Osmena vs.
Orbos the State, although the use thereof is limited to the special
Facts:
President Ferdinand Marcos issued P.D. 1956 creating a
Special Account in the General Fund, designated as the Oil
Price Stabilization Fund (OPSF). The OPSF was designed to
reimburse oil companies for cost increases in crude oil and
imported petroleum products resulting from exchange rate
adjustments and from increases in the world market prices of
crude oil.
Subsequently, the OPSF was reclassified into a "trust liability
account," in virtue of E.O 1024,7 and ordered released from
the National Treasury to the Ministry of Energy. The same
Executive Order also authorized the investment of the fund in
government securities, with the earnings from such placements
accruing to the fund.
President Corazon Aquino, amended P.D. 1956. She
promulgated Executive Order No. 137 on February 27, 1987,
expanding the grounds for reimbursement to oil companies for
possible cost underrecovery incurred as a result of the
reduction of domestic prices of petroleum products, the
amount of the underrecovery being left for determination by
the Ministry of Finance.
Petitioner allege that the status of the OPSF as of March 31,
1991 showed a "Terminal Fund Balance deficit" of some P
12.877 billion; that to abate the worsening deficit, "the Energy
Regulatory Board ** issued an Order on December 10, 1990,
approving the increase in pump prices of petroleum products,"
and at the rate of recoupment, the OPSF deficit should have
been fully covered in a span of six (6) months, but this
notwithstanding, the respondents "are poised to accept,
process and pay claims not authorized under P.D. 1956."
The petition further avers that the creation of the trust fund
violates § 29(3), Article VI of the Constitution,
"(3) All money collected on any tax levied for a special
purpose shall be treated as a special fund and paid out for such
purposes only. If the purpose for which a special fund was
created has been fulfilled or abandoned, the balance, if any,
shall be transferred to the general funds of the Government."
The petitioner argues that "the monies collected pursuant to **
P.D. 1956, as amended, must be treated as a 'SPECIAL
FUND,' not as a 'trust account' or a 'trust fund,' and that "if a
special tax is collected for a specific purpose, the revenue
generated therefrom shall be treated as a special fund' to be
used only for the purpose indicated, and not channeled to
another government objective."10 Petitioner further points out
that since "a 'special fund' consists of monies, collected
through the taxing power of a State, such amounts belong to
1
purpose/objective for which it was created."
The petitioner does not suggest that a "trust account" is illegal
per se, but maintains that the monies collected, which form
part of the OPSF, should be maintained in a special account of
the general fund for the reason that the Constitution so
provides, and because they are, supposedly, taxes levied for a
special purpose. He assumes that the Fund is formed from a
tax undoubtedly because a portion thereof is taken from
collections of ad valorem taxes and the increases thereon.
Issue:
WoN the powers granted under P.D. 1956 is of the nature of
the taxation power of the State (NO)
Ruling:
Fluctuations in world market prices and in tanker rates and
foreign exchange rates would in a completely free market
translate into corresponding adjustments in domestic prices of
oil and petroleum products with sympathetic frequency. But
domestic prices which vary from day to day or even only from
week to week would result in a chaotic market with
unpredictable effects upon the country's economy in general.
The OPSF was established precisely to protect local
consumers from the adverse consequences that such frequent
oil price adjustments may have upon the economy.
Thus, the OPSF serves as a pocket, as it were, into which a
portion of the purchase price of oil and petroleum products
paid by consumers as well as some tax revenues are inputted
and from which amounts are drawn from time to time to
reimburse oil companies, when appropriate situations arise, for
increases in, as well as underrecovery of, costs of crude
importation. The OPSF is thus a buffer mechanism through
which the domestic consumer prices of oil and petroleum
products are stabilized, instead of fluctuating every so often,
and oil companies are allowed to recover those portions of
their costs which they would not otherwise recover given the
level of domestic prices existing at any given time. To the
extent that some tax revenues are also put into it, the OPSF is
in effect a device through which the domestic prices of
petroleum products are subsidized in part. It appears to the
Court that the establishment and maintenance of the OPSF is
well within that pervasive and non-waivable power and
responsibility of the government to secure the physical and
economic survival and well-being of the community, that
comprehensive sovereign authority we designate as the police
power of the State. The stabilization, and subsidy of domestic
prices of petroleum products and fuel oil—clearly critical in
importance considering, among other things, the continuing
high level of dependence of the country on imported crude oil
—are appropriately regarded as public purposes."
Hence, it seems clear that while the funds collected may be
referred to as taxes, they are exacted in the exercise of the
police power of the State. Moreover, that the OPSF is a special
fund is plain from the special treatment given it by E.O. 137. It
is segregated from the general fund; and while it is placed in
what the law refers to as a "trust liability account," the fund
nonetheless remains subject to the scrutiny and review of the
COA. The Court is satisfied that these measures comply with
the constitutional description of a "special fund."
What petitioner would wish is the fixing of some definite,
quantitative restriction, or "a specific limit on how much to
tax." The Court is cited to this requirement by the petitioner on
the premise that what is involved here is the power of taxation;
but as already discussed, this is not the case. What is here
involved is not so much the power of taxation as police power.
Although the provision authorizing the ERB to impose
additional amounts could be construed to refer to the power of
taxation, it cannot be overlooked that the overriding
consideration is to enable the delegate to act with expediency
in carrying out the objectives of funds of the government."
Philippine Airlines vs. Edu
Facts:
The Philippine Airlines (PAL) is a corporation organized and
existing under the laws of the Philippines and engaged in the
air transportation business under a legislative franchise, Act
No. 4271, as amended by Republic Act Nos. 2360 and 2667.
Under its franchise, PAL is exempt from the payment of taxes.
PAL has, since 1956, not been paying motor vehicle
registration fees. Sometime in 1971, however, appellee
Commissioner Romeo F. Edu, issued a regulation requiring all
tax exempt entities, among them PAL to pay motor vehicle
registration fees.
Despite PAL’s protestations, the appellee refused to register
the appellant’s motor vehicles unless the amounts imposed
under Republic Act 4136 were paid. The appellant thus paid,
under protest, the amount of P19,529.75 as registration fees of
its motor vehicles. After’ paying under protest, PAL through
counsel, wrote a letter dated May 19, 1971, to Commissioner
Edu demanding a refund of the amounts paid, invoking the
ruling in Calalang v. Lorenzo (97 Phil. 212 [1951]) where it
was held that motor vehicle registration fees are in reality
taxes from the payment of which PAL is exempt by virtue of
its legislative franchise. Appellee Edu denied the request for
refund basing his action on the decision in Republic v.
Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30,
1970) to the effect that motor vehicle registration fees are
regulatory exactions and not revenue measures and, therefore,
do not come within the exemption granted to PAL under its
franchise.
Hence, PAL filed the complaint against Land Transportation
Commissioner Romeo F. Edu and National Treasurer Ubaldo
Carbonell with the Court of First Instance of Rizal.
2
Republic v. Philippine Rabbit Bus Lines, Inc.
Registration fees of motor vehicles are not taxes, but
regulatory fees imposed as an incident of the exercise of the
police power of the state.
Calalang v. Lorenzo
Generally speaking, taxes are for revenue, whereas fees are
exactions for purposes of regulation and inspection and are for
that reason limited in amount to what is necessary to cover the
cost of the services rendered in that connection. Hence, ‘a
charge fixed by statute for the service to be performed by an
officer, where the charge has no relation to the value of the
services performed and where the amount collected eventually
finds its way into the treasury of the branch of the government
whose officer or officers collected the charge, is not a fee but a
tax.’
