Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 134062 April 17, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.
DECISION
CORONA, J.:
This is a petition for review on certiorari1 of a decision2 of the Court of Appeals (CA) dated
May 29, 1998 in CA-G.R. SP No. 41025 which reversed and set aside the decision3 and
resolution4 of the Court of Tax Appeals (CTA) dated November 16, 1995 and May 27, 1996,
respectively, in CTA Case No. 4715.
In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue (CIR)
assessed respondent Bank of the Philippine Islands’ (BPI’s) deficiency percentage and
documentary stamp taxes for the year 1986 in the total amount of ₱129,488,656.63:
1986 – Deficiency Percentage Tax
Deficiency percentage
₱ 7, 270,892.88
tax

Add: 25% surcharge 1,817,723.22

20% interest from 1-21-

3,215,825.03
87 to 10-28-88

15,000.00
Compromise penalty

TOTAL AMOUNT DUE

₱12,319,441.13
AND COLLECTIBLE
1986 – Deficiency Documentary Stamp Tax
Deficiency
₱93,723,372.40
percentage tax
 Add: 25% surcharge 23,430,843.10

15,000.00
Compromise penalty

TOTAL AMOUNT
DUE AND ₱117,169,215.50.5
COLLECTIBLE
Both notices of assessment contained the following note:
Please be informed that your [percentage and documentary stamp taxes have] been
assessed as shown above. Said assessment has been based on return – (filed by you) – (as
verified) – (made by this Office) – (pending investigation) – (after investigation). You are
requested to pay the above amount to this Office or to our Collection Agent in the Office of
the City or Deputy Provincial Treasurer of xxx6
In a letter dated December 10, 1988, BPI, through counsel, replied as follows:
1. Your "deficiency assessments" are no assessments at all. The taxpayer is not
informed, even in the vaguest terms, why it is being assessed a deficiency. The very
purpose of a deficiency assessment is to inform taxpayer why he has incurred a
deficiency so that he can make an intelligent decision on whether to pay or to protest
the assessment. This is all the more so when the assessment involves astronomical
amounts, as in this case.
We therefore request that the examiner concerned be required to state, even in the
briefest form, why he believes the taxpayer has a deficiency documentary and
percentage taxes, and as to the percentage tax, it is important that the taxpayer be
informed also as to what particular percentage tax the assessment refers to.
2. As to the alleged deficiency documentary stamp tax, you are aware of the
compromise forged between your office and the Bankers Association of the Philippines
[BAP] on this issue and of BPI’s submission of its computations under this
compromise. There is therefore no basis whatsoever for this assessment, assuming it
is on the subject of the BAP compromise. On the other hand, if it relates to
documentary stamp tax on some other issue, we should like to be informed about what
those issues are.
3. As to the alleged deficiency percentage tax, we are completely at a loss on how
such assessment may be protested since your letter does not even tell the taxpayer
what particular percentage tax is involved and how your examiner arrived at the
deficiency. As soon as this is explained and clarified in a proper letter of assessment,
 we shall inform you of the taxpayer’s decision on whether to pay or protest the
assessment.7
On June 27, 1991, BPI received a letter from CIR dated May 8, 1991 stating that:
… although in all respects, your letter failed to qualify as a protest under Revenue
Regulations No. 12-85 and therefore not deserving of any rejoinder by this office as no valid
issue was raised against the validity of our assessment… still we obliged to explain the basis
of the assessments.
xxx xxx xxx
… this constitutes the final decision of this office on the matter.8
On July 6, 1991, BPI requested a reconsideration of the assessments stated in the CIR’s
May 8, 1991 letter.9 This was denied in a letter dated December 12, 1991, received by BPI
on January 21, 1992.10
On February 18, 1992, BPI filed a petition for review in the CTA.11 In a decision dated
November 16, 1995, the CTA dismissed the case for lack of jurisdiction since the subject
assessments had become final and unappealable. The CTA ruled that BPI failed to protest
on time under Section 270 of the National Internal Revenue Code (NIRC) of 1986 and
Section 7 in relation to Section 11 of RA 1125.12 It denied reconsideration in a resolution
dated May 27, 1996.13
On appeal, the CA reversed the tax court’s decision and resolution and remanded the case
to the CTA14 for a decision on the merits.15 It ruled that the October 28, 1988 notices were
not valid assessments because they did not inform the taxpayer of the legal and factual
bases therefor. It declared that the proper assessments were those contained in the May 8,
1991 letter which provided the reasons for the claimed deficiencies.16 Thus, it held that BPI
filed the petition for review in the CTA on time.17 The CIR elevated the case to this Court.
This petition raises the following issues:
1) whether or not the assessments issued to BPI for deficiency percentage and
documentary stamp taxes for 1986 had already become final and unappealable and
2) whether or not BPI was liable for the said taxes.
The former Section 27018 (now renumbered as Section 228) of the NIRC stated:
Sec. 270. Protesting of assessment. — When the [CIR] or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the
taxpayer of his findings. Within a period to be prescribed by implementing regulations, the
taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the
[CIR] shall issue an assessment based on his findings.
 xxx xxx xxx (emphasis supplied)
Were the October 28, 1988 Notices Valid Assessments?
The first issue for our resolution is whether or not the October 28, 1988 notices19 were valid
assessments. If they were not, as held by the CA, then the correct assessments were in the
May 8, 1991 letter, received by BPI on June 27, 1991. BPI, in its July 6, 1991 letter,
seasonably asked for a reconsideration of the findings which the CIR denied in his
December 12, 1991 letter, received by BPI on January 21, 1992. Consequently, the petition
for review filed by BPI in the CTA on February 18, 1992 would be well within the 30-day
period provided by law.20
The CIR argues that the CA erred in holding that the October 28, 1988 notices were invalid
assessments. He asserts that he used BIR Form No. 17.08 (as revised in November 1964)
which was designed for the precise purpose of notifying taxpayers of the assessed amounts
due and demanding payment thereof.21 He contends that there was no law or jurisprudence
then that required notices to state the reasons for assessing deficiency tax liabilities.22
BPI counters that due process demanded that the facts, data and law upon which the
assessments were based be provided to the taxpayer. It insists that the NIRC, as worded
now (referring to Section 228), specifically provides that:
"[t]he taxpayer shall be informed in writing of the law and the facts on which the assessment
is made; otherwise, the assessment shall be void."
According to BPI, this is declaratory of what sound tax procedure is and a confirmation of
what due process requires even under the former Section 270.
BPI’s contention has no merit. The present Section 228 of the NIRC provides:
Sec. 228. Protesting of Assessment. — When the [CIR] or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the
taxpayer of his findings: Provided, however, That a preassessment notice shall not be
required in the following cases:
xxx xxx xxx
The taxpayer shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void.
xxx xxx xxx (emphasis supplied)
Admittedly, the CIR did not inform BPI in writing of the law and facts on which the
assessments of the deficiency taxes were made. He merely notified BPI of his findings,
consisting only of the computation of the tax liabilities and a demand for payment thereof
within 30 days after receipt.
In merely notifying BPI of his findings, the CIR relied on the provisions of the former Section
270 prior to its amendment by RA 8424 (also known as the Tax Reform Act of
1997).23 In CIR v. Reyes,24 we held that:
In the present case, Reyes was not informed in writing of the law and the facts on which the
assessment of estate taxes had been made. She was merely notified of the findings by the
CIR, who had simply relied upon the provisions of former Section 229 prior to its amendment
by [RA] 8424, otherwise known as the Tax Reform Act of 1997.
First, RA 8424 has already amended the provision of Section 229 on protesting an
assessment. The old requirement of merely notifying the taxpayer of the CIR's findings
was changed in 1998 to informing the taxpayer of not only the law, but also of the facts on
which an assessment would be made; otherwise, the assessment itself would be invalid.
It was on February 12, 1998, that a preliminary assessment notice was issued against the
estate. On April 22, 1998, the final estate tax assessment notice, as well as demand letter,
was also issued. During those dates, RA 8424 was already in effect. The notice required
under the old law was no longer sufficient under the new law.25 (emphasis supplied;
italics in the original)
Accordingly, when the assessments were made pursuant to the former Section 270, the only
requirement was for the CIR to "notify" or inform the taxpayer of his "findings." Nothing in the
old law required a written statement to the taxpayer of the law and facts on which the
assessments were based. The Court cannot read into the law what obviously was not
intended by Congress. That would be judicial legislation, nothing less.
Jurisprudence, on the other hand, simply required that the assessments contain a
computation of tax liabilities, the amount the taxpayer was to pay and a demand for payment
within a prescribed period.26 Everything considered, there was no doubt the October 28,
1988 notices sufficiently met the requirements of a valid assessment under the old law and
jurisprudence.
The sentence
[t]he taxpayers shall be informed in writing of the law and the facts on which the assessment
is made; otherwise, the assessment shall be void
was not in the old Section 270 but was only later on inserted in the renumbered Section 228
in 1997. Evidently, the legislature saw the need to modify the former Section 270 by inserting
the aforequoted sentence.27 The fact that the amendment was necessary showed that, prior
to the introduction of the amendment, the statute had an entirely different meaning.28
Contrary to the submission of BPI, the inserted sentence in the renumbered Section 228 was
not an affirmation of what the law required under the former Section 270. The amendment
introduced by RA 8424 was an innovation and could not be reasonably inferred from the old
law.29 Clearly, the legislature intended to insert a new provision regarding the form and
substance of assessments issued by the CIR.30
In ruling that the October 28, 1988 notices were not valid assessments, the CA explained:
xxx. Elementary concerns of due process of law should have prompted the [CIR] to inform
[BPI] of the legal and factual basis of the former’s decision to charge the latter for deficiency
documentary stamp and gross receipts taxes.31
In other words, the CA’s theory was that BPI was deprived of due process when the CIR
failed to inform it in writing of the factual and legal bases of the assessments —even if these
were not called for under the old law.
We disagree.
Indeed, the underlying reason for the law was the basic constitutional requirement that "no
person shall be deprived of his property without due process of law."32 We note, however,
what the CTA had to say:
xxx xxx xxx
From the foregoing testimony, it can be safely adduced that not only was [BPI] given the
opportunity to discuss with the [CIR] when the latter issued the former a Pre-Assessment
Notice (which [BPI] ignored) but that the examiners themselves went to [BPI] and "we talk to
them and we try to [thresh] out the issues, present evidences as to what they need." Now,
how can [BPI] and/or its counsel honestly tell this Court that they did not know anything
about the assessments?
Not only that. To further buttress the fact that [BPI] indeed knew beforehand the
assessments[,] contrary to the allegations of its counsel[,] was the testimony of Mr. Jerry
Lazaro, Assistant Manager of the Accounting Department of [BPI]. He testified to the fact that
he prepared worksheets which contain his analysis regarding the findings of the [CIR’s]
examiner, Mr. San Pedro and that the same worksheets were presented to Mr. Carlos Tan,
Comptroller of [BPI].
xxx xxx xxx
From all the foregoing discussions, We can now conclude that [BPI] was indeed aware of the
nature and basis of the assessments, and was given all the opportunity to contest the same
but ignored it despite the notice conspicuously written on the assessments which states that
"this ASSESSMENT becomes final and unappealable if not protested within 30 days after
receipt." Counsel resorted to dilatory tactics and dangerously played with time.
Unfortunately, such strategy proved fatal to the cause of his client.33
The CA never disputed these findings of fact by the CTA:
[T]his Court recognizes that the [CTA], which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily developed an expertise on
the subject, and its conclusions will not be overturned unless there has been an abuse or
improvident exercise of authority. Such findings can only be disturbed on appeal if they are
not supported by substantial evidence or there is a showing of gross error or abuse on the
part of the [CTA].34
Under the former Section 270, there were two instances when an assessment became final
and unappealable: (1) when it was not protested within 30 days from receipt and (2) when
the adverse decision on the protest was not appealed to the CTA within 30 days from receipt
of the final decision:35
Sec. 270. Protesting of assessment.1a\^/phi1.net
xxx xxx xxx
Such assessment may be protested administratively by filing a request for reconsideration or
reinvestigation in such form and manner as may be prescribed by the implementing
regulations within thirty (30) days from receipt of the assessment; otherwise, the assessment
shall become final and unappealable.
If the protest is denied in whole or in part, the individual, association or corporation adversely
affected by the decision on the protest may appeal to the [CTA] within thirty (30) days from
receipt of the said decision; otherwise, the decision shall become final, executory and
demandable.
Implications Of A Valid Assessment
Considering that the October 28, 1988 notices were valid assessments, BPI should have
protested the same within 30 days from receipt thereof. The December 10, 1988 reply it sent
to the CIR did not qualify as a protest since the letter itself stated that "[a]s soon as this is
explained and clarified in a proper letter of assessment, we shall inform you of the
taxpayer’s decision on whether to pay or protest the assessment."36 Hence, by its own
declaration, BPI did not regard this letter as a protest against the assessments. As a matter
of fact, BPI never deemed this a protest since it did not even consider the October 28, 1988
notices as valid or proper assessments.
The inevitable conclusion is that BPI’s failure to protest the assessments within the 30-day
period provided in the former Section 270 meant that they became final and unappealable.
Thus, the CTA correctly dismissed BPI’s appeal for lack of jurisdiction. BPI was, from then
on, barred from disputing the correctness of the assessments or invoking any defense that
would reopen the question of its liability on the merits.37 Not only that. There arose a
presumption of correctness when BPI failed to protest the assessments:
Tax assessments by tax examiners are presumed correct and made in good faith. The
taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the
performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner
and approved by his superior officers will not be disturbed. All presumptions are in favor of
the correctness of tax assessments.38
Even if we considered the December 10, 1988 letter as a protest, BPI must nevertheless be
deemed to have failed to appeal the CIR’s final decision regarding the disputed assessments
within the 30-day period provided by law. The CIR, in his May 8, 1991 response, stated that
it was his "final decision … on the matter." BPI therefore had 30 days from the time it
received the decision on June 27, 1991 to appeal but it did not. Instead it filed a request for
reconsideration and lodged its appeal in the CTA only on February 18, 1992, way beyond the
reglementary period. BPI must now suffer the repercussions of its omission. We have
already declared that:
… the [CIR] should always indicate to the taxpayer in clear and unequivocal language
whenever his action on an assessment questioned by a taxpayer constitutes his final
determination on the disputed assessment, as contemplated by Sections 7 and 11 of [RA
1125], as amended. On the basis of his statement indubitably showing that the
Commissioner's communicated action is his final decision on the contested
assessment, the aggrieved taxpayer would then be able to take recourse to the tax
court at the opportune time. Without needless difficulty, the taxpayer would be able to
determine when his right to appeal to the tax court accrues.
The rule of conduct would also obviate all desire and opportunity on the part of the
taxpayer to continually delay the finality of the assessment — and, consequently, the
collection of the amount demanded as taxes — by repeated requests for
recomputation and reconsideration. On the part of the [CIR], this would encourage his
office to conduct a careful and thorough study of every questioned assessment and render a
correct and definite decision thereon in the first instance. This would also deter the [CIR]
from unfairly making the taxpayer grope in the dark and speculate as to which action
constitutes the decision appealable to the tax court. Of greater import, this rule of conduct
would meet a pressing need for fair play, regularity, and orderliness in administrative
action.39 (emphasis supplied)
Either way (whether or not a protest was made), we cannot absolve BPI of its liability under
the subject tax assessments.
We realize that these assessments (which have been pending for almost 20 years) involve a
considerable amount of money. Be that as it may, we cannot legally presume the existence
of something which was never there. The state will be deprived of the taxes validly due it and
the public will suffer if taxpayers will not be held liable for the proper taxes assessed against
them:
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.40
WHEREFORE, the petition is hereby GRANTED. The May 29, 1998 decision of the Court of
Appeals in CA-G.R. SP No. 41025 is REVERSED and SET ASIDE.
SO ORDERED.
RENATO C. CORONA
Associate Justice

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 106611 July 21, 1994
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF APPEALS, CITYTRUST BANKING CORPORATION and COURT OF TAX
APPEALS, respondents.
The Solicitor General for petitioner.
Palaez, Adriano & Gregorio for private respondent.

REGALADO, J.:
The judicial proceedings over the present controversy commenced with CTA Case No. 4099,
wherein the Court of Tax Appeals ordered herein petitioner Commissioner of Internal
Revenue to grant a refund to herein private respondent Citytrust Banking Corporation
(Citytrust) in the amount of P13,314,506.14, representing its overpaid income taxes for 1984
and 1985, but denied its claim for the alleged refundable amount reflected in its 1983 income
tax return on the ground of prescription.1 That judgment of the tax court was affirmed by
respondent Court of Appeals in its judgment in CA-G.R. SP
No. 26839.2 The case was then elevated to us in the present petition for review
on certiorari wherein the latter judgment is impugned and sought to be nullified and/or set
aside.
It appears that in a letter dated August 26, 1986, herein private respondent corporation filed
a claim for refund with the Bureau of Internal Revenue (BIR) in the amount of
P19,971,745.00 representing the alleged aggregate of the excess of its carried-over total
quarterly payments over the actual income tax due, plus carried-over withholding tax
payments on government securities and rental income, as computed in its final income tax
return for the calendar year ending December 31, 1985.3
Two days later, or on August 28, 1986, in order to interrupt the running of the prescriptive
period, Citytrust filed a petition with the Court of Tax Appeals, docketed therein as CTA Case
No. 4099, claiming the refund of its income tax overpayments for the years 1983, 1984 and
1985 in the total amount of P19,971,745.00.4
In the answer filed by the Office of the Solicitor General, for and in behalf of therein
respondent commissioner, it was asserted that the mere averment that Citytrust incurred a
net loss in 1985 does not ipso facto merit a refund; that the amounts of P6,611,223.00,
P1,959,514.00 and P28,238.00 claimed by Citytrust as 1983 income tax overpayment, taxes
withheld on proceeds of government securities investments, as well as on rental income,
respectively, are not properly documented; that assuming arguendo that petitioner is entitled
to refund, the right to claim the same has prescribed
with respect to income tax payments prior to August 28, 1984, pursuant to Sections 292 and
295 of the National Internal Revenue Code of 1977, as amended, since the petition was filed
only on August 28, 1986.5
On February 20, 1991, the case was submitted for decision based solely on the pleadings
and evidence submitted by herein private respondent Citytrust. Herein petitioner could not
present any evidence by reason of the repeated failure of the Tax Credit/Refund Division of
the BIR to transmit the records of the case, as well as the investigation report thereon, to the
Solicitor General.6
However, on June 24, 1991, herein petitioner filed with the tax court a manifestation and
motion praying for the suspension of the proceedings in the said case on the ground that the
claim of Citytrust for tax refund in the amount of P19,971,745.00 was already being
processed by the Tax Credit/Refund Division of the BIR, and that said bureau was only
awaiting the submission by Citytrust of the required confirmation receipts which would show
whether or not the aforestated amount was actually paid and remitted to the BIR.7
Citytrust filed an opposition thereto, contending that since the Court of Tax Appeals already
acquired jurisdiction over the case, it could no longer be divested of the same; and, further,
that the proceedings therein could not be suspended by the mere fact that the claim for
refund was being administratively processed, especially where the case had already been
submitted for decision.
It also argued that the BIR had already conducted an audit, citing therefor Exhibits Y, Y-1, Y-
2 and Y-3 adduced in the case, which clearly showed that there was an overpayment of
income taxes and for which a tax credit or refund was due to Citytrust. The Foregoing
exhibits are allegedly conclusive proof of and an admission by herein petitioner that there
had been an overpayment of income taxes.8
The tax court denied the motion to suspend proceedings on the ground that the case had
already been submitted for decision since February 20, 1991.9
Thereafter, said court rendered its decision in the case, the decretal portion of which
declares:
WHEREFORE, in view of the foregoing, petitioner is entitled to a refund but only
for the overpaid taxes incurred in 1984 and 1985. The refundable amount as
shown in its 1983 income tax return is hereby denied on the ground of
prescription. Respondent is hereby ordered to grant a refund to petitioner
Citytrust Banking Corp. in the amount of P13,314,506.14 representing the
overpaid income taxes for 1984 and 1985, recomputed as follows:
1984 Income tax due P 4,715,533.00
Less: 1984 Quarterly payments P 16,214,599.00*
1984 Tax Credits —
W/T on int. on gov't. sec. 1,921,245.37*
W/T on rental inc. 26,604.30* 18,162,448.67
——————— ———————
Tax Overpayment (13,446,915.67)
Less: FCDU payable 150,252.00
———————
Amount refundable for 1984 P (13,296,663.67)

