong Company declared such surplus on July 22, 1937,
and it distributed them on August 4 and October 28, 1937; it has also paid the income tax on the said
surplus. Thereafter, as a result of the decision of the Honkong Company and its stockholders to
voluntarily liquidate, the liquidator duly filed his accounting on January 12, 1938, and in accordance
with the provisions of Hongkong Law, the Hongkong Company was duly dissolved at the expiration of
three months from that date. The plaintiffs thereafter duly filed Philippine income tax returns, and CIR
Meer subsequently made deficiency assessments against them.
Wise maintain that the amounts received by them and on which the taxes in question were assessed
and collected were ordinary dividends. CIR Meer, on the other hand, contends that they were
liquidating dividends. One of the non-resident alien individual stockholder appellants also contended
that they were not subject to the normal tax as regards the distributions received by them and involved
in the instant case, and that the distributions were subject only to the additional tax. For them, if the
distributions received by them were to be considered as a sale of their stock to the Hongkong
Company, the profit they realized does not constitute income from Philippine sources and is not
subject to Philippine taxes, "since all steps in the carrying out of this so-called sale took place outside
the Philippines." CIR Meer averred that they were subject to both the normal and the additional tax.
ISSUES:
(1) Are the dividends and surplus declared on June 8 and July 22, 1937 respectively, that the plaintiffs
subsequently received, called ordinary dividends?
(2) Are the said dividends and surplus taxable as liquidating dividends?
(3) Are the profit realized by the non-resident alien individual stockholder subject to tax as income from
Philippine sources?
HELD:
(1) No, the dividends and surplus declared on June 8 and July 22, 1937 respectively, that the plaintiffs
subsequently received, are not called ordinary dividends but are called liquidating dividends.
58
When in the deed of July 22, 1937, by authority of its stockholders, the Hongkong Company thru its
authorized representative declared and agreed that the aforesaid sale and transfer shall take effect as
of June 1, 1937, and distribution from its assets to those same stockholders made after June 1, 1937,
although before July 22, 1937, must have been considered by them as liquidating dividends; for how
could they consistently deem all the business and assets of the corporation sold as of June 1, 1937,
and still say that said corporation, as a going concern, distributed ordinary dividends to them
thereafter? The directors or representatives of the Hongkong Company or the Manila Company, or
both, could of course not convert into ordinary dividends what in law and in reality were not such.
The amounts thus distributed among the plaintiffs were not in the nature of a recurring return on stock
— in fact, they surrendered and relinquished their stock in return for said distributions, thus ceasing to
be stockholders of the Hongkong Company, which in turn ceased to exist in its own right as a going
concern during its more or less brief administration of the business as trustee for the Manila Company,
and finally disappeared even as such trustee.
Therefore, the amounts received by the plaintiffs in this case are liquidating dividends, not ordinary
dividends.
(2) Yes, the dividends and surplus in this case are liquidating dividends and are thus taxable under
section 25 (a) of the former Income Tax Law, as amended. Said distributions were taxable alike to
Wise and Co., Inc. and to the other plaintiffs.
It should be borne in mind that plaintiffs received the distributions in question in exchange for the
surrender and relinquishment by them of their stock in the Hongkong Company which was dissolved
and in process of complete liquidation. When the corporation was dissolved and in process of
complete liquidation and its shareholders surrendered their stock to it and it paid the sums in question
to them in exchange, a transaction took place, which was no different in its essence from a sale of the
same stock to a third party who paid therefor. In either case the shareholder who received the
consideration for the stock earned that much money as income of his own, which again was properly
taxable to him under the Income Tax Law.
Our law at the time of the transactions in question, in providing that where a corporation, etc.
distributes all its assets in complete liquidation or dissolution, the gain realized or loss sustained by the
stockholder is a taxable income or a deductible loss as the case may be, in effect treated such
distributions as payments in exchange for the stock or share. Thus, in making the deficiency
assessments under consideration, the Collector, among other items, made proper deduction of the
"value of shares" or "cost of shares" in the case of each individual plaintiff, assessing the tax only on
the resulting "profit realized"; and of course in case the value or cost of the shares should exceed the
distribution received by the stockholder, the resulting difference will be treated as a "deductible loss."
Therefore, the dividends and surplus in this case are liquidating dividends and are taxable.
(3) Yes, the profit realized by the non-resident alien individual stockholder in this case is subject to tax
as income from Philippine sources.
The Hongkong Company was at the time of the sale of its business in the Philippines, and the Manila
Company was a domestic corporation domiciled and doing business also in the Philippines. Hence, its
earnings, profits, and assets, including those from whose proceeds the distributions in question were
made, the major part of which consisted in the purchase price of the business, had been earned and
acquired in the Philippines. From aught that appears in the record it is clear that said distributions were
income "from Philippine sources."
Therefore, the profit realized by the non-resident alien individual stockholder in this case is subject to
tax as income from Philippine sources.
59
NATIONAL TAXATION
Income Tax
THE PROCEEDS OF REDEMPTION OF STOCK DIVIDENDS ARE ESSENTIALLY DISTRIBUTION

OF CASH DIVIDENDS, WHICH WHEN PAID BECOMES THE ABSOLUTE PROPERTY OF THE
STOCKHOLDER, WHO HAVING REALIZED GAIN FROM THAT REDEMPTION, CANNOT ESCAPE
INCOME TAX
Commissioner of Internal Revenue v. Court of Appeals, Court of Tax Appeals, and A. Soriano
Corp.
G.R. No. 108576. January 20, 1999
Martinez, J.
FACTS:
ANSCOR is wholly owned and controlled by the family of Don Andres, who are all non-resident aliens.
As of the date of Don Andres’s death, he has a total shareholdings of 185,154 shares.
Correspondingly, one-half of that shareholdings or 92,577 shares were transferred to his wife Doña
Carmen Soriano, as her conjugal share, while the other half formed part of his estate. On March 31,
1968 Doña Carmen exchanged her whole 138,864 common shares for 138,860 of the newly
reclassified preferred shares. The estate of Don Andres in turn, exchanged 11,140 of its common
shares for the remaining 11,140 preferred shares, thus reducing its (the estate) common shares to
127,727. On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common
shares from the Don Andres’ estate. About a year later, ANSCOR again redeemed 80,000 common
shares from the Don Andres’ estate, further reducing the latter’s common shareholdings to 19,727.
The Bureau of Internal Revenue (BIR) then made the corresponding assessments for deficiency
withholding tax-at-source, pursuant to Sections 53 and 54 of the 1939 Revenue Code for the year
1968 and the second quarter of 1969 based on the transactions of exchange and redemption of
stocks, despite the claim of ANSCOR that it availed of the tax amnesty under Presidential Decree
(P.D.) 23 which were amended by P.D.’s 67 and 157. However, petitioner ruled that the invoked
decrees do not cover Sections 53 and 54 in relation to Article 83(b) of the 1939 Revenue Act under
which ANSCOR was assessed. Upon filing with the CTA a petition for review assailing the tax
assessments on the redemptions and exchange of stocks, the CTA reversed petitioner’s ruling
Petitioner contended that: (1) the exchange transaction is tantamount to "cancellation’’ under Section
83(b) making the proceeds thereof taxable; (2) that the said Section applies to stock dividends which is
the bulk of stocks that ANSCOR redeemed; (3) that under the "net effect test," the estate of Don
Andres gained from the redemption: and that (3) accordingly, it was the duty of ANSCOR to withhold
the tax-at-source arising from the two transactions, pursuant to Section 53 and 54 of the 1939
Revenue Act. ANSCOR, on the other hand, argued that to treat as ‘taxable dividend’ the proceeds of
the redeemed stock dividends would be to impose on such stock an undisclosed lien and would be
extremely unfair to intervening purchasers, i.e. those who buy the stock dividends after their issuance.
ISSUES:
(1) Is ANSCOR’s redemption of stocks from its stockholder as well as the exchange of common with
preferred shares can be considered as "essentially equivalent to the distribution of taxable dividend,"
making the proceeds thereof taxable?
(2) Is a withholding agent, like ANSCOR in this transaction, protected by the amnesty under
Presidential Decree (P.D.) 23?
HELD:
(1) Yes. ANSCOR’s redemption of 82,752.5 stock dividends is essentially equivalent to a distribution of
taxable dividends for which it is liable for the withholding tax-at-source.
Stock dividends issued by the corporation are considered unrealized gain, and cannot be subjected to
income tax until that gain has been realized. Before the realization, stock dividends are nothing but a
representation of an interest in the corporate properties. However, if a corporation cancels or redeems
stock issued as a dividend at such time and in such manner as to make the distribution and
cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable
60
dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as
taxable income to the extent it represents a distribution of earnings or profits accumulated.
The test of taxability whether income was realized through the redemption of stock dividends. The
redemption converts into money the stock dividends which become a realized profit or gain and
consequently, the stockholder’s separate property. Profits derived from the capital invested cannot
escape income tax. As realized income, the proceeds of the redeemed stock dividends can be
reached by income taxation regardless of the existence of any business purpose for the redemption.
Depending on the circumstances, the proceeds of redemption of stock dividends are essentially
distribution of cash dividends, which when paid becomes the absolute property of the stockholder.
Thereafter, the latter becomes the exclusive owner thereof and can exercise the freedom of choice.
Having realized gain from that redemption, the income earner cannot escape income tax.
It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable
dividends. Here, it is undisputed that at the time of the last redemption, the original common shares
owned by the estate were only 25,247.5. 91 This means that from the total of 108,000 shares
redeemed from the estate, the balance of 82,752.5 (108,000 less 25,247.5) must have come from
stock dividends.
Therefore, ANSCOR’s redemption of 82,752.5 stock dividends is herein considered as essentially

equivalent to a distribution of taxable dividends for which it is liable for the withholding tax-at-source.
(2) No. Not being a taxpayer, a withholding agent, like ANSCOR in this transaction is not protected by
the amnesty under Presidential Decree (P.D.) 23.
An income taxpayer covers all persons who derive taxable income. ANSCOR was assessed by
petitioner for deficiency withholding tax under Sections 53 and 54 of the 1939 Code. As such, it is
being held liable in its capacity as a withholding agent and not in its personality as a taxpayer.
In the operation of the withholding tax system, the withholding agent is the payor, a separate entity
acting no more than an agent of the government for the collection of the tax in order to ensure its
payments; the payer is the taxpayer — he is the person subject to tax imposed by law; and the payee
is the taxing authority. In other words, the withholding agent is merely a tax collector, not a taxpayer.
Under the withholding system, however, the agent-payor becomes a payee by fiction of law. His
(agent) liability is direct and independent from the taxpayer, because the income tax is still imposed on
and due from the latter. The agent is not liable for the tax as no wealth flowed into him — he earned no
income. The Tax Code only makes the agent personally liable for the tax arising from the breach of its
legal duty to withhold as distinguished from its duty to pay tax since: "the government’s cause of action
against the withholding agent is not for the collection of income tax, but for the enforcement of the
withholding provision of Section 53 of the Tax Code, compliance with which is imposed on the
withholding agent and not upon the taxpayer."
ANSCOR’s claim of amnesty cannot prosper. The implementing rules of P.D. 370 which expanded
amnesty on previously untaxed income under P.D. 23 is very explicit, to wit: "SECTION 4. Cases Not
Covered by Amnesty. — The following cases are not covered by the amnesty subject of these
regulations:vix x x (2) Tax liabilities with or without assessments, on withholding tax at source
provided under Sections 53 and 54 of the National Internal Revenue Code, as amended.” ANSCOR
was assessed under Sections 53 and 54 of the 1939 Tax Code. Thus, by specific provision of law, it is
not covered by the amnesty.
Therefore, ANSCOR, as a withholding agent, is not protected by the amnesty under Presidential
Decree (P.D.) 23
61
NATIONAL TAXATION
Income Tax
CLAIM FOR DEDUCTION OF REPRESENTATION EXPENSES MUST BE BASED UPON

RECEIPTS ISSUED BY THE ENTITIES IN WHICH THE ALLEGED EXPENSES HAD BEEN
INCURRED
FOR BAD DEBTS TO BE ALLOWED AS DEDUCTIONS, THERE MUST BE ASCERTAINMENT BY
THE TAXPAYER OF ITS WORTHLESSNESS AND THAT HE ACTED IN GOOD FAITH
Collector of Internal Revenue v. Goodrich International Rubber Co.

G.R. No. L-22265, December 22, 1967
Concepcion, C.J.
FACTS:
This is an appeal by the Government from a decision of the CTA, setting aside the assessments made
by the CIR as the deficiency income taxes allegedly due from respondent Goodrich International
Rubber Company for the years 1951 and 1952, respectively.
These assessments were based on disallowed deductions, claimed by Goodrich, consisting of several
alleged bad debts, in the aggregate sum of P50,455.41, for the year 1951, and the sum of P30,138.88,
as representation expenses allegedly incurred in the year 1952. CTA allowed the bad debts and
representation expenses as deductions. On appeal by the Government, it pointed out that the claim for
deduction is based upon receipts issued, not by the entities in which the alleged expenses had been
incurred, but by the officers of Goodrich who allegedly paid them.
ISSUES:
(1) Is there proper deductions of bad debts and representation expenses based on receipts issued by
entities who allegedly paid them?
(2) Did the taxpayer ascertain the worthlessness of the debts for the same to be properly deducted as
bad debts for the year 1951?
HELD:
(1) No. The claim for deduction of representation expenses is based upon receipts issued, not by the
entities in which the alleged expenses had been incurred, but by the officers of Goodrich who allegedly
paid them, must be rejected. If the expenses had really been incurred, receipts or chits would have
been issued by the entities to which the payments had been made, and it would have been easy for
Goodrich or its officers to produce such receipts. These issued by said officers merely attest to
their claim that they had incurred and paid said expenses. They do not establish payment of said
alleged expenses to the entities in which the same are said to have been incurred.
(2) No. The claim for deduction of ten (10) debts should be rejected. Goodrich has not established
either that the debts are actually worthless or that it had reasonable grounds to believe them to be so
in 1951. Our statute permits the deduction of debts "actually ascertained to be worthless within the
taxable year," obviously to prevent arbitrary action by the taxpayer, to unduly avoid tax liability.
The requirement of ascertainment of worthlessness requires proof of two facts: (1) that the taxpayer
did in fact ascertain the debt to be worthlessness, in the year for which the deduction is sought; and (2)
that, in so doing, he acted in good faith.
Good faith on the part of the taxpayer is not enough. He must show, also, that he had reasonably
investigated the relevant facts and had drawn a reasonable inference from the information thus
obtained by him. Respondent herein has not adequately made such showing.
The payments made, some in full, after some of the foregoing accounts had been characterized as
bad debts, merely stresses the undue haste with which the same had been written off. At any rate,
respondent has not proven that said debts were worthless. There is no evidence that the debtors
62
cannot pay them. It should be noted also that, in violation of Revenue Regulations No. 2, Section 102,
respondent had not attached to its income tax returns a statement showing the propriety of the
deductions therein made for alleged bad debts.
In addition, Court also ruled here that a deduction of these eight (8) accounts, aggregating
P22,627.35, as bad debts should be allowed. These accounts were among those referred to counsel
for Goodrich for collection. Up to 1951, when they were written off, counsel had sent 17 Letters of
demand to Lion Shoe Store; 16 demand letters to Ruiz Highway Transit; and 6 letters of demand to
Esquire Auto Seat Cover. Subsequent to the write-off, additional small payments were made and
accounted for as income of Goodrich. Counsel interviewed the debtors, investigated their ability to pay
and threatened law suits. He found that the debtors were in strained financial condition and had no
attachable or leviable property. Moreover, Lion Shoe Store was burned twice, in 1948 and 1949.
Thereafter, it continued to do business on limited scale. Later; it went out of business. Ruiz Highway
Transit, had more debts than assets. Counsel, therefore, advised respondent to write off these
accounts as bad debts without going to court, for it would be "foolish to spend good money after bad."
63
NATIONAL TAXATION
Income Tax
REPRESENTATION EXPENSES TO BE DEDUCTIBLE FROM INCOME TAX NEED SUPPORTING

PAPERS
Visayan Cebu Terminal v. Collector

G.R. No. L-12798, May 30, 1960
FACTS:
The Visayan Cebu Terminal Co. Inc., is a corporation organized for the purpose of handling arrastre
operations in the port of Cebu. It was awarded the contract for the said arrastre operations by the
Bureau of Customs, pursuant to Act No. 3002, as amended.
On March 1, 1952, appellant filed its income tax return for 1951 reporting a gross income of
P420,633.40 and claimed deductions amounting to P379,036.95, leaving a net income of P41,596.45
on which it paid income tax in the sum of P8,319.29.
The sum of P379,036.95 claimed as deductions consisted of various items including salaries,
representation and miscellaneous expenses. However, the said expenses were disallowed by the
Collector of Internal Revenue, thus giving rise to a deficiency assessment. Upon reconsideration, the
Collector modified the deficiency income tax assessment by allowing the deduction from appellant's
gross income of the salary and miscellaneous expenses.
The Visayan Cebu Terminal Co. Inc., maintains that said court had acted arbitrarily in considering the
representation expenses in 1950, not those incurred in 1949 and 1952, in fixing the amount deductible
in 1951
ISSUE: Should the sum of P75,855.88 be deducted as representation expenses?
HELD:
No. The Court rejected the deduction on the ground that there was absolutely no concrete evidence of
the sums actually spent for purposes of representation. The explanation to the effect that the
supporting papers of some of the expenses had been destroyed when the house of appellant's
treasurer was burned, is not satisfactory, for appellant's records were supposed to be kept in its
offices, not in the residence of one of its officers.
The Court further found out: (a) that part of the alleged representation expenses had never had any
supporting paper; (b) that the vouchers and chits covering other representation expenses had been
allegedly destroyed; (c) that there is no documentary evidence on record of any of the representation
expenses in question; (d) that no testimonial evidence has been introduced on any specific item of said
alleged expenses; (e) that there is no more than oral proof to the effect that payments had been made
to appellant's officers for representation expenses allegedly made by the latter and about the general
nature of such alleged expenses; (f) that the gross income in 1950 exceeded the gross income in 1951
and 1952, and (g) that the representation expenses in 1948 amounted to P500 only. Under these
circumstances, the lower court was fully justified in concluding that the representation expenses in
1951 should be slightly less than those incurred in 1950.
64
NATIONAL TAXATION
Income Tax
CLAIM FOR DEDUCTION OF PROMOTION OR ENTERTAINMENT EXPENSES MUST BE

SUBSTANTIATED OR SUPPORTED BY RECORD SHOWING IN DETAIL THE AMOUNT AND
NATURE OF EXPENSES INCURRED
Mariano Zamora v. Collector of Internal Revenue

G.R. No. L-15290, May 31, 1963
Paredes, J.
FACTS:
Zamora, owner of the Bay View Hotel and Farmacia Zamora Manila, filed his income tax returns the
years 1951 and 1952. The CIR found that he claimed deductions which were not allowable. The
collector required him to pay deficiency income tax for the years 1951 and 1952, respectively. On
appeal by Zamora, the CTA modified the decision appealed from and ordered him to pay the reduced
total sum of P30,258.00 as deficiency income tax for the years 1951 and 1952, respectively.
It is alleged by Mariano Zamora that the CTA erred in disallowing P10,478.50 as promotion expenses
incurred by his wife, Mrs. Esperanza for the promotion of the Bay View Hotel and Farmacia Zamora.
He contends that the whole amount of P20,957.00 as promotion expenses in his 1951 income tax
returns, should be allowed and not merely one-half of it or P10,478.50, on the ground that, while not all
the itemized expenses are supported by receipts, the absence of some supporting receipts has been
sufficiently and satisfactorily established. It has been shown that his wife went abroad on a combined
medical and business trip. As alleged, the said amount of P20,957.00 was spent by Mrs. Esperanza
during her travel to Japan and the United States to purchase machinery for a new Tiki-Tiki plant, and
to observe hotel management in modern hotels. As found by the CTA, the alleged expenses were not
supported by receipts. Mrs. Zamora could not even remember how much money she had when she
left abroad in 1951, and how the alleged amount of P20,957.00 was spent.
ISSUE: Should the whole amount of P20,957.00 as promotion expenses be allowed as deductions
and not merely half of it even if the said expenses were not supported by receipts?
HELD:
No. Absent some supporting receipts establishing the itemized expenses, allowable deductions is
allowed only to an extent as determined by the Court.
Section 30 of the Tax Code provides that in computing net income, there shall be allowed as
deductions all the ordinary and necessary expenses paid or incurred during the taxable year, in
carrying on any trade or business. Claim for the deduction of promotion expenses or entertainment
expenses must also be substantiated or supported by record showing in detail the amount and nature
of the expenses incurred.
Considering, that Mrs. Zamora went abroad on a combined medical and business trip, not all of her
expenses came under the category of ordinary and necessary expenses; part thereof constituted her
personal expenses. There having been no means by which to ascertain which expense was incurred
by her in connection with the business of Mariano Zamora and which was incurred for her personal
benefit, the Collector and the CTA in their decisions, considered 50% of the said amount of
P20,957.00 as business expenses and the other 50%, as her personal expenses. We hold that said
allocation is very fair to Mariano Zamora, there having been no receipt whatsoever, submitted to
explain the alleged business expenses, or proof of the connection which said expenses had to the
business or the reasonableness of the said amount of P20,957.00
In the case of Visayan Cebu Terminal Co., Inc. v. Collector of Int. Rev., it was declared that
representation expenses fall under the category of business expenses which are allowable deductions
from gross income, if said business expenses must be ordinary and necessary expenses paid or
incurred in carrying on any trade or business; that those expenses must also meet the further test of
reasonableness in amount; that when some of the representation expenses claimed by the taxpayer
65
were evidenced by vouchers or chits, but others were without vouchers or chits, documents or
supporting papers, or it is not possible to determine the actual amount covered by supporting papers
and the amount without supporting papers, the court should determine from all available data, the
amount properly deductible as representation expenses.
In view hereof, We are of the opinion that the CTA, did not commit error in allowing as promotion
expenses of Mrs. Zamora claimed in Mariano Zamora's 1951 income tax returns, merely one-half or
P10,478.50.
66
NATIONAL TAXATION
Income Tax
BUSINESS EXPENSES AS ALLOWABLE DEDUCTION

REAL PROPERTIES USED IN TAXPAYER’S BUSINESS ARE ORDINARY ASSETS
Lino Gutierrez v. Collector (now Commissioner) of Internal Revenue

G.R. No. L-19537. May 20, 1965
Bengzon, J.P., J.
FACTS:
Gutierrez was primarily engaged in the business of leasing real property for which he paid real estate
broker’s privilege tax. He then filed his income tax returns for the years 1951, 1952, 1953 and 1954.
The Commissioner of Internal Revenue issued a warrant of distraint and levy to collect the tax due
thereunder. The CIR also assessed against Gutierrez deficiency income tax, or a total of P11,841.00,
which came about by the disallowance of deductions from gross income representing depreciation,
expenses Gutierrez allegedly incurred in carrying on his business, and the addition to gross income of
receipts which he did not report in his income tax returns. The following are the items of income which
Gutierrez did not declare in his income tax returns: (1) in 1951- Income of wife (admitted by Gutierrez)
P2,749.90; (2) in 1953- Overstatement of purchase price of real estate P8,476.92, and
Understatement of profits from sale of real estate 5,803.74; and (3) in 1954- Understatement of profits
from sale of real estate P5,444.24.
In 1953 and 1954 Gutierrez sold four other properties upon which he made substantial profits.
Convinced that said properties were capital assets, he declared only 50% of the profits from their sale.
However, treating said properties as ordinary assets (as property held and used by Gutierrez in his
business), the Commissioner taxed 100% of the profits from their disposition pursuant to Section 35 of
the Tax Code.
ISSUES:
(1) Are the deductions claimed by Gutierrez allowable?
(2) Are real properties used in the trade or business of the taxpayer capital or ordinary assets?
HELD:
(1) Yes, some of the deductions claimed by Gutierrez are allowable, while some are not allowable.
Section 30(a) of the Tax Code allows business expenses to be deducted from gross income. To be
deductible, therefore, an expense must be (1) ordinary and necessary; (2) paid or incurred within the
taxable year; and, (3) paid or incurred in carrying on a trade or business.
The transportation expenses which petitioner incurred to attend the funeral of his friends and the cost
of admission tickets to operas were expenses relative to his personal and social activities rather than
to his business of leasing real estate. Likewise, the procurement and installation of an iron door to his
residence is purely a personal expense. Personal, living, or family expenses are not deductible.
On the other hand, the cost of furniture given by the taxpayer as commission in furtherance of a
business transaction, the expenses incurred in attending the National Convention of Filipino
Businessmen, luncheon meeting and cruise to Corregidor of the Homeowners’ Association, were
shown to have been made in the pursuit of his business. Commissions given in consideration for
bringing about a profitable transaction are part of the cost of the business transaction and are
deductible.
The record shows that Gutierrez was an officer of the Junior Chamber of Commerce which sponsored
the National Convention of Filipino Businessmen. He was also the president of the Homeowners’
Association, an organization established by those engaged in the real estate trade. Having proved that
67
his membership thereof and activities in connection therewith were solely to enhance his business, the
expenses incurred thereunder are deductible as ordinary and necessary business expenses.
With respect to the taxpayer’s claim for deduction for car expenses, salary of his driver and car
depreciation, according to the evidence, the taxpayer’s car was utilized both for personal and business
needs. We therefore find it reasonable to allow as deduction one-half of the driver’s salary, car
expenses and depreciation.
The electrical supplies, paint, lumber, plumbing, cement, tiles, gravel, masonry and labor used to
repair the taxpayer’s rental apartments, did not increase the value of such apartments, or prolong their
life. They merely kept the apartments in an ordinary operating condition. Hence, the expenses incurred
therefor are deductible as necessary expenditures for the maintenance of the taxpayer’s business.
Similarly, the litigation expenses defrayed by Gutierrez to collect apartment rentals and to eject
delinquent tenants are ordinary and necessary expenses in pursuing his business. It is routinary and
necessary for one in the leasing business to collect rentals and to eject tenants who refuse to pay their
accounts.
The following are not deductible business expenses but should be integrated into the cost of the
capital assets for which they were incurred and depreciated yearly: (1) Expenses in watching over
laborers in construction work. Watching over laborers is an activity more akin to the construction work
than to running the taxpayer’s business. Hence, the expenses incurred therefor should form part of the
construction cost. (2) Real estate tax which remained unpaid by the former owner of Gutierrez’ rental
property but which the latter paid, is an additional cost to acquire such property and ought therefore to
be treated as part of the property’s purchase price. (3) The iron bars, venetian blind and water pump
augmented the value of the apartments where they were installed. Their cost is not a maintenance
charge, hence, not deductible. (4) Expenses for the relocation, survey and registration of property tend
to strengthen title over the property, hence, they should be considered as addition to the cost of such
property. (5) The set of "Comments on the Rules of Court" having a life span of more than one year
should be depreciated ratably during its whole life span instead of its total cost being deducted in one
year.
Coming to the claim for depreciation of Gutierrez’ residence, we find the same not deductible. A
taxpayer may deduct from gross income a reasonable allowance for deterioration of property arising
out of its use or employment in business or trade. Gutierrez’ residence was not used in his trade or
business.
As regards the alms to an indigent family and various individuals, contributions to Lydia Yamson and
G. Trinidad and a donation consisting of officers’ jewels and aprons to Biak-na-Bato Lodge No. 7, the
same are not deductible from gross income inasmuch as their recipients have not been shown to be
among those specified by law.
(2) The real properties used in the trade or business of the taxpayer are ordinary assets.
In his income tax returns for 1953 and 1954, Gutierrez reported only 50% of profits he realized from
the sale of real properties during the years 1953 and 1954 on the ground that said properties were
capital assets. Profits from the sale of capital assets are taxable to the extent of 50% thereof pursuant
to Section 34 of the Tax Code.
Congress classified "real property used in the trade or business of the taxpayer" is ordinary asset. As
such real property is used in the trade or business of the taxpayer, it is logical that the gain or loss from
the sale or exchange thereof should be treated as ordinary income or loss. Accordingly, the real
estate, admittedly used by Gutierrez in his business, which he sold in 1953 and 1954 should be treated
as ordinary assets and the gain from the sale thereof, as ordinary gain, hence, fully taxable
68
NATIONAL TAXATION
Income Tax
DEDUCTIONS FOR INCOME TAX PURPOSES REFER TO ORDINARY AND NECESSARY

EXPENSES
Commissioner of Internal Revenue v. General Foods

G.R. No. 143672, April 24, 2003
Corona, J.
FACTS:
Respondent corporation General Foods (Phils), which is engaged in the manufacture of “Tang”,
“Calumet” and “Kool-Aid”, filed its income tax return for the fiscal year ending February 1985 and
claimed as deduction, among other business expenses, P9,461,246 for media advertising for “Tang”.
The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income taxes of
P2,635,141.42 against General Foods, prompting the latter to file a Motion for Reconsideration which
was denied. General Foods later on filed a petition for review at CA, which reversed and set aside an
earlier decision by CTA dismissing the company’s appeal.
The Commissioner maintains that the subject advertising expense was not ordinary on the ground that
it failed the two conditions set by U.S. jurisprudence: first, “reasonableness” of the amount incurred
and second, the amount incurred must not be a capital outlay to create “goodwill” for the product
and/or private respondent’s business. Otherwise, the expense must be considered a capital
expenditure to be spread out over a reasonable time.
ISSUE: Is the subject media advertising expense for “Tang” ordinary and necessary expense fully
deductible under the NIRC?
HELD:
No. Deductions for income taxes partake of the nature of tax exemptions; hence, if tax exemptions are
strictly construed, then deductions must also be strictly construed.
To be deductible from gross income, the subject advertising expense must comply with the following
requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred
during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of
the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.
While the subject advertising expense was paid or incurred within the corresponding taxable year and
was incurred in carrying on a trade or business, hence necessary, the parties’ views conflict as to
whether or not it was ordinary. To be deductible, an advertising expense should not only be necessary
but also ordinary.
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising
expense. There being no hard and fast rule on the matter, the right to a deduction depends on a
number of factors such as but not limited to: the type and size of business in which the taxpayer is
engaged; the volume and amount of its net earnings; the nature of the expenditure itself; the intention
of the taxpayer and the general economic conditions. It is the interplay of these, among other factors
and properly weighed, that will yield a proper evaluation.
The Court finds the subject expense for the advertisement of a single product to be inordinately large.
Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under then
Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use
of services and (2) advertising designed to stimulate the future sale of merchandise or use of services.
69
The second type involves expenditures incurred, in whole or in part, to create or maintain some form of
goodwill for the taxpayer’s trade or business or for the industry or profession of which the taxpayer is a
member. If the expenditures are for the advertising of the first kind, then, except as to the question of
the reasonableness of amount, there is no doubt such expenditures are deductible as business
expenses. If, however, the expenditures are for advertising of the second kind, then normally they
should be spread out over a reasonable period of time.
The company’s media advertising expense for the promotion of a single product is doubtlessly
unreasonable considering it comprises almost one-half of the company’s entire claim for marketing
expenses for that year under review.
70
NATIONAL TAXATION
Income Tax
THE QUESTION AS TO WHETHER THE EXPENDITURE IS AN ALLOWABLE DEDUCTION AS A

BUSINESS EXPENSE MUST BE DETERMINED FROM THE NATURE OF THE EXPENDITURE
ITSELF
Atlas Consolidated Mining v. Commissioner of Internal Revenue

G.R. No. L-26911, January 27, 1981
De Castro, J.
FACTS:
Atlas is a domestic corporation engaged in mining industry. In 1962, the Commissioner assessed
against Atlas deficiency income taxes for the years 1957 and 1958. Atlas protested the assessment
asking for its reconsideration and cancellation. On reinvestigation, Commissioner issued a revised
assessment. CTA assailed the disallowance of stockholders relation service fee as deductible from its
gross income. Atlas appealed that portion of the CTA’s. It is the contention of Atlas that the amount of
P25,523.14 paid in 1958 as annual public relations expenses is a deductible expense from gross
income concerning the operation of the Atlas was aimed at creating a favorable image and goodwill to
gain or maintain their patronage. Atlas claimed that it was paid for services of a public relations firm,
P.K Macker & Co., a reputable public relations consultant in New York City, U.S.A., hence, an ordinary
and necessary business expense in order to compete with other corporations also interested in the
investment market in the United States.
ISSUE:
Are the expenses paid for the services rendered by a public relations firm P.K MacKer & Co. labelled
as stockholders relation service fee an allowable deduction as business expense under the National
Internal Revenue Code?
HELD:
No. The expenditure paid to P.K MacKer & Co. as compensation for services carrying on the selling
campaign in an effort to sell Atlas' additional capital stock of P3,325,000 is not an ordinary expense.
To be deductible as a business expense, three conditions are imposed, namely: (1) the expense must
be ordinary and necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be
paid or incurred in carrying in a trade or business. In addition, not only must the taxpayer meet the
business test, he must substantially prove by evidence or records the deductions claimed under the
law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of
expense is ordinary and necessary does not justify its deduction.
An expense will be considered "necessary" where the expenditure is appropriate and helpful in the
development of the taxpayer's business. It is "ordinary" when it connotes a payment which is normal in
relation to the business of the taxpayer and the surrounding circumstances. The term "ordinary" does
not require that the payments be habitual or normal in the sense that the same taxpayer will have to
make them often; the payment may be unique or non-recurring to the particular taxpayer affected.
Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer's business,
the answer to the question as to whether the expenditure is an allowable deduction as a business
expense must be determined from the nature of the expenditure itself, which in turn depends on the
extent and permanency of the work accomplished by the expenditure. The questioned item,
stockholders relation service fee, was in effect spent for the acquisition of additional capital, ergo, a
capital expenditure. The expenditure of P25,523.14 paid to P.K. Macker & Co. as compensation for
services carrying on the selling campaign in an effort to sell Atlas' additional capital stock of
P3,325,000 is not an ordinary expense.
71
NATIONAL TAXATION
Income Tax
BONUSES PAID TO EMPLOYEES IN GOOD FAITH AND AS ADDITIONAL COMPENSATION ARE

DEDUCTIBLE
Kuenzle & Streiff v. Commissioner of Internal Revenue

G.R. Nos. L-12010 and L-12113, October 20, 1959
FACTS:
Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its income tax return, declaring losses. CIR
filed for deficiency of income taxes against Kuenzle & Streiff Inc. for the said years in the amounts of
P40,455.00, P11,248.00 and P16,228.00, respectively, arising from the disallowance, as deductible
expenses, of the bonuses paid by the corporation to its officers, upon the ground that they were not
ordinary, nor necessary, nor reasonable expenses within the purview of Section 30(a) (1) of the
National Internal Revenue Code.
The corporation filed with the Court of Tax Appeals a petition for review contesting the assessments.
CTA favored the CIR, however lowered the tax due on 1954. The corporation moved for
reconsideration, but still lost. The Corporation contends that the tax court, in arriving at its conclusion,
acted "in a purely arbitrary manner", and erred in not considering individually the total compensation
paid to each of petitioner's officers and staff members in determining the reasonableness of the
bonuses in question, and that it erred likewise in holding that there was nothing in the record indicating
that the actuation of the respondent was unreasonable or unjust.
ISSUE: Are the bonuses in question reasonable and just to be allowed as a deduction?
HELD:
No. It is a general rule that `Bonuses to employees made in good faith and as additional compensation
for the services actually rendered by the employees are deductible, provided such payments, when
added to the stipulated salaries, do not exceed a reasonable compensation for the services rendered.
The condition precedents to the deduction of bonuses to employees are: (1) the payment of the
bonuses is in fact compensation; (2) it must be for personal services actually rendered; and (3)
bonuses, when added to the salaries, are `reasonable ... when measured by the amount and quality of
the services performed with relation to the business of the particular taxpayer. Here it is admitted that
the bonuses are in fact compensation and were paid for services actually rendered. The only question
is whether the payment of said bonuses is reasonable.
There is no fixed test for determining the reasonableness of a given bonus as compensation. This
depends upon many factors, one of them being the amount and quality of the services performed with
relation to the business. Other tests suggested are: payment must be 'made in good faith'; the
character of the taxpayer's business, the volume and amount of its net earnings, its locality, the type
and extent of the services rendered, the salary policy of the corporation'; 'the size of the particular
business'; 'the employees' qualifications and contributions to the business venture'; and 'general
economic conditions. However, 'in determining whether the particular salary or compensation payment
is reasonable, the situation must be considered as a whole.
It seems clear from the record that, in arriving at its main conclusion, the tax court considered, inter
alia, the following factors:
1) The paid officers, in the absence of evidence to the contrary, that they were competent, on the other
the record discloses no evidence nor has petitioner ever made the claim that all or some of them were
gifted with some special talent, or had undergone some extraordinary training, or had accomplished
any particular task, that contributed materially to the success of petitioner's business during the taxable
years in question.
2) All the other employees received no pay increase in the said years.
72
3) The bonuses were paid despite the fact that it had suffered net losses for 3 years. Furthermore the
corporation cannot use the excuse that it is 'salary paid' to an employee because the CIR does not
question the basic salaries paid by petitioner to the officers and employees, but disallowed only the
bonuses paid to petitioner's top officers at the end of the taxable years in question.
73
NATIONAL TAXATION
Income Tax
DEDUCTIONS FOR INCOME TAX PURPOSES REFER TO REASONABLE COMPENSATION FOR

PERSONAL SERVICES
Alhambra Cigar v. Collector

G.R. No. L-23226, November 28, 1967
FACTS:
The petitioner Alhambra Cigar have been paying A. P. Kuenzle and H.A. Streiff, non – resident aliens,
who were its President and Vice-President respectively, their salaries, officers; bonus, officers;
commissions to managers and directors' fees. Such were always claimed by the petitioner as ordinary
expenses to be deducted from its gross receipts for the purposes of Income Taxation. However, time
has come that the CIR reduced the amount thereof base on the sums paid to Mr. W. Eggmann, the
resident Treasurer and Manager Alhambra.
Under the category of salaries, officers of the fixed annual compensation of A. P. Kuenzle and H. A.
Streiff in the amount of P15,000.00 each the CIR allowed for each of them a salary of only P6,000.00
and disallowed the balance of P9,000.00, or a total disallowance of P18,00.0,0 for both of them, for
each of the years in question.
Under that of the bonus, officers of the amount under such category paid to the above gentlemen is
P14,750.00 each, the CIR allowed each of them a bonus of only P5,850.00, and disallowed the
balance of P8,900.00 for both of them for each year in question. As to the deduction in the concept of
commissions to managers, the commissions paid by the petitioner-appellant to A. P. Kuenzle and H. A.
Streiff for both of them, were entirely disallowed by the CIR. Concerning the directors' fees paid to both
officials by Alhambra, were also entirely disallowed by the CIR.
ISSUE:
Are the reduction and disallowances just and reasonable?
HELD:
Yes. The Court emphatically stated that in the language of then Justice, now Chief Justice,
Concepcion: "In the light of the tenor of the foregoing provision, whenever a controversy arises on the
deductibility, for purposes of income tax, of certain items for alleged compensation of officers of the
taxpayer, two (2) questions become material, namely: (a) Have "personal services" been "actually
rendered" by said officers? (b) In the affirmative case, what is the "reasonable allowance" therefore?
When the Collector of Internal Revenue disallowed the fees, bonuses and commissions
aforementioned, and the company appealed therefrom, it became necessary for the [Court of Tax
Appeals] to determine whether said officer had correctly applied section 30 of the Tax Code, and this,
in turn, required the consideration of the two (2) questions already adverted to. In the circumstances
surrounding the case, we are of the opinion that the [Court of Tax Appeals] has correctly construed
and applied said provision." Thus, the appeal cannot prosper.
The Court argued that considering the nature of the services performed by Messrs. Kuenzle and Streiff
the salary of P6,000.00 paid to each of them was reasonable and, therefore, deductions is ordinary
and necessary business expense. The bonus paid to each of said officers which were reduced to the
amount equivalent to that paid to Mr. W. Eggmann, the resident Treasurer and Manager of Alhambra
is also sound according to the factual milieu of this case.
The Court agreed with the Tax Court that “Upon the evidence of record, we find no justification to
reverse or modify the decision of CIR with respect to the disallowance of a portion of the salaries and
bonuses paid to Messrs. Kuenzle and Streiff. Alhambra seeks to justify the increase in the salaries of
Messrs. Kuenzle and Streiff on the ground of increased costs of living. The said officers of Alhambra
are, however, non-residents of the Philippines."
74
NATIONAL TAXATION
Income Tax
THE DEDUCTIBLE SHARE OF OVERHEAD EXPENSES WHICH BENEFIT ITS BRANCHES ALL
OVER THE WORLD IS A RATABLE PART OF SUCH EXPENSES BASED ON THE RATIO OF THE
LOCAL BRANCH’S GROSS INCOME TO THE TOTAL GROSS INCOME WORLDWIDE
Commissioner of Internal Revenue v. Court of Tax Appeals and Smith Kline & French Overseas
Co. (Philippine Branch)
G.R. No. L-54108 January 17, 1984
Aquino, J.
FACTS:
This case is about the refund of a 1971 income tax amounting to P324,255 by Smith Kline and French
Overseas Company, a multinational firm domiciled in Pennsylvania licensed to do business in the
Philippines.
In its 1971 original ITR, Smith Kline claimed a deduction of P501,040 ($77,060) from its gross income
representing its share of the head office overhead expenses. However, in its amended return filed
1973, there was an overpayment of P324,255 "arising from underdeduction of home office overhead".
It made a formal claim for the refund of the alleged overpayment. It appears that in 1972, Smith Kline
received from its international independent auditors an authenticated certification that there has been
an overpayment of its tax liability. Without awaiting the action of the CIR on its claim, Smith Kline filed
a petition for review with the CTA. CTA ordered CIR to refund the overpayment or grant a tax credit to
Smith Kline. Hence, this petition for review filed by CIR.
CIR maintains that such right is not absolute and that as there exists a contract (in this case a service
agreement) which Smith Kline has entered into with its home office, prescribing the amount (here, it is
fixed at $77,060) that a branch can deduct as its share of the main office's overhead expenses. Hence,
it could not claim more than the said amount. On the other hand, Smith Kline submits that the matter
of allocated expenses which are deductible under the law cannot be the subject of an agreement
between private parties.
ISSUE: Is the deduction of overhead expense from the gross income of a local branch limited to that
stipulated in a service agreement contract?
HELD:
No. The allowable deduction of local branch of overhead expenses is determined by a ratable share.
Section 37(b) of the old NIRC provides that from the items of gross income specified in subsection (a)
of this section, there shall be deducted the expenses, losses, and other deductions properly
apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which
cannot definitely be allocated to some item or class of gross income. The remainder, if any, shall be
included in full as net income from sources within the Philippines. Moreover, Section 160 of RR No. 2
provides further that there shall be deducted the expenses, losses, and other deductions properly
apportioned or allocated thereto and a ratable part of any other expenses, losses or deductions which
cannot definitely be allocated to some item or class of gross income.
Where an expense is clearly related to the production of Philippine-derived income or to Philippine

operations that expense can be deducted from the gross income acquired in the Philippines without
resorting to apportionment. However, the overhead expenses incurred by the parent company in
connection with finance, administration, and research and development, all of which direct benefit its
branches all over the world, including the Philippines, fall under a different category. These are items
which cannot be definitely allocated or identified with the operations of the Philippine branch. For 1971,
the parent company of Smith Kline spent $1,077,739. Under the above-mentioned laws, Smith Kline
can claim as its deductible share a ratable part of such expenses based upon the ratio of the local
branch's gross income to the total gross income, worldwide, of the multinational corporation.
75
NATIONAL TAXATION
Income Tax
INTEREST PAID FOR LATE PAYMENT OF TAX IS DEDUCTIBLE FROM GROSS INCOME
The Commissioner of Internal Revenue v. Consuelo L. Vda. De Prieto

G.R. No. L-13912. September 30, 1960
Gutierrez-David, J.
FACTS:
This is an appeal from a decision of the CTA reversing the decision of the CIR holding Vda. de Prieto
liable for the payment of deficiency income tax, plus penalties and monthly interest.
On December 4, 1945, the respondent conveyed by way of gifts to her four children real property with
a total assessed value of P892,497.50. After the filing of the gift tax returns, the CIR appraised the real
property donated for gift tax purposes at P1,231,268.00 and assessed the total sum of P117,706.50 as
donor’s gift tax, interests and compromises due thereon. Of the said total sum of P117,706.50 paid by
respondent, the sum of P55,978.65 represents the total interest on account of delinquency. This sum
was claimed as deduction in her 1954 income tax return. Petitioner, however, disallowed the claim and
as a consequence of such disallowance assessed respondent the total sum of P21,410.38 as
deficiency income tax due on the aforesaid P55,978.65, including interest, surcharge and compromise
for the late payment.
ISSUE:
Is interest paid upon late payment of donor’s tax deductible from gross income?
HELD:
Yes, because interest on taxes is interest on indebtedness and is deductible. The term "indebtedness"
as used in the Tax Code of the United States has been defined as an unconditional and legally
enforceable obligation for the payment of money. The term "debt" is properly used in a comprehensive
sense as embracing not merely money due by contract but whatever one is bound to render to
another, either for contract, or the requirement of the law. It is apparent that a tax may be considered
an indebtedness.
Under the law, for interest to be deductible, it must be shown that there be an indebtedness, that there
should be interest upon it, and that what is claimed as an interest deduction should have been paid or
accrued within the year. Here, the interest paid by respondent was in consequence of the late payment
of her donor’s tax, and the same was paid within the year it is sought to be deducted. Interest on
deficiency taxes is deductible, not as taxes, but as interest. Section 80 of Revenue Regulation No. 2
merely incorporated the established application of the tax deduction statute in the United States, where
deduction of "taxes" has always been limited to taxes proper and has never included interest on
delinquent taxes, penalties and surcharges.
In conclusion, the Court is of the opinion that although interest payment for delinquent taxes is not
deductible as tax under Section 30(c) and Section 80 of the Income Tax Regulations, the taxpayer is
not precluded thereby from claiming said interest payment as deduction under section 30(b) of the
same Code.
76
NATIONAL TAXATION
Income Tax
TAXES PAID BY AN ALIEN TO HIS OWN GOVERNMENT NOT DEDUCTIBLE FROM GROSS
INCOME
Commissioner of Internal Revenue v. V.E. Lednicky and Maria Valero Lednicky

G.R. Nos. L-18169, L-18262 & L-21434, July 31, 1964
Reyes, J.B.L J.
FACTS:
Spouses Lednicky were both American citizens residing in the Philippines, and have derived all their
income from Philippine sources for the taxable years in question. In compliance with local law, they
filed their income tax return for 1956, reporting a gross income of P1,017,287. 65 and a net income of
P733,809.44 on which the amount of P317,395.4 was assessed after deducting withholding tax.
Pursuant to the assessment notice, the respondents paid the total amount of P326,247.41, inclusive of
the withheld taxes. Respondents then filed an amended income tax return for 1956. The amendment
consists in a claimed deduction paid in 1956 to the US government as federal income tax for 1956.
Simultaneously, they requested the refund of P112,437.90.
G. R. No. L-18169 is a claim for refund as alleged overpaid income tax for 1955 on income from
Philippine sources on a cash basis. Payment of these federal income taxes were made in 1955 to the
U.S. Director of Internal Revenue, Baltimore, Maryland. G. R. No. 21434 refer to respondents income
tax return for 1957 representing taxes paid to the U.S. Government on income derived wholly from
Philippine sources.
ISSUE:
May the citizen of a foreign country residing in the Philippines, who derives income wholly from
sources within the Philippines, deduct from his gross income the income taxes he has paid to his own
government on the strength of section 30 (C-1) of the Tax Code?
HELD:
No. The law's intent that the right to deduct income taxes paid to foreign government from the
taxpayer's gross income is given only as an alternative or substitute to his right to claim a tax credit for
such foreign income taxes; so that unless the alien resident has a right to claim such tax credit if he so
chooses, he is precluded from deducting the foreign income taxes from his gross income. It is obvious
that in prescribing that such deduction shall be allowed in the case of a taxpayer who does not
signify in his return his desire to have to any extent the benefits of paragraph (3) (credits for taxes paid
to foreign countries), the statute assumes that the taxpayer also may signify his desire to claim a tax
credit and waive the deduction; otherwise, the foreign taxes would always be deductible, and their
mention in the list of non-deductible items might as well have been omitted, or at least expressly
limited to taxes on income from sources outside the Philippine Islands.
Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same
governmental entity. In the present case, while the taxpayers would have to pay two taxes on the
same income, the Philippine government only receives the proceeds of one tax. As between the
Philippines, where the income was earned and where the taxpayer is domiciled, and the US, where
that income was not earned and where the taxpayer did not reside, it is indisputable that justice and
equity demand that the tax on the income should accrue to the benefit of the Philippines. Any relief
from the alleged double taxation should come from the United States, and not from the Philippines,
since the former's right to burden the taxpayer is solely predicated on his citizenship, without
contributing to the production of the wealth that is being taxed.
77
NATIONAL TAXATION
Income Tax
LOSSES OR BAD DEBTS ASCERTAINED TO BE SO AND WRITTEN OFF DURING THE

TAXABLE YEAR ARE DEDUCTIBLE IN FULL OR NOT AT ALL
Hermanos v. Commissioner of Internal Revenue and Court of Tax Appeals