Issue:
WoN Motor vehicle registration fees are of the nature of tax
(YES)
Ruling:
The Land Transportation Code governs Motor vehicle
registration fees. Section 61 of such Code provides:
“Sec. 61. Disposal of Monies Collected.—Monies collected
under the provisions of this Act shall be deposited in a special
trust account in the National Treasury to constitute the
Highway Special Fund, which shall be apportioned and
expended in accordance with the provisions of the ‘Philippine
Highway Act of 1935.’ Provided, however, That the amount
necessary to maintain and equip the Land Transportation
Commission but not to exceed twenty per cent of the total
collection during one year, shall be set aside for the purpose.
(As amended by RA 6374, approved August 6 1971).”
It appears clear from the above provisions that the legislative
intent and purpose behind the law requiring owners of vehicles
to pay for their registration is mainly to raise funds for the
construction and maintenance of highways and to a much
lesser degree, pay for the operating expenses of the
administering agency. On the other hand, the Philippine
Rabbit case mentions a presumption arising from the use of
the term “fees” which appears to have been favored by the
legislature to distinguish fees from other taxes.
Fees may be properly regarded as taxes even though they also
serve as an instrument of regulation. As stated by a former
presiding judge of the Court of Tax Appeals and writer on
various aspects of taxes:
“It is possible for an exaction to be both tax and regulation.
License fees are often looked to as a source of revenue as well
as a means of regulation. (Sonzinsky v. U.S., 300 U.S. 506)
This is true, for example, of automobile license fees. In such
case, the fees may properly be regarded as taxes even though
they also serve as an instrument of regulation. 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.”
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. Such is the case of motor vehicle
registration fees. The conclusions become inescapable in view
of Section 70(b) of Rep. Act 587 quoted in the Calalang case.
The same provision appears as Section 59(b) in the Land
Transportation Code. It is patent therefrom that the legislators
had in mind a regulatory tax as the law refers to the imposition
on the registration, operation or ownership of a motor vehicle
as a “tax or fee.” Though nowhere in Rep. Act 4136 does the
law specifically state that the imposition is a tax, Section 59(b)
speaks of “taxes or fees x x x for the registration or operation
or on the ownership of any motor vehicle, or for the exercise
of the profession of chauffeur x x x” making the intent to
impose a tax more apparent
It is quite apparent that vehicle registration fees were
originally simple exactions intended only for regulatory
purposes in the exercise of the State’s police powers. Over the
years, however, as vehicular traffic exploded in number and
motor vehicles became absolute necessities without which
modern life as we know it would stand still, Congress found
the registration of vehicles a very convenient way of raising
much needed revenues. Without changing the earlier
denomination of registration payments as “fees,” their nature
has become that of “taxes.”
In view of the foregoing, we rule that motor vehicle
registration fees as at present exacted pursuant to the Land
Transportation and Traffic Code are actually taxes intended
for additional revenues of government even if one fifth or less
of the amount collected is set aside for the operating expenses
of the agency administering the program.
Progressive Development v. Q.C.
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:
“Sec. 3. Supervision Fee.—–Privately owned and operated
public markets shall submit monthly to the Treasurer’s Office,
a certified list of stallholders showing the amount of stall fees
or rentals paid daily by each stallholder, x x x and shall pay
10% of the gross receipts from stall rentals to the City, x x x,
as supervision fee.”
3
The Market Code was thereafter amended by Ordinance No.
9236, Series of 1972, on 23 March 1972, which reads:
SECTION 1. There is hereby imposed a five percent (5%) tax
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 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 Republic Act No. 2264, as amended.
The Solicitor General also filed an Answer arguing that
petitioner, not having paid the ten percent (10%) supervision
fee prescribed by Ordinance No. 7997, had no personality to
question, and was estopped from questioning, its validity; 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.
Issue:
WoN the questioned imposition is in the nature of a license fee
(YES)
Ruling:
The scope of legislative authority conferred upon the Quezon
City Council in respect of businesses like that of the petitioner,
is comprehensive: the grant of authority is not only” [to]
regulate” and “fix the license fee,” but also “to tax.”
Also, It is now settled that Republic Act No. 2264 confers
upon local governments broad taxing authority extending to
almost “everything, excepting those which are mentioned
therein,” provided that the tax levied is “for public purposes,
just and uniform,” does not transgress any constitutional
provision and is not repugnant to a controlling statute. Both
the Local Autonomy Act and the Charter of respondent clearly
show that respondent is authorized to fix the license fee
collectible from and regulate the business of petitioner as
operator of a privately-owned public market.
Petitioner, however, insists that the “supervision fee” collected
from rentals, being a return from capital invested in the
construction of the Farmers Market, practically operates as a
tax on income, one of those expressly excepted from
respondent’s taxing authority, and thus beyond the latter’s
competence.
This contention has no merit. 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. To be
considered a license fee, the imposition questioned must relate
to an occupation or activity that so engages the public interest
in health, morals, safety and development as to require
regulation for the protection and promotion of such public
interest; the imposition must also bear a reasonable relation to
the probable expenses of regulation, taking into account not
only the costs of direct regulation but also its incidental
consequences as well.
In the case at bar, the “Farmers Market & Shopping Center”
was built by virtue of Resolution No. 7350 passed on 30
January 1967 by respondents’s local legislative body
authorizing petitioner to establish and operate a market with a
permit to sell fresh meat, fish, poultry and other foodstuffs.
The same resolution imposed upon petitioner, as a condition
for continuous operation, the obligation to “abide by and
comply with the ordinances, rules and regulations prescribed
for the establishment, operation and maintenance of markets in
Quezon City.”
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, applying the standards
set forth above, was done principally in the exercise of the
respondent’s police power. The operation of a privately owned
market is, as correctly noted by the Solicitor General,
equivalent to or quite the same as the operation of a
government-owned market; both are established for the
rendition of service to the general public, which warrants close
supervision and control by the respondent City, for the
protection of the health of the public by insuring, e.g., the
maintenance of sanitary and hygienic conditions in the market,
compliance of all food stuffs sold therein with applicable food
and drug and related standards, for the prevention of fraud and
imposition upon the buying public, and so forth.
We believe and so hold that the five percent (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
4
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.
Compañia General de Tabacos de Filipinas vs. City of
Manila
Facts:
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. 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.
Tabacalera filed this action in the Court of First Instance of
Manila to recover from appellants, City of Manila and its
Treasurer, Marcelino Sarmiento—also hereinafter referred to
as the City—the sum of P15,280.00 allegedly overpaid by it as
taxes on its wholesale and retail sales of liquor for the period
from the third quarter of 1954 to the second quarter of 1957,
inclusive, under Ordinances Nos. 3634, 3301, and 3816.
Tabacalera's action for refund is based on the theory that, in
connection with its liquor sales, it should pay the license fees
prescribed by Ordinance No. 3358 but not the municipal sales
taxes imposed by Ordinances Nos. 3634, 3301, and 3816; and
since it already paid the license fees aforesaid, the sales taxes
paid by it—amounting to the sum of P15,208.00 15,208.00—
under the three ordinances mentioned heretofore is an
overpayment made by mistake, and therefore refundable.
It appears that in the year 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.
The City, on the other hand, contends that, for the permit
issued to it granting proper authority to "conduct or engage in
the sale of alcoholic beverages or liquors" Tabacalera is
subject to pay the license fees prescribed by Ordinance No.
3358, aside from the sales taxes imposed by Ordinances Nos.
3634, 3301, and 3816; that, even assuming that Tabacalera is
not subject to the payment of the sales taxes prescribed by the
said three ordinances as regards its liquor sales, it is not
entitled to the refund.
Issue:
WoN Tabacalera is exempted from paying sales tax since is
already paid license fees (NO)
Ruling:
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 No. 3358 is clearly one that prescribes municipal
license fees for the privilege to engage in the business of
selling "liquor or alcoholic beverages,, having been enacted by
the Municipal Board of Manila pursuant to its charter power to
fix license fees on, and regulate, the sale of intoxicating
liquors, whether imported or locally manufactured. 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.