1985 Income tax due (loss) P — 0 —

Less: W/T on rentals 36,716.47*
———————
Tax Overpayment (36,716.47)*
Less: FCDU payable 18,874.00
———————
Amount Refundable for 1985 P (17,842.47)
* Note:
 These credits are smaller than the claimed amount because only
the above figures are well supported by the various exhibits
presented during the hearing.
No pronouncement as to costs.
SO ORDERED.10
The order for refund was based on the following findings of the Court of Tax Appeals: (1) the
fact of withholding has been established by the statements and certificates of withholding
taxes accomplished by herein private respondent's withholding agents, the authenticity of
which were neither disputed nor controverted by herein petitioner; (2) no evidence was
presented which could effectively dispute the correctness of the income tax return filed by
herein respondent corporation and other material facts stated therein; (3) no deficiency
assessment was issued by herein petitioner; and (4) there was an audit report submitted by
the BIR Assessment Branch, recommending the refund of overpaid taxes for the years
concerned (Exhibits Y to Y-3), which enjoys the presumption of regularity in the performance
of official duty.11
A motion for the reconsideration of said decision was initially filed by the Solicitor General on
the sole ground that the statements and certificates of taxes allegedly withheld are not
conclusive evidence of actual payment and remittance of the taxes withheld to the BIR.12 A
supplemental motion for reconsideration was thereafter filed, wherein it was contended for
the first time that herein private respondent had outstanding unpaid deficiency income taxes.
Petitioner alleged that through an inter-office memorandum of the Tax Credit/Refund
Division, dated August 8, 1991, he came to know only lately that Citytrust had outstanding
tax liabilities for 1984 in the amount of P56,588,740.91 representing deficiency income and
business taxes covered by Demand/Assessment Notice No. FAS-1-84-003291-003296.13
Oppositions to both the basic and supplemental motions for reconsideration were filed by
private respondent Citytrust.14 Thereafter, the Court of Tax Appeals issued a resolution
denying both motions for the reason that Section 52 (b) of the Tax Code, as implemented by
Revenue Regulation
6-85, only requires that the claim for tax credit or refund must show that the income received
was declared as part of the gross income, and that the fact of withholding was duly
established. Moreover, with regard to the argument raised in the supplemental motion for
reconsideration anent the deficiency tax assessment against herein petitioner, the tax court
ruled that since that matter was not raised in the pleadings, the same cannot be considered,
invoking therefor the salutary purpose of the omnibus motion rule which is to obviate
multiplicity of motions and to discourage dilatory pleadings.15
As indicated at the outset, a petition for review was filed by herein petitioner with respondent
Court of Appeals which in due course promulgated its decision affirming the judgment of the
Court of Tax Appeals. Petitioner eventually elevated the case to this Court, maintaining that
said respondent court erred in affirming the grant of the claim for refund of Citytrust,
considering that, firstly, said private respondent failed to prove and substantiate its claim for
such refund; and, secondly, the bureau's findings of deficiency income and business tax
liabilities against private respondent for the year 1984 bars such payment.16
After a careful review of the records, we find that under the peculiar circumstances of this
case, the ends of substantial justice and public interest would be better subserved by the
remand of this case to the Court of Tax Appeals for further proceedings.
It is the sense of this Court that the BIR, represented herein by petitioner Commissioner of
Internal Revenue, was denied its day in court by reason of the mistakes and/or negligence of
its officials and employees. It can readily be gleaned from the records that when it was
herein petitioner's turn to present evidence, several postponements were sought by its
counsel, the Solicitor General, due to the unavailability of the necessary records which were
not transmitted by the Refund Audit Division of the BIR to said counsel, as well as the
investigation report made by the Banks/Financing and Insurance Division of the said bureau/
despite repeated requests.17 It was under such a predicament and in deference to the tax
court that ultimately, said records being still unavailable, herein petitioner's counsel was
constrained to submit the case for decision on February 20, 1991 without presenting any
evidence.
For that matter, the BIR officials and/or employees concerned also failed to heed the order of
the Court of Tax Appeals to remand the records to it pursuant to Section 2, Rule 7 of the
Rules of the Court of Tax Appeals which provides that the Commissioner of Internal
Revenue and the Commissioner of Customs shall certify and forward to the Court of Tax
Appeals, within ten days after filing his answer, all the records of the case in his possession,
with the pages duly numbered, and if the records are in separate folders, then the folders
shall also be numbered.
The aforestated impassé came about due to the fact that, despite the filing of the
aforementioned initiatory petition in CTA Case No. 4099 with the Court of Tax Appeals, the
Tax Refund Division of the BIR still continued to act administratively on the claim for refund
previously filed therein, instead of forwarding the records of the case to the Court of Tax
Appeals as ordered.18
It is a long and firmly settled rule of law that the Government is not bound by the errors
committed by its agents.19 In the performance of its governmental functions, the State cannot
be estopped by the neglect of its agent and officers. Although the Government may generally
be estopped through the affirmative acts of public officers acting within their authority, their
neglect or omission of public duties as exemplified in this case will not and should not
produce that effect.
Nowhere is the aforestated rule more true than in the field of taxation.20 It is axiomatic that
the Government cannot and must not be estopped particularly in matters involving taxes.
Taxes are the lifeblood of the nation through which the government agencies continue to
operate and with which the State effects its functions for the welfare of its constituents.21 The
errors of certain administrative officers should never be allowed to jeopardize the
Government's financial position,22 especially in the case at bar where the amount involves
millions of pesos the collection whereof, if justified, stands to be prejudiced just because of
bureaucratic lethargy.
Further, it is also worth nothing that the Court of Tax Appeals erred in denying petitioner's
supplemental motion for reconsideration alleging bringing to said court's attention the
existence of the deficiency income and business tax assessment against Citytrust. The fact
of such deficiency assessment is intimately related to and inextricably intertwined with the
right of respondent bank to claim for a tax refund for the same year. To award such refund
despite the existence of that deficiency assessment is an absurdity and a polarity in
conceptual effects. Herein private respondent cannot be entitled to refund and at the same
time be liable for a tax deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that is, the
facts stated therein are true and correct. The deficiency assessment, although not yet final,
created a doubt as to and constitutes a challenge against the truth and accuracy of the facts
stated in said return which, by itself and without unquestionable evidence, cannot be the
basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the
applicable law when the claim of Citytrust was filed, provides that "(w)hen an assessment is
made in case of any list, statement, or return, which in the opinion of the Commissioner of
Internal Revenue was false or fraudulent or contained any understatement or undervaluation,
no tax collected under such assessment shall be recovered by any suits unless it is proved
that the said list, statement, or return was not false nor fraudulent and did not contain any
understatement or undervaluation; but this provision shall not apply to statements or returns
made or to be made in good faith regarding annual depreciation of oil or gas wells and
mines."
Moreover, to grant the refund without determination of the proper assessment and the tax
due would inevitably result in multiplicity of proceedings or suits. If the deficiency assessment
should subsequently be upheld, the Government will be forced to institute anew a
proceeding for the recovery of erroneously refunded taxes which recourse must be filed
within the prescriptive period of ten years after discovery of the falsity, fraud or omission in
the false or fraudulent return involved.23 This would necessarily require and entail additional
efforts and expenses on the part of the Government, impose a burden on and a drain of
government funds, and impede or delay the collection of much-needed revenue for
governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically
necessary and legally appropriate that the issue of the deficiency tax assessment against
Citytrust be resolved jointly with its claim for tax refund, to determine once and for all in a
single proceeding the true and correct amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, 24 it would be only just
and fair that the taxpayer and the Government alike be given equal opportunities to avail of
remedies under the law to defeat each other's claim and to determine all matters of dispute
between them in one single case. It is important to note that in determining whether or not
petitioner is entitled to the refund of the amount paid, it would necessary to determine how
much the Government is entitled to collect as taxes. This would necessarily include the
determination of the correct liability of the taxpayer and, certainly, a determination of this
case would constitute res judicata on both parties as to all the matters subject thereof or
necessarily involved therein.
The Court cannot end this adjudication without observing that what caused the Government
to lose its case in the tax court may hopefully be ascribed merely to the ennui or ineptitude of
officialdom, and not to syndicated intent or corruption. The evidential cul-de-sac in which the
Solicitor General found himself once again gives substance to the public perception and
suspicion that it is another proverbial tip in the iceberg of venality in a government bureau
which is pejoratively rated over the years. What is so distressing, aside from the financial
losses to the Government, is the erosion of trust in a vital institution wherein the reputations
of so many honest and dedicated workers are besmirched by the acts or omissions of a few.
Hence, the liberal view we have here taken pro hac vice, which may give some degree of
assurance that this Court will unhesitatingly react to any bane in the government service,
with a replication of such response being likewise expected by the people from the executive
authorities.
WHEREFORE, the judgment of respondent Court of Appeals in CA-G.R. SP No. 26839 is
hereby SET ASIDE and the case at bar is REMANDED to the Court of Tax Appeals for
further proceedings and appropriate action, more particularly, the reception of evidence for
petitioner and the corresponding disposition of CTA Case No. 4099 not otherwise
inconsistent with our adjudgment herein.
SO ORDERED.
Narvasa, C.J., Padilla, Puno and Mendoza, JJ., concur.
G.R. No. 147062-64 December 14, 2001
REPUBLIC OF THE PHILIPPINES, represented by the PRESIDENTIAL COMMISSION
ON GOOD GOVERNMENT (PCGG), petitioner,
vs.
COCOFED, ET AL. and BALLARES, ET AL.,1 EDUARDO M. COJUANGCO JR. and the
SANDIGANBAYAN (First Division) respondents.
PANGANIBAN, J.:
The right to vote sequestered shares of stock registered in the names of private individuals
or entitles and alleged to have been acquired with ill-gotten wealth shall, as a rule, be
exercised by the registered owner. The PCGG may, however, be granted such voting right
provided in can (1) show prima facie evidence that the wealth and/or the shares are indeed
ill-gotten; and (2) demonstrate imminent danger of dissipation of the assets, thus
necessitating their continued sequestration and voting by the government until a decision,
ruling with finality on their ownership, is promulgated by the proper court.1âwphi1.nêt
However, the foregoing "two-tiered" test does not apply when the sequestered stocks are
acquired with funds that are prima facie public in character or, at least, are affected with
public interest. Inasmuch as the subject UCPB shares in the present case were undisputably
acquired with coco levy funds which are public in character, then the right to vote them shall
be exercised by the PCGG. In sum, the "public character" test, not the "two-tiered" one,
applies in the instant controversy.
The Case
Before us is a Petition for Certiorari with a prayer for the issuance of a temporary restraining
order and/or a writ of preliminary injunction under Rule 65 of the Rules of Court, seeking to
set aside the February 28, 2001 Order2 of the First Division of the Sandiganbayan3 in Civil
Case Nos. 0033-A, 0033-B and 0033-F. The pertinent portions of the assailed Order read as
follows:
"In view hereof, the movants COCOFED, et al. and Ballares, et al. as well as Eduardo
Cojuangco, et al., who were acknowledged to be registered stockholders of the UCPB
are authorized, as are all other registered stockholders of the United Coconut Planters
Bank, until further orders from this Court, to exercise their rights to vote their shares of
stock and themselves to be voted upon in the United Coconut Planters Bank (UCPB)
at the scheduled Stockholders' Meeting on March 6, 2001 or on any subsequent
continuation or resetting thereof, and to perform such acts as will normally follow in the
exercise of these rights as registered stockholders.
"Since by way of form, the pleadings herein had been labeled as praying for an
injunction, the right of the movants to exercise their right as abovementioned will be
subject to the posting of a nominal bond in the amount of FIFTY THOUSAND PESOS
 (P50,000.00) jointly for the defendants COCOFED, et al. and Ballares, et al., as well
as all other registered stockholders of sequestered shares in that bank, and FIFTY
THOUSAND PESOS (P50,000.00) for Eduardo Cojuangco, Jr., et al., to answer for
any undue damage or injury to the United Coconut Planters Bank as may be attributed
to their exercise of their rights as registered stockholders."4
The Antecedents
The very roots of this case are anchored on the historic events that transpired during the
change of government in 1986. Immediately after the 1986 EDSA Revolution, then President
Corazon C. Aquino issued Executive Order (EO) Nos. 1,5 26 and 14.7
"On the explicit premise that 'vast resources of the government have been amassed by
former President Ferdinand E. Marcos, his immediate family, relatives, and close associates
both here and abroad,' the Presidential Commission on Good Government (PCGG) was
created by Executive Order No. 1 to assist the President in the recovery of the ill-gotten
wealth thus accumulated whether located in the Philippines or abroad."8
Executive Order No. 2 states that the ill-gotten assets and properties are in the form of bank
accounts, deposits, trust accounts, shares of stocks, buildings, shopping centers,
condominiums, mansions, residences, estates, and other kinds of real and personal
properties in the Philippines and in various countries of the world.9
Executive Order No. 14, on the other hand, empowered the PCGG, with the assistance of
the Office of the Solicitor General and other government agencies, inter alia, to file and
prosecute all cases investigated by it under EO Nos. 1 and 2.
Pursuant to these laws, the PCGG issued and implemented numerous sequestrations,
freeze orders and provisional takeovers of allegedly ill-gotten companies, assets and
properties, real or personal.10
Among the properties sequestered by the Commission were shares of stock in the United
Coconut Planters Bank (UCPB) registered in the names of the alleged "one million coconut
farmers," the so-called Coconut Industry Investment Fund companies (CIIF companies) and
Private Respondent Eduardo Cojuangco Jr. (hereinafter "Cojuangco").
In connection with the sequestration of the said UCPB shares, the PCGG, on July 31, 1987,
instituted an action for reconveyance, reversion, accounting, restitution and damages
docketed as Case No. 0033 in the Sandiganbayan.
On November 15, 1990, upon Motion11 of Private Respondent COCOFED, the
Sandiganbayan issued a Resolution12 lifting the sequestration of the subject UCPB shares
on the ground that herein private respondents – in particular, COCOFED and the so-called
CIIF companies – had not been impleaded by the PCGG as parties-defendants in its July 31,
1987 Complaint for reconveyance, reversion, accounting, restitution and damages. The
Sandiganbayan ruled that the Writ of Sequestration issued by the Commission was
automatically lifted for PCGG's failure to commence the corresponding judicial action within
the six-month period ending on August 2, 1987 provided under Section 26, Article XVIII of
the 1987 Constitution. The anti-graft court noted that though these entities were listed in an
annex appended to the Complaint, they had not been named as parties-respondents.
This Sandiganbayan Resolution was challenged by the PCGG in a Petition for Certiorari
docketed as GR No. 96073 in this Court. Meanwhile, upon motion of Cojuangco, the anti-
graft court ordered the holding of elections for the Board of Directors of UCPB. However, the
PCGG applied for and was granted by this Court a Restraining Order enjoining the holding of
the election. Subsequently, the Court lifted the Restraining Order and ordered the UCPB to
proceed with the election of its board of directors. Furthermore, it allowed the sequestered
shares to be voted by their registered owners.
The victory of the registered shareholders was fleeting because the Court, acting on the
solicitor general's Motion for Clarification/Manifestation, issued a Resolution on February 16,
1993, declaring that "the right of petitioners [herein private respondents] to vote stock in their
names at the meetings of the UCPB cannot be conceded at this time. That right still has to
be established by them before the Sandiganbayan. Until that is done, they cannot be
deemed legitimate owners of UCPB stock and cannot be accorded the right to vote
them."13 The dispositive portion of the said Resolution reads as follows:
"IN VIEW OF THE FOREGOING, the Court recalls and sets aside the Resolution
dated March 3, 1992 and, pending resolution on the merits of the action at bar, and
until further orders, suspends the effectivity of the lifting of the sequestration decreed
by the Sandiganbayan on November 15, 1990, and directs the restoration of the status
quo ante, so as to allow the PCGG to continue voting the shares of stock under
sequestration at the meetings of the United Coconut Planters Bank."14
On January 23, 1995, the Court rendered its final Decision in GR No. 96073, nullifying and
setting aside the November 15, 1990 Resolution of the Sandiganbayan which, as earlier
stated, lifted the sequestration of the subject UCPB shares. The express impleading of
herein Respondents COCOFED et al. was deemed unnecessary because "the judgment
may simply be directed against the shares of stock shown to have been issued in
consideration of ill-gotten wealth."15 Furthermore, the companies "are simply the res in the
actions for the recovery of illegally acquires wealth, and there is, in principle, no cause of
action against them and no ground to implead them as defendants in said case."16
A month thereafter, the PCGG – pursuant to an Order of the Sandiganbayan – subdivided
Case No. 0033 into eight Complaints and docketed them as Case Nos. 0033-A to 0033-H.
Six years later, on February 13, 2001, the Board of Directors of UCPB received from the
ACCRA Law Office a letter written on behalf of the COCOFED and the alleged nameless one
million coconut farmers, demanding the holding of a stockholders' meeting for the purpose
of, among others, electing the board of directors. In response, the board approved a
Resolution calling for a stockholders' meeting on March 6, 2001 at three o'clock in the
afternoon.
On February 23, 2001, "COCOFED, et al. and Ballares, et al." filed the "Class Action
Omnibus Motion"17 referred to earlier in Sandiganbayan Civil Case Nos. 0033-A, 0033-B and
0033-F, asking the court a quo:
"1. To enjoin the PCGG from voting the UCPB shares of stock registered in the
respective names of the more than one million coconut farmers; and
"2. To enjoin the PCGG from voting the SMC shares registered in the names of the 14
CIIF holding companies including those registered in the name of the PCGG."18
On February 28, 2001, respondent court, after hearing the parties on oral argument, issued
the assailed Order.
Hence, this Petition by the Republic of the Philippines represented by the PCGG.19
The case had initially been raffled to this Court's Third Division which, by a vote of 3-
2,20 issued a Resolution21 requiring the parties to maintain the status quo existing before the
issuance of the questioned Sandiganbayan Order dated February 28, 2001. On March 7,
2001, Respondent COCOFED et al. moved that the instant Petition be heard by the Court en
banc.22 The Motion was unanimously granted by the Third Division.
On March 13, 2001, the Court en banc resolved to accept the Third Division's referral.23 It
heard the case on Oral Argument in Baguio City on April 17, 2001. During the hearing, it
admitted the intervention of a group of coconut farmers and farm worker organizations,
the Pambansang Koalisyon ng mga Samahang Magsasaka at Manggagawa ng
Niyugan (PKSMMN). The coalition claims that its members have been excluded from the
benefits of the coconut levy fund. Inter alia, it joined petitioner in praying for the exclusion of
private respondents in voting the sequestered shares.
Issues
Petitioner submits the following issues for our consideration:24
"A.
Despite the fact that the subject sequestered shares were purchased with coconut levy
funds (which were declared public in character) and the continuing effectivity of
Resolution dated February 16, 1993 in G.R. No. 96073 which allows the PCGG to vote
said sequestered shares, Respondent Sandiganbayan, with grave abuse of discretion,
issued its Order dated February 20, 2001 enjoining PCGG from voting the
sequestered shares of stock in UCPB.
 "B.
The Respondent Sandiganbayan violated petitioner's right to due process by taking
cognizance of the Class Action Omnibus Motion dated 23 February 2001 despite
gross lack of sufficient notice and by issuing the writ of preliminary injunction despite
the obvious fact that there was no actual pressing necessity or urgency to do so."
In its Resolution dated April 17, 2001, the Court defined the issue to be resolved in the
instant case simply as follows:
This Court's Ruling
The Petition is impressed with merit.
Main Issue:
Who May Vote the Sequestered Shares of Stock?
Simply stated, the gut substantive issue to be resolved in the present Petition is: "Who may
vote the sequestered UCPB shares while the main case for their reversion to the State is
pending in the Sandiganbayan?"
This Court holds that the government should be allowed to continue voting those shares
inasmuch as they were purchased with coconut levy funds – that are prima facie public in
character or, at the very least, are "clearly affected with public interest."
General Rule: Sequestered Shares
Are Voted by the Registered Holder
At the outset, it is necessary to restate the general rule that the registered owner of the
shares of a corporation exercises the right and the privilege of voting.25 This principle applies
even to shares that are sequestered by the government, over which the PCGG as a mere
conservator cannot, as a general rule, exercise acts of dominion.26 On the other hand, it is
authorized to vote these sequestered shares registered in the names of private persons and
acquired with allegedly ill-gotten wealth, if it is able to satisfy the two-tiered test devised by
the Court in Cojuangco v. Calpo27 and PCGG v. Cojuangco Jr.,28 as follows:
(1) Is there prima facie evidence showing that the said shares are ill-gotten and thus
belong to the State?
(2) Is there an imminent danger of dissipation, thus necessitating their continued
sequestration and voting by the PCGG, while the main issue is pending with the
Sandiganbayan?
Sequestered Shares Acquired with Public Funds are an Exception
From the foregoing general principle, the Court in Baseco v. PCGG29 (hereinafter "Baseco")
and Cojuangco Jr. v. Roxas30 ("Cojuangco-Roxas") has provided two clear "public character"
exceptions under which the government is granted the authority to vote the shares:
(1) Where government shares are taken over by private persons or entities who/which
registered them in their own names, and
(2) Where the capitalization or shares that were acquired with public funds somehow
landed in private hands.
The exceptions are based on the common-sense principle that legal fiction must yield to
truth; that public property registered in the names of non-owners is affected with trust
relations; and that the prima facie beneficial owner should be given the privilege of enjoying
the rights flowing from the prima facie fact of ownership.
In Baseco, a private corporation known as the Bataan Shipyard and Engineering Co. was
placed under sequestration by the PCGG. Explained the Court:
"The facts show that the corporation known as BASECO was owned and controlled by
President Marcos 'during his administration, through nominees, by taking undue
advantage of his public office and/or using his powers, authority, or influence,' and that
it was by and through the same means, that BASECO had taken over the business
and/or assets of the National Shipyard and Engineering Co., Inc., and other
government-owned or controlled entities."31
Given this factual background, the Court discussed PCGG's right over BASECO in the
following manner:
"Now, in the special instance of a business enterprise shown by evidence to have
been 'taken over by the government of the Marcos Administration or by entities or
persons close to former President Marcos,' the PCGG is given power and authority, as
already adverted to, to 'provisionally take (it) over in the public interest or to prevent * *
(its) disposal or dissipation;' and since the term is obviously employed in reference to
going concerns, or business enterprises in operation, something more than mere
physical custody is connoted; the PCGG may in this case exercise some measure of
control in the operation, running, or management of the business itself."32
Citing an earlier Resolution, it ruled further:
"Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in
respondents' calling and holding of a stockholders' meeting for the election of directors
as authorized by the Memorandum of the President * * (to the PCGG) dated June 26,
1986, particularly, where as in this case, the government can, through its designated
directors, properly exercise control and management over what appear to be
properties and assets owned and belonging to the government itself and over which
 the persons who appear in this case on behalf of BASECO have failed to show any
right or even any shareholding in said corporation."33 (Italics supplied)
The Court granted PCGG the right to vote the sequestered shares because they appeared to
be "assets belonging to the government itself." The Concurring Opinion of Justice Ameurfina
A. Melencio-Herrera, in which she was joined by Justice Florentino P. Feliciano, explained
this principle as follows:
"I have no objection to according the right to vote sequestered stock in case of a take-
over of business actually belonging to the government or whose capitalization comes
from public funds but which, somehow, landed in the hands of private persons, as in
the case of BASECO. To my mind, however, caution and prudence should be
exercised in the case of sequestered shares of an on-going private business
enterprise, specially the sensitive ones, since the true and real ownership of said
shares is yet to be determined and proven more conclusively by the Courts."34 (Italics
supplied)
The exception was cited again by the Court in Cojuangco-Roxas35 in this wise:
"The rule in this jurisdiction is, therefore, clear. The PCGG cannot perform acts of strict
ownership of sequestered property. It is a mere conservator. It may not vote the
shares in a corporation and elect the members of the board of directors. The only
conceivable exception is in a case of a takeover of a business belonging to the
government or whose capitalization comes from public funds, but which landed in
private hands as in BASECO."36 (Italics supplied)
The "public character" test was reiterated in many subsequent cases; most recently,
in Antiporda v. Sandiganbayan.37 Expressly citing Conjuangco-Roxas,38 this Court said that
in determining the issue of whether the PCGG should be allowed to vote sequestered
shares, it was crucial to find out first whether these were purchased with public funds,
as follows:
"It is thus important to determine first if the sequestered corporate shares came from
public funds that landed in private hands."39
In short, when sequestered shares registered in the names of private individuals or entities
are alleged to have been acquired with ill-gotten wealth, then the two-tiered test is applied.
However, when the sequestered shares in the name of private individuals or entities are
shown, prima facie, to have been (1) originally government shares, or (2) purchased with
public funds or those affected with public interest, then the two-tiered test does not apply.
Rather, the public character exceptions in Baseco v. PCGG and Cojuangco Jr. v.
Roxas prevail; that is, the government shall vote the shares.
UCPB Shares Were Acquired With Coconut Levy Funds
In the present case before the Court, it is not disputed that the money used to purchase the
sequestered UCPB shares came from the Coconut Consumer Stabilization Fund (CCSF),
otherwise known as the coconut levy funds.
This fact was plainly admitted by private respondent's counsel, Atty. Teresita J. Herbosa,
during the Oral Arguments held on April 17, 2001 in Baguio City, as follows:
"Justice Panganiban:
"In regard to the theory of the Solicitor General that the funds used to purchase [both]
the original 28 million and the subsequent 80 million came from the CCSF, Coconut
Consumers Stabilization Fund, do you agree with that?
"Atty. Herbosa:
"Yes, Your Honor.
xxx xxx xxx
"Justice Panganiban:
"So it seems that the parties [have] agreed up to that point that the funds used to
purchase 72% of the former First United Bank came from the Coconut Consumer
Stabilization Fund?
"Atty. Herbosa:
"Yes, Your Honor."40
Indeed in Cocofed v. PCGG,41 this Court categorically declared that the UCPB was
acquired "with the use of the Coconut Consumers Stabilization Fund in virtue of
Presidential Decree No. 755, promulgated on July 29, 1975."
Coconut Levy Funds Are Affected With Public Interest
Having conclusively shown that the sequestered UCPB shares were purchased with coconut
levies, we hold that these funds and shares are, at the very least, "affected with public
interest."
The Resolution issued by the Court on February 16, 1993 in Republic v.
Sandiganbayan42 stated that coconut levy funds were "clearly affected with public interest";
thus, herein private respondents – even if they are the registered shareholders – cannot be
accorded the right to vote them. We quote the said Resolution in part, as follows:
"The coconut levy funds being 'clearly affected with public interest, it follows that the
corporations formed and organized from those funds, and all assets acquired
therefrom should also be regarded as 'clearly affected with public interest.'"43
xxx xxx xxx
 "Assuming, however, for purposes of argument merely, the lifting of sequestration to
be correct, may it also be assumed that the lifting of sequestration removed the
character of the coconut levy companies of being affected with public interest, so that
they and their stock and assets may now be considered to be of private ownership?
May it be assumed that the lifting of sequestration operated to relieve the holders of
stock in the coconut levy companies – affected with public interest – of the obligation
of proving how that stock had been legitimately transferred to private ownership, or
that those stockholders who had had some part in the collection, administration, or
disposition of the coconut levy funds are now deemed qualified to acquire said stock,
and freed from any doubt or suspicion that they had taken advantage of their special
or fiduciary relation with the agencies in charge of the coconut levies and the funds
thereby accumulated? The obvious answer to each of the questions is a negative one.
It seems plain that the lifting of sequestration has no relevance to the nature of the
coconut levy companies or their stock or property, or to the legality of the acquisition
by private persons of their interest therein, or to the latter's capacity or disqualification
to acquire stock in the companies or any property acquired from coconut levy funds.
"This being so, the right of the [petitioners] to vote stock in their names at the meetings
of the UCPB cannot be conceded at this time. That right still has to be established by
them before the Sandiganbayan. Until that is done, they cannot be deemed legitimate
owners of UCPB stock and cannot be accorded the right to vote them."44 (Italics
supplied)
It is however contended by respondents that this Resolution was in the nature of a temporary
restraining order. As such, it was supposedly interlocutory in character and became functus
oficio when this Court decided GR No. 96073 on January 23, 1995.
This argument is aptly answered by petitioner in its Memorandum, which we quote:
"The ruling made in the Resolution dated 16 February 1993 confirming the public
nature of the coconut levy funds and denying claimants their purported right to vote is
an affirmation of doctrines laid down in the cases of COCOFED v.
PCGG supra, Baseco v. PCGG, supra, and Cojuangco v. Roxas, supra. Therefore it
is of no moment that the Resolution dated 16 February 1993 has not been ratified. Its
jurisprudential based remain."45 (Italics supplied)
To repeat, the foregoing juridical situation has not changed. It is still the truth today: "the
coconut levy funds are clearly affected with public interest." Private respondents have not
"demonstrated satisfactorily that they have legitimately become private funds."
If private respondents really and sincerely believed that the final Decision of the Court
in Republic v. Sandiganbayan (GR No. 96073, promulgated on January 23, 1995) granted
them the right to vote, why did they wait for the lapse of six long years before definitively
asserting it (1) through their letter dated February 13, 2001, addressed to the UCPB Board of
Directors, demanding the holding of a shareholders' meeting on March 6, 2001; and (2)
through their Omnibus Motion dated February 23, 2001 filed in the court a quo, seeking to
enjoin PCGG from voting the subject sequestered shares during the said stockholders'
meeting? Certainly, if they even half believed their submission now – that they already had
such right in 1995 – why are they suddenly and imperiously claiming it only now?
It should be stressed at this point that the assailed Sandiganbayan Order dated February 28,
2001 – allowing private respondents to vote the sequestered shares – is not based on any
finding that the coconut levies and the shares have "legitimately become private funds."
Neither is it based on the alleged lifting of the TRO issued by this Court on February 16,
1993. Rather, it is anchored on the grossly mistaken application of the two-tiered test
mentioned earlier in this Decision.
To stress, the two-tiered test is applied only when the sequestered asset in the hands of a
private person is alleged to have been acquired with ill-gotten wealth. Hence, in PCGG v.
Cojuangco,47 we allowed Eduardo Cojuangco Jr. to vote the sequestered shares of the San
Miguel Corporation (SMC) registered in his name but alleged to have been acquired with ill-
gotten wealth. We did so on his representation that he had acquired them with borrowed
funds and upon failure of the PCGG to satisfy the "two-tiered" test. This test was, however,
not applied to sequestered SMC shares that were purchased with coco levy funds.
In the present case, the sequestered UCPB shares are confirmed to have been acquired
with coco levies, not with alleged ill-gotten wealth. Hence, by parity of reasoning, the right to
vote them is not subject to the "two-tiered test" but to the public character of their acquisition,
which per Antiporda v. Sandiganbayan cited earlier, must first be determined.
Coconut Levy Funds Are Prima Facie Public Funds
To avoid misunderstanding and confusion, this Court will even be more categorical and
positive than its earlier pronouncements: the coconut levy funds are not only affected
with public interest; they are, in fact, prima facie public funds.
Public funds are those moneys belonging to the State or to any political subdivision of the
State; more specifically, taxes, customs duties and moneys raised by operation of law for the
support of the government or for the discharge of its obligations.48 Undeniably, coconut levy