G.R. No. L-21551, September 30, 1969
Teehankee, J.
FACTS:
The taxpayer, Fernandez Hermanos, Inc., is a domestic corporation organized for the principal
purpose of engaging in business as an "investment company" with main office at Manila. Sometime in
1945, Palawan Manganese Mines, Inc., the controlling stockholders of which are also the controlling
stockholders of petitioner corporation, requested financial help from petitioner to enable it to resume it
mining operations in Coron, Palawan. The request for financial assistance was readily and
unanimously approved by the Board of Directors of petitioner. Petitioner then gave to Palawan
Manganese Mines, Inc. yearly advances starting from 1945, which advances amounted to
P587,308.07 by the end of 1951. Despite these advances and the resumption of operations by
Palawan Manganese Mines, Inc., it continued to suffer losses. By 1951, petitioner became convinced
that those advances could no longer be recovered. While it continued to give advances, it decided to
write off as worthless the sum of P353,134.25. From these facts, and as admitted by petitioner itself,
Palawan Manganese Mines, Inc., was still in operation when the advances corresponding to the years
1945 to 1949 were written off the books of petitioner. Hence, the issue at bar, include among others
the sum of P353,134.25 properly claimed by petitioner as deduction in its income tax return for 1951for
either losses or bad debts that was disallowed by the Tax Court.
ISSUE:
Is the disallowance of losses in or bad debt representing the amount advanced or loaned by petitioner
to its subsidiary Palawan Manganese Mines tenable
HELD:
YES. The taxpayer's contention that its advances were loans to its subsidiary as against the Tax
Court's finding that under their memorandum agreement, the taxpayer did not expect to be repaid,
since if the subsidiary had no earnings, there was no obligation to repay those advances, becomes
immaterial, in the light of our resolution of the question. The Tax Court correctly held that the
subsidiary company was still in operation in 1951 and 1952 and the taxpayer continued to give it
advances in those years, and, therefore, the alleged debt or investment could not properly be
considered worthless and deductible in 1951, as claimed by the taxpayer. Furthermore, neither under
Section 30 (d) (2) of our Tax Code providing for deduction by corporations of losses actually sustained
and charged off during the taxable year nor under Section 30 (e) (1) thereof providing for deduction of
bad debts actually ascertained to be worthless and charged off within the taxable year, can there be a
partial writing off of a loss or bad debt, as was sought to be done here by the taxpayer. For such
losses or bad debts must be ascertained to be so and written off during the taxable year, are therefore
deductible in full or not at all, in the absence of any express provision in the Tax Code authorizing
partial deductions.
78
NATIONAL TAXATION
Income Tax
THE PARTIES HAVE ENTERED INTO A PARTNERSHIP AGREEMENT WHERE THE “POWER OF
ATTORNEY” REVEALS THAT A PARTNERSHIP OR JOINT VENTURE WAS INDEED INTENDED
ADVANCES, WHICH ARE ACTUALLY INVESTMENTS IN A PARTNERSHIP, ARE NOT

SUBSISTING “DEBTS” WHICH COULD BE DEDUCTED
Philex Mining Corp. v. Commissioner of Internal Revenue

G.R. No. 148187, April 16, 2008
Ynares-Santiago, J.
FACTS:
Philex Mining Corp. entered into an agreement (Power of Attorney) with Baguio Gold Mining Company
for the former to manage the latter’s mining claim, known as the Sto. Nino mine. The parties’
agreement was denominated as “Power of Attorney.” Philex Mining made advances of cash and
property in accordance with the agreement but the mine suffered continuing losses over the years
which resulted to Philex’s withdrawal as manager of the mine and in the eventual cessation of mine
operations. Thereafter the parties executed a “Compromise with Dation in Payment” wherein Baguio
Gold admitted an indebtedness to Philex Mining Corp. and agreed to pay the same in three segments.
The Compromise was later amended to include liabilities of Baguio Gold to other creditors that Philex
Mining had assumed as guarantor. The parties then ascertained that Baguio Gold had a remaining
outstanding indebtedness to Philex Mining in the amount of P114,996,768.00. Subsequently, Philex
Mining wrote off in its 1982 books of account the remaining outstanding indebtedness of Baguio Gold
by charging P112,136,000.00 to allowances and reserves that were set up in 1981 and P2,860,768.00
to the 1982 operations.
In its 1982 annual income tax return, Philex Mining deducted from its gross income the amount of
P112,136,000.00 as “loss on settlement of receivables from Baguio Gold against reserves and
allowances.” However, the BIR disallowed the amount as deduction for bad debt and assessed
petitioner a deficiency income tax of P62,811,161.39.
ISSUES:
(1) Are the advances investments which indicate a partnership relation between the parties?
(2) Are the advances bad debts?
HELD:
(1) Yes. Perusal of the agreement denominated as the "Power of Attorney" indicates that the parties
had intended to create a partnership and establish a common fund for the purpose. They also had a
joint interest in the profits of the business as shown by a 50-50 sharing in the income of the mine.
Under the "Power of Attorney", Philex Mining and Baguio Gold undertook to contribute money,
property and industry to the common fund known as the Sto. Niño mine. In this regard, we note that
there is a substantive equivalence in the respective contributions of the parties to the development and
operation of the mine. Pursuant to paragraphs 4 and 5 of the agreement, petitioner and Baguio Gold
were to contribute equally to the joint venture assets under their respective accounts. Baguio Gold
would contribute P11M under its owner’s account plus any of its income that is left in the project, in
addition to its actual mining claim. Meanwhile, petitioner’s contribution would consist of its expertise in
the management and operation of mines, as well as the manager’s account which is comprised
of P11M in funds and property and petitioner’s "compensation" as manager that cannot be paid in
cash. The strongest indication that petitioner was a partner in the Sto Niño mine is the fact that it would
receive 50% of the net profits as "compensation" under paragraph 12 of the agreement. Hence, the
lower courts did not err in treating petitioner’s advances as investments in a partnership known as the
Sto. Nino mine.
(2) No, the advances in this case are not bad debts.
79
The lower courts did not err in treating petitioner’s advances as investments in a partnership known as
the Sto. Nino mine. The advances were not "debts" of Baguio Gold to petitioner inasmuch as the latter
was under no unconditional obligation to return the same to the former under the "Power of Attorney".
As for the amounts that petitioner paid as guarantor to Baguio Gold’s creditors, we find no reason to
depart from the tax court’s factual finding that Baguio Gold’s debts were not yet due and demandable
at the time that petitioner paid the same. Verily, petitioner pre-paid Baguio Gold’s outstanding loans to
its bank creditors and this conclusion is supported by the evidence on record.
In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income.
Deductions for income tax purposes partake of the nature of tax exemptions and are strictly construed
against the taxpayer, who must prove by convincing evidence that he is entitled to the deduction
claimed. The agreement provided for a distribution of assets of the Sto. Niño mine upon termination, a
provision that is more consistent with a partnership than a creditor-debtor relationship. Hence,
petitioner failed to substantiate its assertion that the advances were subsisting debts of Baguio Gold
that could be deducted from its gross income. Consequently, it could not claim the advances as a valid
bad debt deduction.
80
NATIONAL TAXATION
Income Tax
PROPERTY THAT HAS NEVER BEEN ACTUALLY DEVOTED TO THE TAXPAYER’S BUSINESS,
PARTICULARLY INCOMPLETE ASSETS THAT HAVE YET TO BE USED, CANNOT BE
CONSIDERED FOR DEPRECIATION EXPENSES TO BE THEN AN ALLOWABLE DEDUCTION
Consolidated Mines Inc. v. Court of Tax Appeals and Commissioner of Internal Revenue
G.R. Nos. L-18843 and L-18844, August 29, 1974
Makalintal, C.J.,
FACTS:
These are appeals from the amended decision of the CTA ordering the Consolidated Mines, Inc.,
hereinafter referred to as the Company, to pay the CIR the amounts of P79,812.93, P51,528.24 and
P71,392.82 as deficiency income taxes for the years 1953, 1954 and 1956, respectively.
The Company, a domestic corporation engaged in mining, had filed its ITR for 1951, 1952, 1953 and
1956. In 1957 examiners of the BIR investigated the ITR filed by the Company and reported that
depletion and depreciation expenses had been overcharged; and that for the year 1956, the Company
had overstated its claim for depletion; and (2) certain claims for miscellaneous expenses were not duly
supported by evidence. As such, CIR required it to pay deficiency income taxes. CTA affirmed the
disallowance of depreciation charges and certain miscellaneous expenses
The Company questions the disallowance by the Tax Court of the depreciation charges claimed by the
Company as deductions from its gross income. The items thus disallowed consist mainly of
depreciation expenses for the years 1953 and 1954 allegedly sustained as a result of the deterioration
of some of the Company's incomplete constructions.
CIR reasoned that the Company could not claim depreciation expenses for income tax purposes since
up to its completion (the incomplete asset) has not been and is not capable of use in the operation, in
fairness to the Government and the taxpayer, as the said asset is still under construction.
Issue:
Could there be proper depreciation deductions from gross income arising from incomplete assets that
are still under construction?
HELD:
No. As an income tax concept, depletion is wholly a creation of the statute — "solely a matter of
legislative grace." Hence, the taxpayer has the burden of justifying the allowance of any deduction
claimed.
Despite the period granted by the CIR, the record is bare that the Company ever submitted its itemized
objection to the items of depreciation adjustments or disallowances for the years involved. Inasmuch
as the taxpayer has the burden of justifying the deductions claimed for depreciation, the Company's
failure to discharge the burden prevents this Court, from disturbing the Commissioner's computation.
Section 30 (f), par. I of the Tax Code, permits the taxpayer, in computing the net income, to deduct
from the gross income "(A) reasonable allowance for deterioration of property arising out of its use or
employment in the business or trade, or out of its not being used:…”
For taxation purposes the phrase "out of its not being used," with reference to depreciation allowable
on assets which are idle or the use of which is temporarily suspended, should be understood to refer
only to property that has once been used in the trade or business, not to property that has never been
actually devoted to the taxpayer's business, particularly incomplete assets that have yet to be used.
Hence, the disallowance by the Tax Court of the depreciation charges claimed by the Company as
deductions from its gross income was proper.
81
NATIONAL TAXATION
Income Tax
FOR PURPOSES OF REIMBURSEMENT, THE EXPANDED SENIOR CITIZENS ACT STATES

THAT THE COST OF THE DISCOUNT SHALL BE DEDUCTED FROM GROSS INCOME, THE
AMOUNT OF INCOME DERIVED FROM ALL SOURCES BEFORE DEDUCTING ALLOWABLE
EXPENSES, WHICH WILL RESULT IN NET INCOME
Carlos Superdrug v. DSWD

G.R. No.166494, June 29, 2007
Azcuna, J.
FACTS:
RA 9257, otherwise known as the “Expanded Senior Citizens Act of 2003” was signed into law by
President Arroyo, which provided among others the grant of a 20% discount to senior citizens. Section
4 (a) of the law provides:
(a) The grant of twenty percent (20%) discount from all establishments relative to the utilization of services in
hotels and similar lodging establishments, restaurants and recreation centers, and purchase of medicines in
all establishments for the exclusive use or enjoyment of senior citizens, including funeral and burial services
for the death of senior citizens;
… The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on
the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed
as deduction from gross income for the same taxable year that the discount is granted.
Under a tax deduction scheme, the tax deduction on discounts was subtracted from Net Sales together
with other deductions which are considered as operating expenses before the Tax Due was computed
based on the Net Taxable Income. On the other hand, under a tax credit scheme, the amount of
discounts which is the tax credit item, was deducted directly from the tax due amount.
Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of
private property. Compelling drugstore owners and establishments to grant the discount will result in a
loss of profit and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded
medicines; and 2) the law failed to provide a scheme whereby drugstores will be justly compensated
for the discount. Examining petitioners’ arguments, it is apparent that what petitioners are ultimately
questioning is the validity of the tax deduction scheme as a reimbursement mechanism for the twenty
percent (20%) discount that they extend to senior citizens.
ISSUE: Is the grant of the senior citizen discount unduly oppressive to petitioners’ business?
HELD:
No, it is incorrect for petitioners to insist that the grant of the senior citizen discount is unduly
oppressive to their business.
To illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive maintenance drug
Norvasc as an example. According to the latter, it acquires Norvasc from the distributors at ₱37.57 per
tablet, and retails it at ₱39.60 (or at a margin of 5%). If it grants a 20% discount to senior citizens or an
amount equivalent to ₱7.92, then it would have to sell Norvasc at ₱31.68 which translates to a loss
from capital of ₱5.89 per tablet. Even if the government will allow a tax deduction, only ₱2.53 per tablet
will be refunded and not the full amount of the discount which is ₱7.92. In short, only 32% of the 20%
discount will be reimbursed to the drugstores.
Petitioners’ computation is flawed. For purposes of reimbursement, the law states that the cost of the
discount shall be deducted from gross income, the amount of income derived from all sources before
deducting allowable expenses, which will result in net income. Here, petitioners tried to show a loss on
a per transaction basis, which should not be the case. An income statement, showing an accounting of
petitioners’ sales, expenses, and net profit (or loss) for a given period could have accurately reflected
82
the effect of the discount on their income. Absent any financial statement, petitioners cannot
substantiate their claim that they will be operating at a loss should they give the discount. In addition,
the computation was erroneously based on the assumption that their customers consisted wholly of
senior citizens. Lastly, the 32% tax rate is to be imposed on income, not on the amount of the discount.
83
NATIONAL TAXATION
Income Tax
THE EXPANDED SENIOR CITIZENS ACT OF 2003 SPEAKS OF DEDUCTIONS AND NOT TAX
CREDIT
Commissioner of Internal Revenue v. Bicolandia Drug Corporation

G.R. No. 148083, July 21, 2006
Velasco, Jr., J.
FACTS:
RA 7432 granted senior citizens several privileges, one of which was obtaining a 20% discount from
certain establishments. Said private establishments giving the discount to senior citizens may claim the
cost as tax credit. BIR issued Revenue Regulations No. 2-94, which defined "tax credit" as the amount
representing the 20% discount granted to a qualified senior citizen by all establishments relative to
their utilization of transportation services, hotels and similar lodging establishments, restaurants, halls,
circuses, carnivals and other similar places of culture, leisure and amusement, which discount shall be
deducted by the said establishments from their gross income for income tax purposes and from their
gross sales for value-added tax or other percentage tax purposes.
In 1995, Bicolandia Drug Corporation, under the business style of "Mercury Drug," granted the 20%
discount to qualified senior citizens purchasing their medicines. Respondent treated this discount as a
deduction from its gross income. Respondent filed its 1995 Corporate Annual Income Tax Return,
and in 1996, a claim for tax refund or credit because its net losses for the year 1995 prevented it from
benefiting from the treatment of sales discounts as a deduction from gross sales during the said
taxable year. It alleged that the CIR erred in treating the 20% discount given to senior citizens as a
deduction from its gross income for income tax purposes or other percentage tax purposes rather than
as a tax credit. Respondent appealed to the CTA in order to toll the running of two-year prescriptive
period to file a claim for refund. It argued that since Section 4 of R.A. No. 7432 provided that discounts
granted to senior citizens may be claimed as tax credit, Section 2(i) of Revenue Regulations No. 2-94,
stating that the discount "shall be deducted by the said establishments from their gross income for
income tax purposes and from their gross sales for VAT or OPT purposes," is illegal, void and without
effect for being inconsistent with the statute it implements.
ISSUE: May the 20% sales discount granted to senior citizens pursuant to R.A. No. 7432 be claimed
as a tax credit, instead of a deduction from gross income or gross sales?
HELD:
Yes. Revenue Regulations No. 2-94 is still subordinate to R.A. No. 7432, and in cases of conflict, the
implementing rule will not prevail over the law it seeks to implement. A tax credit reduces the
taxpayer's liability, compared to a deduction which reduces taxable income upon which the tax liability
is calculated. A credit differs from deduction to the extent that the former is subtracted from the tax
while the latter is subtracted from income before the tax is computed. Tax credit is not tax refund.
The lawmakers intended the grant of a tax credit. The tax credit may actually have provided greater
incentive for the private establishments to comply with R.A. No. 7432, or quicker relief from the cut into
profits of these businesses. Revenue Regulations No. 2-94 is null and void for failing to conform to the
law it sought to implement. In case of discrepancy between the basic law and a rule or regulation
issued to implement said law, the basic law prevails because said rule or regulation cannot go beyond
the terms and provisions of the basic law. It must be ruled that under R.A. No. 7432, which was
effective at the time, respondent is entitled to its claim of a tax credit.
R.A. No. 7432 has been amended by Republic Act No. 9257, the "Expanded Senior Citizens Act of
2003." It must be noted that the concerns of the petitioner regarding tax credits granted to private
establishments giving discounts to senior citizens have been addressed. In this, the term "tax credit" is
no longer used. The establishment may claim the discounts as tax deduction based on the net cost of
the goods sold or services rendered provided, that the cost of the discount shall be allowed as
deduction from gross income for the same taxable year that the discount is granted. This time around,
84
there is no conflict between the law and the implementing Revenue Regulations. Under Revenue
Regulations No. 4-2006, "(o)nly the actual amount of the discount granted or a sales discount not
exceeding 20% of the gross selling price can be deducted from the gross income, net of value added
tax, if applicable, for income tax purposes, and from gross sales or gross receipts of the business
enterprise concerned, for VAT or other percentage tax purposes." Under the new law, there is no tax
credit to speak of, only deductions.
But as it was R.A. No. 7432 in force at the time this case arose, this law controls the result in this
particular case, for which reason the petition must fail.
85
NATIONAL TAXATION
Income Tax
THE TERM “COST” UNDER RA 7432 REFERS TO THE ACTUAL AMOUNT OF THE 20%
DISCOUNT EXTENDED BY A PRIVATE ESTABLISHMENT TO SENIOR CITIZENS IN THEIR
PURCHASE OF MEDICINES
Mercury Drug v. Commissioner of Internal Revenue

G.R. No. 164050, July 20, 2011
Perez, J.
FACTS:
Pursuant to RA 7432, petitioner Mercury Drug Corporation (petitioner), a retailer of pharmaceutical
products, granted a 20% sales discount to qualified senior citizens on their purchases of medicines.
For the taxable year April to December 1993 and January to December 1994, the amounts
representing the 20% sales discount totalled ₱3,719,287.68 and ₱35,500,593.44, respectively, which
petitioner claimed as deductions from its gross income.
Realizing that RA 7432 allows a tax credit for sales discounts granted to senior citizens, petitioner filed
with the Commissioner of Internal Revenue (CIR) claims for refund in the amount of ₱2,417,536.00 for
the year 1993 and ₱23,075,386.00 for the year 1994. Petitioner presented a computation of its
overpayment of income tax. When the CIR failed to act upon petitioner’s claims, the latter filed a
petition for review with the Court of Tax Appeals. The Court of Tax Appeals favored petitioner by
declaring that the 20% sales discount should be treated as tax credit rather than a mere deduction
from gross income. The Court of Tax Appeals however found some discrepancies and irregularities in
the cash slips submitted by petitioner as basis for the tax refund. Hence, it disallowed the claim for
taxable year 1994 and some portion of the amount claimed for 1993 by petitioner.
Petitioner moved for partial reconsideration. the Court of Tax Appeals modified its earlier ruling by
increasing the creditable tax amount to ₱18,038,489.71, inclusive of the taxable years 1993 and 1994.
The Court of Tax Appeals finally granted the claim for refund for the taxable year 1994 on the basis of
the cash slips submitted by petitioner, in the sum of ₱16,350,311.28. Petitioner elevated the case to
the Court of Appeals where it rendered a decision sustaining the Court of Tax Appeals and dismissing
the petition. Hence, the instant petition.
ISSUE:
Should the claim for tax credit be based on the full amount of the 20% senior citizens’ discount or the
acquisition cost of the merchandise sold?
HELD:
Section 4(a) of Republic Act No. 7432 reads: SEC. 4. Privileges for the Senior Citizens. — The senior
citizens shall be entitled to the following: a) the grant of twenty percent (20%) discount from all
establishments relative to the utilization of transportation services, hotels and similar lodging
establishments, restaurants and recreation centers and purchase of medicines anywhere in the
country: Provided, That private establishments may claim the cost as tax credit x x x
The foregoing proviso specifically allows the 20% senior citizens' discount to be claimed by the private
establishment as a tax credit and not merely as a tax deduction from gross sales or gross income. The
law however is silent as to how the "cost of the discount" as tax credit should be construed.
There is nothing novel in the issues raised in this petition. In Bicolandia, we construed the term "cost"
as referring to the amount of the 20% discount extended by a private establishment to senior citizens
in their purchase of medicines. It is worthy to mention that Republic Act No. 7432 had undergone two
(2) amendments; first in 2003 by Republic Act No. 9257 and most recently in 2010 by Republic Act No.
9994. The 20% sales discount granted by establishments to qualified senior citizens is now treated as
tax deduction and not as tax credit. As we have likewise declared in Commissioner of Internal
Revenue v. Central Luzon Drug Corporation, this case covers the taxable years 1993 and 1994, thus,
Republic Act No. 7432 applies.
86
Based on the foregoing, we sustain petitioner’s argument that the cost of discount should be computed
on the actual amount of the discount extended to senior citizens. However, we give full accord to the
factual findings of the Court of Tax Appeals with respect to the actual amount of the 20% sales
discount, i.e., the sum of ₱3,522,123.25. for the year 1993 and ₱34,211,769.45 for the year 1994.
Therefore, petitioner is entitled to a tax credit equivalent to the actual amounts of the 20% sales
discount as determined by the Court of Tax Appeals. A new computation for tax refund is in order.
87
NATIONAL TAXATION
Income Tax
A PROPERTY CEASES TO BE A CAPITAL ASSET IF THE AMOUNT EXPENDED TO IMPROVE IT

IS DOUBLE ITS ORIGINAL COST
Calasanz v. Commissioner of Internal Revenue

G.R. No. L-26284, October 8, 1986
Fernan, J.
FACTS:
This is an appeal taken by Spouses Calasanz from the decision of the CTA in 1966, holding them
liable for the payment of P3,561.24 as deficiency income tax and interest for the calendar year 1957
and P150.00 as real estate dealer’s fixed tax.
Ursula Calasanz inherited from her father an agricultural land, containing a total area of 1,678,000
square meters. In order to liquidate her inheritance, she had the land surveyed and subdivided into
lots. Improvements, such as good roads, concrete gutters, drainage and lighting system, were
introduced to make the lots saleable. Soon after, the lots were sold to the public at a profit. In their joint
income tax return for the year 1957 filed with the BIR on March 31, 1958, petitioners disclosed a profit
of P31,060.06 realized from the sale of the subdivided lots, and reported fifty per centum thereof or
P15,530.03 as taxable capital gains. Upon an audit and review of the return this filed, the Revenue
Examiner adjudged petitioners engaged in business as real estate dealers and required them to pay
the real estate dealer’s tax and assessed a deficiency income tax on profits derived from the sale of
the lots based on the rates for ordinary income. On September 29, 1962, petitioners received from CIR
demands for real estate dealer’s fixed tax and compromise penalty for late payment and assessment
for deficiency income tax on ordinary gain plus interest.
On October 17, 1962, petitioners filed with the CTA a petition for review contesting the aforementioned
assessments. The Tax Court upheld the respondent Commissioner except for that portion of the
assessment regarding the compromise penalty of P10.00 for the reason that in this jurisdiction, the
same cannot be collected in the absence of a valid and binding compromise agreement.
ISSUES:
(1) Are petitioners real estate dealers liable for real estate dealer’s fixed tax?
(2) Are the gains realized from the sale of the lots taxable in full as ordinary income or capital gains
taxable at capital gain rates?
HELD:
1. Yes, the petitioners are engaged in the business of selling real estate.
Inherited land which an heir subdivides and wherein he makes improvements several times higher
than the original cost of the land is not a capital asset, but an ordinary asset. The activities of
petitioners are indistinguishable from those invariably employed by one engaged in the business of
selling real estate. They did not sell the land in the condition in which they acquired it. While the land
was originally devoted to rice and fruit trees, it was subdivided into small lots and in the process
converted into a residential subdivision and given the name Don Mariano Subdivision. Extensive
improvements like the laying out of streets, construction of concrete gutters and installation of lighting
system and drainage facilities, among others, were undertaken to enhance the value of the lots and
make them more attractive to prospective buyers. The audited financial statements submitted together
with the tax return in question disclosed that a considerable amount was expended to cover the cost of
improvements. As a matter of fact, the estimated improvements of the lots sold reached P170,028.60
whereas the cost of the land is only P4,742.66. There is authority that a property ceases to be a capital
asset if the amount expended to improve it is double its original cost, for the extensive improvement
indicates that the seller held the property primarily for sale to customers in the ordinary course of his
business.
88
Another distinctive feature of the real estate business discernible from the records is the existence of
contracts receivables, which stood at P395,693.35 as of the year ended December 31, 1957. The
sizable amount of receivables in comparison with the sales volume of P446,407.00 during the same
period signifies that the lots were sold on installment basis and suggests the number, continuity and
frequency of the sales. Also of significance is the circumstance that the lots were advertised for sale to
the public and that sales and collection commissions were paid out during the period in question.
2. Yes. In the course of selling the subdivided lots, petitioners engaged in the real estate business and
accordingly, the gains from the sale of the lots are ordinary income taxable in full. The decision of the
CTA is affirmed.
89
NATIONAL TAXATION
Income Tax
THE PREDOMINANT USE OF OTHER CLASSIFICATION OF PROPERTIES LOCATED IN A

STREET/BARANGAY ZONE SHALL BE CONSIDERED FOR PURPOSES OF ZONAL VALUATION
Commissioner of Internal Revenue v. Aquafresh Seafoods

G.R. No. 170389, October 20, 2010
Peralta, J.
FACTS:
Aquafresh Seafoods sold to Philips Seafoods, Inc. two parcels of land, including improvements
thereon, for the consideration of Php 3,100, 000.00. Respondent then filed a Capital Gains Tax
Return/Application for Certification Authorizing Registration and paid the amount of Php 186,000.00,
representing the Capital Gains Tax (CGT) and the amount of Php 46,500.00, representing the
Documentary Stamp Tax (DST) due from the said sale. Subsequently, the Revenue District Officer
issued a Certificate Authorizing Registration.
The BIR however, received a report that the lots sold were undervalued for taxation purposes. This
prompted the Special Investigation Division (SID) of the BIR to conduct an ocular inspection over the
properties. After the investigation, the SID concluded that the subject properties were commercial with
a zonal value of Php 2,000.00 per square meter. The Regional Director of the Revenue Region sent
two Assessment Notices apprising respondent of CGT and DST deficiencies in the sum of Php
1,372,171.46 and Php 356,267.62, respectively. The Director relied on the findings of the SID that the
subject properties were commercial with a zonal valuation of Php 2,000.00 per square meter. The
respondent sent a letter protesting the assessments. The Director denied respondent's protest for lack
of legal basis. Respondent appealed, but the same was denied with finality. Thereafter, respondent
filed a petition for review before the CTA seeking the reversal of the denial of its protest. The main
thrust of respondent's petition was that the subject properties were located in Barrio Banica, Roxas,
where the pre-defined zonal value was Php 650.00 per square meter based on the "Revised Zonal
Values of Real Properties in the City of Roxas under Revenue District Office No. 72 – Roxas City"
(1995 Revised Zonal Values of Real Properties). Respondent asserted that the subject properties were
classified as "RR" or residential and not commercial. Respondent argued that since there was already
a pre-defined zonal value for properties located in Barrio Banica, the BIR officials had no business re-
classifying the subject properties to commercial.
ISSUE:
Should Fair Market Value based on the zonal valuation of a residential land be applied as tax base in
the computation of Capital Gains Tax (CGT) and Documentary Stamp Tax (DST)?
HELD:
Yes. Zonal valuation was established with the objective of having an ‘efficient tax administration by
minimizing the use of discretion in the determination of the tax based on the part of the administrator
on one hand and the taxpayer on the other hand.’ It is determined for the purpose of establishing a
more realistic basis for real property valuation. Since internal revenue taxes, such as CGT and DST,
are assessed on the basis of valuation, the zonal valuation existing at the time of the sale should be
taken into account. If petitioner feels that the properties in Barrio Banica should also be classified as
commercial, then petitioner should work for its revision in accordance with the rules. The burden was
on petitioner to prove that the classification and zonal valuation in Barrio Banica have been revised. In
the absence of proof to the contrary, the 1995 Revised Zonal Values of Real Properties must be
followed. The Court takes note of the wording of the Zonal Valuation Guidelines, to wit: “The
predominant use of other classification of properties located in a street/barangay zone, regardless of
actual use shall be considered for purposes of zonal valuation.” It appears that actual use is not
considered for zonal valuation, but the predominant use of other classification of properties located in
the zone. Again, it is undisputed that the entire Barrio Banica has been classified as residential.
90
NATIONAL TAXATION
Income Tax
MERGER AIMED AT THE CONTINUATION AND EXPANSION OF BUSINESS IS EXEMPT FROM

PAYMENT OF CAPITAL GAINS TAX
Commissioner of Internal Revenue v. Rufino

G.R. Nos. L-33665-68, February 27, 1987
Cruz, J.
FACTS:
This is a petition for review on certiorari of the decision of the CTA absolving the private respondents
from liability for capital gains tax on the stocks received by them from the Eastern Theatrical, Inc.
These were originally four cases involving appeals from the decision of the CIR holding the
respondents liable for deficiency income tax, surcharge and interest for the year 1959.
The respondents were majority stockholders of Eastern Theatrical Co., Inc (Old Company) which had
a corporate term of 25 years, which terminated on January 25, 1959. On December 8, 1958, the
Eastern Theatrical Co, Inc. (New Company, with a corporate term of 50 years) was organized, and the
Rufinos were also the majority stockholders of the corporation. Both were engaged in the same
business. The Old Company held a stockholder’s meeting to merge with the New Company to
continue its business after the end of Old Company’s corporate term. The merger was authorized by a
board resolution. It was expressly declared that the merger was necessary to continue operating their
shared establishment. A Deed of Assignment was executed, which conveyed and transferred all the
business, property, assets and good will of the Old Company to the New Company in exchange for
shares of stock of the latter to be issued to the shareholders at the rate of one stock for each stock
held in the Old Company. The Deed was to retroact from January 1, 1959. The New Company’s Board
approved the merger and the Deed of Assignment on January 12, 1959 and all changes duly
registered with the SEC. The BIR, after examination, declared that the merger was not undertaken for
a bona fide business purpose but only to avoid liability for the capital gains tax on the exchange of the
old for the new shares of stock. The BIR then imposed deficiency assessments against the private
respondents. The latter requested for a reconsideration, which was denied. They elevated their matter
to the CTA, which reversed the said judgement, saying that they found that there was “no taxable gain
derived from the exchange of old stocks simply for new stocks for the New Corporation” because it
was pursuant to a valid plan of reorganization.
ISSUE:
Was there a valid merger and therefore no taxable gain derived therefrom?
HELD:
Yes, the CTA was correct in ruling that there was a merger and that no taxable gain was derived. In
support of its argument that the respondents were trying to avoid the payment of capital gains tax, the
petitioner said that the New Company did not actually issue stocks in exchange for the properties of
the Old Company. The increase in capitalization only happened in March 1959, or 37 days after the
Old Company expired. Prior to registration, the New Company could not have validly performed the
transfer. The SC ruled that the retroactivity of the Deed of Assignment cured the defect and there was
no impediment. It also ruled that the New Company had a bona fide business purpose. The criterion of
the law is that the purpose of the merger must be for a bona fide business purpose and not for the
purpose of escaping taxes.
What is also worth noting is that, as in the case of the Old Company when it was dissolved, there has
been no distribution of the assets of the New Company since then and up to now, as far as the record
discloses. To date, the private respondents have not derived any benefit from the merger of the Old
Company and the New Company almost three decades earlier that will make them subject to the
capital gains tax under the Code. They are no more liable now than they were when the merger took
effect in 1959, as the merger, being genuine, exempted them under the law from such tax. The
government is, of course, not left entirely without recourse, at least in the future. The fact is that the
91
merger had merely deferred the claim for taxes, which may be asserted by the government later, when
gains are realized and benefits are distributed among the stockholders as a result of the merger. In
other words, the corresponding taxes are not forever foreclosed or forfeited but may at the proper time
and without prejudice to the government still be imposed upon the private respondents, in accordance
with the Tax Code. Then, in assessing the tax, "the basis of the property transferred in the hands of
the transferee shall be the same as it would be in the hands of the transferor, increased by the amount
of gain recognized to the transferor on the transfer." The only inhibition now is that time has not yet
come.
92
NATIONAL TAXATION
Income Tax
OUR RULING THAT THE MWE EXEMPTION IS AVAILABLE FOR THE ENTIRE TAXABLE YEAR
2008 IS PREMISED ON THE FACT OF ONE'S STATUS AS AN MWE; THAT IS, WHETHER THE
EMPLOYEE DURING THE ENTIRE YEAR OF 2008 WAS AN MWE AS DEFINED BY R.A. 9504
Soriano v Secretary of Finance

G.R. No. 184450, January 24, 2017
Sereno, CJ.
FACTS:
These consolidated petitions for certiorari, prohibition, and mandamus, seek to nullify certain
provisions of Revenue Regulation No. (RR) 10-2008, which granted, among others, income tax
exemption for minimum wage earners (MWEs), as well as an increase in personal and additional
exemptions for individual taxpayers.
R.A. 9504 was approved and signed into law by President Arroyo. One of the salient features of the
said law was that it granted Minimum Wage Earners (MWEs) exemption from payment of income tax
on their minimum wage, holiday pay, overtime pay, night shift differential pay and hazard pay. The BIR
issued RR 10-2008, highlights of which are: (1) MWEs receiving 'other benefits' exceeding the
P30,000.00 limit shall be taxable on the excess benefits, as well as on his salaries, wages and
allowances, just like an employee receiving compensation income beyond the SMW; (2) That an
employee who receives/earns additional compensation such as commissions, honoraria, fringe
benefits, benefits in excess of the allowable statutory amount of P30,000.00, taxable allowances and
other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift
differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are
not exempt from income tax, and consequently, from withholding tax; and (3) For MWEs receiving
other income: the SMW, holiday pay, overtime pay, night shift differential pay and hazard pay shall still
be exempt from withholding tax.
ISSUES:
(1) Is a Minimum Wage Earner exempt for the entire taxable year 2008 or from 6 July 2008 only?
(2) Are Sections 1 and 3 of RR 10-2008 consistent with the law in providing that an MWE who receives
other benefits in excess of the statutory limit of P30,000 is no longer entitled to the exemption provided
by R.A. 9504?
HELD:
(1) The MWE is exempt for the entire taxable year 2008. As it stands, the calendar year 2008
remained as one taxable year for an individual taxpayer. Therefore, RR 10-2008 cannot declare the
income earned by a minimum wage earner from 1 January 2008 to 5 July 2008 to be taxable and
those earned by him for the rest of that year to be tax-exempt. To do so would be to contradict the
NIRC and jurisprudence, as taxable income would then cease to be determined on a yearly basis.
A clarification is proper at this point. Our ruling that the MWE exemption is available for the entire
taxable year 2008 is premised on the fact of one's status as an MWE; that is, whether the employee
during the entire year of 2008 was an MWE as defined by R.A. 9504. When the wages received
exceed the minimum wage anytime during the taxable year, the employee necessarily loses the MWE
qualification. Therefore, wages become taxable as the employee ceased to be an MWE. But the
exemption of the employee from tax on the income previously earned as an MWE remains.
(2) Sections 1 and 3 of RR 10-2008 add a requirement not found in the law by effectively declaring that
an MWE who receives other benefits in excess of the statutory limit of P30,000 is no longer entitled to
the exemption provided by R.A. 9504. Nowhere in the above provisions of R.A. 9504 would one find
the qualifications prescribed by the assailed provisions of RR 10-2008. The provisions of the law are
clear and precise; they leave no room for interpretation - they do not provide or require any other
qualification as to who are MWEs.
93
To be exempt, one must be an MWE, a term that is clearly defined. Section 22(HH) says he/she must
be one who is paid the statutory minimum wage if he/she works in the private sector, or not more than
the statutory minimum wage in the non-agricultural sector where he/she is assigned, if he/she is a
government employee. Thus, one is either an MWE or he/she is not. Simply put, MWE is the status
acquired upon passing the litmus test - whether one receives wages not exceeding the prescribed
minimum wage.
In respondents' view, anyone receiving 13th month pay and other benefits in excess of P30,000
cannot be an MWE. They seek to impose their own definition of "MWE" by arguing that someone who
earns beyond the incomes and benefits above-enumerated is definitely not a low-income earner. We
do not agree. As stated before, nothing to this effect can be read from R.A. 9504. The amendment is
silent on whether compensation-related benefits exceeding the P30,000 threshold would make an
MWE lose exemption. R.A. 9504 has given definite criteria for what constitutes an MWE, and R.R. 10-
2008 cannot change this.
Given the foregoing, the treatment of bonuses and other benefits that an employee receives from the
employer in excess of the P30,000 ceiling cannot but be the same as the prevailing treatment prior to
R.A. 9504 - anything in excess of P30,000 is taxable; no more, no less. The treatment of this excess
cannot operate to disenfranchise the MWE from enjoying the exemption explicitly granted by R.A.
9504.
94
NATIONAL TAXATION
Income Tax
“CORPORATION” INCLUDES PARTNERSHIPS NO MATTER HOW CREATED OR ORGANIZED
Commissioner of Internal Revenue v. Batangas Tayabas Bus Company and Laguna-Tayabas

Bus Company
G.R. No. L-9692, January 6, 1958
Montemayor, J.
FACTS:
Respondents are 2 separate corporations engaged in the business of land transportation. To
economize their overhead expenses and to recoup losses incurred during the war, BTC and LTBC
entered into a joint management contract called “Joint Emergency Operation” which allowed the two
companies to save on salaries for one manager, one assistant manager, fifteen inspectors, special
agents and an entire office worth of clerical workers. The savings for one year amounted to around
200,000 or about 100, 000 for each company. At the end of each calendar year, all gross receipts and
expenses by both were determined and the net profits were divided 50-50, and then reflected on the
books of account for each company. Each one prepared its own income tax return from this fifty per
centum of the gross receipts and expenditures, assets and liabilities thus transferred to it from the
“Joint Emergency Operation” and paid the corresponding income taxes thereon separately.
Under the theory that the two companies had pooled their resources in the establishment of the Joint
Emergency Operation, thereby forming a joint venture, the Collector wrote the bus companies that
there was due from them the amount of P422,210.89 as deficiency income tax and compromise for the
years 1946 to 1949, inclusive. As a joint venture, the two companies were a single corporation, distinct
from their individual identities, for the purposes of taxation.
The companies appealed this assessment, claiming that they were not a corporation pursuant to their
joint emergency operations. The CTA granted their appeal. Hence this case by the Collector.
ISSUE: Are the two companies liable to pay income tax as a corporation, pursuant to their joint
emergency operation?
HELD:
Yes. Joint Emergency Operation or sole management or joint venture in this case falls under the
provisions of section 84 (b) of the Internal Revenue Code, and consequently, it is liable to income tax
provided for in section 24 of the same code.
It is well entrenched in jurisprudence that when the tax code includes “partnerships” among the entities
subject to the tax on corporations, it must refer to organizations which are not necessarily partnerships
in the technical sense of the term, and that furthermore, said law defined the term "corporation" as
including partnerships no matter how created or organized, thereby indicating that a joint venture need
not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law
on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations;
that besides, said section 84 (b) provides that the term "corporation" includes "joint accounts" (cuentas
en participacion) and "associations", none of which has a legal personality independent of that of its
members.”
In the present case, the two companies contributed money to a common fund to pay the sole general
manager, the accounts and office personnel attached to the office of said manager, as well as for
maintenance, a common repair shop, all the salaries of the personnel of both companies. The net
income was determined and divided equally between them, wholly and utterly disregarding the
expenses incurred in the maintenance and operation of each company. In view of this, and considering
that the Batangas Transportation and the Laguna Bus operated different lines, sometimes in different
provinces or territories, under different franchises, with different equipment and personnel, it cannot
possibly be true and correct to say that the end of each year, the gross receipts and income in the
gross expenses of two companies are exactly the same for purposes of the payment of income tax.
95
What was actually done in this case was that, although no legal personality may have been created by
the Joint Emergency Operation, nevertheless, said Joint Emergency Operation joint venture, or joint
management operated the business affairs of the two companies as though they constituted a single
entity, company or partnership, thereby obtaining substantial economy and profits in the operation.
Hence, the joint emergency operation involved the creation of a corporation within the meaning of the
NIRC, so as to make them liable as such for income taxes.
96
NATIONAL TAXATION
Income Tax
THE SHARING OF RETURNS DOES NOT IN ITSELF ESTABLISH A PARTNERSHIP WHETHER

OR NOT THE PERSONS SHARING THEREIN HAVE A JOINT OR COMMON RIGHT OR INTEREST
IN THE PROPERTY
Pascual v. Commissioner of Internal Revenue

G.R. No. 78133, October 18, 1988
Gancayco, J.
FACTS:
On June 22, 1965, petitioners bought two parcels of land from Santiago Bernardino, et al. and on May
28, 1966, they bought another three parcels of land from Juan Roque. The first two parcels of land
were sold by petitioners in 1968 to Marenir Development Corporation, while the three parcels of land
were sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioners realized a
net profit in the sale made in 1968 in the amount of P165,224.70, while they realized a net profit of
P60,000.00 in the sale made in 1970. The corresponding capital gains taxes were paid by petitioners
in 1973 and 1974 by availing of the tax amnesties granted in the said years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners
were assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporate
income taxes for the years 1968 and 1970. Petitioners protested and asserted that they had availed of
tax amnesties way back in 1974. In a reply, respondent Commissioner informed petitioners that in the
years 1968 and 1970, petitioners as co-owners in the real estate transactions formed an unregistered
partnership or joint venture taxable as a corporation under Section 20(b) and its income was subject to
the taxes prescribed under Section 24 of the NIRC that the unregistered partnership was subject to
corporate income tax as distinguished from profits derived from the partnership by them which is
subject to individual income tax; and that the availment of tax amnesty under P.D. No. 23, as
amended, by petitioners relieved petitioners of their individual income tax liabilities but did not relieve
them from the tax liability of the unregistered partnership. Hence, the petitioners were required to pay
the deficiency income tax assessed.
Petitioners filed a petition for review with the respondent Court of Tax Appeals where it affirmed the
decision and action taken by respondent commissioner with costs against petitioners. Hence, this
petition.
ISSUE: Should petitioners be treated as co-ownership or an unregistered partnership or joint venture

for income tax purposes?
HELD:
No. In the present case, there is no evidence that petitioners entered into an agreement to contribute
money, property or industry to a common fund, and that they intended to divide the profits among
themselves. Respondent just assumed these conditions to be present on the basis of the fact that
petitioners purchased certain parcels of land and became co-owners thereof. Petitioners bought two
parcels of land in 1965. They did not sell the same nor make any improvements thereon. In 1966, they
bought another three (3) parcels of land from one seller. It was only 1968 when they sold the two (2)
parcels of land after which they did not make any additional or new purchase. The remaining three (3)
parcels were sold by them in 1970. The transactions were isolated. The character of habituality
peculiar to business transactions for the purpose of gain was not present.
The sharing of returns does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. There must be a clear intent to form a
partnership, the existence of a juridical personality different from the individual partners, and the
freedom of each party to transfer or assign the whole property. In the present case, there is clear
evidence of co-ownership between the petitioners. There is no adequate basis to support the
proposition that they thereby formed an unregistered partnership. The two isolated transactions
97
whereby they purchased properties and sold the same a few years thereafter did not thereby make
them partners. They shared in the gross profits as co- owners and paid their capital gains taxes on
their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be
considered to have formed an unregistered partnership which is thereby liable for corporate income
tax, as the respondent commissioner proposes.
98
NATIONAL TAXATION
Income Tax
CO-OWNERSHIP OF INHERITED PROPERTIES IS AUTOMATICALLY CONVERTED INTO AN

UNREGISTERED PARTNERSHIP THE MOMENT THE COMMON PROPERTIES/INCOMES
DERIVED THEREFROM ARE USED AS COMMON FUND WITH INTENT TO PRODUCE PROFITS
Ona v. Commissioner of Internal Revenue

G.R. No. L-19342, May 25, 1972
Barredo, J.
FACTS:
Julia Buñales died, leaving as heirs her surviving spouse, Lorenzo T. Oña and her five children. Oña
was appointed administrator of the estate. Because three of the heirs were still minors when the
project of partition was submitted and approved, Oña was appointed as guardian of said minors. The
project shows that the heirs have undivided interest in ten parcels of land with a total assessed value
of P87,860.00, six houses with a total assessed value of P17,590.00 and an undetermined amount to
be collected from the War Damage Commission. Later, they received P50,000.00, more or less. This
amount was not divided among them but was used in the rehabilitation of properties owned by them in
common. Although the project of partition was approved, no attempt was made to divide the
properties. Instead, the properties remained under the management of Oña who used said properties
in business by leasing or selling them and investing the income derived therefrom and the proceeds
from the sales thereof in real properties and securities. As a result, the properties and investments
gradually increased. From said investments and properties petitioners derived such incomes as profits
from installment sales of subdivided lots, profits from sales of stocks, dividends, rentals and interests
which were recorded in the books of account kept by Oña where the corresponding shares of the
petitioners in the net income for the year are also known. Every year, petitioners returned for income
tax purposes their shares in the net income derived from said properties and securities and/or from
transactions involving them. However, petitioners did not actually receive their shares in the yearly
income. The income was always left in the hands of Lorenzo T. Oña who invested them.
The CIR decided that petitioners formed an unregistered partnership and therefore, subject to the
corporate income tax. Petitioners protested against the assessment and asked for reconsideration,
which was denied, of the ruling of respondent that they have formed an unregistered partnership.
ISSUE: Should petitioners be considered as co-owners of the properties inherited by them, or, must
they be deemed to have formed an unregistered partnership subject to tax?
HELD:
They are deemed to have formed an unregistered partnership subject to tax. In cases of inheritance,
there should be a period when the heirs can be considered as co-owners rather than unregistered co-
partners within the contemplation of our corporate tax laws. Before the partition and distribution of the
estate of the deceased, all the income thereof does belong commonly to all the heirs without them
becoming thereby unregistered co-partners, but it does not necessarily follow that such status as co-
owners continues until the inheritance is actually and physically distributed, for it is easily conceivable
that after knowing their respective shares in the partition, they might decide to continue holding said
shares under the common management. If this were to be allowed, it would be the easiest thing for
heirs in any inheritance to circumvent and render meaningless the NIRC. Further, the income derived
from inherited properties may be considered as individual income of the respective heirs only so long
as the inheritance or estate is not distributed or partitioned, but the moment their respective known
shares are used as part of the common assets of the heirs to be used in making profits, it is but proper
that the income of such shares should be considered as the part of the taxable income of an
unregistered partnership.
99
Petitioners did not merely limit themselves to holding the properties inherited by them. Some of the
said properties were sold at considerable profit, and that with said profit, petitioners engaged in the
purchase and sale of corporate securities. All the profits from these ventures were divided among
petitioners proportionately in accordance with their respective shares in the inheritance. From the
moment they allowed the incomes from their shares and inherited properties to be used by Oña as a
common fund in undertaking several transactions or in business, with the intention of deriving profit to
be shared by them proportionally, such act was tantamount to actually contributing such incomes to a
common fund and, in effect, they thereby formed an unregistered partnership. Note that for purposes
of the tax on corporations, NIRC includes these partnerships — with the exception only of duly
registered general copartnerships — within the purview of the term "corporation." Petitioners constitute
a partnership, insofar as said Code is concerned, and are subject to the income tax for corporations.
100
NATIONAL TAXATION
Income Tax
SHARING OF GROSS RETURNS DOES NOT OF ITSELF ESTABLISH A PARTNERSHIP
Jose P. Obillos, Jr., et al. v. Commissioner of Internal Revenue

GR. No. L-68118, October 29, 1985
Aquino, J.:
FACTS:
On March 2, 1973, Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots in
Greenhills, San Juan, Rizal. He transferred his rights to his children (herein petitioners) for them to
build their residences. In 1974, petitioners resold the subject property to Walled City Securities Corp.
and Olga Cruz Canda for P313,050. They derived from the sale a total profit of P134,341.88 or
P33,584 for each of them. They treated the profit as a capital gain and paid an income tax on one-half
thereof or of P16,792.
In April 1980, one day before expiration of 5 year prescriptive period, CIR required the petitioners to
pay corporate income tax on the total profit of P134,336 in addition to individual income tax on their
shares thereof. He assessed P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and
P15,547.56 as 42% accumulated interest, or a total of P71,074.56. Not only that. CIR considered the
share of the profits of each petitioner in the sum of P33,584 as a " taxable in full (not a mere capital
gain of which ½ is taxable) and required them to pay deficiency income taxes aggregating P56,707.20
including the 50% fraud surcharge and the accumulated interest. Thus, the petitioners are being held
liable for deficiency income taxes and penalties totalling P127,781.76 on their profit of P134,336, in
addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered
partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code Collector of
Internal Revenue vs. Batangas Trans. Co. The petitioners contested the assessments. Two Judges of
the Tax Court sustained the same. One judge dissented. Hence, the instant appeal.
ISSUE:
Was the Commissioner correct in considering petitioners as having formed a partnership?
HELD:
No. It is error to consider the petitioners as having formed a partnership under Art. 1767, Civil Code
simply because they allegedly contributed money to buy the two lots, resold the same and divided the
profit among themselves. To regard the petitioners as having formed a taxable unregistered
partnership would result in oppressive taxation and confirm the dictum that the power to tax involves
the power to destroy. That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To
consider them as partners would obliterate the distinction between a co-ownership and a partnership.
The petitioners were not engaged in any joint venture by reason of that isolated transaction. Their
original purpose was to divide the lots for residential purposes. If later on they found it not feasible to
build their residences on the lots because of the high cost of construction, then they had no choice but
to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the
dissolution of the co-ownership which was in the nature of things a temporary state. It had to be
terminated sooner or later. Art. 1769(3), Civil Code provides that "the sharing of gross returns does not
of itself establish a partnership, whether or not the persons sharing them have a joint or common right
or interest in any property from which the returns are derived". There must be an unmistakable
intention to form a partnership or joint venture.
Hence, CIR was not correct.
101
NATIONAL TAXATION
Income Tax
PARTNERSHIP THUS FORMED IS LIABLE FOR THE PAYMENT OF INCOME TAX, WHEREAS IF
THERE WAS MERELY A COMMUNITY PROPERTY, THEY ARE EXEMPT FROM SUCH PAYMENT
Gatchalian v. Commissioner of Internal Revenue