That Tabacalera is being subjected to double taxation is more
apparent than real. As already stated what is collected under
Ordinance No. 3358 is a license fee for the privilege of
engaging in the sale of liquor, a calling in which —it is
obvious—not anyone or anybody may freely engage,
considering that the sale of liquor indiscriminately may
endanger public health and morals. On the other hand, what
the three ordinances mentioned heretofore impose is a tax for
revenue purposes based on the sales made of the same article
or merchandise. It is already settled in this connection that
both a license fee and a tax may be imposed on the same
5
business or occupation, or for selling the same article, this not
being in violation of the rule against double taxation.
Ferrer Jr. vs. Bautista
Facts:
On October 17, 2011, respondent Quezon City Council
enacted Ordinance No. SP-2095, S-2011,2 or the Socialized
Housing Tax of Quezon City, Section 3 of which provides:
SECTION 3. IMPOSITION.—A special assessment
equivalent to one-half percent (0.5%) on the assessed value of
land in excess of One Hundred Thousand Pesos
(Php100,000.00) shall be collected by the City Treasurer
which shall accrue to the Socialized Housing Programs of the
Quezon City Government. The special assessment shall accrue
to the General Fund under a special account to be established
for the purpose.
On the other hand, Ordinance No. SP-2235, S-20135 was
enacted on December 16, 2013 and took effect ten days after
when it was approved by respondent City Mayor. The
proceeds collected from the garbage fees on residential
properties shall be deposited solely and exclusively in an
earmarked special account under the general fund to be
utilized for garbage collections.
Petitioner alleges that he is a registered co-owner of a 371-
square-meter residential property in Quezon City which is
covered by Transfer Certificate of Title (TCT) No. 216288,
and that, on January 7, 2014, he paid his realty tax which
already included the garbage fee in the sum of Php100.00.
The instant petition was filed on January 17, 2014. We issued
a TRO on February 5, 2014, which enjoined the enforcement
of Ordinance Nos. SP-2095 and SP-2235 and required
respondents to comment on the petition without necessarily
giving due course thereto.
Socialized Housing
Petitioner asserts that the protection of real properties from
informal settlers and the collection of garbage are basic and
essential duties and functions of the Quezon City Government.
By imposing the SHT and the garbage fee, the latter has
shown a penchant and pattern to collect taxes to pay for public
services that could be covered by its revenues from taxes
imposed on property, idle land, business, transfer, amusement,
etc., as well as the Internal Revenue Allotment (IRA) from the
National Government. For petitioner, it is noteworthy that
respondents did not raise the issue that the Quezon City
Government is in dire financial state and desperately needs
money to fund housing for informal settlers and to pay for
garbage collection. In fact, it has not denied that its revenue
collection in 2012 is in the sum of P13.69 billion. Moreover,
the imposition of the SHT and the garbage fee cannot be
justified by the Quezon City Government as an exercise of its
power to create sources of income under Section 5, Article X
of the 1987 Constitution.47 According to petitioner, the
constitutional provision is not a carte blanche for the LGU to
tax everything under its territorial and political jurisdiction as
the provision itself admits of guidelines and limitations.
Petitioner further claims that the annual property tax is an ad
valorem tax, a percentage of the assessed value of the
property, which is subject to revision every three (3) years in
order to reflect an increase in the market value of the property.
The SHT and the garbage fee are actually increases in the
property tax which are not based on the assessed value of the
property or its reassessment every three years; hence, in
violation of Sections 232 and 233 of the LGC.
Respondents emphasize that the SHT is pursuant to the social
justice principle found in the Constitution.
Garbage Fees
Respondents claim that Ordinance No. S-2235, which is an
exercise of police power, collects on the average from every
household a garbage fee in the meager amount of thirty-three
(33) centavos per day compared with the sum of P1,659.83
that the Quezon City Government annually spends for every
household for garbage collection and waste management.62 In
addition, there is no double taxation because the ordinance
involves a fee. Even assuming that the garbage fee is a tax, the
same cannot be a direct duplicate tax as it is imposed on a
different subject matter and is of a different kind or character.
Petitioner contends that the imposition of garbage fee is
tantamount to double taxation because garbage collection is a
basic and essential public service that should be paid out from
property tax, business tax, transfer tax, amusement tax,
community tax certificate, other taxes, and the IRA of the
Quezon City Government. Also, it is inconsistent with R.A.
No. 9003 for while the law encourages segregation,
composting, and recycling of waste, the ordinance only
emphasizes the collection and payment of garbage fee; while
the law calls for an active involvement of the barangay in the
collection, segregation, and recycling of garbage, the
ordinance skips such mandate.
Issue:
WoN the SHT is valid (YES)
WoN the Garbage fees is valid (NO)
Ruling:
Respondents correctly argued that an ordinance, as in every
law, is presumed valid. LGUs are able to legislate only by
virtue of a valid delegation of legislative power from the
national legislature; they are mere agents vested with what is
called the power of subordinate legislation. “Congress enacted
the LGC as the implementing law for the delegation to the
6
various LGUs of the State’s great powers, namely: the police
power, the power of eminent domain, and the power of
taxation. Specifically, with regard to the power of taxation, it
is indubitably the most effective instrument to raise needed
revenues in financing and supporting myriad activities of the
LGUs for the delivery of basic services essential to the
promotion of the general welfare and the enhancement of
peace, progress, and prosperity of the people.
Indeed, LGUs have no inherent power to tax except to the
extent that such power might be delegated to them either by
the basic law or by the statute. “Under the now prevailing
Constitution, where there is neither a grant nor a prohibition
by statute, the tax power must be deemed to exist although
Congress may provide statutory limitations and guidelines.
Subject to the provisions of the LGC and consistent with the
basic policy of local autonomy, every LGU is now empowered
and authorized to create its own sources of revenue and to levy
taxes, fees, and charges which shall accrue exclusively to the
local government unit as well as to apply its resources and
assets for productive, developmental, or welfare purposes, in
the exercise or furtherance of their governmental or
proprietary powers and functions.
Socialized Housing Tax
Police power, which flows from the recognition that salus
populi est suprema lex (the welfare of the people is the
supreme law), is the plenary power vested in the legislature to
make statutes and ordinances to promote the health, morals,
peace, education, good order or safety and general welfare of
the people. Property rights of individuals may be subjected to
restraints and burdens in order to fulfill the objectives of the
government in the exercise of police power. In this
jurisdiction, it is wellentrenched that taxation may be made the
implement of the state’s police power.
Clearly, the SHT charged by the Quezon City Government is a
tax which is within its power to impose. Aside from the
specific authority vested by Section 43 of the UDHA, cities
are allowed to exercise such other powers and discharge such
other functions and responsibilities as are necessary,
appropriate, or incidental to efficient and effective provision
of the basic services and facilities which include, among
others, programs and projects for low-cost housing and other
mass dwellings. The collections made accrue to its socialized
housing programs and projects. The tax is not a pure exercise
of taxing power or merely to raise revenue; it is levied with a
regulatory purpose. The levy is primarily in the exercise of the
police power for the general welfare of the entire city. It is
greatly imbued with public interest. Removing slum areas in
Quezon City is not only beneficial to the underprivileged and
homeless constituents but advantageous to the real property
owners as well. The situation will improve the value of their
property investments, fully enjoying the same in view of an
orderly, secure, and safe community, and will enhance the
quality of life of the poor, making them law-abiding
constituents and better consumers of business products.
For the purpose of undertaking a comprehensive and
continuing urban development and housing program, the
disparities between a real property owner and an informal
settler as two distinct classes are too obvious and need not be
discussed at length. The differentiation conforms to the
practical dictates of justice and equity and is not
discriminatory within the meaning of the Constitution.
Notably, the public purpose of a tax may legally exist even if
the motive which impelled the legislature to impose the tax
was to favor one over another. It is inherent in the power to tax
that a State is free to select the subjects of taxation. Inequities
which result from a singling out of one particular class for
taxation or exemption infringe no constitutional limitation.