funds satisfy this general definition of public funds, because of the following reasons:
1. Coconut levy funds are raised with the use of the police and taxing powers of the
State.
2. They are levies imposed by the State for the benefit of the coconut industry and its
farmers.
 3. Respondents have judicially admitted that the sequestered shares were purchased
with public funds.
4. The Commission on Audit (COA) reviews the use of coconut levy funds.
5. The Bureau of Internal Revenue (BIR), with the acquiescence of private
respondents, has treated them as public funds.
6. The very laws governing coconut levies recognize their public character.
We shall now discuss each of the foregoing reasons, any one of which is enough to show
their public character.
1. Coconut Levy Funds Are Raised Through the State's Police and Taxing Powers.
Indeed, coconut levy funds partake of the nature of taxes which, in general, are enforced
proportional contributions from persons and properties, exacted by the State by virtue of its
sovereignty for the support of government and for all public needs.49
Based on this definition, a tax has three elements, namely: a) it is an enforced proportional
contribution from persons and properties; b) it is imposed by the State by virtue of its
sovereignty; and c) it is levied for the support of the government. The coconut levy funds fall
squarely into these elements for the following reasons:
(a) They were generated by virtue of statutory enactments imposed on the coconut
farmers requiring the payment of prescribed amounts. Thus, PD No. 276, which
created the Coconut Consumer Stabilization Fund (CCSF), mandated the following:
"a. A levy, initially, of P15.00 per 100 kilograms of copra resecada or its equivalent in
other coconut products, shall be imposed on every first sale, in accordance with the
mechanics established under RA 6260, effective at the start of business hours on
August 10, 1973.
"The proceeds from the levy shall be deposited with the Philippine National Bank or
any other government bank to the account of the Coconut Consumers Stabilization
Fund, as a separate trust fund which shall not form part of the general fund of the
government."50
The coco levies were further clarified in amendatory laws, specifically PD No.
96151 and PD No. 146852 – in this wise:
"The Authority (Philippine Coconut Authority) is hereby empowered to impose and
collect a levy, to be known as the Coconut Consumers Stabilization Fund Levy, on
every one hundred kilos of copra resecada, or its equivalent in other coconut products
delivered to, and/or purchased by, copra exporters, oil millers, desiccators and other
end-users of copra or its equivalent in other coconut products. The levy shall be paid
by such copra exporters, oil millers, desiccators and other end-users of copra or its
 equivalent in other coconut products under such rules and regulations as the Authority
may prescribe. Until otherwise prescribed by the Authority, the current levy being
collected shall be continued."53
Like other tax measures, they were not voluntary payments or donations by the
people. They were enforced contributions exacted on pain of penal sanctions, as
provided under PD No. 276:
"3. Any person or firm who violates any provision of this Decree or the rules and
regulations promulgated thereunder, shall, in addition to penalties already prescribed
under existing administrative and special law, pay a fine of not less than P2,500 or
more than P10,000, or suffer cancellation of licenses to operate, or both, at the
discretion of the Court."54
Such penalties were later amended thus:
"Whenever any person or entity willfully and deliberately violates any of the provisions
of this Act, or any rule or regulation legally promulgated hereunder by the Authority,
the person or persons responsible for such violation shall be punished by a fine of not
more than P20,000.00 and by imprisonment of not more than five years. If the offender
be a corporation, partnership or a juridical person, the penalty shall be imposed on the
officer or officers authorizing, permitting or tolerating the violation. Aliens found guilty
of any offenses shall, after having served his sentence, be immediately deported and,
in the case of a naturalized citizen, his certificate of naturalization shall be cancelled."55
(b) The coconut levies were imposed pursuant to the laws enacted by the proper
legislative authorities of the State. Indeed, the CCSF was collected under PD No. 276,
issued by former President Ferdinand E. Marcos who was then exercising legislative
powers.56
(c) They were clearly imposed for a public purpose. There is absolutely no question
that they were collected to advance the government's avowed policy of protecting the
coconut industry. This Court takes judicial notice of the fact that the coconut industry is
one of the great economic pillars of our nation, and coconuts and their byproducts
occupy a leading position among the country's export products; that it gives
employment to thousands of Filipinos; that it is a great source of the state's wealth;
and that it is one of the important sources of foreign exchange needed by our country
and, thus, pivotal in the plans of a government committed to a policy of currency
stability.
Taxation is done not merely to raise revenues to support the government, but also to provide
means for the rehabilitation and the stabilization of a threatened industry, which is so
affected with public interest as to be within the police power of the State, as held in Caltex
Philippines v. COA57 and Osmeña v. Orbos.58
Even if the money is allocated for a special purpose and raised by special means, it is still
public in character. In the case before us, the funds were even used to organize and finance
State offices. In Cocofed v. PCGG,59 the Court observed that certain agencies or enterprises
"were organized and financed with revenues derived from coconut levies imposed under a
succession of laws of the late dictatorship x x x with deposed Ferdinand Marcos and his
cronies as the suspected authors and chief beneficiaries of the resulting coconut industry
monopoly."60 The Court continued: "x x x. It cannot be denied that the coconut industry is
one of the major industries supporting the national economy. It is, therefore, the State's
concern to make it a strong and secure source not only of the livelihood of a significant
segment of the population, but also of export earnings the sustained growth of which is one
of the imperatives of economic stability. x x x."61
2. Coconut Funds Are Levied for the Benefit of the Coconut Industry and Its Farmers.
Just like the sugar levy funds, the coconut levy funds constitute state funds even though they
may be held for a special public purpose.
In fact, Executive Order No. 481 dated May 1, 1998 specifically likens the coconut levy funds
to the sugar levy funds, both being special public funds acquired through the taxing
and police powers of the State. The sugar levy funds, which are strikingly similar to the
coconut levies in their imposition and purpose, were declared public funds by this Court
in Gaston v. Republic Planters Bank,62 from which we quote:
"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 vs. 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. 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 vs. Araneta, supra.)."63
The Court further explained:64
"The stabilization fees in question are levied by the State upon sugar millers, planters
and producers for a special purpose – that of 'financing the growth and development of
the sugar industry and all its components, stabilization of the domestic market
including the foreign market.' The fact that the State has taken possession of moneys
pursuant to law is sufficient to constitute them as state funds, even though they are
 held for a special purpose (Lawrence v. American Surety Co., 263 Mich 586. 294 ALR
535, cited in 42 Am. Jur., Sec. 2., p. 718). Having been levied for a special purpose,
the revenues collected are to be treated as a special fund, to be, in the language of the
statute, 'administered in trust' for the purpose intended. Once the purpose has been
fulfilled or abandoned, the balance, if any, is to be transferred to the general funds of
the Government. That is the essence of the trust intended (see 1987 Constitution, Art.
VI, Sec. 29[3], lifted from the 1935 Constitution, Article VI, Sec. 23[1]. (Italics supplied)
"The character of the Stabilization Fund as a special fund is emphasized by the fact
that the funds are deposited in the Philippine National Bank and not in the Philippine
Treasury, moneys from which may be paid out only in pursuance of an appropriation
made by law (1987 Constitution, Article VI, Sec. 29[1], 1973 Constitution, Article VIII,
Sec. 18[1]).
"That the fees were collected from sugar producers, planters and millers, and that the
funds were channeled to the purchase of shares of stock in respondent Bank do not
convert the funds into a trust fund for their benefit nor make them the beneficial
owners of the shares so purchased. It is but rational that the fees be collected from
them since it is also they who are to be benefited from the expenditure of the funds
derived from it. The investment in shares of respondent Bank is not alien to the
purpose intended because of the Bank's character as a commodity bank for sugar
conceived for the industry's growth and development. Furthermore, of note is the fact
that one-half (1/2) or P0.50 per picul, of the amount levied under P.D. No. 388 is to be
utilized for the 'payment of salaries and wages of personnel, fringe benefits and
allowances of officers and employees of PHILSUCOM' thereby immediately negating
the claim that the entire amount levied is in trust for sugar, producers, planters and
millers.
"To rule in petitioners' favor would contravene the general principle that revenues
derived from taxes cannot be used for purely private purposes or for the exclusive
benefit of private persons. The Stabilization Fund is to be utilized for the benefit of the
entire sugar industry, 'and all its components, stabilization of the domestic market
including the foreign market,' the industry being of vital importance to the country's
economy and to national interest."
In the same manner, this Court has also ruled that the oil stabilization funds were public in
character and subject to audit by COA. It ruled in this wise:
"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.' Indeed, the practice is not without precedent."65
In his Concurring Opinion in Kilosbayan v. Guingona,66 Justice Florentino P. Feliciano
explained that the funds raised by the On-line Lottery System were also public in nature. In
his words:
"x x x. In the case presently before the Court, the funds involved are clearly public in
nature. The funds to be generated by the proposed lottery are to be raised from the
population at large. Should the proposed operation be as successful as its proponents
project, those funds will come from well-nigh every town and barrio of Luzon. The
funds here involved are public in another very real sense: they will belong to the
PCSO, a government owned or controlled corporation and an instrumentality of the
government and are destined for utilization in social development projects which, at
least in principle, are designed to benefit the general public. x x x. The interest of a
private citizen in seeing to it that public funds, from whatever source they may have
been derived, go only to the uses directed and permitted by law is as real and
personal and substantial as the interest of a private taxpayer in seeing to it that tax
monies are not intercepted on their way to the public treasury or otherwise diverted
from uses prescribed or allowed by law. It is also pertinent to note that the more
successful the government is in raising revenues by non-traditional methods such as
PAGCOR operations and privatization measures, the lesser will be the pressure upon
the traditional sources of public revenues, i.e., the pocket books of individual taxpayers
and importers."67
Thus, the coconut levy funds – like the sugar levy and the oil stabilization funds, as well as
the monies generated by the On-line Lottery System – are funds exacted by the State. Being
enforced contributions, the are prima facie public funds.
3. Respondents Judicially Admit That the Levies Are Government Funds.
Equally important as the fact that the coconut levy funds were raised through the taxing and
police powers of the State is respondents' effective judicial admission that these levies are
government funds. As shown by the attachments to their pleadings,68 respondents concede
that the Coconut Consumers Stabilization Fund (CCSF) and the Coconut Investment
Development Fund "constitute government funds x x x for the benefit of coconut farmers."
"Collections on both levies constitute government funds. However, unlike other taxes
that the Government levies and collects such as income tax, tariff and customs duties,
etc., the collections on the CCSF and CIDF are, by express provision of the laws
imposing them, for a definite purpose, not just for any governmental purpose. As
stated above part of the collections on the CCSF levy should be spent for the benefit
 of the coconut farmers. And in respect of the collections on the CIDF levy, P.D. 582
mandatorily requires that the same should be spent exclusively for the establishment,
operation and maintenance of a hybrid coconut seed garden and the distribution, for
free, to the coconut farmers of the hybrid coconut seednuts produced from that seed
garden.
"On the other hand, the laws which impose special levies on specific industries, for
example on the mining industry, sugar industry, timber industry, etc., do not, by their
terms, expressly require that the collections on those levies be spent exclusively for
the benefit of the industry concerned. And if the enabling law thus so provide, the fact
remains that the governmental agency entrusted with the duty of implementing the
purpose for which the levy is imposed is vested with the discretionary power to
determine when and how the collections should be appropriated."69
4. The COA Audit Shows the Public Nature of the Funds.
Under COA Office Order No. 86-9470 dated April 15, 1986,70 the COA reviewed the
expenditure and use of the coconut levies allocated for the acquisition of the UCPB. The
audit was aimed at ascertaining whether these were utilized for the purpose for which they
had been intended.71 Under the 1987 Constitution, the powers of the COA are as follows:
"The Commission on Audit shall have the power, authority, and duty to examine, audit,
and settle all accounts pertaining to the revenue and receipts of, and expenditures or
uses of funds and property, owned or held in trust by, or pertaining to, the
Government, or any of its subdivisions, agencies, or instrumentalities x x x."72
Because these funds have been subjected to COA audit, there can be no other conclusion
than that are prima facie public in character.
5. The BIR Has Pronounced That the Coconut Levy Funds Are Taxes.
In response to a query posed by the administrator of the Philippine Coconut Authority
regarding the character of the coconut levy funds, the Bureau of Internal Revenue has
affirmed that these funds are public in character. It held as follows: "[T]he coconut levy is not
a public trust fund for the benefit of the coconut farmers, but is in the nature of a tax and,
therefore, x x x public funds that are subject to government administration and disposition."73
Furthermore, the executive branch treats the coconut levies as public funds. Thus, Executive
Order No. 277, issued on September 24, 1995, directed the mode of treatment, utilization,
administration and management of the coconut levy funds. It provided as follows:
'(a) The coconut levy funds, which include all income, interests, proceeds or profits
derived therefrom, as well as all assets, properties and shares of stocks procured or
obtained with the use of such funds, shall be treated, utilized, administered and
managed as public funds consistent with the uses and purposes under the laws which
 constituted them and the development priorities of the government, including the
government's coconut productivity, rehabilitation, research extension, farmers
organizations, and market promotions programs, which are designed to advance the
development of the coconut industry and the welfare of the coconut farmers."74 (Italics
supplied)
Doctrinally, acts of the executive branch are prima facie valid and binding, unless declared
unconstitutional or contrary to law.
6. Laws Governing Coconut Levies Recognize Their Public Nature.
Finally and tellingly, the very laws governing the coconut levies recognize their public
character. Thus, the third Whereas clause of PD No. 276 treats them as special funds for a
specific public purpose. Furthermore, PD No. 711 transferred to the general funds of the
State all existing special and fiduciary funds including the CCSF. On the other hand, PD No.
1234 specifically declared the CCSF as a special fund for a special purpose, which should
be treated as a special account in the National Treasury.
Moreover, even President Marcos himself, as the sole legislative/executive authority during
the martial law years, struck off the phrase which is a private fund of the coconut
farmers from the original copy of Executive Order No. 504 dated May 31, 1978, and we
quote:
"WHEREAS, by means of the Coconut Consumers Stabilization Fund ('CCSF'), which
is the private fund of the coconut farmers (deleted), essential coconut-based
products are made available to household consumers at socialized prices." (Emphasis
supplied)
The phrase in bold face -- which is the private fund of the coconut farmers – was
crossed out and duly initialed by its author, former, President Marcos. This deletion, clearly
visible in "Attachment C" of petitioner's Memorandum,75 was a categorical legislative intent to
regard the CCSF as public, not private, funds.
Having Been Acquired With Public Funds, UCPB Shares Belong, Prima Facie, to the
Government
Having shown that the coconut levy funds are not only affected with public interest, but are in
fact prima facie public funds, this Court believes that the government should be allowed to
vote the questioned shares, because they belong to it as the prima facie beneficial and true
owner.
As stated at the beginning, voting is an act of dominion that should be exercised by the share
owner. One of the recognized rights of an owner is the right to vote at meetings of the
corporation. The right to vote is classified as the right to control.76 Voting rights may be for
the purpose of, among others, electing or removing directors, amending a charter, or making
or amending by laws.77 Because the subject UCPB shares were acquired with government
funds, the government becomes their prima facie beneficial and true owner.
Ownership includes the right to enjoy, dispose of, exclude and recover a thing without
limitations other than those established by law or by the owner.78 Ownership has been aptly
described as the most comprehensive of all real rights.79 And the right to vote shares is a
mere incident of ownership. In the present case, the government has been shown to be
the prima facie owner of the funds used to purchase the shares. Hence, it should be allowed
the rights and privileges flowing from such fact.
And paraphrasing Cocofed v. PCGG, already cited earlier, the Republic should continue to
vote those shares until and unless private respondents are able to demonstrate, in the main
cases pending before the Sandiganbayan, that "they [the sequestered UCPB shares] have
legitimately become private."
Procedural and Incidental Issues:
Grave Abuse of Discretion, Improper Arguments and Intervenors' Relief
Procedurally, respondents argue that petitioner has failed to demonstrate that the
Sandiganbayan committed grave abuse of discretion, a demonstration required in every
petition under Rule 65.80
We disagree. We hold that the Sandiganbayan gravely abused its discretion when it
contravened the rulings of this Court in Baseco and Cojuangco-Roxas – thereby unlawfully,
capriciously and arbitrarily depriving the government of its right to vote sequestered shares
purchased with coconut levy funds which are prima facie public funds.
Indeed, grave abuse of discretion may arise when a lower court or tribunal violates or
contravenes the Constitution, the law or existing jurisprudence. In one case,81 this Court
ruled that the lower court's resolution was "tantamount to overruling a judicial
pronouncement of the highest Court x x x and unmistakably a very grave abuse of
discretion."82
The Public Character of Shares Is a Valid Issue
Private respondents also contend that the public nature of the coconut levy funds was not
raised as an issue before the Sandiganbayan. Hence, it could not be taken up before this
Court.
Again we disagree. By ruling that the two-tiered test should be applied in evaluating private
respondents' claim of exercising voting rights over the sequestered shares, the
Sandiganbayan effectively held that the subject assets were private in character. Thus, to
meet this issue, the Office of the Solicitor General countered that the shares were not private
in character, and that quite the contrary, they were and are public in nature because they
were acquired with coco levy funds which are public in character. In short, the main issue of
who may vote the shares cannot be determined without passing upon the question of the
public/private character of the shares and the funds used to acquire them. The latter issue,
although not specifically raised in the Court a quo, should still be resolved in order to fully
adjudicate the main issue.
Indeed, this Court has "the authority to waive the lack of proper assignment of errors if the
unassigned errors closely relate to errors properly pinpointed out or if the unassigned errors
refer to matters upon which the determination of the questions raised by the errors properly
assigned depend."83
Therefore, "where the issues already raised also rest on other issues not specifically
presented as long as the latter issues bear relevance and close relation to the former and as
long as they arise from matters on record, the Court has the authority to include them in its
discussion of the controversy as well as to pass upon them."84
No Positive Relief For Intervenors
Intervenors anchor their interest in this case on an alleged right that they are trying to
enforce in another Sandiganbayan case docketed as SB Case No. 0187.85 In that case, they
seek the recovery of the subject UCPB shares from herein private respondents and the
corporations controlled by them. Therefore, the rights sought to be protected and the reliefs
prayed for by intervenors are still being litigated in the said case. The purported rights they
are invoking are mere expectancies wholly dependent on the outcome of that case in the
Sandiganbayan.
Clearly, we cannot rule on intervenors' alleged right to vote at this time and in this case. That
right is dependent upon the Sandiganbayan's resolution of their action for the recovery of
said sequestered shares. Given the patent fact that intervenors are not registered
stockholders of UCPB as of the moment, their asserted rights cannot be ruled upon in the
present proceedings. Hence, no positive relief can be given them now, except insofar as they
join petitioner in barring private respondents from voting the subject shares.
Epilogue
In sum, we hold that the Sandiganbayan committed grave abuse of discretion in grossly
contradicting and effectively reversing existing jurisprudence, and in depriving the
government of its right to vote the sequestered UCPB shares which are prima facie public in
character.
In making this ruling, we are in no way preempting the proceedings the Sandiganbayan may
conduct or the final judgment it may promulgate in Civil Case Nos. 0033-A, 0033-B and
0033-F. Our determination here is merely prima facie, and should not bar the anti-graft court
from making a final ruling, after proper trial and hearing, on the issues and prayers in the
said civil cases, particularly in reference to the ownership of the subject shares.
We also lay down the caveat that, in declaring the coco levy funds to be prima facie public in
character, we are not ruling in any final manner on their classification – whether they are
general or trust or special funds – since such classification is not at issue here. Suffice it to
say that the public nature of the coco levy funds is decreed by the Court only for the purpose
of determining the right to vote the shares, pending the final outcome of the said civil cases.
Neither are we resolving in the present case the question of whether the shares held by
Respondent Cojuangco are, as he claims, the result of private enterprise. This factual matter
should also be taken up in the final decision in the cited cases that are pending in the court a
quo. Again suffice it to say that the only issue settled here is the right of PCGG to vote the
sequestered shares, pending the final outcome of said cases.
This matter involving the coconut levy funds and the sequestered UCPB shares has been
straddling the courts for about 15 years. What we are discussing in the present Petition, we
stress, is just an incident of the main cases which are pending in the anti-graft court – the
cases for the reconveyance, reversion and restitution to the State of these UCPB shares.
The resolution of the main cases has indeed been long overdue. Every effort, both by the
parties and the Sandiganbayan, should be exerted to finally settle this controversy.
WHEREFORE, the Petition is hereby GRANTED and the assailed Order SET ASIDE. The
PCGG shall continue voting the sequestered shares until Sandiganbayan Civil Case Nos.
0033-A, 0033-B and 0033-F are finally and completely resolved. Furthermore, the
Sandiganbayan is ORDERED to decide with finality the aforesaid civil cases within a period
of six (6) months from notice. It shall report to this Court on the progress of the said cases
every three (3) months, on pain of contempt. The Petition in Intervention
is DISMISSED inasmuch as the reliefs prayed for are not covered by the main issues in this
case. No costs.
SO ORDERED.
Davide, Jr., Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza, Quisumbing, Pardo, Buena,
Ynares-Santiago, De Leon, Jr., and Sandoval-Gutierrez, JJ., concur.
G.R. No. 119286 October 13, 2004
PASEO REALTY & DEVELOPMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
DECISION
TINGA, J.:
The changes in the reportorial requirements and payment schedules of corporate income
taxes from annual to quarterly have created problems, especially on the matter of tax
refunds.1 In this case, the Court is called to resolve the question of whether alleged excess
taxes paid by a corporation during a taxable year should be refunded or credited against its
tax liabilities for the succeeding year.
Paseo Realty and Development Corporation, a domestic corporation engaged in the lease of
two (2) parcels of land at Paseo de Roxas in Makati City, seeks a review of the Decision2 of
the Court of Appeals dismissing its petition for review of the resolution3 of the Court of Tax
Appeals (CTA) which, in turn, denied its claim for refund.
The factual antecedents4 are as follows:
On April 16, 1990, petitioner filed its Income Tax Return for the calendar year 1989
declaring a gross income of ₱1,855,000.00, deductions of ₱1,775,991.00, net income
of ₱79,009.00, an income tax due thereon in the amount of ₱27,653.00, prior year’s
excess credit of ₱146,026.00, and creditable taxes withheld in 1989 of ₱54,104.00 or
a total tax credit of ₱200,130.00 and credit balance of ₱172,477.00.
On November 14, 1991, petitioner filed with respondent a claim for "the refund of
excess creditable withholding and income taxes for the years 1989 and 1990 in the
aggregate amount of ₱147,036.15."
On December 27, 1991 alleging that the prescriptive period for refunds for 1989 would
expire on December 30, 1991 and that it was necessary to interrupt the prescriptive
period, petitioner filed with the respondent Court of Tax Appeals a petition for review
praying for the refund of "₱54,104.00 representing creditable taxes withheld from
income payments of petitioner for the calendar year ending December 31, 1989."
On February 25, 1992, respondent Commissioner filed an Answer and by way of
special and/or affirmative defenses averred the following: a) the petition states no
cause of action for failure to allege the dates when the taxes sought to be refunded
were paid; b) petitioner’s claim for refund is still under investigation by respondent
Commissioner; c) the taxes claimed are deemed to have been paid and collected in
accordance with law and existing pertinent rules and regulations; d) petitioner failed to
allege that it is entitled to the refund or deductions claimed; e) petitioner’s contention
that it has available tax credit for the current and prior year is gratuitous and does
not ipso facto warrant the refund; f) petitioner failed to show that it has complied with
the provision of Section 230 in relation to Section 204 of the Tax Code.
 After trial, the respondent Court rendered a decision ordering respondent
Commissioner "to refund in favor of petitioner the amount of ₱54,104.00, representing
excess creditable withholding taxes paid for January to July1989."
Respondent Commissioner moved for reconsideration of the decision, alleging that the
₱54,104.00 ordered to be refunded "has already been included and is part and parcel
of the ₱172,477.00 which petitioner automatically applied as tax credit for the
succeeding taxable year 1990."
In a resolution dated October 21, 1993 Respondent Court reconsidered its decision of
July 29, 1993 and dismissed the petition for review, stating that it has "overlooked the
fact that the petitioner’s 1989 Corporate Income Tax Return (Exh. "A") indicated that
the amount of ₱54,104.00 subject of petitioner’s claim for refund has already been
included as part and parcel of the ₱172,477.00 which the petitioner automatically
applied as tax credit for the succeeding taxable year 1990."
Petitioner filed a Motion for Reconsideration which was denied by respondent Court on
March 10, 1994.5
Petitioner filed a Petition for Review6 dated April 3, 1994 with the Court of Appeals.
Resolving the twin issues of whether petitioner is entitled to a refund of ₱54,104.00
representing creditable taxes withheld in 1989 and whether petitioner applied such creditable
taxes withheld to its 1990 income tax liability, the appellate court held that petitioner is not
entitled to a refund because it had already elected to apply the total amount of ₱172,447.00,
which includes the ₱54,104.00 refund claimed, against its income tax liability for 1990. The
appellate court elucidated on the reason for its dismissal of petitioner’s claim for refund, thus:
In the instant case, it appears that when petitioner filed its income tax return for the
year 1989, it filled up the box stating that the total amount of ₱172,477.00 shall be
applied against its income tax liabilities for the succeeding taxable year.
Petitioner did not specify in its return the amount to be refunded and the amount to be
applied as tax credit to the succeeding taxable year, but merely marked an "x" to the
box indicating "to be applied as tax credit to the succeeding taxable year." Unlike what
petitioner had done when it filed its income tax return for the year 1988, it specifically
stated that out of the ₱146,026.00 the entire refundable amount, only ₱64,623.00 will
be made available as tax credit, while the amount of ₱81,403.00 will be refunded.
In its 1989 income tax return, petitioner filled up the box "to be applied as tax credit to
succeeding taxable year," which signified that instead of refund, petitioner will apply
the total amount of ₱172,447.00, which includes the amount of ₱54,104.00 sought to
be refunded, as tax credit for its tax liabilities in 1990. Thus, there is really nothing left
to be refunded to petitioner for the year 1989. To grant petitioner’s claim for refund is
 tantamount to granting twice the refund herein sought to be refunded, to the prejudice
of the Government.
The Court of Appeals denied petitioner’s Motion for Reconsideration7 dated November 8,
1994 in its Resolution8 dated February 21, 1995 because the motion merely restated the
grounds which have already been considered and passed upon in its Decision.9
Petitioner thus filed the instant Petition for Review10 dated April 14, 1995 arguing that the
evidence presented before the lower courts conclusively shows that it did not apply the
₱54,104.00 to its 1990 income tax liability; that the Decision subject of the instant petition is
inconsistent with a final decision11 of the Sixteenth Division of the appellate court in C.A.-
G.R. Sp. No. 32890 involving the same parties and subject matter; and that the affirmation of
the questioned Decision would lead to absurd results in the manner of claiming refunds or in
the application of prior years’ excess tax credits.
The Office of the Solicitor General (OSG) filed a Comment12 dated May 16, 1996 on behalf of
respondents asserting that the claimed refund of ₱54,104.00 was, by petitioner’s election in
its Corporate Annual Income Tax Return for 1989, to be applied against its tax liability for
1990. Not having submitted its tax return for 1990 to show whether the said amount was
indeed applied against its tax liability for 1990, petitioner’s election in its tax return stands.
The OSG also contends that petitioner’s election to apply its overpaid income tax as tax
credit against its tax liabilities for the succeeding taxable year is mandatory and irrevocable.
On September 2, 1997, petitioner filed a Reply13 dated August 31, 1996 insisting that the
issue in this case is not whether the amount of ₱54,104.00 was included as tax credit to be
applied against its 1990 income tax liability but whether the same amount was actually
applied as tax credit for 1990. Petitioner claims that there is no need to show that the amount
of ₱54,104.00 had not been automatically applied against its 1990 income tax liability
because the appellate court’s decision in C.A.-G.R. Sp. No. 32890 clearly held that petitioner
charged its 1990 income tax liability against its tax credit for 1988 and not 1989. Petitioner
also disputes the OSG’s assertion that the taxpayer’s election as to the application of excess
taxes is irrevocable averring that there is nothing in the law that prohibits a taxpayer from
changing its mind especially if subsequent events leave the latter no choice but to change its
election.
The OSG filed a Rejoinder14 dated March 5, 1997 stating that petitioner’s 1988 tax return
shows a prior year’s excess credit of ₱81,403.00, creditable tax withheld of ₱92,750.00 and
tax due of ₱27,127.00. Petitioner indicated that the prior year’s excess credit of ₱81,403.00
was to be refunded, while the remaining amount of ₱64,623.00 (₱92,750.00 - ₱27,127.00)
shall be considered as tax credit for 1989. However, in its 1989 tax return, petitioner included
the ₱81,403.00 which had already been segregated for refund in the computation of its
excess credit, and specified that the full amount of ₱172,479.00* (₱81,403.00 + ₱64,623.00
+ ₱54,104.00** - ₱27,653.00***) be considered as its tax credit for 1990. Considering that it
had obtained a favorable ruling for the refund of its excess credit for 1988 in CA-G.R. SP.
No. 32890, its remaining tax credit for 1989 should be the excess credit to be applied against
its 1990 tax liability. In fine, the OSG argues that by its own election, petitioner can no longer
ask for a refund of its creditable taxes withheld in 1989 as the same had been applied
against its 1990 tax due.
In its Resolution15 dated July 16, 1997, the Court gave due course to the petition and
required the parties to simultaneously file their respective memoranda within 30 days from
notice. In compliance with this directive, petitioner submitted its Memorandum16 dated
September 18, 1997 in due time, while the OSG filed its Memorandum17 dated April 27, 1998
only on April 29, 1998 after several extensions.
The petition must be denied.
As a matter of principle, it is not advisable for this Court to set aside the conclusion reached
by an agency such as the CTA which is, by the very nature of its functions, dedicated
exclusively to the study and consideration of tax problems and has necessarily developed an
expertise on the subject, unless there has been an abuse or improvident exercise of its
authority.18
This interdiction finds particular application in this case since the CTA, after careful
consideration of the merits of the Commissioner of Internal Revenue’s motion for
reconsideration, reconsidered its earlier decision which ordered the latter to refund the
amount of ₱54,104.00 to petitioner. Its resolution cannot be successfully assailed based, as
it is, on the pertinent laws as applied to the facts.
Petitioner’s 1989 tax return indicates an aggregate creditable tax of ₱172,477.00,
representing its 1988 excess credit of ₱146,026.00 and 1989 creditable tax of ₱54,104.00
less tax due for 1989, which it elected to apply as tax credit for the succeeding taxable
year.19 According to petitioner, it successively utilized this amount when it obtained refunds
in CTA Case No. 4439 (C.A.-G.R. Sp. No. 32300) and CTA Case No. 4528 (C.A.-G.R. Sp.
No. 32890), and applied its 1990 tax liability, leaving a balance of ₱54,104.00, the amount
subject of the instant claim for refund.20 Represented mathematically, petitioner accounts for
its claim in this wise:
₱172,477.00 Amount indicated in petitioner’s 1989 tax return to be applied as tax
credit for the succeeding taxable year