G.R. No. L-45425, April 29, 1939
Imperial, J.:
FACTS:
On December 15, 1934, the plaintiffs, all 15 of them, each contributed in order to buy a sweepstakes
ticket worth Php 2.00. That immediately thereafter but prior to December 16, 1934, plaintiffs
purchased, in the ordinary course of business, from one of the duly authorized agents of the National
Charity Sweepstakes Office one ticket bearing No. 178637 for the sum of two pesos (P2) and that the
said ticket was registered in the name of Jose Gatchalian and Company.
The above-mentioned ticket bearing No. 178637 won one of the third prizes in the amount of P50,000
and that the corresponding check covering the above-mentioned prize of P50,000 was drawn by the
National Charity Sweepstakes Office in favor of Jose Gatchalian & Company against the Philippine
National Bank, which check was cashed during the latter part of December, 1934 by Jose Gatchalian
& Company. Thereafter, Jose Gatchalian was required by income tax examiner Alfredo David to file
the corresponding income tax return covering the prize won by Jose Gatchalian & Company and that
on December 29, 1934
The defendant made an assessment against Jose Gatchalian & Company requesting the payment of
the sum of P1,499.94 to the deputy provincial treasurer of Pulilan, Bulacan. The plaintiffs requested
exemption from the payment of the income tax but it was rejected. The plaintiffs paid in protest the tax
assessment given to them.
ISSUE: Did plaintiffs form a partnership, or merely a community of property without a personality of its
own?
HELD:
Plaintiffs formed a partnership. It is admitted that the partnership thus formed is liable for the payment
of income tax, whereas if there was merely a community of property, they are exempt from such
payment.
There is no doubt that if the plaintiffs merely formed a community of property the latter is exempt from
the payment of income tax under the law. But according to the stipulation facts the plaintiffs organized
a partnership of a civil nature because each of them put up money to buy a sweepstakes ticket for the
sole purpose of dividing equally the prize which they may win, as they did in fact in the amount of
P50,000 (article 1665, Civil Code). The partnership was not only formed, but upon the organization
thereof and the winning of the prize, Jose Gatchalian personally appeared in the office of the
Philippines Charity Sweepstakes, in his capacity as co-partner, as such collection the prize, the office
issued the check for P50,000 in favor of Jose Gatchalian and company, and the said partner, in the
same capacity, collected the said check. All these circumstances repel the idea that the plaintiffs
organized and formed a community of property only.
Having organized and constituted a partnership of a civil nature, the said entity is the one bound to pay
the income tax which the defendant collected under the aforesaid section 10 (a) of Act No. 2833, as
amended by section 2 of Act No. 3761. There is no merit in plaintiff's contention that the tax should be
prorated among them and paid individually, resulting in their exemption from the tax.
102
NATIONAL TAXATION
Income Tax
PAGCOR IS NO LONGER EXEMPT FROM THE PAYMENT OF INCOME TAX
PAGCOR v. BIR
G.R. No. 172087, March 15, 2011
Peralta, J.
FACTS:
PAGCOR was created pursuant to P.D. No. 1067-A. Simultaneous to its creation, P.D. No. 1067-B
(supplementing P.D. No. 1067-A) was issued exempting PAGCOR from the payment of any type of
tax, except a franchise tax of five percent (5%) of the gross revenue. On January 1, 1998, R.A. No.
8424, otherwise known as the National Internal Revenue Code of 1997, took effect. Section 27 (c) of
the same law provides that government-owned and controlled corporations (GOCCs) shall pay
corporate income tax, except PAGCOR, among others. With the enactment of R.A. No. 9337, certain
sections of R.A. No. 8424 were amended. The particular amendment that is at issue in this case is
Section 1 of R.A. No. 9337, which amended Section 27 (c) by excluding PAGCOR from the
enumeration of GOCCs that are exempt from payment of corporate income tax.
Different groups came to the Court via petitions for certiorari and prohibition assailing the validity and
constitutionality of R.A. No. 9337. On September 1, 2005, the Court dismissed all the petitions and
upheld the constitutionality of R.A. No. 9337. On the same date, respondent BIR issued Revenue
Regulations (RR) No. 16--2005, specifically identifying PAGCOR as one of the franchisees subject to
10% VAT imposed under Section 108 of the National Internal Revenue Code of 1997, as amended by
R.A. No. 9337.
ISSUES:
(1) Is PAGCOR still exempt from corporate income tax and VAT with the enactment of R.A. No. 9337?
(2) Is R.R. No. 16-2005 valid?
HELD:
(1) No, PAGCOR is no longer exempt from corporate income tax. Taxation is the rule and exemption is
the exception. The burden of proof rests upon the party claiming exemption to prove that it is, in fact,
covered by the exemption so claimed.
In this case, PAGCOR failed to prove that it is still exempt from the payment of corporate income tax,
considering that Section 1 of R.A. No. 9337 amended Section 27 (c) of the National Internal Revenue
Code of 1997 by omitting PAGCOR from the exemption. The legislative intent, as shown by the
discussions in the Bicameral Conference Meeting, is to require PAGCOR to pay corporate income tax;
hence, the omission or removal of PAGCOR from exemption from the payment of corporate income
tax. It is a basic precept of statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio
alterius. Thus, the express mention of the GOCCs exempted from payment of corporate income tax
excludes all others. Not being excepted, petitioner PAGCOR must be regarded as coming within the
purview of the general rule that GOCCs shall pay corporate income tax, expressed in the maxim:
exceptio firmat regulam in casibus non exceptis.
(2) No, R.R. No. 16-2005 is not valid. The provision subjecting PAGCOR to 10% VAT is invalid for
being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it provided that petitioner can be
subjected to VAT. R.A. No. 9337 is clear only as to the removal of petitioner's exemption from the
payment of corporate income tax.
Although R.A. No. 9337 introduced amendments to Section 108 of R.A. No. 8424 by imposing VAT on
other services not previously covered, it did not amend the portion of Section 108 (B) (3) that subjects
to zero percent rate services performed by VAT-registered persons to persons or entities whose
103
exemption under special laws or international agreements to which the Philippines is a signatory
effectively subjects the supply of such services to 0% rate.
104
NATIONAL TAXATION
Income Tax
EXTENSION OF FRANCHISE UNDER THE SAME TERMS AND CONDITIONS MEANS A

CONTINUATION OF TAX-EXEMPT STATUS
PAGCOR v. BIR
G.R. No. 215427, December 10, 2014
Peralta, J.
FACTS:
On March 15, 2011, the Court rendered a Decision (G.R. No. 172087) granting in part the petition filed
by petitioner. Both petitioner and respondent filed their respective motions for partial reconsideration,
but the samewere denied by the Court.
BIR issued RMC No. 33-2013 pursuant to the Decision dated March 15, 2011 and the Resolution
dated May 31, 2011, which clarifies the "Income Tax and Franchise Tax Due from the Philippine
Amusement and Gaming Corporation (PAGCOR), its Contractees and Licensees." PAGCOR wrote the
BIR Commissioner requesting for reconsideration of the tax treatment of its income from gaming
operations and other related operations under RMC No. 33-2013. The request was, however, denied
by the BIR Commissioner. PAGCOR filed a Motion for Clarification alleging that RMC No. 33-2013 is
an erroneous interpretation and application of the aforesaid Decision.
ISSUES:
Is PAGCOR's gaming income subject to both 5% franchise tax and corporate income tax?
HELD:
PAGCOR's income from gaming operations is subject to the five percent (5%) franchise tax only and
its income from other related services is subject to corporate income tax only.
It is worthy to note that under P.D. 1869, as amended, PAGCOR’s income is classified into two: (1)
income from its operations conducted under its Franchise, pursuant to Section 13(2) (b) thereof
(income from gaming operations); and (2) income from its operation of necessary and related services
under Section 14(5) thereof (income from other related services). Accordingly, the income tax
exemption ordained under Section 27(c) of R.A. No. 8424 clearly pertains only to petitioner’s income
from operation of related services. Such income tax exemption could not have been applicable to
petitioner’s income from gaming operations as it is already exempt therefrom under P.D. 1869, as
amended. There was no need for Congress to grant tax exemption to petitioner with respect to its
income from gaming operations as the same is already exempted from all taxes of any kind or form,
income or otherwise, whether national or local, under its Charter, save only for the five percent (5%)
franchise tax. The extension of petitioner’s franchise under the same terms and conditions means a
continuation of its tax exempt status with respect to its income from gaming operations. Given that
petitioner’s Charter is not deemed repealed or amended by R.A. No. 9337, petitioner’s income derived
from gaming operations is subject only to the five percent (5%) franchise tax, in accordance with P.D.
1869, as amended. With respect to petitioner’s income from operation of other related services, the
same is subject to income tax only.
105
NATIONAL TAXATION
Income Tax
PAYMENT OF THE 5% FRANCHISE TAX BY PAGCOR AND ITS CONTRACTEES AND

LICENSEES EXEMPTS THEM FROM PAYMENT OF ANY OTHER TAXES
Bloomberry Resorts v. BIR

G.R. No. 212530, August 10, 2016
Perez, J.
FACTS:
PAGCOR granted to Bloomberry Resorts a provisional license to establish and operate an integrated
resort and casino complex at the Entertainment City project site of PAGCOR. Petitioner and its parent
company, Sureste Properties, Inc., own and operate Solaire Resort & Casino. Thus, being one of its
licensees, petitioner only pays PAGCOR license fees, in lieu of all taxes, as contained in its provisional
license and consistent with the PAGCOR Charter which provides the exemption from taxes of persons
or entities contracting with PAGCOR in casino operations. R.A. No. 9337 amended Section 27(C) of
the NIRC of 1997, which excluded PAGCOR from the enumeration of government-owned or controlled
corporations (GOCCs) exempt from paying corporate income tax. In implementing the amendments,
BIR issued RMC No. 33-2013 declaring, among others, that PAGCOR's contractees and licensees,
being entities duly authorized and licensed by it to perform gambling casinos, gaming clubs and other
similar recreation or amusement places, and gaming pools, are likewise subject to income tax under
the NIRC of 1997, as amended.
Since the assailed provision in RMC No. 33-2013 subjecting the contractees and licensees of
PAGCOR to income tax under the NIRC of 1997, as amended, contravenes the provision of the
PAGCOR Charter granting tax exemptions to corporations, associations, agencies, or individuals with
whom PAGCOR has any contractual relationship in connection with the operations of the casinos
authorized to be conducted under the PAGCOR Charter, it is petitioner's position that the assailed
provision was issued by respondent CIR with grave abuse of discretion amounting to lack or excess of
jurisdiction. Noticeably, the Court in the 2014 case of PAGCOR v. BIR intentionally did not rule on the
issue of whether or not PAGCOR's tax privilege of paying only the 5% franchise tax in lieu of all other
taxes inures to the benefit of third parties with contractual relationship with it in connection with the
operation of casinos, such as petitioner herein.
ISSUES:
Does PAGCOR's privilege of paying only 5% franchise tax inure to the benefit of its contractees and
licensees?
HELD:
Yes, the tax privilege extends to its contractees and employees. Section 13 of PD No. 1869 evidently
states that payment of the 5% franchise tax by PAGCOR and its contractees and licensees exempts
them from payment of any other taxes, including corporate income tax. The provision providing for the
said exemption was neither amended nor repealed by any subsequent laws (i.e. Section 1 of R.A. No.
9337 which amended Section 27(C) of the NIRC of 1997); thus, it is still in effect.
As the PAGCOR Charter states in unequivocal terms that exemptions granted for earnings derived
from the operations conducted under the franchise specifically from the payment of any tax, income or
otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and extend to
corporation(s), association(s), agency(ies), or individual(s) with whom the PAGCOR or operator has
any contractual relationship in connection with the operations of the casino(s) authorized to be
conducted under this Franchise, so it must be that all contractees and licensees of PAGCOR, upon
payment of the 5% franchise tax, shall likewise be exempted from all other taxes, including corporate
income tax realized from the operation of casinos.
Guided by the doctrinal teachings in resolving the case at bench, it is without a doubt that, like
PAGCOR, its contractees and licensees remain exempted from the payment of corporate income tax
and other taxes since the law is clear that said exemption inures to their benefit.
106
NATIONAL TAXATION
Income Tax
TAX CREDIT PURSUANT TO TAX TREATIES MUST BE PROVEN IF PREFERENTIAL RATE IS

SOUGHT TO BE AVAILED OF ON TAXES IMPOSED UPON ROYALTIES
Commissioner of Internal Revenue v. S.C. Johnson and CA

G.R. No. 127105, June 25, 1999
Gonzaga-Reyes, J.
FACTS:
This is a Petition for Review on Certiorari under Rule 45 seeking to set aside the decision of the CTA
ordering the CIR to issue a tax credit certificate in favor of respondent SC Johnson, a domestic corporation,
representing the overpaid withholding tax on royalty payments, beginning July 1992 to May 1993.
By virtue of a license agreement entered by SC Johnson and SC Johnson and Son-USA, SC Johnson was
granted the right to use the trademark, patents and technology owned by the SC Johnson-USA. The license
agreement was duly registered with the Technology Transfer Board of the Bureau of Patents, Trade Marks
and Technology Transfer. For the use of the trademark or technology, SC Johnson was obliged to pay SC
Johnson-USA royalties based on a percentage of net sales and subjected to 25% withholding tax on royalty
payments which SC Johnson paid for the period covering July 1992 to May 1993. Thereafter, SC Johnson
filed with the International Tax Affairs Division of the BIR a claim for refund of overpaid withholding tax on
royalties arguing that that since the agreement was approved by the Technology Transfer Board, the “most
favored nation” preferential tax rate of 10% should apply to them.
The CIR did not act on said claim for refund, prompting respondent to file a petition for review before the
CTA to claim a refund of the overpaid withholding tax on royalty payments. The CTA ruled in favor of
respondent and issued the contested order, Hence, this petition for review.
ISSUE: Is respondent entitled to the tax rate of 10% on royalties as provided in the RP-US Tax Treaty in
relation to the RP-West Germany Tax Treaty?
HELD:
No. The rate of 10% provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed
upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar
circumstances. This would mean that private respondent must prove that the RP-US Tax Treaty grants
similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties earned
from sources within the Philippines as those allowed to their German counterparts under the RP-Germany
Tax Treaty.The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax
crediting. The most favored nation clause is intended to establish the principle of equality of international
treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges
accorded by either party to those of the most favored nation. The essence of the principle is to allow the
taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of
residence of such taxpayer is also a party provided that the subject matter of taxation, in this case royalty
income, is the same as that in the tax treaty under which the taxpayer is liable.
The Court accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax
credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany
Tax Treaty, private respondent cannot be deemed entitled to the 10% rate granted under the latter treaty for
the reason that there is no payment of taxes on royalties under similar circumstances.
The purpose of these international agreements is to reconcile the national fiscal legislations of the
contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. In
negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a
part of the tax in the expectation that the tax given up for this particular investment is not taxed by the other
country. It bears stressing that tax refunds are in the nature of tax exemptions. As such they are regarded
as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity
claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must
be able to justify his claim by the clearest grant of organic or statute law. Private respondent is claiming for a
refund of the alleged overpayment of tax on royalties; however, there is nothing on record to support a claim
107
that the tax on royalties under the RP-US Tax Treaty is paid under similar circumstances as the tax on
royalties under the RP-West Germany Tax Treaty.
108
NATIONAL TAXATION
Income Tax
AN INTERNATIONAL CARRIER WHICH HAS APPOINTED A TICKET SALES AGENT IN THE

PHILIPPINES, ALTHOUGH IT DOES NOT OPERATE ANY AIRPLANE IN THE PHILIPPINES, IS A
RESIDENT FOREIGN CORPORATION
GROSS INCOME DEFINITION IS BROAD ENOUGH TO INCLUDE PROCEEDS FROM SALES OF

AIRLINE TICKETS IN THE PHILIPPINES EVEN IF NO SERVICE OR AIRLIFTING OF PASSENGER
OR CARGO BY AN AIRLINE IS DONE BY ITS PLANES IN THE PHILIPPINES
Commissioner of Internal Revenue v. British Overseas Airways Corporation

G.R. No. L-65773-74, April 30, 1987
Melencio-Herrera, J.
FACTS:
The Commissioner of Internal Revenue assessed deficiency income taxes against British Overseas
Airways Corporation for the fiscal years 1959 to 1967, 1968-69 to 1970-71. During the periods covered
by the assessments, it is admitted that BOAC had no landing rights for traffic purposes in the
Philippines, and was not granted a Certificate of public convenience and necessity to operate in the
Philippines, except for a nine-month period, partly in 1961 and partly in 1962, when it was granted a
temporary landing permit by the CAB. Consequently, it did not carry passengers and/or cargo to or
from the Philippines, although during the period covered by the assessments, it maintained a general
sales agent in the Philippines — Wamer Barnes and Company, Ltd., and later Qantas Airways —
which was responsible for selling BOAC tickets covering passengers and cargoes. Said general sales
agent, from 1959 to 1971, was engaged in (1) selling and issuing tickets; (2) breaking down the whole
trip into series of trips — each trip in the series corresponding to a different airline company; (3)
receiving the fare from the whole trip; and (4) consequently allocating to the various airline companies
on the basis of their participation in the services rendered through the mode of interline settlement as
prescribed by Article VI of the Resolution No. 850 of the IATA Agreement.
ISSUES:
(1) Is BOAC a resident foreign corporation doing business in the Philippines?
(2) Does the revenue derived by BOAC from sales of tickets in the Philippines for air transportation,
while having no landing rights here, constitute income of BOAC from Philippine sources?
HELD:
(1) Yes, BOAC is a resident foreign corporation doing business in the Philippines. There is no specific
criterion as to what constitutes "doing" or "engaging in" or "transacting" business. The term implies a
continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the purpose and object of the business organization.
In order that a foreign corporation may be regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous business, such as the appointment of a
local agent, and not one of a temporary character.
BOAC's activities were in exercise of the functions which are normally incident to, and are in
progressive pursuit of, the purpose and object of its organization as an international air carrier. In fact,
the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation
of sales being the paramount objective. There should be no doubt then that BOAC was "engaged in"
business in the Philippines through a local agent during the period covered by the assessments.
Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the
preceding taxable year from all sources within the Philippines.
(2) Yes, it constitutes income within. The source of an income is the property, activity or service that
produced the income. For the source of income to be considered as coming from the Philippines, it is
sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of
tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here
109
and payments for fares were also made here in Philippine currency. The site of the source of
payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine
territory, enjoying the protection accorded by the Philippine government.
The absence of flight operations to and from the Philippines is not determinative of the source of
income or the site of income taxation. Admittedly, BOAC was an off-line international airline at the time
pertinent to this case. The test of taxability is the "source" and the source of an income is that activity
which produced the income. Unquestionably, the passage documentations in these cases were sold in
the Philippines and the revenue therefrom was derived from a activity regularly pursued within the
Philippines.
110
NATIONAL TAXATION
Income Tax
GROSS PHILIPPINE BILLINGS; RESIDENT FOREIGN CORPORATION; TAX TREATY
Air Canada v. Commissioner of Internal Revenue

G.R. No. 169507, January 11, 2016
Leonen, J.
FACTS:
On April 24, 2000, the Civil Aeronautics Board granted AC, a foreign corporation, an authority to
operate as an offline carrier, which is to expire after 5 years (2005). As an off-line carrier, it can neither
have flights from, nor can it operate any airplane in, the Philippines. In 1999, AC engaged the services
of Aerotel as general sales agent in the Philippines, selling its passage documents therein. AC filed
quarterly and annual income tax returns on Gross Philippine Billings (GPB) in the amount of
P5,185,676.77. On Nov. 28, 2002, AC filed a written claim for refund of alleged erroneously paid taxes,
saying that NIRC imposes taxes on GPB for carriage by foreign corporations in a continuous and
uninterrupted flight, irrespective of the place of sale and payment of the ticket or passage document.
CTA Division denied the Petition for Review on the ground that AC shall be taxed as a resident foreign
since it has a local agent in the Philippines; that even if it shall not be taxed on its GPB, it shall
nevertheless be subject to the regular corporate income tax of 32% for the income received from the
sale of tickets in the Philippines.
In this petition, AC contends that the Republic of the Philippines failed to apply the RP-Canada Tax
Treaty which imposes the maximum ceiling of 1 1/2% tax on gross revenues acquired by foreign
corporations engaged in business in the Philippines.
ISSUES:
(1) Shall the petitioner be subject to tax on Gross Philippine Billings under Sec. 28 (A)(3) of NIRC?
(2) Shall the petitioner be subject to the corporate income tax under Sec. 28 (A)(1) of NIRC?
HELD:
(1) No. The tax attaches only when the carriage of persons, excess baggage, cargo, and mail
originated from the Philippines in a continuous and uninterrupted flight, regardless of where the
passage documents were sold. Not having flights to and from the Philippines, petitioner is clearly not
liable for the Gross Philippine Billings tax.
This is without saying that AC is not a resident foreign corporation. All amendments of the NIRC
defines it as "a foreign corporation engaged in trade or business within the Philippines," under which
AC falls. In order that a foreign corporation may be regarded as doing business within a State, there
must be continuity of conduct and intention to establish a continuous business, such as the
appointment of a local agent, and not one of a temporary character. Aerotel performs acts or works or
exercises functions that are incidental and beneficial to the purpose of AC's business. The activities of
Aerotel bring direct receipts or profits to petitioner. Aerotel cannot "enter into any contract on behalf of
AC without the express written consent of the latter, and it must perform its functions according to the
standards required by petitioner. Through Aerotel, AC is able to engage in an economic activity in the
Philippines.
(2) Yes, but on a different rate because there is a tax treaty that must be taken into consideration to
determine the proper tax rate.
A tax treaty is an agreement entered into between sovereign states "for purposes of eliminating double
taxation on income and capital, preventing fiscal evasion, promoting mutual trade and investment, and
according fair and equitable tax treatment to foreign residents or nationals." Pacta sunt servanda is a
fundamental international law principle that requires agreeing parties to comply with their treaty
obligations in good faith.
111
As stipulated, the treaty binds a person acting in a contracting state on behalf of an enterprise of the
contracting state, and is considered a permanent establishment if he has and habitually exercises an
authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the
purchase of goods or merchandise for the enterprise. Through the appointment of Aerotel as its local
sales agent, AC is deemed to have created a "permanent" establishment" in the Philippines as defined
under the Republic of the Philippines-Canada Tax Treaty.
Hence, while AC is taxable as a resident foreign corporation under Section 28(A)(1) of the 1997
National Internal Revenue Code on its taxable income from sale of airline tickets in the Philippines, it
could only be taxed at a maximum of 1 1/2% of gross revenues, pursuant to Article VIII of the Republic
of the Philippines-Canada Tax Treaty. AC’s income from sale of ticket for international carriage of
passenger is income derived from international operation of aircraft. The sale of tickets is closely
related to the international operation of aircraft that it is considered incidental thereto.
112
NATIONAL TAXATION
Income Tax
INTERNATIONAL AIR CARRIERS WHICH DO NOT MAINTAIN FLIGHT TO AND FROM THE
PHILIPPINES SHALL BE TAXED AT 32% OF ITS INCOME FROM OTHER ACTIVITIES IN THE
COUNTRY
United Airlines, Inc. v. Commissioner of Internal Revenue

G.R. No. 178788, September 29, 2010
Villarama, Jr., J.
FACTS:
UA was a foreign corporation which used to be an online international carrier of passenger and cargo.
Upon cessation of its passenger flights in and out of the Philippines beginning February 21, 1998, UA
appointed a sales agent in the Philippines -- Aerotel Ltd. Corp., an independent general sales agent.
UA continued operating cargo flights from the Philippines until January 31, 2001. In 2002, UA sought
to refund the total amount of P15,916,680.69 pertaining to income taxes paid on gross passenger and
cargo revenues for the taxable years 1999 to 2001. Citing the change in definition of Gross Philippine
Billings (GPB) in the NIRC, UA argued that since it no longer operated passenger flights originating
from the Philippines beginning February 21, 1998, its passenger revenue for 1999, 2000 and 2001
cannot be considered as income from sources within the Philippines, and hence should not be subject
to Philippine income tax under Article 9 of the RP-US Tax Treaty. CTA Division denied the claim, and
CTA En Banc affirmed the decision.
UA asserts that under the new definition of GPB under the 1997 NIRC and Article 4(7) of the RP-US
Tax Treaty, Philippine tax authorities have jurisdiction to tax only the gross revenue derived by US air
and shipping carriers from outgoing traffic in the Philippines, and that as of 1998 it no longer flew
passenger flights to and from the Philippines.
ISSUE:
Is the petitioner entitled to a refund of the income tax paid in 1999?
HELD:
No. As correctly pointed out by petitioner, inasmuch as it ceased operating passenger flights to or from
the Philippines in 1998, it is not taxable under Section 28(A)(3)(a) of the NIRC for gross passenger
revenues. If an international air carrier maintains flight to and from the Philippines, it shall be taxed at
the rate of 2 ½% of its Gross Philippine Billings while international air carriers that do not have flights to
and from the Philippines but nonetheless earn income from other activities in the country will be taxed
at the rate of 32% of such income.
Here, the subject of claim for tax refund is the tax paid on passenger revenue for taxable year 1999 at
the time when petitioner was still operating cargo flights originating from the Philippines although it had
ceased passenger flight operations. The CTA found that petitioner had underpaid its GPB tax for 1999
because petitioner had made deductions from its gross cargo revenues in the income tax return it filed
for the taxable year 1999, the amount of underpayment even greater than the refund sought for
erroneously paid GPB tax on passenger revenues for the same taxable period. Hence, the CTA ruled
petitioner is not entitled to a tax refund. Under Section 72 of the NIRC, the CTA can make a valid
finding that petitioner made erroneous deductions on its gross cargo revenue; that because of the
erroneous deductions, petitioner reported a lower cargo revenue and paid a lower income tax thereon;
and that petitioner's underpayment of the income tax on cargo revenue is even higher than the income
tax it paid on passenger revenue subject of the claim for refund, such that the refund cannot be
granted.
113
NATIONAL TAXATION
Income Tax
GROSS PHILIPPINE BILLINGS
South African Airways v. Commissioner of Internal Revenue

G.R. No. 180356, February 16, 2010
Velasco, Jr., J.
FACTS:
The petitioner is a foreign corporation which was not registered with SEC and is not licensed to do
business in the Philippines. It appointed Aerotel Ltd. Corp. as its independent general sales agent
which sells passage documents for compensation for the petitioner’s off-line flights for the carriage of
passengers and cargo between ports outside the territorial jurisdiction of the Philippines. It filed a claim
for refund of the amount of P1,727,766.38 as erroneously paid tax on Gross Philippine Billings for the
taxable year 2000. CTA Division denied the claim, saying that the petitioner is a resident foreign
corporation engaged in trade or business in the Philippines.
ISSUE:
Is the petitioner subject to income tax?
HELD:
Yes. The 1977 NIRC previously defines Gross Philippine Billings as gross revenue realized from uplifts
anywhere in the world by any international carrier doing business in the Philippines of passage
documents sold therein, whether for passenger, excess baggage or mail, provided the cargo or mail
originates from the Philippines. However, it has been changed to gross revenue derived from carriage
of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or
passage document. Now, the place of sale is irrelevant as long as the uplifts are to or from the
Philippines.
The general rule is that resident foreign corporations shall be liable for a 32% income tax on their
income from within the Philippines, except for resident foreign corporations that are international
carriers that derive income "from carriage of persons, excess baggage, cargo and mail originating from
the Philippines" which shall be taxed at 2 1/2% of their Gross Philippine Billings. Petitioner, being an
international carrier with no flights originating from the Philippines, does not fall under the exception.
As such, petitioner must fall under the general rule. If an international air carrier maintains flights to
and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while
international air carriers that do not have flights to and from the Philippines but nonetheless earn
income from other activities in the country will be taxed at the rate of 32% of such income.
114
NATIONAL TAXATION
Income Tax
PREFERENTIAL RATE OF 10% BPRT BY VIRTUE OF RP-GERMANY TAX TREATY
Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue

G.R. No. 188550, August 19, 2013
Sereno, J.
FACTS:
Petitioner withheld and remitted to respondent the amount of P67,688,553.51 which represented 15%
branch profit remittance tax (BPRT) on its regular banking unit (RBU) net income remitted to Deutsche
Bank Germany. Believing it made an overpayment, petitioner filed with the BIR Large Taxpayers
Assessment and Investigation Division an administrative claim for refund or issuance of its tax credit
certificate in the total amount of PHP 22,562,851.17. On the same date, petitioner requested from the
International Tax Affairs Division (ITAD) a confirmation of its entitlement to the preferential tax rate of
10% under the RP-Germany Tax Treaty.
Alleging the inaction of the BIR on its administrative claim, petitioner filed a Petition for Review with the
CTA. However, the claim of petitioner for a refund was denied on the ground that the application for a
tax treaty relief was not filed with ITAD prior to the payment by the former of its BPRT and actual
remittance of its branch profits to DB Germany, or prior to its availment of the preferential rate of ten
percent (10%) under the RP-Germany Tax Treaty provision. The court a quo held that petitioner
violated the fifteen (15) day period mandated under Section III paragraph (2) of Revenue
Memorandum Order (RMO) No. 1-2000.
ISSUE: Is petitioner entitled to refund?
HELD:
Yes. Under Section 28(A)(5) of the NIRC, any profit remitted to its head office shall be subject to a tax
of 15% based on the total profits applied for or earmarked for remittance without any deduction of the
tax component. However, petitioner invokes paragraph 6, Article 10 of the RP-Germany Tax Treaty,
which provides that where a resident of the Federal Republic of Germany has a branch in the Republic
of the Philippines, this branch may be subjected to the branch profits remittance tax withheld at source
in accordance with Philippine law but shall not exceed 10% of the gross amount of the profits remitted
by that branch to the head office.
By virtue of the RP-Germany Tax Treaty, we are bound to extend to a branch in the Philippines,
remitting to its head office in Germany, the benefit of a preferential rate equivalent to 10% BPRT. The
BIR must not impose additional requirements that would negate the availment of the reliefs provided
for under international agreements. More so, when the RP-Germany Tax Treaty does not provide for
any pre-requisite for the availment of the benefits under said agreement.
Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which would indicate a
deprivation of entitlement to a tax treaty relief for failure to comply with the 15-day period. We
recognize the clear intention of the BIR in implementing RMO No. 1-2000, but the CTA’s outright
denial of a tax treaty relief for failure to strictly comply with the prescribed period is not in harmony with
the objectives of the contracting state to ensure that the benefits granted under tax treaties are
enjoyed by duly entitled persons or corporations.
It is significant to emphasize that petitioner applied – though belatedly – for a tax treaty relief, in
substantial compliance with RMO No. 1-2000. A ruling by the BIR would have confirmed whether
petitioner was entitled to the lower rate of 10% BPRT pursuant to the RP-Germany Tax Treaty.
Petitioner is liable to pay only the amount of PHP 45,125,702.34 on its RBU net income amounting to
PHP 451,257,023.29 for 2002 and prior taxable years, applying the 10% BPRT. Thus, it is proper to
grant petitioner a refund of the difference between the PHP 67,688,553.51 (15% BPRT) and PHP
45,125,702.34 (10% BPRT) or a total of PHP 22,562,851.17.
115
NATIONAL TAXATION
Income Tax
TAX BASE OF THE 15% BPRT IS IMPOSED ON THE PROFIT ACTUALLY REMITTED ABROAD
Commissioner of Internal Revenue v. Burroughs Ltd.

G.R. No. L-66653, June 19, 1986
Paras, J.
FACTS:
Petition for certiorari to review and set aside the Decision dated June 27, 1983 of respondent Court of
Tax Appeals in its C.T.A. Case No. 3204, entitled "Burroughs Limited vs. Commissioner of Internal
Revenue" which ordered petitioner Commissioner of Internal Revenue to grant in favor of private
respondent Burroughs Limited, tax credit in the sum of P172,058.90, representing erroneously
overpaid branch profit remittance tax.
Burroughs Limited is a foreign corporation authorized to engage in trade or business in the Philippines
through a branch office located at De la Rosa corner Esteban Streets, Legaspi Village, Makati, Metro
Manila. Claiming that the 15% profit remittance tax should have been computed on the basis of the
amount actually remitted (P6,499,999.30) and not on the amount before profit remittance tax
(P7,647,058.00), private respondent filed on December 24, 1980, a written claim for the refund or tax
credit of the amount of P172,058.90 representing alleged overpaid branch profit remittance tax.
CTA rendered decision ordering CIR to grant a tax credit in favor of Burroughs Ltd. Unable to obtain a
reconsideration from the aforesaid decision, petitioner filed the instant petition before this Court with
the prayers as herein earlier stated upon the sole issue of whether the tax base upon which the 15%
branch profit remittance tax shall be imposed under the provisions of section 24(b) of the Tax Code, as
amended, is the amount applied for remittance on the profit actually remitted after deducting the 15%
profit remittance tax.
ISSUE: Is Burroughs Limited legally entitled to a refund of the amount of P172,058.90?
HELD:
Yes. Burroughs Limited is legally entitled to a refund of the aforementioned amount of P172,058.90.
Under Section 24(b) (2) of the Tax Code the 15% branch profit remittance tax shall be imposed on the
profit actually remitted abroad and not on the total branch profit out of which the remittance is to be
made. Also, in a Bureau of Internal Revenue ruling dated January 21, 1980 by then Acting
Commissioner of Internal Revenue Hon. Efren I. Plana the aforequoted provision had been interpreted
to mean that "the tax base upon which the 15% branch profit remittance tax . . . shall be imposed . . .
(is) the profit actually remitted abroad and not on the total branch profits out of which the remittance is
to be made."
Based on such ruling petitioner should have paid only the amount of P974,999.89 in remittance tax
computed by taking the 15% of the profits of P6,499.89 in remittance tax actually remitted to its head
office in the United States, instead of P1,147,058.70 on its net profit of P7,647,058.00. Undoubtedly,
petitioner has overpaid its branch profit remittance tax in the amount of P172,058.90.
The assailed decision of respondent Court of Tax Appeals is affirmed and CIR is obliged to grant a tax
credit in favor of Burroughs Ltd.
116
NATIONAL TAXATION
Income Tax
WHEN THE FOREIGN CORPORATION TRANSACTS BUSINESS IN THE PHILIPPINES

INDEPENDENTLY OF ITS BRANCH, THE TRANSACTION BECOMES ONE OF THE FOREIGN
CORPORATION, NOT OF THE BRANCH AND THE FORMER IS THE TAXPAYER
Marubeni Corp. v. Commissioner of Internal Revenue

G.R. No. 76573, September 14, 1989
Fernan, C.J.
FACTS:
Marubeni Corporation of Japan has equity investments in AG&P of Manila. For the first quarter of 1981
ending March 31, AG&P declared and paid cash dividends to petitioner in the amount of P849,720 and
withheld the corresponding 10% final dividend tax thereon. Similarly, for the third quarter of 1981
ending September 30, AG&P declared and paid P849,720 as cash dividends to petitioner and withheld
the corresponding 10% final dividend tax thereon.
AG&P directly remitted the cash dividends to petitioner's head office in Tokyo the 10% final dividend
tax in the amounts of P764,748 for the first and third quarters of 1981,and also the withheld 15% profit
remittance tax based on the remittable amount after deducting the final withholding tax of 10%. A
schedule of dividends declared and paid by AG&P to its stockholder Marubeni Corporation of Japan,
the 10% final intercorporate dividend tax and the 15% branch profit remittance tax paid thereon
The 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of P114,712.20 for the
first quarter of 1981 were paid to the BIR by AG&P on April 20, 1981 under Central Bank Receipt No.
6757880. Likewise, the 10% final dividend tax of P84,972 and the 15% branch profit remittance tax of
P114,712 for the third quarter of 1981 were paid to the BIR on August 4, 1981 under Central Bank
Confirmation Receipt No. 7905930.
Thus, for the first and third quarters of 1981, AG&P as withholding agent paid 15% branch profit
remittance on cash dividends declared and remitted to petitioner at its head office in Tokyo in the total
amount of P229,424.40 on April 20 and August 4, 1981. The petitioner, in a letter, sought a ruling from
the BIR on whether or not the dividends petitioner received from AG&P are effectively connected with
its conduct or business in the Philippines as to be considered branch profits subject to the 15% profit
remittance tax imposed under Section 24 (b) (2) of the NIRC as amended by PD Nos. 1705 and 1773.
Acting Commissioner Ruben Ancheta ruled that the dividends received by Marubeni from AG&P are
not income arising from the business activity in which Marubeni is engaged. Accordingly, said
dividends if remitted abroad are not considered branch profits for purposes of the 15% profit
remittance tax imposed by Section 24 (b) (2) of the Tax Code, as amended.
Consequently, petitioner claimed for the refund or issuance of a tax credit of P229,424.40
"representing profit tax remittance erroneously paid on the dividends remitted by AG&P on April 20
and August 4, 1981 to the head office in Tokyo. CIR denied. Petitioner appealed to the Court of Tax
Appeals which affirmed the denial of the refund by the CIR. Hence, the instant petition for review.
ISSUES:
(1) Is Marubeni Japan a resident foreign corporation?
(2) What is the tax rate applicable to Marubeni Japan?
HELD:
(1) Marubeni Japan is a non-resident foreign corporation. The general rule that a foreign corporation is
the same juridical entity as its branch office in the Philippines cannot apply here. This rule is based on
the premise that the business of the foreign corporation is conducted through its branch office,
following the principal agent relationship theory. It is understood that the branch becomes its agent
here. So that when the foreign corporation transacts business in the Philippines independently of its
branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign
117
corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or
the resident foreign corporation.
Corollarily, if the business transaction is conducted through the branch office, the latter becomes the
taxpayer, and not the foreign corporation. In other words, the alleged overpaid taxes were incurred for
the remittance of dividend income to the head office in Japan which is a separate and distinct income
taxpayer from the branch in the Philippines. There can be no other logical conclusion considering the
undisputed fact that the investment (totaling 283.260 shares including that of nominee) was made for
purposes peculiarly germane to the conduct of the corporate affairs of Marubeni, Japan, but certainly
not of the branch in the Philippines.
(2) Petitioner, being a non-resident foreign corporation with respect to the transaction in question, the
applicable provision of the Tax Code is Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan
Treaty of 1980.
Proceeding to apply the above section to the case at bar, petitioner, being a non-resident foreign
corporation, as a general rule, is taxed 35 % of its gross income from all sources within the Philippines.
[Section 24 (b) (1)]. However, a discounted rate of 15% is given to petitioner on dividends received
from a domestic corporation (AG&P) on the condition that its domicile state (Japan) extends in favor of
petitioner, a tax credit of not less than 20 % of the dividends received. This 20 % represents the
difference between the regular tax of 35 % on non-resident foreign corporations which petitioner would
have ordinarily paid, and the 15 % special rate on dividends received from a domestic corporation.
118
NATIONAL TAXATION
Income Tax
NET CAPITAL GAIN OF A NON-RESIDENT FOREIGN COMPANY IS NOT AN ACCUMULATED

DIVIDENDS IN ARREARS SUBJECTED TO 15% FINAL WITHHOLDING TAX
Commissioner of Internal Revenue v. Goodyear Philippines, Inc.

G.R. No. 216130, August 3, 2016
Perlas-Bernabe, J.
FACTS:
Goodyear Tire and Rubber Company (GTRC), a foreign company organized and existing under the
laws of the State of Ohio, United States of America (US) and is unregistered in the Philippines, solely
and exclusively subscribed to all the preferred shares of Goodyear. On October 15, 2008, GTRC
received P97,732,314.00 as redemption price when Goodyear redeemed GTRC’s 3,729,216 preferred
shares. Goodyear then filed an application on the same date for relief from double taxation before the
International Tax Affairs Division of the BIR to confirm that the redemption was not subject to
Philippine income tax, pursuant to the Republic of the Philippines (RP) - US Tax Treaty.
On November 3, 2008, Goodyear, however, still withheld and remitted P14,659,847.10 to the
BIR representing fifteen percent (15%) Final Withholding Tax (FWT), computed based on the
difference of the redemption price and aggregate par value of the shares. Goodyear later filed an
administrative claim for refund or issuance of TCC, representing 15% FWT before the BIR. Goodyear
filed a judicial claim, by way of petition for review, before the CTA, which ruled that absent any law
which specifically treats the gain derived by GTRC as dividends, the same could not be subjected to
15% FWT under Section 28 (B) (5) (b). The CTA En Banc affirmed the findings of the CTA Division.
The CIR contended that GTRC’s net capital gain from the redemption of its 3,729,216 preferred shares
should be subject to 15% FWT on dividends; that while the payment of the original subscription price
could not be taxed as it represented a return of capital, the additional amount, however, or the
component of the redemption price representing the amount of P97,732,314.00 should not be treated
as a mere premium and part of the subscription price, but as accumulated dividend in arrears, and,
hence, subject to 15% FWT.
ISSUE: Should the P97,732,314.00 net capital gain of GTRC be treated as accumulated dividend in
arrears which is subject to 15% FWT on dividends, in accordance with Section 28 (B) (5) (b) of the Tax
Code?
HELD:
No, the P97,732,314.00 net capital gain of GTRC should not be treated as accumulated dividend in
arrears which is subject to 15% FWT on dividends, in accordance with Section 28 (B) (5) (b) of the Tax
Code.
The imposition of 15% FWT on intercorporate dividends received by a non-resident foreign corporation
is found in Section 28 (B) (5) (b) of the Tax Code. It must be noted, however, that GTRC is a non-
resident foreign corporation, specifically a resident of the US. Thus, pursuant to the cardinal principle
that treaties have the force and effect of law in this jurisdiction, the RP-US Tax Treaty complementarily
governs the tax implications of respondent's transactions with GTRC. Under Article 11 (5) of the RP-
US Tax Treaty, the term "dividends" should be understood according to the taxation law of the State in
which the corporation making the distribution is a resident, which, in this case, pertains to respondent,
a resident of the Philippines. Accordingly, attention should be drawn to the statutory definition of what
constitutes "dividends," pursuant to Section 73 (A) of the Tax Code which provides that "[t]he term
'dividends' x x x means any distribution made by a corporation to its shareholders out of its earnings or
profits and payable to its shareholders, whether in money or in other property." It is also worth
mentioning that one of the primary features of an ordinary dividend is that the distribution should be in
the nature of a recurring return on stock which, however, does not obtain in this case. As aptly pointed
out by the CTA En Banc, the amount of P97,732,314.00 received by GTRC did not represent a
119
periodic distribution of dividend, but rather a payment by respondent for the redemption47 of GTRC's
3,729,216 preferred shares. In Wise & Co., Inc. v. Meer: The amounts thus distributed among the
plaintiffs were not in the nature of a recurring return on stock — in fact, they surrendered and
relinquished their stock in return for said distributions, thus ceasing to be stockholders of the
Hongkong Company, which in turn ceased to exist in its own right as a going concern during its more
or less brief administration of the business as trustee for the Manila Company, and finally disappeared
even as such trustee. "The distinction between a distribution in liquidation and an ordinary dividend
is factual; the result in each case depending on the particular circumstances of the case and the intent
of the parties. If the distribution is in the nature of a recurring return on stock it is an ordinary dividend.
However, if the corporation is really winding up its business or recapitalizing and narrowing its
activities, the distribution may properly be treated as in complete or partial liquidation and as payment
by the corporation to the stockholder for his stock. The corporation is, in the latter instances, wiping out
all parts of the stockholders' interest in the company.
Therefore, the redemption price representing the amount of P97,732,314.00 received by GTRC could
not be treated as accumulated dividends in arrears that could be subjected to 15% FWT.
120
NATIONAL TAXATION
Income Tax
15% DIVIDEND TAX RATE IS APPLIED IF THE DOMICILE OF THE FOREIGN CORPORATION
GRANTS IT A 20% TAX CREDIT
Commissioner of Internal Revenue v. Procter and Gamble

G.R. No. L-66838, December 2, 1991
Feliciano, J.
FACTS:
Procter and Gamble Philippines is a wholly owned subsidiary of Procter and Gamble USA (P&G USA),
a non-resident foreign corporation in the Philippines. P&G PH declared dividends amounting to
P24.1M, payable to its parent company and sole stockholder, P&G USA.P&G PH paid a 35% dividend
withholding tax to the BIR which amounted to P8.3M. It subsequently filed a claim with the
Commissioner of Internal Revenue for a refund or tax credit, claiming that pursuant to the tax-sparing
provision of Section 24(b)(1) of the NIRC, the applicable rate of withholding tax on the dividends
remitted was only 15%.
ISSUE: Is P&G PH entitled to the 15% preferential tax rate on dividends declared and remitted to its
parent corporation?
HELD:
YES. Section 24 (b) (1) of the NIRC: (1) Non-resident corporation. — A foreign corporation not
engaged in trade and business in the Philippines, . . ., shall pay a tax equal to 35% of the gross
income receipt during its taxable year from all sources within the Philippines, as . . . dividends . .
. Provided, still further, that on dividends received from a domestic corporation liable to tax under this
Chapter, the tax shall be 15% of the dividends, which shall be collected and paid as provided in
Section 53 (d) of this Code, subject to the condition that the country in which the non-resident foreign
corporation, is domiciled shall allow a credit against the tax due from the non-resident foreign
corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which represents
the difference between the regular tax (35%) on corporations and the tax (15%) on dividends as
provided in this Section . . .
The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident
corporate stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country of
domicile of the foreign stockholder corporation "shall allow" such foreign corporation a tax credit for
"taxes deemed paid in the Philippines," applicable against the tax payable to the domiciliary country by
the foreign stockholder corporation. In other words, in the instant case, the reduced fifteen percent
(15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for "taxes
deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC specifies that
such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount
equivalent to 20% which represents the difference between the regular 35% dividend tax rate and the
preferred 15% dividend tax rate.
It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed
paid" tax credit for the dividend tax (20%) waived by the Philippines in making applicable the preferred
divided tax rate of 15%. In other words, our NIRC does not require that the US tax law deem the
parent-corporation to have paid the 20% dividend tax waived by the Philippines. The NIRC only
requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to
the 20% waived by the Philippines.
121
NATIONAL TAXATION
Income Tax
TAX SPARING CREDIT APPLIES IF THE COUNTRY OF THE PARENT CORPORATION ALLOWS
A FOREIGN TAX CREDIT
Commissioner of Internal Revenue v. Wander Philippines

G.R. No. L-68375, April 15, 1988
Bidin, J.
FACTS:
Wander Philippines, Inc. is a domestic corporation and a wholly-owned subsidiary of the Glaro S.A.
Ltd. (Glaro), a Swiss corporation not engaged in trade or business in the Philippines. Wander remitted
dividends to Glaro, from which 35% tax was withheld and paid to the BIR. Wander then filed a claim for
reimbursement, contending that it is liable only for 15% withholding tax in accordance with Sec. 24 (b)
(1) of the NIRC. It appears that Switzerland, the country where Glaro is domiciled, does not impose
any income tax on dividends received by Swiss corporations from corporations domiciled in foreign
countries. Petitioner, on the other hand, avers that the tax sparing credit is applicable only if the
country of the parent corporation allows a foreign tax credit not only for the 15 percentage-point portion
actually paid but also for the equivalent twenty percentage point portion spared, waived or otherwise
deemed as if paid in the Philippines.
ISSUE: Did Switzerland’s non-imposition of tax on dividends comply with the 20% tax credit condition?
HELD:
YES. Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the law involved in this
case, reads:
(b) Tax on foreign corporations. — 1) Non-resident corporation. A foreign corporation not engaged in
trade or business in the Philippines xxx shall pay a tax equal to 35% of the gross income received
during its taxable year from all sources within the Philippines, xxx Provided, still further That on
dividends received from a domestic corporation liable to tax under this Chapter, the tax shall be 15% of
the dividends received, which shall be collected and paid as provided in Section 53 (d) of this Code,
subject to the condition that the country in which the non-resident foreign corporation is domiciled shall
allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have
been paid in the Philippines equivalent to 20% which represents the difference between the regular tax
(35%) on corporations and the tax (15%) dividends as provided in this section
From the above-quoted provision, for the dividends received from a domestic corporation liable to tax,
the tax shall be 15% of the dividends received, subject to the condition that the country in which the
non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-
resident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 20%
which represents the difference between the regular tax (35%) on corporations and the tax (15%)
dividends.
While it may be true that claims for refund are construed strictly against the claimant, nevertheless, the
fact that Switzerland did not impose any tax or the dividends received by Glaro from the Philippines
should be considered as a full satisfaction of the given condition. Besides, it is significant to note that
the conclusion reached by respondent Court is but a confirmation of the May 19, 1977 ruling of
petitioner that "since the Swiss Government does not impose any tax on the dividends to be received
by the said parent corporation in the Philippines, the condition imposed under the above-mentioned
section is satisfied.…”
122
NATIONAL TAXATION
Income Tax
RETENTION OF EARNINGS FOR THE REASONABLE NEEDS OF THE BUSINESS
Greenhills Properties v. Commissioner of Internal Revenue

CTA Case No. 8295, May 15, 2015
Casanova, J.
FACTS:
Respondent issued petitioner a Preliminary Assessment Notice with Details of Discrepancies. After the
petitioner filed its reply, respondent issued Formal Letter of Demand with Details of Discrepancies and
Assessment Notices for deficiency income tax, VAT, expanded withholding tax (EWT), final
withholding tax (FWT), improperly accumulated earnings tax (IAET), and for compromise penalty. The
aggregate amount of deficiency taxes was P135,837,346.04. Upon investigation, respondent found
that petitioner's audited financial statements (AFS) reflected a Retained Earnings more than the Paid-
up Capital Stock at the end of the taxable year 2007. Hence, respondent considered the difference as
petitioner's improperly accumulated Retained Earnings in the amount of P487,536,722.00, and
assessed petitioner of deficiency IAET in the amount of P76,089,121.56 Petitioner disagreed with the
assessment and avers that dividends declared in 2016 should be excluded in computing deficiency tax
liabilities as they pertained to transactions before taxable year 2007. It further maintains that it properly
set aside portion of its accumulated retained earnings for the reasonable needs of the business as
contemplated in Section 29 of the NIRC.
ISSUES:
(1) Should the dividend transactions in 2006 be included in the assessment of deficiency IAET liability
for 2007?
(2) Did petitioner’s business have reasonable needs for accumulating its earnings, making the
imposition of IAET improper?
HELD:
(1) NO. The assessment must only involve those transactions covered by the period indicated in the
LOA, which is the taxable year 2007. Hence, those dividend transactions made before or subsequent
to 2007 must be excluded.
In the first place, these dividends declared in 2006, regardless of when paid, is no longer included as
part of Retained Earnings as of December 31, 2007, as presented in the AFS. As a basic accounting
precept, the amount of dividends is already deducted from unrestricted retained earnings upon
declaration. Thus, it is erroneous to deduct the same again from retained earnings as of the end of
2007 for purposes of computing the deficiency IAET.
(2) NO. Upon careful examination of the BOD Resolution, the Court finds that it is incredulous that as
early as April 19, 2006, the President of GPI, and also as resolved by the BODs, had already known
that the amount of accumulated retained earnings as of December 31, 2006 will be P1,782,509,264.00
to base the amount which will be appropriated. And, more incredulously, such amount was exactly
achieved by the end of 2006 as it was presented in the AFS under the year 2006 column of the
Balance Sheet. Further, significant transactions such as appropriations of retained earnings are
required to be presented in the financial statements as a disclosure to the Notes to the Financial
Statements as per Philippine Accounting Standards (PAS) 1: Presentation of Financial Statements,
paragraph 103.
Petitioner failed to comply with such disclosure requirement. A significant transaction such as an
appropriation for future business expansion is one of the information needed to be disclosed in the
financial statements to apprise (1) the stockholders, on the reduction of the retained earnings available
for distribution to them; and (2), more importantly, the government and public, as to the entity's
accountability as a taxpayer and a service provider.
123
Finding such irregularity in the BOD Resolution issued for the appropriation without corroborating the
information that had been disclosed regarding such expansion in the AFS, leads the Court to doubt on
the veracity of the appropriation.
Also, without clear and convincing evidence showing that BOD approved the appropriation of the
retained earnings for a definite expansion project, the said retention of profits for such purpose cannot
be considered as reasonable need under Section 3(b) of RR No. 2-2001.
In fine, petitioner failed to persuade this Court that there was an actual appropriation for the
reasonable needs of the business, thus, petitioner shall be liable for deficiency improperly accumulated
earnings tax for the year 2007 amounting to P73,056,320.80. Nevertheless, since the above amount of
P73,056,320.80 is higher than the assessment made by respondent in the amount of P48,753,672.20,
the Court is constrained to uphold the lower amount of P48,753,672.20.
124
NATIONAL TAXATION
Income Tax
ACCUMULATED PROFITS FOR THE REASONABLE NEEDS OF THE BUSINESS
Cyanamid Philippines v. Court of Appeals

G.R. No. 108067, January 20, 2000
Quisumbing, J.
FACTS:
Petitioner is engaged in the manufacture of pharmaceutical products and chemicals, a wholesaler of
imported finished goods, and an importer/indentor. On February 7, 1985, the CIR sent an assessment
letter to petitioner and demanded the payment of deficiency income tax of P119,817.00 for taxable
year 1981. Petitioner protested the assessments and claimed, among others, that the surtax for the
undue accumulation of earnings was not proper because the said profits were retained to increase
petitioner’s working capital and it would be used for reasonable business needs of the company.
ISSUES:
Is petitioner’s purpose for accumulating its earnings (to increase its working capital) a reasonable
business need that would excuse it from payment of IAET
HELD:
NO. In order to determine whether profits are accumulated for the reasonable needs of the business to
avoid the surtax upon shareholders, it must be shown that the controlling intention of the taxpayer is
manifested at the time of accumulation, not intentions declared subsequently, which are mere
afterthoughts. Furthermore, the accumulated profits must be used within a reasonable time after the
close of the taxable year. In the instant case, petitioner did not establish, by clear and convincing
evidence, that such accumulation of profit was for the immediate needs of the business.
In Manila Wine Merchants, Inc. v. Commissioner of Internal Revenue, we ruled:
"To determine the ‘reasonable needs’ of the business in order to justify an accumulation of
earnings, the Courts of the United States have invented the so-called ‘Immediacy Test’ which
construed the words ‘reasonable needs of the business’ to mean the immediate needs of the
business, and it was generally held that if the corporation did not prove an immediate need for
the accumulation of the earnings and profits, the accumulation was not for the reasonable
needs of the business, and the penalty tax would apply. (Mertens, Law of Federal Income
Taxation, Vol. 7, Chapter 39, p. 103).
In the present case, the Tax Court opted to determine the working capital sufficiency by using the ratio
between current assets to current liabilities. The working capital needs of a business depend upon the
nature of the business, its credit policies, the amount of inventories, the rate of turnover, the amount of
accounts receivable, the collection rate, the availability of credit to the business, and similar factors.
Petitioner, by adhering to the "Bardahl" formula, failed to impress the tax court with the required
definiteness envisioned by the statute. We agree with the tax court that the burden of proof to establish
that the profits accumulated were not beyond the reasonable needs of the company, remained on the
taxpayer.
125
NATIONAL TAXATION
Income Tax
IN CASE AN EXEMPT INSTITUTION UNDER SECTION 30(E) OR (G) OF THE NIRC EARNS
INCOME FROM ITS “FOR-PROFIT” ACTIVITIES”, IT WILL NOT LOSE ITS TAX EXEMPTION.
HOWEVER, ITS INCOME FROM “FOR-PROFIT ACTIVITIES” WILL BE SUBJECT TO INCOME
TAX AT THE PREFERENTIAL RATE OF 10% PURSUANT TO SECTION 27(B) THEREOF
Commissioner of Internal Revenue v. St. Luke’s Medical Center, Inc.