Garbage Fee
Under R.A. No. 9003, it is the declared policy of the State to
adopt a systematic, comprehensive and ecological solid waste
management program which shall, among others, ensure the
proper segregation, collection, transport, storage, treatment
and disposal of solid waste through the formulation and
adoption of the best environmental practices in ecological
waste management. The law provides that segregation and
collection of solid waste shall be conducted at the barangay
level, specifically for biodegradable, compostable and reusable
wastes, while the collection of nonrecyclable materials and
special wastes shall be the responsibility of the municipality or
city. Mandatory segregation of solid wastes shall primarily be
conducted at the source, to include household, institutional,
industrial, commercial and agricultural sources.
Under R.A. No. 9003, it is clear that the authority of a
municipality or city to impose fees is limited to the collection
and transport of nonrecyclable and special wastes and for the
disposal of these into the sanitary landfill. Barangays, on the
other hand, have the authority to impose fees for the collection
and segregation of biodegradable, compostable and reusable
wastes from households, commerce, other sources of domestic
wastes, and for the use of barangay MRFs. This is but
consistent with Section 10 of R.A. No. 9003 directing that
segregation and collection of biodegradable, compostable and
reusable wastes shall be conducted at the barangay level, while
the collection of nonrecyclable materials and special wastes
shall be the responsibility of the municipality or city.
It is clear that the authority of a municipality or city to impose
fees is limited to the collection and transport of nonrecyclable
and special wastes and for the disposal of these into the
sanitary landfill. Barangays, on the other hand, have the
authority to impose fees for the collection and segregation of
biodegradable, compostable and reusable wastes from
households, commerce, other sources of domestic wastes, and
for the use of barangay MRFs. This is but consistent with
Section 10 of R.A. No. 9003 directing that segregation and
7
collection of biodegradable, compostable and reusable wastes
shall be conducted at the barangay level, while the collection
of nonrecyclable materials and special wastes shall be the
responsibility of the municipality or city.
In this case, the alleged bases of Ordinance No. SP-2235 in
imposing the garbage fee is the volume of waste currently
generated by each person in Quezon City, which purportedly
stands at 0.66 kilogram per day, and the increasing trend of
waste generation for the past three years. Respondents did not
elaborate any further. The figure presented does not reflect the
specific types of wastes generated — whether residential,
market, commercial, industrial, construction/demolition, street
waste, agricultural, agro-industrial, institutional, etc. It is
reasonable, therefore, for the Court to presume that such
amount pertains to the totality of wastes, without any
distinction, generated by Quezon City constituents. To
reiterate, however, the authority of a municipality or city to
impose fees extends only to those related to the collection and
transport of nonrecyclable and special wastes.
Republic vs. Bacolod-Murcia Milling Co., Inc., et al.
Facts:
Republic Act No. 632 is the charter of the Philippine Sugar
Institute, Philsugin for short, a semi-public corporation created
for the general improvement of the sugar industry. To realize
and achieve these ends, Sections 15 and 16 of the
aforementioned law provide that there shall be levied on the
annual sugar production a tax of TEN CENTAVOS [P0.10]
per picul of sugar to be collected for a period of five (5) years
beginning the crop year 1951–1952. The amount shall be
borne by the sugar cane planters and the sugar centrals in the
proportion of their corresponding milling share, and said levy
shall constitute a lien on their sugar quedans and/or warehouse
receipts.
From the evidence presented, on which there is no
controversy, it was disclosed that on September 3, 1951, the
Philippine Sugar Institute, known as the PHILSUGIN for
short, acquired the: Insular Sugar Refinery for a total
consideration of P3,070,909.60 payable from the process of
the sugar tax to be collected under Republic Act 632. The
evidence further discloses that the operation of the Insular
Sugar Refinery for the years, 1954, 1955, 1956 and 1957 was
disastrous in the sense that PHILSUGIN incurred tremendous
losses as shown by an examination of the statements of
income and expenses.
Contending that the purchase of the Insular Sugar Refinery
with money from the Philsugin Fund was not authorized by
Republic Act 632 and that the continued operation of the said
refinery was inimical to their interests, the appellants refused
to continue with their contributions to the said fund. They
maintained that their obligation to contribute or pay to the said
Fund subsists only to the limit and extent that they are
benefited by such contributions since Republic Act 632 is not
a revenue measure but an Act which establishes a “special
assessments.” Adverting to the finding of the lower court that
proceeds of the said Fund had been used or applied to absorb
the “tremendous losses” incurred by Philsugin in its
“disastrous operation” of the said refinery, the appellants
herein argue that they should not only be released from their
obligation to pay the said assessment but be refunded, besides,
of all that they might have previously paid thereunder.
The appellants’ thesis is simply to the effect that the “10
centavos per picul of sugar” authorized to be collected under
Sec. 15 of Republic 632 is a special assessment, As such, the
proceeds thereof may be devoted only to the specific purpose
for which the assessment was authorized, a special assessment
being a levy upon property predicated on the doctrine that the
property against which it is levied derives some special benefit
from the improvement. It is not a tax measure intended to raise
revenues for the Government.
Issue:
WoN the sugar tax is a special assessment (NO)
Ruling:
The nature of a “special assessment” similar to the case at bar
has already been discussed and explained by this Court in the
case of Lutz vs. Araneta. For in this Lutz case,
Commonwealth Act 567, otherwise known as the Sugar
Adjustment Act, levies on owners or persons in control of
lands devoted to the cultivation of sugar cane and ceded to
others for a consideration, on lease or otherwise. Under
Section 6 of the said law, Commonwealth Act 567, all
collections made thereunder “shall accrue to a special fund in
the Philippine Treasury, to be known as the ‘Sugar Adjustment
and Stabilization Fund,’ and shall be paid out only for any or
all of the following purposes or to attain any or all of the
following objectives, as may be provided by law.”
The plaintiff in the above case, Walter Lutz, contended that
the aforementioned tax or special assessment was
unconstitutional because it was being “levied for the aid and
support of the sugar industry exclusively,” and therefore, not
for a public purpose. In rejecting the theory advanced by the
said plaintiff, this Court said:
“The basic defect in the plaintiff’s position in his assumption
that the tax provided for in Commonwealth Act No. 567 is a
pure exercise of the taxing power. Analysis of the Act, and
particularly Section 6, will show that the tax is levied with a
regulatory purpose, to provide means for the rehabilitation and
stabilization of the threatened sugar industry. In other words,
the the act is primarily an exercise of the police power.”
8
“Once it is conceded, as it must that the protection and
promotion of the sugar industry is a matter of public concern,
it follows that the Legislature may determine within
reasonable bounds what is necessary for its protection and
expedient for its promotion. Here, the legislative discretion
must be allowed full play, subject only to the test of
reasonableness; and it is not contended that the means
provided in Section 6 of the law (above quoted) bear no
relation to the objective pursued or are oppressive in character.
If objective and methods are alike constitutionally valid, no
reason is seen why the state may not levy taxes to raise funds
for their prosecution and attainment. Taxation may be made
the implement of the state’s police power.
On the authority of the above case, then, We hold that the
special assessment at bar may be considered as similarly as the
above, that is, that the levy for the Philsugin Fund is not so
much an exercise of the power of taxation. nor the imposition
of a special assessment, but, the exercise of the police power
for the general welfare of the entire country. It is, therefore, an
exercise of a sovereign power which no private citizen may
lawfully resist. Besides, under Section 2(a) of the charter, the
Philsugin is authorized “to conduct research work for the
sugar industry in all its phases, either agricultural or industrial,
for the purpose of introducing into the sugar industry such
practices or processes that will reduce the cost of production, x
x x, and achieve greater efficiency in the industry.”