- 25,623.00 Claim for refund in CTA Case No. 4439 (C.A.-G.R. Sp. No. 32300)

₱146,854.00 Balance as of April 16, 1990

 - 59,510.00 Claim for refund in CTA Case No. 4528 (C.A.-G.R. Sp. No. 32890)

₱87,344.00 Balance as of January 2, 1991

- 33,240.00 Income tax liability for calendar year 1990 applied as of April 15, 1991

₱54,104.00 Balance as of April 15, 1991 now subject of the instant claim for
refund21
Other than its own bare allegations, however, petitioner offers no proof to the effect that its
creditable tax of ₱172,477.00 was applied as claimed above. Instead, it anchors its assertion
of entitlement to refund on an alleged finding in C.A.-G.R. Sp. No. 3289022 involving the
same parties to the effect that petitioner charged its 1990 income tax liability to its tax credit
for 1988 and not its 1989 tax credit. Hence, its excess creditable taxes withheld of
₱54,104.00 for 1989 was left untouched and may be refunded.
Note should be taken, however, that nowhere in the case referred to by petitioner did the
Court of Appeals make a categorical determination that petitioner’s tax liability for 1990 was
applied against its 1988 tax credit. The statement adverted to by petitioner was actually
presented in the appellate court’s decision in CA-G.R. Sp No. 32890 as part of petitioner’s
own narration of facts. The pertinent portion of the decision reads:
It would appear from petitioner’s submission as follows:
x x x since it has already applied to its prior year’s excess credit of ₱81,403.00 (which
petitioner wanted refunded when it filed its 1988 Income Tax Return on April 14, 1989)
the income tax liability for 1988 of ₱28,127.00 and the income tax liability for 1989 of
₱27,653.00, leaving a balance refundable of ₱25,623.00 subject of C.T.A. Case No.
4439, the ₱92,750.00 (₱64,623.00 plus ₱28,127.00, since this second amount was
already applied to the amount refundable of ₱81,403.00) should be the refundable
amount. But since the taxpayer again used part of it to satisfy its income tax liability of
₱33,240.00 for 1990, the amount refundable was ₱59,510.00, which is the amount
prayed for in the claim for refund and also in the petitioner (sic) for review.
That the present claim for refund already consolidates its claims for refund for 1988,
1989, and 1990, when it filed a claim for refund of ₱59,510.00 in this case (CTA Case
No. 4528). Hence, the present claim should be resolved together with the previous
claims.23
The confusion as to petitioner’s entitlement to a refund could altogether have been avoided
had it presented its tax return for 1990. Such return would have shown whether petitioner
actually applied its 1989 tax credit of ₱172,477.00, which includes the ₱54,104.00 creditable
taxes withheld for 1989 subject of the instant claim for refund, against its 1990 tax liability as
it had elected in its 1989 return, or at least, whether petitioner’s tax credit of ₱172,477.00
was applied to its approved refunds as it claims.
The return would also have shown whether there remained an excess credit refundable to
petitioner after deducting its tax liability for 1990. As it is, we only have petitioner’s allegation
that its tax due for 1990 was ₱33,240.00 and that this was applied against its remaining tax
credits using its own "first in, first out" method of computation.
It would have been different had petitioner not included the ₱54,104.00 creditable taxes for
1989 in the total amount it elected to apply against its 1990 tax liabilities. Then, all that would
have been required of petitioner are: proof that it filed a claim for refund within the two (2)-
year prescriptive period provided under Section 230 of the NIRC; evidence that the income
upon which the taxes were withheld was included in its return; and to establish the fact of
withholding by a copy of the statement (BIR Form No. 1743.1) issued by the payor24 to the
payee showing the amount paid and the amount of tax withheld therefrom. However, since
petitioner opted to apply its aggregate excess credits as tax credit for 1990, it was incumbent
upon it to present its tax return for 1990 to show that the claimed refund had not been
automatically credited and applied to its 1990 tax liabilities.
The grant of a refund is founded on the assumption that the tax return is valid, i.e., that the
facts stated therein are true and correct.25 Without the tax return, it is error to grant a refund
since it would be virtually impossible to determine whether the proper taxes have been
assessed and paid.
Why petitioner failed to present such a vital piece of evidence confounds the Court.
Petitioner could very well have attached a copy of its final adjustment return for 1990 when it
filed its claim for refund on November 13, 1991. Annex "B" of its Petition for Review26 dated
December 26, 1991 filed with the CTA, in fact, states that its annual tax return for 1990 was
submitted in support of its claim. Yet, petitioner’s tax return for 1990 is nowhere to be found
in the records of this case.
Had petitioner presented its 1990 tax return in refutation of respondent Commissioner’s
allegation that it did not present evidence to prove that its claimed refund had already been
automatically credited against its 1990 tax liability, the CTA would not have reconsidered its
earlier Decision. As it is, the absence of petitioner’s 1990 tax return was the principal basis of
the CTA’s Resolution reconsidering its earlier Decision to grant petitioner’s claim for refund.
Petitioner could even still have attached a copy of its 1990 tax return to its petition for review
before the Court of Appeals. The appellate court, being a trier of facts, is authorized to
receive it in evidence and would likely have taken it into account in its disposition of the
petition.
In BPI-Family Savings Bank v. Court of Appeals,27 although petitioner failed to present its
1990 tax return, it presented other evidence to prove its claim that it did not apply and could
not have applied the amount in dispute as tax credit. Importantly, petitioner therein attached
a copy of its final adjustment return for 1990 to its motion for reconsideration before the CTA
buttressing its claim that it incurred a net loss and is thus entitled to refund. Considering this
fact, the Court held that there is no reason for the BIR to withhold the tax refund.
In this case, petitioner’s failure to present sufficient evidence to prove its claim for refund is
fatal to its cause. After all, it is axiomatic that a claimant has the burden of proof to establish
the factual basis of his or her claim for tax credit or refund. Tax refunds, like tax exemptions,
are construed strictly against the taxpayer.28
Section 69, Chapter IX, Title II of the National Internal Revenue Code of the Philippines
(NIRC) provides:
Sec. 69. Final Adjustment Return.—Every corporation liable to tax under Section 24
shall file a final adjustment return covering the total net income for the preceding
calendar or fiscal year. If the sum of the quarterly tax payments made during the said
taxable year is not equal to the total tax due on the entire taxable net income of that
year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
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. [Emphasis supplied]
Revenue Regulation No. 10-77 of the Bureau of Internal Revenue clarifies:
SEC. 7. Filing of final or adjustment return and final payment of income tax. – A final or
an adjustment return on B.I.R. Form No. 1702 covering the total taxable income of the
corporation for the preceding calendar or fiscal year shall be filed on or before the 15th
day of the fourth month following the close of the calendar or fiscal year. The return
shall include all the items of gross income and deductions for the taxable year. The
amount of income tax to be paid shall be the balance of the total income tax shown on
the final or adjustment return after deducting therefrom the total quarterly income taxes
paid during the preceding first three quarters of the same calendar or fiscal year.
Any excess of the total quarterly payments over the actual income tax computed and
shown in the adjustment or final corporate income tax return shall either (a) be
refunded to the corporation, or (b) may be credited against the estimated quarterly
income tax liabilities for the quarters of the succeeding taxable year. The corporation
 must signify in its annual corporate adjustment return its intention whether to request
for refund of the overpaid income tax or claim for automatic credit to be applied against
its income tax liabilities for the quarters of the succeeding taxable year by filling up the
appropriate box on the corporate tax return (B.I.R. Form No. 1702). [Emphasis
supplied]
As clearly shown from the above-quoted provisions, 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 year. The carrying forward of any excess
or overpaid income tax for a given taxable year is limited to the succeeding taxable year
only.
In the recent case of AB Leasing and Finance Corporation v. Commissioner of Internal
Revenue,29 where the Court declared that "[T]he carrying forward of any excess or overpaid
income tax for a given taxable year then is limited to the succeeding taxable year only," we
ruled that since the case involved a claim for refund of overpaid taxes for 1993, petitioner
could only have applied the 1993 excess tax credits to its 1994 income tax liabilities. To
further carry-over to 1995 the 1993 excess tax credits is violative of Section 69 of the NIRC.
In this case, petitioner included its 1988 excess credit of ₱146,026.00 in the computation of
its total excess credit for 1989. It indicated this amount, plus the 1989 creditable taxes
withheld of ₱54,104.00 or a total of ₱172,477.00, as its total excess credit to be applied as
tax credit for 1990. By its own disclosure, petitioner effectively combined its 1988 and 1989
tax credits and applied its 1990 tax due of ₱33,240.00 against the total, and not against its
creditable taxes for 1989 only as allowed by Section 69. This is a clear admission that
petitioner’s 1988 tax credit was incorrectly and illegally applied against its 1990 tax liabilities.
Parenthetically, while a taxpayer is given the choice whether to claim for refund or have its
excess taxes applied as tax credit for the succeeding taxable year, such election is not final.
Prior verification and approval by the Commissioner of Internal Revenue is required. The
availment of the remedy of tax credit is not absolute and mandatory. It does not confer an
absolute right on the taxpayer to avail of the tax credit scheme if it so chooses. Neither does
it impose a duty on the part of the government to sit back and allow an important facet of tax
collection to be at the sole control and discretion of the taxpayer.30
Contrary to petitioner’s assertion however, the taxpayer’s election, signified by the ticking of
boxes in Item 10 of BIR Form No. 1702, is not a mere technical exercise. It aids in the proper
management of claims for refund or tax credit by leading tax authorities to the direction they
should take in addressing the claim.
The amendment of Section 69 by what is now Section 76 of Republic Act No.
842431 emphasizes that it is imperative to indicate in the tax return or the final adjustment
return whether a tax credit or refund is sought by making the taxpayer’s choice irrevocable.
Section 76 provides:
SEC. 76. Final Adjustment Return.—Every corporation liable to tax under Section 27
shall file a final adjustment return covering the total taxable income for the preceding
calendar or fiscal year. If the sum of the quarterly tax payments made during the said
taxable year is not equal to the total tax due on the entire taxable income of that year,
the corporation shall either:
(A) Pay the balance of the tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated
quarterly income taxes paid, the excess amount shown on its final adjustment return
may be carried over and credited against the estimated quarterly income tax liabilities
for the taxable quarters of the succeeding taxable years. Once the option to carry-
over and apply the excess quarterly income tax against income tax due for the
taxable quarters of the succeeding taxable years has been made, such option
shall be considered irrevocable for that taxable period and no application for
cash refund or issuance of a tax credit certificate shall be allowed
therefore. [Emphasis supplied]
As clearly seen from this provision, the taxpayer is allowed three (3) options if the sum of its
quarterly tax payments made during the taxable year is not equal to the total tax due for that
year: (a) pay the balance of the tax still due; (b) carry-over the excess credit; or (c) be
credited or refunded the amount paid. If the taxpayer has paid excess quarterly income
taxes, it may be entitled to a tax credit or refund as shown in its final adjustment return which
may be carried over and applied against the estimated quarterly income tax liabilities for the
taxable quarters of the succeeding taxable years. However, once the taxpayer has exercised
the option to carry-over and to apply the excess quarterly income tax against income tax due
for the taxable quarters of the succeeding taxable years, such option is irrevocable for that
taxable period and no application for cash refund or issuance of a tax credit certificate shall
be allowed.
Had this provision been in effect when the present claim for refund was filed, petitioner’s
excess credits for 1988 could have been properly applied to its 1990 tax liabilities.
Unfortunately for petitioner, this is not the case.
Taxation is a destructive power which interferes with the personal and property rights of the
people and takes from them a portion of their property for the support of the government.
And since taxes are what we pay for civilized society, or are the lifeblood of the nation, the
law frowns against exemptions from taxation and statutes granting tax exemptions are thus
construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. A
claim of refund or exemption from tax payments must be clearly shown and be based on
language in the law too plain to be mistaken. Elsewise stated, taxation is the rule, exemption
therefrom is the exception.32
WHEREFORE, the instant petition is DENIED. The challenged decision of the Court of
Appeals is hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Puno, Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.
G.R. No. 120082 September 11, 1996
MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner,
vs.
HON. FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the Regional
Trial Court, Branch 20, Cebu City, THE CITY OF CEBU, represented by its Mayor HON.
TOMAS R. OSMEÑA, and EUSTAQUIO B. CESA, respondents.

DAVIDE, JR., J.:

For review under Rule 45 of the Rules of Court on a pure question of law are the
decision of 22 March 19951 of the Regional Trial Court (RTC) of Cebu City, Branch 20,
dismissing the petition for declaratory relief in Civil Case No. CEB-16900 entitled
"Mactan Cebu International Airport Authority vs. City of Cebu", and its order of 4, May
19952 denying the motion to reconsider the decision.
We resolved to give due course to this petition for its raises issues dwelling on the
scope of the taxing power of local government-owned and controlled corporations.
The uncontradicted factual antecedents are summarized in the instant petition as
follows:
Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by
virtue of Republic Act No. 6958, mandated to "principally undertake the
economical, efficient and effective control, management and supervision of the
Mactan International Airport in the Province of Cebu and the Lahug Airport in
Cebu City, . . . and such other Airports as may be established in the Province of
Cebu . . . (Sec. 3, RA 6958). It is also mandated to:
a) encourage, promote and develop international and
domestic air traffic in the Central Visayas and
Mindanao regions as a means of making the regions
 centers of international trade and tourism, and
accelerating the development of the means of
transportation and communication in the country; and
b) upgrade the services and facilities of the airports and
to formulate internationally acceptable standards of
airport accommodation and service.
Since the time of its creation, petitioner MCIAA enjoyed the privilege of
exemption from payment of realty taxes in accordance with Section 14 of its
Charter.
Sec. 14. Tax Exemptions. — The authority shall be exempt from
realty taxes imposed by the National Government or any of its
political subdivisions, agencies and instrumentalities . . .
On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office
of the Treasurer of the City of Cebu, demanded payment for realty taxes on
several parcels of land belonging to the petitioner (Lot Nos. 913-G, 743, 88
SWO, 948-A, 989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77
Psd., 746 and 991-A), located at Barrio Apas and Barrio Kasambagan, Lahug,
Cebu City, in the total amount of P2,229,078.79.
Petitioner objected to such demand for payment as baseless and unjustified,
claiming in its favor the aforecited Section 14 of RA 6958 which exempt it from
payment of realty taxes. It was also asserted that it is an instrumentality of the
government performing governmental functions, citing section 133 of the Local
Government Code of 1991 which puts limitations on the taxing powers of local
government units:
Sec. 133. Common Limitations on the Taxing Powers of Local
Government Units. — Unless otherwise provided herein, the
exercise of the taxing powers of provinces, cities, municipalities,
and barangay shall not extend to the levy of the following:
a) . . .
xxx xxx xxx
o) Taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, and
local government units. (Emphasis supplied)
Respondent City refused to cancel and set aside petitioner's realty tax account,
insisting that the MCIAA is a government-controlled corporation whose tax
exemption privilege has been withdrawn by virtue of Sections 193 and 234 of
the Local Governmental Code that took effect on January 1, 1992:
Sec. 193. Withdrawal of Tax Exemption Privilege. — Unless otherwise provided
in this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under RA
No. 6938, non-stock, and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code. (Emphasis supplied)
xxx xxx xxx
Sec. 234. Exemptions from Real Property taxes. — . . .
(a) . . .
xxx xxx xxx
(c) . . .
Except as provided herein, any exemption from payment of real
property tax previously granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned
or controlled corporations are hereby withdrawn upon the effectivity
of this Code.
As the City of Cebu was about to issue a warrant of levy against the properties
of petitioner, the latter was compelled to pay its tax account "under protest" and
thereafter filed a Petition for Declaratory Relief with the Regional Trial Court of
Cebu, Branch 20, on December 29, 1994. MCIAA basically contended that the
taxing powers of local government units do not extend to the levy of taxes or
fees of any kind on an instrumentality of the national government. Petitioner
insisted that while it is indeed a government-owned corporation, it nonetheless
stands on the same footing as an agency or instrumentality of the national
government. Petitioner insisted that while it is indeed a government-owned
corporation, it nonetheless stands on the same footing as an agency or
instrumentality of the national government by the very nature of its powers and
functions.
Respondent City, however, asserted that MACIAA is not an instrumentality of
the government but merely a government-owned corporation performing
proprietary functions As such, all exemptions previously granted to it were
deemed withdrawn by operation of law, as provided under Sections 193 and 234
of the Local Government Code when it took effect on January 1, 1992.3
The petition for declaratory relief was docketed as Civil Case No. CEB-16900.
In its decision of 22 March 1995,4 the trial court dismissed the petition in light of its
findings, to wit:
A close reading of the New Local Government Code of 1991 or RA 7160
provides the express cancellation and withdrawal of exemption of taxes by
government owned and controlled corporation per Sections after the effectivity
of said Code on January 1, 1992, to wit: [proceeds to quote Sections 193 and
234]
Petitioners claimed that its real properties assessed by respondent City
Government of Cebu are exempted from paying realty taxes in view of the
exemption granted under RA 6958 to pay the same (citing Section 14 of RA
6958).
However, RA 7160 expressly provides that "All general and special laws, acts,
city charters, decress [sic], executive orders, proclamations and administrative
regulations, or part or parts thereof which are inconsistent with any of the
provisions of this Code are hereby repealed or modified accordingly." ([f],
Section 534, RA 7160).
With that repealing clause in RA 7160, it is safe to infer and state that the tax
exemption provided for in RA 6958 creating petitioner had been expressly
repealed by the provisions of the New Local Government Code of 1991.
So that petitioner in this case has to pay the assessed realty tax of its properties
effective after January 1, 1992 until the present.
This Court's ruling finds expression to give impetus and meaning to the overall
objectives of the New Local Government Code of 1991, RA 7160. "It is hereby
declared the policy of the State that the territorial and political subdivisions of the
State shall enjoy genuine and meaningful local autonomy to enable them to
attain their fullest development as self-reliant communities and make them more
effective partners in the attainment of national goals. Towards this end, the State
shall provide for a more responsive and accountable local government structure
instituted through a system of decentralization whereby local government units
shall be given more powers, authority, responsibilities, and resources. The
process of decentralization shall proceed from the national government to the
local government units. . . .5
Its motion for reconsideration having been denied by the trial court in its 4 May 1995
order, the petitioner filed the instant petition based on the following assignment of
errors:
 I RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE
PETITIONER IS VESTED WITH GOVERNMENT POWERS AND
FUNCTIONS WHICH PLACE IT IN THE SAME CATEGORY AS AN
INSTRUMENTALITY OR AGENCY OF THE GOVERNMENT.
II RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER
IS LIABLE TO PAY REAL PROPERTY TAXES TO THE CITY OF
CEBU.
Anent the first assigned error, the petitioner asserts that although it is a government-
owned or controlled corporation it is mandated to perform functions in the same
category as an instrumentality of Government. An instrumentality of Government is
one created to perform governmental functions primarily to promote certain aspects of
the economic life of the people.6 Considering its task "not merely to efficiently operate
and manage the Mactan-Cebu International Airport, but more importantly, to carry out
the Government policies of promoting and developing the Central Visayas and
Mindanao regions as centers of international trade and tourism, and accelerating the
development of the means of transportation and communication in the country,"7 and
that it is an attached agency of the Department of Transportation and Communication
(DOTC),8 the petitioner "may stand in [sic] the same footing as an agency or
instrumentality of the national government." Hence, its tax exemption privilege under
Section 14 of its Charter "cannot be considered withdrawn with the passage of the
Local Government Code of 1991 (hereinafter LGC) because Section 133 thereof
specifically states that the taxing powers of local government units shall not extend to
the levy of taxes of fees or charges of any kind on the national government its
agencies and instrumentalities."
As to the second assigned error, the petitioner contends that being an instrumentality
of the National Government, respondent City of Cebu has no power nor authority to
impose realty taxes upon it in accordance with the aforesaid Section 133 of the LGC,
as explained in Basco vs. Philippine Amusement and Gaming Corporation;9
Local governments have no power to tax instrumentalities of the National
Government. PAGCOR is a government owned or controlled corporation with an
original character, PD 1869. All its shares of stock are owned by the National
Government. . . .
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter
joke is governmental, which places it in the category of an agency or
instrumentality of the Government. Being an instrumentality of the Government,
PAGCOR should be and actually is exempt from local taxes. Otherwise, its
 operation might be burdened, impeded or subjected to control by a mere Local
government.
The states have no power by taxation or otherwise, to retard, impede, burden or
in any manner control the operation of constitutional laws enacted by Congress
to carry into execution the powers vested in the federal government. (McCulloch
v. Maryland, 4 Wheat 316, 4 L Ed. 579).
This doctrine emanates from the "supremacy" of the National Government over
local government.
Justice Holmes, speaking for the Supreme Court, make references to the entire
absence of power on the part of the States to touch, in that way (taxation) at
least, the instrumentalities of the United States (Johnson v. Maryland, 254 US
51) and it can be agreed that no state or political subdivision can regulate a
federal instrumentality in such a way as to prevent it from consummating its
federal responsibilities, or even to seriously burden it in the accomplishment of
them. (Antieau Modern Constitutional Law, Vol. 2, p. 140)
Otherwise mere creature of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable activities
or enterprise using the power to tax as "a toll for regulation" (U.S. v. Sanchez,
340 US 42). The power to tax which was called by Justice Marshall as the
"power to destroy" (McCulloch v. Maryland, supra) cannot be allowed to defeat
an instrumentality or creation of the very entity which has the inherent power to
wield it. (Emphasis supplied)
It then concludes that the respondent Judge "cannot therefore correctly say that the
questioned provisions of the Code do not contain any distinction between a
governmental function as against one performing merely proprietary ones such that
the exemption privilege withdrawn under the said Code would apply to all government
corporations." For it is clear from Section 133, in relation to Section 234, of the LGC
that the legislature meant to exclude instrumentalities of the national government from
the taxing power of the local government units.
In its comment respondent City of Cebu alleges that as local a government unit and a
political subdivision, it has the power to impose, levy, assess, and collect taxes within
its jurisdiction. Such power is guaranteed by the Constitution10 and enhanced further
by the LGC. While it may be true that under its Charter the petitioner was exempt from
the payment of realty taxes,11 this exemption was withdrawn by Section 234 of the
LGC. In response to the petitioner's claim that such exemption was not repealed
because being an instrumentality of the National Government, Section 133 of the LGC
prohibits local government units from imposing taxes, fees, or charges of any kind on
it, respondent City of Cebu points out that the petitioner is likewise a government-
owned corporation, and Section 234 thereof does not distinguish between
government-owned corporation, and Section 234 thereof does not distinguish between
government-owned corporation, and Section 234 thereof does not distinguish between
government-owned or controlled corporations performing governmental and purely
proprietary functions. Respondent city of Cebu urges this the Manila International
Airport Authority is a governmental-owned corporation, 12 and to reject the application
of Basco because it was "promulgated . . . before the enactment and the singing into
law of R.A. No. 7160," and was not, therefore, decided "in the light of the spirit and
intention of the framers of the said law.
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its
range, acknowledging in its very nature no limits, so that security against its abuse is
to be found only in the responsibility of the legislature which imposes the tax on the
constituency who are to pay it. Nevertheless, effective limitations thereon may be
imposed by the people through their Constitutions.13 Our Constitution, for instance,
provides that the rule of taxation shall be uniform and equitable and Congress shall
evolve a progressive system of taxation.14 So potent indeed is the power that it was
once opined that "the power to tax involves the power to destroy."15 Verily, taxation is a
destructive power which interferes with the personal and property for the support of the
government. Accordingly, tax statutes must be construed strictly against the
government and liberally in favor of the taxpayer.16 But since taxes are what we pay
for civilized society,17 or are the lifeblood of the nation, the law frowns against
exemptions from taxation and statutes granting tax exemptions are thus
construed strictissimi juris against the taxpayers and liberally in favor of the taxing
authority.18 A claim of exemption from tax payment must be clearly shown and based
on language in the law too plain to be mistaken.19 Elsewise stated, taxation is the rule,
exemption therefrom is the exception.20 However, if the grantee of the exemption is a
political subdivision or instrumentality, the rigid rule of construction does not apply
because the practical effect of the exemption is merely to reduce the amount of money
that has to be handled by the government in the course of its operations.21
The power to tax is primarily vested in the Congress; however, in our jurisdiction, it
may be exercised by local legislative bodies, no longer merely by virtue of a valid
delegation as before, but pursuant to direct authority conferred by Section 5, Article X
of the Constitution.22 Under the latter, the exercise of the power may be subject to
such guidelines and limitations as the Congress may provide which, however, must be
consistent with the basic policy of local autonomy.
There can be no question that under Section 14 of R.A. No. 6958 the petitioner is
exempt from the payment of realty taxes imposed by the National Government or any
of its political subdivisions, agencies, and instrumentalities. Nevertheless, since
taxation is the rule and exemption therefrom the exception, the exemption may thus be
withdrawn at the pleasure of the taxing authority. The only exception to this rule is
where the exemption was granted to private parties based on material consideration of
a mutual nature, which then becomes contractual and is thus covered by the non-
impairment clause of the Constitution.23
The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the
exercise by local government units of their power to tax, the scope thereof or its
limitations, and the exemption from taxation.
Section 133 of the LGC prescribes the common limitations on the taxing powers of
local government units as follows:
Sec. 133. Common Limitations on the Taxing Power of Local Government Units.
— Unless otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend to the levy of
the following:
(a) Income tax, except when levied on banks and other financial
institutions;
(b) Documentary stamp tax;
(c) Taxes on estates, "inheritance, gifts, legacies and other
acquisitions mortis causa, except as otherwise provided herein
(d) Customs duties, registration fees of vessels and wharfage on
wharves, tonnage dues, and all other kinds of customs fees charges
and dues except wharfage on wharves constructed and maintained
by the local government unit concerned:
(e) Taxes, fees and charges and other imposition upon goods
carried into or out of, or passing through, the territorial jurisdictions
of local government units in the guise or charges for wharfages,
tolls for bridges or otherwise, or other taxes, fees or charges in any
form whatsoever upon such goods or merchandise;
(f) Taxes fees or charges on agricultural and aquatic products when
sold by marginal farmers or fishermen;
(g) Taxes on business enterprise certified to be the Board of
Investment as pioneer or non-pioneer for a period of six (6) and four
(4) years, respectively from the date of registration;
 (h) Excise taxes on articles enumerated under the National Internal
Revenue Code, as amended, and taxes, fees or charges on
petroleum products;
(i) Percentage or value added tax (VAT) on sales, barters or
exchanges or similar transactions on goods or services except as
otherwise provided herein;
(j) Taxes on the gross receipts of transportation contractor and
person engage in the transportation of passengers of freight by hire
and common carriers by air, land, or water, except as provided in
this code;
(k) Taxes on premiums paid by ways reinsurance or retrocession;
(l) Taxes, fees, or charges for the registration of motor vehicles and
for the issuance of all kinds of licenses or permits for the driving of
thereof, except, tricycles;
(m) Taxes, fees, or other charges on Philippine product actually
exported, except as otherwise provided herein;
(n) Taxes, fees, or charges, on Countryside and Barangay Business
Enterprise and Cooperatives duly registered under R.A. No. 6810
and Republic Act Numbered Sixty nine hundred thirty-eight (R.A.
No. 6938) otherwise known as the "Cooperative Code of the
Philippines; and
(o) TAXES, FEES, OR CHARGES OF ANY KIND ON THE
NATIONAL GOVERNMENT, ITS AGENCIES AND
INSTRUMENTALITIES, AND LOCAL GOVERNMENT UNITS.
(emphasis supplied)
Needless to say the last item (item o) is pertinent in this case. The "taxes, fees or
charges" referred to are "of any kind", hence they include all of these, unless otherwise
provided by the LGC. The term "taxes" is well understood so as to need no further
elaboration, especially in the light of the above enumeration. The term "fees" means
charges fixed by law or Ordinance for the regulation or inspection of business
activity,24 while "charges" are pecuniary liabilities such as rents or fees against person
or property.25
Among the "taxes" enumerated in the LGC is real property tax, which is governed by
Section 232. It reads as follows:
 Sec. 232. Power to Levy Real Property Tax. — A province or city or a
municipality within the Metropolitan Manila Area may levy on an annual ad
valorem tax on real property such as land, building, machinery and other
improvements not hereafter specifically exempted.
Section 234 of LGC provides for the exemptions from payment of real property taxes
and withdraws previous exemptions therefrom granted to natural and juridical persons,
including government owned and controlled corporations, except as provided therein.
It provides:
Sec. 234. Exemptions from Real Property Tax. — The following are exempted
from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of
its political subdivisions except when the beneficial use thereof had
been granted, for reconsideration or otherwise, to a taxable person;
(b) Charitable institutions, churches, parsonages or convents
appurtenants thereto, mosques nonprofits or religious cemeteries
and all lands, building and improvements actually, directly, and
exclusively used for religious charitable or educational purposes;
(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;
(d) All real property owned by duly registered cooperatives as
provided for under R.A. No. 6938; and;
(e) Machinery and equipment used for pollution control and
environmental protection.
Except as provided herein, any exemptions from payment of real
property tax previously granted to or presently enjoyed by, all
persons whether natural or juridical, including all government owned
or controlled corporations are hereby withdrawn upon the effectivity
of his Code.
These exemptions are based on the ownership, character, and use of the property.
Thus;
(a) Ownership Exemptions. Exemptions from real property taxes on
the basis of ownership are real properties owned by: (i) the
 Republic, (ii) a province, (iii) a city, (iv) a municipality, (v) a
barangay, and (vi) registered cooperatives.
(b) Character Exemptions. Exempted from real property taxes on
the basis of their character are: (i) charitable institutions, (ii) houses
and temples of prayer like churches, parsonages or convents
appurtenant thereto, mosques, and (iii) non profit or religious
cemeteries.
(c) Usage exemptions. Exempted from real property taxes on the
basis of the actual, direct and exclusive use to which they are
devoted are: (i) all lands buildings and improvements which are
actually, directed and exclusively used for religious, charitable or
educational purpose; (ii) all machineries and equipment actually,
directly and exclusively used or by local water districts or by
government-owned or controlled corporations engaged in the
supply and distribution of water and/or generation and transmission
of electric power; and (iii) all machinery and equipment used for
pollution control and environmental protection.
To help provide a healthy environment in the midst of the modernization of the
country, all machinery and equipment for pollution control and environmental
protection may not be taxed by local governments.
2. Other Exemptions Withdrawn. All other exemptions previously
granted to natural or juridical persons including government-owned
or controlled corporations are withdrawn upon the effectivity of the
Code.26
Section 193 of the LGC is the general provision on withdrawal of tax exemption
privileges. It provides:
Sec. 193. Withdrawal of Tax Exemption Privileges. — Unless otherwise
provided in this code, tax exemptions or incentives granted to or presently
enjoyed by all persons, whether natural or juridical, including government-
owned, or controlled corporations, except local water districts, cooperatives duly
registered under R.A. 6938, non stock and non profit hospitals and educational
constitutions, are hereby withdrawn upon the effectivity of this Code.
On the other hand, the LGC authorizes local government units to grant tax exemption
privileges. Thus, Section 192 thereof provides:
 Sec. 192. Authority to Grant Tax Exemption Privileges. — Local government
units may, through ordinances duly approved, grant tax exemptions, incentives
or reliefs under such terms and conditions as they may deem necessary.
The foregoing sections of the LGC speaks of: (a) the limitations on the taxing powers
of local government units and the exceptions to such limitations; and (b) the rule on tax
exemptions and the exceptions thereto. The use of exceptions of provisos in these
section, as shown by the following clauses:
(1) "unless otherwise provided herein" in the opening paragraph of
Section 133;
(2) "Unless otherwise provided in this Code" in section 193;
(3) "not hereafter specifically exempted" in Section 232; and
(4) "Except as provided herein" in the last paragraph of Section 234
initially hampers a ready understanding of the sections. Note, too, that the
aforementioned clause in section 133 seems to be inaccurately worded. Instead of the
clause "unless otherwise provided herein," with the "herein" to mean, of course, the
section, it should have used the clause "unless otherwise provided in this Code." The
former results in absurdity since the section itself enumerates what are beyond the
taxing powers of local government units and, where exceptions were intended, the
exceptions were explicitly indicated in the text. For instance, in item (a) which excepts
the income taxes "when livied on banks and other financial institutions", item (d) which
excepts "wharfage on wharves constructed and maintained by the local government
until concerned"; and item (1) which excepts taxes, fees, and charges for the
registration and issuance of license or permits for the driving of "tricycles". It may also
be observed that within the body itself of the section, there are exceptions which can
be found only in other parts of the LGC, but the section interchangeably uses therein
the clause "except as otherwise provided herein" as in items (c) and (i), or the clause
"except as otherwise provided herein" as in items (c) and (i), or the clause "excepts as
provided in this Code" in item (j). These clauses would be obviously unnecessary or
mere surplus-ages if the opening clause of the section were" "Unless otherwise
provided in this Code" instead of "Unless otherwise provided herein". In any event,
even if the latter is used, since under Section 232 local government units have the
power to levy real property tax, except those exempted therefrom under Section 234,
then Section 232 must be deemed to qualify Section 133.
Thus, reading together Section 133, 232 and 234 of the LGC, we conclude that as a
general rule, as laid down in Section 133 the taxing powers of local government units
cannot extend to the levy of inter alia, "taxes, fees, and charges of any kind of the
National Government, its agencies and instrumentalties, and local government units";
however, pursuant to Section 232, provinces, cities, municipalities in the Metropolitan
Manila Area may impose the real property tax except on, inter alia, "real property
owned by the Republic of the Philippines or any of its political subdivisions except
when the beneficial used thereof has been granted, for consideration or otherwise, to a
taxable person", as provided in item (a) of the first paragraph of Section 234.
As to tax exemptions or incentives granted to or presently enjoyed by natural or
juridical persons, including government-owned and controlled corporations, Section
193 of the LGC prescribes the general rule, viz., they are withdrawn upon the
effectivity of the LGC, except upon the effectivity of the LGC, except those granted to
local water districts, cooperatives duly registered under R.A. No. 6938, non stock and
non-profit hospitals and educational institutions, and unless otherwise provided in the
LGC. The latter proviso could refer to Section 234, which enumerates the properties
exempt from real property tax. But the last paragraph of Section 234 further qualifies
the retention of the exemption in so far as the real property taxes are concerned by
limiting the retention only to those enumerated there-in; all others not included in the
enumeration lost the privilege upon the effectivity of the LGC. Moreover, even as the
real property is owned by the Republic of the Philippines, or any of its political
subdivisions covered by item (a) of the first paragraph of Section 234, the exemption is
withdrawn if the beneficial use of such property has been granted to taxable person for
consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of
the LGC, exemptions from real property taxes granted to natural or juridical persons,
including government-owned or controlled corporations, except as provided in the said
section, and the petitioner is, undoubtedly, a government-owned corporation, it
necessarily follows that its exemption from such tax granted it in Section 14 of its
charter, R.A. No. 6958, has been withdrawn. Any claim to the contrary can only be
justified if the petitioner can seek refuge under any of the exceptions provided in
Section 234, but not under Section 133, as it now asserts, since, as shown above, the
said section is qualified by Section 232 and 234.
In short, the petitioner can no longer invoke the general rule in Section 133 that the
taxing powers of the local government units cannot extend to the levy of:
(o) taxes, fees, or charges of any kind on the National Government,
its agencies, or instrumentalities, and local government units.
I must show that the parcels of land in question, which are real property, are any one
of those enumerated in Section 234, either by virtue of ownership, character, or use of
the property. Most likely, it could only be the first, but not under any explicit provision
of the said section, for one exists. In light of the petitioner's theory that it is an
"instrumentality of the Government", it could only be within be first item of the first
paragraph of the section by expanding the scope of the terms Republic of the
Philippines" to embrace . . . . . . "instrumentalities" and "agencies" or expediency we
quote:
(a) real property owned by the Republic of the Philippines, or any of
the Philippines, or any of its political subdivisions except when the
beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person.
This view does not persuade us. In the first place, the petitioner's claim that it is an
instrumentality of the Government is based on Section 133(o), which expressly
mentions the word "instrumentalities"; and in the second place it fails to consider the
fact that the legislature used the phrase "National Government, its agencies and
instrumentalities" "in Section 133(o),but only the phrase "Republic of the Philippines or
any of its political subdivision "in Section 234(a).
The terms "Republic of the Philippines" and "National Government" are not
interchangeable. The former is boarder and synonymous with "Government of the
Republic of the Philippines" which the Administrative Code of the 1987 defines as the
"corporate governmental entity though which the functions of the government are
exercised through at the Philippines, including, saves as the contrary appears from the
context, the various arms through which political authority is made effective in the
Philippines, whether pertaining to the autonomous reason, the provincial, city,
municipal or barangay subdivision or other forms of local government."27 These
autonomous regions, provincial, city, municipal or barangay subdivisions" are the
political subdivision.28
On the other hand, "National Government" refers "to the entire machinery of the
central government, as distinguished from the different forms of local
Governments."29 The National Government then is composed of the three great
departments the executive, the legislative and the judicial.30
An "agency" of the Government refers to "any of the various units of the Government,
including a department, bureau, office instrumentality, or government-owned or
controlled corporation, or a local government or a distinct unit therein;"31 while 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 some if not all corporate powers, administering special funds, and
enjoying operational autonomy; usually through a charter. This term includes
regulatory agencies, chartered institutions and government-owned and controlled
corporations".32
If Section 234(a) intended to extend the exception therein to the withdrawal of the
exemption from payment of real property taxes under the last sentence of the said
section to the agencies and instrumentalities of the National Government mentioned in
Section 133(o), then it should have restated the wording of the latter. Yet, it did not
Moreover, that Congress did not wish to expand the scope of the exemption in Section
234(a) to include real property owned by other instrumentalities or agencies of the
government including government-owned and controlled corporations is further borne
out by the fact that the source of this exemption is Section 40(a) of P.D. No. 646,
otherwise known as the Real Property Tax Code, which reads:
Sec 40. Exemption from Real Property Tax. — The exemption shall be as
follows:
(a) Real property owned by the Republic of the
Philippines or any of its political subdivisions and any
government-owned or controlled corporations so
exempt by is charter: Provided, however, that this
exemption shall not apply to real property of the above
mentioned entities the beneficial use of which has been
granted, for consideration or otherwise, to a taxable
person.
Note that as a reproduced in Section 234(a), the phrase "and any government-owned
or controlled corporation so exempt by its charter" was excluded. The justification for
this restricted exemption in Section 234(a) seems obvious: to limit further tax
exemption privileges, specially in light of the general provision on withdrawal of
exemption from payment of real property taxes in the last paragraph of property taxes
in the last paragraph of Section 234. These policy considerations are consistent with
the State policy to ensure autonomy to local governments33 and the objective of the
LGC that they enjoy genuine and meaningful local autonomy to enable them to attain
their fullest development as self-reliant communities and make them effective partners
in the attainment of national goals.34 The power to tax is the most effective instrument
to raise needed revenues to finance and support myriad activities of local government
units for the delivery of basic services essential to the promotion of the general welfare
and the enhancement of peace, progress, and prosperity of the people. It may also be
relevant to recall that the original reasons for the withdrawal of tax exemption
privileges granted to government-owned and controlled corporations and all other units
of government were that such privilege resulted in serious tax base erosion and
distortions in the tax treatment of similarly situated enterprises, and there was a need
for this entities to share in the requirements of the development, fiscal or otherwise, by
paying the taxes and other charges due from them.35
The crucial issues then to be addressed are: (a) whether the parcels of land in
question belong to the Republic of the Philippines whose beneficial use has been
granted to the petitioner, and (b) whether the petitioner is a "taxable person".
Section 15 of the petitioner's Charter provides:
Sec. 15. Transfer of Existing Facilities and Intangible Assets. — All existing
public airport facilities, runways, lands, buildings and other properties, movable
or immovable, belonging to or presently administered by the airports, and all
assets, powers, rights, interests and privileges relating on airport works, or air
operations, including all equipment which are necessary for the operations of air
navigation, acrodrome control towers, crash, fire, and rescue facilities are
hereby transferred to the Authority: Provided however, that the operations
control of all equipment necessary for the operation of radio aids to air
navigation, airways communication, the approach control office, and the area
control center shall be retained by the Air Transportation Office. No equipment,
however, shall be removed by the Air Transportation Office from Mactan without
the concurrence of the authority. The authority may assist in the maintenance of
the Air Transportation Office equipment.
The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan
International AirPort in the Province of Cebu",36 which belonged to the Republic of the
Philippines, then under the Air Transportation Office (ATO).37
It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then
administered by the Lahug Air Port and includes the parcels of land the respondent
City of Cebu seeks to levy on for real property taxes. This section involves a "transfer"
of the "lands" among other things, to the petitioner and not just the transfer of the
beneficial use thereof, with the ownership being retained by the Republic of the
Philippines.
This "transfer" is actually an absolute conveyance of the ownership thereof because
the petitioner's authorized capital stock consists of, inter alia "the value of such real
estate owned and/or administered by the airports."38 Hence, the petitioner is now the
owner of the land in question and the exception in Section 234(c) of the LGC is
inapplicable.
Moreover, the petitioner cannot claim that it was never a "taxable person" under its
Charter. It was only exempted from the payment of real property taxes. The grant of
 the privilege only in respect of this tax is conclusive proof of the legislative intent to
make it a taxable person subject to all taxes, except real property tax.
Finally, even if the petitioner was originally not a taxable person for purposes of real
property tax, in light of the forgoing disquisitions, it had already become even if it be
conceded to be an "agency" or "instrumentality" of the Government, a taxable person
for such purpose in view of the withdrawal in the last paragraph of Section 234 of
exemptions from the payment of real property taxes, which, as earlier adverted to,
applies to the petitioner.
Accordingly, the position taken by the petitioner is untenable. Reliance on Basco
vs. Philippine Amusement and Gaming Corporation39 is unavailing since it was
decided before the effectivity of the LGC. Besides, nothing can prevent Congress from
decreeing that even instrumentalities or agencies of the government performing
governmental functions may be subject to tax. Where it is done precisely to fulfill a
constitutional mandate and national policy, no one can doubt its wisdom.
WHEREFORE, the instant petition is DENIED. The challenged decision and order of
the Regional Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are
AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Narvasa, C.J., Melo, Francisco and Panganiban, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-31156 February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant
appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and
Assistant Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for appellees.
MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No.
3294, which was certified to Us by the Court of Appeals on October 6, 1969, as involving
only pure questions of law, challenging the power of taxation delegated to municipalities
under the Local Autonomy Act (Republic Act No. 2264, as amended, June 19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the
Philippines, Inc., commenced a complaint with preliminary injunction before the Court of First
Instance of Leyte for that court to declare Section 2 of Republic Act No. 2264.1 otherwise
known as the Local Autonomy Act, unconstitutional as an undue delegation of taxing
authority as well as to declare Ordinances Nos. 23 and 27, series of 1962, of the municipality
of Tanauan, Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of
which state that, first, both Ordinances Nos. 23 and 27 embrace or cover the same subject
matter and the production tax rates imposed therein are practically the same, and second,
that on January 17, 1963, the acting Municipal Treasurer of Tanauan, Leyte, as per his letter
addressed to the Manager of the Pepsi-Cola Bottling Plant in said municipality, sought to
enforce compliance by the latter of the provisions of said Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25,
1962, levies and collects "from soft drinks producers and manufacturers a tai of one-
sixteenth (1/16) of a centavo for every bottle of soft drink corked." 2 For the purpose of
computing the taxes due, the person, firm, company or corporation producing soft drinks
shall submit to the Municipal Treasurer a monthly report, of the total number of bottles
produced and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962,
levies and collects "on soft drinks produced or manufactured within the territorial jurisdiction
of this municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.)
of volume capacity." 4 For the purpose of computing the taxes due, the person, fun company,
partnership, corporation or plant producing soft drinks shall submit to the Municipal Treasurer
a monthly report of the total number of gallons produced or manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal
production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the
complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring
Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay the taxes due
under the oft the said Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of
Appeals, which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act
of 1948, as amended.
There are three capital questions raised in this appeal:
1. — Is Section 2, Republic Act No. 2264 an undue delegation of power,
confiscatory and oppressive?
2. — Do Ordinances Nos. 23 and 27 constitute double taxation and impose
percentage or specific taxes?
3. — Are Ordinances Nos. 23 and 27 unjust and unfair?
1. 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. 6 It is a power that is purely legislative and which the central legislative body cannot
delegate either to the executive or judicial department of the government without infringing
upon the theory of separation of powers. The exception, however, lies in the case of
municipal corporations, to which, said theory does not apply. Legislative powers may be
delegated to local governments in respect of matters of local concern. 7 This is sanctioned by
immemorial practice. 8 By necessary implication, the legislative power to create political
corporations for purposes of local self-government carries with it the power to confer on such
local governmental agencies the power to tax. 9 Under the New Constitution, local
governments are granted the autonomous authority to create their own sources of revenue
and to levy taxes. Section 5, Article XI provides: "Each local government unit shall have the
power to create its sources of revenue and to levy taxes, subject to such limitations as may
be provided by law." Withal, it cannot be said that Section 2 of Republic Act No. 2264
emanated from beyond the sphere of the legislative power to enact and vest in local
governments the power of local taxation.
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
delegating the authority, the State is not limited 6 the exact measure of that which is
exercised by itself. When it is said that the taxing power may be delegated to municipalities
and the like, it is meant that there may be delegated such measure of power to impose and
collect taxes as the legislature may deem expedient. Thus, municipalities may be permitted
to tax subjects which for reasons of public policy the State has not deemed wise to tax for
more general purposes. 10 This is not to say though that the constitutional injunction against
deprivation of property without due process of law may be passed over under the guise of
the taxing power, except when the taking of the property is in the lawful exercise of the taxing
power, as when (1) the tax is for a public purpose; (2) the rule on uniformity of taxation is
observed; (3) either the person or property taxed is within the jurisdiction of the government
levying the tax; and (4) in the assessment and collection of certain kinds of taxes notice and
opportunity for hearing are provided. 11 Due process is usually violated where the tax
imposed is for a private as distinguished from a public purpose; a tax is imposed on property
outside the State, i.e., extraterritorial taxation; and arbitrary or oppressive methods are used
in assessing and collecting taxes. But, a tax does not violate the due process clause, as
applied to a particular taxpayer, although the purpose of the tax will result in an injury rather
than a benefit to such taxpayer. Due process does not require that the property subject to the
tax or the amount of tax to be raised should be determined by judicial inquiry, and a notice
and hearing as to the amount of the tax and the manner in which it shall be apportioned are
generally not necessary to due process of law. 12
There is no validity to the assertion that the delegated authority can be declared
unconstitutional on the theory of double taxation. It must be observed that the delegating
authority specifies the limitations and enumerates the taxes over which local taxation may
not be exercised. 13 The reason is that the State has exclusively reserved the same for its
own prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental
law, since We have not adopted as part thereof the injunction against double taxation found
in the Constitution of the United States and some states of the Union.14 Double taxation
becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same
governmental entity 15 or by the same jurisdiction for the same purpose, 16 but not in a case
where one tax is imposed by the State and the other by the city or municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation,
because these two ordinances cover the same subject matter and impose practically the
same tax rate. The thesis proceeds from its assumption that both ordinances are valid and
legally enforceable. This is not so. As earlier quoted, Ordinance No. 23, which was approved
on September 25, 1962, levies or collects from soft drinks producers or manufacturers a tax
of one-sixteen (1/16) of a centavo for .every bottle corked, irrespective of the volume
contents of the bottle used. When it was discovered that the producer or manufacturer could
increase the volume contents of the bottle and still pay the same tax rate, the Municipality of
Tanauan enacted Ordinance No. 27, approved on October 28, 1962, imposing a tax of one
centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The difference
between the two ordinances clearly lies in the tax rate of the soft drinks produced: in
Ordinance No. 23, it was 1/16 of a centavo for every bottle corked; in Ordinance No. 27, it is
one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The
intention of the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus clear: it
was intended as a plain substitute for the prior Ordinance No. 23, and operates as a repeal
of the latter, even without words to that effect. 18 Plaintiff-appellant in its brief admitted that
defendants-appellees are only seeking to enforce Ordinance No. 27, series of 1962. Even
the stipulation of facts confirms the fact that the Acting Municipal Treasurer of Tanauan,
Leyte sought t6 compel compliance by the plaintiff-appellant of the provisions of said
Ordinance No. 27, series of 1962. The aforementioned admission shows that only Ordinance
No. 27, series of 1962 is being enforced by defendants-appellees. Even the Provincial Fiscal,
counsel for defendants-appellees admits in his brief "that Section 7 of Ordinance No. 27,
series of 1962 clearly repeals Ordinance No. 23 as the provisions of the latter are
inconsistent with the provisions of the former."
That brings Us to the question of whether the remaining Ordinance No. 27 imposes a
percentage or a specific tax. Undoubtedly, the taxing authority conferred on local
governments under Section 2, Republic Act No. 2264, is broad enough as to extend to
almost "everything, accepting those which are mentioned therein." As long as the text levied
under the authority of a city or municipal ordinance is not within the exceptions and
limitations in the law, the same comes within the ambit of the general rule, pursuant to the
rules of exclucion attehus and exceptio firmat regulum in cabisus non excepti 19 The
limitation applies, particularly, to the prohibition against municipalities and municipal districts
to impose "any percentage tax or other taxes in any form based thereon nor impose taxes on
articles subject to specific tax except gasoline, under the provisions of the National Internal
Revenue Code." For purposes of this particular limitation, a municipal ordinance which
prescribes a set ratio between the amount of the tax and the volume of sale of the taxpayer
imposes a sales tax and is null and void for being outside the power of the municipality to
enact. 20 But, the imposition of "a tax of one centavo (P0.01) on each gallon (128 fluid
ounces, U.S.) of volume capacity" on all soft drinks produced or manufactured under
Ordinance No. 27 does not partake of the nature of a percentage tax on sales, or other taxes
in any form based thereon. The tax is levied on the produce (whether sold or not) and not on
the sales. The volume capacity of the taxpayer's production of soft drinks is considered
solely for purposes of determining the tax rate on the products, but there is not set ratio
between the volume of sales and the amount of the tax.21
Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on
specified articles, such as distilled spirits, wines, fermented liquors, products of tobacco other
than cigars and cigarettes, matches firecrackers, manufactured oils and other fuels, coal,
bunker fuel oil, diesel fuel oil, cinematographic films, playing cards, saccharine, opium and
other habit-forming drugs. 22 Soft drink is not one of those specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all
softdrinks, produced or manufactured, or an equivalent of 1-½ centavos per case, 23 cannot
be considered unjust and unfair. 24 an increase in the tax alone would not support the claim
that the tax is oppressive, unjust and confiscatory. Municipal corporations are allowed much
discretion in determining the reates of imposable taxes. 25 This is in line with the
constutional policy of according the widest possible autonomy to local governments in
matters of local taxation, an aspect that is given expression in the Local Tax Code (PD No.
231, July 1, 1973). 26 Unless the amount is so excessive as to be prohibitive, courts will go
slow in writing off an ordinance as unreasonable. 27 Reluctance should not deter compliance
with an ordinance such as Ordinance No. 27 if the purpose of the law to further strengthen
local autonomy were to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with five but not more
than ten crowners or P2,000.00 with ten but not more than twenty crowners imposed on
manufacturers, producers, importers and dealers of soft drinks and/or mineral waters under
Ordinance No. 54, series of 1964, as amended by Ordinance No. 41, series of 1968, of
defendant Municipality, 29 appears not to affect the resolution of the validity of Ordinance No.
27. Municipalities are empowered to impose, not only municipal license taxes upon persons
engaged in any business or occupation but also to levy for public purposes, just and uniform
taxes. The ordinance in question (Ordinance No. 27) comes within the second power of a
municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise
known as the Local Autonomy Act, as amended, is hereby upheld and Municipal Ordinance
No. 27 of the Municipality of Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance
No. 23, same series, is hereby declared of valid and legal effect. Costs against petitioner-
appellant.
SO ORDERED.
Castro, C.J., Teehankee, Barredo, Makasiar, Antonio, Esguerra, Muñoz Palma, Aquino and
Concepcion, Jr., JJ., concur.
G.R. No. 127249 February 27, 1998
CAMARINES NOTE ELECTRIC COOPERATIVE, INC. (CANORECO); RUBEN, N.
BARRAMEDA; ELVIS L. ESPIRITU; MERARDO G. ENERO, JR.; MERCELITO B. ABAS;
and REYNALDO V. ABUNDO, petitioners,
vs.
HON. RUBEN D. TORRES, in his capacity as Executive Secretary; REX TANTIONGCO;
HONESTO DE JESUS; ANDRES IBASCO; TEODULO M. MEA; and VICENTE
LUKBAN, respondents.