G.R. No. 203514, February 13, 2017
Del Castillo, J.
FACTS:
On December 14, 2007, St. Luke’s Medical Center, Inc. (SLMC) received from the BIR Audit
Results/Assessment Notices assessing SLMC deficiency income tax under Section 27(B) of the Tax
Code in the aggregate amount of P135,737,301 for taxable years 2005 and 2006. SLMC filed an
administrative protest assailing the assessments. SLMC claimed that as a nonstock, non-profit
charitable and social welfare organization under Section 30(E) and (G) of the 1997 NIRC, as
amended, it is exempt from paying income tax.
Aggrieved from the denial of the protest, SLMC elevated the matter to the CTA via a Petition for
Review. CTA Division rendered a Decision finding SLMC not liable for deficiency income tax under
Section 27(B) of the 1997 NIRC, as amended, since it is exempt from paying income tax under Section
30(E) and (G) of the same Code. This prompted CIR to file a Petition for Review before the CTA En
Banc. CTA En Banc affirmed the cancellation and setting aside of the Audit Results/Assessment
Notices issued against SLMC. Hence, CIR filed the instant Petition under Rule 45.
Meanwhile, on September 26, 2012, the Court rendered a Decision in G.R. Nos. 195909 and 195960,
entitled CIR v. St. Luke's Medical Center, Inc., finding SLMC not entitled to the tax exemption under
Section 30(E) and (G) of the NIRC of 1997 as it does not operate exclusively for charitable or social
welfare purposes insofar at its revenue from paying patients are concerned. Accordingly, CIR argues
that under the doctrine of stare decisis, SLMC is subject to 10% income tax under Section 27(B) of the
1997 NIRC.
SLMC begs the indulgence of the Court to revisit its ruling and contends that earning a profit by a
charitable, benevolent hospital or educational institution does not result in the withdrawal of its tax
exempt privilege. SLMC further claims that the income it derives from operating a hospital is not
income from "activities conducted for profit.
ISSUE: Are SLMC’s profits from hospital operation exempt from income tax under Section30 (E) and
(G), of the 1997 NIRC?
HELD:
No. SLMC’s profits from hospital operation is not exempt. The Court reaffirmed its ruling in G.R. Nos.
195909 and 195960 (Commissioner Internal Revenue v. St. Luke's Medical Center, Inc.).
Even if the charitable institution must be 'organized and operated exclusively' for charitable purposes,
it is nevertheless allowed to engage in 'activities conducted for profit' without losing its tax exempt
status for its not for- profit activities. The only consequence is that the 'income of whatever kind and
character' of a charitable institution 'from any of its activities conducted for profit, regardless of the
disposition made of such income, shall be subject to tax.'
It cannot be disputed that a hospital which receives approximately P1.73 billion from paying patients is
not an institution 'operated exclusively' for charitable purposes. Clearly, revenues from paying patients
are income received from 'activities conducted for profit.' For an institution to be completely exempt
from income tax, Section 30(E) and (G) of the 1997 NIRC requires said institution to operate
exclusively for charitable or social welfare purpose. But in case an exempt institution under Section
30(E) or (G) of the said Code earns income from its “for-profit activities”, it will not lose its tax
126
exemption. However, its income from “for-profit activities” will be subject to income tax at the
preferential 10% rate pursuant to Section 27(B) thereof.
Following earlier cases, St. Luke's fails to meet the requirements under Section 30(E) and (G) of the
NIRC to be completely tax exempt from all its income. However, it remains a proprietary nonprofit
hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits to its
members and such profits are reinvested pursuant to its corporate purposes. St. Luke's, as a
proprietary non-profit hospital, is entitled to the preferential tax rate of 10% on its net income from its
for-profit activities.
Thus, SLMC’s profits from hospital operation is not exempt from income tax under Section30 (E) and
(G), of the 1997 NIRC.
127
NATIONAL TAXATION
Income Tax
ARTICLE XIV, SECTION 4 (3) OF THE 1987 CONSTITUTION DOES NOT REQUIRE THAT THE
REVENUES AND INCOME MUST HAVE ALSO BEEN SOURCED FROM EDUCATIONAL
ACTIVITIES OR ACTIVITIES RELATED TO THE PURPOSES OF AN EDUCATIONAL INSTITUTION
Commissioner of Internal Revenue v. De La Salle University

G.R. No. 196596, November 9, 2016
Brion, J.
FACTS:
In 2004, the Bureau of Internal Revenue (BIR) issued a letter authorizing it’s revenue officers to
examine the book of accounts of and records for the year 2003 De La Salle University (DLSU) and
later on issued a demand letter to demand payment of tax deficiencies for (1) income tax on rental
earnings from restaurants/canteens and bookstores operating within the campus; (2) Value-added
tax (VAT) on business income; and (3) Documentary stamp tax (DST) on loans and lease contracts for
the years 2001,2002, and 2003, amounting to P17,303,001.12.
DLSU protested the assessment that was however not acted upon, and later on filed a petition for
review with the Court of Tax Appeals (CTA). DLSU argues that as a non-stock, non-profit educational
institution, it is exempt from paying taxes according to Article XIV, Section 4 (3) of the 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).
CIR argued that the rental income is taxable regardless of how such income is derived, used or
disposed of. DLSU’s operations of canteens and bookstores within its campus even though exclusively
serving the university community do not negate income tax liability. Article XIV, Section 4 (3) of the
Constitution must be harmonized with Section 30 (H) of the Tax Code, which states among others, that
the income of whatever kind and character of a non-stock and non-profit educational institution from
any of its properties, real or personal, or from any of its activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed by this Code.
DLSU argued that Article XIV, Section 4 (3) of the Constitution is clear that all assets and revenues of
non-stock, non-profit educational institutions used actually, directly and exclusively for educational
purposes are exempt from taxes and duties. Under the doctrine of constitutional supremacy, which
renders any subsequent law that is contrary to the Constitution void and without any force and
effect. Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the income of whatever kind
and character of a non-stock and non-profit educational institution from any of its properties, real or
personal, or from any of its activities conducted for profit regardless of the disposition made of such
income, should be declared without force and effect in view of the constitutionally granted tax
exemption on “all revenues and assets of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes.“ that it complied with the requirements for the
application of Article XIV, Section 4 (3) of the Constitution.
ISSUES: Are the income and revenues of DLSU which proven to have been used actually, directly and
exclusively for educational purpose exempt from duties and taxes?
HELD:
Yes. The income and revenues of DLSU proven to have been used actually, directly and exclusively
for educational purpose are exempt from duties and taxes. A plain reading of the Constitution would
show that Article XIV, Section 4 (3) does not require that the revenues and income must have also
been sourced from educational activities or activities related to the purposes of an educational
institution. The phrase all revenues is unqualified by any reference to the source of revenues. Thus, so
long as the revenues and income are used actually, directly and exclusively for educational purposes,
then said revenues and income shall be exempt from taxes and duties.
128
Revenues consist of the amounts earned by a person or entity from the conduct of business
operations. It may refer to the sale of goods, rendition of services, or the return of an investment.
Revenue is a component of the tax base in income tax, VAT, and local business tax (LBT). Assets, on
the other hand, are the tangible and intangible properties owned by a person or entity. It may refer to
real estate, cash deposit in a bank, investment in the stocks of a corporation, inventory of goods, or
any property from which the person or entity may derive income or use to generate the same. In
Philippine taxation, the fair market value of real property is a component of the tax base in real
property tax (RPT). Also, the landed cost of imported goods is a component of the tax base in VAT on
importation and tariff duties. Thus, when a non-stock, non-profit educational institution proves that it
uses its revenues actually, directly, and exclusively for educational purposes, it shall be exempted from
income tax, VAT, and LBT. On the other hand, when it also shows that it uses its assets in the form of
real property for educational purposes, it shall be exempted from RPT.
The last paragraph of Section 30 of the Tax Code without force and effect for being contrary to the
Constitution insofar as it subjects to tax the income and revenues of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational purpose. We make this declaration in
the exercise of and consistent with our duty to uphold the primacy of the Constitution.
Thus, the income and revenues of DLSU proven to have been used actually, directly and exclusively
for educational purpose are exempt from duties and taxes.
129
NATIONAL TAXATION
Income Tax
MERE PROVISION FOR THE DISTRIBUTION OF ITS ASSETS TO THE STOCKHOLDERS UPON
DISSOLUTION DOES NOT REMOVE THE RIGHT OF AN EDUCATIONAL INSTITUTION FROM
TAX EXEMPTION
Commissioner of Internal Revenue v. V.G. Sinco Educational Corp.

G.R. No. L-9276, October 23, 1956
Bautista Angelo, J.:
FACTS:
In June, 1949, Vicente G. Sinco established and operated an educational institution known as
Foundation College of Dumaguete. Sinco would have continued operating said college were it not for
the requirement of the Department of Education that as far as practicable schools and colleges
recognized by the government should be incorporated, and so on September 21, 1951, the V. G. Sinco
Educational Institution was organized. This corporation was non-stock and was capitalized by V. G.
Sinco and members of his immediate family. This corporation continued the operations of
Foundation College of Dumaguete.
The Collector of Internal Revenue assessed against the college an income tax for the years 1950 and
1951 in the aggregate sum of P5,364.77, which was paid by the college. Two years thereafter, the
corporation commenced an action in the Court of First Instance of Negros Oriental for the refund of this
amount alleging that it is exempt from income tax under section 27 (e) of the National Internal
Revenue Code. Pursuant to the provisions of Republic Act 1125, the case was remanded to the Court'
of Tax Appeals which, after due trial, decided the case in favor of the corporation.
Invoking section 27 (e) of the National Internal Revenue Code, the appellee claims that it is exempt
from the payment of the income tax because it is organized and maintained exclusively for the
educational purposes and no part of its net income inures to the benefit of any private individual. On
the other hand, the appellant maintains that part of the net income accumulated by the appellee inured
to the benefit of V. Q. Sinco, president and founder of the corporation, and therefore the appellee is
not entitled to the exemption prescribed by the law.
ISSUE: Is it correct to say that appellee is an educational institution in which part of its income inures
to the benefit of one of its stockholders as maintained by appellant?
HELD:
No. It is indeed too sweeping if not unfair to conclude that part of the income of the appellee as an
institution inured to the benefit of one of its stockholders simply because part of the income was
carried in its books as accumulated salaries of its president and teacher. Much less can it be said that
the payments made by the college to the Community Publishers, Inc. redounded to the personal
benefit of Sinco simply because he is one of its stockholders.
The fact is that, as it has been established, the appellee is a non-profit institution and since its
organization it has never distributed any dividend or profit to its stockholders. Of course, part of its
income went to the payment of its teachers or professors and to the other expenses of the college
incident to an educational institution but none of the income has ever been channeled to the benefit of
any individual stockholder. The authorities are clear to the effect that whatever payment is made to
those who work for a school or college as a remuneration for their services is not considered as
distribution of profit as would make the school one conducted for profit.
Of course, it is not denied that the appellee charges tuition fees and other fees for the different
services it renders to the students and in fact it is its only source of income, but such fact does not in
itself make the school a profit-making enterprise that would place it beyond the purview of the law.
While the acquisition of additional facilities, may redound to the benefit of the institution itself, it cannot
be positively asserted that the same will redound to the benefit of its stockholders, for no-one can
predict the financial condition of the institution upon its dissolution. At any rate, it has been held by
130
several authorities that the mere provision for the distribution of its assets to the stockholders
upon dissolution does not remove the right of an educational institution from tax exemption.
131
NATIONAL TAXATION
Income Tax
EXEMPTION FROM INCOME TAX OF CHARITABLE INSTITUTIONS
Commissioner of Internal Revenue v. Court of Appeals, Court of Tax Appeals, YMCA

G.R. No. 124043, October 14, 1998
Panganiban, J.
FACTS:
This is a petition for review on certiorari challenging two Resolutions issued by the CA. Both
Resolutions affirmed the Decision of the CTA allowing the YMCA to claim tax exemption on the latter's
income from the lease of its real property.
Private Respondent YMCA is a non-stock, non-profit institution, which conducts various programs and
activities that are beneficial to the public, especially the young people, pursuant to its religious,
educational and charitable objectives. Private respondent earned, among others, income from leasing
out a portion of its premises to small shop owners and from parking fees collected from non-members.
CIR issued an assessment to private respondent for deficiency income tax. Private respondent
formally protested the assessment, which the CIR denied. Contesting the denial of its protest, the
YMCA filed a petition for review at the CTA.
Petitioner argues that while the income received by the organizations enumerated in Section 27 (now
Section 26) of the NIRC is, as a rule, exempted from the payment of tax "in respect to income received
by them as such," the exemption does not apply to income derived " from any of their properties, real
or personal, or from any of their activities conducted for profit, regardless of the disposition made of
such income." Petitioner adds that "rental income derived by a tax-exempt organization from the lease
of its properties, real or personal, [is] not, therefore, exempt from income taxation, even if such income
[is] exclusively used for the accomplishment of its objectives."
ISSUE: Is the income derived from rentals of real property owned by the Young Men's Christian
Association of the Philippines, Inc. (YMCA) — established as "a welfare, educational and charitable
non-profit corporation" — subject to income tax?
HELD:
Yes, said income from rentals is subject to income tax. The exemption claimed by the YMCA is
expressly disallowed by the very wording of the last paragraph of then Section 27 of the NIRC which
mandates that the income of exempt organizations (such as the YMCA) from any of their properties,
real or personal, be subject to the tax imposed by the same Code. Because the last paragraph of said
section unequivocally subjects to tax the rent income of the YMCA from its real property, the Court is
duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convoluted
attempt at construction.
The last paragraph of Section 27, the YMCA argues, should be "subject to the qualification that the
income from the properties must arise from activities 'conducted for profit' before it may be considered
taxable." This argument is erroneous. As previously stated, a reading of said paragraph ineludibly
shows that the income from any property of exempt organizations, as well as that arising from any
activity it conducts for profit, is taxable. The phrase "any of their activities conducted for profit" does not
qualify the word "properties." This makes from the property of the organization taxable, regardless of
how that income is used — whether for profit or for lofty non-profit purposes.
Respondent Court of Appeals committed reversible error when it allowed, on reconsideration, the tax
exemption claimed by YMCA on income it derived from renting out its real property, on the solitary but
unconvincing ground that the said income is not collected for profit but is merely incidental to its
operation. The law does not make a distinction. The rental income is taxable regardless of whence
132
such income is derived and how it is used or disposed of. Where the law does not distinguish, neither
should we.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Character, claiming that the YMCA
"is a non-stock, non-profit educational institution whose revenues and assets are used actually, directly
and exclusively for educational purposes so it is exempt from taxes on its properties and income." We
reiterate that private respondent is exempt from the payment of property tax, but not income tax on the
rentals from its property. The bare allegation alone that it is a non-stock, non-profit educational
institution is insufficient to justify its exemption from the payment of income tax.
133
NATIONAL TAXATION
Income Tax
FUTILE TO FURTHER REQUIRE THE CLAIMANT TO PRESENT INCOME TAX RETURNS OF THE
SUCCEEDING YEAR WHEN THERE IS COMPLIANCE WITH THE TAX REFUND REQUISITES
Golden Arches Development Corporation v. Commissioner of Internal Revenue

C.T.A. Case No. 7200
Castañeda, J.
FACTS:
Commissioner of Internal Revenue assails the Decision of the CTA in Division partially granting the
refund or the issuance of a tax credit certificate representing unutilized creditable withholding taxes
(CWTs in favor Golden Arches Development Corp. (GADC)
GADC filed its 2002 Annual Income Tax Return through electronic filing and payment system (EFPS)
with the BIR. Thereafter, it amended such return. It asserts that it is entitled to the unutilized CWTs for
the said year and sought with the BIR the refund or issuance of a tax credit certificate. Due to
Commissioner’s inaction, GADC filed a petition for review before the CTA’s Second Division. The CTA
in division, granted GADC’s amended petition praying that the Commissioner consider the alternative
option for the issuance of a tax credit certificate. The CTA in division ordered the refund, but with a
reduced amount.
On its part, the Commissioner asserts that the non-presentation of GADC's 2003 quarterly income tax
returns is fatal. Without such returns, it cannot be proven with reasonable certainty that GADC's 2002
excess tax credits were not carried-over and applied against its 2003 income tax liabilities.If GADC did
carry over its 2002 excess tax credits to the succeeding year, it may no longer apply for refund of its
alleged unutilized creditable withholding taxes for the calendar year 2002 since such option is
irrevocable in accordance with the law. Both parties appealed to the Court en banc by way of Petition
for Review.
ISSUE:
(1) Is GADC entitled only to the reduced amount of tax credit?
(2) Does the law require submission of quarterly income tax returns of the succeeding year?
HELD:
(1) Yes. The court duly complied with the tax refund requisites supporting the reduced amount
representing unutilized creditable withholding taxes for calendar year 2002. Instead of presenting
schedules, GADC should have submitted source documents of the transactions giving rise to CWTs
showing that there were clerical errors in the entries of CWT certificates. Even if it has source
documents of the transaction clarifying the existence of errors in the CWT certificates, GADC can no
longer proffer them at this stage and prove that it is the payee/income recipient. The offer of evidence
is mperative because it is the duty of the court to rest its findings of fact and its judgment only and
strictly upon the evidence offered by the parties. Otherwise, document not offered is merely a scrap of
paper bereft of probative weight.
(2) No. The presentation of GADC's quarterly income tax returns for the first, second and third quarters
of calendar year 2003 is not a legal requisite in the refund claim of its excess CWTs for calendar year
2002. Clearly, the Commissioner has failed to adduce any evidence to substantiate his argument that
GADC's excess withholding tax credits for calendar year 2002 were actually carried over and applied
against its income tax liabilities for the first, second and third quarters of calendar year 2003. This
Court disagrees with the Commissioner's contention that presentation of quarterly income tax returns
for the succeeding year is vital in refund claims of excess cwts. Nowhere is it required in Section 76 of
the 1997 NIRC that income tax returns for the subsequent years are necessary to prove refund of
excess creditable withholding taxes. In the case at bar, although GADC presented its 2003 annual
income tax return, the submission of such document, including its 2003 quarterly income tax returns is
134
not required. It is futile to further require the claimant to present income tax returns of the succeeding
year when there is compliance with the tax refund requisites.
135
NATIONAL TAXATION
Income Tax
COMPENSATION FOR ADVISORY SERVICES PERFORMED ABROAD BY PERSONNEL OF A

NON-RESIDENT FOREIGN CORPORATION NOT DOING BUSINESS IN THE PHILIPPINES IS
SUBJECT TO WITHHOLDING INCOME TAX
Philippine American Life Insurance Company v. Court of Tax Appeals and CIR
CA-G.R. SP No. 31283, April 25, 1995
Tayao-Jaguros, J.
FACTS:
This is a consolidated case involving a claim for the refund of the amount of P643,125.00 as allegedly
erroneous payment of withholding tax at source for 1980 in C.T.A. Case No. 3504 and an assessment
for the similar amount of P643,125.00 as deficiency withholding tax at source for 1979.
PHILAMLIFE, a domestic corporation, entered into a Management Services Agreement with AIRCO, a
non-resident foreign corporation engaged in reinsurance, wherein AIRCO shall perform for
PHILAMLIFE several services such as reporting on world monetary and investment trends and
investigating, analyzing investment opportunities, Underwriting and Marketing.
In 1978, AIRCO merged with petitioner AIGI with the latter as the surviving corporation and successor-
in-interest in AIRCO's Management services Agreement. Respondent requested petitioner to pay the
amount of P643,125.00 as deficiency withholding tax at source for 1979 for the compensation paid for
advisory services rendered outside the Philippines to petitioner AIGI because these are considered
"rentals and royalties from properties located in the Philippines" pursuant to Section 37 (a) (4) of the
NIRC. Petitioner sought the annulment of said assessment.
Petitioners insist that there is no legal nor factual bias for the respondent court to conclude that the
compensation paid for advisory services rendered outside the Philippines to petitioner AIGI, a non-
resident foreign corporation not engaged in trade or business in the Philippines, is considered "rentals
and royalties from properties located in the Philippines" pursuant to Section 37 (a) (4) of the NIRC.
Petitioners contend that petitioner AIGI is not covered by the above provision of the Tax Code
considering that it has no properties located in the Philippines from which rentals and royalties can be
derived.
ISSUE:
Does compensation for advisory services admittedly performed abroad by the personnel of a non-
resident foreign corporation not doing business in the Philippines (AIGI) are subject to Philippines
withholding income tax?
HELD:
Yes. The services call for the supply by the non-resident foreign corporation of technical and
commercial information, knowledge, advice, assistance or services in connection with technical
management or administration of an insurance business — a commercial undertaking.
Therefore, the income derived for the services performed by AIGI for PHILAMLIFE under the said
management contract shall be considered as income from services within the Philippines. AIGI being a
non-resident foreign corporation not engaged in trade or business in the Philippines 'shall pay a tax
equal to thirty-five (35%) percent of the gross income received during each taxable year from all
sources within the Philippines as interest, dividends, rents, royalties (including remuneration for
technical services) . . . (Section 12(6) (I) of the NIRC).
Thus, this Court rules that while it is true petitioner AIGI has no properties in the Philippines,
agreement with petitioner PHILAMLIFE necessary for the latter company's efficient operation and
growth, with petitioner AIGI deriving income form said agreement, petitioner AIGI is well-within the
ambit of Section 37 (a)(7) of the Tax Code.
136
In our jurisprudence, the test of taxability is the 'source', and the source of an income is "that activity . .
. which produced the income".
It is not the presence of any property from which one derives rentals and royalties that is controlling,
but rather as expressed under the expanded meaning of "royalties", it includes " royalties for the
supply of scientific, technical, industrial, or commercial knowledge or information; and the technical
advice, assistance or services rendered in connection with the technical management and
administration of any scientific, industrial or commercial undertaking, venture, project or scheme", and
others (Section 37 (a) (7) as amended by P.D. 1457).
137
NATIONAL TAXATION
Estate and Donor’s Taxes
TO SETTLE CLAIMS AGAINST THE ESTATE, AS AN INHERITANCE TAX, IS FOR THE

CLAIMANT TO PRESENT A CLAIM BEFORE THE PROBATE COURT
Domingo v. Garlitos
G.R. No. L-18994. June 29, 1963
Labrador, J.
FACTS:
This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of Leyte,
Hon. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and for an order in this
Court directing the respondent court below to execute the judgment in favor of the Government against
the estate of Walter Scott Price for internal revenue taxes.
In Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, 106 Phil., 1138, this Court declared as final and
executory the order for the payment by the estate of the estate and inheritance taxes, charges and
penalties amounting to P40,058.55, issued by the Court of First Instance of Leyte in special
proceedings No. 14 entitled "In the Matter of the Intestate Estate of the Late Walter Scott Price." In
order to enforce the claims against the estate the fiscal presented a petition dated June 21, 1961, to
the court below for the execution of the judgment. The petition was, however, denied by the court
which held that the execution is not justifiable as the Government is indebted to the estate under
administration in the amount of P262,200.
ISSUE:
Did petitioner have the right to execute the judgment for taxes against the estate of the deceased
Walter Scott Price?
HELD:
No. The petitioner has no right to execute the judgment for taxes against the estate of the deceased
Walter Scott Price.
The ordinary procedure by which to settle claims or indebtedness against the estate of a deceased
person, as an inheritance tax, is for the claimant to present a claim before the probate court so that
said court may order the administrator to pay the amount thereof. The legal basis for such a procedure
is the fact that in the testate or intestate proceedings to settle the estate of a deceased person, the
properties belonging to the estate are under the jurisdiction of the court and such jurisdiction continues
until said properties have been distributed among the heirs entitled thereto. During the pendency of the
proceedings all the estate is in custodia legis and the proper procedure is not to allow the sheriff, in
case of a court judgment, to seize the properties but to ask the court for an order to require the
administrator to pay the amount due from the estate and required to be paid.
Moreover, the fact that the court having jurisdiction of the estate had found that the claim of the estate
against the Government has been recognized and an amount of P262, 200 has already been
appropriated for the purpose by a corresponding law (Rep. Act No. 2700). Under the above
circumstances, both the claim of the Government for inheritance taxes and the claim of the intestate
for services rendered have already become overdue and demandable as well as fully liquidated.
Compensation, therefore, takes place by operation of law, in accordance with the provisions of Articles
1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount.
138
NATIONAL TAXATION
TRANSMISSION BY INHERITANCE IS TAXABLE AT THE TIME OF THE PREDECESSOR’S

DEATH
Pablo Lorenzo v. Juan Posadas, Jr.

G.R. No. L-43082, June 18, 1937
Laurel, J.
FACTS:
Decedent Thomas Hanley died in Zamboanga leaving a will and considerable amount of real and
personal properties. The will was admitted to probate and proceedings began. P.J. M. Moore acted as
trustee from March 10, 1924 to February 29, 1932. Petitioner Pablo Lorenzo was appointed as trustee
in his stead. During his incumbency as trustee, defendant Juan Posadas, Jr., as Collector of Internal
Revenue, assessed against the estate an inheritance tax in the amount of P2,052.74 including
interest. The defendant filed a motion in the testamentary proceedings pending before the Court of
First Instance of Zamboanga (Special proceedings No. 302) praying that the trustee, plaintiff herein, be
ordered to pay to the Government the said sum of P2,052.74. The motion was granted. Plaintiff paid
the said amount under protest. However, the defendant overruled the plaintiff's protest and refused to
refund the said amount hausted.
ISSUES:
(a) When does the inheritance tax accrue and when must it be satisfied?
(b) Should the inheritance tax be computed on the basis of the value of the estate at the time of the
testator's death, or on its value ten years later?
(c) In determining the net value of the estate subject to tax, is it proper to deduct the compensation due
to trustees?
(d) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the tax-
payer be given retroactive effect?
(e) Has there been deliquency in the payment of the inheritance tax? If so, should the additional
interest claimed by the defendant in his appeal be paid by the estate?
HELD:
(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as
amended, of the Administrative Code, imposes the tax upon "every transmission by virtue of
inheritance, devise, bequest, gift mortis causa, or advance in anticipation of inheritance, devise, or
bequest." The tax therefore is upon transmission or the transfer or devolution of property of a
decedent, made effective by his death. It is in reality an excise or privilege tax imposed on the right to
succeed to, receive, or take property by or under a will or the intestacy law, or deed, grant, or gift to
become operative at or after death.
From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the
obligation to pay the tax arose as of the date. The time for the payment on inheritance tax is clearly
fixed by section 1544 of the Revised Administrative Code as amended by Act No. 3031, in relation to
section 1543 of the same Code. Under the aforementioned section, the tax should have been paid
before the delivery of the properties in question to P. J. M. Moore as trustee on March 10, 1924.
(b) If death is the generating source from which the power of the estate to impose inheritance taxes
takes its being and if, upon the death of the decedent, succession takes place and the right of the
estate to tax vests instantly, the tax should be measured by the value of the estate as it stood at the
time of the decedent's death, regardless of any subsequent contingency value of any subsequent
increase or decrease in value.
We hold that a transmission by inheritance is taxable at the time of the predecessor's death,
notwithstanding the postponement of the actual possession or enjoyment of the estate by the
beneficiary, and the tax measured by the value of the property transmitted at that time regardless of its
appreciation or depreciation.
139
(c) No, it is not proper.
A trustee, no doubt, is entitled to receive a fair compensation for his services. But from this it does not
follow that the compensation due him may lawfully be deducted in arriving at the net value of the
estate subject to tax. There is no statute in the Philippines which requires trustees' commissions to be
deducted in determining the net value of the estate subject to inheritance tax. Furthermore, though a
testamentary trust has been created, it does not appear that the testator intended that the duties of his
executors and trustees should be separated.
(d) No, we cannot give the provisions of Act No. 3606 retroactive effect. The law in force at the time of
decedent’s death was Act No. 3031, such act should therefore apply.
It is well-settled that inheritance taxation is governed by the statute in force at the time of the death of
the decedent. The taxpayer can not foresee and ought not to be required to guess the outcome of
pending measures. Of course, a tax statute may be made retroactive in its operation. Liability for taxes
under retroactive legislation has been "one of the incidents of social life." But legislative intent that a
tax statute should operate retroactively should be perfectly clear. A statute should be considered as
prospective in its operation, whether it enacts, amends, or repeals an inheritance tax, unless the
language of the statute clearly demands or expresses that it shall have a retroactive effect.
Though the last paragraph of section 5 of Regulations No. 65 of the Department of Finance makes
section 3 of Act No. 3606, amending section 1544 of the Revised Administrative Code, applicable to all
estates the inheritance taxes due from which have not been paid, Act No. 3606 itself contains no
provisions indicating legislative intent to give it retroactive effect. No such effect can begiven the
statute by this court.
(e) Yes, there has been delinquency in the payment of inheritance tax. Interest should be paid.
The mere fact that the estate of the deceased was placed in trust did not remove it from the operation
of our inheritance tax laws or exempt it from the payment of the inheritance tax. The corresponding
inheritance tax should have been paid on or before March 10, 1924, to escape the penalties of the
laws. This is so for the reason already stated that the delivery of the estate to the trustee was in esse
delivery of the same estate to the cestui que trust, the beneficiary in this case.
The highest considerations of public policy also justify the conclusion we have reached. Were we to
hold that the payment of the tax could be postponed or delayed by the creation of a trust of the type at
hand, the result would be plainly disastrous. Testators may provide, as Thomas Hanley has provided,
that their estates be not delivered to their beneficiaries until after the lapse of a certain period of time.
In the case at bar, the period is ten years. In other cases, the trust may last for fifty years, or for a
longer period which does not offend the rule against perpetuities. The collection of the tax would then
be left to the will of a private individual. The mere suggestion of this result is a sufficient warning
against the acceptance of the essential to the very existence of government. The obligation to pay
taxes rests not upon the privileges enjoyed by, or the protection afforded to, a citizen by the
government but upon the necessity of money for the support of the state. For this reason, no one is
allowed to object to or resist the payment of taxes solely because no personal benefit to him can be
pointed out. While courts will not enlarge, by construction, the government's power of taxation they
also will not place upon tax laws so loose a construction as to permit evasions on merely fanciful and
insubstantial distinctions. When proper, a tax statute should be construed to avoid the possibilities of
tax evasion. Construed this way, the statute, without resulting in injustice to the taxpayer, becomes fair
to the government.
140
NATIONAL TAXATION
RECIPROCITY MUST BE TOTAL
Commissioner of Internal Revenue v. Fisher

G.R. No. L-11668, January 28, 1961
Barrera, J.
FACTS:
Walter G. Stevenson was born in the Philippines of British parents, married in Manila to another British
subject, Beatrice. He died in 1951 in California where he and his wife moved to. In his will, he
instituted Beatrice as his sole heiress to certain real and personal properties, among which are
210,000 shares of stocks in Mindanao Mother Lode Mines (Mines). Ian Murray Statt (Statt), the
appointed ancillary administrator of his estate filed an estate and inheritance tax return. He made a
preliminary return to secure the waiver of the CIR on the inheritance of the Mines shares of stock.
In 1952, Beatrice assigned all her rights and interests in the estate to the spouses Fisher. Statt filed
an amended estate and inheritance tax return claiming additional exemptions, one of which is
the estate and inheritance tax on the Mines’ shares of stock pursuant to a reciprocity proviso in the
NIRC, hence, warranting a refund from what he initially paid. The collector denied the claim. He then
filed in the CFI of Manila for the said amount. CFI ruled that (a) the ½ share of Beatrice should be
deducted from the net estate of Walter, (b) the intangible personal property belonging to the estate of
Walter is exempt from inheritance tax pursuant to the reciprocity proviso in the NIRC
ISSUE:
Can the estate can avail itself of the reciprocity proviso in the NIRC granting exemption from the
payment of taxes for the Mines shares of stock?
HELD:
No, it cannot avail of the reciprocity proviso in the NIRC.
Reciprocity must be total. If any of the two states collects or imposes or does not exempt any transfer,
death, legacy or succession tax of any character, the reciprocity does not work. In the Philippines,
upon the death of any citizen or resident, or non-resident with properties, there are imposed upon his
estate, both an estate and an inheritance tax. But, under the laws of California, only inheritance tax is
imposed. Also, although the Federal Internal Revenue Code imposes an estate tax, it does not grant
exemption on the basis of reciprocity. Thus, a Filipino citizen shall always be at a disadvantage. This is
not what the legislators intended. Specifically, Section122 of the NIRC provides that “No tax shall be
collected under this Title in respect of intangible personal property (a) if the decedent at the time of his
death was a resident of a foreign country which at the time of his death did not impose a transfer of tax
or death tax of any character in respect of intangible personal property of citizens of the Philippines not
residing in that foreign country, or (b) if the laws of the foreign country of which the decedent was a
resident at the time of his death allow a similar exemption from transfer taxes or death taxes of every
character in respect of intangible personal property owned by citizens of the Philippines not residing in
that foreign country." On the other hand, Section 13851 of the California Inheritance Tax Law provides
that intangible personal property is exempt from tax if the decedent at the time of his death was a
resident of a territory or another State of the United States or of a foreign state or country which then
imposed a legacy, succession, or death tax in respect to intangible personal property of its own
residents, but either: did not impose a legacy, succession, or death tax of any character in respect to
intangible personal property of residents of this State, or had in its laws a reciprocal provision under
which intangible personal property of a non-resident was exempt from legacy, succession, or death
taxes of every character if the Territory or other State of the United States or foreign state or country in
which the nonresident resided allowed a similar exemption in respect to intangible personal property of
residents of the Territory or State of the United States or foreign state or country of residence of the
decedent."
141
NATIONAL TAXATION
IMPOSITION OF GIFT TAX IS NOT A VIOLATION OF THE CONSTITUTIONAL PROVISION

EXEMPTING CHURCHES, PARSONAGES OR CONVENTS FROM PROPERTY TAX
Rev. Fr. Casimiro Lladoc. v. Commissioner of Internal Revenue and Court of Tax Appeals
G.R. No. L-19201, June 16, 1965
Paredes, J.
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.
Petitioner lodged a protest to the assessment and requested the withdrawal thereof. The protest and
the motion for reconsideration presented to the Commissioner of Internal Revenue were denied. The
petitioner appealed to the Court of Tax Appeals. Petitioner asserted that the assessment of the gift tax,
even against the Roman Catholic Church, would not be valid, for such would be a clear violation of the
provisions of the Constitution.
ISSUE:
Is petitioner liable for the assessed donee’s gift tax on the donation for the construction of the Victorias
Parish Church?
HELD:
No, petitioner is not personally liable for the assessed gift tax; however, the Head of the Diocese, to
which the parish Victorias pertains is liable. 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 excise upon the use made
of the properties, upon the exercise of the privilege of receiving the properties. Manifestly, gift tax is not
within the exempting provisions of the section just mentioned. A gift tax is not a property tax, but an
excise tax imposed on the transfer of property by way of gift inter vivos, the imposition of which on
property used exclusively for religious purposes, does not constitute an impairment of the Constitution.
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.
142
NATIONAL TAXATION
POLITICAL CONTRIBUTIONS ARE TAXABLE GIFTS
Abello v. Commissioner of Internal Revenue

G.R. No. 120721, February 23, 2005
FACTS:
During the 1987 national elections, petitioners, who are partners in the Angara, Abello, Concepcion,
Regala and Cruz (ACCRA) law firm, contributed P882,661.31 each to the campaign funds of Senator
Edgardo Angara, then running for the Senate. In letters dated April 21, 1988, the Bureau of Internal
Revenue (BIR) assessed each of the petitioners P263,032.66 for their contributions. On August 2,
1988, petitioners questioned the assessment through a letter to the BIR. They claimed that political or
electoral contributions are not considered gifts under the National Internal Revenue Code (NIRC), and
that, therefore, they are not liable for donor's tax. The claim for exemption was denied by the
Commissioner.
Petitioners filed a Petition for Review with the CTA, which was decided on October 7, 1991 in favor of
the petitioners. On appeal, the Court of Appeals reversed and set aside the CTA decision on April 20,
1994.
The Bureau of Internal Revenue issued Ruling No. 344 on July 20, 1988: Political Contributions. 'For
internal revenue purposes, political contributions in the Philippines are considered taxable gift rather
than taxable income. This is so, because a political contribution is indubitably not intended by the giver
or contributor as a return of value or made because of any intent to repay another what is his due, but
bestowed only because of motives of philanthropy or charity. His purpose is to give and to bolster the
morals, the winning chance of the candidate and/or his party, and not to employ or buy. On the other
hand, the recipient-donee does not regard himself as exchanging his services or his product for the
money contributed. But more importantly he receives financial advantages gratuitously.
In the light of the above BIR Ruling, it is clear that the political contributions of the private respondents
to Sen. Edgardo Angara are taxable gifts. The vagueness of the law as to what comprise the gift
subject to tax was made concrete by the above-quoted BIR ruling. Hence, there is no doubt that
political contributions are taxable gifts.
ISSUES:
(1) Was there a donation?
(2) Was there donative intent?
(3) Was electoral contribution material in knowing whether the political contributions are taxable?
HELD:
(1) Yes, the present case falls squarely within the definition of a donation. Petitioners, the late Manuel
G. Abello, Jose C. Concepcion, Teodoro D. Regala and Avelino V. Cruz, each gave P882,661.31 to
the campaign funds of Senator Edgardo Angara, without any material consideration. All three elements
of a donation are present. The patrimony of the four petitioners were reduced by P882,661.31 each.
Senator Edgardo Angara's patrimony correspondingly increased by P3,530,645.249 . There was intent
to do an act of liberality or animus donandi was present since each of the petitioners gave their
contributions without any consideration.
(2) Yes, there is donative intent. This Court is not convinced that since the purpose of the contribution
was to help elect a candidate, there was no donative intent. Petitioners' contribution of money without
any material consideration evinces animus donandi. The fact that their purpose for donating was to aid
in the election of the donee does not negate the presence of donative intent.
(3) The fact that petitioners will somehow in the future benefit from the election of the candidate to
whom they contribute, in no way amounts to a valuable material consideration so as to remove political
143
contributions from the purview of a donation. Senator Angara was under no obligation to benefit the
petitioners. The proper performance of his duties as a legislator is his obligation as an elected public
servant of the Filipino people and not a consideration for the political contributions he received. In fact,
as a public servant, he may even be called to enact laws that are contrary to the interests of his
benefactors, for the benefit of the greater good. In fine, the purpose for which the sums of money were
given, which was to fund the campaign of Senator Angara in his bid for a senatorial seat, cannot be
considered as a material consideration so as to negate a donation.
144
NATIONAL TAXATION
ABSENCE OF DONATIVE INTENT DOES NOT EXEMPT THE SALES OF STOCK FROM
DONOR’S TAX
Philippine American Life and General Insurance Company v. Secretary of Finance and
Commissioner of Internal Revenue
G.R. No. 210987, November 24, 2014
Velasco, Jr., J.
FACTS:
In 2009, petitioner, in a bid to divest itself of its interests in the health maintenance organization
industry, offered to sell its shareholdings in PhilamCare through competitive bidding. Petitioner’s
Class A shares were sold for USD 2,190,000, or P104,259,330 based on the prevailing exchange
rate at the time of the sale, to STI Investments, Inc., who emerged as the highest bidder.
After the sale was completed, Philamlife filed an application for a certificate authorizing
registration/tax clearance with the Bureau of Internal Revenue (BIR) Large Taxpayers Service
Division to facilitate the transfer of the shares. Months later, petitioner was informed that it
needed to secure a BIR ruling in connection with its application due to potential donor’s tax
liability. Petitioner complied. However, respondent Commissioner on Internal Revenue
(Commissioner) denied Philamlife’s request through BIR Ruling No. 015-12. As determined by
the Commissioner, the selling price of the shares thus sold was lower than their book value based
on the financial statements of PhilamCare as of the end of 2008.6 As such, the Commisioner
held, donor’s tax became imposable on the price difference pursuant to Sec. 100 of the National
Internal Revenue Code (NIRC).
ISSUE:
Is the price difference in petitioner’s adverted sale of shares in PhilamCare subject to donor’s
tax?
HELD:
Yes, the price difference is subject to donor’s tax.
Petitioner's substantive arguments are unavailing. The absence of donative intent, if that be the
case, does not exempt the sales of stock transaction from donor's tax since Sec. 100 of the NIRC
categorically states that the amount by which the fair market value of the property exceeded the
value of the consideration shall be deemed a gift. Thus, even if there is no actual donation, the
difference in price is considered a donation by fiction of law.
Moreover, Sec. 7(c.2.2) of RR 06-08 does not alter Sec. 100 of the NIRC but merely sets the
parameters for determining the "fair market value" of a sale of stocks. Such issuance was made
pursuant to the Commissioner's power to interpret tax laws and to promulgate rules and
regulations for their implementation.
Lastly, petitioner is mistaken in stating that RMC 25-11, having been issued after the sale, was
being applied retroactively in contravention to Sec. 246 of the NIRC. Instead, it merely called for
the strict application of Sec. 100, which was already in force the moment the NIRC was enacted.
145
LOCAL TAXATION
Local Government Taxation
LOCAL MUNICIPALITIES HAVE DELEGATED POWER TO TAX
Pepsi Cola v. Municipality of Tanauan, Leyte

G.R. No. L-31156, February 27, 1976
Martin, J.
FACTS:
This is a case appealed to the Supreme Court from the Court of Appeals for purely questions of law
challenging the power of taxation delegated to Local Municipalities from the Court of First Instance.
Petitioner is Pepsi Cola, filing a complaint for the unconstitutionality of the Local Autonomy Act.
Respondent on the other hand is the Municipality of Tanauan which had 2 ordinances nos 23 and 27
which collected taxes 1/16th of a centavo for each bottle corked and 1 centavo on each volume of
capacity.
The tax imposed are denominated a municipal production tax.
Petitioner contends that the Local Municipality had no power to tax based on the unconstitutionality of
the Local Autonomy Act. Respondent avers that it does have authority.
ISSUE:
Is the power to tax delegated to Local Municipalities valid?
HELD:
Yes. The Local Autonomy is valid and constitutional.
The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of
right to every independent government, without being expressly conferred by the people. The plenary
nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would not suffice
to invalidate the said law as confiscatory and oppressive.
In the case at bar the municipality is well within its authority to tax Pepsi Cola through its ordinances
nos 23 and 27.
As such, Pepsi Cola must pay for the taxes.
146
LOCAL TAXATION
A LAWFUL BUSINESS OR CALLING MAY NOT, UNDER THE GUISE OF REGULATION, BE

UNREASONABLY INTERFERED WITH EVEN BY THE EXERCISE OF POLICE POWER
Acebedo Optical vs. Court of Appeals

G.R. No. 100152, March 31, 2000
Purisima, J.
FACTS:
This is a petition for review under Rule 45 of the Rules of Court seeking to nullify the dismissal of the
CA of petitioner’s original petition for certiorari, prohibition and mandamus against the City Mayor and
City Legal Officer of Iligan.
Petitioner, a corporation engaged in the selling of optical glasses, applied with the Office of the City
Mayor of Iligan (OCM) for a business permit. Respondent OCM issued the business permit despite
opposition of local optometrists. Thereafter, Samahan ng Optometrist sa Pilipinas (SOPI) filed a
complaint against the petitioner before the OCM, alleging that petitioner had violated the conditions set
forth in its business permit and requesting the cancellation and/or revocation of such permit. After
inspection of the City Legal Office, OCM sent a Notice of Resolution and Cancellation of Business
Permit to petitioner and giving it three months to wind up its affairs.
Petitioner then filed a petition for certiorari, prohibition and mandamus with prayer for restraining
order/preliminary injunction against respondents, but this was denied. Thereafter, petitioner filed a
petition for certiorari, prohibition and mandamus with the CA seeking to set aside the questioned Order
of Dismissal. The CA dismissed the Petition for lack of merit. Hence, this present petition.
In their defense, respondents alleged that as a valid exercise of police power, respondent City Mayor
has the authority to impose, as he did, special conditions in the grant of business permits.
ISSUE:
Was the business permit, which contains special conditions, filed by the City Mayor’s Office a valid
exercise of police power?
HELD:
No, as the business permit issued by the City Mayor’s Office was not exercised in accordance with
law.
Sec. 171, par. 2 (n) of BP Blg. 337, also known as the Local Government Code of 1983, provides that
the City Mayor shall grant or refuse to grant, pursuant to law, city licenses or permits, and revoke the
same for violation of law or ordinance or the conditions upon which they are granted.
While a business may be regulated, such regulation must, however, be within the bounds of reason, ie
the regulatory ordinance must be reasonable, and its provision cannot be oppressive amounting to an
arbitrary interference with the business or calling subject of regulation. A lawful business may not,
under the guise of regulation, be unreasonably interfered with even by the exercise of police power.
Petitioner is a private corporation that hires optometrists who practice their profession in the course of
their employment in petitioner’s optical shops. Such does not translate into practice of optometry by
petitioner itself. A business permit is issued primarily to regulate the conduct of business and the City
Mayor cannot, through the issuance of such permit, regulate the practice of a profession, like that of
optometry.
147
LOCAL TAXATION
LGU POWER TO TAX, LICENSE AND REGULATE WAGERS OR BETTING DOES NOT INCLUDE
POWER TO ISSUE FRANCHISE
Lim v. Pacquing
G.R. No. 115044, January 27, 1995
Padilla, J.
FACTS:
Congress enacted the Charter of the City of Manila in 1949, which included the following provision:
Sec. 18. Legislative Powers. — The Municipal Board shall have the following legislative powers:
xxx xxx xxx
(jj) To tax, license, permit and regulate wagers or betting by the public on boxing, sipa, bowling,
billiards, pools, horse and dog races, cockpits, jai-alai, roller or ice-skating on any sporting or athletic
contests, as well as grant exclusive rights to establishments for this purpose, notwithstanding any
existing law to the contrary.
In 1971, the Municipal Board of Manila issued an ordinance permitting Associated Development Corp.
(ADC) to operate a Jal-Alai in the city, although the corporation had no prior franchise granted by the
Congress to operate.
Thus, ADC anchored its franchise to operate Jal-Alai solely on the ordinance enacted by the Municipal
Board of Manila.
ISSUE:
Does the charter of the City of Manila authorizing the LGU in R.A. 409 to “tax, license and regulate
wagers or betting” necessarily include the power to issue franchise of the same?
HELD:
NO—It is clear from that the Congress did not delegate to the City of Manila the power "to franchise"
wagers or betting, including the jai-alai, but retained for itself such power "to franchise".
What Congress delegated to the City of Manila in R.A. 409, with respect to wagers or betting, was the
power to "license, permit, or regulate" which therefore means that a license or permit issued by the
City of Manila to operate a wager or betting activity would not amount to something meaningful unless
the holder of the permit or license was also franchised by the national government to so operate.
Hence, the City of Manila’s power to tax, license and regulate wagers or betting does not include the
power to issue franchise of the same.
(NOTE: This power to license, permit or regulate wagers or betting on jai-alai was removed from local
governments, including the City of Manila, and transferred to the Games and Amusements Board by
E.O. No. 392 in 1951. Also, in 1975, P.D. 771 expressly revoked all existing franchises and permits
issued by local governments. These developments, which the case actually focused more on,
rendered the portion discussing taxing, regulatory and franchising power, academic rather than
jurisprudential.)
148
LOCAL TAXATION
LGU MAY NOT ENACT AN ORDINANCE PROHIBITING OPERATION OF CASINO WHICH IS

AUTHORIZED BY STATUTE
Magtajas v. Pryce Properties Corp., Inc.