Philsugin’s experience alone of running a refinery is a gain to
the entire industry. That the operation resulted in a financial
loss is by no means an index that the industry did not profit
therefrom, as other farms of a different nature may have been
realized. Thus, from its financially unsuccessful venture, the
Philsugin could very well have advanced in its appreciation of
the problems of management faced by sugar centrals. It could
have understood more clearly the difficulties of marketing
sugar products. It could have known with better intimacy the
precise area of the industry in need of the more help from the
government. The view of the appellants herein, therefore, that
they were not benefited by the unsuccessful operation of the
refinery in question is not entirely accurate.
Philex Mining vs. CIR
Facts:
The facts show that on August 5, 1992, the BIR sent a letter to
Philex asking it to settle its tax liabilities for the 2nd, 3rd and
4th quarter of 1991 as well as the 1st and 2nd quarter of 1992
in the total amount of P123,821,982.52. In a letter dated
August 20, 1992, Philex protested the demand for payment of
the tax liabilities stating that it has pending claims for VAT
input credit/refund for the taxes it paid for the years 1989 to
1991 in the amount of P119,977,037.02 plus interest.
Therefore, these claims for tax credit/refund should be applied
against the tax liabilities.

In the course of the proceedings, the BIR issued Tax Credit
Certificate SN 001795 in the amount of P13,144,313.88
which, applied to the total tax liabilities of Philex of
P123,821,982.52; effectively lowered the latter’s tax
obligation to P110,677,688.52. Despite the reduction of its tax
liabilities, the CTA still ordered Philex to pay the remaining
balance of P110,677,688.52 plus interest, elucidating its
reason, to wit:
“taxes cannot be subject to set-off on compensation since
claim for taxes is not a debt or contract.”
A few days after the denial of its motion for reconsideration,
Philex was able to obtain its VAT input credit/refund not only
for the taxable year 1989 to 1991 but also for 1992 and 1994.
In view of the grant of its VAT input credit/refund, Philex now
contends that the same should, ipso jure, off-set its excise tax
liabilities since both had already become “due and
demandable, as well as fully liquidated”; hence, legal
compensation can properly take place.
Issue:
WoN the VAT refund can be set off with the tax liabilities by
BIR (NO)
Ruling:
In several instances prior to the instant case, we have already
made the pronouncement that taxes cannot be subject to
compensation for the simple reason that the government and
the taxpayer are not creditors and debtors of each other. There
is a material distinction between a tax and debt. Debts are due
to the Government in its corporate capacity, while taxes are
due to the Government in its sovereign capacity. We find no
cogent reason to deviate from the aforementioned distinction.
We have consistently ruled that there can be no off-setting of
taxes against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the ground
that the government owes him an amount equal to or greater
than the tax being collected. The collection of a tax cannot
await the results of a lawsuit against the government. Taxes
cannot be the subject of compensation because the government
and taxpayer are not mutually creditors and debtors of each
other and a claim for taxes is not such a debt, demand, contract
or judgment as is allowed to be setoff.
Caltex vs. COA
Facts:
The Oil Price Stabilization Fund (OPSF) was created under
Section 8 of Presidential Decree (P.D.) No. 1956, as amended
by Executive Order (E.O.) No. 137. Such law created a Trust
Account in the books of accounts of the Ministry of Energy to
be designated as Oil Price Stabilization Fund (OPSF) for the
9
purpose of minimizing frequent price changes brought about
by exchange rate adjustments and/ or changes in world market
prices of crude oil and imported petroleum products. The
Fund herein created shall be used for the following, among
others:
“To reimburse the oil companies for possible cost
underrecovery incurred as a result of the reduction of domestic
prices of petroleum products. The magnitude of the
underrecovery, if any, shall be determined by the Ministry of
Finance. ‘Cost underrecovery’ shall include the following:
1. Reduction in oil company take as directed by the
Board of Energy without the corresponding reduction
in the landed cost of oil inventories in the possession
of the oil companies at the time of the price change;
2. Reduction in internal ad valorem taxes as a result of
foregoing government mandated price reductions;
3. Other factors as may be determined by the Ministry
of Finance to result in cost underrecovery.
COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter
referred to as Petitioner, directing the latter to remit to the
OPSF its collection, excluding that unremitted for the years
1986 and 1988, of the additional tax on petroleum products
authorized under the aforesaid Section 8 of P.D. No. 1956 and
informing it that, pending such remittance, all of its claims for
reimbursement from the OPSF shall be held in abeyance. By
way of a reply, petitioner, in a letter dated 31 May 1989,
submitted to the COA a proposal for the payment of the
collections and the recovery of claims, since the outright
payment of the sum of P1.287 billion to the OEA as a
prerequisite for the processing of said claims against the OPSF
will cause a very serious impairment of its cash position.
The COA, with the Chairman taking no part, handed down
Decision No. 921 accepting the abovestated proposal but
prohibiting petitioner from further offsetting remittances and
reimbursements for the current and ensuing years.
It appears that under letters of authority issued by the
Chairman, Energy Regulatory Board, the aforenamed oil
companies were allowed to offset the amounts due to the Oil
Price Stabilization Fund against their outstanding claims from
the said Fund for the calendar years 1987 and 1988, pending
with the then Ministry of Energy, the government entity
charged with administering the OPSF. This Commission,
however, expressing serious doubts as to the propriety of the
offsetting of all types of reimbursements from the OPSF
against all categories of remittances, advised these oil
companies that such offsetting was bereft of legal basis.
Ultimately, the Commission agreed to the proposal provided
that 15% of whatever amount is due from the Fund is retained
by the Office of Energy Affairs.
However, COA disallowed reimbursements for:
1. Recovery of financing charges
2. Product Sales
3. Inventory Losses
4. Sale of Atlas/Macrocopper
Aggrieved, petitioner appealed the disallowances and also
contended that the amount of reimbursement could be offset
with the amounts due to the OPSF.
To support this contention, petitioner claims that the amounts
due from it do not arise as a result of taxation because “P.D.
1956, as amended, did not create a source of taxation; it
instead established a special fund . . .,”56 and that the OPSF
contributions do not go to the general fund of the state and are
not used for public purpose, i.e., not for the support of the
government, the administration of law, or the payment of
public expenses. This alleged lack of a public purpose behind
OPSF exactions distinguishes such from a tax. Hence, the
OPSF may be subject to compensation.
Issue:
WoN the reimbursement claims can be offset against the
amounts due to the OPSF (NO)
Ruling:
We find no merit in petitioner’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.
There can be no doubt that the oil industry is greatly imbued
with public interest as it vitally affects the general welfare.
Any unregulated increase in oil prices could hurt the lives of a
majority of the people and cause economic crisis of untold
proportions. It would have a chain reaction in terms of, among
others, demands for wage increases and upward spiralling of
the cost of basic commodities. The stabilization then of oil
prices is one of prime concern which the state, via its police
power, may properly address.
It is settled that a taxpayer may not offset taxes due from the
claims that he may have against the government. Taxes cannot
be the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other
and a claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off.
We may even further state that technically, in respect to the
taxes for the OPSF, the oil companies merely act as agents for
the Government in the latter’s collection since the taxes are, in
reality, passed unto the end-users—the consuming public. In
10
that capacity, the petitioner, as one of such companies, has the
primary obligation to account for and remit the taxes collected
to the administrator of the OPSF.
In respect, therefore, to its collection for the OPSF vis-a-vis its
claims for reimbursement, no compensation is likewise legally
feasible. Firstly, the Government and the petitioner cannot be
said to be mutually debtors and creditors of each other.
Secondly, there is no proof that petitioner’s claim is already
due and liquidated.
Air Canada vs. CJR
Facts:
Air Canada is a “foreign corporation organized and existing
under the laws of Canada.” On April 24, 2000, it was granted
an authority to operate as an offline carrier by the Civil
Aeronautics Board. “As an offline carrier, Air Canada does
not have flights originating from or coming to the Philippines
and does not operate any airplane in the Philippines.”