DAVIDE, JR., J.:

May the Office of the President validly constitute an ad hoc committee to take over and
manage the affairs of an electric cooperative?
This is the key issue in this original action for certiorari and prohibition under Rule 65
of the Rules of Court wherein the petitioners seek to (a) annul and set aside
Memorandum Order No. 409 of the Office of the President dated 3 December 1996
constituting an Ad Hoc Committee to take over and manage the affairs of the
Camarines Norte Electric Cooperative, Inc., (hereafter CANORECO) "until such time
as a general membership meeting can be called to decide the serious issues affecting
the said cooperative and normalcy in operations is restored"; and (b) prohibit the
respondents from performing acts or continuing proceedings pursuant to the
Memorandum Order.
The factual backdrop of this case is not complicated.
Petitioner CANORECO is an electric cooperative organized under the provisions of
P.D. No. 269, otherwise known as the National Electrification Administration Decree,
as amended by P.D. No. 1645.
On 10 March 1990, then President Corazon C. Aquino signed into law R.A. No. 6938
and R.A. No. 6939. The former is the Cooperative Code of the Philippines, while the
latter created the Cooperative Development Authority (CDA) and vested solely upon
the CDA the power to register cooperatives.
Article 122 of the Cooperative Code expressly provides that electric cooperatives shall
be covered by the Code. Article 128 of the said Code and Section 17 of R.A. No. 6939
similarly provide that cooperatives created under P.D. No. 269, as amended by P.D.
No. 1645, shall have three years within which to qualify and register with the CDA and
that after they shall have so qualified and registered, the provisions of Sections 3 and
5 of P.D. No. 1645 shall no longer be applicable to them. These Sections 3 and 5 read
as follows:
Sec. 3. Section 5(a), Chapter II of Presidential Decree No. 269 is hereby
amended by adding sub-paragraph (6) to read as follows:
(6) To authorize the NEA Administrator to designate, subject to the confirmation
of the Board Administrators, an Acting General Manager and/or Project
Supervisor for a Cooperative where vacancies in the said positions occur and/or
when the interest of the Cooperative and the program so requires, and to
prescribe the functions of said Acting General Manager and/or Project
Supervisor, which powers shall not be nullified, altered or diminished by any
policy or resolution of the Board of Directors of the Cooperative concerned.
xxx xxx xxx
Sec. 5. Section 10, Chapter II of Presidential Decree No. 269 is hereby
amended to read as follows:
Sec. 10. Enforcement Powers and Remedies. — In the exercise of its power of
supervision and control over electric cooperatives and other borrower,
 supervised or controlled entities, the NEA is empowered to issue orders, rules
and regulations and motu proprio or upon petition of third parties, to conduct
investigations, referenda and other similar actions in all matters affecting said
electric cooperatives and other borrower, or supervised or controlled entities.
xxx xxx xxx
Finally, the repealing clause (Article 127) of the Cooperative Code provides:
Provided, however, That nothing in this Code shall be interpreted to mean the
amendment or repeal of any provision of Presidential Decree No. 269: Provided,
further, That the electric cooperatives which qualify as such under this Code
shall fall under the coverage thereof.
CANORECO registered with the CDA pursuant to R.A. No. 6938 and R.A. No. 6939.
On 8 March 1993, the CDA issued a Certificate of Provisional Registration (T-003-93)
to CANORECO effective for two years. 1 On 1 March 1995, the CDA extended this
provisional registration until 4 May 1997.2 However, on 10 July 1996, CANORECO
filed with the CDA its approved amendments to its Articles of Cooperation converting
itself from a non-stock to a stock cooperative pursuant to the provisions of R.A. No.
6938 and the Omnibus Implementing Rules and Regulations on Electric Cooperatives.
On the same date the CDA issued a Certificate of Registrations3 of the amendments to
CANORECO Articles of Cooperation certifying that CANORECO is "registered as a
full-[f]ledged cooperative under and by virtue of R.A. 6938."
Previously, on 11 March 1995, the Board of Directors of CANORECO4 approved
Resolution No. 22 appointing petitioner Reynaldo V. Abundo as permanent General
Manager. The Board was composed of
Ruben N. Barrameda — President
Elvis L. Espiritu — Vice president
Merardo G. Enero, Jr. — Secretary
Marcelito B. Abas — Treasurer
Antonio R. Obias — Director
Luis A. Pascua — Director
Norberto Z. Ochoa — Director
Leonida Z. Manalo — OIC GM/Ex-Officio
On 28 May 1995, Antonio Obias, Norberto Ochoa, Luis Pascua, and Felicito Ilan held
a special meeting of the Board of Directors of CANORECO. The minutes of the
meeting5 showed that President Ruben Barrameda, Vice-President Elvis Espiritu, and
Treasurer Marcelito Abas were absent; that Obias acted as temporary chairman; that
the latter informed those present that it was the responsibility of the Board after the
annual meeting to meet and elect the new set of officers, but that despite the fact that
he had called the attention of President Barrameda and Directors Abas and Espiritu for
the holding thereof, the three chose not to appear; and that those present in the
special meeting declared all positions in the board vacant and thereafter proceeded to
hold elections by secret balloting with all the directors present considered candidates
for the positions. The following won and were declared as the newly elected officers of
the CANORECO:
President Norberto Ochoa
Vice President Antonio Obias
Secretary Felicito Ilan
Treasurer Luis Pascua
Thereupon, these newly elected officers approved the following resolutions:
1) Resolution No. 27, c.s. — confirming the election of the new set of officers of
the Board of Directors of CANORECO
2) Resolution No. 28, c.s. — recalling Resolution No. 22, c.s. appointing Mr.
Reynaldo V. Abundo as permanent General Manager in view of the fact that
such appointment was in violation of the provisions of R.A. 6713; declaring the
position of General Manager as vacant; and designating Mr. Oscar Acobera as
Officer-in-Charge
3) Resolution No. 29, c.s. — authorizing the Board President, or in his absence,
the Vice-President, countersigned by the Treasurer, or in his absence, the
Secretary, to be the only officers who can transfer funds from savings to current
accounts; and authorizing the Officer-in-Charge, Mr. Acobera, to issue checks
without countersignature in an amount not to exceed P3,000.00 and in excess
thereof, to be countersigned by the President and/or the Treasurer
4) Resolution No. 30, c.s. — hiring the services of Atty. Juanito Subia as
retainer-lawyer for CANORECO.6
The petitioners challenged the above resolutions and the election of officers by filing
with the CDA a Petition for Declaration of Nullity of Board Resolutions and Election of
Officers with Prayer for Issuance of Injunction/Temporary Restraining Order, which the
CDA docketed CDA-CO Case No. 95-010.
In its Resolution of 15 February 1996,7 the CDA resolved the petition in favor of the
petitioners and decreed as follows:
 WHEREFORE, premises considered, the Board Meeting of May 28, 1995,
participated by the respondents, and all the Resolutions issued on such
occasion, are hereby declared NULL AND VOID AB INITIO.
Likewise, the election of respondents Norberto Ochoa, Antonio Obias, Felicito
Ilan, and Luis Pascua, as President, Vice-President, Secretary, and Treasurer,
respectively, of CANORECO is hereby declared NULL AND VOID AB INITIO.
Hence, respondents Norberto Ochoa, Antonio Obias, Felicito Ilan, and Luis
Pascua are hereby ordered to refrain from representing themselves as
President, Vice-President, Secretary, and Treasurer, respectively, of
CANORECO. The same respondents are further ordered to refrain from acting
as authorized signatories to the bank accounts of CANORECO.
Further respondent Felicito Ilan is hereby ordered to refrain from exercising the
duties and functions of a member of the Board of CANORECO until the election
protest is resolved with finality by the proper forum. In the meantime, the
incumbency of petitioner Merardo Enero, Jr. as Director of the CANORECO
Board is hereby recognized.
A status quo is hereby ordered as regards the position of General Manager,
being held by Mr. Reynaldo Abundo, considering that the recall of his
appointment was done under a void Resolution, and that the designation of Mr.
Oscar Acodera as Officer-in-Charge, under the same void Resolution, has no
force and effect.
Finally, respondents Antonio Obias, Norberto Ochoa, Luisito Pascua, and
petitioners Ruben Barrameda, Elvis Espiritu, Marcelito Abas and Merardo
Enero, Jr. are hereby ordered to work together, as Board of Directors, for the
common good of CANORECO and its consumer-members, and to maintain an
atmosphere of sincere cooperation among the officers and members of
CANORECO.
On 28 June 1996, in defiance of the abovementioned Resolution of the CDA and with
the active participation of some officials of the National Electrification Administration
(NEA), the group of Norberto Ochoa, Antonio Obias, Felicito Ilan, and Luis Pascua
forcibly took possession of the offices of CANORECO and assumed the duties as
officers thereof.8
On 26 September 1996, pursuant to the writ of execution and order to vacate issued
by the CDA, the petitioners were able to reassume control of the CANORECO and to
perform their respective functions.9
On 3 December 1996, the President of the Philippines issued Memorandum Order No.
40910 constituting an Ad Hoc Committee to temporarily take over and manage the
affairs of CANORECO. It reads as follows:
To efficiently and effectively address the worsening problem of the Camarines
Norte Electric Cooperative, Inc. (CANORECO) and in order not to prejudice and
endanger the interest of the people who rely on the said cooperative for their
supply of electricity, an AD HOC Committee is hereby constituted to take over
and manage the affairs of CANORECO until such time as a general membership
meeting can be called to decide the serious issues affecting the said cooperative
and normalcy in operations is restored. Further, if and when warranted, the
present Board of Directors may be called upon by the Committee for advisory
services without prejudice to the receipt of their per diems as may be authorized
by existing rules and regulations.
The AD HOC Committee shall be composed of the following:
REX TANTIONGCO — Chairman
Presidential Assistant on Energy Affairs
HONESTO DE JESUS — Member
Cooperative Development Authority Nominee
ANDRES IBASCO — Member
Cooperative Development Authority Nominee
TEODULO M. MEA — Member
National Electrification Administration Nominee
VICENTE LUKBAN — Member
National Electrification Administration Nominee
The said Committee shall have the following functions:
1. Designate the following upon the recommendation of the Chairman:
1.1 an Acting General Manager who shall handle the day-to-day
operations of the Cooperative. In the meantime, the General
Manager shall be deemed to be on leave without prejudice to the
payment of his salaries legally due him; and
1.2 a Comptroller who shall handle the financial affairs of the
Cooperative.
2. Ensure that:
 xxx xxx xxx
The AD HOC Committee shall submit a written report to the President, through
the Office of the Executive Secretary, every two (2) weeks from the effectivity of
this Order.
A General Membership Meeting shall be called by the AD HOC Committee to
determine whether or not there is a need to change the composition of the
membership of the Cooperative's Board of Directors. If the need exists, the AD
HOC Committee shall call for elections. Once composition of the Board of
Directors is finally settled, it shall decide on the appointment of a General
Manager in accordance with prescribed laws, rules and regulations. Upon the
appointment of a General Manager, the Committee shall become functus officio.
This Memorandum Order shall take effect immediately.
On 11 December 1996, the petitioners filed this petition wherein they claim that
I. THE PRESIDENT HAS NO POWER TO TAKE OVER AND MANAGE OR TO
ORDER THE TAKE-OVER OR MANAGEMENT OF CANORECO.
II. [THE] TAKE-OVER OF CANORECO BY THE AD HOC COMMITTEE IS
UNLAWFUL DESPITE DESIGNATION OF CANORECO CONSUMERS AS
MEMBERS OF AD HOC COMMITTEE.
III. [THE] RELEGATION OF PETITIONERS AS MERE ADVISERS TO THE AD
HOC COMMITTEE AMOUNTS TO REMOVAL FROM OFFICE WHICH THE
PRESIDENT HAS NO POWER TO DO. MOREOVER, PETITIONERS'
REMOVAL VIOLATES PETITIONERS' RIGHT TO DUE PROCESS OF LAW.
IV. THE PRESIDENT IS LIKEWISE WITHOUT POWER TO DESIGNATE OR
ORDER THE DESIGNATION OF AN ACTING GENERAL MANAGER FOR
CANORECO AND TO CONSIDER THE INCUMBENT REYNALDO V. ABUNDO
TO BE ON LEAVE.
The petitioners assert that there is no provision in the Constitution or in a statute
expressly, or even impliedly, authorizing the President or his representatives to lake
over or order the take-over of electric cooperatives. Although conceding that while the
State, through its police power, has the right to interfere with private business or
commerce, they maintain that the exercise thereof is generally limited to the regulation
of the business or commerce and that the power to regulate does not include the
power to take over, control, manage, or direct the operation of the business.
Accordingly, the creation of the Ad Hoc Committee for the purpose of take-over was
illegal and void.
The petitioners further claim that Memorandum Order No. 409 removed them from
their positions as members of the Board of Directors of CANORECO. The President
does not have the authority to appoint, much less to remove, members of the board of
directors of a private enterprise including electric cooperatives. He cannot rely on his
power of supervision over the NEA to justify the designation of an acting general
manager for CANORECO under P.D. No. 269 as amended by P.D. No. 1645, for
CANORECO had already registered with the CDA pursuant to R.A. 6938 and R.A. No.
6939; hence, the latter laws now govern the internal affairs of CANORECO
On 3 January 1997, the petitioners filed an Urgent Motion for Issuance of a Temporary
Restraining Order.
On 9 January 1997, the petitioners filed a Manifestation and Motion informing the
Court that on 8 January 1997 respondent Rex Tantiongco notified the petitioners that
the Ad Hoc Committee was taking over the affairs and management of CANORECO
effective as of that date.11 They reiterated their plea for the issuance of a temporary
restraining order because the Ad Hoc Committee has taken control of CANORECO
and usurped the functions of the individual petitioners.
In the Resolution dated 13 January 1997, we required respondents to comment on the
petition.
Despite four extensions granted it, the Office of the Solicitor General (OSG) failed to
file its Comment. Hence, in the resolution of 16 July 1997 we deemed the OSG to
have waived the filing of its Comment and declared this case submitted for decision.
The OSG's motion to admit its Comment, as well as the attached Comment, belatedly
filed on 24 July 1997 was merely noted without action in the resolution of 13 August
1997. We also subsequently denied for lack of merit its motion for reconsideration.
We find the instant petition impressed with merit.
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 the affairs of cooperatives, and Article 39 provides for the powers of
the board of directors. These sections read:
Art. 38. Composition of the Board of Directors. — The conduct and management
of the affairs of a cooperative shall be vested in a board of directors which shall
be composed of not less than five (5) nor more than fifteen (15) members
elected by the general assembly for a term fixed in the by-laws but not
exceeding a term of two (2) years and shall hold office until their successors are
 duly elected and qualified, or until duly removed. However, no director shall
serve of more than three (3) consecutive terms.
Art. 39. Powers of the Board of Directors. — The board of directors shall direct
and supervise the business, manage the property of the cooperative and may,
by resolution, exercise all such powers of the cooperative as are not reserved
for the general assembly under this Code and the by-laws.
As to the officers of cooperatives, Article 43 of the Code provides:
Art. 43. Officers of the Cooperative. — The board of directors shall elect from
among themselves only the chairman and vice-chairman, and elect or appoint
other officers of the cooperative from outside of the board in accordance with
their by-laws. All officers shall serve during good behavior and shall not be
removed except for cause and after due hearing. Loss of confidence shall not be
a valid ground for removal unless evidenced by acts or omissions causing loss
of confidence in the honesty and integrity of such officer. No two (2) or more
persons with relationship up to the third degree of consanguinity or affinity shall
serve as elective or appointive officers in the same board.12
Under Article 34 of the Code, the general assembly of cooperatives has the exclusive
power, which cannot be delegated, to elect or appoint the members of the board of
directors and to remove them for cause. Article 51 thereof provides for removal of
directors and officers as follows:
Art. 51. Removal. — An elective officer, director, or committee member may be
removed by a vote of two-thirds (2/3) of the voting members present and
constituting a quorum, in a regular or special general assembly meeting called
for the purpose. The person involved shall be given an opportunity to be heard
at said assembly.
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. Considering that (1) the take-over
will be "until such time that a general membership meeting can be called to decide the
serious issues affecting the said cooperative and normalcy in operations is restored,
and (2) the date such meeting shall be called and the determination of whether there is
a need to change the composition of the membership of CANORECO's Board of
Directors are exclusively left to the Ad Hoc Committee, 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. The said Memorandum did no less to the
lawfully appointed General Manager by directing that upon the settlement of the issue
concerning the composition of the board of directors the Committee shall decide on
the appointment of a general manager. In the meantime, it authorized the Committee
to designate upon the recommendation of the Chairman an Acting Manager, with the
lawfully appointed Manager considered on leave, but who is, however, entitled to the
payment of his salaries.
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. One faction was led by the group of Norberto
Ochoa, while the other was petitioners' group whose members were, at that time, the
incumbent directors and officers. It was the action of Ochoa and his cohorts in holding
a special meeting on 28 May 1995 and then declaring vacant the positions of
cooperative officers and thereafter electing themselves to the positions of president,
vice-president, treasurer, and secretary of CANORECO which compelled the
petitioners to file a petition with the CDA. The CDA thereafter came out with a decision
favorable to the petitioners.
Obviously there was a clear case of intra-cooperative dispute. Article 121 of the
Cooperative Code is explicit on how the dispute should be resolved; thus:
Art. 121. Settlement of Disputes. — Disputes among members, officers,
directors, and committee members, and intra-cooperative disputes shall, as far
as practicable, be settled amicably in accordance with the conciliation or
mediation mechanisms embodied in the by-laws of the cooperative, and in
applicable laws.
Should such a conciliation/mediation proceeding fail, the matter shall be settled
in a court of competent jurisdiction.
Complementing this Article is Section 8 of R.A. No. 6939, which provides:
Sec. 8. Mediation and Conciliation. — Upon request of either or both or both
parties, the [CDA] shall mediate and conciliate disputes with the cooperative or
between cooperatives: Provided, That if no mediation or conciliation succeeds
within three (3) months from request thereof, a certificate of non-resolution shall
be issued by the commission prior to the filing of appropriate action before the
proper courts.
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, motu proprio or upon request of a party, supplant or
overturn the decision of the CDA. The record does not disclose that the group of
Norberto Ochoa appealed from the decision of the CDA in CDA-CO Case No. 95-010
to the Office of the President as the head of the Executive Department exercising
supervision and control over said agency. In fact the CDA had already issued a Cease
and Desist Order dated 14 August 1996 ordering Antonio Obias, Norberto Ochoa, Luis
Pascua, Felicito Ilan and their followers "to cease and desist from acting as the Board
of Directors and Officers of Camarines Norte Electric Cooperative (CANORECO) and
to refrain from implementing their Resolution calling for the District V Election on
August 17 and 24, 1996."13 Consequently, the said decision of the CDA had long
become final and executory when Memorandum Order No. 409 was issued on 3
December 1996. That Memorandum cannot then be considered as one reversing the
decision of the CDA which had attained finality.
Under Section 15, Chapter III of Book VII of the Administrative Code of 1987
(Executive Order No. 292), decisions of administrative agencies become final and
executory fifteen days after receipt of a copy thereof by the party adversely affected
unless within that period an administrative appeal or judicial review, if proper, has been
perfected. One motion for reconsideration is allowed. A final resolution or decision of
an administrative agency also binds the Office of the President even if such agency is
under the administrative supervision and control of the latter.
We have stated before, and reiterate it now, that administrative decisions must end
sometime, as fully as public policy demands that finality be written on judicial
controversies. Public interest requires that proceedings already terminated should not
be altered at every step, for the rule of non quieta movere prescribes that what had
already been terminated should not be disturbed. A disregard of this principle does not
commend itself to sound public policy.14
Neither can police power be invoked to clothe with validity the assailed Memorandum
Order No. 409. 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.15 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.16 Delegation of legislative powers to the President is permitted
in Sections 23(2) and 28(2) of Article VI of the Constitution.17 The pertinent laws on
cooperatives, namely, R.A. No. 6938, R.A. No. 6939, and P.D. No. 269 as amended
by P.D. No. 1645 do not provide for the President or any other administrative body to
take over the internal management of a cooperative. Article 98 of R.A. 6938 instead
provides:
 Art. 98. Regulation of Public Service Cooperatives. — (1) The internal affairs of
public service cooperatives such as the rights and privileges of members, the
rules and procedures for meetings of the general assembly, board of directors
and committees; for the election and qualification of officers, directors, and
committee members; allocation and distribution of surpluses, and all other
matters relating to their internal affairs shall be governed by this Code.
xxx xxx xxx
We do not then hesitate to rule that Memorandum Order No. 409 has no constitutional
and statutory basis. It violates the basic underlying principle enshrined in Article 4(2) of
R.A. No. 6938 that cooperatives are democratic organizations and that their affairs
shall be administered by persons elected or appointed in a manner agreed upon by
the members. Likewise, it runs counter to the policy set forth in Section 1 of R.A. No.
6939 that the State shall, except as provided in said Act, maintain a policy of non-
interference in the management and operation of cooperatives.
WHEREFORE, the instant petition is GRANTED and Memorandum Order No. 409 of
the President is hereby declared INVALID.
SO ORDERED.
Narvasa, C.J., Regalado, Romero, Bellosillo, Melo, Puno, Vitug, Kapunan, Mendoza,
Panganiban and Martinez, JJ., concur.
Quisumbing and Purisima, JJ., took no part.
G.R. No. 164171 February 20, 2006
HON. EXECUTIVE SECRETARY, HON. SECRETARY OF THE DEPARTMENT OF
TRANSPORTATION AND COMMUNICATIONS (DOTC), COMMISSIONER OF CUSTOMS,
ASSISTANT SECRETARY, LAND TRANSPORTATION OFFICE (LTO), COLLECTOR OF
CUSTOMS, SUBIC BAY FREE PORT ZONE, AND CHIEF OF LTO, SUBIC BAY FREE
PORT ZONE, Petitioners,
vs.
SOUTHWING HEAVY INDUSTRIES, INC., represented by its President JOSE T. DIZON,
UNITED AUCTIONEERS, INC., represented by its President DOMINIC SYTIN, and
MICROVAN, INC., represented by its President MARIANO C. SONON, Respondents.
x---------------x
G.R. No. 164172 February 20, 2006
HON. EXECUTIVE SECRETARY, SECRETARY OF THE DEPARTMENT OF
TRANSPORTATION AND COMMUNICATION (DOTC), COMMISSIONER OF CUSTOMS,
ASSISTANT SECRETARY, LAND TRANSPORTATION OFFICE (LTO), COLLECTOR OF
CUSTOMS, SUBIC BAY FREE PORT ZONE AND CHIEF OF LTO, SUBIC BAY FREE
PORT ZONE, Petitioners,
vs.
SUBIC INTEGRATED MACRO VENTURES CORP., represented by its President
YOLANDA AMBAR, Respondent.
x---------------x
G.R. No. 168741 February 20, 2006
HON. EXECUTIVE SECRETARY, HON. SECRETARY OF FINANCE, THE CHIEF OF THE
LAND TRANSPORTATION OFFICE, THE COMMISSIONER OF CUSTOMS, and THE
COLLECTOR OF CUSTOMS, SUBIC SPECIAL ECONOMIC ZONE, Petitioners,
vs.
MOTOR VEHICLE IMPORTERS ASSOCIATION OF SUBIC BAY FREEPORT, INC.,
represented by its President ALFREDO S. GALANG, Respondent.
DECISION
YNARES-SANTIAGO, J.:
The instant consolidated petitions seek to annul and set aside the Decisions of the Regional
Trial Court of Olongapo City, Branch 72, in Civil Case No. 20-0-04 and Civil Case No. 22-0-
04, both dated May 24, 2004; and the February 14, 2005 Decision of the Court of Appeals in
CA-G.R. SP. No. 83284, which declared Article 2, Section 3.1 of Executive Order No. 156
(EO 156) unconstitutional. Said executive issuance prohibits the importation into the country,
inclusive of the Special Economic and Freeport Zone or the Subic Bay Freeport (SBF or
Freeport), of used motor vehicles, subject to a few exceptions.
The undisputed facts show that on December 12, 2002, President Gloria Macapagal-Arroyo,
through Executive Secretary Alberto G. Romulo, issued EO 156, entitled "Providing for a
comprehensive industrial policy and directions for the motor vehicle development program
and its implementing guidelines." 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:
3.1.1 A vehicle that is owned and for the personal use of a returning resident or
immigrant and covered by an authority to import issued under the No-dollar
Importation Program. Such vehicles cannot be resold for at least three (3) years;
3.1.2 A vehicle for the use of an official of the Diplomatic Corps and authorized
to be imported by the Department of Foreign Affairs;
3.1.3 Trucks excluding pickup trucks;
 1. with GVW of 2.5-6.0 tons covered by an authority to import issued by
the DTI.
2. With GVW above 6.0 tons.
3.1.4 Buses:
1. with GVW of 6-12 tons covered by an authority to import issued by DTI;
2. with GVW above 12 tons.
3.1.5 Special purpose vehicles:
1. fire trucks
2. ambulances
3. funeral hearse/coaches
4. crane lorries
5. tractor heads and truck tractors
6. boom trucks
7. tanker trucks
8. tank lorries with high pressure spray gun
9. reefers or refrigerated trucks
10. mobile drilling derricks
11. transit/concrete mixers
12. mobile radiological units
13. wreckers or tow trucks
14. concrete pump trucks
15. aerial/bucket flat-form trucks
16. street sweepers
17. vacuum trucks
18. garbage compactors
19. self loader trucks
20. man lift trucks
21. lighting trucks
22. trucks mounted with special purpose equipment
23. all other types of vehicle designed for a specific use.
The issuance of EO 156 spawned three separate actions for declaratory relief before Branch
72 of the Regional Trial Court of Olongapo City, all seeking the declaration of the
unconstitutionality of Article 2, Section 3.1 of said executive order. 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.
G.R. No. 164171:
On January 16, 2004, respondents Southwing Heavy Industries, Inc., (Southwing) United
Auctioneers, Inc. (United Auctioneers), and Microvan, Inc. (Microvan), instituted a
declaratory relief case docketed as Civil Case No. 20-0-04,1 against the Executive Secretary,
Secretary of Transportation and Communication, Commissioner of Customs, Assistant
Secretary and Head of the Land Transportation Office, Subic Bay Metropolitan Authority
(SBMA), Collector of Customs for the Port at Subic Bay Freeport Zone, and the Chief of the
Land Transportation Office at Subic Bay Freeport Zone.
Southwing, United Auctioneers and Microvan prayed that judgment be rendered (1) declaring
Article 2, Section 3.1 of EO 156 unconstitutional and illegal; (2) directing the Secretary of
Finance, Commissioner of Customs, Collector of Customs and the Chairman of the SBMA to
allow the importation of used motor vehicles; (2) ordering the Land Transportation Office and
its subordinates inside the Subic Special Economic Zone to process the registration of the
imported used motor vehicles; and (3) in general, to allow the unimpeded entry and
importation of used motor vehicles subject only to the payment of the required customs
duties.
Upon filing of petitioners’ answer/comment, respondents Southwing and Microvan filed a
motion for summary judgment which was granted by the trial court. On May 24, 2004, a
summary judgment was rendered declaring that Article 2, Section 3.1 of EO 156 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 Republic Act No. 7227
(RA 7227) or the Bases Conversion and Development Act of 1992 which allows the free flow
of goods and capital within the Freeport. The dispositive portion of the said decision reads:
WHEREFORE, judgment is hereby rendered in favor of petitioner declaring Executive Order
156 [Article 2, Section] 3.1 for being unconstitutional and illegal; directing respondents
Collector of Customs based at SBMA to allow the importation and entry of used motor
vehicles pursuant to the mandate of RA 7227; directing respondent Chief of the Land
Transportation Office and its subordinates inside the Subic Special Economic Zone or SBMA
to process the registration of imported used motor vehicle; and in general, to allow
unimpeded entry and importation of used motor vehicles to the Philippines subject only to the
payment of the required customs duties.
SO ORDERED.2
From the foregoing decision, petitioners sought relief before this Court via a petition for
review on certiorari, docketed as G.R. No. 164171.
G.R. No. 164172:
On January 20, 2004, respondent Subic Integrated Macro Ventures Corporation (Macro
Ventures) filed with the same trial court, a similar action for declaratory relief docketed as
Civil Case No. 22-0-04,3 with the same prayer and against the same parties4 as those in Civil
Case No. 20-0-04.
In this case, the trial court likewise rendered a summary judgment on May 24, 2004, holding
that Article 2, Section 3.1 of EO 156, is repugnant to the constitution.5 Elevated to this
Court via a petition for review on certiorari, Civil Case No. 22-0-04 was docketed as G.R. No.
164172.
G.R. No. 168741
On January 22, 2003, respondent Motor Vehicle Importers Association of Subic Bay
Freeport, Inc. (Association), filed another action for declaratory relief with essentially the
same prayer as those in Civil Case No. 22-0-04 and Civil Case No. 20-0-04, against the
Executive Secretary, Secretary of Finance, Chief of the Land Transportation Office,
Commissioner of Customs, Collector of Customs at SBMA and the Chairman of SBMA. This
was docketed as Civil Case No. 30-0-2003,6 before the same trial court.
In a decision dated March 10, 2004, the court a quo granted the Association’s prayer and
declared the assailed proviso as contrary to the Constitution, to wit:
WHEREFORE, judgment is hereby rendered in favor of petitioner declaring Executive Order
156 [Article 2, Section] 3.1 for being unconstitutional and illegal; directing respondents
Collector of Customs based at SBMA to allow the importation and entry of used motor
vehicles pursuant to the mandate of RA 7227; directing respondent Chief of the Land
Transportation Office and its subordinates inside the Subic Special Economic Zone or SBMA
to process the registration of imported used motor vehicles; directing the respondent
Chairman of the SBMA to allow the entry into the Subic Special Economic Zone or SBMA
imported used motor vehicle; and in general, to allow unimpeded entry and importation of
used motor vehicles to the Philippines subject only to the payment of the required customs
duties.
SO ORDERED.7
Aggrieved, the petitioners in Civil Case No. 30-0-2003, filed a petition for certiorari8 with the
Court of Appeals (CA-G.R. SP. No. 83284) which denied the petition on February 14, 2005
and sustained the finding of the trial court that Article 2, Section 3.1 of EO 156, is void for
being repugnant to the constitution. The dispositive portion thereof, reads:
WHEREFORE, the instant petition for certiorari is hereby DENIED. The assailed decision of
the Regional Trial Court, Third Judicial Region, Branch 72, Olongapo City, in Civil Case No.
30-0-2003, accordingly, STANDS.
SO ORDERED.9
The aforequoted decision of the Court of Appeals was elevated to this Court and docketed