G.R. No. 111097 July 20, 1994
Cruz, J.
FACTS:
PAGCOR, following its authorization from P.D. 1869, announced the opening of a casino in Cagayan
de Oro City.
After this announcement, the Sangguniang Panlungsod of Cagayan de Oro City enacted Ordinance
No. 3353 prohibiting the issuance of business permits and cancelling business permits of
establishments allowing operation of casino. A year later, it went as far as penalizing operation of
casino in its jurisdiction by enacting Ordinance No. 3375-93.
ISSUE:
Can an LGU enact an ordinance prohibiting PAGCOR from legitimately pursuing casino operations as
authorized by law?
HELD:
NO—Casino gambling is authorized by P.D. 1869. This decree has the status of a statute that cannot
be amended or nullified by a mere ordinance.
Under Section 458 of the Local Government Code, local government units are authorized to prevent or
suppress, among others, "gambling and other prohibited games of chance."
Obviously, this provision excludes games of chance which are not prohibited but are in fact permitted
by law. The language of the section is clear and unmistakable. Under the rule of noscitur a sociis, a
word or phrase should be interpreted in relation to, or given the same meaning of, words with which it
is associated. Accordingly, the Court held that since the word "gambling" is associated with "and other
prohibited games of chance," the word should be read as referring to only illegal gambling which, like
the other prohibited games of chance, must be prevented or suppressed.
Hence, it was not competent for the Sangguniang Panlungsod of Cagayan de Oro City to enact
Ordinance No. 3353 prohibiting the use of buildings for the operation of a casino and Ordinance No.
3375-93 prohibiting the operation of casinos; likewise, they are ultra vires and void.
149
LOCAL TAXATION
SEC. 143(H) OF THE LGC PROHIBITS LGUs LIKE THE CITY OF MANILA FROM IMPOSING
TAXES TWICE ON MANUFACTURERS
Unilever Philippines Inc. v. The Treasurer of the City of Manila

C.T.A. AC No. 56; June 2, 2010
Uy, J.
FACTS:
The instant Petition for Review seeks the reversal of the Decision rendered by Branch 49 of the RTC
of Manila denying petitioner Unilever Philippines Inc. (Unilever)’s claim for refund.
On October 4, 2001, petitioner, through its counsel, wrote to respondent to seek refund of business
taxes paid under Section 21 of the Manila Revenue Code (MRC). As its claim for refund remained
unacted upon, petitioner filed a Petition for Refund with an application for a temporary restraining order
and/or writ of preliminary injunction before the Regional Trial Court of Manila, Branch 49, on January
17, 2003.
It prayed, among others, for the court a quo to declare petitioner as not liable for business taxes under
Section 21 of the Manila Revenue Code, having already paid business taxes under Section 14 thereof;
and to refund to petitioner the taxes paid for the first quarter of taxable year 2001 in the amount of
P8,773,944.00.
ISSUE:
Is the imposition of both Sections 14 and 21 of the MRC on Unilever constitute direct duplicate
taxation?
HELD:
Yes. Imposition of business taxes under Sections 14 and 21 of the Manila Revenue Code constitutes
double taxation.
Section 14 of the Manila Revenue Code imposes tax on manufacturers. Similarly, Section 21 of the
same Code imposes business tax on persons who sell goods and services in the course of trade or
business, and those who import goods whether for business or otherwise. Simply put, both Sections
14 and 21 of the Manila Revenue Code impose business taxes.
Section 143(h) of the Local Government Code of 1991 prohibits local government units like the City of
Manila from imposing taxes twice on manufacturers such as petitioner. It only allows the imposition of
new business taxes in cases not otherwise specified in paragraphs (a) to (g) thereof. Thus, businesses
taxed under Sections 14 of the Manila Revenue Code can no longer be taxed under Section 21
thereof. This is the literal import of the law.
Also subjecting respondent to tax under Section 21 of the RCM is prohibited as it will constitute the
obnoxious type of double taxation. Furthermore, the Local Government Code of 1991 does not
authorize local government units to impose taxes on end-users and/or to appoint withholding agents
for purposes of collecting taxes. In the absence of such authority there is no valid basis for the
imposition of any tax on end-users or tax on purchases and for constituting petitioner as withholding
agent for purposes of collecting such tax.
150
LOCAL TAXATION
A HOLDING COMPANY IS NOT SUBJECT TO LOCAL BUSINESS TAX ON DIVIDEND INCOME
Michigan Holdings, Inc. v. The City Treasurer of Makati City

CTA EB No. 1093, June 17, 2015
FACTS:
Respondent City Treasurer of Makati assessed Petitioner Michigan Holdings, Inc. (MHI) for alleged
deficiency local business tax (LBT) on dividend income earned for taxable year 2006. MHI protested
the deficiency LBT assessment, arguing that dividend income is subject to income tax hence exempt
from LBT under Section 133(a) of the Local Government Code (LGC).
As the City Treasurer did not act on its protest within the 60-day period, MHI filed a complaint before
the Makati Regional Trial Court (RTC) for the cancellation of the LBT assessment. The RTC dismissed
MHI’s appeal on the ground that it was directed at the validity of Section 3A.02(p) of the Revised
Makati Revenue Code, which should have been questioned before the Secretary of Justice within 30
days from effectivity of the said ordinance as prescribed by Section 187 of the LGC. MHI filed a
Petition for Review with the CTA. The CTA Second Division upheld the ruling of the RTC. MHI
elevated the case to the CTA En Banc.
ISSUES:
1. Is MHI prohibited from questioning the legality of the basis of the LBT assessment?
2. Can the Makati City Treasurer levy LBT on MHI’s dividend income?
HELD:
1. No. Section 195 of the LGC does not limit the grounds for contesting an LBT assessment. Thus, an
aggrieved taxpayer is not barred from challenging the validity of a tax ordinance or a provision thereof
upon which the assessment is based. There is nothing in Section 195 of the LGC that requires a
taxpayer who relies on this ground to first assail the validity of the ordinance before the Secretary of
Justice. Section 195 as a taxpayer’s remedy against an assessment is separate, distinct, and
independent from Section 187 that prescribes the procedure for contesting the constitutionality of a tax
ordinance.
2. No. Makati City has no authority to impose LBT on the dividend income of MHI. Section 133(a) of
the LGC expressly provides that the taxing powers of provinces, cities, municipalities, and barangays
shall not extend to the levy of income tax, except when levied on banks and other financial institutions.
Section 131 (e) defines “banks and other financial institutions,” which excludes holding companies.
Section 3.A.02(h) of the Revised Makati Revenue Code imposes an LBT on the dividend income of
banks and other financial institutions. Section 3.A.02(p), however, makes holding companies, such as
MHI, liable for the same business tax. Section 3.A.02(p) of the Revised Makati Revenue Code violates
the limit set by Section 133(a) of the LGC, which prohibits the imposition of income tax except when
levied on banks and other financial institutions. The said provision is therefore an ultra vires exercise of
local taxing power that cannot be given effect without violating the principle that an ordinance must
confirm with and can neither amend nor repeal a statute.
151
LOCAL TAXATION
ANY FORM OF IMPOSITION ON GOODS PASSING THROUGH THE TERRITORIAL

JURISDICTION OF THE MUNICIPALITY IS CLEARLY PROHIBITED EVEN IF IT IS ACTUALLY
IMPOSED FOR POLICE SURVIELLANCE ON THE GOODS
Palma Development Corporation v. Municipality of Malangas Zamboanga Del Sur

G.R. No.152492, October 16, 2003
Panganiban, J.
FACTS:
This is a Petition for Review under Rule 45 assailing the Court of Appeals decision reversing the
decision of the RTC’s finding that Municipal Revenue Code No. 09 as ultra vires.
Petitioner Palma Development Corporation is engaged in milling and selling rice and corn to
wholesalers in Zamboanga City. It uses the municipal port of Malangas, Zamboanga del Sur as
transshipment point for its goods. The port, as well as the surrounding roads leading to it, belong to
and are maintained by the Municipality of Malangas, Zamboanga del Sur. The municipality passed
Municipal Revenue Code No. 09, Series of 1993. Section 5G.01 provides that here shall be collected
service fee for its use of the municipal road[s] or streets leading to the wharf and to any point along the
shorelines within the jurisdiction of the municipality and for police surveillance on all goods and all
equipment harbored or sheltered in the premises of the wharf and other within the jurisdiction of this
municipality.
The service fees imposed by Section 5G.01 of the ordinance was paid by petitioner under protest. It
contended that under Republic Act No. 7160, otherwise known as the Local Government Code of
1991, municipal governments did not have the authority to tax goods and vehicles that passed through
their jurisdictions. Petitioner filed against the Municipality of Malangas on November 20, 1995, an
action for declaratory relief assailing the validity of Section 5G.01 of the municipal ordinance before the
RTC. The RTC declared the entire Municipal Revenue Code No. 09 as ultra vires and, hence, null and
void. On appeal, the CA ruled that Section 5G.01 is valid.
Petitioner argues that while respondent has the power to tax or impose fees on vehicles using its
roads, it cannot tax the goods that are transported by the vehicles. The provision of the ordinance
imposing a service fee for police surveillance on goods is allegedly contrary to Section 133(e) of RA
No. 7160, Respondent claims that there is no proof that the P0.50 fee for every sack of rice or corn is a
fraudulent legislation enacted to subvert the limitation imposed by Section 133(e) of RA No. 7160.
Moreover, it argues that allowing petitioner to use its roads without paying the P0.50 fee for every sack
of rice or corn would contravene the principle of unjust enrichment.
ISSUE:
Is Section 5G.01 of Municipal Revenue Code No. 09 is valid.
HELD:
No. By express language of Sections 153 and 155 of RA No. 7160, local government units, through
their Sanggunian, may prescribe the terms and conditions for the imposition of toll fees or charges for
the use of any public road, pier or wharf funded and constructed by them. A service fee imposed on
vehicles using municipal roads leading to the wharf is thus valid. However, Section 133(e) of RA No.
7160 prohibits the imposition, in the guise of wharfage, of fees -- as well as all other taxes or charges
in any form whatsoever -- on goods or merchandise. It is therefore irrelevant if the fees imposed are
actually for police surveillance on the goods, because any other form of imposition on goods passing
through the territorial jurisdiction of the municipality is clearly prohibited by Section 133(e).
Unpersuasive is the contention of respondent that petitioner would unjustly be enriched at the formers
expense. Though the rules thereon apply equally well to the government, for unjust enrichment to be
deemed present, two conditions must generally concur: (a) a person is unjustly benefited, and (b) such
benefit is derived at anothers expense or damage. In the instant case, the benefits from the use of the
municipal roads and the wharf were not unjustly derived by petitioner. Those benefits resulted from the
152
infrastructure that the municipality was mandated by law to provide. There is no unjust enrichment
where the one receiving the benefit has a legal right or entitlement thereto, or when there is no causal
relation between ones enrichment and the others impoverishment.
153
LOCAL TAXATION
BOI CERTIFICATION; PIONEER ENTERPRISE; SIX-YEAR TAX HOLIDAY ON LOCAL TAXES

REMOVAL OF THE BLANKET EXCLUSION OF GOVERNMENT INSTRUMENTALITIES FROM
LOCAL TAXATION
Batangas Power Corp. v. Batangas City

G.R. No. 152675, April 28, 2004
Puno, J.
FACTS:
Enron Power Development Corporation (Enron) agreed to supply a power station to National Power
Corp. (NPC) and transfer its plant to the latter after ten (10) years of operation. Section 11.02 of the
Build Operate and Transfer (BOT) Agreement between Enron and NPC provided that NPC shall be
responsible for the payment of all taxes that may be imposed on the power station, except income
taxes and permit fees. Subsequently, Enron assigned its obligation under the BOT Agreement to
petitioner Batangas Power Corporation (BPC).
BPC registered itself with the Board of Investments (BOI) as a pioneer enterprise. On September 23,
1992, the BOI issued a certificate of registration to BPC as a pioneer enterprise entitled to a tax
holiday for a period of six (6) years. The construction of the power station in respondent Batangas City
was then completed. BPC operated the station.
Batangas City (the city, for brevity), thru its legal officer Teodulfo A. Deguito, sent a letter to BPC
demanding payment of business taxes and penalties, commencing from the year 1994 as provided
under Ordinance XI or the 1992 Batangas City Tax Code. BPC refused to pay, citing its tax-exempt
status as a pioneer enterprise for six (6) years under Section 133 (g) of the LGC. Later on, city
treasurer Benjamin S. Pargas modified the city’s tax claim and demanded payment of business taxes
from BPC only for the years 1998-1999. He acknowledged that BPC enjoyed a 6-year tax holiday as a
pioneer industry but its tax exemption period expired on September 22, 1998, six (6) years after its
registration with the BOI on September 23, 1992. The city treasurer held that thereafter BPC became
liable to pay its business taxes.
BPC still refused to pay the tax. It insisted that its 6-year tax holiday commenced from the date of its
commercial operation on July 16, 1993, not from the date of its BOI registration in September 1992. It
furnished the city with a BOI letter wherein BOI designated July 16, 1993 as the start of BPC’s income
tax holiday as BPC was not able to immediately operate due to force majeure. BPC claimed that the
local tax holiday is concurrent with the income tax holiday. In the alternative, BPC asserted that the city
should collect the tax from the NPC as the latter assumed responsibility for its payment under their
BOT Agreement.
The matter was not put to rest. The city legal officer insisted that BPC’s tax holiday has already
expired, while the city argued that it directed its tax claim to BPC as it is the entity doing business in
the city and hence liable to pay the taxes. The city alleged that it was not privy to NPC’s assumption of
BPC’s tax payment under their BOT Agreement as the only parties thereto were NPC and BPC.
BPC adamantly refused to pay the tax claims and reiterated its position. The city was likewise
unyielding on its stand. The NPC then intervened. While admitting assumption of BPC’s tax obligations
under their BOT Agreement, NPC refused to pay BPC’s business tax as it allegedly constituted an
indirect tax on NPC which is a tax-exempt corporation under its Charter. Petitioners BPC and NPC
insist that NPC’s exemption from all taxes under its Charter had not been repealed by the LGC. They
argue that NPC’s Charter is a special law which cannot be impliedly repealed by a general and later
legislation like the LGC. They likewise anchor their claim of tax-exemption on Section 133 (o) of the
LGC which exempts government instrumentalities, such as the NPC, from taxes imposed by LGUs,
citing in support thereof the case of Basco v. PAGCOR.
ISSUES:
154
1. Did BPC’s 6-year tax holiday commence on the date of its BOI registration as a pioneer enterprise
and not on the date of its actual commercial operation as certified by the BOI?
2. Were NPC’s tax exemption privileges under its Charter were withdrawn by Section 193 of the Local
Government Code (LGC)?
HELD:
1. Yes, the BPC’s 6-year tax holiday commenced on the date of its BOI registration as a pioneer
enterprise.
Sec. 133 (g) of the LGC, which proscribes LGUs from levying taxes on BOI-certified pioneer
enterprises for a period of six years from the date of registration, applies specifically to taxes imposed
by the local government, like the business tax imposed by Batangas City on BPC in the case at bar.
Reliance of BPC on the provision of Executive Order No. 226 (1987 Omnibus Investment Code, as
amended), specifically Section 1, Article 39, Title III, is clearly misplaced as the six-year tax holiday
provided therein which commences from the date of commercial operation refers to income taxes
imposed by the national government on BOI-registered pioneer firms. Clearly, it is the provision of the
Local Government Code that should apply to the tax claim of Batangas City against the BPC.
Hence, the 6-year tax exemption of BPC in relation to local taxes should thus commence from the date
of BPC’s registration with the BOI. Meaning, said exemption began on Sept. 23, 1992 and ending on
Sept. 22, 1998.
2. Yes, the tax exemption privileges under the NPC Charter were withdrawn by the LGC.
The effect of the LGC on the tax exemption privileges of the NPC has already been extensively
discussed and settled in the case of National Power Corporation v. City of Cabanatuan. In said case,
the SC recognized the removal of the blanket exclusion of government instrumentalities from local
taxation as one of the most significant provisions of the 1991 LGC. Specifically, Section 193 of the
LGC, an express and general repeal of all statutes granting exemptions from local taxes, withdrew the
sweeping tax privileges previously enjoyed by the NPC under its Charter. Considered as the most
revolutionary piece of legislation on local autonomy, the LGC effectively deals with the fiscal
constraints faced by LGUs. It widens the tax base of LGUs to include taxes which were prohibited by
previous laws.
Furthermore, the NPC cannot successfully rely on the Basco case as this was decided prior to the
effectivity of the LGC, when there was still no law empowering local government units to tax
instrumentalities of the national government. Consequently, when NPC assumed the tax liabilities of
the BPC under their 1992 BOT Agreement, the LGC which removed NPC’s tax exemption privileges
had already been in effect for six (6) months.
Thus, while BPC remains to be the entity doing business in said city, it is the NPC that is ultimately
liable to pay said taxes under the provisions of both the 1992 BOT Agreement and the 1991 Local
Government Code.
155
LOCAL TAXATION
THE PROVINCE SHALL NOT IMPOSE THE TAX ON BUSINESS ENJOYING FRANCHISE
OPERATING WITHIN THE TERRITORIAL JURISDICTION OF ANY CITY LOCATED WITHIN THE
PROVINCE
Provincial Government of Cagayan v. Smart Communications, Inc.

C.T.A. AC No. 92, July 25, 2013
FACTS:
Petitioner claims that since mid of 2009, it had been asking respondent to submit a statement of its
gross receipts or income in the province of Cagayan for purposes of computing its franchise tax
pursuant to Section 2G.02 of the Cagayan Revenue Code of 2005, in relation to Sec. 137 of the LGC.
Despite advisement, respondent failed to submit any, prompting petitioner to issue a "presumptive tax
assessment” amounting to 86.5M.
In its protest letter, respondent clarified that it has only one sales office in the Province of Cagayan and
it is located in Tuguegarao City, which has its own taxing jurisdiction for purposes of franchise tax.
Petitioner argued that respondent conducts its telecommunications business in the entire province of
Cagayan. Petitioner emphasized that respondent's business operates not only in the Province of
Cagayan but in the entire country as well.
ISSUE:
Whether or not the petitioner cannot impose and collect franchise tax from respondent on its
telecommunications business in the Province of Cagayan on the ground that the business/ sales office
of respondent is located only in Tuguegarao City.
HELD:
YES, Cagayan cannot. In the case Digitel v. Pangasinan, the SC held that the significant provisions to
the present petition are Sections 137 and 232 of the LGC. Section 137 of the Local Government Code,
in principle, withdrew any exemption from the payment of a tax on businesses enjoying a franchise.
Expressly, it authorized local governments to impose a franchise tax on businesses enjoying a
franchise within its territorial jurisdiction.
While petitioner may legally impose franchise tax on businesses enjoying franchise operating within its
territorial jurisdiction in accordance with Section 137 of the LGC, the Implementing Rules and
Regulation of the law, specifically, Article 226(a) and (b), thereof, which dictates the situs of taxation
for franchise tax, clarified and explicitly delimits such power. The provisions provide that the petitioner
is not allowed to impose franchise tax on businesses enjoying franchise operating within the territorial
jurisdiction of any city located within the province, which has its own taxing power pursuant to Section
151 of the LGC.
In the case at bar, it is Tuguegarao located within the Province of Cagayan which has the jurisdiction
to assess franchise tax against respondent, as it already did. Therefore, Cagayan cannot impose
franchise tax on the respondent’s business anymore.
156
LOCAL TAXATION
A TAX ON BUSINESS IS DISTINCT FROM A TAX ON THE ARTICLE ITSELF.
Philippine Petroleum Corporation vs. Municipality of Pililla, Rizal

G.R. No. 90766, June 3, 1991
Paras, J.:
FACTS:
This is a petition for certiorari seeking to annul and set aside the decision of the Regional Trial Court
upholding the legality of the taxes, fees and charges being imposed in Pililla under Municipal Tax
Ordinance No. 1. PPC owns and maintains an oil refinery including forty-nine storage tanks for its
petroleum products in Malaya, Pililla, Rizal.
On June 28, 1973, Presidential Decree No. 231 was issued governing the exercise by provinces,
cities, municipalities and barrios of their taxing and other revenue-raising powers
Respondent municipality, through Municipal Council Resolution No. 25, S-1974, enacted Municipal
Tax Ordinance No. 1 on June 14, 2974, which took effect on July 1, 1974. Sections 9 and 10 imposed
a tax on business, except for those for which fixed taxes are provided in the Local Tax Code on
manufacturers, importers, or producers of any article of commerce of whatever kind or nature,
including brewers, distillers, rectifiers, repackers, and compounders of liquors, distilled spirits and/or
wines in accordance with the schedule found in the Local Tax Code, as well as mayor’s permit,
sanitary inspection fee and storage permit fee for flammable, combustible or explosive substances,
while Section 139 imposed surcharges and interests on unpaid taxes, fees or charges.
On June 3, 1997, P.D. No. 1158 otherwise known as the National Internal Revenue Code of 1977 was
enacted, Section 153 of which specifically imposes specific tax on refined and manufactured mineral
oils and motor fuels. Enforcing the provisions of the ordinance, respondent municipality filed a
complaint on April 4, 1986 against PPC for the collection of the business tax from 1979 to 1986,
storage permit fees from 1975 to 1986, mayor’s permit and sanitary inspection fees from 1975 to 1984.
ISSUE:
Is PPC whose oil products are subject to specific tax under the NIRC, still liable to pay tax on
business, storage fees, mayor’s permit and sanitary inspection fee?
HELD:
Yes, PPC is liable except for storage fees.
There is no question that Pililla’s Municipal Tax Ordinance No.1 imposing the assailed taxes, fees and
charges is valid especially Section 9(A) which according to the trial court “was lifted in toto and/or is a
literal reproduction of Section 19(a) of the Local Tax Code as amended by P.D. No. 426.” It conforms
with the mandate of said law.
But P.D. No. 426 amending the Local Tax Code is deemed to have repealed Provincial Circular Nos.
26-73 and 26-A-73 issued by the Secretary of Finance when Sections 19 and 19(a) were carried over
into P.D. No. 426 and no exemptions were given to manufacturers, wholesalers, retailers or dealers in
petroleum products.
Furthermore, while Section 2 of P.D. 436 prohibits the imposition of local taxes on petroleum products,
said decree did not amend Sections 19 and 19(a) of P.D. 231 as amended by P.D. 426, wherein the
municipality is granted the right to levy taxes on business of manufacturers, importers, producers of
any article of commerce of whatever kind or nature. A tax on business is distinct from a tax on the
article itself. Thus, if the imposition of tax on business of manufacturers, etc. in petroleum products
contravenes a declared national policy, it should have been expressly stated in P.D. No. 436.
The storage permit fee being imposed by Pililla’s tax ordinance is a fee for the installation and keeping
in storage of any flammable, combustible or explosive substances. Inasmuch as said storage makes
use of tanks owned not by the municipality of Pililla, but by petitioner PPC, same is obviously not a
charge for any service rendered by the municipality as what is envisioned in Section 37 of the same
Code.
Therefore, aside from the storage fees, PPC is liable to pay the taxes, charges and fees under the tax
ordinance.
157
LOCAL TAXATION
SECTION 193 OF LGC WITHDREW TAX EXEMPTION PREVIOUSLY GRANTED
City of Iriga v. Camarines Sur III Electric Cooperative, Inc. (CASURECO III)
G.R. No. 192945, September 5, 2012
Perlas-Bernabe, J.
FACTS:
CASURECO III is an electric cooperative duly organized and existing by virtue of PD No. 269. It is
engaged in the business of electric power distribution to various end-users and consumers within the
City of Iriga and the municipalities of the Province of Camarines Sur.
In 2003, petitioner City of Iriga required CASURECO III to submit a report of its gross receipts for the
period 1997-2002 to serve as the basis for the computation of franchise taxes, fees and other charges.
CASURECO III complied and was subsequently assessed taxes. On January 7, 2004, petitioner made
a final demand on CASURECO III to pay the franchise taxes due for the period 1998-2003 and real
property taxes due for the period 1995-2003. CASURECO III, however, refused to pay said taxes on
the ground that it is an electric cooperative provisionally registered with the Cooperative Development
Authority (CDA) (RA No. 6938), and therefore exempt from the payment of local taxes.
The RTC ruled that CASURECO III is liable for real property taxes and franchise taxes. CASURECO III
raised it on appeal questioning its liability for franchise tax. The CA found that CASURECO III is not
liable for franchise tax by virtue of Article 131 of the Local Government Code.
ISSUE:
Whether or not CASURECO III is liable for the payment of franchise tax?
HELD:
Yes. CASURECO III is not exempt from franchise tax. PD 269, which took effect on August 6, 1973,
granted electric cooperatives registered with the NEA, like CASURECO III, several tax privileges, one
of which is exemption from the payment of "all national government, local government and municipal
taxes and fees, including franchise, filing, recordation, license or permit fees or taxes."
On March 10, 1990, Congress enacted into law RA 6938, otherwise known as the "Cooperative Code
of the Philippines," and RA 6939 creating the CDA. The latter law vested the power to register
cooperatives solely on the CDA, while the former provides that electric cooperatives registered with the
NEA under PD 269 which opt not to register with the CDA shall not be entitled to the benefits and
privileges under the said law.
On January 1, 1992, the LGC took effect, and Section 193 thereof withdrew tax exemptions or
incentives previously enjoyed by "all persons, whether natural or juridical, including government-owned
or controlled corporations, except local water districts, cooperatives duly registered under R.A. No.
6938, non-stock and non-profit hospitals and educational institutions."
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary, Department
of Interior and Local Government, the Court held that the tax privileges granted to electric cooperatives
registered with NEA under PD 269 were validly withdrawn and only those registered with the CDA
under RA 6938 may continue to enjoy the tax privileges under the Cooperative Code.
Therefore, CASURECO III can no longer invoke PD 269 to evade payment of local taxes. Moreover, its
provisional registration with the CDA which granted it exemption for the payment of local taxes was
extended only until May 4, 1992. Thereafter, it can no longer claim any exemption from the payment of
local taxes, including the subject franchise tax.
158
LOCAL TAXATION
TO BE LIABLE TO THE LOCAL FRANCHISE TAX, ASIDE FROM THE FACT THAT THE
FRANCHISEE IS EXERCISING ITS ELECTRICAL TRANSMISSION FUNCTION WITHIN THE
TERRITORIAL JURISDICTION CONCERNED, THE FRANCHISEE SHOULD LIKEWISE REALIZE
ITS GROSS ANNUAL RECEIPTS WITHIN THE SAME TERRITORIAL JURISDICTION
National Transmission Corporation Vs Province Of Agusan Del Norte

CTA EB No. 950, March 17, 2014
COTANGCO-MANALASTAS,J.
FACTS:
Petitioner National Transmission Corporation (TRANSCO) is a government instrumentality, created
pursuant to Republic Act (R.A.) No. 9136, otherwise known as the 'Electric Power Industry Reform Act
of 2001' (EPIRA). petitioner received a letter entitled "Notice of Franchise Tax Delinquency in the
Province of Agusan del Norte" dated January 19, 2009 from respondent, through Mr. Leopolda L.
Avila, the Provincial Treasurer. In the said notice, respondent assessed petitioner in the aggrega
amount of P3,401,001.92, inclusive of surcharge and interest, representing franchise tax due for the
years 2003 to 2008 pursuant to the provision of Sections 14 and 17 of the Agusan del Norte Revenue
Code of 1993 under Provincial Ordinance No. 008-93 as amended by Provincial Revenue Code No.
195- 2006 and Section 3, paragraph (b), item 1, 2 and 3 of the Local Finance Circular No. 1-07.
Petitioner asserts that the Province of Agusan del Norte cannot impose franchise tax based on gross
receipts realized outside its territorial jurisdiction. Petitioner contends that Section 5 of the EPIRA
divided the electric power industry into four sectors, namely: generation, transmission, distribution and
supply. Petitioner was created to assume the "transmission" functions while the "distribution" function
shall be undertaken by private distribution utilities, cooperatives, local government units presently
undertaking this function and other duly authorized entities (Section 22, EPIRA). Hence, petitioner
does not deal with individual households; its customers being "private distribution utilities, cooperatives
and local government units" undertaking the distribution of electricity. Distribution of electricity to
households or any end-user is the distribution utilities' function. As a transmission corporation,
petitioner derived gross receipts from its transmission of electricity to ANECO, a distribution utility.
Petitioner has no knowledge of or control as to where ANECO distributes the electricity transmitted to
it.
Petitioner argues that under Section 137 of R.A. No. 7160, reinforced by Articles 226 (a) and (b) of
R.A. No. 7160's Implementing Rules and Regulations (IRR), the local franchise tax that may be
collected shall be limited to those realized within a local government's territorial jurisdiction. Since
ANECO is located in Butuan City, outside Agusan del Norte's territorial jurisdiction, petitioner's gross
receipts are realized outside of Agusan del Norte's jurisdiction. Applying law and jurisprudence,
Agusan del Norte has no authority to impose franchise tax on petitioner based on gross receipts from
ANECO.
ISSUE:
Whether petitioner's gross receipts from ANECO were realized in Butuan City, where the latter's
principal office is located, or in the Province of Agusan del Norte, where ANECO distributes electricity
(ANECO distributes electricity to the Province of Agusan del Norte including Butuan City).
HELD:
In corporation law, the principal office of the corporation is the place where the books of the
corporation are kept, where its officers usually and ordinarily meet for the purpose of managing the
affairs and transacting the business of the corporation.26 Likewise, in corporation law, the residence of
a corporation is the place where its principal office is established.27 Also, applying the doctrine in the
City of !riga us. CASURECO III, supra, by analogy, the place where the
company's principal office is located is from where it operates.
ANECO is deemed to be located within the City of Butuan.
159
In this case, petitioner's gross receipts were received from ANECO, the principal office of which is
located in the City of Butuan, hence, the one authorized to impose the franchise tax on petitioner's
gross receipts from ANECO is the City of Butuan. Consequently, the Province of Agusan del Norte
cannot impose the franchise tax on petitioner's gross receipts from ANECO pursuant to Article 226 of
the Implementing Rules and Regulations of the LGC which provides that the province shall not impose
the tax on business enjoying franchise operating within the territorial jurisdiction of any city located
within the province. maintenance of its high voltage transmission facilities , including grid24
interconnections and ancillary services.2s
In other words, since petitioner's franchise involves the transport of power from the generation plant to
its customers (distribution utilities, electric cooperatives, etc.), then the transmission function is
exercised starting from the places where the generation plants are located up to the location of its
customers and in the places where the transmission lines traverse and where the substations and
related facilities are located.
Hence, even if petitioner's substation is located in the City of Butuan, there is nothing on record which
shows that its high voltage transmission facilities, including grid interconnections and ancillary services
in operating the business to its customers are not within the territory of the Province of Agusan del
Norte.
Therefore, petitioner exercised its privileges under its franchise, with respect to its electrical
transmission function, within the Province of Agusan del Norte, including the City of Butuan.
However, as also established in the above-mentioned CTA cases, to be liable to the local franchise
tax, aside from the fact that the franchisee is exercising its electrical transmission function within the
territorial jurisdiction concerned, the franchisee should likewise realize its gross annual receipts within
the same territorial jurisdiction pursuant to Section 137 of the LGC which provides that the franchise
tax shall be "based on the incoming receipt, or realized, within its territorial jurisdiction."
It is of no moment that the electricity transmitted to ANECO is subsequently distributed to end-users

located in both the City of Butuan and the municipalities of the Province of Agusan del Norte since
petitioner derives its gross receipts from its transmission of electricity to ANECO, a distribution
utility, and not from the end-users.
160
LOCAL TAXATION
PROHIBITION AGAINST THE IMPOSITION OF PERCENTAGE TAXES REFERS TO

MUNICIPALITIES AND MUNICIPAL DISTRICTS BUT NOT TO CHARTERED CITIES
Philippine Match Co., LTD v. The City of Cebu and Jesus E. Zabate
G.R. No. L-30745 January 18, 1978
AQUINO, J.
FACTS:
The Philippine Match Co., Ltd., whose principal office is in Manila, is engaged in the manufacture of
matches. Its factory is located at Punta, Sta. Ana, Manila. It ships cases or cartons of matches from
Manila to its branch office in Cebu City for storage, sale and distribution within the territories and
districts under its Cebu branch or the whole Visayas-Mindanao region. Petitioner assails the legality of
Ordinance No. 279 of Cebu City which imposes a quarterly tax on gross sales or receipts of
merchants, dealers, importers and manufacturers of any commodity doing business" in Cebu City. It
imposes a sales tax of one percent (1%) on the gross sales, receipts or value of commodities sold,
bartered, exchanged or manufactured in the city in excess of P2,000 a quarter. Section 9 of the
ordinance provides that, for purposes of the tax, "all deliveries of goods or commodities stored in the
City of Cebu, or if not stored are sold" in that city, "shall be considered as sales" in the city and shall be
taxable. It would seem that under the tax ordinance sales of matches consummated outside of the city
are taxable as long as the matches sold are taken from the company's stock stored in Cebu City.
The company paid under protest to the city t the sum of P12,844.61 as one percent sales tax on those
three classes of out-of-town deliveries of matches for the second quarter of 1961 to the second quarter
of 1963. The company in its letter of April 15, 1961 to the city treasurer sought the refund of the sales
tax paid for out-of-town deliveries of matches. invoked Shell Company of the Philippines, Ltd. vs.
Municipality of Sipocot, Camarines Sur, 105 Phil. 1263. In that case sales of oil and petroleum
products effected outside the territorial limits of Sipocot, were held not to be subject to the tax imposed
by an ordinance of that municipality. It assails the legality of the tax which the city treasurer collected
on out-of- town deliveries of matches, to wit: (1) sales of matches booked and paid for in Cebu City but
shipped directly to customers outside of the city; (2) transfers of matches to newsmen assigned to
different agencies outside of the city and (3) shipments of matches to provincial customers pursuant to
salesmen's instructions.The city treasurer denied the request. His stand is that under section 9 of the
ordinance all out-of-town deliveries of latches stored in the city are subject to the sales tax imposed by
the ordinance.
ISSUE:
Can the City of Cebu tax sales of matches which were perfected and paid for in Cebu City but the
matches were delivered to customers outside of the City.
HELD:
Yes. The city can validly tax the sales of matches to customers outside of the city as long as the orders
were booked and paid for in the company's branch office in the city. Those matches can be regarded
as sold in the city, as contemplated in the ordinance, because the matches were delivered to the
carrier in Cebu City. The taxing power validly delegated to cities and municipalities is defined in the
Local Autonomy Act, Republic Act No. 2264. Under this law, the prohibition against the imposition of
percentage taxes refers to municipalities and municipal districts but not to chartered cities, and, that
the taxing power of cities, municipalities and municipal districts may be used (1) "upon any person
engaged in any occupation or business, or exercising any privilege" therein; (2) for services rendered
by those political subdivisions or rendered in connection with any business, profession or occupation
being conducted therein, and (3) to levy, for public purposes, just and uniform taxes, licenses or fees.
The sales in were in the city and the matches sold were stored in the city. The fact that the matches
were delivered to customers, whose places of business were outside of the city, would not place those
sales beyond the city's taxing power. Those sales formed part of the merchandising business being
assigned on by the company in the city. In essence, they are the same as sales of matches fully
161
consummated in the city. Furthermore, because the sellers place of business is in Cebu City, it cannot
be sensibly argued that such sales should be considered as transactions subject to the taxing power of
the political subdivisions where the customers resided and accepted delivery of the matches sold.
Thus, the city can tax sales of matches which were perfected and paid for in Cebu City but the
matches were delivered to customers outside of the City.
162
LOCAL TAXATION
THE TAX EXEMPTION MUST BE EXPRESSED IN THE STATUTE IN CLEAR LANGUAGE THAT
LEAVES NO DOUBT OF THE INTENTION OF THE LEGISLATURE TO GRANT SUCH EXEMPTION
Philippine Long Distance Telephone Company, Inc. v. Province of Laguna and Manuel E.
Leycano Jr.
G.R. No. 151899, August 16, 2005
Garcia, J.
FACTS:
PLDT is a holder of a legislative franchise under Act No. 3436, as amended, to render local and
international telecommunications services. On August 24, 1991, the terms and conditions of its
franchise were consolidated under Republic Act No. 7082, Section 12 of which embodies the so-called
"in-lieu-of-all taxes" clause, whereunder PLDT shall pay a franchise tax equivalent to three percent
(3%) of all its gross receipts, which franchise tax shall be "in lieu of all taxes". Meanwhile, or on
January 1, 1992, Republic Act No. 7160, otherwise known as the Local Government Code, took effect.
Section 137 of the Code, in relation to Section 151 thereof, grants provinces and other local
government units the power to impose local franchise tax on businesses enjoying a franchise. By
Section 193 of the same Code, all tax exemption privileges then enjoyed by all persons, whether
natural or juridicial, save those expressly mentioned therein, were withdrawn, necessarily including
those taxes from which PLDT is exempted under the "in-lieu-of-all taxes" clause in its charter.
Invoking its authority under Section 137, supra, of the Local Government Code, the Province of
Laguna, through its local legislative assembly, enacted Provincial Ordinance No. 01-92, imposing a
franchise tax upon all businesses enjoying a franchise, PLDT included. PLDT paid the Province of
Laguna its local franchise tax liability for the year 1998. Prior thereto, Congress enacted Republic Act
No. 7925, otherwise known as the Public Telecommunications Policy Act of the Philippines which took
effect on March 16, 1995. The Department of Finance issued a ruling that PLDT, among other
telecommunication companies, became exempt from local franchise tax under the said law. PLDT
refused to pay the Province of Laguna its local franchise tax liability for 1999. And, on December 22,
1999, it even filed with the Office of the Provincial Treasurer a written claim for refund of the amount it
paid as local franchise tax for 1998. With no refund having been made, PLDT instituted with the
Regional Trial Court at Laguna a petition therefor against the Province and its Provincial Treasure.
RTC denied PLDT’s petition.
ISSUE:
May the province impose franchise tax on PLDT.
HELD:
Yes. In PLDT vs. City of Davao, and again in PLDT vs. City of Bacolod, et al., the Court has
interpreted Section 23 of Rep. Act No. 7925. There, the Court ruled that Section 23 does not operate
to exempt PLDT from the payment of franchise tax. It does not appear that, in approving Section 23 of
R.A. No. 7925, Congress intended it to operate as a blanket tax exemption to all telecommunications
entities. The tax exemption must be expressed in the statute in clear language that leaves no doubt of
the intention of the legislature to grant such exemption. And, even if it is granted, the exemption must
be interpreted in strictissimi juris against the taxpayer and liberally in favor of the taxing authority.
Applying the rule of strict construction of laws granting tax exemptions and the rule that doubts should
be resolved in favor of municipal corporations in interpreting statutory provisions on municipal taxing
powers, the Court hold that Section 23 of R.A. No. 7925 cannot be considered as having amended
petitioner's franchise so as to entitle it to exemption from the imposition of local franchise taxes.
Consequently, we hold that petitioner is liable to pay local franchise taxes in the amount of
₱3,681,985.72 for the period covering the first to the fourth quarter of 1999 and that it is not entitled to
a refund of taxes paid by it for the period covering the first to the third quarter of 1998.
163
LOCAL TAXATION
TAX EXEMPTION STRICTLY CONSTRUED AGAINST THE TAXPAYER
Philippine Long Distance Telephone Company, Inc. v. City of Bacolod

G.R. No. 149179, July 15, 2005
Garcia, J.
FACTS:
PLDT is a holder of a legislative franchise under Act No. 3436 to render local and international
telecommunications services. On August 24, 1991, the terms and conditions of its franchise were
consolidated under Republic Act No. 7082, Section 12 of which embodies the so-called "in-lieu-of-all-
taxes" clause, whereunder PLDT shall pay a franchise tax equivalent to three percent (3%) of all its
gross receipts, which franchise tax shall be "in lieu of all taxes."
Meanwhile, or on January 1, 1992, R.A. No. 7160, otherwise known as the Local Government Code,
took effect. Section 137 of the Code, in relation to Section 151 thereof, grants cities and other local
government units the power to impose local franchise tax on businesses enjoying a franchise. By
Section 193 of the same Code, all tax exemption privileges then enjoyed by all persons, whether
natural or juridical, save those expressly mentioned therein, were withdrawn, necessarily including
those taxes from which PLDT is exempted under the "in-lieu-of-all-taxes" clause in its charter.
Complying therewith, PLDT began paying the City franchise tax from the year 1994 until the third
quarter of 1998.
On June 1998, the Department of Finance through its Bureau of Local Government Finance (BLGF),
issued a ruling to the effect that as of 16 March 1995, the effectivity date of the R.A. No. 7925 that,
PLDT, among other telecommunication companies, became exempt from local franchise tax. PLDT
then stopped paying local franchise and business taxes to Bacolod City in 1998. Sometime 1999,
PLDT applied for the issuance of a Mayor’s Permit but the City of Bacolod withheld issuance thereof
pending PLDT’s payment of its franchise tax liability.
ISSUE:
Whether or not PLDT is liable for the payment of franchise tax?
HELD:
Yes. In PLDT v. City of Davao, the Court has had the occasion to interpret Section 23 of Rep. Act No.
7925. There, we ruled that Section 23 does not operate to exempt PLDT from the payment of franchise
tax imposed upon it by the City of Davao: In sum, it does not appear that, in approving Section 23 of
R.A. No. 7925, Congress intended it to operate as a blanket tax exemption to all telecommunications
entities. Applying the rule of strict construction of laws granting tax exemptions and the rule that doubts
should be resolved in favor of municipal corporations in interpreting statutory provisions on municipal
taxing powers, we hold that Section 23 of R.A. No. 7925 cannot be considered as having amended
petitioner's franchise so as to entitle it to exemption from the imposition of local franchise taxes.
Exemptions from taxation are highly disfavored, so much so that they may almost be said to be odious
to the law. He who claims an exemption must be able to point to some positive provision of law
creating the right. The tax exemption must be expressed in the statute in clear language that leaves no
doubt of the intention of the legislature to grant such exemption. And, even if it is granted, the
exemption must be interpreted in strictissimi juris against the taxpayer and liberally in favor of the
taxing authority.
164
LOCAL TAXATION
PROFESSIONAL BASKETBALL GAMES IS REQUIRED TO PAY AN AMUSEMENT TAX

EQUIVALENT TO FIFTEEN PER CENTUM (15%) OF THEIR GROSS RECEIPTS TO THE BIR
WHICH PAYMENT IS A NATIONAL TAX
Philippine Basketball Association vs Court Of Appeals

G.R. No. 119122, August 8, 2000
PURISIMA, J.
FACTS:
June 21, 1989, petitioner received an assessment letter from the Commissioner of Internal Revenue
for payment of deficiency amusement tax. Petitioner files a protest with the Commissioner who denied
the same. Petitioner files for review with Court of Tax Appeals questioning denial by Commissioner of
its tax protest. CTA dismissed PBA’s petition for lack of merit
Petitioner files a motion for reconsideration but was denied by CTA. Petitioner files a motion for
reconsideration but was denied by CA. Petitioner contends that PD 231, Local Tax Code of 1973,
transferred power and authority to levy and collect amusement taxes from sale of admission of tickets
of amusement from national government to local government?
ISSUE:
Whether or not the amusement tax on admission tickets to PBA games a local tax?
HELD:
Section 13 of the Local Tax Code provides:
"SECTION 13. Amusement tax on admission. — The province shall impose a tax on admission to be
collected from the proprietors, lessees, or operators of theaters, cinematographs, concert halls,
circuses and other places of amusement . . ."
The foregoing provision of law in point indicates that the province can only impose a tax on admission
from the proprietors, lessees, or operators of theaters, cinematographs, concert halls, circuses and
other places of amusement. The authority to tax professional basketball games is not therein included,
as the same is expressly embraced in PD 1959, which amended PD 1456.
From the foregoing it is clear that the "proprietor, lessee or operator of . . . professional basketball
games" is required to pay an amusement tax equivalent to fifteen per centum (15%) of their gross
receipts to the Bureau of Internal Revenue, which payment is a national tax. The said payment of
amusement tax is in lieu of all other percentage taxes of whatever nature and description.
While Section 13 of the Local Tax Code mentions "other places of amusement", professional
basketball games are definitely not within its scope. Under the principle of ejusdem generis, where
general words follow an enumeration of persons or things, by words of a particular and specific
meaning, such general words are not to be construed in their widest extent, but are to be held as
applying only to persons or things of the same kind or class as those specifically mentioned.9 Thus, in
determining the meaning of the phrase "other places of amusement", one must refer to the prior
enumeration of theaters, cinematographs, concert halls and circuses with artistic expression as their
common characteristic. Professional basketball games do not fall under the same category as
theaters, cinematographs, concert halls and circuses as the latter basically belong to artistic forms of
entertainment while the former caters to sports and gaming.
165
LOCAL TAXATION
CONDOMINIUM CORPORATIONS ARE GENERALLY EXEMPT FROM LOCAL BUSINESS

TAXATION UNLESS, OWNERS OF A CONDOMINIUM WOULD BAND TOGETHER TO ENGAGE IN
ACTIVITIES FOR PROFIT.
Yamane v. BA Lepanto Condominium Corp

G.R. No. 154993 October 25, 2005
Tinga, J.
FACTS:
Petitioner City Treasurer of Makati, Luz Yamane (City Treasurer), presents for resolution of this Court
a novel question: whether a local government unit can, under the Local Government Code, impel a
condominium corporation to pay business taxes.
The Corporation received a Notice of Assessment signed by the City Treasurer. The Notice of
Assessment stated that the Corporation is "liable to pay the correct city business taxes, fees and
charges," computed as totaling ₱1,601,013.77 for the years 1995 to 1997. The Notice of Assessment
was silent as to the statutory basis of the business taxes assessed. The Corporation responded with a
written tax protest dated 12 February 1999, addressed to the City Treasurer. It was evident in the
protest that the Corporation was perplexed on the statutory basis of the tax assessment. The protest
was rejected by the City Treasurer, She insisted that the collection of dues from the unit owners was
effected primarily "to sustain and maintain the expenses of the common areas, with the end in view of
getting full appreciative living values for the individual condominium occupants and to command better
marketable prices for those occupants" who would in the future sell their respective units. Thus, she
concluded since the "chances of getting higher prices for well-managed common areas of any
condominium are better and more effective that condominiums with poor [sic] managed common
areas," the corporation activity "is a profit venture making"
The RTC concluded that the activities of the Corporation fell squarely under the definition of "business"
under Section 13(b) of the Local Government Code, and thus subject to local business taxation. The
appellate court reversed the RTC and declared that the Corporation was not liable to pay business
taxes to the City of Makati.
ISSUES:
Whether the City of Makati may collect business taxes on condominium corporations.
HELD:
NO. Local tax on businesses is authorized under Section 143 of the Local Government Code. The
word "business" itself is defined under Section 131(d) of the Code as "trade or commercial activity
regularly engaged in as a means of livelihood or with a view to profit."45 This definition of "business"
takes on importance, since Section 143 allows local government units to impose local taxes on
businesses other than those specified under the provision. Moreover, even those business activities
specifically named in Section 143 are themselves susceptible to broad interpretation. For example,
Section 143(b) authorizes the imposition of business taxes on wholesalers, distributors, or dealers in
any article of commerce of whatever kind or nature.
It is thus imperative that in order that the Corporation may be subjected to business taxes, its activities
must fall within the definition of business as provided in the Local Government Code. And to hold that
they do is to ignore the very statutory nature of a condominium corporation.
We can elicit from the Condominium Act that a condominium corporation is precluded by statute from
engaging in corporate activities other than the holding of the common areas, the administration of the
condominium project, and other acts necessary, incidental or convenient to the accomplishment of
such purposes. Neither the maintenance of livelihood, nor the procurement of profit, fall within the
scope of permissible corporate purposes of a condominium corporation under the Condominium Act.
Even though the Corporation is empowered to levy assessments or dues from the unit owners, these
amounts collected are not intended for the incurrence of profit by the Corporation or its members, but
to shoulder the multitude of necessary expenses that arise from the maintenance of the Condominium
Project.
166
Condominium corporations are generally exempt from local business taxation under the Local
Government Code, irrespective of any local ordinance that seeks to declare otherwise. Still, we can
note a possible exception to the rule. It is not unthinkable that the unit owners of a condominium would
band together to engage in activities for profit under the shelter of the condominium corporation.61
Such activity would be prohibited under the Condominium Act, but if the fact is established, we see no
reason why the condominium corporation may be made liable by the local government unit for
business taxes. Even though such activities would be considered as ultra vires, since they are
engaged in beyond the legal capacity of the condominium corporation62, the principle of estoppel
would preclude the corporation or its officers and members from invoking the void nature of its
undertakings for profit as a means of acquitting itself of tax liability.
167
LOCAL TAXATION
CITIES AND MUNICIPALITIES MAY VALIDLY IMPOSE A TAX ON BUSINESS BUT MAY NOT
IMPOSE PERCENTAGE OR SALES TAX ON TOP OF WHAT IS ALREADY IMPOSED IN THE NIRC
City of Manila v. Colet