Air Canada engaged the services of Aerotel Ltd., Corp.
(Aerotel) as its general sales agent in the Philippines. Aerotel
“sells Air Canada’s passage documents in the Philippines.”
For the period ranging from the third quarter of 2000 to the
second quarter of 2002, Air Canada, through Aerotel, filed
quarterly and annual income tax returns and paid the income
tax on Gross Philippine Billings in the total amount of
P5,185,676.77.
Air Canada filed a written claim for refund of alleged
erroneously paid income taxes amounting to P5,185,676.77
before the Bureau of Internal Revenue, Revenue District
Office No. 47-East Makati. It found basis from the revised
definition of Gross Philippine Billings under Section 28(A)(3)
(a) of the 1997 National Internal Revenue Code. Hence, it
contended that it was only subject to 2 ½% on its Gross
Philippine Billings.
The CTA ruled that while Air Canada was not liable for tax on
its Gross Philippine Billings under Section 28(A)(3), it was
nevertheless liable to pay the 32% corporate income tax on
income derived from the sale of airline tickets within the
Philippines pursuant to Section 28(A)(1).
Issue:
WoN Air Canada may refuse to pay tax deficiencies since it
has claims for refund. (NO)
Ruling:
Ultimately, the Supreme Court ruled that as an offline
international carrier with no landing rights in the Philippines,
is not liable to tax on Gross Philippine Billings under Section
28(A)(3) of the 1997 National Internal Revenue Code. Under
the foregoing provision, 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.
Also, the petitioner, an offline carrier is a resident foreign
corporation for income tax purposes. Petitioner falls within the
definition of resident foreign corporation under Section 28(A)
(1) of the 1997 National Internal Revenue Code, thus, it may
be subject to 32%53 tax on its taxable income. However, the
application of the regular 32% tax rate under Section 28(A)(1)
of the 1997 National Internal Revenue Code must consider the
existence of an effective tax treaty between the Philippines
and the home country of the foreign air carrier. Through the
appointment of Aerotel as its local sales agent, petitioner is
deemed to have created a “permanent establishment” in the
Philippines as defined under the Republic of the Philippines-
Canada Tax Treaty.
Aerotel is a dependent agent of petitioner pursuant to the terms
of the Passenger General Sales Agency Agreement executed
between the parties. It has the authority or power to conclude
contracts or bind petitioner to contracts entered into in the
Philippines. A third party liability on contracts of Aerotel is to
petitioner as the principal, and not to Aerotel, and liability to
such third party is enforceable against petitioner. While
Aerotel maintains a certain independence and its activities
may not be devoted wholly to petitioner, nonetheless, when
representing petitioner pursuant to the Agreement, it must
carry out its functions solely for the benefit of petitioner and
according to the latter’s Manual and written instructions.
Aerotel is required to submit its annual sales plan for
petitioner’s approval. In essence, Aerotel extends to the
Philippines the transportation business of petitioner. It is a
conduit or outlet through which petitioner’s airline tickets are
sold.
Income attributable to Aerotel or from business activities
effected by petitioner through Aerotel may be taxed in the
Philippines. However, pursuant to the last paragraph of Article
VII in relation to Article VIII Shipping & Air Transport) of
the same Treaty, the tax imposed on income derived from the
operation of ships or aircraft in international traffic should not
exceed 1 1/2% of gross revenues derived from Philippine
sources.
Ruling on issue:
We reject petitioner’s contention that the Court of Tax
Appeals erred in denying its claim for refund of erroneously
paid Gross Philippine Billings tax on the ground that it is
subject to income tax under Section 28(A) (1) of the National
Internal Revenue Code because (a) it has not been assessed at
all by the Bureau of Internal Revenue for any income tax
11
liability; and (b) internal revenue taxes cannot be the subject
of setoff or compensation.
In this case, petitioner’s claim that it erroneously paid the 5%
final tax is an admission that the quarterly tax return it filed in
2000 was improper. Hence, to determine if petitioner was
entitled to the refund being claimed, the Court of Tax Appeals
has the duty to determine if petitioner was indeed not liable for
the 5% final tax and, instead, liable for taxes other than the 5%
final tax. The Petitioner’s request for refund can neither be
granted nor denied outright without such determination.
A taxpayer may not offset taxes due from the claims that he
may have against the government. Taxes cannot be the subject
of compensation because the government and taxpayer are not
mutually creditors and debtors of each other and a claim for
taxes is not such a debt, demand, contract or judgment as is
allowed to be setoff. In sum, the rulings in those cases were
to the effect that the taxpayer cannot simply refuse to pay tax
on the ground that the tax liabilities were offset against any
alleged claim the taxpayer may have against the government.
Such would merely be in keeping with the basic policy on
prompt collection of taxes as the lifeblood of the government.
Phil Guaranty Co., Inc. v. CIR
Facts:
The Philippine Guaranty Co., Inc., a domestic insurance
company, entered into reinsurance contracts, on various dates,
with foreign insurance companies not doing business in the
Philippines. The Company agreed to cede to the foreign
reinsurers a portion of the premiums on insurance it has
originally under written in the Philippines, in consideration for
the assumption by the latter of liability on an equivalent
portion of the risks insured. Pursuant to the aforesaid
reinsurance contracts, Philippine Guaranty Co., Inc. ceded to
the foreign reinsurers the following premiums: 1953 - P
42,466.71; 1954 - P721,471.85. Said premiums were
excluded by Philippine Guaranty Co., Inc. from its gross
income when it filed its income tax returns for 1953 and 1954.
Furthermore, it did not withhold or pay tax on them.
Consequently, per letter dated April 13, 1959, the
Commissioner of Internal Revenue assessed against Philippine
Guaranty Co., Inc. withholding tax on the ceded reinsurance
premiums amounting to P 230,673.00 and P234,364.00 for
1953 and 1954, respectively.
Philippine Guaranty Co., Inc. protested the assessment on the
ground that reinsurance premiums ceded to foreign reinsurers
not doing business in the Philippines are not subject to
withholding tax. Petitioner maintains that the reinsurance
premiums in question did not constitute income from sources
within the Philippines because the foreign reinsurers did not
engage in business in the Philippines, nor did they have office
here. Its protest was denied and it appealed to the Court of
Tax Appeals.
Issue:
WoN the Company is required to withhold taxes on remitted
premiums (YES)
Ruling:
Section 24 of the Tax Code subjects foreign corporations to
tax on their income from sources within the Philippines. The
word “sources” has been interpreted as the activity, property
or service giving rise to the income. The reinsurance
premiums were income created from the undertaking of the
foreign reinsurance companies to reinsure Philippine Guaranty
Co., Inc. against liability for loss under original insurances.
Such undertaking, as explained above, took place in the
Philippines. These insurance premiums, therefore, came from
sources within the Philippines and, hence, are subject to
corporate income tax.
Discussion on Necessity Theory:
The power to tax is an attribute of sovereignty. It is a power
emanating from necessity. It is a necessary burden to preserve
the State’s sovereignty and a means to give the citizenry an
army to resist an aggression, a navy to defend its shores from
invasion, a corps of civil servants to serve, public
improvements designed for the enjoyment of the citizenry and
those which come within the State’s territory, and facilities
and protection which a government is supposed to provide.
Considering that the reinsurance premiums in question were
afforded protection by the government and the recipient
foreign reinsurers exercised rights and privileges guaranteed
by our laws, such reinsurance premiums and reinsurers should
share the burden of maintaining the state.
Marcos II vs. Court of Appeals
Facts:
Upon the death of Pres. Marcos, Special Tax Audit Team was
created to conduct investigations and examinations of the tax
liabilities and obligations of the late president, as well as that
of his family, associates and “cronies.” Said audit team
concluded its investigation with a Memorandum dated July 26,
1991. The investigation disclosed that the Marcoses failed to
file a written notice of the death of the decedent, an estate tax
returns [sic], as well as several income tax returns covering the
years 1982 to 1986, -all in violation of the National Internal
Revenue Code (NIRC).