as G.R. No. 168741. In a Resolution dated October 4, 2005,10 said case was consolidated
with G.R. No. 164171 and G.R. No. 164172.
Petitioners are now before this Court contending that Article 2, Section 3.1 of EO 156 is valid
and applicable to the entire country, including the Freeeport. In support of their arguments,
they raise procedural and substantive issues bearing on the constitutionality of the assailed
proviso. The procedural issues are: the lack of respondents’ locus standi to question the
validity of EO 156, the propriety of challenging EO 156 in a declaratory relief proceeding and
the applicability of a judgment on the pleadings in this case.
Petitioners argue that respondents will not be affected by the importation ban considering
that their certificate of registration and tax exemption do not authorize them to engage in the
importation and/or trading of used cars. They also aver that the actions filed by respondents
do not qualify as declaratory relief cases. Section 1, Rule 63 of the Rules of Court provides
that a petition for declaratory relief may be filed before there is a breach or violation of rights.
Petitioners claim that there was already a breach of respondents’ supposed right because
the cases were filed more than a year after the issuance of EO 156. In fact, in Civil Case No.
30-0-2003, numerous warrants of seizure and detention were issued against imported used
motor vehicles belonging to respondent Association’s members.
Petitioners’ arguments lack merit.
The established rule that the constitutionality of a law or administrative issuance can be
challenged by one who will sustain a direct injury as a result of its enforcement11 has been
satisfied in the instant case. The broad subject of the prohibited importation is "all types of
used motor vehicles." Respondents would definitely suffer a direct injury from the
implementation of EO 156 because their certificate of registration and tax exemption
authorize them to trade and/or import new and used motor vehicles and spare parts,
except "used cars."12 Other types of motor vehicles imported and/or traded by respondents
and not falling within the category of used cars would thus be subjected to the ban to the
prejudice of their business. Undoubtedly, respondents have the legal standing to assail the
validity of EO 156.
As to the propriety of declaratory relief as a vehicle for assailing the executive issuance,
suffice it to state that any breach of the rights of respondents will not affect the case.
In Commission on Audit of the Province of Cebu v. Province of Cebu,13 the Court entertained
a suit for declaratory relief to finally settle the doubt as to the proper interpretation of the
conflicting laws involved, notwithstanding a violation of the right of the party affected. We find
no reason to deviate from said ruling mindful of the significance of the present case to the
national economy.
So also, summary judgments were properly rendered by the trial court because the issues
involved in the instant case were pure questions of law. A motion for summary judgment is
premised on the assumption that the issues presented need not be tried either because
these are patently devoid of substance or that there is no genuine issue as to any pertinent
fact. It is a method sanctioned by the Rules of Court for the prompt disposition of a civil
action in which the pleadings raise only a legal issue, not a genuine issue as to any material
fact.14
At any rate, even assuming the procedural flaws raised by petitioners truly exist, the Court is
not precluded from brushing aside these technicalities and taking cognizance of the action
filed by respondents considering its importance to the public and in keeping with the duty to
determine whether the other branches of the government have kept themselves within the
limits of the Constitution.15
We now come to the substantive issues, which are: (1) whether there is statutory basis for
the issuance of EO 156; and (2) if the answer is in the affirmative, whether the application of
Article 2, Section 3.1 of EO 156, reasonable and within the scope provided by law.
The main thrust of the petition is that EO 156 is constitutional because it was issued
pursuant to EO 226, the Omnibus Investment Code of the Philippines and that its application
should be extended to the Freeport because the guarantee of RA 7227 on the free flow of
goods into the said zone is merely an exemption from customs duties and taxes on items
brought into the Freeport and not an open floodgate for all kinds of goods and materials
without restriction.
In G.R. No. 168741, the Court of Appeals invalidated Article 2, Section 3.1 of EO 156, on the
ground of lack of any statutory basis for the President to issue the same. It held that the
prohibition on the importation of used motor vehicles is an exercise of police power vested
on the legislature and absent any enabling law, the exercise thereof by the President through
an executive issuance, is void.
Police power is 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 with 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.16 Such delegation confers upon the
President quasi-legislative power which may be defined as the authority delegated by the
law-making body to the administrative body to adopt rules and regulations intended to carry
out the provisions of the law and implement legislative policy.17 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.18
Contrary to the conclusion of the Court of Appeals, EO 156 actually satisfied the first
requisite of a valid administrative order. It has both constitutional and statutory bases.
Delegation of legislative powers to the President is permitted in Section 28(2) of Article VI of
the Constitution. It provides:
(2) The Congress may, by law, authorize the President to fix within specified limits, and
subject to such limitations and restrictions as it may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the
national development program of the Government.19 (Emphasis supplied)
The relevant statutes to execute this provision are:
1) The Tariff and Customs Code which authorizes the President, in the interest of national
economy, general welfare and/or national security, to, inter alia, prohibit the importation of
any commodity. Section 401 thereof, reads:
Sec. 401. Flexible Clause. —
a. In the interest of national economy, general welfare and/or national security, and
subject to the limitations herein prescribed, the President, upon recommendation of
the National Economic and Development Authority (hereinafter referred to as NEDA),
is hereby empowered: x x x (2) to establish import quota or to ban imports of any
commodity, as may be necessary; x x x Provided, That upon periodic investigations by the
Tariff Commission and recommendation of the NEDA, the President may cause a gradual
reduction of protection levels granted in Section One hundred and four of this Code,
including those subsequently granted pursuant to this section. (Emphasis supplied)
2) Executive Order No. 226, the Omnibus Investment Code of the Philippines which was
issued on July 16, 1987, by then President Corazon C. Aquino, in the exercise of legislative
power under the Provisional Freedom Constitution,20 empowers the President to approve or
reject the prohibition on the importation of any equipment or raw materials or finished
products. Pertinent provisions thereof, read:
ART. 4. Composition of the board. The Board of Investments shall be composed of seven (7)
governors: The Secretary of Trade and Industry, three (3) Undersecretaries of Trade and
Industry to be chosen by the President; and three (3) representatives from the government
agencies and the private sector x x x.
ART. 7. Powers and duties of the Board.
xxxx
(12) Formulate and implement rationalization programs for certain industries whose
operation may result in dislocation, overcrowding or inefficient use of resources, thus
impeding economic growth. For this purpose, the Board may formulate guidelines for
progressive manufacturing programs, local content programs, mandatory sourcing
requirements and dispersal of industries. In appropriate cases and upon approval of the
President, the Board may restrict, either totally or partially, the importation of any
equipment or raw materials or finished products involved in the rationalization
program; (Emphasis supplied)
3) Republic Act No. 8800, otherwise known as the "Safeguard Measures Act" (SMA), and
entitled "An Act Protecting Local Industries By Providing Safeguard Measures To Be
Undertaken In Response To Increased Imports And Providing Penalties For Violation
Thereof,"21 designated the Secretaries22 of the Department of Trade and Industry (DTI) and
the Department of Agriculture, in their capacity as alter egos of the President, as the
implementing authorities of the safeguard measures, which include, inter alia, modification or
imposition of any quantitative restriction on the importation of a product into the Philippines.
The purpose of the SMA is stated in the declaration of policy, thus:
SEC. 2. Declaration of Policy. – The State shall promote competitiveness of domestic
industries and producers based on sound industrial and agricultural development policies,
and efficient use of human, natural and technical resources. In pursuit of this goal and in the
public interest, the State shall provide safeguard measures to protect domestic industries
and producers from increased imports which cause or threaten to cause serious injury to
those domestic industries and producers.
There are thus explicit constitutional and statutory permission authorizing the President to
ban or regulate importation of articles and commodities into the country.
Anent the second requisite, that is, that the order must be issued or promulgated in
accordance with the prescribed procedure, it is necessary that the nature of the
administrative issuance is properly determined. As in the enactment of laws, the general rule
is that, the promulgation of administrative issuances requires previous notice and hearing,
the only exception being where the legislature itself requires it and mandates that the
regulation shall be based on certain facts as determined at an appropriate
investigation.23 This exception pertains to the issuance of legislative rules as distinguished
from interpretative rules which give no real consequence more than what the law itself has
already prescribed;24 and are designed merely to provide guidelines to the law which the
administrative agency is in charge of enforcing.25 A legislative rule, on the other hand, is in
the nature of subordinate legislation, crafted to implement a primary legislation.
In Commissioner of Internal Revenue v. Court of Appeals,26 and Commissioner of Internal
Revenue v. Michel J. Lhuillier Pawnshop, Inc.,27 the Court enunciated the doctrine that when
an administrative rule goes beyond merely providing for the means that can facilitate or
render less cumbersome the implementation of the law and substantially increases the
burden of those governed, it behooves the agency to accord at least to those directly
affected a chance to be heard and, thereafter, to be duly informed, before the issuance is
given the force and effect of law.
In the instant case, EO 156 is obviously a legislative rule as it seeks to implement or execute
primary legislative enactments intended to protect the domestic industry by imposing a ban
on the importation of a specified product not previously subject to such prohibition. The due
process requirements in the issuance thereof are embodied in Section 40128 of the Tariff and
Customs Code and Sections 5 and 9 of the SMA29 which essentially mandate the conduct of
investigation and public hearings before the regulatory measure or importation ban may be
issued.
In the present case, respondents neither questioned before this Court nor with the courts
below the procedure that paved the way for the issuance of EO 156. What they challenged in
their petitions before the trial court was the absence of "substantive due process" in the
issuance of the EO.30 Their main contention before the court a quo is that the importation
ban is illogical and unfair because it unreasonably drives them out of business to the
prejudice of the national economy.
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,31 and there being no
objection from the respondents as to 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.
To determine whether EO 156 has complied with the third and fourth requisites of a valid
administrative issuance, to wit, that it was issued within the scope of authority given by the
legislature and that it is reasonable, an examination of the nature of a Freeport under RA
7227 and the primordial purpose of the importation ban under the questioned EO is
necessary.
RA 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 and Freeport Zone, or the Subic Bay Freeport, in order
to promote the economic and social development of Central Luzon in particular and the
country in general.
The Rules and Regulations Implementing RA 7227 specifically defines the territory
comprising the Subic Bay Freeport, referred to as the Special Economic and Freeport Zone
in Section 12 of RA 7227 as "a separate customs territory consisting of the City of Olongapo
and the Municipality of Subic, Province of Zambales, the lands occupied by the Subic Naval
Base and its contiguous extensions as embraced, covered and defined by the 1947
Philippine-U.S. Military Base Agreement as amended and within the territorial jurisdiction of
Morong and Hermosa, Province of Bataan, the metes and bounds of which shall be
delineated by the President of the Philippines; provided further that pending establishment of
secure perimeters around the entire SBF, the SBF shall refer to the area demarcated by the
SBMA pursuant to Section 1332 hereof."
Among the salient provisions of RA 7227 are as follows:
SECTION 12. Subic Special Economic Zone. —
xxxx
The abovementioned zone shall be subject to the following policies:
xxxx
(a) Within the framework and subject to the mandate and limitations of the Constitution
and the pertinent provisions of the Local Government Code, the Subic Special
Economic Zone shall be developed into a self-sustaining, industrial, commercial,
financial and investment center to generate employment opportunities in and around
the zone and to attract and promote productive foreign investments;
(b) The Subic Special Economic Zone shall be operated and managed as a separate
customs territory ensuring free flow or movement of goods and capital within, into and
exported out of the Subic Special Economic Zone, as well as provide incentives such
as tax and duty-free importations of raw materials, capital and equipment. However,
exportation or removal of goods from the territory of the Subic Special Economic Zone
to the other parts of the Philippine territory shall be subject to customs duties and
taxes under the Customs and Tariff Code and other relevant tax laws of the
Philippines;
The Freeport was designed to ensure free flow or movement of goods and capital within a
portion of the Philippine territory in order to attract investors to invest their capital in a
business climate with the least governmental intervention. The concept of this zone was
explained by Senator Guingona in this wise:
Senator Guingona. Mr. President, the special economic zone is successful in many places,
particularly Hong Kong, which is a free port. The difference between a special economic
zone and an industrial estate is simply expansive in the sense that the commercial activities,
including the establishment of banks, services, financial institutions, agro-industrial activities,
maybe agriculture to a certain extent.
This delineates the activities that would have the least of government intervention,
and the running of the affairs of the special economic zone would be run principally
by the investors themselves, similar to a housing subdivision, where the subdivision
owners elect their representatives to run the affairs of the subdivision, to set the
policies, to set the guidelines.
We would like to see Subic area converted into a little Hong Kong, Mr. President,
where there is a hub of free port and free entry, free duties and activities to a
maximum spur generation of investment and jobs.
While the investor is reluctant to come in the Philippines, as a rule, because of red tape and
perceived delays, we envision this special economic zone to be an area where there will be
minimum government interference.
The initial outlay may not only come from the Government or the Authority as envisioned
here, but from them themselves, because they would be encouraged to invest not only for
the land but also for the buildings and factories. As long as they are convinced that in such
an area they can do business and reap reasonable profits, then many from other parts, both
local and foreign, would invest, Mr. President.33 (Emphasis, added)
With minimum interference from the government, investors can, in general, engage in any
kind of business as well as import and export any article into and out of the Freeport. These
are among the rights accorded to Subic Bay Freeport Enterprises under Section 39 of the
Rules and Regulations Implementing RA 7227, thus –
SEC. 39. Rights and Obligations.- SBF Enterprises shall have the following rights and
obligations:
a. To freely engage in any business, trade, manufacturing, financial or service activity, and to
import and export freely all types of goods into and out of the SBF, subject to the provisions
of the Act, these Rules and other regulations that may be promulgated by the SBMA;
Citing, inter alia, the interpellations of Senator Enrile, petitioners claim that the "free flow or
movement of goods and capital" 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. They thus surmise that the importation
ban on motor vehicles is applicable within the Freeport. Pertinent interpellations of Senator
Enrile on the concept of Freeport is as follows:
Senator Enrile: Mr. President, I think we are talking here of sovereign concepts, not territorial
concepts. The concept that we are supposed to craft here is to carve out a portion of our
terrestrial domain as well as our adjacent waters and say to the world: "Well, you can set up
your factories in this area that we are circumscribing, and bringing your equipment and
bringing your goods, you are not subject to any taxes and duties because you are not within
the customs jurisdiction of the Republic of the Philippines, whether you store the goods or
only for purposes of transshipment or whether you make them into finished products again to
be reexported to other lands."
xxxx
My understanding of a "free port" is, we are in effect carving out a part of our territory
and make it as if it were foreign territory for purposes of our customs laws, and that
people can come, bring their goods, store them there and bring them out again, as
long as they do not come into the domestic commerce of the Republic.
We do not really care whether these goods are stored here. The only thing that we care is for
our people to have an employment because of the entry of these goods that are being
discharged, warehoused and reloaded into the ships so that they can be exported. That will
generate employment for us. For as long as that is done, we are saying, in effect, that we
have the least contact with our tariff and customs laws and our tax laws. Therefore, we
consider these goods as outside of the customs jurisdiction of the Republic of the Philippines
as yet, until we draw them from this territory and bring them inside our domestic commerce.
In which case, they have to pass through our customs gate. I thought we are carving out this
entire area and convert it into this kind of concept.34
However, contrary to the claim of petitioners, there is nothing in the foregoing excerpts which
absolutely limits the incentive to Freeport investors only to exemption from customs duties
and taxes. Mindful of the legislative intent to attract investors, enhance investment and boost
the economy, the legislature could not have limited the enticement only to exemption from
taxes. The minimum interference policy of the government on the Freeport extends to the
kind of business that investors may embark on and the articles which they may import or
export into and out of the zone. A contrary interpretation would defeat the very purpose of
the Freeport and drive away investors.
It does not mean, however, that the right of Freeport enterprises to import all types of goods
and article is absolute. Such right is of course subject to the limitation that articles absolutely
prohibited by law cannot be imported into the Freeport.35 Nevertheless, in determining
whether the prohibition would apply to the Freeport, resort to the purpose of the prohibition is
necessary.
In issuing EO 156, particularly the prohibition on importation under Article 2, Section 3.1, the
President envisioned to rationalize the importation of used motor vehicles and to enhance
the capabilities of the Philippine motor manufacturing firms to be globally competitive
producers of completely build-up units and their parts and components for the local and
export markets.36 In justifying the issuance of EO 156, petitioners alleged that there has been
a decline in the sales of new vehicles and a remarkable growth of the sales of imported used
motor vehicles. To address the same, the President issued the questioned EO to prevent
further erosion of the already depressed market base of the local motor vehicle industry and
to curtail the harmful effects of the increase in the importation of used motor vehicles.37
Taking our bearings from the foregoing discussions, we hold that the importation ban runs
afoul the third requisite for a valid administrative order. To be valid, an administrative
issuance must not be ultra vires or beyond the limits of the authority conferred. It must not
supplant or modify the Constitution, its enabling statute and other existing laws, for such is
the sole function of the legislature which the other branches of the government cannot usurp.
As held in United BF Homeowner’s Association v. BF Homes, Inc.:38
The rule-making power of a public administrative body is a delegated legislative power,
which it may not use either to abridge the authority given it by Congress or the Constitution
or to enlarge its power beyond the scope intended. Constitutional and statutory provisions
control what rules and regulations may be promulgated by such a body, as well as with
respect to what fields are subject to regulation by it. It may not make rules and regulations
which are inconsistent with the provisions of the Constitution or a statute, particularly the
statute it is administering or which created it, or which are in derogation of, or defeat, the
purpose of a statute.
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,
exceeded the scope of its application by extending the prohibition on the importation of used
cars to the Freeport, which RA 7227, considers to some extent, a foreign territory.
The domestic industry which the EO seeks to protect is actually the "customs territory"
which is defined under the Rules and Regulations Implementing RA 7227, as follows:
"the portion of the Philippines outside the Subic Bay Freeport where the Tariff and
Customs Code of the Philippines and other national tariff and customs laws are in
force and effect."39
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 RA 7227. Indeed, when the application of an administrative issuance modifies
existing laws or exceeds the intended scope, as in the instant case, the issuance becomes
void, not only for being ultra vires, but also for being unreasonable.
This brings us to the fourth requisite. It is an axiom in administrative law that administrative
authorities should not act arbitrarily and capriciously in the issuance of rules and regulations.
To be valid, such rules and regulations must be reasonable and fairly adapted to secure the
end in view. If shown to bear no reasonable relation to the purposes for which they were
authorized to be issued, then they must be held to be invalid.40
There is no doubt that the issuance of the ban to protect the domestic industry is a
reasonable exercise of police power. The deterioration of the local motor manufacturing firms
due to the influx of imported used motor vehicles is an urgent national concern that needs to
be swiftly addressed by the President. In the exercise of delegated police power, the
executive can therefore validly proscribe the importation of these vehicles. Thus, in Taxicab
Operators of Metro Manila, Inc. v. Board of Transportation,41 the Court held that a regulation
phasing out taxi cabs more than six years old is a valid exercise of police power. The
regulation was sustained as reasonable holding that the purpose thereof was to promote the
convenience and comfort and protect the safety of the passengers.
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 or
remedied will not arise. The application of the law should be consistent with the purpose of
and reason for the law. Ratione cessat lex, et cessat lex. When the reason for the law
ceases, the law ceases. It is not the letter alone but the spirit of the law also that gives it
life.42 To apply the proscription to the Freeport would not serve the purpose of the EO.
Instead of improving the general economy of the country, the application of the importation
ban in the Freeport would subvert the avowed purpose of RA 7227 which is to create a
market that would draw investors and ultimately boost the national economy.
In similar cases, we also declared void the administrative issuance or ordinances concerned
for being unreasonable. To illustrate, in De la Cruz v. Paras,43 the Court held as
unreasonable and unconstitutional an ordinance characterized by overbreadth. In that case,
the Municipality of Bocaue, Bulacan, prohibited the operation of all night clubs, cabarets and
dance halls within its jurisdiction for the protection of public morals. As explained by the
Court:
x x x It cannot be said that such a sweeping exercise of a lawmaking power by Bocaue could
qualify under the term reasonable. The objective of fostering public morals, a worthy and
desirable end can be attained by a measure that does not encompass too wide a field.
Certainly the ordinance on its face is characterized by overbreadth. The purpose sought to
be achieved could have been attained by reasonable restrictions rather than by an absolute
prohibition. The admonition in Salaveria should be heeded: "The Judiciary should not lightly
set aside legislative action when there is not a clear invasion of personal or property rights
under the guise of police regulation." It is clear that in the guise of a police regulation, there
was in this instance a clear invasion of personal or property rights, personal in the case of
those individuals desirous of patronizing those night clubs and property in terms of the
investments made and salaries to be earned by those therein employed.
Lupangco v. Court of Appeals,44 is a case involving a resolution issued by the Professional
Regulation Commission which prohibited examinees from attending review classes and
receiving handout materials, tips, and the like three days before the date of examination in
order to preserve the integrity and purity of the licensure examinations in accountancy.
Besides being unreasonable on its face and violative of academic freedom, the measure was
found to be more sweeping than what was necessary, viz:
Needless to say, the enforcement of Resolution No. 105 is not a guarantee that the alleged
leakages in the licensure examinations will be eradicated or at least minimized. Making the
examinees suffer by depriving them of legitimate means of review or preparation on those
last three precious days — when they should be refreshing themselves with all that they
have learned in the review classes and preparing their mental and psychological make-up for
the examination day itself — would be like uprooting the tree to get rid of a rotten branch.
What is needed to be done by the respondent is to find out the source of such leakages and
stop it right there. If corrupt officials or personnel should be terminated from their loss, then
so be it. Fixers or swindlers should be flushed out. Strict guidelines to be observed by
examiners should be set up and if violations are committed, then licenses should be
suspended or revoked. x x x
In Lucena Grand Central Terminal, Inc. v. JAC Liner, Inc.,45 the Court likewise struck down
as unreasonable and overbreadth a city ordinance granting an exclusive franchise for 25
years, renewable for another 25 years, to one entity for the construction and operation of one
common bus and jeepney terminal facility in Lucena City. While professedly aimed towards
alleviating the traffic congestion alleged to have been caused by the existence of various bus
and jeepney terminals within the city, the ordinance was held to be beyond what is
reasonably necessary to solve the traffic problem in the city.
By parity of reasoning, 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. If the aim of the EO is to prevent the entry of used motor vehicles
from the Freeport to the customs territory, the solution is not to forbid entry of these vehicles
into the Freeport, but to intensify governmental campaign and measures to thwart illegal
ingress of used motor vehicles into the customs territory.
At this juncture, it must be mentioned that on June 19, 1993, President Fidel V. Ramos
issued Executive Order No. 97-A, "Further Clarifying The Tax And Duty-Free Privilege Within
The Subic Special Economic And Free Port Zone," Section 1 of which provides:
SECTION 1. The following guidelines shall govern the tax and duty-free privilege within the
Secured Area of the Subic Special Economic and Free Port Zone:
1.1. The Secured Area consisting of the presently fenced-in former Subic Naval Base shall
be the only completely tax and duty-free area in the SSEFPZ. Business enterprises and
individuals (Filipinos and foreigners) residing within the Secured Area are free to import raw
materials, capital goods, equipment, and consumer items tax and dutry-free. Consumption
items, however, must be consumed within the Secured Area. Removal of raw materials,
capital goods, equipment and consumer items out of the Secured Area for sale to non-
SSEFPZ registered enterprises shall be subject to the usual taxes and duties, except as may
be provided herein.
In Tiu v. Court of Appeals46 as reiterated in Coconut Oil Refiners Association, Inc. v.
Torres,47 this provision limiting the special privileges on tax and duty-free importation in the
presently fenced-in former Subic Naval Base has been declared valid and constitutional and
in accordance with RA 7227. Consistent with these rulings and for easier management and
monitoring of activities and to prevent fraudulent importation of merchandise and smuggling,
the free flow and importation of used motor vehicles shall be operative only within the
"secured area."
In sum, the Court finds that Article 2, Section 3.1 of EO 156 is void insofar as it is made
applicable to the presently secured fenced-in former Subic Naval Base area as stated in
Section 1.1 of EO 97-A. Pursuant to the separability clause48 of EO 156, Section 3.1 is
declared valid insofar as it applies to the customs territory or the Philippine territory outside
the presently secured fenced-in former Subic Naval Base area as stated in Section 1.1 of EO
97-A. Hence, used motor vehicles that come into the Philippine territory via the secured
fenced-in former Subic Naval Base area may be stored, used or traded therein, or exported
out of the Philippine territory, but they cannot be imported into the Philippine territory outside
of the secured fenced-in former Subic Naval Base area.
WHEREFORE, the petitions are PARTIALLY GRANTED and the May 24, 2004 Decisions of
Branch 72, Regional Trial Court of Olongapo City, in Civil Case No. 20-0-04 and Civil Case
No. 22-0-04; and the February 14, 2005 Decision of the Court of Appeals in CA-G.R. SP No.
63284, are MODIFIED insofar as they declared Article 2, Section 3.1 of Executive Order No.
156, void in its entirety.
Said provision is declared VALID insofar as it applies to the Philippine territory outside the
presently fenced-in former Subic Naval Base area and VOID with respect to its application to
the secured fenced-in former Subic Naval Base area.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-4043 May 26, 1952
CENON S. CERVANTES, petitioner,
vs.
THE AUDITOR GENERAL, respondent.
Cenon Cervantes in his own behalf.
Office of the Solicitor General Pompeyo Diaz and Solicitor Felix V. Makasiar for respondent.
REYES, J.:
This is a petition to review a decision of the Auditor General denying petitioner's claim for
quarters allowance as manager of the National Abaca and Other Fibers Corporation,
otherwise known as the NAFCO.
It appears that petitioner was in 1949 the manager of the NAFCO with a salary of P15,000 a
year. By a resolution of the Board of Directors of this corporation approved on January 19 of
that year, he was granted quarters allowance of not exceeding P400 a month effective the
first of that month. Submitted the Control Committee of the Government Enterprises Council
for approval, the said resolution was on August 3, 1949, disapproved by the said Committee
on strenght of the recommendation of the NAFCO auditor, concurred in by the Auditor
General, (1) that quarters allowance constituted additional compensation prohibited by the