G.R. No.120051, December 10, 2014
Leonardo-De Castro J.
FACTS:
On June 22, 1993, the Manila Revenue Code was enacted. Section 21(B) of said Code imposes a tax
or 50% of 1% per year on the gross sale or receipts of keepers of garages, cars for rent or hire driven
by the lessee, transportation contractors, persons who transport passenger or freight for hire, and
common carriers by land, air or water, except owners of bancas and owners of animal-drawn two-
wheel vehicle. Petitioners were assessed and/or compelled to pay business taxes pursuant to Section
21(B) of the Manila Revenue Code, as amended, before they were issued their business permits for
1994. Petitioners, with principal offices in Manila and operating as "transportation contractors, persons
who transport passenger or freight for hire, and common carriers by land, air or water," filed their
respective petitions before the Manila RTC against the City of Manila. Petitioner and intervenor
corporations essentially sought the (1) declaration of Section 21(B) of the Manila Revenue Code, as
amended, as void/invalid for being contrary to the Constitution and the Local Government Code (LGC)
of 1991; and (2) refund of the business taxes that the petitioner and intervenor corporations paid
under protest. The RTC upheld the power of the respondent City of Manila, as a local government unit
(LGU), to levy the business tax under Section 21(B) of the Manila Revenue Code, as amended,
consistent with the basic policy of local autonomy.
ISSUE:
Is Section 21 (B) of Ordinance No. 7794 of the City of Manila valid and constitutional?
HELD:
No. Under the Philippine system of government, the power of taxation, while inherent in the State in
view of its sovereign prerogatives, is not inherent in municipal corporations or LGUs. LGUs may
exercise the power only if and to the extent that it is delegated to them. One of the common limitations
on the power to tax of LGUs is Section 133(j) of the LGC, carried over from the Local Tax Code of
1973. Section 133(j) expressly states that the taxing powers of the LGUs shall not extend to the
transportation business. In addition, although Section 21(B) of the Manila Revenue Code, as
amended, imposed what was denominated as a "business tax," in reality it was a percentage or sales
tax. Business tax is imposed on the privilege of doing business, though it may be computed as a
percentage of gross sales. For business tax, there is no set ratio between volume of sales and the
amount of tax. Cities and municipalities are given the power to impose business tax under Section
143(h) of the LGC. In contrast, percentage or sales tax is based on gross sales or receipts. The
percentage bears a direct relationship to the sales or receipts generated by a business, without regard
for the extent of operation or size of the business. Cities and municipalities may validly impose a tax on
business, but consonant with the limitations on local taxation, they may not impose percentage or
sales tax on top of what is already imposed in the NIRC. Section 21(B) of the Manila Revenue Code,
as amended, imposing on "transportation contractors, persons who transport passenger or freight for
hire, and common carriers by land, air or water," a tax of 50% of 1% of the gross sales or receipts from
the preceding year on top of the national taxes already imposed by the NIRC was unjust, unfair,
excessive, confiscatory, and in restraint of economic trade.
168
LOCAL TAXATION
FAILURE TO FOLLOW THE PROCEDURE IN ENACTMENT OF TAX MEASURES RENDERS THE

SAME NULL AND VOID
Coca-Cola Bottlers Philippines, Inc. v. City of Manila

G.R. No. 156252, June 27, 2006
Chico-Nazario, J.
FACTS:
In a petition for review on certiorari under Rule 45, petitioner, Coca-Cola Bottlers Philippines Inc.
(Coca-Cola), assailed the Order of the RTC dismissing Coca-Cola’s petition for Injunction filed against
respondent, City of Manila.
City of Manila enacted and approved Tax Ordinance No. 7988, otherwise known as "Revised Revenue
Code of the City of Manila" repealing the Revenue Code of the City of Manila. The new Ordinance
increased the tax rates applicable to certain establishments operating within the territorial jurisdiction of
the City of Manila, including Coca-Cola. However, said Ordinance was only published once. Coca-cola
then filed a petition to the Secretary of Justice to declare the Ordinance null and void. The Secretary of
Justice declared said Ordinance as null and void. However, City of Manila continued to assess Coca
Cola’s business tax based on the Ordinance that was declared null and void.
Coca Cola filed a petition for injunction and prayed that the City of Manila be enjoined from
implementing the said Ordinance because it has no legal effect as it was already declared null and
void.
City of Manila, on the other hand, enacted Ordinance No. 8011, amending the Ordinance that was
declared null and void. Because of this, the RTC dismissed the petition of Coca Cola.
ISSUE:
Whether or not Tax Ordinance No. 7988 is null and void and of no legal effect.
HELD:
Yes, Tax Ordinance No. 7988 is null and void and of no legal effect.
According to Section 188 of the LGC, “Within ten (10) days after their approval, certified true copies of
all provincial, city and municipal tax ordinances or revenue measures shall be published in full for three
(3) consecutive days in a newspaper of local circulation; Provided, however, that in provinces, cities,
and municipalities where there are no newspapers or local circulations the same may be posted in at
least two (2) conspicuous and publicly accessible places."
In the case at bar, Tax Ordinance No. 7988 was only published once. The City of Manila failed to
publish the Ordinance for three consecutive days in a newspaper of local circulation. Thus, due to its
failure to follow the procedure in the enactment of tax measures as mandated by Section 188 of the
LGC, said Ordinance was declared null and void and without legal effect. Despite this, the City of
Manila enacted Ordinance no. 8011, which amended Ordinance No. 7988. However, said amendment
does not cure the defects of Ordinance No. 7988 because when an order or law sought to be
amended is invalid, then it does not legally exist, there should be no occasion or need to amend it.
Therefore, Tax Ordinance No. 7988 is null and void and without legal effect, and thus dismissal of
Coca Cola’s case is erroneous.
169
LOCAL TAXATION
A MUNICIPALITY OR CITY CANNOT IMPOSE LOCAL BUSINESS TAXES UNDER SEC. 143(F)
AND SEC. 143(H) OF THE LGC SIMULTANEOUSLY
Treasurer of City of Manila v. China Banking Corporation

C.T.A. EB Case No. 867; September 27, 2013
Fabon-Victorino, J.
FACTS:
Petitioner Treasurer of City of Manila (Petitioner) filed the instant Petition for Review assailing the
decision of the Court in Division which ordered the cancellation of Petitioner’s assessment and ordered
to refund respondent China Banking Corporation (Respondent) of the erroneously paid local business
taxes.
In January 2006, while respondent China Banking Corporation (CBC) was in the process of renewing
its local business permits, petitioner Treasurer of City of Manila (Treasurer), without issuing a written
assessment, informed Petitioner’s Binondo Business Center (BBC) branch that the amount of
P5,388,799.58 in taxes, charges and fees was due from it payable to the city government pursuant to
Section 21 of the Manila Revenue Code (MRC). Petitioner paid under protest taxes and fees for the
1st and 2nd quarter of 2006 questioning the additional tax assessed under the MRC and sent a
subsequent letter for the refund. Petitioner acknowledged the letter without resolving the request for
refund. Petitioner merely stated that the imposition of Sec. 21 of the MRC does not constitute double
taxation.
The 2nd Division ruled that registered businesses in Manila that are already taxed under Sec. 19 may
no longer be taxed under Sec. 21 of the MBC as the same constitutes double taxation.
ISSUE:
May the City of Manila validly impose Sections 19 and 21 of the MRC simultaneously against
Respondent without violating the rules on double taxation?
HELD:
No. Section 19 of the MRC provides for the Tax on Banks, Insurance Companies and Other Financial
Institutions at the rate if 75% of 1% on the gross receipts of the preceding calendar year while Section
21 of the MRC provides for the Tax on Business Subject to the Excise, Value-Added or Percentage
Taxes Under the NIRC at the rate of 50% of 1% per annum on the gross sales or receipts of the
preceding calendar year with the proviso that all registered businesses in the City of Manila that are
already paying the aforementioned tax shall be exempted from the payment thereof.
The City of Manila v. Coca-Cola Bottlers Philippines, Inc. has ruled that double taxation in its prohibited
form indeed exists in this kind of case. Pertinent parts of the decision are quoted as follows:
“Double taxation means taxing the same property twice when it should be taxed only once; that is,
'taxing the same person twice by the same jurisdiction for the same thing. “
From the foregoing disquisition, it is evident that direct duplicate taxation indeed exists in this case.
Respondent was taxed twice - first under Section 19, and second, under Section 21; for the same
subject matter - on gross receipts derived from its business of operating a bank; by the same taxing
authority - the City of Manila; within the same taxing jurisdiction - within the territorial jurisdiction of the
City of Manila. Finally, respondent was taxed for the same taxing periods, for the 1st and 2nd quarters
of year 2006.
Moreover, perusal of Section 143 of the LGC, the provision from which the power of cities and
municipalities to impose local business tax emanates, will show that when a municipality or city
imposes local business tax on a bank or financial institution pursuant to Section 143(f), the same
municipality or city may no longer subject the same bank or financial institution to local business tax
under Section 143(h) of the same Code. In the same manner, banks and financial institutions already
170
made liable to local business tax under Section 19 of the MRC, which is based on Section 143(f) of the
LGC, may no longer be subjected to local business tax pursuant to Section 21 of the MRC, which is
based on Section 143(h) of the LGC.
171
PRINCIPAL OFFICE IS THE HEAD OR MAIN OFFICE OF THE BUSINESS APPEARING IN THE
PERTINENT DOCUMENTS SUBMITTED TO THE SECURITIES AND EXCHANGE COMMISSION,
OR THE DEPARTMENT OF TRADE AND INDUSTRY, OR OTHER APPROPRIATE AGENCIES, AS
THE CASE MAY BE
THE CITY OF MAKATI vs. THE MUNICIPALITY OF BAKUN AND LUZON HYDRO CORPORATION
CTA EB CASE NO. 1179
January 14, 2016
FACTS:
Municipality of Bakun is a local government unit with principal office at Ampusungan, Bakun, Benguet
Province. City of Makati is also a local government unit with principal office at J.P. Rizal, Makati City.
Luzon Hydro Corporation (LHC) is a duly organized domestic corporation with principal address at
Alilem, Ilocos Sur.
LHC operates a 70MW hydroelectric power plant facility that harnesses the Bakun River spanning the
Provinces of Ilocos Sur and Benguet. It maintains factories, project offices, plants, and/or plantations in
the pursuit of its business. Since it was registered with Board of Investments (BOI) as an entity
engaged in a pioneer area of investment, it enjoyed a six year tax holiday until the year 2003. Thus, it
was only in 2004 that it commenced paying local business tax to xxx Bakun, xxx Makati City, and the
Municipality of Alilem pursuant to Section 150 of the Local Government Code (LGC), in relation to
Article 243 (b)(l), (2), (3) and (5) of the Implementing Rules and Regulations (IRR) of the LGC.
To pay local business tax, LHC allocated 70% of its annual gross sales and receipts apportioning it
among the three named local government unit (LGUs) as follows:
Municipality of Ali/em -23.33% (as site of the plant)
Municipality of Bakun -23.33°/o (as site of the plant)
City of Makati office") -23.33°/o (as site of the "project
On September 20, 2004 Bakun passed Resolution No. 168-2004 questioning the allocation of local
business taxes made by LHC to Makati City and Alilem. The issue was submitted through the same
Resolution to the Bureau of Local Government Finance (BLGF) for determination. On Februay 8, 2006,
the BLGF issued an opinion dated February 8, 2006 declaring that the Makati City is not entitled to
share in the 70°/o allocation of the LHC for the payment of local business tax for lack of legal basis. It
opined that there was nothing in the LGC of 1991 and its IRR authorizing the same. The LHC's office
in Makati City is an administrative office, and as such, is not among the sites enumerated in Section
150 of the LGC and its IRR for purposes of local business taxation. BLGF concluded that only Alitem
and Bakun must share in equal portion the 70°/o allocation of LHC for the payment of local business
taxes. The City of Makati, where the administrative office is located, can only collect Mayor's permit fee
and other regulatory fees provided under the pertinent local tax ordinance.
On September 18, 2006, Bakun adopted the BLGF opinion via Resolution No. 134-2006, and urged
LHC to apportion its 70% local business tax allocation equally to it and Ali/em only. Bakun Further
urged LHC to pay both Municipalities deficit business taxes constituting the 23.33% allocation
previously paid to Makati City for the years 2004-2006. On January 15, 2007, Ali/em issued Resolution
No. 07-02 also requiring LHC to abide by the BLGF opinion. Makati City, on the other hand, intimated
that despite the BLGF opinion, it will continue to assess LHC for local business tax. This prompted
LHC to file special Civil Action for Interpleader docketed as Civil Case No. 07-049 on January 17, 2007
with the RTC of Makati, Branch 134. LH[C] asked the RTC to determine to which LGUs it should pay
local business taxes and how it should distribute the 70°/o allocation it made for the purpose.
ISSUE:
Is the office of Luzon Hydro Corporation (LHC) in Makati City is an administrative office and not a
"Project Office?
HELD:
Yes. The law provides,
172
Administrative Order No. 270
Article 243. Situs of the Tax. -
(a) Definition of Terms -
(1) Principal Office- the head or main office of the business appearing in the pertinent documents
submitted to the Securities and Exchange Commission, or the Department of Trade and Industry, or
other appropriate agencies, as the case may be. The city or municipality specifically mentioned in the
articles of incorporation of official registration papers as being the official address of said principal
office shall be considered as the situs thereof.
(2) Branch or Sales Office - a fixed place in a locality which conducts operations of the business as an
extension of the principal office. Offices used only as display areas of the products where no stocks or
items are stored for sale, although orders for the products may be received thereat, are not branch or
sales offices as herein contemplated. A warehouse which accepts orders and/or issues sales invoices
independent of a branch with sales office shall be considered as a sales office.
From the foregoing, the city or municipality specifically mentioned in the articles of incorporation as the
official address of said principal office shall be considered as the situs of tax in the absence of branch
or sales office. Otherwise, the branch or sales outlet shall record the sale in the branch or sales outlet
making the sale or transaction, and the tax thereon shall accrue and shall be paid to the municipality
where such branch or sales outlet is located.
In cases where there is a factory, project office, plant or plantation in pursuit of business, thirty percent
(30°/o) of all sales recorded in the principal office shall be taxable by the city or municipality where the
principal office is located and seventy percent (70°/o) of all sales recorded in the principal office shall
be taxable by the city or municipality where the factory, project office, plant or plantation is located.
In cases where a manufacturer, assembler, producer, exporter or contractor has two (2) or more
factories, project offices, plants, or plantations located in different localities, the seventy percent (70°/o)
sales allocation shall be prorated among the localities where the factories, project offices, plants, and
plantations are located in proportion to their respective volumes of production during the period for
which the tax is due.
In the case at bar, it is undisputed that thirty percent (30°/o) of the local business tax was paid to
Alilem as the principal office mentioned in the Articles of Incorporation and the remaining 70°/o is
being contested by the Municipality of Bakun, Municipality of Alilem and Makati City. Furthermore, it is
undisputed that the Luzon Hydro Corporation's electric power plant facility spans across the provinces
of Benguet and !locus Sur. The power station and switch chart are located in Alilem !locos Sur while
the conveyance panel and water intake are located in Bakun, Benguet. LHC has an office in Makati
City. Thus, the question is raised as to whether Makati City should share in the local business tax.
Concomitantly, considering that the Makati City office is not a branch or sales office, it is not entitled to
share in the 70°/o sales allocation.
173
LOCAL TAXATION
THE RIGHT TO RECEIVE INCOME, AND NOT THE ACTUAL RECEIPT, DETERMINES WHEN TO
INCLUDE THE AMOUNT IN GROSS INCOME.
Ericsson Telecommunications v. City of Pasig

G.R. No. 176667 November 22, 2007
Austria-Martinez, J
FACTS:
In an Assessment Notice issued by the City Treasurer of Pasig City, petitioner was assessed a
business tax deficiency for the years 1998 and 1999 amounting to P9,466,885.00 and P4,993,682.00,
respectively, based on its gross revenues as reported in its audited financial statements for the years
1997 and 1998. Petitioner filed a Protest, claiming that the computation of the local business tax
should be based on gross receipts and not on gross revenue. The City of Pasig (respondent) issued
another Notice of Assessment to petitioner, this time based on business tax deficiencies for the years
2000 and 2001, amounting to P4,665,775.51 and P4,710,242.93, respectively, based on its gross
revenues for the years 1999 and 2000. Again, petitioner filed a Protest, reiterating its position that the
local business tax should be based on gross receipts and not gross revenue.
ISSUE:
Whether the local business tax on contractors should be based on gross receipts or gross revenue.
HELD:
Respondent is authorized to levy business taxes under Section 143 in relation to Section 151 of the
Local Government Code. Insofar as petitioner is concerned, the applicable provision is subsection (e),
Section 143 of the same Code covering contractors and other independent contractors, to wit: “(e) On
contractors and other independent contractors, in accordance with the following schedule: With gross
receipts for the preceding calendar year in the amount of…”
The above provision specifically refers to gross receipts which is defined under Section 131 of the
Local Government Code.
The law is clear. Gross receipts include money or its equivalent actually or constructively received in
consideration of services rendered or articles sold, exchanged or leased, whether actual or
constructive.
In contrast, gross revenue covers money or its equivalent actually or constructively received, including
the value of services rendered or articles sold, exchanged or leased, the payment of which is yet to be
received. This is in consonance with the International Financial Reporting Standards, which defines
revenue as the gross inflow of economic benefits (cash, receivables, and other assets) arising from the
ordinary operating activities of an enterprise (such as sales of goods, sales of services, interest,
royalties, and dividends),22 which is measured at the fair value of the consideration received or
receivable.
In petitioner's case, its audited financial statements reflect income or revenue which accrued to it
during the taxable period although not yet actually or constructively received or paid. This is because
petitioner uses the accrual method of accounting, where income is reportable when all the events have
occurred that fix the taxpayer's right to receive the income, and the amount can be determined with
reasonable accuracy; the right to receive income, and not the actual receipt, determines when to
include the amount in gross income.
The imposition of local business tax based on petitioner's gross revenue will inevitably result in the
constitutionally proscribed double taxation – taxing of the same person twice by the same jurisdiction
for the same thing – inasmuch as petitioner's revenue or income for a taxable year will definitely
include its gross receipts already reported during the previous year and for which local business tax
has already been paid.
Thus, respondent committed a palpable error when it assessed petitioner's local business tax based
on its gross revenue as reported in its audited financial statements, as Section 143 of the Local
Government Code and Section 22(e) of the Pasig Revenue Code clearly provide that the tax should be
computed based on gross receipts.
174
LOCAL TAXATION
Real Property Taxation
REAL ESTATE TAXES ACCRUE TO THE LGU, IT HAVING A DISTINCT AND SEPARATE
PERSONALITY FROM OUR REPUBLIC.
JOSE DE BORJA vs. VICENTE G. GELLA, ET AL.

G.R. No. L-18330, July 31, 1963
BAUTISTA ANGELO, J.:
FACTS:
Jose de Borja has been delinquent in the payment of his real estate taxes since 1958 and has offered
to pay them with two negotiable certificates of indebtedness to which he is only an assignee. These
were rejected by the City treasurers of both Manila and Pasay cities on the ground of their limited
negotiability. Borja brought the question to the Treasurer of the Philippines who opined that the
negotiable certificates cannot be accepted as payment of real estate taxes inasmuch as the law
provides for their acceptance from their backpay holder only or the original applicant himself, but not
his assignee. Borja filed an action against the treasurers of both the City of Manila and Pasay City, as
well as the Treasurer of the Philippines, to impel them to execute an act which the law allegedly
requires them to perform, to wit: to accept the above-mentioned certificates of indebtedness
considering that they were already due and redeemable so as not to deprive him illegally of his
privilege to pay his obligation to the government thru such means.
Lower court ruled in favor of Borja. Respondents took this appeal on purely questions of law, one of
which is: (b) can compensation be invoked to extinguish appellee's real estate tax liability between the
latter's obligation and the credit represented by said certificates of indebtedness?
ISSUE:
Can compensation be invoked to extinguish appellee's real estate tax liability between the latter's
obligation and the credit represented by said certificates of indebtedness?
HELD:
No, compensation cannot be invoked insofar as the two obligations are concerned.
Articles 1278 and 1279 of the new Civil Code provide:
ART. 1278. Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other.
ART. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they two liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor.
It is clear from the above legal provisions that compensation cannot be effected with regard to the two
obligations in question. In the first place, the debtor insofar as the certificates of indebtedness are
concerned is the Republic of the Philippines, whereas the real estate taxes owed by appellee are due
to the City of Manila and Pasay City, each one of which having a distinct and separate personality from
our Republic. With regard to the certificates, the creditor is the appellee while the debtor is the
Republic of the Philippines. And with regard to the taxes, the creditors are the City of Manila and
Pasay City while the debtor is the appellee. It appears, therefore, that each one of the obligors
concerning the two obligations is not at the same time the principal creditor of the other. It cannot also
be said for certain that the certificates are already due. Since the requisites for the accomplishment of
legal compensation cannot be fulfilled, the latter cannot take place with regard to the two obligations.
175
LOCAL TAXATION
MANILA INTERNATIONAL AIRPORT AUTHORITY IS AN INSTRUMENTALITY OF THE

GOVERNMENT AND THUS EXEMPT FROM LOCAL TAXATION;
REAL PROPERTIES OF MIAA ARE OWNED BY THE REPUBLIC OF THE PHILIPPINES AND
THUS EXEMPT FROM REAL ESTATE TAX.
Manila International Airport Authority v. Court of Appeals

G.R. No. 155650, July 20, 2006
CARPIO, J.:
FACTS:
Manila International Airport Authority (MIAA) is the operator of the Ninoy International Airport (NAIA)
located at Paranaque City. As operator of the international airport, MIAA administers the land,
improvements and equipment within the NAIA Complex. The MIAA Charter transferred to MIAA
approximately 600 hectares of land. The said charter also provides that no portion of the land
transferred to MIAA shall be disposed of through sale or any other mode unless specifically approved
by the President of the Philippines.
The Office of the Government Corporate Counsel (OGCC) issued Opinion No. 061, wherein it opined
that the LGC of 1991 withdrew the exemption from real estate tax granted to MIAA under Section 21 of
the MIAA Charter. Respondent City sent notices to petitioner due to the real estate tax delinquency.
MIAA the settled some of the amount, but when it failed to settle the entire amount, the officers of
Paranaque city threatened to levy and subject to auction the land and buildings of MIAA, which they
later on did. Petitioner sought for a Temporary Restraining Order from the Court of Appeals but it failed
to do so within the 60 days reglementary period, hence the petition was dismissed. It then sought for
the TRO with the Supreme Court a day before the public auction, where it was granted but
unfortunately the TRO was received by the Paranaque City officers 3 hours after the public auction.
MIAA admits that the MIAA Charter has placed the title to the Airport Lands and Buildings in the name
of MIAA. However, it points out that it cannot claim ownership over these properties since the real
owner of the Airport Lands and Buildings is the Republic of the Philippines. It also contends that it is an
instrumentality of the government and as such exempted from real estate tax and the land, as well as
the buildings of MIAA are of public dominion hence it cannot be subjected to levy and auction sale.
On the other hand, the officers of Paranaque City claim that MIAA is a government owned and
controlled corporation therefore not exempted to real estate tax.
ISSUES:
1. Is MIAA an instrumentality of the government and not a government owned and controlled
corporation?
2. Were the land and buildings of MIAA part of the public dominion and thus cannot be the
subject of levy and auction sale?
RULING:
1. Yes, MIAA is an instrumentality of the National Government and thus exempt from local
taxation.
A Government-owned or controlled corporation refers to any agency organized as a stock or non-stock
corporation, vested with functions relating to public needs whether governmental or proprietary in
nature, and owned by the Government directly or through its instrumentalities either wholly, or, where
applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of its
capital stock xxx.
On the other hand, an Instrumentality refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by law, endowed with
176
some if not all corporate powers, administering special funds, and enjoying operational autonomy,
usually through a charter. x x x
In this case, MIAA is not a stock corporation for its capital is not divided into shares. It is also not a
non-stock corporation since it has no members. Since it is neither a stock nor a non-stock corporation,
MIAA is categorized as an instrumentality of the government vested with corporate powers and
government functions.
2. Yes, the real properties of MIAA are owned by the Republic of the Philippines, hence exempt
from real estate tax.
Under the civil code, property may either be under public dominion or private ownership. Those under
public dominion are owned by the State and are utilized for public use, public service and for the
development of national wealth. The ports included in the public dominion pertain either to seaports or
airports. When properties under public dominion cease to be for public use and service, they form part
of the patrimonial property of the State.
The court held that the land and buildings of MIAA are part of the public dominion. Since the airport is
devoted for public use, for the domestic and international travel and transportation. Even if MIAA
charge fees, this is for support of its operation and for regulation and does not change the character of
the land and buildings of MIAA as part of the public dominion. As part of the public dominion the land
and buildings of MIAA are outside the commerce of man. To subject them to levy and public auction is
contrary to public policy. Unless the President issues a proclamation withdrawing the airport land and
buildings from public use, these properties remain to be of public dominion and are inalienable. As
long as the land and buildings are for public use the ownership is with the Republic of the Philippines.
177
LOCAL TAXATION
REAL PROPERTY TAX; IMPERIAL MINING CORPORATION’S CLAIM OF REAL PROPERTY TAX
EXEMPTION FROM THE LEASE OF A MINERAL LAND
Province of Nueva Ecija vs Imperial Mining

G.R. No. L-59463. November 19, 1982
J. Plana
FACTS:
In 1968, IMC leased from the Government thru the Department of Agriculture and Natural Resources
placers mining claims (192 hectares) with the right to explore, develop, mine, extract and dispose of
mineral products. In the lease contract, it was stipulated that "the Lessee shall pay real estate tax on
all buildings and other improvements built on the land leased." The contract however was silent on the
obligation of the lessee to pay realty tax on the mineral land itself, as distinguished from the
improvements thereon. In 1974, the Provincial Assessor of Nueva Ecija declared the leased property
in the name of IMC; and subsequently, IMC was assessed for real property tax.
The defendant resisted, maintaining that the mineral land subject of the assessment was owned by the
Government and therefore exempt from real estate tax.
ISSUE:
Whether the respondent is exempted from the payment of real property tax over the mineral land
leased?
HELD:
YES. The respondent mining company is liable to pat Real Property Tax from the year 1974. In 1974,
a new Real Property Tax Code came into being when Presidential Decree 464 was issued. It changed
the basis of real property taxation. It adopted the policy of taxing real property on the basis of actual
use, even if the user is not the owner (Sections 3 (a) and 19 of PD 464). It is true that Presidential
Decree 464 recognizes and respects real property tax exemption "under other laws" and one such law,
with respect to mineral land, is Presidential Decree 463 (Section 53), the Mineral Resources
Development Decree of 1974. It does not appear however that IMC was entitled to tax exemption,
including exemption from real property tax, under Section 53 of Presidential Decree 463 during the
period here in question.
178
LOCAL TAXATION
PERSONAL PROPERTY MAY BE CONSIDERED AS REAL PROPERTY FOR TAX PURPOSES
Caltex Philippines v CBAA

G.R. No. L-50466, May 31, 1982
Aquino, J.
FACTS:
In a petition under Rule 65 before the Supreme Court, petitioner Caltex Philippines challenges the
decision of the CBAA, in reversing the ruling of city board of tax appeals of Pasay City, finding that
pieces of gas station equipment and machinery are subject to realty tax.
The city assessor of Pasay City characterized the underground tanks, elevated tank, elevated water
tanks, water tanks, gasoline pumps, computing pumps, water pumps, car washer, car hoists, truck
hoists, air compressors and tireflators of a Caltex gas stations as taxable realty. The said machines
and equipment are loaned by Caltex to gas station operators under an appropriate lease agreement or
receipt. The lessor of the land, where the gas station is located, does not become the owner of the
machines and equipment installed therein. Caltex retains the ownership thereof during the term of the
lease.
The Board held that said machines and equipment are real property within the meaning of sections
3(k) & (m) and 38 of the Real Property Tax Code. Caltex invokes the rule that machinery which is
movable in its nature only becomes immobilized when placed in a plant by the owner of the property or
plant but not when so placed by a tenant, a usufructuary, or any person having only a temporary right,
unless such person acted as the agent of the owner (Davao Saw Mill Co. vs. Castillo, 61 Phil 709).
ISSUE:
Whether or not the pieces of gas station equipment and machinery are subject to realty tax?
HELD:
Yes, the said machines and equipment are subject to real property tax. The said equipment and
machinery, as appurtenances to the gas station building or shed owned by Caltex (as to which it is
subject to realty tax) and which fixtures are necessary to the operation of the gas station, for without
them the gas station would be useless, and which have been attached or affixed permanently to the
gas station site or embedded therein, are taxable improvements and machinery within the meaning of
the Assessment Law and the Real Property Tax Code.
In the Davao Saw Mills case the question was whether the machinery mounted on foundations of
cement and installed by the lessee on leased land should be regarded as real property for purposes of
execution of a judgment against the lessee. Here, the question is whether the gas station equipment
and machinery permanently affixed by Caltex to its gas station and pavement (which are indubitably
taxable realty) should be subject to the realty tax. This question is different from the issue raised in the
Davao Saw Mill case.
Improvements on land are commonly taxed as realty even though for some purposes they might be
considered personalty (84 C.J.S. 181-2, Notes 40 and 41). "It is a familiar phenomenon to see things
classed as real property for purposes of taxation which on general principle might be considered
personal property" (Standard Oil Co. of New York vs. Jaramillo, 44 Phil. 630, 633).
Therefore, the machines and equipment are subject to real property tax.
179
LOCAL TAXATION
TAX EXEMPT STATUS CANNOT BE EXTENDED THROUGH A BOT CONTRACT
NPC v. CBAA
G.R. No. 171470, January 30, 2009
Brion, J.
FACTS:
Petition for Review on Certiorari filed under Rule 45 of the Rules of Court by NAPOCOR challenges
the uniform rulings of LBAA of the Province of La Union, the CBAA and the CTA in rejecting
NAPOCOR's claim that the machineries and equipment used in a project covered by a BOT
agreement, to which it is a party, should be accorded the tax-exempt status it enjoys.
First Private Power Corporation (FPPC) entered into a BOT agreement with NAPOCOR for the
construction of the 215 Megawatt Bauang Diesel Power Plant in La Union. The BOT Agreement
provided for the creation of the Bauang Private Power Corporation (BPPC) that will own, manage and
operate the power plant/station, and assume and perform FPPC's obligations under the BOT
agreement. For a fee, BPPC will convert NAPOCOR's supplied diesel fuel into electricity and deliver
the product to NAPOCOR. The machineries and equipment were originally considered tax-exempt, but
on initiative of a local politician, these declarations of real property were cancelled and Notice of
Assessments were sent out.
The assessments were questioned but the LBAA, CBAA and CTA uniformly held exemption provided
by Section 234(c) of the LGC applies only when a government-owned or controlled corporation like
NAPOCOR owns and/or actually uses machineries and equipment for the generation and transmission
of electric power; in this case, NAPOCOR does not own and does not even actually and directly use
the machineries.
ISSUE:
Under the terms of the BOT Agreement, can the GOCC be deemed the actual, direct, and exclusive
user of machineries and equipment for tax exemption purposes? If not, can it pass on its tax-exempt
status to its BOT partner, a private corporation, through the BOT agreement?
HELD:
No, NPC cannot be deemed the actual, direct, and exclusive user under our tax laws. By express
terms of the BOT agreement, BPPC has complete ownership - both legal and beneficial - of the
project, including the machineries and equipment used, subject only to the transfer of these properties
without cost to NAPOCOR after the lapse of the period agreed upon.
The mere undertaking of petitioner NPC under Section 10.1 of the Agreement, that it shall be
responsible for the payment of all real estate taxes and assessments, does not justify the exemption.
The privilege granted to petitioner NPC cannot be extended to FELS. The covenant is between FELS
and NPC and does not bind a third person not privy thereto, in this case, the Province of Batangas.
Thus, the CTA committed no reversible error in denying NAPOCOR's claim for tax exemption. The
machinery and equipment are taxable real property.
180
LOCAL TAXATION
A LESSEE OF A LAND BELONGING TO THE GOVERNMENT IS NOT LIABLE FOR TAX ON THE
LAND BUT MAY BE HELD LIABLE FOR TAX ON THE IMPROVEMENT IF LESSEE RETAINS
OWNERSHIP OF IMPROVEMENTS AND OWNERSHIP IS PASSED TO THE GOVERNMENT AT
THE TERMINATION OF THE LEASE.
Asiatic Petroleum Co. vs. Llanes

G.R. No. 25386, October 20, 1926
Street, J.
FACTS:
It appears that on August 22,1919, the Governor-General, acting on behalf of the Government of the
Philippine Islands, entered into a contract of lease with the plaintiff, the Asiatic Petroleum Co. (P. I.),
whereby the Government leased to said company for the term of fifty years a piece of land, having an
area of one and one-half hectares, said island being at a distance of about 600 meters from the
landing place of the port of Cebu.
At the time of the making of the lease, the land referred to was accustomed to be covered by water at
high tide; but it was needed by the lessee as a site for tanks to be used in the storage of petroleum. In
order to reclaim the site and protect the improvements thereon from the sea, it was necessary for the
company to build a concrete and cement f oundation, protected by retaining walls of the same
material.
The contract of lease recites that the lease is made pursuant to the provisions of Act No. 1654 of the
Philippine Commission, as amended by Act No. 2570 of the Philippine Legislature. The portion of the
same Act which deals with the subject of the leasing of lands under water (sections 5 and 6) makes no
mention of the liability of the lessee for taxes; and the lease itself contains no stipulation making the
lessee liable for taxes
However, after the lessee obtained possession, the taxing authorities made an assessment against it
with respect 1 923 to the land and improvements thereon for the years 1923 to 1925, inclusive, which
tax had been paid by the plaintiff under protest, and for the recovery of the same, this action was
instituted.
It is contended by the provincial fiscal of Cebu, as attorney for the Government, that Act No. 2874
should be given a retroactive effect, with the result that the lessee under this contract is made liable for
the taxes upon Shell Island and improvements thereon
ISSUE:
1. Whether or not Asiatic Petroleum Co. is liable for tax
a. On the land.
b. On the improvements
2. Whether Act No. 2874 which superseded Act 1654 should be given retroactive effect to the
effect of taxing Asiatic.
HELD:
1. a. NO, Asiatic is not liable for tax. It is quite that the lessee is not liable for the tax assessed
against it with respect to the land which is the subject of the lease.
That land is the property of the Government; and section 344 of the Administrative Code especially
exempts from local taxation property owned by the United States of America or by the Government of
the Philippine Islands. This point was expressly ruled by this court in Fairchild vs. Sarmiento (47 Phil.,
485), where we held that when the Government as owner of land leases it for a fixed rental, under a
contract not containing a stipulation for the payment of taxes by the lessee, such land is exempt in the
hands of the lessee. This rule must be understood to apply to all property which is exempt in the hands
of the Government, whether it be of a public or patrimonial nature. In this jurisdiction real property,
whether consisting of land or the improvements thereon, is assessable against the owner; and in the
absence of special provision no liability for the tax attaches to any other person than the owner.
181
In this case, even if the plaintiff now holds said land under a contract of lease with the Government,
still by no means makes the plaintiff liable for the tax on the land.
1. b. YES, Asiatic is liable for tax on the improvements it introduced.
In Army and Navy Club vs. Trinidad(44 Phil., 383), we held that the circumstance that at the end of a
long term of years the property now owned by the Army and Navy Club is subject to an option for the
purchase of the same by the city, at a very small valuation, does not affect the liability of the present
owner for taxes upon the full value of, the property.
In this case, the improvements upon which the assessment is now sustained certainly belong to the
lessee; and, with the assent of the officials mentioned in the contract, the lessee may assign the lease,
or mortgage or encumber the improvements, and its successors will have full enjoyment of both the
lease and the improvements during the term of the contract. It is true, as already stated, that the
improvements cannot be removed and that upon termination of the lease the improvements will
become the property of the Government. This change of ownership, which can only occur at the end of
the life of lease, can in no wise affect the liability of present owners for taxes.
Therefore, the result of the discussion is that while the lessee is not taxable in respect to the land
which is the subject of the lease, it is subject to taxation with respect to the improvements.
2. NO, it should not affect the contract of lease.
We note that Act No. 1654 has been superseded by certain provisions in Act No. 2874; and in section
113 of this Act there is a general provision that all the lands granted by virtue of said Act, except
homesteads, shall be subject to the ordinary taxes which shall be paid by the grantee even though the
title remains in the Government.
In this case, the contention of provincial fiscal of Cebu is untenable. While it may be conceded that the
Act referred to could be given a retroactive effect with respect to the administrative and curative
features of the statute, it could not be given retroactive effect to the extent of impairing the obligation of
an existing lease, since our Organic Law prohibits the enactment of laws impairing the obligation of
contracts.
Therefore, the amendatory law cannot impair the contract of lease.
182
LOCAL TAXATION
PIPELINES ARE REAL PROPERTY SUBJECT TO REAL PROPERTY TAXES
Meralco Securities v CBAA

GR No. L-46245, May 31, 1982
Aquino, J.
FACTS:
In this special civil action of certiorari, Meralco Securities Industrial Corporation assails the decision of
the Central Board of Assessment Appeals dated May 6, 1976, holding that Meralco Securities' oil
pipeline is subject to realty tax.
Pursuant to a pipeline concession issued under the Petroleum Act of 1949, Meralco Securities
installed from Batangas to Manila a pipeline system consisting of cylindrical steel pipes joined together
and buried not less than one meter below the surface along the shoulder of the public highway. The
portion passing through Laguna is about thirty kilometers long.
The pipes are embedded in the soil and are firmly and solidly welded together so as to preclude
breakage or damage thereto and prevent leakage or seepage of the oil. The provincial assessor of
Laguna treated the pipeline as real property and issued Tax Declarations for San Pedro, Cabuyao,
Sta. Rosa; Biñan and Calamba. Meralco Securities appealed the assessments to the Board of
Assessment Appeals of Laguna which upheld the assessments. Meralco Securities brought the case
to the Central Board of Assessment Appeals which confirmed the previous rulings.
CBAA reasoned out that the pipes are machinery or improvements, as contemplated in the
Assessment Law and the Real Property Tax Code. Meralco Securities insists that its pipeline is not
subject to realty tax because it is not real property within the meaning of article 415.
ISSUE:
Whether or not the pipeline is real property?
HELD:
Yes, the pipeline is real property. Article 415[l] and [3] of the Civil Code provides that real property may
consist of constructions of all kinds adhered to the soil and everything attached to an immovable in a
fixed manner, in such a way that it cannot be separated therefrom without breaking the material or
deterioration of the object.
The pipeline system in question is indubitably a construction adhering to the soil. It is attached to the
land in such a way that it cannot be separated therefrom without dismantling the steel pipes which
were welded to form the pipeline. Insofar as the pipeline uses valves, pumps and control devices to
maintain the flow of oil, it is in a sense machinery within the meaning of the Real Property Tax Code.
Hence, the pipeline should be considered as real property and is subject to realty tax.
183
LOCAL TAXATION
THE TEST OF EXEMPTION IS THE USE, NOT THE OWNERSHIP OF THE MACHINERIES
National Power Corporation v. Province of Quezon and Municipality of Pagbilao

G.R. No. 171586, July 15, 2009
Brion, J.
FACTS:
NPC is a GOCC that entered into a Built Operate Transfer under an Energy Conversion Agreement
(ECA) agreement with Mirant for a powerplant on NPCs lot in Pagbilao, Quezon. NPC had the
obligation to pay all taxes that government may impose on Mirant under the ECA. The Municipality of
Pagbilao assessed real property taxes on the power plant and machineries 1.5B for 1997 –2007. NPC
filed a petition before the Local Board of Assessment Appeals - asking them to declare them exempt
from payment of property tax on equipment used for power generation under section 234 of the LGC.
NPC also objected to the assessment against Mirant and claims exemption under Sec 234 (c) and (e)
of the LGC. Section 234 which states: Exemptions from Real Property Tax. – The following are
exempted from payment of the real property tax:
(c) All machineries and equipment that are actually, directly, and exclusively used by local water
districts and government-owned or –controlled corporations engaged in the supply and distribution of
water and/or generation and transmission of electric power;
x x x x (e) Machinery and equipment used for pollution control and environmental protection.
They further state that should they not be entitled to claim the exemptions then they are entitled to a
lower assessment level and allowance for deprecation
ISSUE:
Whether or not NPC is exempt from payment of the RPT on the machineries.
HELD:
No. NPCs claim of tax exemption without merit since they failed to prove the 2 elements in Sec 234 of
the LGC:
a. the machineries and equipment are actually, directly, and exclusively used by local water
districts and government-owned or controlled corporations; and
b. the local water districts and government-owned and controlled corporations claiming
exemption must be engaged in the supply and distribution of water and/or the generation and
transmission of electric power.
As applied to the present case, the government-owned or controlled corporation claiming exemption
must be the entity actually, directly, and exclusively using the real properties, and the use must be
devoted to the generation and transmission of electric power.
Neither the NPC nor Mirant satisfies both requirements. Although the plant’s machineries are devoted
to the generation of electric power, by the NPC’s own admission and as previously pointed out, Mirant
– a private corporation – uses and operates them. That Mirant operates the machineries solely in
compliance with the will of the NPC only underscores the fact that NPC does not actually, directly, and
exclusively use them. The machineries must be actually, directly, and exclusively used by the
government-owned or controlled corporation for the exemption under Section 234(c) to apply.
Even the NPC’s claim of beneficial ownership is unavailing. The test of exemption is the use, not the
ownership of the machineries devoted to generation and transmission of electric power
184
LOCAL TAXATION
A LAW SHOULD NOT BE SIMPLY INTREPRETED AS PROVIDING FOR A BLANKET TAX

EXEMPTIONS FOR SIMILAR ENTITIES
Digitel v. Pangasinan
G.R. No. 152534, February 23, 2007
Chico-Nazario, J.:
FACTS:
Digitel operated telecommunications facilities in Pangasinan under a provincial franchise. Digitel’s
provincial franchise made it liable for provincial franchise and real property taxes. Later, the
Pangasinan Provincial Board enacted an ordinance imposing real property tax. This affected Digitel
such that it became liable for RPT not only on its lands but on the improvements on these lands as
well. In 1993, the Pangasinan Provincial Board passed a franchise tax ordinance. In 1994, Congress
granted Digitel a national franchise, under which Digitel was made liable for franchise tax and real
property tax on its real estate “exclusive of its franchise”. Pangasinan conducted an audit and found
that Digitel has not paid its franchise tax since 1992, so it ordered Digitel to pay up or have its
provincial franchise cancelled.
In 1995, the Public Telecommunications Policy Act (RA 7925 or the PTPA) took effect. Digitel used this
as basis to claim exemption from the Pangasinan franchise and real property taxes, claiming that Sec.
23 of the PTPA extended the tax exemptions granted to telecommunications franchisees to
franchisees who did not have any. Thus the tax exemption granted in the franchises of Smart, Globe,
and Bell has become applicable to Digitel, the argument goes. Digitel thus refused to pay the
Pangasinan taxes. Pangasinan therefore sued Digitel for the assessment and collection of the taxes.
ISSUE:
Whether or not Digitel is entitled to exemption from provincial franchise tax.
HELD:
NO, but it is liable for VAT. Prior to the issuance of its national franchise, Digitel only had a provincial
franchise, which expressly subjected it to franchise and real property taxes. It was only the enactment
of RA 7925 and of subsequent national franchises containing the “in lieu of all taxes” proviso that
enabled Digitel to claim exemption from franchise and real estate tax.
In PLDT v. Davao City, it has already been held that the word “exemption” in RA 7925 Sec. 23 pertains
to exemption from regulatory or reportorial requirements of the DOTC or the NTC and not to exemption
from tax liability. The issue in that case was whether or not PLDT was entitled to exemption from local
franchise tax by virtue of Sec. 23 in view of a similar tax exemption granted to Globe and Smart even
though the “in lieu of all taxes” proviso in PLDT’s national franchise has already been withdrawn by the
Local Government Code. HELD: Congress did not intend RA 7925 Sec. 23 to operate as a blanket tax
exemption to telecommunications entities. It thus cannot be said to have amended PLDT’s franchise
so as to entitle it to exemption from local franchise tax. Tax exemptions are highly disfavored, and are
strictly construed against the claiming taxpayer.
Moreover, RA 7716 abolished the franchise tax and imposed value-added tax in its stead. Therefore,
the “in lieu of all taxes” proviso in the franchises of Globe, Smart, Bell, etc. has become functus officio.
From the effectivity of RA 7716 on Jan. 1, 1996, Digitel and other similar telecommunications entities
became liable for VAT under NIRC 108.
Note that the Congress can validly grant tax exemptions to entities notwithstanding the withdrawal of
tax exemptions in the Local Government Code. Since the national franchise of Digitel is a later law,
Congress is presumed to have intended to repeal the LGC to the extent of granting Digitel the tax
exemption granted to it in the franchise.
185
LOCAL TAXATION
THE GRANT OF TAXING POWERS TO LGUS UNDER THE CONSTITUTION AND THE LGC DOES
NOT AFFECT THE POWER OF CONGRESS TO GRANT EXEMPTIONS TO CERTAIN PERSONS,
PURSUANT TO A DECLARED NATIONAL POLICY
Quezon City v. Bayan Telecommunications

G.R. No. 162015, March 6, 2006
FACTS:
Respondent Bayan Telecommunications, Inc. (Bayantel) is a legislative franchise holder under
Republic Act (R.A.) No. 3259 (1961) to establish and operate radio stations for domestic
telecommunications, radiophone, broadcasting and telecasting. Section 14 (a) of R.A. No. 3259
states: “The grantee shall be liable to pay the same taxes on its real estate, buildings and personal
property, exclusive of the franchise, xxx”. In 1992, R.A. No. 7160, otherwise known as the “Local
Government Code of 1991” (LGC) took effect. Section 232 of the Code grants local government units
within the Metro Manila Area the power to levy tax on real properties. Barely few months after the LGC
took effect, Congress enacted R.A. No. 7633, amending Bayantel’s original franchise. The Section 11
of the amendatory contained the following tax provision: “The grantee, its successors or assigns shall
be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this
franchise, xxx“. In 1993, the government of Quezon City enacted an ordinance otherwise known as the
Quezon City Revenue Code withdrawing tax exemption privileges.
ISSUE:
Whether or not Bayantel’s real properties in Quezon City are exempt from real property taxes under its
franchise.
RULING:
YES. A clash between the inherent taxing power of the legislature, which necessarily includes the
power to exempt, and the local government’s delegated power to tax under the aegis of the 1987
Constitution must be ruled in favor of the former. The grant of taxing powers to LGUs under the
Constitution and the LGC does not affect the power of Congress to grant exemptions to certain
persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local
governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts
must be resolved in favor of municipal corporations.
The legislative intent expressed in the phrase “exclusive of this franchise” cannot be construed other
than distinguishing between two (2) sets of properties, be they real or personal, owned by the
franchisee, namely, (a) those actually, directly and exclusively used in its radio or telecommunications
business, and (b) those properties which are not so used. It is worthy to note that the properties
subject of the present controversy are only those which are admittedly falling under the first category.
Since R. A. No. 7633 was enacted subsequent to the LGC, perfectly aware that the LGC has already
withdrawn Bayantel’s former exemption from realty taxes, the Congress using, Section 11 thereof with
exactly the same defining phrase “exclusive of this franchise” is the basis for Bayantel’s exemption
from realty taxes prior to the LGC. In plain language, the Court views this subsequent piece of
legislation as an express and real intention on the part of Congress to once again remove from the
LGC’s delegated taxing power, all of the franchisee’s (Bayantel’s) properties that are actually, directly
and exclusively used in the pursuit of its franchise.
186
LOCAL TAXATION
GOVERNMENT INSTRUMENTALITY SUBJECT TO REAL PROPERTY TAX
Philippine Fisheries Development Authority vs. CA

G.R. No. 169836, July 31, 2007
Ynares-Santiago, J.
FACTS:
Assailed in this Petition for Review is the Decision of the Court of Appeals which held that petitioner
Philippine Fisheries Development Authority (as Authority) is liable to pay real property taxes on the
land and buildings of the Iloilo Fishing Port Complex (IFPC) which are owned by the Republic of the
Philippines but operated and governed by the Authority.
Authority is an attached agency of the Department of Agriculture. Pursuant to Section 11 of PD 977,
which places fishing port complexes and related facilities under the governance and operation of the
Authority, the Ministry of Public Works and Highways turned over IFPC to the Authority. However, title
to the land and buildings of the IFPC remained with the Republic. The Authority thereafter leased
portions of IFPC to private firms and individuals engaged in fishing related businesses. Sometime in
May 1988, the City of Iloilo assessed the entire IFPC for real property taxes. Since, the assessment
remained unpaid until the alleged total tax delinquency, the City of Iloilo scheduled the sale at public
auction of the IFPC. Authority filed an injunction case with the RTC. The parties agreed at the pre-trial
for the Authority file a claim for tax exemption with the Iloilo City Assessor's Office but the latter denied
the same. Thus, the Authority elevated the case to the Department of Finance (DOF) but the latter
ruled that the Authority is liable to pay real property taxes because it enjoys the beneficial use of the
IFPC and that the property that is owned by the Authority shall be auctioned, and not the IFPC, which
is a property of the Republic. The Office of the President dismissed Authority’s petition. Upon its
petition with the CA, the latter affirmed the decision of the Office of the President but ruled that IFPC
may be sold at public auction to satisfy the tax delinquency of the Authority.
ISSUE:
1. Is the Authority liable to pay real property tax to the City of Iloilo?
2. If the answer is in the affirmative, may the IFPC be sold at public auction to satisfy the tax
delinquency?
HELD:
1. Yes. The Authority which is liable to pay real property taxes only with respect to the portions
of the property, the beneficial use of which were vested in private entities.
The Authority is actually a national government instrumentality which is defined as an agency of the
national government, not integrated within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and
enjoying operational autonomy, usually through a charter. Instrumentalities of the national government
are exempt from local taxes pursuant to Section 133(o) of the Local Government Code. This
exemption, however, admits of an exception with respect to real property taxes. Applying Section
234(a) of the Local Government Code, the Court ruled that when an instrumentality of the national
government grants to a taxable person the beneficial use of a real property owned by the Republic,
said instrumentality becomes liable to pay real property tax.
The Authority is an instrumentality of the national government which is generally exempt from payment
of real property tax. However, said exemption does not apply to the portions of the IFPC which the
Authority leased to private entities. With respect to these properties, the Authority is liable to pay real
property tax.
Hence, the Authority is liable to pay real property taxes only with respect to the portions of the
property, the beneficial use of which were vested in private entities.
187
2. No, the IFPC, being a property of public dominion cannot be sold at public auction to satisfy
the tax delinquency.
In Chavez v. Public Estates Authority, it was held that reclaimed lands are lands of the public domain
and cannot, without Congressional fiat, be subject of a sale, public or private. Further, the Iloilo fishing
port which was constructed by the State for public use and/or public service falls within the term "port"
under Article 420 of the Civil Code. Being a property of public dominion the same cannot be subject to
execution or foreclosure sale.
Notwithstanding said tax delinquency on the leased portions of the IFPC, the latter or any part thereof,
being a property of public domain, cannot be sold at public auction. This means that the City of Iloilo
has to satisfy the tax delinquency through means other than the sale at public auction of the IFPC.
Hence, IFPC cannot be sold at public auction to satisfy the tax delinquency.
188
LOCAL TAXATION
GOVERNMENT INSTRUMENTALITY EXEMPT FROM REAL PROPERTY TAX
Manila International Airport Authority v. City of Pasay