On July 26, 1991, the BIR issued the following: (1)
Deficiency estate tax assessment no. FAC-2-89-91-002464
(against the estate of the late president Ferdinand Marcos in
the amount of P23,293,607,638.00 Pesos); (2) Deficiency
income tax assessment no. FAC-1-85-91-002452 and
Deficiency income tax assessment no. FAC-1-86-91-002451
12
(against the Spouses Ferdinand and Imelda Marcos in the
amounts of P149,551.70 and P184,009,737.40 representing
deficiency income tax for the years 1985 and 1986); (3)
Deficiency income tax assessment nos. FAC-182-91-002460
to FAC-1-85-91-002463 (against petitioner Ferdinand
‘Bongbong’ Marcos II in the amounts of P258.70 pesos;
P9,386.40 Pesos; P4,388.30 Pesos; and P6,376.60 Pesos
representing his deficiency income taxes for the years 1982 to
1985).
The Commissioner of Internal Revenue avers that copies of
the deficiency estate and income tax assessments were all
personally and constructively served to the Marcoses.
The deficiency tax assessments were not protested
administratively, by Mrs. Marcos and the other heirs of the
late president, within 30 days from service of said
assessments.
On February 22, 1993, the BIR Commissioner issued
twentytwo notices of levy on real property against certain
parcels of land owned by the Marcoses—to satisfy the alleged
estate tax and deficiency income taxes of Spouses Marcos.
Petitioner posits that notices of levy, notices of sale, and
subsequent sale of properties of the late President Marcos
effected by the BIR are null and void for disregarding the
established procedure for the enforcement of taxes due upon
the estate of the deceased. Petitioner goes further, submitting
that the probate court is not precluded from denying a request
by the government for the immediate payment of taxes, and
should order the payment of the same only within the period
fixed by the probate court for the payment of all the debts of
the decedent.
Issue:
WoN the approval of the probate court is necessary to collect
estate taxes (NO)
Ruling:
It has been repeatedly observed, and not without merit, that the
enforcement of tax laws and the collection of taxes, is of
paramount importance for the sustenance of government.
Taxes are the lifeblood of the government and should be
collected without unnecessary hindrance.
In Vera vs. Fernandez, that the court recognized the liberal
treatment of claims for taxes charged against the estate of the
decedent. Such taxes, we said, were exempted from the
application of the statute of non-claims, and this is justified by
the necessity of government funding, immortalized in the
maxim that taxes are the lifeblood of the government.
“Taxes assessed against the estate of a deceased person, after
administration is opened, need not be submitted to the
committee on claims in the ordinary course of administration.
In the exercise of its control over the administrator, the court
may direct the payment of such taxes upon motion showing
that the taxes have been assessed against the estate.”
From the foregoing, it is discernible that the approval of the
court, sitting in probate, or as a settlement tribunal over the
deceased is not a mandatory requirement in the collection of
estate taxes. It cannot therefore be argued that the Tax Bureau
erred in proceeding with the levying and sale of the properties
allegedly owned by the late President, on the ground that it
was required to seek first the probate court’s sanction. There is
nothing in the Tax Code, and in the pertinent remedial laws
that implies the necessity of the probate or estate settlement
court’s approval of the state’s claim for estate taxes, before the
same can be enforced and collected.
NPC vs. City of Cabanatuan
Facts:
For many years now, petitioner sells electric power to the
residents of Cabanatuan City, posting a gross income of
P107,814,187.96 in 1992. Pursuant to section 37 of Ordinance
No. 165-92, the respondent assessed the petitioner a franchise
tax amounting to P808,606.41, representing 75% of 1% of the
latter’s gross receipts for the preceding year.
Petitioner, whose capital stock was subscribed and paid
wholly by the Philippine Government, refused to pay the tax
assessment. It argued that the respondent has no authority to
impose tax on government entities. Petitioner also contended
that as a non-profit organization, it is exempted from the
payment of all forms of taxes, charges, duties or fees.
The respondent filed a collection suit in the Regional Trial
Court of Cabanatuan City, demanding that petitioner pay the
assessed tax due, plus a surcharge equivalent to 25% of the
amount of tax, and 2% monthly interest. Respondent alleged
that petitioner’s exemption from local taxes has been repealed
by section 193 of Rep. Act No. 7160.
Petitioner also alleges that it is an instrumentality of the
National Government, and as such, may not be taxed by the
respondent city government. It cites the doctrine in Basco vs.
Philippine Amusement and Gaming Corporation where this
Court held that local governments have no power to tax
instrumentalities of the National Government.
Issue:
WoN NPC is subject to franchise tax (YES)
Ruling:
One of the most significant provisions of the LGC is the
removal of the blanket exclusion of instrumentalities and
agencies of the national government from the coverage of
local taxation. Although as a general rule, LGUs cannot
13
impose taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, this rule now
admits an exception, i.e., when specific provisions of the LGC
authorize the LGUs to impose taxes, fees or charges on the
aforementioned entities. Hence, the doctrine in Basco vs.
Philippine Amusement and Gaming Corporation relied upon
by the petitioner to support its claim no longer applies.
Verily, to determine whether the petitioner is covered by the
franchise tax in question, the following requisites should
concur: (1) that petitioner has a “franchise” in the sense of a
secondary or special franchise; and (2) that it is exercising its
rights or privileges under this franchise within the territory of
the respondent city government.
Petitioner fulfills the first requisite. Commonwealth Act No.
120, as amended by Rep. Act No. 7395, constitutes
petitioner’s primary and secondary franchises. With these
powers, petitioner eventually had the monopoly in the
veneration and distribution of electricity. This monopoly was
strengthened with the issuance of Pres. Decree No. 40,
nationalizing the electric power industry. Although Exec.
Order No. 21560 thereafter allowed private sector
participation in the generation of electricity, the transmission
of electricity remains the monopoly of the petitioner.
Petitioner also fulfills the second requisite. It is operating
within the respondent city government’s territorial jurisdiction
pursuant to the powers granted to it by Commonwealth Act
No. 120, as amended.
Necessity Theory discussion
Taxes are the lifeblood of the government, for without taxes,
the government can neither exist nor endure. A principal
attribute of sovereignty, the exercise of taxing power derives
its source from the very existence of the state whose social
contract with its citizens obliges it to promote public interest
and common good. The theory behind the exercise of the
power to tax emanates from necessity; without taxes,
government cannot fulfill its mandate of promoting the general
welfare and well-being of the people. In recent years, the
increasing social challenges of the times expanded the scope
of state activity, and taxation has become a tool to realize
social justice and the equitable distribution of wealth,
economic progress and the protection of local industries as
well as public welfare and similar objectives. Taxation
assumes even greater significance with the ratification of the
1987 Constitution. Thenceforth, the power to tax is no longer
vested exclusively on Congress; local legislative bodies are
now given direct authority to levy taxes, fees and other
charges.
Commissioner v. Algue
Facts:
The private respondent, 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 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. On March 12, 1965, a warrant of distraint
and levy was presented to the private respondent, through its
counsel, Atty. Alberto Guevara, Jr., who refused to receive it
on the ground of the pending protest. A search of the protest in
the dockets of the case proved fruitless. Atty. Guevara
produced his file copy and gave a photostat to BIR agent
Ramon Reyes, who deferred service of the warrant. On April
7, 1965, Atty. Guevara was finally informed that the BIR was
not taking any action on the protest and it was only then that
he accepted the warrant of distraint and levy earlier sought to
be served. Sixteen days later, on April 23, 1965, Algue filed a
petition for review of the decision of the Commissioner of
Internal Revenue with the Court of Tax Appeals. The above
chronology shows that the petition was filed seasonably.
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. 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.
Issue:
WoN the appeal was seasonably filed (YES)
WoN the claimed deduction is valid (YES)
Ruling:
Procedural Issue
It is true that as a rule the warrant of distraint and levy is
"proof of the finality of the assessment" and "renders hopeless
a request for reconsideration," being "tantamount to an
outright denial thereof and makes the said request deemed
rejected."
But there is a special circumstance in the case at bar that
prevents application of this accepted doctrine. The proven fact
is that four days after the private respondent received the
petitioner's notice of assessment, it filed its letter of protest.
This was apparently not taken into account before the warrant
of distraint and levy was issued; indeed, such protest could not
be located in the office of the petitioner. It was only after Atty.
Guevara gave the BIR a copy of the protest that it was, if at
all, considered by the tax authorities. During the intervening
period, the warrant was premature and could therefore not be
served.
Substantive Issue
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The amount was earned through the joint efforts of the persons
among whom it was distributed. It has been established that
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 suggests a tax dodge, an attempt to evade a
legitimate assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the
private respondent when it testified that the payments were not
made in one lump sum but periodically and in different
amounts as each payee's need arose. We agree with the
respondent court that the amount of the promotional fees was
not excessive. The total commission paid by the Philippine
Sugar Estate Development Co. to the private respondent was
P125,000.00. After deducting the said fees, Algue still had a
balance of P50,000.00 as clear profit from the transaction. The
amount of P75,000.00 was 60% of the total commission.
Discussion on Benefits-Protection Theory
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 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.
Caltex vs. COA
Refer to page 9
Issue:
WoN the OPSF contributions are not for public purpose (NO)
Ruling:
We find no merit in petitioner’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.
There can be no doubt that the oil industry is greatly imbued
with public interest as it vitally affects the general welfare.
Any unregulated increase in oil prices could hurt the lives of a
majority of the people and cause economic crisis of untold
proportions. It would have a chain reaction in terms of, among
others, demands for wage increases and upward spiralling of
the cost of basic commodities. The stabilization then of oil
prices is one of prime concern which the state, via its police
power, may properly address.
Pascual vs. Secretary of Public Works
Facts:
Petitioner Wenceslao Pascual, as Provincial Governor of
Rizal, instituted this action for declaratory relief, with
injunction, upon the ground that Republic Act No. 920,
entitled "An Act Appropriating Funds for Public Works",
which appropriated P85,000 "for the construction,
reconstruction, repair, extension and improvement" of "Pasig
feeder road terminals which were private property (owned by
Sen. Zulueta) at the time of the passage and approval of
Republic Act No. 920. Petitioner alleged that the law was
illegal since said appropriation of P85,000.00 was made by
Congress because its members were made to believe that the
projected feeder roads in question were "public roads and not
private streets of a private subdivision'"; that, "in order to give
a semblance of legality, when there is absolutely none, to the
aforementioned appropriation", respondent Zulueta executed,
on December 12, 1953, while he was a member of the Senate
of the Philippines, an alleged deed of donation—copy of
which is annexed to the petition—of the four (4) parcels of
land constituting said projected feeder roads, in favor of the
Government of the Republic of the Philippines; that said
alleged deed of donation was, on the same date, accepted by
the then Executive Secretary; that being subject to an onerous
condition (for street purposes only), said donation partook of
the nature of a contract.
Issue:
WoN public funds may be appropriated not for public purpose
(NO)
Ruling:
15
It is the essential character of the direct object of the
expenditure which must determine its validity as justifying a
tax, and not the magnitude of the interests to be affected nor
the degree to which the general advantage of the community,
and thus the public welfare, may be ultimately benefited by
their promotion. Incidental advantage to the public or to the
state, which results from the promotion of private interests and
the prosperity of private enterprises or business, does not
justify their aid by the use of public money.
In accordance with the rule that the taxing power must be
exercised for public purposes only, discussed supra sec. 14,
money raised by taxation can be expended only for public
purposes and not for the advantage of private individuals.
Generally, under the express or implied provisions of the
constitution, public funds may be used only for a public
purpose. The right of the legislature to appropriate funds is
correlative with its right to tax, and, under constitutional
provisions against taxation except for public purposes and
prohibiting the collection of a tax for one purpose and the
devotion thereof to another purpose, no appropriation of state
funds can be made for other than a public purpose.
Inasmuch as the land on which the projected feeder roads were
to be constructed belonged then to respondent Zulueta, the
result is that said appropriation sought a private purpose, and,
hence, was null and void. The donation to the Government,
over five (5) months after the approval and effectivity of said
Act, made, according to the petition, for the purpose of giving
a "semblance of legality", or legalizing, the appropriation in
question, did not cure its aforementioned basic defect.
Consequently, a judicial nullification of said donation need not
precede the declaration of unconstitutionality of said
appropriation.
Planters Products, Inc.v. Fertiphil Corporation
Facts:
Petitioner PPI and private respondent Fertiphil are private
corporations incorporated under Philippine laws.3 They are
both engaged in the importation and distribution of fertilizers,
pesticides and agricultural chemicals. On June 3, 1985, then
President Ferdinand Marcos, exercising his legislative powers,
issued LOI No. 1465 which provided, among others, for the
imposition of a capital recovery component (CRC) on the
domestic sale of all grades of fertilizers in the Philippines.4
The LOI provides for a capital contribution component of not
less than P10 per bag to make Planters Products, Inc. (PPI)
viable.
After the 1986 Edsa Revolution, FPA voluntarily stopped the
imposition of the P10 levy. With the return of democracy,
Fertiphil demanded from PPI a refund of the amounts it paid
under LOI No. 1465, but PPI refused to accede to the demand.

Fertiphil filed a complaint for collection and damages against

FPA and PPI with the RTC in Makati. Fertiphil alleged that
the LOI solely favored PPI, a privately owned corporation,
which used the proceeds to maintain its monopoly of the
fertilizer industry.

In its Answer, FPA, through the Solicitor General, countered

that the issuance of LOI No. 1465 was a valid exercise of the
police power of the State in ensuring the stability of the
fertilizer industry in the country.

Issue:
WoN the LOI is an exercise of the power of taxation and
hence should be for public use (YES)

Ruling:
Police power and the power of taxation are inherent powers of
the State. These powers are distinct and have different tests for
validity. Police power is the power of the State to enact
legislation that may interfere with personal liberty or property
in order to promote the general welfare,39 while the power of
taxation is the power to levy taxes to be used for public
purpose. The main purpose of police power is the regulation of
a behavior or conduct, while taxation is revenue generation.

We agree with the RTC that the imposition of the levy was an
exercise by the State of its taxation power. While it is true that
the power of taxation can be used as an implement of police
power, the primary purpose of the levy is revenue generation.
If the purpose is primarily revenue, or if revenue is, at least,
one of the real and substantial purposes, then the exaction is
properly called a tax. The P10 levy under LOI No. 1465 is too
excessive to serve a mere regulatory purpose. The levy, no
doubt, was a big burden on the seller or the ultimate consumer.

An inherent limitation on the power of taxation is public

purpose. Taxes are exacted only for a public purpose. They
cannot be used for purely private purposes or for the exclusive
benefit of private persons. The reason for this is simple. The
power to tax exists for the general welfare; hence, implicit in
its power is the limitation that it should be used only for a
public purpose. It would be a robbery for the State to tax its
citizens and use the funds generated for a private purpose

The purpose of a law is evident from its text or inferable from

other secondary sources. Here, We agree with the RTC and
that CA that the levy imposed under LOI No. 1465 was not for
a public purpose. The LOI expressly provided that the levy be
imposed to benefit PPI, a private company. LOI provides that
the imposition of the P10 levy was conditional and dependent
upon PPI becoming financially “viable.” This suggests that the
levy was actually imposed to benefit PPI.

16