G.R. No. 163072, April 2, 2009
Carpio, J.
FACTS:
Assailed in this petition for review on certiorari is the Decision of CA which held that Manila
International Airport Authority (MIAA) is not exempt from paying real property tax and upheld the power
of the City of Pasay to impose and collect realty taxes on the NAIA Pasay properties.
Petitioner Manila International Airport Authority (MIAA) operates and administers the Ninoy Aquino
International Airport (NAIA) Complex under Executive Order No. 903 (EO 903) which was issued on 21
July 1983. Approximately 600 hectares of land, including the runways, the airport tower, and other
airport buildings, were transferred to MIAA. MIAA was assessed for real property tax delinquency by
the City of Pasay for the taxable years 1992 to 2001 for its real properties located in NAIA Complex,
Ninoy Aquino Avenue, Pasay City. MIAA received notices of levy and warrants of levy for the NAIA
Pasay properties and a notice that said properties will be sold at public auction if the delinquent real
property taxes remain unpaid. MIAA filed with the CA a petition for prohibition and injunction with
prayer for preliminary injunction or temporary restraining order enjoining the City of Pasay from
imposing real property taxes on, levying against, and auctioning for public sale the NAIA Pasay
properties. However, the CA held that since MIAA is a government-owned corporation, it follows that
its tax exemption under Section 21 of EO 903 has been withdrawn upon the effectivity of the Local
Government Code.
ISSUE:
Is MIAA liable to pay real property tax for the NAIA Pasay properties?
HELD:
No. MIAA is not a taxable entity under the Local Government Code.
MIAA is not a government-owned or controlled corporation but a government instrumentality which is

exempt from any kind of tax from the local governments. Indeed, the exercise of the taxing power of
local government units is subject to the limitations enumerated in Section 133 of the Local Government
Code. Under Section 133(o) of the Local Government Code, local government units have no power to
tax instrumentalities of the national government like the MIAA.
In this case, MIAA is not liable to pay real property tax for the NAIA Pasay properties. Furthermore, the
airport lands and buildings of MIAA are properties of public dominion intended for public use, and as
such are exempt from real property tax under Section 234(a) of the Local Government Code. However,
under the same provision, if MIAA leases its real property to a taxable person, the specific property
leased becomes subject to real property tax. In this case, only those portions of the NAIA Pasay
properties which are leased to taxable persons like private parties are subject to real property tax by
the City of Pasay.
Hence, MIAA is not liable to pay real property tax for the NAIA Pasay properties.
189
LOCAL TAXATION
NGCP'S TAX EXEMPT STATUS ON REAL PROPERTY DUE TO THE "IN LIEU OF ALL TAXES"
CLAUSE IS QUALIFIED: NGCP SHALL BE LIABLE TO PAY THE SAME TAX AS OTHER
CORPORATIONS ON REAL ESTATE, BUILDINGS AND PERSONAL PROPERTY EXCLUSIVE OF
THEIR FRANCHISE
National Grid Corporation of the Philippines v Oliva

G.R. No.213517, August 10, 2016
Carpio, J.
FACTS:
This is a petition for review, filed by National Grid Corporation of the Philippines (NGCP) against Ofelia
M. Oliva (City Treasurer Oliva), in her official capacity as the City Treasurer of Cebu City.
NGCP received 3 Final Notices of Demand addressed to NPC/TRANSCO from the office of the city
treasurer of Cebu, which notices stated that failure to pay the amounts demanded will result to a public
auction of the properties mentioned in said notices. Pursuant to Section 252 of the LGC, petitioner
paid the total amount demanded under protest.
The City Treasurer did not act on petitioner’s written protest, which prompted petitioner to appeal to the
LBAA of Cebu City. the LBAA directed the City Treasurer and City Assessor of Cebu City to file their
Comment on [NGCP's] Motion to Admit Petition with the LBAA. The City Attorney opposed the same
on the ground that the petition was filed out of time. The LBAA affirmed this. The CBAA dismissed
petitioner’s appeal. The CTA-EB partly granted NGCP's petition, finding NGCP liable for real property
taxes on the subject properties only for the year 2009.
ISSUE:
Was the CTA-EB correct when it held that petitioner NGCP is not exempt from the payment of real
property taxes on the subject properties.
HELD:
Petition GRANTED. We remand the case to the CBAA for the assessment and computation of the
correct amount of real property taxes on the subject properties for two different periods; the years 2001
to 2008 for NPC/TRANSCO, and the year 2009 for NGCP. For the years 2001 to 2008, the CBAA
should determine whether NPC/TRANSCO owned and used the subject properties in connection with
the transmission of electricity, and assess the subject properties in accordance with the Local
Government Code. For the year 2009, the CBAA should determine whether the subject properties are
used in connection with NGCP's franchise. Properties used in connection with NGCP's franchise are
exempt from tax, in accordance with NGCP's franchise. Properties not used in connection with
NGCP's franchise should be assessed and subjected to real property tax, in accordance with the Local
Government Code.
The subject properties were under the control of NPC/TRANSCO from 2001 to 2008. NPC/TRANSCO
was not exempt from real property tax during this period. The applicable laws on real property taxes on
the subject properties from 2001 to 2008 are Sections 21635 and 218(d)36 of the Local Government
Code.
NGCP took control of the subject properties in 2009. Although laws on real property taxes are
prescribed by the Local Government Code, it is imperative to examine the applicable tax provisions in
NGCP's franchise.
Section 939 of RA 9511 provides that NGCP shall pay "a franchise tax equivalent to three percent
(3%) of all gross receipts derived by the Grantee from its operation under this franchise." This
franchise tax is "in lieu of income tax and any and all taxes, duties, fees and charges of any kind,
nature or description levied, established or collected by any authority whatsoever, local or national, on
its franchise, rights, privileges, receipts, revenues and profits, and on properties used in connection
with its franchise, from which taxes, duties and charges, the Grantee is hereby expressly exempted."
190
It is very clear that NGCP's payment of franchise tax exempts it from payment of real property taxes on
properties used in connection with its franchise. However, NGCP's tax exempt status on real property
due to the "in lieu of all taxes" clause is qualified: NGCP shall be liable to pay the same tax as other
corporations on real estate, buildings and personal property exclusive of their franchise. The phrase
"exclusive of this franchise" means that real estate, buildings, and personal property used in the
exercise of the franchise are not subject to the same tax as other corporations.
The CBAA should determine whether the subject properties are properties used in connection with
NGCP's franchise. If the subject properties are used in connection with NGCP's franchise, then NGCP
is exempt from paying real property taxes on the subject properties. If the subject properties are not
used in connection with NGCP's franchise, then the assessment level should be based on actual use,
in accordance with Section 218(a-c) of the Local Government Code.
191
LOCAL TAXATION
SCHEDULE OF VALUES PREPARED SOLELY BY THE RESPONDENT MUNICIPAL ASSESSOR

IS ILLEGAL AND VOID
Alejandro Ty & MVR Picture Tube Inc. v. Hon. Aurelio Trampe, RTC Judge of Pasig
G.R. No. 117577, December 1, 1995
Panganiban, J.
FACTS:
On 06 January 1994, respondent Assessor sent a notice of assessment respecting certain real
properties of petitioners Alejandro Ty and MVR Picture Tube located in Pasig, Metro Manila. In a letter
dated 18 March 1994, petitioners through counsel "requested the Municipal Assessor to reconsider the
subject assessments".
Not satisfied, petitioners filed with the Regional Trial Court of the National Capital Judicial Region,
Branch 163, presided over by respondent Judge Alejandro Trampe, a Petition for Prohibition with
prayer for a restraining order and/or writ of preliminary injunction to declare null and void the new tax
assessments and to enjoin the collection of real estate taxes based on said assessments. In a
Decision, respondent Judge denied the petition "for lack of merit" in the following disposition.
The court a quo ruled that the schedule of market values and the assessments based thereon
prepared solely by respondent assessor are valid and legal, they having been prepared in accordance
with the provisions of the Local Government Code of 1991 (R.A. 7160). It held also that said Code had
effectively repealed the previous law on the matter, P.D. 921, which required, in the preparation of said
schedule, joint action by all the city and municipal assessors in the Metropolitan Manila area.
Rebuffed by said Decision and Order, petitioners filed this present Petition for Review directly before
this Court, raising pure questions of law.
ISSUE:
Did the LGC repealed the provisions of PD 921?
HELD:
No. R.A. 7160 has a repealing provision (Section 534) and, if the intention of the legislature was to
abrogate P.D. 921, it would have included it in such repealing clause, as it did in expressly rendering of
no force and effect several other presidential decrees.
Coming down to specifics, Sec. 9 of P.D. 921 requires that the schedule of values of real properties in
the Metropolitan Manila area shall be prepared jointly by the city assessors in the districts created
therein: while Sec. 212 of R.A. 7160 states that the schedule shall be prepared "by the provincial, city
and municipal assessors of the municipalities within the Metropolitan Manila Area for the different
classes of real property situated in their respective local government units for enactment by ordinance
of the sanggunian concerned. . . ."
It is obvious that harmony in these provisions is not only possible, but in fact desirable, necessary and
consistent with the legislative intent and policy. By reading together and harmonizing these two
provisions, we arrive at the following steps in the preparation of the said schedule, as follows:
1. The assessor in each municipality or city in the Metropolitan Manila area shall prepare his/her
proposed schedule of values, in accordance with Sec. 212, R.A. 7160.
2. Then, the Local Treasury and Assessment District shall meet, per Sec. 9, P.D. 921. In the instant
case, that district shall be composed of the assessors in Quezon City, Pasig, Marikina, Mandaluyong
and San Juan, pursuant to Sec. 1 of said P.D. In this meeting, the different assessors shall compare
their individual assessments, discuss and thereafter jointly agree and produce a schedule of values for
their district, taking into account the preamble of said P.D. that they should evolve "a progressive
revenue raising program that will not unduly burden the taxpayers".
192
3. The schedule jointly agreed upon by the assessors shall then be published in a newspaper of
general circulation and submitted to the sanggunian concerned for enactment by ordinance, per Sec.
212, R.A. 7160.
Since it is now clear that P.D. 921 is still good law, it is likewise clear that the schedule of values
prepared solely by the respondent municipal assessor is illegal and void.
193
LOCAL TAXATION
CHARGING RENTAL FEES TO PHYSICIANS BY A HOSPITAL DOES NOT EQUATE TO A

COMMERCIAL VENTURE
City Assessor of Cebu v. Association of Benevola de Cebu, Inc.

GR No. 152904, June 8, 2007
Velasco, Jr., J.
FACTS:
This Petition for Review on Certiorari under Rule 45, wherein petitioner assails the decision of the CA
and that of the CBAA in overturning the 35% assessment rate of Cebu City Assessor and LBAA and
ruling that respondent is entitled to a 10% assessment.
Respondent Association of Benevola de Cebu, Inc. is a non-stock, non-profit organization is the owner
of Chong Hua Hospital in Cebu City. Petitioner City Assessor of Cebu City assessed the CHHMAC
building as "commercial" and at the assessment level of 35% for commercial buildings, and not at the
10% special assessment currently imposed for CHH and its other separate buildings.
Petitioner argues that CHHMAC is a newly constructed five-storey building situated about 100 meters
away from CHH and, based on actual inspection, was ascertained that it is not a part of the CHH
building but a separate building which is actually used as commercial clinic/room spaces for renting out
to physicians and, thus, classified as "commercial." Petitioner contended that in turn the medical
specialists in CHHMAC charge consultation fees for patients who consult for diagnosis and relief of
bodily ailment together with the ancillary (or support) services which include the areas of anesthesia,
radiology, pathology, and more. Respondent argues that the CHHMAC, though not actually
indispensable, is nonetheless incidental and reasonably necessary to CHH’s operations.
ISSUE:
Is a medical arts center built by a hospital to house its doctors a separate commercial establishment?
HELD:
No, it is not a commercial establishment. The CHHMAC facility, while seemingly not indispensable to
the operations of CHH, is definitely incidental to and reasonably necessary for the operations of the
hospital. The CHHMAC facility is primarily used by the hospital’s accredited physicians to perform
medical check-up, diagnosis, treatment, and care of patients. For another, it also serves as a
specialized outpatient department of the hospital.
Respondent’s charge of rentals for the offices and clinics its accredited physicians occupy cannot be
equated to a commercial venture. First, CHHMAC is only for its consultants or accredited doctors and
medical specialists. Second, the charging of rentals is a practical necessity: (1) to recoup the
investment cost of the building, (2) to cover the rentals for the lot CHHMAC is built on, and (3) to
maintain the CHHMAC building and its facilities. Third, as correctly pointed out by respondent, it pays
the proper taxes for its rental income. And, fourth, if there is indeed any net income from the lease
income of CHHMAC, such does not inure to any private or individual person as it will be used for
respondent’s other charitable projects.
Therefore, CHHMAC, with operations being devoted for the benefit of the CHH’s patients, should be
accorded the 10% special assessment.
194
TARIFF AND CUSTOMS
Tariff and Duties
CUSTOMS OFFICER MUST FIRST ASSESS AND DETERMINE THE CLASSIFICATION OF THE
IMPORTED ARTICLE BEFORE TARIFF MAY BE IMPOSED
Commissioner of Customs vs Hypermix Feeds Corporation

G.R. No. 179579, February 1, 2012
Sereno, J.
FACTS:
Petitioner COC issued CMO 27-2003, which for tariff purposes, classifies wheat according to the (1)
importer or consignee; (2) country of origin; and (3) port of discharge. Depending on these factors,
wheat would then be classified either as food grade or feed grade with a corresponding tariff of 3% and
7% respectively.
Respondent, a wheat importer, filed a Petition for Declaratory Relief with the RTC of Las Pinas
contending that CMO 27-2003 was issued without following the mandate of the Revised Administrative
Code on public participation, prior notice, and publication or registration with the University of the
Philippines Law Center. Furthermore, respondent claimed that the equal protection clause of the
Constitution was violated when the regulation treated non-flour millers differently from flour millers for
no reason at all. Lastly, respondent asserted that the retroactive application of the regulation was
confiscatory in nature.
RTC issued a Temporary Restraining Order (TRO) effective for twenty (20) days from notice.
Petitioners thereafter filed a Motion to Dismiss alleging that, among others, was an internal
administrative rule and not legislative in nature. On 28 February 2005, the RTC ruled in favor of
respondent, declaring CMO 27-2003 as INVALID and OF NO FORCE AND EFFECT, citing the
petitioner’s failure to follow the basic requirements of hearing and publication in the issuance of the
CMO. Petitioners appealed to the CA, raising the same allegations in defense of CMO 27- 2003. CA
dismissed the appeal, holding that the regulation affected substantial rights of petitioners and other
importers and that the petitioners should have observed the requirements of notice, hearing and
publication.
ISSUE:
W/N CMO 27-2003 is valid.
RULING:
No. CMO 27-2003 is not valid.
Section 1403 of the Tariff and Customs Law, as amended provides that, the customs officer tasked to
examine, classify, and appraise imported articles shall determine whether the packages designated for
examination and their contents are in accordance with the declaration in the entry, invoice and other
pertinent documents and shall make return in such a manner as to indicate whether the articles have
been truly and correctly declared in the entry as regard their quantity, measurement, weight, and tariff
classification and not imported contrary to law. He shall submit samples to the laboratory for analysis
when feasible to do so and when such analysis is necessary for the proper classification, appraisal,
and/or admission into the Philippines of imported articles. Likewise, the customs officer shall determine
the unit of quantity in which they are usually bought and sold, and appraise the imported articles in
accordance with Section 201 of this Code. Failure on the part of the customs officer to comply with his
duties shall subject him to the penalties prescribed under Section 3604 of this Code.
The provision mandates that the customs officer must first assess and determine the classification of
the imported article before tariff may be imposed. Unfortunately, CMO 23-2007 has already classified
the article even before the customs officer had the chance to examine it. In effect, petitioner
Commissioner of Customs diminished the powers granted by the Tariff and Customs Code with regard
to wheat importation when it no longer required the customs officer's prior examination and
assessment of the proper classification of the wheat.
It is well-settled that rules and regulations, which are the product of a delegated power to create new
and additional legal provisions that have the effect of law, should be within the scope of the statutory
authority granted by the legislature to the administrative agency. It is required that the regulation be
195
germane to the objects and purposes of the law and that it be not in contradiction to, but in conformity
with, the standards prescribed by law.
Petitioners violated respondent's right to due process in the issuance of CMO 27-2003 when they
failed to observe the requirements under the Revised Administrative Code. Petitioners likewise
violated respondent's right to equal protection of laws when they provided for an unreasonable
classification in the application of the regulation. Finally, petitioner Commissioner of Customs went
beyond his powers of delegated authority when the regulation limited the powers of the customs officer
to examine and assess imported articles.
196
TARIFF AND CUSTOMS
Special Economic Zones
THE PROSCRIPTION IN THE IMPORTATION OF USED MOTOR VEHICLES SHOULD BE

OPERATIVE ONLY OUTSIDE THE FREEPORT AND THE INCLUSION OF SAID ZONE WITHIN
THE AMBIT OF THE PROHIBITION IS AN INVALID MODIFICATION OF R.A. 7227.
AS LONG AS THE USED MOTOR VEHICLES DO NOT ENTER THE CUSTOMS TERRITORY, THE
INJURY OR HARM SOUGHT TO BE PREVENTED OR REMEDIED WILL NOT ARISE.
Hon. Executive Secretary vs. Southwing Heavy Industries, Inc.

G.R. No. 164171, February 20, 2006
Ynares-Santiago, J.:
FACTS:
The instant consolidated petitions seek to annul and set aside the Decisions of the Regional Trial
Court of Olongapo City, and the Decision of the Court of Appeals, which declared Article 2, Section 3.1
of Executive Order No. 156 unconstitutional. Said EO prohibits the importation into the country,
inclusive of the Special Economic and Freeport Zone or the Subic Bay Freeport, of used motor
vehicles, subject to a few exceptions.
On December 12, 2002, President Arroyo issued EO 156. The challenged provision states:
3.1 The importation into the country, inclusive of the Freeport, of all types of used motor
vehicles is prohibited, except for the following: xxx xxx xxx
The issuance of EO 156 spawned 3 separate actions for declaratory relief before the RTC of Olongapo
City. The cases were filed by herein respondent entities, who or whose members, are classified as
Subic Bay Freeport Enterprises and engaged in the business of, among others, importing and/or
trading used motor vehicles.
A summary judgment was rendered declaring that the questioned provision constitutes an unlawful
usurpation of legislative power vested by the Constitution with Congress. The trial court further held
that the proviso is contrary to the mandate of R.A. No. 7227 or the Bases Conversion and
Development Act which allows the free flow of goods and capital within the Freeport.
The petitioners claim that the “free flow or movement of goods and capital in the Freeport” only means
that goods and material brought within the Freeport shall not be subject to customs duties and other
taxes and should not be construed as an open floodgate for entry of all kinds of goods. Thus, the
importation ban on motor vehicles is applicable within the Freeport.
ISSUE:
Is the questioned provision prohibiting the importation of all types of motor vehicles in the Freeport
valid?
HELD:
No, the provision prohibiting the importation of all types of motor vehicles in the Freeport is not valid.
To be valid, an administrative issuance, such as an executive order, must comply with the following
requisites:
1. Its promulgation must be authorized by the legislature;
2. It must be promulgated in accordance with the prescribed procedure;
3. It must be within the scope of the authority given by the legislature; and
4. It must be reasonable.
For the first requisite, delegation of legislative powers to the President is permitted in Section 28(2) of
Article VI of the Constitution. Anent the second requisite, respondents neither questioned before this
Court nor with the courts below the procedure that paved the way for the issuance of EO 156.
Considering the settled principle that in the absence of strong evidence to the contrary, acts of the
other branches of the government are presumed to be valid, and there being no objection as t the
procedure in the promulgation of EO 156, the presumption is that said executive issuance duly
complied with the procedures and limitations imposed by law.
Anent the third requisite, we hold that the importation ban is ultra vires or beyond the limits of the
authority conferred. In the instant case, the subject matter of the laws authorizing the President to
regulate or forbid importation of used motor vehicles, is the domestic industry. EO 156, however,
197
exceeded the scope of its application by extending the prohibition on the importation of used cars to
the Freeport, which R.A. 7227, considers to some extent, a foreign territory. The domestic industry
which the EO seeks to protect is the “customs territory.” The proscription in the importation of used
motor vehicles should be operative only outside the Freeport and the inclusion of said zone within the
ambit of the prohibition is an invalid modification of R.A. 7227.
This brings us to the fourth requisite. There is no doubt that the issuance of the ban to protect the
domestic industry is a reasonable exercise of police power. The problem, however, lies with respect to
the application of the importation ban to the Freeport. The Court finds no logic in the all-encompassing
application of the assailed provision to the Freeport which is outside the customs territory. As long as
the used motor vehicles do not enter the customs territory, the injury or harm sought to be prevented
for remedied will not arise. The application of the law should be consistent with the purpose of and
reason of the law. The importation ban in this case should also be declared void for its too sweeping
and unnecessary application to the Freeport which has no bearing on the objective of the prohibition.
198
TARIFF AND CUSTOMS
Special Economic Zones
CUSTOMS; TAX EXEMPTION; SPECIAL ECONOMIC ZONE
Coconut Oil Refiners Association v. Torres

G.R. No. 132527, July 29, 2005
Azcuna, J.
FACTS:
This is a petition for prohibition and injunction seeking to enjoin the Executive Branch from continuing
with the operation of tax and duty-free shops at the Subic Special Economic Zone (SSEZ) and the
Clerk Special Economic Zone (CSEZ).
Republic Act No. 7227 was enacted, providing for, among other things, the sound and balanced
conversion of the Clark and Subic military reservations and their extensions into alternative productive
uses in the form of special economic zones in order to promote the economic and social development
of Central Luzon in particular and the country in general. On April 3, 1993, President Fidel V. Ramos
issued Executive Order No. 80, which declared, among others, that Clark shall have all the applicable
incentives granted to the Subic Special Economic and Free Port Zone under Republic Act No. 7227.
On June 19, 1993, Executive Order No. 97-A was issued, "Further Clarifying the Tax and Duty-Free
Privilege Within the Subic Special Economic and Free Port Zone.
ISSUE:
1. Shall Sec. 5 of EO No. 80 and Executive Order No. 97-A be declared null?
2. Did the Executive Department, by allowing through the questioned issuances the setting up of
tax and duty-free shops and the removal of consumer goods and items from the zones without
payment of corresponding duties and taxes, arbitrarily provide additional exemptions to the limitations
imposed by Republic Act No. 7227?
HELD:
1. No. It is an established principle of constitutional law that the guaranty of the equal protection
of the laws is not violated by a legislation based on a reasonable classification. Classification, to be
valid, must (1) rest on substantial distinction, (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. Applying the
foregoing test to the present case, the finds no violation of the right to equal protection of the laws.
First, contrary to petitioners’ claim, substantial distinctions lie between the establishments inside and
outside the zone, justifying the difference in their treatment. The Court found substantial differences
between the retailers inside and outside the secured area, thereby justifying a valid and reasonable
classification. Certainly, there are substantial differences between the big investors who are being
lured to establish and operate their industries in the so-called “secured area” and the present business
operators outside the area. On the one hand, we are talking of billion-peso investments and thousands
of new jobs. On the other hand, definitely none of such magnitude. In the first, the economic impact will
be national; in the second, only local. Even more important, at this time the business activities outside
the “secured area” are not likely to have any impact in achieving the purpose of the law, which is to
turn the former military base to productive use for the benefit of the Philippine economy. There is, then,
hardly any reasonable basis to extend to them the benefits and incentives accorded in R.A. 7227. 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.
2. No. While it is true that Section 12 (b) of Republic Act No. 7227 mentions only raw materials,
capital and equipment, this does not necessarily mean that the tax and duty-free buying privilege is
limited to these types of articles to the exclusion of consumer goods. To limit the tax-free importation
privilege of enterprises located inside the special economic zone only to raw materials, capital and
equipment clearly runs counter to the intention of the Legislature to create a free port where the "free
199
flow of goods or capital within, into, and out of the zones" is insured. The phrase "tax and duty-free
importations of raw materials, capital and equipment" was merely cited as an example of incentives
that may be given to entities operating within the zone. The records of the Senate containing the
discussion of the concept of "special economic zone" in Section 12 (a) of Republic Act No. 7227 show
the legislative intent that consumer goods entering the SSEZ which satisfy the needs of the zone and
are consumed there are not subject to duties and taxes in accordance with Philippine laws.
However, the removal of goods from the SSEZ to other parts of the Philippine territory without payment
of said customs duties and taxes is not authorized by the Act. Consequently, the following provisions
are null and void:
1.2 Residents of the SSEFPZ living outside the Secured Area can enter and consume any quantity of
consumption items in hotels and restaurants within the Secured Area. However, these residents can
purchase and bring out of the Secured Area to other parts of the Philippine territory consumer items
worth not exceeding US $100 per month per person. Only residents age 15 and over are entitled to
this privilege.
1.3 Filipinos not residing within the SSEFPZ can enter the Secured Area and consume any quantity of
consumption items in hotels and restaurants within the Secured Area. However, they can purchase
and bring out of the Secured Area to other parts of the Philippine territory consumer items worth not
exceeding US $200 per year per person. Only Filipinos age 15 and over are entitled to this privilege.
A similar provision found in paragraph 5, Section 4(A) of BCDA Board Resolution No. 93-05-034 is
also null and void. Said Resolution applied the incentives given to the SSEZ under Republic Act No.
7227 to the CSEZ, which, as aforestated, is without legal basis.
200
REMEDIES
Government’s Remedies
ORDERING OF CLOSURE NOT APPROPRIATE REMEDY TO COMPEL BANK TO PAY

DELINQUENT TAXES
Rural Bank of Makati, Inc. v. Municipality of Makati

G.R. No. 150763, July 2, 2004
Quisumbing, J.
FACTS:
Upon inquiry into the petitioner’s history of paying taxes, the respondent discovered that the former
has not paid any taxes under the belief that R.A. 720 exempted it from payment of taxes.
The municipality then lodged a criminal complaint against the president and general manager of said
bank for non-payment of taxes, violating Section 21(a), Chapter II, Article 3 in relation to Sections 105
and 169 of the Metropolitan Tax Code.
While the criminal action was pending, the municipality issued an order of closure against herein
petitioner bank.
ISSUE:
Is the order of closure against petitioner one of the appropriate remedies to enforce its payment of
delinquent taxes?
HELD:
NO—Section 62 of the Local Tax Code only allows distraint of personal property and filing of a legal
action as remedies for enforcement of delinquent taxes, as follows:
SEC. 62. Civil Remedies. – The civil remedies available to enforce payment of delinquent taxes shall
be by distraint of personal property, and by legal action. Either of these remedies or both
simultaneously may be pursued at the discretion of the proper authority.
The payment of other revenues accruing to local governments shall be enforced by legal action.
(Emphasis added)
Section 62 does not provide for closure. Moreover, the order of closure violates petitioner’s right to due
process, considering that the records show that the bank exercised good faith and presented what it
thought was a valid and legal justification for not paying the required taxes and fees.
Additionally, even if there is a violation of a municipal ordinance, municipal mayor cannot avail of
extrajudicial remedies. It should have observed due process before ordering the bank’s closure.
The order of closure directed against petitioner, therefore, may not be said to be an appropriate
remedy to enforce its payment of delinquent taxes
201
REMEDIES
TAX ADMINISTRATION REMEDIES; NO NOTICE OF DELINQUENCY OR OF SALE WAS GIVEN

TO EITHER GORGONIA BANTEGUI, THE DELINQUENT OWNER; OR TO HER
REPRESENTATIVE.
Spouses Tan vs Banteguin

G.R. No. 154027 October 24, 2005
J. Panganiban
FACTS:
Bantegui acquired the subject property sometime in 1954 and rented it to spouses Florante B. Caedo
and Florencia B. Caedo. In 1970, she left for the United States of America. She returned to the
Philippines in January 1988 and executed her special power of attorney, making Guadalupe B.
Bautista. Her taxes on the subject property were paid but only until 1977. The real property taxes from
the year 1978 to 1983 however, were not paid.
For failure of Bantegui to pay said taxes, the city treasurer of Quezon City sold said property at public
auction to the spouses Edilberto and Josefina Capistrano for the sum of ₱10,000.00. The Certificate of
Sale of Delinquent Property was subsequently issued in their favor.
Since the property was not redeemed within the one (1) year redemption period, title to said property
was consolidated to the Capistranos and [TCT] No. 361851 was issued in their names. The
Capistranos, however, did not take possession of the land [or inform] the Caedos about the sale or
collected any rent from them. They did not pay real property taxes thereon. These transfers were
unknown to Bantegui and the Caedos despite the fact that Evelyn Pereyra is the daughter of the
Caedos, as the latter did not inform them about anything concerning these transactions. All this time[,]
the actual occupants, the Caedos, considered themselves as tenants of Bantegui, such that they paid
rent to her until December 1993, when they handed the water pump as payment of their arrears.
Bantegui, thru her sister Guadalupe Bautista, and joined by the spouses Caedo[,] filed a Complaint for
Annulment of Sale, Quieting of Title as the were irregularities in the abovementioned public auction
such as lack of notice on.
ISSUE:
Whether irregularities in the public auction for the recovery of tax liabilities render the whole sale void?
HELD:
YES. No notice of delinquency or of sale was given to either Gorgonia Bantegui, the delinquent
owner; or to her representative. The auction sale of real property for the collection of delinquent taxes
is in personam, not in rem. Although sufficient in proceedings in rem like land registration, mere notice
by publication will not satisfy the requirements of proceedings in personam. "[P]ublication of the notice
of delinquency [will] not suffice, considering that the procedure in tax sales is in personam." It is still
incumbent upon the city treasurer to send the notice directly to the taxpayer -- the registered owner of
the property -- in order to protect the latter’s interests. Although preceded by proper advertisement and
publication, an auction sale is void absent an actual notice to a delinquent taxpayer.The sale of land
"for tax delinquency is in derogation of property rights and due process, the prescribed steps must be
followed strictly." In the present case, notices either of delinquency or of sale were not given to the
delinquent taxpayer. Those notices are mandatory, and failure to issue them invalidates a sale.
The auction sale of land to satisfy alleged delinquencies in the payment of real estate taxes derogates
or impinges on property rights and due process. Thus, the steps prescribed by law for the sale,
particularly the notices of delinquency and of sale, must be followed strictly. Failure to observe those
steps invalidates the sale.
202
REMEDIES
STRICT ADHERENCE TO THE STATUTES GOVERNING TAX SALES IS IMPERATIVE
SPOUSES SERFINO vs. COURT OF APPEALS

GR. No. L-40751 September 15, 1987
PARAS, J.
FACTS:
These are two (2) Petitions for certiorari to review the decision of the Court of Appeals in CA-G.R. No.
37748-R, consolidated for Our disposition since they arose from the same factual background.
On 25 August 1937, a parcel of land was patented in the name of Pacifico Casamayor (OCT 1839).
On 14 December 1945, he sold said land in favor of Nemesia D. Balatazar (TCT No. 57-N, 18 January
1946). OCT 1839 was lost during the war and upon petition of Nemesia Baltazar, the Court of First
Instance of Negros Occidental ordered the reconstitution thereof. Pursuant thereto, OCT 14-R (1839)
was issued on 18 January 1946 in the name of Pacifico Casamayor. On that same day, TCT 57-N
was issued in the name of Nemesia Baltazar but after the cancellation of OCT 14-R (1839). On 15
August 1951, Nemesia Baltazar, sold said property to Lopez Sugar Central Mill Co., and the latter did
not present the documents for registration until 17 December 1964 to the Office of the Registry of
Deeds. Said office refused registration upon its discovery that the same property was covered by
another certificate of title, TCT 38985, in the name of Federico Serfino. On 19 November 1964, the
spouses Serfinos mortgaged the land to the Philippine National Bank (PNB) to secure a loan in the
amount of P5,000.00; which was inscribed in TCT No. 38985.
The Lopez Sugar Central instituted an action to recover said land; and the lower court rendered a
decision ordering the cancellation of TCT No. 38985; issuance of a new TCT in the name of plaintiff;
and the payment of the plaintiff PNB the loan of spouses Serfinos secured by said land. Both parties
appealed from this decision of the trial court. Ruling on the assignment of errors, the appellate court
affirmed the judgment of the trial court with modification in its decision setting aside the decision of the
trial court declaring plaintiff liable to PNB for payment, however, ordering the plaintiff to reimburse the
Serfino spouses of the sum P1,839.49, representing the unpaid taxes and penalties paid by the latter
when they repurchased the property. Hence, the appeal by the spouses Serfino and PNB to the
Supreme Court.
ISSUE:
Is the sale of the disputed property null and void?
RULING:
YES. The assailed decision of the appellate court declares that the prescribed procedure in auction
sales of property for tax delinquency being in derogation of property rights should be followed
punctiliously. Strict adherence to the statutes governing tax sales is imperative not only for the
protection of the tax payers, but also to allay any possible suspicion of collusion between the buyer
and the public officials called upon to enforce such laws. Notice of sale to the delinquent landowners
and to the public in general is an essential and indispensable requirement of law, the non-fulfillment of
which initiates the sale.
We give our stamp of approval on the aforementioned ruling of the respondent court. In the case at
bar, there is no evidence that Nemesia Baltazar, who had obtained a transfer certificate of title in her
name on January 18, 1946, was notified of the auction sale which was scheduled on October 30,
1956. Neither was she furnished as the owner of the delinquent real property with the certificate of sale
as prescribed by Sec. 37 of Commonwealth Act No. 470. These infirmities are fatal. Worth mentioning
also is the fact that Lopez Sugar Central was not entirely negligent in its payment of land taxes. The
record shows that taxes were paid for the years 1950 to 1953 and a receipt therefor was obtained in its
name. The sale therefore by the Province of Negros Occidental of the land in dispute to the spouses
Serfinos was void since the Province of Negros Occidental was not the real owner of the property thus
sold. In turn, the spouses Serfinos title which has been derived from that of the Province of Negros
Occidental is likewise void. A purchaser of real estate at the tax sale obtains only such title as that held
by the taxpayer, the principle of caveat emptor applies. Where land is sold for delinquency taxes under
the provisions of the Provincial Assessment Law, rights of registered but undeclared owners of the
203
land are not affected by the proceedings and the sale conveys only such interest as the person who
has declared the property for taxation has therein.
204
REMEDIES
REGISTERED OWNERS ARE ENTITLED TO NOTICE OF TAX DELINQUENCY
Talusan v. Tayag
G.R. No. 133698, April 4, 2001
Panganiban, J.
FACTS:
Assailed in this petition for review on certiorari is the Decision of CA which sustained the validity of the
auction sale.
Petitioners Antonio and Celia Talusan alleged they acquired a condominium unit covered by
Condominium Certificate of Title No. 651 and located in Building IV, Europa Condominium Villas,
Baguio City from Elias Imperial, the original registered owner, for P100,000 as evidenced by a Deed of
Sale which, however, was never been registered with the Register of Deeds. Petitioners also averred
that Baguio City Treasurer Juan Hernandez sold the property at a public auction due to nonpayment of
delinquent real estate taxes thereon. The property was sold to respondent Herminigildo Tayag for
P4,400 which represented the unpaid taxes without any notice to the former owner or to the petitioners
and without compliance with the provisions of PD No. 464, as evidenced by the Certificate of Sale.
Claiming that the bid price of P4,400 is so unconscionably low and shocking to the conscience and
citing irregularities in the proceedings and noncompliance with statutory requirements, petitioners filed
a complaint for annulment of the auction sale before the RTC of Baguio City. The RTC dismissed the
complaint and held that the decision in LRC Adm. Case No. 207-R had already upheld the legality of
the questioned auction sale and to rule again on the same issue would amount to passing upon a
judgment made by a coequal court, contrary to the principle of conclusiveness of judgment. This was
affirmed by the CA.
Petitioners assert that the tax sale should be annulled because of noncompliance with the requirement
of publication prescribed in Section 65 of PD 464. Respondent Tayag countered that he is not bound
by the alleged deed of sale in favor of the petitioners because it was not registered and recorded with
the Registry of Deeds of Baguio City.
ISSUE:
Is auction sale valid notwithstanding the non-publication of the notice of real property tax delinquency
and personal notice to the registered owner?
HELD:
Yes, the auction sale is valid. Cases involving an auction sale of land for the collection of delinquent
taxes are in personam. Thus, notice by publication, though sufficient in proceedings in rem, does not
as a rule satisfy the requirement of proceedings in personam. As such, mere publication of the notice
of delinquency would not suffice, considering that the procedure in tax sales is in personam. It was,
therefore, still incumbent upon the city treasurer to send the notice of tax delinquency directly to the
taxpayer in order to protect the interests of the latter.
In the present case, the notice of delinquency was sent by registered mail to the permanent address of
the registered owner in Manila. In that notice, the city treasurer of Baguio City directed him to settle the
charges immediately and to protect his interest in the property. Under the circumstances, we hold that
the notice sent by registered mail adequately protected the rights of the taxpayer, who was the
registered owner of the condominium unit. For purposes of the real property tax, the registered owner
of the property is deemed the taxpayer. Hence, only the registered owner is entitled to a notice of tax
delinquency and other proceedings relative to the tax sale. Not being registered owners of the
property, petitioners cannot claim to have been deprived of such notice. In fact, they were not entitled
to it.
Insofar as third persons are concerned, it is the registration of the deed of sale that can validly transfer
or convey a persons interest in a property. In the absence of registration, the registered owner whose
name appears on the certificate of title is deemed the taxpayer to whom the notice of auction sale
should be sent. Petitioners, therefore, cannot claim to be taxpayers.
Thus, the auction sale is valid.
205
REMEDIES
IN ASCERTAINING THE IDENTITY OF THE DELINQUENT TAXPAYER, FOR PURPOSES OF

NOTIFYING HIM OF HIS TAX DELINQUENCY AND THE PROSPECT OF A DISTRAINT AND
AUCTION OF HIS DELINQUENT PROPERTY, PETITIONER CITY TREASURER SHOULD NOT
HAVE SIMPLY RELIED ON THE TAX DECLARATION
ESTATE OF MERCEDES JACOB vs. COURT OF APPEALS

G.R. No. 120435. December 22, 1997
BELLOSILLO, J.
FACTS:
These two (2) petitions are heard jointly by the Court for the reason that they involve a common issue
of jurisdiction over the nature of the action.
Alberto Sta. Maria sold in 1964 a parcel of land covered by TCT. No. 68818 to Teresa L. Valencia who,
as a consequence, had the title cancelled and TCT No. 79818 issued in her name. She however failed
to have the tax declaration transferred in her name. In 1973 Valencia sold the land on installment with
a mortgage in favor of respondent Bernardito C. Tolentino. However, from 1979 to 1983 Valencia
failed to pay the real estate taxes due on the land. As a result, the land was sold at a public auction to
cover the tax delinquency. The spouses Romeo and Verna Chua bought the land in question.
Thereafter, a certificate of sale was issued to the Chua spouses but it showed on its face that the land
was still covered by TCT No. 68818 and not TCT No. 79818. Apparently, the Oce of the City Treasurer
was unaware that TCT No. 68818 had already been canceled by TCT No. 79818. However, in the
Final Bill of Sale issued to the Chua spouses TCT No. 79818 still appeared in the name of Alberto Sta.
Maria, the former owner. The Chua spouses led a petition with the Regional Trial Court of Quezon City
for the cancellation of TCT No. 79818 and the issuance of a new title in their name. The court granted
their petition and TCT No. 357727 was issued in the name of the Chua spouses. In the meantime,
Bernardita Tolentino paid in full the purchase price of the property and Teresa L. Valencia executed a
deed of absolute sale in her favor. On 2 August 1988, in view of the re that gutted the oce of the
Register of Deeds of Quezon City, Tolentino led a petition for reconstitution of TCT No. 79818. As
purchasers of the property in the auction sale, the Chuas demanded delivery of possession from
Bernardito C. Tolentino and Teresa L. Valencia. As a consequence, Tolentino sued for annulment of
the auction sale in the Regional Trial Court of Quezon City. The trial court granted the petition. The
Court of Appeals armed the court a q u o . Hence, this petition for review on certiorari by the City
Treasurer of Quezon City.
ISSUE:
Whether the auction sale should be annulled.
RULING:
YES. The Supreme Court annulled the public auction sale and ordered the Register of Deeds of
Quezon City to cancel TCT No. 352727 and issue in lieu thereof a new one in the name of respondent
Bernardita C. Tolentino. The Court held that in ascertaining the identity of the delinquent taxpayer the
City Treasurer should have not simply relied on the tax declaration. The property being covered by the
Torrens System, it would have been more prudent for him to verify from the Office of the Register of
Deeds of Quezon City where the property is situated and as to who the registered owner was at the
time the auction sale was to take place, to determine who the real delinquent taxpayer was within the
purview of Section 73 of PD No. 464. When the property was sold by Sta. Maria to Valencia in 1964
the law applicable was RA No. 537 which provides that failure to do so (to make a new declaration)
shall make the assessment in the name of the previous owner valid and binding on all persons
interested, and for all purposes, as though the same had been assessed in the name of the actual
owner. However the law in force at the time of the auction sale on 29 February 1984 was already PD
No. 464 which did not contain the aforecited phrase. The fact that the pertinent phrase found in both
RA No. 537 and RA No. 409 was not incorporated in PD No. 464 implies that the assessment of the
subject property in the name of Sta. Maria would not bind, much less affect, Valencia for there is no
206
longer any statutory waiver of the right to contest assessment by the actual owner due to mere non-
declaration.
207
REMEDIES
A ROAD CONSTRUCTED BY A LESSEE UNDER A LEASE AGREEMENT WITH THE

GOVERNMENT IN AN ALIENABLE OR DISPOSABLE PUBLIC LAND IS EXEMPT FROM REALTY
TAX UNDER THE ASSESSMENT LAW (COMMONWEALTH ACT NO. 470)
Board of Assessment Appeals of Zamboanga del Sur v. Samar Mining Co., Inc.
G.R. No. L-28034, February 27, 1971
Zaldivar, J.
FACTS:
This is an appeal from the decision of the CTA declaring respondent Samar Mining Co., Inc. exempt
from paying real property tax.
Samar Mining Co., Inc. (Samar Mining) is a domestic corporation engaged in the mining industry. It
decided to construct a 42-kilometer gravel road (known as the Samico road) as a convenient means of
hauling its ores from the mine site at Buug to the pier area at Pamintayan, Zamboanga del Sur. Samar
Mining then received a letter from the Provincial Assessor assessing 13.8 kilometers of said road for
real estate tax purposes. Only 13.8 kilometers of the 42-kilometer road was assessed as the former
traversed alienable or disposable public lands while the rest traversed timber lands, which are
inalienable or disposable.
ISSUE:
Is a road constructed in an alienable or disposable public land exempt from realty tax?
HELD:
Yes, a road constructed in an alienable or disposable public land is exempt from realty tax.
There is no question that the road constructed by Samar Mining on the public lands leased to it by the
government is an improvement. But as to whether the same is taxable under the Assessment Law, this
question has already been answered in the negative by this Court in the case of Bislig Bay Lumber
Co., Inc. vs. Provincial Government of Surigao. It is contended by petitioners that the ruling in the
Bislig case is not applicable in the present case because if the concessionaire in the Bislig case was
exempt from
paying the realty tax it was because the road in that case was constructed on a timberland or on an
indisposable public land, while in the instant case what is being taxed is 13.8 kilometer portion of the
road traversing alienable public lands. This contention has no merit.
The pronouncement in the Bislig case contains no hint whatsoever that the road was not subject to tax
because it was constructed on inalienable public lands. What is emphasized in the lease is that the
improvement is exempt from taxation because it is an integral part of the public land on which it is
constructed and the improvement is the property of the government by right of accession. Under
Section 3(a) of the Assessment Law (Com. Act 470), all properties owned by the government, without
any distinction, are exempt from taxation.
Hence, the road constructed by Samar Mining is exempt from realty tax under the Assessment Law.
208
REMEDIES
NEGLECT OR OMISSION OF GOVERNMENT OFFICIALS ENTRUSTED WITH THE COLLECTION

OF TAXES SHOULD NOT BE ALLOWED TO BRING HARM OR DETRIMENT TO THE PEOPLE
Vera v. Fernandez
G.R. No. L-31364, March 30, 1979
De Castro, J.
FACTS:
This is an appeal from two orders of the Court of First Instance of Negros Occidental dismissing the
Motion for Allowance of Claim and for an Order of Payment of Taxes by the Government of the
Republic of the Philippines against the Estate of the late Luis D. Tongoy, for deficiency income taxes
and denying the Motion for Reconsideration for the Order of Dismissal.
The abovementioned Motion for Allowance of Claim and for payment of taxes was filed to represent
the indebtedness to the Government of the late Luis D. Tongoy for deficiency income taxes. Francis
Tongoy, the administrator, opposed the motion solely on the ground that the claim was barred under
the Rules of Court. Finding the opposition well-founded, the respondent Judge, dismissed the motion
for allowance of claim filed by herein petitioner, Regional Director of the Bureau of Internal Revenue. A
motion for reconsideration was filed, but the same was denied.
ISSUE:
Whether or not the statute of non-claims under the Rules of Court, bars claim of the government for
unpaid taxes within the period of limitation prescribed in the National Internal Revenue Code.
HELD:
No. It has been established by jurisprudence that the assessment, collection and recovery of taxes, as
well as the matter of prescription thereof are governed by the provisions of the National Internal
Revenue Code.
The reason for the more liberal treatment of claims for taxes against a decedent's estate in the form of
exception from the application of the statute of non-claims, is not hard to find. Taxes are the lifeblood
of the Government and their prompt and certain availability are imperious need. Upon taxation
depends the Government ability to serve the people for whose benefit taxes are collected. To
safeguard such interest, neglect or omission of government officials entrusted with the collection of
taxes should not be allowed to bring harm or detriment to the people, in the same manner as private
persons may be made to suffer individually on account of his own negligence, the presumption being
that they take good care of their personal affairs. This should not hold true to government officials with
respect to matters not of their own personal concern. This is the philosophy behind the government's
exception, as a general rule, from the operation of the principle of estoppel.
Moreover, claims for taxes may be collected even after the distribution of the decedent's estate among
his heirs who shall be liable therefor in proportion of their share in the inheritance.
209
REMEDIES
COLLECTION OF SAID TAX MAY BE COMMENCED WITHOUT ASSESSMENT AT ANY TIME

WITHIN 10 YEARS FROM THE DISCOVERY OF THE FALSITY, FRAUD OR OMISSION
Republic v. Patanao
G.R. No. L-22356, July 21, 1967
Angeles, J.
FACTS:
This is an appeal from an order of the Court of First Instance of Agusa, dismissing plaintiff's complaint
so far as concerns the collection of deficiency income taxes and additional residence taxes.
In the complaint filed by the Republic of the Philippines (plaintiff) against Pedro Patanao (defendant), it
is alleged that defendant was the holder of an ordinary timber license with concession at Agusan and
as such was engaged in the business of producing logs and lumber for sale; that defendant failed to
file income tax returns for 1953 and 1954, and although he filed income tax returns for 1951, 1952 and
1955, the same were false and fraudulent because he did not report substantial income earned by him
from his business. Later on, plaintiff, through the Deputy Commissioner of Internal Revenue, sent a
letter of demand with enclosed income tax assessment to the defendant requiring him to pay the said
amount; that notwithstanding repeated demands the defendant refused, failed and neglected to pay
said taxes; and that the assessment for the payment of the taxes in question has become final,
executory and demandable.
Defendant moved to dismiss the complaint on two grounds, namely: (1) that the action is barred by
prior
judgment, defendant having been acquitted in criminal cases Nos. 2089 and 2090 of the same court,
which were prosecutions for failure to file income tax returns and for non-payment of income taxes;
and (2) that the action has prescribed.
ISSUE:
Whether or not the present action is barred by prior judgment and that the action has prescribed.
HELD:
No, the present action is not barred by prior judgment nor has it prescribed. Considering that the
Government cannot seek satisfaction of the taxpayer's civil liability in a criminal proceeding under the
tax law acquittal of the taxpayer in the criminal proceeding does not necessarily entail exoneration
from his liability to pay the taxes. The acquittal in the said criminal cases cannot operate to discharge
defendant from the duty of paying the taxes which the law requires to be paid, since that duty is
imposed by statute prior to and independently of any attempts by the taxpayer to evade payment. Said
obligation is not a consequence of the felonious acts charged in the criminal proceeding, nor is it a
mere civil liability arising from crime that could be wiped out by the judicial declaration of nonexistence
of the criminal acts charged.
Regarding prescription of action, the cause of action on the deficiency income tax and residence tax
for 1951 is not barred even if defendant’s income tax return for 1951 was assessed only on February
14, 1958, or beyond the five year period of limitation for assessment. Under the NIRC, the collection of
said tax may be commenced without assessment at any time within 10 years from the discovery of the
falsity, fraud or omission. The complaint filed on December 7, 1962, alleges that the fraud in the
defendant’s income tax return for 1951, was discovered on February 14, 1958. Applying the NIRC, the
petitioner’s action instituted in court on December 7, 1962 has not prescribed.
210
REMEDIES
Taxpayer’s Remedies
EXCESS TAXES PAID TO BE REFUNDED OR BE TAX CREDIT
PASEO REALTY DEVELOPMENT V CA

G.R. No. 119286, October 13,2004
Tinga, J.
FACTS:
The Supreme Court is to decide on appeal from the Court of Appeals a denied Petition for review from
a case from the Court of Tax Appeals for a claim of refund that was denied.
Paseo Realty and Development Corporation, the petitioner, is a domestic corporation engaged in the
lease of 2 parcels of land located in Makati. Respondent is the Commissioner on Internal Revenue
who is saying that there exists no availability for a tax refund.
On April 16, 1990, petitioner filed its Income Tax Return for the calendar year 1989 declaring a gross
income of P1,855,000.00, deductions of P1,775,991.00, net income of P79,009.00, an income tax due
thereon in the amount of P27,653.00, prior year's excess credit of P146,026.00, and creditable taxes
withheld in 1989 of P54,104.00 or a total tax credit of P200,130.00 and credit balance of P172,477.00.
Petitioner argues for the refund of excess creditable withholding and income taxes.
Respndent on the other hand contends alleging that the P54,104.00 ordered to be refunded "has
already been included and is part and parcel of the P172,477.00 which petitioner automatically applied
as tax credit for the succeeding taxable year 1990.
ISSUE:
Should the excess taxes paid by a corporation during a taxable year be refunded or credited against its
tax liabilities for the succeeding year?
HELD:
No. Excess taxes is not to be refunded when there is substantial compliance to the procedure required
by law.
Sec 69 of NIRC specifically provides, "In case the corporation is entitled to a refund of the excess
estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return
may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable year."
In the case at bar, there was no presentation of a valid tax return nor any evidence to prove existence
of such.The grant of a refund is founded on the assumption that the tax return is valid, Why petitioner
failed to present such a vital piece of evidence confounds the Court.
Hence, absent a final tax return from a corporation during a taxable year, refund and tax credit may not
be given by the Commisioner.
211
REMEDIES
DEEMED PAID TAX CREDIT: USA “SHALL ALLOW A CREDIT AGAINST THE TAX DUE FROM
THE CORP. FOR TAXES DEEMED TO HAVE BEEN PAID IN THE PHILIPPINES
CIR v. Procter & Gamble

G.R. No. L-66838, December 2, 1991
Paras, J.
FACTS:
Private respondent Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared
dividends payable to its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA)
("P&G-USA"),amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21
representing the thirty-five percent (35%) withholding tax at source was deducted.
Private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue (CIR) a claim for
refund or tax credit claiming, among other things, that pursuant to Section 24 (b) (1) of the National
Internal Revenue Code ("NITC"), the applicable rate of withholding tax on the dividends remitted was
only fifteen percent (15%) (and not thirty-five percent [35%]) of the dividends.
There being no responsive action on the part of the CIR, P&G-Phil., filed a petition for review with
public respondent CTA, the CTA rendered a decision ordering CIR to refund or grant the tax credit.
On appeal by the CIR, the Court through its Second Division reversed the decision of the CTA and
held that:
(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the refund or tax
credit here involved; (b) there is nothing in Section 902 or other provisions of the US Tax Code that
allows a credit against the US tax due from P&G-USA of taxes deemed to have been paid in the
Philippines equivalent to twenty percent (20%) which represents the difference between the regular tax
of thirty-five percent (35%) on corporations and the tax of fifteen percent (15%) on dividends; and (c)
private respondent P&G-Phil. failed to meet certain conditions necessary in order that "the dividends
received by its non-resident parent company in the US (P&G-USA) may be subject to the preferential
tax rate of 15% instead of 35%."
ISSUE:
Is P&G Philippines entitled to tax refund/tax credit?
HELD:
YES. P&G Philippines is entitled. Sec 24 (b)(1) of the NIRC states that an ordinary 35% tax rate will be
applied to dividend remittances to non-resident corporate stockholders of a Philippine corporation. This
rate goes down to 15% only if the country of domicile of the foreign stockholder corporation “shall
allow” such foreign corporation a tax credit for “taxes deemed paid in the Philippines,” applicable
against the tax payable to the domiciliary country by the foreign stockholder corporation. However,
such tax credit for “taxes deemed paid in the Philippines” must, as a minimum, reach an amount
equivalent to 20 percentage points which represents the difference between the regular 35% dividend
tax rate and the reduced 15% tax rate. Thus, the test is if USA “shall allow” P&G USA a tax credit for
”taxes deemed paid in the Philippines” applicable against the US taxes of P&G USA, and such tax
credit must reach at least 20 percentage points. Requirements were met.
Since the US Congress desires to avoid or reduce double taxation of the same income stream, it
allows a tax credit of both (i) the Philippine dividend tax actually withheld, and (ii) the tax credit for the
Philippine corporate income tax actually paid by P&G Philippines but “deemed paid” by P&G USA. The
parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income
tax although that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This
"deemed paid" concept merely reflects economic reality, since the Philippine corporate income tax was
in fact paid and deducted from revenues earned in the Philippines, thus reducing the amount
remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine corporate income
212
tax as if it came out of the pocket, as it were, of P&G-USA as a part of the economic cost of carrying
on business operations in the Philippines through the medium of P&G-Phil. and here earning profits.
What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but instead Philippine
corporate income taxes actually paid here by P&G-Phil., which are very real indeed.
Moreover, under the Philippines-United States Convention “With Respect to Taxes on Income,” the
Philippines, by treaty commitment, reduced the regular rate of dividend tax to a maximum of 20% of
the gross amount of dividends paid to US parent corporations, and established a treaty obligation on
the part of the United States that it “shall allow” to a US parent corporation receiving dividends from its
Philippine subsidiary a tax credit for the appropriate amount of taxes paid or accrued to the Philippines
by the Philippine subsidiary.
Thus, private respondent P&G-Phil. is entitled to the tax refund or tax credit which it seeks
213
REMEDIES
LOCAL TAXATION; DISCOURAGE DELAY IN COLLECTION OF TAXES; DENIAL OF A WRIT OF

PRELIMINARY INJUCTION FOR THE COLLECTION OF TAXES BY LGU- CAUAYAN, ISABELA
VALLEY TRADING CO., INC. V. CFI ISABELA

G.R. No. L-49529, March 31, 1989
Ponente: Regalado, J.
FACTS:
Challenged in this petition for certiorari are the orders of the then Court of First Instance of Isabela,
denying petitioner's prayer for a writ of preliminary injunction to enjoin the collection of the Tax
imposed by the Revenue Code of Cauayan, Isabela.
Petitioner Valley Trading Co., Inc. filed a complaint seeking a declaration of the supposed nullity of
Section 2B.02, Sub-paragraph 1, Letter (A), Paragraph 2 of Ordinance No. T-1, Revenue Code of
Cauayan, Isabela, which imposed a graduated tax on retailers, independent wholesalers and
distributors; and for the refund of P23,202.12, plus interest of 14% per annum thereon, which petitioner
had paid pursuant to said ordinance. Petitioner likewise prayed for the issuance of a writ of preliminary
prohibitory injunction to enjoin the collection of said tax. Defendants in said case were Dr. Carlos A.
Uy and Moises Balmaceda, who were sued in their capacity as Mayor and Municipal Treasurer of
Cauayan, Isabela, respectively, together with the Sangguniang Bayan of the same town.
Petitioner takes the position that said ordinance imposes a "graduated fixed tax based on Sales" that
"in effect imposes a sales tax in contravention of the Local Tax Code which prohibits a municipality
from imposing a percentage tax on sales. Respondents, on the other hand, claim in their answer that
the tax is an annual fixed business tax, not a percentage tax on sales, imposable by a municipality
under Section 19(A-1) of the Local Tax Code.
CFI Isabela denied the prayer for a writ of preliminary injunction on the ground that "the collection of
taxes cannot be enjoined.
ISSUE:
Whether or not the CFI erred in denying the writ of preliminary injunction on the ground that collection
of taxes cannot be enjoined.
HELD:
NO, CFI Isabela was correct in denying the writ. The circumstances required for the writ to issue do
not obtain in the case at bar. The damage that may be caused to the petitioner will not, of course, be
irreparable; where so indicated by subsequent events favorable to it, whatever it shall have paid is
easily refundable. Besides, the damage to its property rights must perforce take a back seat to the
paramount need of the State for funds to sustain governmental functions. Compared to the damage to
the State which may be caused by reduced financial resources, the damage to petitioner is negligible.
The policy of the law is to discountenance any delay in the collection of taxes because of the oft-
repeated but unassailable consideration that taxes are the lifeblood of the Government and their
prompt and certain availability is an imperious need.
214
REMEDIES
SECTION 187 OF THE LOCAL GOVERNMENT CODE IS CONSTITUTIONAL
Drilon v. Lim
G.R. No. 112497, August 4, 1994
Cruz, J.
FACTS:
In a petition for certiorari filed by the respondent, Mayor Alfredo Lim, Mayor of City of Manila, RTC
Manila revoked the resolution of petitioner, Secretary of Justice Franklin M. Drilon and sustained the
ordinance. It declared Section 187 of the Local Government Code as unconstitutional because of its
vesture in the Secretary of Justice of the power of control over local governments, which is vested by
the Constitution only to the President of the Philippines.
City of Manila enacted Ordinance No. 7794, otherwise known as the Manila Revenue Code. Four oil
companies and a taxpayer appealed to the Secretary of Justice Drilon and prayed that said Ordinance
be declared void for non-compliance with the prescribed procedure in the enactment of tax ordinances
and for containing certain provisions contrary to law and public policy. Sec. Drilon, in a resolution, set
aside the Ordinance on the ground of non-compliance with the procedure in the enactment of tax
ordinances as there was no written notices, it was not published, and it was not translated in tagalog.
Thus, the City of Manila filed a certiorari in the RTC.
RTC of Manila revoked the Secretary’s resolution and sustained the validity of the Ordinance. It also
declared Section 187 of the LGC as unconstitutional as it empowers the Secretary of Justice to review
tax ordinances and, inferentially, to annul them. It concluded that Section 187 gives the Secretary of
Justice, not only supervision over local government, but also control.
On the other hand, the Sec. Drilon argued that Section 187 of the LGC is constitutional and that the
procedural requirements for the enactment of tax ordinances was not observed.
ISSUE:
Whether or not Section 187 of the LGC is unconstitutional.
HELD:
No, Section 187 of the LGC is constitutional.
According to Section 187 of the LGC, “any question on the constitutionality or legality of tax ordinances
or revenue measures may be raised on appeal within thirty (30) days from the effectivity thereof to the
Secretary of Justice who shall render a decision within sixty (60) days from the date of receipt of the
appeal.” Section 187 authorizes the Secretary of Justice to review only the constitutionality or legality
of the tax ordinance and, if warranted, to revoke it. When he alters or modifies or sets aside a tax
ordinance, he is not permitted to substitute his own judgment for the judgment of the local government
that enacted the measure.
In the case at bar, Sec. Drilon only set aside the Ordinance and did not replace it with his own version
of what the Ordinance should be. He only reviewed and determined if the prescribed procedure was
done in accordance with the law. Thus, Sec. Drilon merely supervised the enactment of the said
Ordinance and not controlled how said Ordinance should be enacted.
Therefore, Section 187 of the LGC does not give the Secretary a control over the local government
and thus not violative of the Constitution.
215
REMEDIES
A TAX REFUND OR CREDIT IS IN THE NATURE OF A TAX EXEMPTION
International Container Terminal Services v. City of Manila

G.R. No. 185622, October 17, 2018
Leonen, J.
FACTS:
In a Petition for Review on Certiorari under Rule 45, petitioner, International Container Terminal
Services, Inc. (International Container) assailed the Order of the CTA En Banc dismissing its Petition
for Review and affirming the Resolution of CTA Second Division of not ordering the respondent, City of
Manila to refund the business taxes paid by International Container despite double taxation.
International Container, a corporation with its principal place of business in Manila, renewed its
business license for 1999. It was assessed for two business taxes: one imposed under Section 21 (A)
of Manila Ordinance No. 7794, and another under Section 18 of Manila Ordinance No. 7794. It paid
the additional assessment, but filed a protest letter. However, the City Treasure failed to decide on
such protest and thus, International Container filed with the RTC a Petition for Certiorari and
Prohibition. While the said petition was pending, the City of Manila continued to impose the business
tax under Section 21 (A), in addition to the business tax under Section 18, on International Container
so that it would be issued business permits. On June 17, 2003, International Container sent a letter to
the City Treasurer of Manila, reiterating its protest to the business tax under Section 21 (A) and
requesting for a refund of its payments in accordance with Section 196 of the LGC.
City of Manila argued that International Container invoked Section 195 of the LGC when it filed its
original action, and only belatedly introduced its cause of action under Section 196 before the Court of
Tax Appeals. Moreover, it contended that even if it may validly invoke Section 196, it failed to comply
with the requirement of filing a written claim prior to the institution of its action with the RTC since it
already filed the case for refund even before it paid the taxes owed to respondents beginning the
fourth quarter of 1999.
ISSUE:
Whether or not International Container is entitled to a refund under Section 196 of the LGC?
HELD:
Yes, International Container is entitled for refund. According to Section 196 of the Local Government
Code, to be entitled to a refund, the taxpayer must comply with the following procedural requirements:
first, file a written claim for refund or credit with the local treasurer; and second, file a judicial case for
refund within two (2) years from the payment of the tax, fee, or charge, or from the date when the
taxpayer is entitled to a refund or credit.
In the case at bar, both of the requirements are complied with. International Container was able to file
written claims for refund or credit with the local treasurer and the judicial action for refund was filed
within two years from the date that the taxpayer is entitled to the refund or credit. Here, International
Container always file for a claim with the treasurer. However, the treasurer is not always acting on it.
Thus, International Container no longer filed for claim and resorted to a judicial action with the RTC as
further claims before the City Treasurer would have been another exercise in futility as it would have
merely raised the same grounds that it already raised. In such case, doctrine of administrative
exhaustion would not apply because resort to the administrative remedy would be an idle ceremony
such that it will be absurd and unjust for it to continue seeking relief that evidently will not be granted to
it. Thus, International Container’s failure to file written claims of refund for all of the taxes under
Section 21 (A) with respondent City Treasurer is warranted under the circumstances.
Therefore, International Container is entitled for refund of all the taxes it paid under Section 21 (A).
216
REMEDIES
SEC. 187 OF R.A. 7160 PROVIDES, THAT THE TAXPAYER MAY QUESTION THE
CONSTITUTIONALITY OR LEGALITY OF TAX ORDINANCE ON APPEAL WITHIN THIRTY (30)
DAYS FROM EFFECTIVITY THEREOF, TO THE SECRETARY OF JUSTICE
LOPEZ vs. CITY OF MANILA

G.R. No. 127139. February 19, 1999
QUISUMBING, J.
FACTS:
This petition for review on certiorari , assails the Order 11 of the Regional Trial Court of Manila, Branch
39, promulgated on October 24, 1996, dismissing Civil Case No. 96-77510 which sought the
declaration of nullity of City of Manila Ordinance No. 7894, led by petitioner Jaime C. Lopez.
Section 219 of Republic Act 7160, or the Local Government Code of 1991, requires the conduct of the
general revision of real property. In September 1995, the City Assessor's Office submitted the
proposed schedule of fair market values to the City Council for its appropriate action. The Council,
acting on the proposed schedule, conducted public hearings as required by law. The proposed
ordinance was subjected to the regular process in the enactment of ordinances pursuant to the City
Charter of Manila. The ordinance was approved by the City Mayor and was made effective on January
1, 1996. With the implementation of Manila Ordinance No. 7894, the tax on the land owned by the
petitioner was increased by 580%. With respect to the improvement, the tax was increased by 250%.
Consequently, petitioner led a special proceeding for the declaration of nullity of the ordinance. The
case was raffled, but on the same day, Manila Ordinance No. 7905 took effect, reducing by 50% the
assessment levels for the computation of tax due. The court directed the issuance of a writ of
injunction and denied the motion to dismiss by the respondent. The latter led a motion for
reconsideration and cited the happening of a supervening event, i.e ., the enactment and approval of
Manila Ordinance No. 7905. The trial court granted the motion to dismiss, which was justified by the
failure of petitioner to exhaust the administrative remedies and that the petition had become moot and
academic. Petitioner led a motion for reconsideration, but it was denied for lack of merit. Hence, this
petition.
ISSUE:
1) Was there failure to exhaust administrative remedies?
2) Whether the petitioner questioned the legality of the ordinance in accordance with the law
RULING:
YES. As a general rule, where the law provides for the remedies against the action of an administrative
board, body, or officer, relief to courts can be sought only after exhausting all remedies provided. The
reason rests upon the presumption that the administrative body, if given the chance to correct its
mistake or error, may amend its decision on a given matter and decide it properly. Therefore, where a
remedy is available within the administrative machinery, this should be resorted to before resort can be
made to the courts, not only to give the administrative agency the opportunity to decide the matter by
itself correctly, but also to prevent unnecessary and premature resort to courts.
NO. With regard to the question on the legality of a tax ordinance, the remedies available to the
taxpayers are provided under Section 187, 226, and 252 of R.A. 7160.
Sec. 187 of R.A. 7160 provides, that the taxpayer may question the constitutionality or legality of tax
ordinance on appeal within thirty (30) days from effectivity thereof, to the Secretary of Justice. The
petitioner after finding that his assessment is unjust, confiscatory, or excessive, must have brought the
case before the Secretary of Justice for question of legality or constitutionality of the city ordinance.
Under Section 226 of R.A. 7160, an owner of real property who in not satisfied with the assessment of
his property may, within sixty (60) days from notice of assessment, appeal to the Board of Assessment
Appeals.
Should the taxpayers question the excessiveness of the amount of tax, he must first pay the amount
due, in accordance with Section 252 of R.A. 7160. Then, he must request the annotation of the phrase
"paid under protest" and accordingly appeal to the Board of Assessment Appeals by filing a petition
217
under oath together with copies of the tax declarations and affidavits or documents to support his
appeal.
The rule is well-settled that courts will not interfere in matters which addressed to the sound discretion
of government agencies entrusted with the regulations of activities coming under the special technical
knowledge and training of such agencies. Furthermore, the crux of petitioner's cause of action is the
determination of whether or not the tax is excessive, oppressive or confiscatory. This issue is
essentially a question of fact and thereby, precludes this Court from reviewing the same.
218
REMEDIES
REAL PROPERTY TAX; MANDATORY REQUIREMENT OF MANDATORY HEARINGS AND

PUBLICATION IN THE IMPOSITION OF REAL PROPERTY TAX.
Figuerres vs Court of Appeals

G.R. No. 119172; March 25, 1999
J. Mendoza
FACTS:
Belen C. Figuerres is the owner of a parcel of land located at Amarillo Street, Barangay Mauway, City
of Mandaluyong. In 1993, she received a notice of assessment from the municipal assessor of the
Municipality of Mandaluyong..
The assessment was based on a number of ordinances issued by the Sangguniang Bayan of
Mandaluyong. Ordinance No. 119 contains a schedule of fair market values of the different classes of
real property in the municipality. Ordinance No. 125 fixes the assessment levels applicable to such
classes of real property. Finally, Ordinance No. 135 amended Ordinance No. 119, by providing that
only one third (1/3) of the increase in the market values applicable to residential lands pursuant to the
said ordinance shall be implemented in the years 1994, 1995, and 1996.
Figuerres brought a prohibition suit in the CA against the Assessor, the Treasurer, and the
Sangguniang Bayan to stop them from enforcing the ordinances in question on the ground that the
ordinances were invalid for having been adopted allegedly without public hearings and prior
publication or posting and without complying with the implementing rules yet to be issued by the
Department of Finance.
CA dismissed the petition stating that the approval and determination by the Department of Finance is
not needed under the Local Government Code of 1991, since it is now the city council of Mandaluyong
that is empowered to determine and approve the aforecited ordinances
ISSUE:
1. Whether publication and hearing be dispensed with in the implementation of the imposition of
real property tax?
2. Whether or not there is a need for the publication of fair market values.
HELD:
1. No. Yes. R.A. No. 7160, Sec. 186 provides that an ordinance levying taxes, fees, or charges
“shall not be enacted without any prior public hearing conducted for the purpose.”
However, it is noteworthy that apart from her bare assertions, Figuerres has not presented any
evidence to show that no public hearings were conducted prior to the enactment of the ordinances in
question. On the other hand, the Municipality of Mandaluyong claims that public hearings were indeed
conducted before the subject ordinances were adopted, although it likewise failed to submit any
evidence to establish this allegation.
In accordance with the presumption of validity in favor of an ordinance, their constitutionality or legality
should be upheld in the absence of evidence showing that the procedure prescribed by law was not
observed in their enactment.
Furthermore, the lack of a public hearing is a negative allegation essential to petitioner’s cause of
action in the present case. Hence, as petitioner is the party asserting it, she has the burden of proof.
Since petitioner failed to rebut the presumption of validity in favor of the subject ordinances and to
discharge the burden of proving that no public hearings were conducted prior to the enactment thereof,
we are constrained to uphold their constitutionality or legality.
219
2. Yes. R.A. No. 7160, Sec. 212 which in part states that he schedule of fair market values
shall be published in a newspaper of general circulation in the province, city, or municipality
concerned, or in the absence thereof, shall be posted in the provincial capitol, city or municipal hall and
in two other conspicuous public places therein.
Hence, after the proposed schedule of fair market values of the different classes of real property in a
local government unit within Metro Manila, as prepared jointly by the local assessors of the district to
which the city or municipality belongs, has been published or posted in accordance with Sec 212 of
R.A. No. 7160 and enacted into ordinances by the Sanggunians of the municipalities and cities
concerned, the ordinances containing the schedule of fair market values must themselves be
published or posted in the manner provided by §188 of R.A. No. 7160.
220
REMEDIES
THE LOCAL GOVERNMENT CODE, OR ANY OTHER STATUTE FOR THAT MATTER, DOES NOT
EXPRESSLY CONFER APPELLATE JURISDICTION ON THE PART OF REGIONAL TRIAL
COURTS FROM THE DENIAL OF A TAX PROTEST BY A LOCAL TREASURER
China Banking Corporation vs City Treasurer Of Manila

G.R. No. 204117, July 01, 2015
Mendoza, J.
FACTS:
On January 2007, on the basis of the reported income of respondent CBC's Sto. Cristo Branch,
Binondo, Manila, amounting to P34,310,777.34 for the year ending December 31, 2006, respondent
CBC was assessed the amount of P267,128.70 by petitioner City Treasurer of Manila, consisting of
local business tax, business permits, and other fees for taxable year 2007
On January 15, 2007, respondent CBC paid the amount of P267,128.70 and protested, thru a Letter
dated January 12, 2007, the imposition of business tax under Section 21 of the Manila Revenue Code
in the amount of P154,398.50, on the ground that it is not liable of said additional business tax and the
same constitutes double taxation.
On March 27, 2007, respondent CBC wrote a letter-reply to [respondent's] petitioner’s Letter dated
February 8, 2007, reiterating that respondent already protested the additional assessment under
Section 21 of the Manila Revenue Code in its Letter dated January 12, 2007.
On April 17, 2007, respondent CBC filed a Petition for Review with the RTC of Manila, Branch 173,
entitled "China Banking Corporation vs. Hon. Liberty M. Toledo in her capacity as City Treasurer of
Manila.
The City Treasurer filed her Memorandum for the Respondent where she contended that CBC never
filed a formal letter of protest to state the grounds for its objection while admitting that it had paid the
assessed amount under protest. She claimed that CBC simply filed a petition for review with the RTC
without filing a formal letter of protest. Without a formal letter of protest, the City Treasurer argued that
its claim for refund should be dismissed.
The City Treasurer also questioned the jurisdiction of the RTC in entertaining the petition for review
filed before it as well as the timeliness of the filing of the petitioner’s appeal.
ISSUE:
1. Whether or not CBC filed a valid protest?
2. Whether or not RTC has jurisdiction over the case?
HELD:
1. Accordingly, a protest is valid so long as it states the taxpayer’s objection to the assessment and the
reasons therefor.
In this case, the Court finds that the City Treasurer’s contention that CBC was not able to properly
protest the assessment to be without merit. The Court is of the view that CBC was able to properly file
its protest against the assessment of the City Treasurer when it filed its letter on January 15, 2007,
questioning the imposition while paying the assessed amount. In the said letter, the petitioner was
unequivocal in its objection, stating that it took exception to the assessment made by the City
Treasurer under Section 21 of the city’s revenue code, arguing that it was not liable to pay the
additional tax imposed under the subject ordinance and that the imposition “constitute[d] double
taxation” and, for said reason, invalid. Despite its objection, it remitted the total amount of P267,128.70
under protest “to avoid penalties/surcharges and any threat of closure.
The Court, however, is of the view that the period within which the City Treasurer must act on the
protest, and the consequent period to appeal a “denial due to inaction,” should be reckoned from
January 15, 2007, the date CBC filed its protest, and not March 27, 2007. Consequently, the Court
221
finds that the CTA En Banc did not err in ruling that CBC had lost its right to challenge the City
Treasurer’s “denial due to inaction.” On this matter, Section 195 of the LGC is clear.
SECTION 195. Protest of Assessment. - …The taxpayer shall have thirty (30) days from the receipt of
the denial of the protest or from the lapse of the sixty (60)-day period prescribed herein within which to
appeal with the court of competent jurisdiction otherwise the assessment becomes conclusive and
unappealable.
Time and again, it has been held that the perfection of an appeal in the manner and within the period
laid down by law is not only mandatory but also jurisdictional. The failure to perfect an appeal as
required by the rules has the effect of defeating the right to appeal of a party and precluding the
appellate court from acquiring jurisdiction over the case. At the risk of being repetitious, the Court
declares that the right to appeal is not a natural right nor a part of due process. It is merely a statutory
privilege, and may be exercised only in the manner and in accordance with the provisions of the
law.29redarclaw
2. At any rate, even if the Court considers CBC’s appeal from the “denial due to inaction” by the City
Treasurer to have been timely filed, the same must be dismissed because it was not filed with a court
of competent jurisdiction.
Explaining the nature of the jurisdiction of the RTC, the Court, in Yamane explained:L
…the Local Government Code, or any other statute for that matter, does not expressly confer appellate
jurisdiction on the part of regional trial courts from the denial of a tax protest by a local treasurer. On
the other hand, Section 22 of B.P. 129 expressly delineates the appellate jurisdiction of the Regional
Trial Courts, confining as it does said appellate jurisdiction to cases decided by Metropolitan,
Municipal, and Municipal Circuit Trial Courts. Unlike in the case of the Court of Appeals, B.P. 129 does
not confer appellate jurisdiction on Regional Trial Courts over rulings made by non-judicial entities.
Clearly, with the passage of R.A. No. 9282, the authority to exercise either original or appellate
jurisdiction over local tax cases depended on the amount of the claim. In cases where the RTC
exercises appellate jurisdiction, it necessarily follows that there must be a court capable of exercising
original jurisdiction – otherwise there would be no appeal over which the RTC would exercise appellate
jurisdiction. The Court cannot consider the City Treasurer as the entity that exercises original
jurisdiction not only because it is not a “court” within the context of Batas Pambansa (B.P.) Blg. 129,
but also because, as explained above, “B.P. 129 expressly delineates the appellate jurisdiction of the
Regional Trial Courts, confining as it does said appellate jurisdiction to cases decided by Metropolitan,
Municipal, and Municipal Circuit Trial Courts.” Verily, unlike in the case of the CA, B.P. 129 does not
confer appellate jurisdiction on the RTC over rulings made by non-judicial entities. The RTC exercises
appellate jurisdiction only from cases decided by the Metropolitan, Municipal, and Municipal Circuit
Trial Courts in the proper cases. The nature of the jurisdiction exercised by these courts is original,
considering it will be the first time that a court will take judicial cognizance of a case instituted for
judicial action.
222
REMEDIES
CLAIMS FOR REFUND OF ALLEGEDLY OVERPAID CUSTOMS DUTIES, UNLESS SHOWN THAT
PAYMENT OF THE CUSTOMS DUTIES WAS IN EXCESS OF WHAT WAS REQUIRED BY THE
LAW AT THE TIME WHEN THE IMPORTATION WAS MADE ARE NOT GOVERNED BY THE
RULES ON SOLUTIO INDEBITI
Nestle Philippines, Inc. (formerly Filipro, Inc.) v. Court of Appeals

G.R. No. 134114, July 6, 2001
De Leon, Jr., J.
FACTS:
This is a petition for review on certiorari challenging the decision of the CA affirming the decision of the
CTA dismissing petitioner’s petition for review to compel the Commissioner of Customs to grant it a
refund of allegedly overpaid import duties, on its various importations of milk and milk products.
Petitioner is a duly organized domestic corporation engaged in the importations of milk and milk
products for processing, distribution and sale in the Philippines. Petitioner transacted sixteen (16)
separate importations of milk and milk products from different countries. Petitioner was assessed
customs duties and advance sales taxes by the Collector of Customs (COC) of Manila for each of
these separate importations on the basis of the published Home Consumption Value (HCV) indicated
in the BOC Revision Orders. Petitioner paid the same but seasonably filed the corresponding protests
before the said COC, uniformly alleging therein that the latter erroneously applied higher home
consumption values in determining the dutiable value for each of these separate importations. In the
said protests, petitioner claims for refund of both the alleged overpaid import duties and the advance
sales taxes. Petitioner then formally filed a claim for refund of allegedly overpaid advance sales taxes
with the BIR. On the other hand, the sixteen (16) protest cases for refund of alleged overpaid customs
were left with the COC of Manila, who failed to render his decision thereon after almost six (6) years
since petitioner paid under protest.
Consequently, under the belief that its claims are governed by the rules on solution indebiti, which
prescribes in six (6) years, petitioner immediately filed a petition for review with the CTA despite the
absence of a ruling on its protests from both the COC of Manila and the Commissioner of Customs.
ISSUE:
Are claims for refund of allegedly overpaid customs duties governed by the New Civil Code provisions
on solution indebiti?
HELD:
No, claims for refund of allegedly overpaid customs duties are not governed by the New Civil Code
provisions on solution indebiti.
In the light of Sections 2308, 2309, and 2312 of the Tariff and Customs Code, it appears that in all
cases subject to protest, the claim for refund of customs duties may be foreclosed only when the
interested party claiming refund fails to file a written protest before the COC. This written protest which
must set forth the claimant's objection to the ruling or decision in question together with the reasons
therefor must be made either at the time when payment of the amount claimed to be due the
government is made or within fifteen (15) days thereafter. In conjunction with this right of the claimant
is the duty of the COC to hear and decide such protest in accordance and within the period of time
prescribed by the law (issue an order for hearing within fifteen [15] days from receipt of protest and
render a decision within thirty [30] days from termination of the hearing).
Accordingly, once a written protest is seasonably filed with the COC the failure or inaction of the latter
to promptly perform his mandated duty under the Tariff and Customs Code should not be allowed to
prejudice the right of the party adversely affected thereby. Technicalities and legalisms, however
exalted, should not be misused by the government to keep money not belonging to it, if any is proven,
and thereby enrich itself at the expense of the taxpayers. If the State expects its taxpayers to observe
223
fairness and honesty in paying their taxes, so must it apply the same standard against itself in
refunding excess payments, if any, of such taxes. Indeed the State must lead by its own example of
honor, dignity and uprightness.
Here, it is undisputed that the inaction of the COC of Manila for nearly six (6) years on the protests
seasonably filed by the petitioner has caused the latter to immediately resort to the CTA. The petitioner
did so on the mistaken belief that its claims are governed by the rule on quasi-contract or solutio
indebiti which prescribes in six (6) years under Article 1145 of the New Civil Code.
This belief or contention of the petitioner is misplaced. In order for the rule on solutio indebiti to apply it
is an essential condition that petitioner must first show that its payment of the customs duties was in
excess of what was required by the law at the time when the subject sixteen (16) importations of milk
and milk products were made. Unless shown otherwise, the disputable presumption of regularity of
performance of duty lies in favor of the COC.
In the present case, there is no factual showing that the collection of the alleged overpaid customs
duties was more than what is required of the petitioner when it made the aforesaid separate
importations. There is no factual finding yet by the government agency concerned that petitioner is
indeed entitled to its claim of overpayment and, if true, for how much it is entitled. It bears stress that in
determining whether or not petitioner is entitled to refund of alleged overpayment of customs duties, it
is necessary to determine exactly how much the Government is entitled to collect as customs duties on
the importations. Thus, it would only be just and fair that the petitioner-taxpayer and the Government
alike be given equal opportunities to avail of the remedies under the law to contest or defeat each
other's claim and to determine all matters of dispute between them in one single case.
224
REMEDIES
AN ACTION FOR REIMBURSEMENT BY A USUFRUCTUARY WHO CLAIMS REIMBURSEMENT

FOR PAYMENT OF LAND TAX ON THE BASIS OF THE 1ST PARAGRAPH OF ARTICLE 505
(NOW ARTICLE 597) MAY BE BROUGHT EVEN BEFORE THE EXPIRATION OF THE USUFRUCT
Mercado v. Real
G.R. No. 45534, April 27, 1939
Avanceña, C.J.
FACTS:
This is a case questioning the resolutions of the trial court sustaining the demurrer of defendant on the
ground that the action to compel the defendant naked owner to reimburse the complainant
usufructuaries for the latter’s payment for the land tax is premature.
A property belonging in usufruct to nine of the heirs and in naked ownership to seven others was
assessed for payment of land tax. The usufructuaries, being made to pay the land tax, refused to pay
the same, contending that the duty to pay such tax devolves upon the naked owners. The naked
owners then deducted from the products corresponding to the usufructuaries a sum for payment of the
land tax. Claiming for reimbursement therefor, one of the naked owners, herein defendant, did not
agree to reimburse the usufructuaries for the sums deducted from their share of the products.
An action was then brough to compel the defendant to pay the reimbursement, who then filed a
demurrer on the ground of prematurity, because under Article 505 of the Civil Code, the usufructuary
who pays for the tax shall be reimbursed upon the expiration of the usufruct. Since the usufruct still
subsists, the demurrer was sustained.
ISSUE:
Is an action for reimbursement by the usufructuaries who, without their consent and against their will,
paid the land tax premature while the usufruct is still afoot?
HELD:
No, an action for reimbursement by the usufructuaries who, without their consent and against their will,
paid the land tax, while the usufruct is still afoot, is not premature.
Under Article 505 of the Civil Code (now Article 597 of the NCC), the tax directly burdens the capital,
i.e., the real value of the property and should be paid by the owner. However, under the second
paragraph of the article, if the usufructuary should pay the tax, he would be entitled to reimbursement
for the amount thereof only upon the expiration of the usufruct, and the usufruct being still afoot, it is
premature for the plaintiffs, as usufructuaries who advanced the payment of the tax, to bring the action
for the recovery of what they paid. There is, however, no basis for this reasoning. The plaintiffs, in
claiming the amount, do not rely on paragraph 2 of article 505 of the Civil Code, for having paid the tax
on the lands, but on the first paragraph thereof because it is their contention that, as usufructuaries,
they are not the ones called upon to make this payment.
The plaintiffs did not pay the tax. They objected to this payment. They did not consent to the deduction
thereof from their share in the products, and much less to the application thereof to this payment which
they believe they are not bound to make. In fact they did not make the payment; the naked owners
were the ones who made it without their consent and with money belonging to them as their share of
the fruits coming to them in their capacity as usufructuaries.
Hence, the usufructuaries are entitled to reimbursement.
225
REMEDIES
Court of Tax Appeals
PURPOSE AND EFFECT OF THE IMPOSITION DETERMINE WHETHER IT IS A TAX OR A FEE
Smart Communications, Inc. vs. Municipality of Malvar

G.R. No. 204429, February 18, 2014
Carpio, J.
FACTS:
Smart constructed a telecommunications tower within the Municipality of Malvar. On 30 July 2003, the
Municipality passed Ordinance No. 18, series of 2003, entitled "An Ordinance Regulating the
Establishment of Special Projects." Thereafter, Smart received from the Office of the Mayor an
assessment letter with a schedule of payment for the total amount of P389,950.00 for Smart’s
telecommunications tower.
Consequently, Smart filed a protest challenging the validity of Ordinance No. 18 on which the
assessment was based. Smart argues that the fees imposed in Ordinance No. 18 are actually taxes
since they are not regulatory but rather, revenue-raising and that the Municipality is encroaching on the
regulatory powers of the National Telecommunications Commission (NTC).
Smart cites Section 5(g) of Republic Act No. 7925 which provides that the NTC, in the exercise of its
regulatory powers, shall impose such fees and charges as may be necessary to cover reasonable
costs and expenses for the regulation and supervision of the operations of telecommunications
entities. Thus, Smart alleges that the regulation of telecommunications entities and all aspects of its
operations is specifically lodged by law on the NTC. The Municipality counters that the said Ordinance
is not a tax ordinance but a regulatory fee.
ISSUE:
Whether or not “fees” imposes by the Municipality are actually taxes.
HELD:
NO. Since the main purpose of Ordinance No. 18 is to regulate certain construction activities of the
identified special projects, which included "cell sites" or telecommunications towers, the fees imposed
in Ordinance No. 18 are primarily regulatory in nature, and not primarily revenue-raising. While the
fees may contribute to the revenues of the Municipality, this effect is merely incidental. Thus, the fees
imposed in Ordinance No. 18 are not taxes.
If the generating of revenue is the primary purpose and regulation is merely incidental, the imposition
is a tax; but if regulation is the primary purpose, the fact that incidentally revenue is also obtained
does not make the imposition a tax. The purpose and effect of the imposition determine whether it is a
tax or a fee, and that the lack of any standards for such imposition gives the presumption that the
same is a tax. Ordinance No. 18 expressly provides for the standards which Smart must satisfy prior to
the issuance of the specified permits, clearly indicating that the fees are regulatory in nature.
Even if the fees do not appear in Section 143 or any other provision in the LGC, the Municipality is
empowered to impose taxes, fees and charges, not specifically enumerated in the LGC or taxed under
the Tax Code or other applicable law according to Section 186 of the LGC. Thus they don’t encroach
on NTC’s powers.
226
REMEDIES
WHEN IT REFERS TO THE COLLECTION OF INCOME TAX IT IS MANDATORY THAT THE RIGHT
OF THE COLLECTOR OF INTERNAL REVENUE TO COLLECT IT BY THE SUMMARY METHODS
OF DISTRAINT AND LEVY BE EXERCISED WITHIN THE PERIOD OF THREE YEARS FROM THE
TIME THE INCOME TAX RETURN IS FILED
CIR v. Aurelio Reyes and CTA

G.R. No. L-8685, January 31, 1957
Felix, J.
FACTS:
CIR seeks to nullify the resolution of the CTA restraining him from collecting, through summary
administrative methods, taxes allegedly due from Dr. Aurelio P. Reyes.
In 1954, CIR thru a letter, demanded from Aurelio P. Reyes the payment of his alleged deficiency
income taxes, surcharges, interests and penalties for the tax years 1946 to 1950 amounting to
P641,470.04. Together with said letter of assessment, Reyes received a warrant of distraint and levy
on his properties in the event that he should fail to pay the alleged deficiency income taxes on or
before October 31, 1954. City Treasurer of Manila informed Reyes in a letter that said Treasurer was
instructed by CIR to execute the warrant of distraint and levy on the amount demanded is not settled
on or before November 10, 1954. Thereafter, Reyes filed with the CTA a petition for review of the
Collector's assessment of his alleged deficiency income tax liabilities. Reyes also filed an urgent
petition, to restrain the CIR from executing the warrant of distraint and levy on his properties. His
contention: right of CIR to collect by summary proceedings the tax demanded had already prescribed
in accordance with section 51 (d) of the NIRC as his income tax returns for the tax years 1946 to 1950
had been filed more than three years ago, the last one being on April 27, 1951;
CIR opposed said petition contending that CTA has no authority to restrain him from executing the
warrant of distraint and levy on his properties of Reyes in connection with the collection of the latter's
deficiency income taxes;
CTA ruled in favor of Reyes and ordered CIR to desist from collecting by administrative method the
taxes allegedly due from Reyes pending the outcome of his appeal, without prejudice to other judicial
remedy or remedies which the Collector may desire to pursue for the protection of the interest of the
Government, pending the final decision of the case on the merits.
ISSUE:
Can CTA can restrain CIR from enforcing collection of income tax deficiency by summary proceedings
after the expiration of the three-year period provided for in section 51 (d) of the National Internal
Revenue Code; and (2) granting that the Collector could be restrained, do the Court of Tax Appeals
have any power to grant an injunction without requiring the filing of a bond or making a deposit as
prescribed by section 11 of Republic Act No. 1125.
HELD:
Yes. SEC. 305. INJUNCTION NOT AVAILABLE TO RESTRAIN THE COLLECTION OF TAX. — No
court shall have authority to grant an injunction to restrain the collection of any internal revenue tax,
fee, or charge imposed by this Code (National Internal Revenue Code).
However, Section 11 of Republic Act No. 1125 prescribes the following:
SEC. 11. — Who may appeal; effect of appeal. — Any person, association or corporation adversely
affected by a decision or ruling of the Collector of internal Revenue,. may file an appeal in the Court of
Tax Appeals within thirty days after receipt of such decision or ruling.
No appeal taken to the Court of Tax Appeals from the decision of the Collector of Internal Revenue . . .
shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the
227
satisfaction of his tax liability as provided by existing law: Provided, however, That when in the opinion
of the Court the collection by the Bureau of Internal Revenue . . . may jeopardize the interest of the
Government and/or the taxpayer the Court at any stage of the proceeding may suspend said collection
and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than
double the amount with the Court.
There may be instances like the one at bar, when the CIR could be restrained from proceeding with
the collection, levy, distraint and/or sale of any property of the taxpayer
CIR now asserts that even if CTA is empowered to order his to desists from collection, the court still
erred from inssuing the injuction without requiring the taxpayer to deposit a bond. – SC DISAGREES
• Second paragraph of said Section 11 will lead us to the conclusion that the requirement of the
bond as a condition precedent to the issuance of the writ of injunction applies only in cases where the
processes by which the collection sought to be made by means thereof are carried out in consonance
with the law for such cases provided and NOT when said processes are obviously in violation of the
law to the extreme that they have to be SUSPENDED for jeopardizing the interests of the taxpayer.
• CTA the injunction in question on the basis of its finding that the means intended to be used
by petitioner in the collection of the alleged deficiency taxes were in violation of law. It certainly would
be an absurdity on the part of the Court of Tax Appeals to declare that the collection by the summary
methods of distraint and levy was violative of law, and then, on the same breath require the petitioner
to deposit or file a bond as a prerequisite for the issuance of a writ of injunction.
Whether the CTA could restrain the CIR from enforcing collection of income tax deficiency by summary
proceedings after the expiration of the three-year period provided for in section 51 (d) of the National
InternalRevenue Code -- YES
Section 51 (d) of the National Internal Revenue Code reads as follows:

SEC. 51. Assessment and Payment of income Tax. —
xxx xxx xxx
(d) Refusal or neglect to make return; fraudulent returns, etc. — In cases of refusal or neglect to make
return or in cases of erroneous, false or fraudulent returns, the Collector of Internal Revenue shall,
upon discovery thereof, at any time within three years after said return is due, or has been made,
make a return upon information obtained as provided for in this Code or by existing law, or require the
necessary corrections to be made, and the assessment made by the Collector on Internal Revenue
thereon shall be paid by such person or corporation immediately upon notification of the amount of
said assessment.
The three year prescriptive period provided therein constituted a limitation to the right of the
Government to enforce the collection of income taxes by the summary proceedings of distraint and
levy though it could proceed to recover the taxes due by the institution of the corresponding civil
action.
(CIR v Avelino): The right of the Collector of Internal Revenue to collect it by the summary methods of
distraint and levy be exercised within the period of three years from the time the income tax return is
filed, otherwise the right can only be enforced by judicial action.
228
REMEDIES
A BUSINIESS TAXED UNDER SECTION 143 (A) OF THE LGC CAN NO LONGER BE TAXED
UNDER SECTION 143 (H) OF THE SAME CODE
City of Manila v. Coca-Cola Bottlers Philippines, Inc.

G.R. No. 181845, August 4, 2009
Chico-Nazario, J.
FACTS:
In a petition for review on certiorari under Rule 45, petitioner, City of Manila, assailed the Order of the
CTA En Banc seeking to review and reverse its decision of dismissing their petition for review and for
affirming the resolution of CTA First Division that their petition is filed out of time and does not comply
with the Revised Rules of the CTA.
Respondent, Coca-Cola Bottlers Philippines, Inc. (Coca-Cola) is a corporation engaged in the

business of manufacturing and selling beverages, and which maintains a sales office in the City of
Manila. Coca-Cola had been paying only local business tax under Section 14 of Tax Ordinance No.
7794, being expressly exempted from the business tax under Section 21 of the same tax ordinance.
Subsequently, City of Manila approved Tax Ordinance No. 7988, amending certain sections of Tax
Ordinance No. 7794,
Which deleted the proviso for exemption from Section 21. The said Ordinance was later declared null
and void. However, before it was declared as null and void, City of Manila assessed Coca-Cola on the
basis of Ordinance No.7988. Coca-Cola protested said assessment as such amounted to double
taxation.
City of Manila maintained that imposing upon Coca-Cola of local business taxes under both Sections
14 and 21 of Tax Ordinance No. 7794 does not constitute direct double taxation. It contended that
there can be no double taxation because under Section 14, Coca-Cola is being taxed as a
manufacturer, while under Section 21, it is being taxed as a person selling goods in the course of trade
or business subject to excise, VAT, or percentage tax.
ISSUE:
Whether or not taxes under Section 14 and Section 21 of Ordinance No. 7794 may be both imposed
against Coca-Cola?
HELD:
No, both taxes cannot be imposed against Coca-Cola as such constitutes double taxation.
According to Section 143 of the LGC, the municipality may impose taxes on the following businesses:
(a) On manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and
compounders of liquors, distilled spirits, and wines or manufacturers of any article of commerce of
whatever kind or nature; (h) On any business, not otherwise specified in the preceding paragraphs,
which the sanggunian concerned may deem proper to tax: Provided, That on any business subject to
the excise, value-added or percentage tax under the National Internal Revenue Code, as amended,
the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar
year. Pursuant to this Section, when a municipality or city has already imposed a tax based on
subsection (a), it may no longer subject the same manufacturers, etc. to a business tax under
subsection (h). This is because Section 143 (h) may be imposed only on businesses that are subject to
excise tax, VAT, or percentage tax under the NIRC, and that are "not otherwise specified in preceding
paragraphs.”
In the case at bar, Section 14 of Ordinance No. 7794 is based on Section 143 (a) of the LGC, while
Section 21 of the same Ordinance is based on Section 143 (h) of the LGC. Since Coca-Cola’s
business is already subject to a local business tax under Section 14, it can no longer be made liable
for local business tax under Section 21 of the same Tax Ordinance as such constitutes double
taxation.
229
Therefore, both taxes cannot be imposed against Coca-Cola.
230

TAX 4DF1920 Case Digests

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

TAX 4DF1920 Case Digests

Uploaded by

Copyright:

Available Formats

GENERAL PRINCIPLES

Concept and Purpose of Taxation

THE POWER TO TAX IS SOMETIMES CALLED THE POWER TO DESTROY; THEREFORE, IT

Roxas v. Court of Tax Appeals

GENERAL PRINCIPLE; COLLECTION OF TAXES MUST BE IN ACCORDANCE WITH LAW;

Commissioner of Internal Revenue v. Algue, Inc.,

POLICE POWER IS THE POWER INHERENT IN A GOVERNMENT TO ENACT LAWS, WITHIN

Camarines Norte Electric Cooperative, Inc. vs. Hon. Ruben Torres

TO BE CONSIDERED A PROPER EXERCISE OF POLICE POWER THE SAME MUST COMPLY

xxx xxx xxx

A. Sale and servicing of spark plugs, batteries, and distributor parts;

Planters Product Inc. v. Fertiphil Corp.

AN ORDINANCE WHICH TAKES WITHOUT COMPENSATION A CERTAIN AREA FROM A

City Government of Quezon vs. Judge Ericta

THE DIFFERENTIATING FACTOR OF A TAX IS THAT THE PURPOSE TO BE SUBSERVED IS

REPUBLIC OF THE PHILIPPINES vs. PHILIPPINE RABBIT BUS LINES, INC.

Compania General de Tabacos de Filipinas v. City of Manila

TAX DISTINGUISHED FROM LICENSE FEE

Progressive Development v. Quezon City

GENERAL PRINCIPLE; NAPOCOR’S CLAIM OF EXEMPTION FROM REAL PROPERTY TAX

National Power Corporation v. Province of Albay

TAXATION MAY BE USED AS AN EXERCISE OF THE POLICE POWER OF THE STATE

Virgilio Gaston v Republic Planters Bank

"TO IMPLEMENT AND ACCOMPLISH THE PRIVATIZATION OF REPUBLIC PLANTERS BANK BY

CONSTRUCTION OF APPLICABLE LAW TO ORDINANCES; SPECIAL STATUTE THAT REFERS

Thus, the Local Tax Code controls.

PRESIDENTIAL DECREES PROVIDING FOR FINES, FORFEITURES OR TAX AND REVENUE

Tañada vs. Tuvera

Therefore, PD regarding tax and revenue measures should be published.

Juan Luna Subdivision v. M. Sarmiento

A VALID CLASSIFICATION MUST BE BASED ON REAL AND SUBSTANTIAL DIFFERENCES

City Ordinance No. 6537 is entitled:

Tolentino et.al, v. Secretary of Finance

Villanueva vs. City of Iloilo

Lung Center of the Philippines v. Quezon City

IMPOSITION OF GIFT TAX IS NOT A VIOLATION OF THE CONSTITUTIONAL PROVISION

Rev. Fr. Casimiro Lladoc. v. CIR and CTA

A HOSPITAL ORGANIZED AS A CHARITABLE INSTITUTION IS PRESUMED TO BE OPERATING

Hospital De San Juan De Dion, Inc. v. Pasay City

DETAILS AS TO THE ENFORCEMENT AND ADMINISTRATION OF THE POWER TO TAX MAY BE

ABAKADA Guro Partylist v. Ermita

A STATUTE WILL NOT BE CONSTRUED AS IMPOSING A TAX UNLESS DOES SO CLEARLY,

MARINDUQUE IRON MINES AGENTS V. MUNICIPAL COUNCIL OF HINABANGAN

BY THE VERY NATURE OF INDIRECT TAXATION, THE ECONOMIC BURDEN OF SUCH

Ernesto Maceda vs. Hon. Catalino Macaraig, Jr.

TAX EXEMPTIONS ARE STRICTLY CONSTRUED AGAINST THE TAXPAYER

Meralco vs. Vera

Yutivo Sons Hardware v. CTA

PERIOD TO ASSESS TAX

CIR VS Estate of Benigno Toda Jr.

ELEMENT OF WILFULLNESS TO SUPPLY CORRECT AND ACCURATE INFORMATION

People VS Judy Anne Santos

VIOLATION OF SECTION 255 OF NIRC (FAILURE TO SUPPLY CORRECT AND ACCURATE

Joel Mendez VS People of the Philippines

THE CONSTITUTION MAY PROVIDE FOR SPECIFIC TAX EXEMPTIONS: LOCAL

JOHN HAY PEOPLE’S ALTERNATIVE COALITION V. VICTOR LIM

TAX EXEMPTION MUST BE EXPRESSED IN CLEAR LANGUAGE; BLGF IS NOT A HIGHLY

PLDT v. City of Davao

THE “IN LIEU OF ALL TAXES” CLAUSE IN A LEGISLATIVE FRANCHISE SHOULD

Smart Communications Inc. v. The City of Davao

“IN LIEU OF ALL TAXES” CLAUSE’S EXTENT MUST BE CLEARLY ESTABLISHED

“IN LIEU OF ALL TAXES” CLAUSE PRIOR TO LGC ARE WITHDRAWN

REAL PROPERTY TAX EXEMPTION OF GOCC

Mactan Cebu International Airport Authority v. City of Lapu-Lapu