charter of the NAFCO, which fixes the salary of the general manager thereof at the sum not
to exceed P15,000 a year, and (2) that the precarious financial condition of the corporation
did not warrant the granting of such allowance.
On March 16, 1949, the petitioner asked the Control Committee to reconsider its action and
approve his claim for allowance for January to June 15, 1949, amounting to P1,650. The
claim was again referred by the Control Committee to the auditor General for comment. The
latter, in turn referred it to the NAFCO auditor, who reaffirmed his previous recommendation
and emphasized that the fact that the corporation's finances had not improved. In view of
this, the auditor General also reiterated his previous opinion against the granting of the
petitioner's claim and so informed both the Control Committee and the petitioner. But as the
petitioner insisted on his claim the Auditor General Informed him on June 19, 1950, of his
refusal to modify his decision. Hence this petition for review.
The NAFCO was created by the Commonwealth Act No. 332, approved on June 18, 1939,
with a capital stock of P20,000,000, 51 per cent of which was to be able to be subscribed by
the National Government and the remainder to be offered to provincial, municipal, and the
city governments and to the general public. The management the corporation was vested in
a board of directors of not more than 5 members appointed by the president of the
Philippines with the consent of the Commission on Appointments. But the corporation was
made subject to the provisions of the corporation law in so far as they were compatible with
the provisions of its charter and the purposes of which it was created and was to enjoy the
general powers mentioned in the corporation law in addition to those granted in its charter.
The members of the board were to receive each a per diem of not to exceed P30 for each
day of meeting actually attended, except the chairman of the board, who was to be at the
same time the general manager of the corporation and to receive a salary not to exceed
P15,000 per annum.
On October 4, 1946, Republic Act No. 51 was approved authorizing the President of the
Philippines, among other things, to effect such reforms and changes in government owned
and controlled corporations for the purpose of promoting simplicity, economy and efficiency
in their operation Pursuant to this authority, the President on October 4, 1947, promulgated
Executive Order No. 93 creating the Government Enterprises Council to be composed of the
President of the Philippines as chairman, the Secretary of Commerce and Industry as vice-
chairman, the chairman of the board of directors and managing heads of all such
corporations as ex-officio members, and such additional members as the President might
appoint from time to time with the consent of the Commission on Appointments. The council
was to advise the President in the excercise of his power of supervision and control over
these corporations and to formulate and adopt such policy and measures as might be
necessary to coordinate their functions and activities. The Executive Order also provided that
the council was to have a Control Committee composed of the Secretary of Commerce and
Industry as chairman, a member to be designated by the President from among the
members of the council as vice-chairman and the secretary as ex-officio member, and with
the power, among others —
(1) To supervise, for and under the direction of the President, all the corporations
owned or controlled by the Government for the purpose of insuring efficiency and
economy in their operations;
(2) To pass upon the program of activities and the yearly budget of expenditures
approved by the respective Boards of Directors of the said corporations; and
(3) To carry out the policies and measures formulated by the Government Enterprises
Council with the approval of the President. (Sec. 3, Executive Order No. 93.)
With its controlling stock owned by the Government and the power of appointing its directors
vested in the President of the Philippines, there can be no question that the NAFCO is
Government controlled corporation subject to the provisions of Republic Act No. 51 and the
executive order (No. 93) promulgated in accordance therewith. Consequently, it was also
subject to the powers of the Control Committee created in said executive order, among
which is the power of supervision for the purpose of insuring efficiency and economy in the
operations of the corporation and also the power to pass upon the program of activities and
the yearly budget of expenditures approved by the board of directors. It can hardly be
questioned that under these powers the Control Committee had the right to pass upon, and
consequently to approve or disapprove, the resolution of the NAFCO board of directors
granting quarters allowance to the petitioners as such allowance necessarily constitute an
item of expenditure in the corporation's budget. That the Control Committee had good
grounds for disapproving the resolution is also clear, for, as pointed out by the Auditor
General and the NAFCO auditor, the granting of the allowance amounted to an illegal
increase of petitioner's salary beyond the limit fixed in the corporate charter and was
furthermore not justified by the precarious financial condition of the corporation.
It is argued, however, that Executive Order No. 93 is null and void, not only because it is
based on a law that is unconstitutional as an illegal delegation of legislature power to
executive, but also because it was promulgated beyond the period of one year limited in said
law.
The second ground ignores the rule that in the computation of the time for doing an act, the
first day is excluded and the last day included (Section 13 Rev. Ad. Code.) As the act was
approved on October 4, 1946, and the President was given a period of one year within which
to promulgate his executive order and that the order was in fact promulgated on October 4,
1947, it is obvious that under the above rule the said executive order was promulgated within
the period given.
As to the first ground, the rule is that so long as the Legislature "lays down a policy and a
standard is established by the statute" there is no undue delegation. (11 Am. Jur. 957).
Republic Act No. 51 in authorizing the President of the Philippines, among others, to make
reforms and changes in government-controlled corporations, lays down a standard and
policy that the purpose shall be to meet the exigencies attendant upon the establishment of
the free and independent government of the Philippines and to promote simplicity, economy
and efficiency in their operations. The standard was set and the policy fixed. The President
had to carry the mandate. This he did by promulgating the executive order in question which,
tested by the rule above cited, does not constitute an undue delegation of legislative power.
It is also contended that the quarters allowance is not compensation and so the granting of it
to the petitioner by the NAFCO board of directors does not contravene the provisions of the
NAFCO charter that the salary of the chairman of said board who is also to be general
manager shall not exceed P15,000 per anum. But regardless of whether quarters allowance
should be considered as compensation or not, the resolution of the board of the directors
authorizing payment thereof to the petitioner cannot be given effect since it was disapproved
by the Control Committee in the exercise of powers granted to it by Executive Order No. 93.
And in any event, petitioner's contention that quarters allowance is not compensation, a
proposition on which American authorities appear divided, cannot be insisted on behalf of
officers and employees working for the Government of the Philippines and its
Instrumentalities, including, naturally, government-controlled corporations. This is so
because Executive Order No. 332 of 1941, which prohibits the payment of additional
compensation to those working for the Government and its Instrumentalities, including
government-controlled corporations, was in 1945 amended by Executive Order No. 77 by
expressly exempting from the prohibition the payment of quarters allowance "in favor of local
government officials and employees entitled to this under existing law." The amendment is a
clear indication that quarters allowance was meant to be included in the term "additional
compensation", for otherwise the amendment would not have expressly excepted it from the
prohibition. This being so, we hold that, for the purpose of the executive order just
mentioned, quarters allowance is considered additional compensation and, therefore,
prohibited.
In view of the foregoing, the petition for review is dismissed, with costs.
Paras, C.J., Feria, Pablo, Bengzon, Tuason, Montemayor and Bautista Angelo, JJ., concur.
EN BANC
January 24, 2017
G.R. No. 184450
JAIME N. SORIANO, MICHAEL VERNON M. GUERRERO, MARY ANN L. REYES,
MARAH SHARYN M. DE CASTRO and CRIS P. TENORIO, Petitioners,
vs.
SECRETARY OF FINANCE and the COMMISSIONER OF INTERNAL REVENUE,
Respondents.
x-----------------------x
G.R. No. 184508
SENATOR MANUEL A. ROXAS, Petitioner,
vs.
MARGARITO B. TEVES, in his capacity as Secretary of the Department of Finance and
LILIAN B. HEFTI, in her capacity as Commissioner of the Bureau of Internal
Revenue, Respondents.
x-----------------------x
G.R. No. 184538
TRADE UNION CONGRESS OF THE PHILIPPINES (TUCP), represented by its
President, DEMOCRITO T. MENDOZA, Petitioner,
vs.
MARGARITO B. TEVES, in his capacity as Secretary of the Department of Finance and
LILIAN B. HEFTI, in her capacity as Commissioner of the Bureau of Internal
Revenue, Respondents.
x-----------------------x
G.R. No. 185234
SENATOR FRANCIS JOSEPH G. ESCUDERO, TAX MANAGEMENT ASSOCIATION OF
THE PHILIPPINES, INC. and ERNESTO G. EBRO, Petitioners,
vs.
MARGARITO B. TEVES, in his capacity as Secretary of the Department of Finance and
SIXTO S. ESQUIVIAS IV, in his capacity as Commissioner of the Bureau of Internal
Revenue, Respondents.
DECISION
SERENO, CJ.:
Before us are consolidated Petitions for Certiorari, Prohibition and Mandamus, under Rule 65
of the 1997 Revised Rules of Court. These Petitions seek to nullify certain provisions of
Revenue Regulation No. (RR) 10-2008. The RR was issued by the Bureau of Internal
Revenue (BIR) on 24 September 2008 to implement the provisions of Republic Act No.
(R.A.) 9504. The law granted, among others, income tax exemption for minimum wage
earners (MWEs), as well as an increase in personal and additional exemptions for individual
taxpayers.
Petitioners assail the subject RR as an unauthorized departure from the legislative intent of
R.A. 9504. The regulation allegedly restricts the implementation of the MWEs income tax
exemption only to the period starting from 6 July 2008, instead of applying the exemption to
the entire year 2008. They further challenge the BIR's adoption of the prorated application of
the new set of personal and additional exemptions for taxable year 2008. They also contest
the validity of the RR's alleged imposition of a condition for the availment by MWEs of the
exemption provided by R.A. 9504. Supposedly, in the event they receive other benefits in
excess of ₱30,000, they can no longer avail themselves of that exemption. Petitioners
contend that the law provides for the unconditional exemption of MWEs from income tax and,
thus, pray that the RR be nullified.
ANTECEDENT FACTS
R.A. 9504
On 19 May 2008, the Senate filed its Senate Committee Report No. 53 on Senate Bill No.
(S.B.) 2293. On 21 May 2008, former President Gloria M. Arroyo certified the passage of the
bill as urgent through a letter addressed to then Senate President Manuel Villar. On the
same day, the bill was passed on second reading IN the Senate and, on 27 May 2008, on
third reading. The following day, 28 May 2008, the Senate sent S.B. 2293 to the House of
Representatives for the latter's concurrence.
On 04 June 2008, S.B. 2293 was adopted by the House of Representatives as an
amendment to House Bill No. (H.B.) 3971.
On 17 June 2008, R.A. 9504 entitled "An Act Amending Sections 22, 24, 34, 35, 51, and 79
of Republic Act No. 8424, as Amended, Otherwise Known as the National Internal Revenue
Code of 1997," was approved and signed into law by President Arroyo. The following are the
salient features of the new law:
1. It increased the basic personal exemption from ₱20,000 for a single individual,
₱25,000 for the head of the family, and ₱32,000 for a married individual to P50,000 for
each individual.
2. It increased the additional exemption for each dependent not exceeding four from
₱8,000 to ₱25,000.
3. It raised the Optional Standard Deduction (OSD) for individual taxpayers from 10%
of gross income to 40% of the gross receipts or gross sales.
4. It introduced the OSD to corporate taxpayers at no more than 40% of their gross
income.
5. It granted MWEs exemption from payment of income tax on their minimum wage,
holiday pay, overtime pay, night shift differential pay and hazard pay. 1
Section 9 of the law provides that it shall take effect 15 days following its publication in
the Official Gazette or in at least two newspapers of general circulation. Accordingly, R.A.
9504 was published in the Manila Bulletin and Malaya on 21 June 2008. On 6 July 2008, the
end of the 15-day period, the law took effect.
RR 10-2008
On 24 September 2008, the BIR issued RR 10-2008, dated 08 July 2008, implementing the
provisions of R.A. 9504. The relevant portions of the said RR read as follows:
SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read as
follows:
Sec. 2.78.1. Withholding of Income Tax on Compensation Income.
xxxx
The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not be
considered in determining the ₱30,000.00 ceiling of 'other benefits' excluded from gross
income under Section 32 (b) (7) (e) of the Code. Provided that, the excess of the 'de
minimis' benefits over their respective ceilings prescribed by these regulations shall be
considered as part of 'other benefits' and the employee receiving it will be subject to tax only
on the excess over the ₱30,000.00 ceiling. Provided, further, that MWEs receiving 'other
benefits' exceeding the ₱30,000.00 limit shall be taxable on the excess benefits, as
well as on his salaries, wages and allowances, just like an employee receiving
compensation income beyond the SMW.
xxxx
(B) Exemptions from Withholding Tax on Compensation. - The following income payments
are exempted from the requirements of withholding tax on compensation:
xxxx
(13) Compensation income of MWEs who work in the private sector and being paid the
Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity
Board (RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the
place where he/she is assigned.
The aforesaid income shall likewise be exempted from income tax.
'Statutory Minimum Wage' (SMW) shall refer to the rate fixed by the Regional Tripartite
Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment
Statistics (BLES) of the Department of Labor and Employment (DOLE). The RTWPB of each
region shall determine the wage rates in the different regions based on established criteria
and shall be the basis of exemption from income tax for this purpose.
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided,
however, that an employee who receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of ₱30,000.00, taxable allowances and other taxable income other than the
SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not
enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not
exempt from income tax, and consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation income
are not exempted from income tax on their entire income earned during the taxable year.
This rule, notwithstanding, the SMW, holiday pay, overtime pay, night shift differential
pay and hazard pay shall still be exempt from withholding tax.
For purposes of these regulations, hazard pay shall mean the amount paid by the employer
to MWEs who were actually assigned to danger or strife-torn areas, disease-infested places,
or in distressed or isolated stations and camps, which expose them to great danger of
contagion or peril to life. Any hazard pay paid to MWEs which does not satisfy the above
criteria is deemed subject to income tax and consequently, to withholding tax.
xxxx
SECTION 3. Section 2. 79 of RR 2-98, as amended, is hereby further amended to read as
follows:
Sec. 2.79. Income Tax Collected at Source on Compensation Income. --
(A) Requirement of Withholding. - Every employer must withhold from compensation paid an
amount computed in accordance with these Regulations. Provided, that no withholding of tax
shall be required on the SMW, including holiday pay, overtime pay, night shift differential and
hazard pay of MWEs in the private/public sectors as defined in these Regulations. Provided,
further, that an employee who receives additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of ₱30,000.00, taxable allowances and other taxable income other than the
SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not
enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not
exempt from income tax and, consequently, shall be subject to withholding tax.
xxxx
For the year 2008, however, being the initial year of implementation of R.A. 9504, there shall
be a transitory withholding tax table for the period from July 6 to December 31, 2008 (Annex
"D") determined by prorating the annual personal and additional exemptions under R.A. 9504
over a period of six months. Thus, for individuals, regardless of personal status, the prorated
personal exemption is ₱25,000, and for each qualified dependent child (QDC), ₱12,500.
xxxx
SECTION 9. Effectivity. -
These Regulations shall take effect beginning July 6, 2008. (Emphases supplied)
The issuance and effectivity of RR 10-2008 implementing R.A. 9504 spawned the present
Petitions.1âwphi1
G.R. No. 184450
Petitioners Jaime N. Soriano et al. primarily assail Section 3 of RR 10-2008 providing for the
prorated application of the personal and additional exemptions for taxable year 2008 to begin
only effective 6 July 2008 for being contrary to Section 4 of Republic Act No. 9504.2
Petitioners argue that the prorated application of the personal and additional exemptions
under RR 10-2008 is not "the legislative intendment in this jurisdiction."3 They stress that
Congress has always maintained a policy of "full taxable year treatment"4 as regards the
application of tax exemption laws. They allege further that R.A. 9504 did not provide for a
prorated application of the new set of personal and additional exemptions. 5
G.R. No. 184508
Then Senator Manuel Roxas, as principal author of R.A. 9504, also argues for a full taxable
year treatment of the income tax benefits of the new law. He relies on what he says is clear
legislative intent. In his "Explanatory Note of Senate Bill No. 103," he stresses "the very spirit
of enacting the subject tax exemption law"6 as follows:
With the poor, every little bit counts, and by lifting their burden of paying income tax, we give
them opportunities to put their money to daily essentials as well as savings. Minimum wage
earners can no longer afford to be taxed and to be placed in the cumbersome income
tax process in the same manner as higher-earning employees. It is our obligation to
ease their burdens in any way we can.7 (Emphasis Supplied)
Apart from raising the issue of legislative intent, Senator Roxas brings up the following legal
points to support his case for the full-year application of R.A. 9504's income tax benefits. He
says that the pro rata application of the assailed RR deprives MWEs of the financial relief
extended to them by the law;8 that Umali v. Estanislao9serves as jurisprudential basis for his
position that R.A. 9504 should be applied on a full-year basis to taxable year 2008; 10 and
that the social justice provisions of the 1987 Constitution, particularly Articles II and XIII,
mandate a full application of the law according to the spirit of R.A. 9504. 11
On the scope of exemption of MWEs under R.A. 9504, Senator Roxas argues that the
exemption of MWEs is absolute, regardless of the amount of the other benefits they receive.
Thus, he posits that the Department of Finance (DOF) and the BIR committed grave abuse
of discretion amounting to lack and/or excess of jurisdiction. They supposedly did so when
they provided in Section l of RR 10-2008 the condition that an MWE who receives "other
benefits" exceeding the ₱30,000 limit would lose the tax exemption. 12 He further contends
that the real intent of the law is to grant income tax exemption to the MWE without any
limitation or qualification, and that while it would be reasonable to tax the benefits in excess
of ₱30,000, it is unreasonable and unlawful to tax both the excess benefits and the salaries,
wages and allowances. 13
G.R. No. 184538
Petitioner Trade Union Congress of the Philippine contends that the provisions of R.A. 9504
provide for the application of the tax exemption for the full calendar year 2008. It also
espouses the interpretation that R.A. 9504 provides for the unqualified tax exemption of the
income of MWEs regardless of the other benefits they receive. 14 In conclusion, it says that
RR 10-2008, which is only an implementing rule, amends the original intent of R.A. 9504,
which is the substantive law, and is thus null and void.
G.R. No. 185234
Petitioners Senator Francis Joseph Escudero, the Tax Management Association of the
Philippines, Inc., and Ernesto Ebro allege that R.A. 9504 unconditionally grants MWEs
exemption from income tax on their taxable income, as well as increased personal and
additional exemptions for other individual taxpayers, for the whole year 2008. They note that
the assailed RR 10-2008 restricts the start of the exemptions to 6 July 2008 and provides
that those MWEs who received "other benefits" in excess of ₱30,000 are not exempt from
income taxation. Petitioners believe this RR is a "patent nullity" 15 and therefore void.
Comment of the OSG
The Office of the Solicitor General (OSG) filed a Consolidated Comment16 and took the
position that the application of R.A. 9504 was intended to be prospective, and not retroactive.
This was supposedly the general 1ule under the rules of statutory construction: law will only
be applied retroactively if it clearly provides for retroactivity, which is not provided in this
instance. 17
The OSG contends that Umali v. Estanislao is not applicable to the present case.1âwphi1 It
explains that R.A. 7167, the subject of that case, was intended to adjust the personal
exemption levels to the poverty threshold prevailing in 1991. Hence, the Court in that case
held that R.A. 7167 had been given a retroactive effect. The OSG believes that the grant of
personal exemptions no longer took into account the poverty threshold level under R.A.
9504, because the amounts of personal exemption far exceeded the poverty threshold
levels. 18
The OSG further argues that the legislative intent of non-retroactivity was effectively
confirmed by the "Conforme" of Senator Escudero, Chairperson of the Senate Committee on
Ways and Means, on the draft revenue regulation that became RR 10-2008.
ISSUES
Assailing the validity of RR 10-2008, all four Petitions raise common issues, which may be
distilled into three major ones:
First, whether the increased personal and additional exemptions provided by R.A. 9504
should be applied to the entire taxable year 2008 or prorated, considering that R.A. 9504
took effect only on 6 July 2008.
Second, whether an MWE is exempt for the entire taxable year 2008 or from 6 July 2008
only.
Third, whether Sections 1 and 3 of RR 10-2008 are consistent with the law in providing that
an MWE who receives other benefits in excess of the statutory limit of ₱30,000 19 is no
longer entitled to the exemption provided by R.A. 9504.
THE COURT'S RULING
I.
Whether the increased personal and additional exemptions provided by R.A. 9504
should be applied to the entire taxable year 2008 or prorated, considering that the law
took effect only on 6 July 2008
The personal and additional exemptions established by R.A. 9504 should be applied to the
entire taxable year 2008.
Umali is applicable.
Umali v. Estanislao20supports this Comi's stance that R.A. 9504 should be applied on a full-
year basis for the entire taxable year 2008.21 In Umali, Congress enacted R.A. 7167
amending the 1977 National Internal Revenue Code (NIRC). The amounts of basic personal
and additional exemptions given to individual income taxpayers were adjusted to the poverty
threshold level. R.A. 7167 came into law on 30 January 1992. Controversy arose when the
Commission of Internal Revenue (CIR) promulgated RR 1-92 stating that the regulation shall
take effect on compensation income earned beginning 1 January 1992. The issue posed was
whether the increased personal and additional exemptions could be applied to compensation
income earned or received during calendar year 1991, given that R.A. 7167 came into law
only on 30 January 1992, when taxable year 1991 had already closed.
This Court ruled in the affirmative, considering that the increased exemptions were already
available on or before 15 April 1992, the date for the filing of individual income tax returns.
Further, the law itself provided that the new set of personal and additional exemptions would
be immediately available upon its effectivity. While R.A. 7167 had not yet become effective
during calendar year 1991, the Court found that it was a piece of social legislation that was in
part intended to alleviate the economic plight of the lower-income taxpayers. For that
purpose, the new law provided for adjustments "to the poverty threshold level" prevailing at
the time of the enactment of the law. The relevant discussion is quoted below:
[T]he Court is of the considered view that Rep. Act 7167 should cover or extend to
compensation income earned or received during calendar year 1991.
Sec. 29, par.(L), Item No. 4 of the National Internal Revenue Code, as amended, provides:
Upon the recommendation of the Secretary of Finance, the President shall automatically
adjust not more often than once every three years, the personal and additional exemptions
taking into account, among others, the movement in consumer price indices, levels of
minimum wages, and bare subsistence levels.
As the personal and additional exemptions of individual taxpayers were last adjusted in
1986, the President, upon the recommendation of the Secretary of Finance, could have
adjusted the personal and additional exemptions in 1989 by increasing the same even
without any legislation providing for such adjustment. But the President did not.
However, House Bill 28970, which was subsequently enacted by Congress as Rep. Act
7167, was introduced in the House of Representatives in 1989 although its passage was
delayed and it did not become effective law until 30 January 1992. A perusal, however, of the
sponsorship remarks of Congressman Hernando B. Perez, Chairman of the House
Committee on Ways and Means, on House Bill 28970, provides an indication of the intent of
Congress in enacting Rep. Act 716 7. The pertinent legislative journal contains the following:
At the outset, Mr. Perez explained that the Bill Provides for increased personal additional
exemptions to individuals in view of the higher standard of living.
The Bill, he stated, limits the amount of income of individuals subject to income tax to enable
them to spend for basic necessities and have more disposable income.
xxxx
Mr. Perez added that inflation has raised the basic necessities and that it had been three
years since the last exemption adjustment in 1986.
xxxx
Subsequently, Mr. Perez stressed the necessity of passing the measure to mitigate the
effects of the current inflation and of the implementation of the salary standardization law.
Stating that it is imperative for the government to take measures to ease the burden of the
individual income tax filers, Mr. Perez then cited specific examples of how the measure can
help assuage the burden to the taxpayers.
He then reiterated that the increase in the prices of commodities has eroded the purchasing
power of the peso despite the recent salary increases and emphasized that the Bill will serve
to compensate the adverse effects of inflation on the taxpayers. x x x (Journal of the House
of Representatives, May 23, 1990, pp. 32-33).
It will also be observed that Rep. Act 7167 speaks of the adjustments that it provides for, as
adjustments "to the poverty threshold level." Certainly, "the poverty threshold level" is the
poverty threshold level at the time Rep. Act 7167 was enacted by Congress, not poverty
threshold levels in futuro, at which time there may be need of further adjustments in personal
exemptions. Moreover, the Court can not lose sight of the fact that these personal and
additional exemptions are fixed amounts to which an individual taxpayer is entitled, as
a means to cushion the devastating effects of high prices and a depreciated
purchasing power ofthe currency. In the end, it is the lower-income and the middle-
income groups of taxpayers (not the high-income taxpayers) who stand to benefit
most from the increase of personal and additional exemptions provided for by Rep.
Act 7167. To that extent, the act is a social legislation intended to alleviate in part the
present economic plight of the lower income taxpayers. It is intended to remedy the
inadequacy of the heretofore existing personal and additional exemptions for
individual taxpayers.
And then, Rep. Act 7167 says that the increased personal exemptions that it provides for
shall be available thenceforth, that is, after Rep. Act 7167 shall have become effective.
In other words, these exemptions are available upon the filing of personal income tax
returns which is, under the National Internal Revenue Code, done not later than the
15th day of April after the end of a calendar year. Thus, under Rep. Act 7167, which
became effective, as aforestated, on 30 January 1992, the increased exemptions are
literally available on or before 15 April 1992 (though not before 30 January 1992). But
these increased exemptions can be available on 15 April 1992 only in respect of
compensation income earned or received during the calendar year 1991.
The personal exemptions as increased by Rep. Act 7167 cannot be regarded as available in
respect of compensation income received during the 1990 calendar year; the tax due in
respect of said income had already accrued, and been presumably paid, by 15 April 1991
and by 15 July 1991, at which time Rep. Act 7167 had not been enacted. To make Rep. Act
7167 refer back to income received during 1990 would require language explicitly retroactive
in purport and effect, language that would have to authorize the payment of refunds of taxes
paid on 15 April 1991 and 15 July 1991: such language is simply not found in Rep. Act 7167.
The personal exemptions as increased by Rep. Act 7167 cannot be regarded as
available only in respect of compensation income received during 1992, as the
implementing Revenue Regulations No. 1-92 purport to provide. Revenue Regulations
No. 1-92 would in effect postpone the availability of the increased exemptions to 1
January-15 April 1993, and thus literally defer the effectivity of Rep. Act 7167 to 1
January 1993. Thus, the implementing regulations collide frontally with Section 3 of Rep. Act
7167 which states that the statute "shall take effect upon its approval." The objective of the
Secretary of Finance and the Commissioner of Internal Revenue in postponing through
Revenue Regulations No. 1-92 the legal effectivity of Rep. Act 7167 is, of course, entirely
understandable - to defer to 1993 the reduction of governmental tax revenues which
irresistibly follows from the application of Rep. Act 7167. But the law-making authority has
spoken and the Court can not refuse to apply the law-maker's words. Whether or not the
government can afford the drop in tax revenues resulting from such increased exemptions
was for Congress (not this Court) to decide.22 (Emphases supplied)
In this case, Senator Francis Escudero's sponsorship speech for Senate Bill No. 2293
reveals two important points about R.A. 9504: (1) it is a piece of social legislation; and (2) its
intent is to make the proposed law immediately applicable, that is, to taxable year 2008:
Mr. President, distinguished colleagues, Senate Bill No. 2293 seeks, among others, to
exempt minimum wage earners from the payment of income and/or withholding tax. It is an
attempt to help our people cope with the rising costs of commodities that seem to be
going up unhampered these past few months.
Mr. President, a few days ago, the Regional Tripartite and Wages Productivity Board granted
an increase of ₱20 per day as far as minimum wage earners are concerned. By way of
impact, Senate Bill No. 2293 would grant our workers an additional salary or take-home pay
of approximately ₱34 per day, given the exemption that will be granted to all minimum wage
earners. It might be also worthy of note that on the part of the public sector, the Senate
Committee on Ways and Means included, as amongst those who will be exempted from the
payment of income tax and/or withholding tax, government workers receiving Salary Grade
V. We did not make any distinction so as to include Steps 1 to 8 of Salary Grade V as long
as one is employed in the public sector or in government.
In contradistinction with House Bill No. 3971 approved by the House of Representatives
pertaining to a similar subject matter, the House of Representatives, very much like the
Senate, adopted the same levels of exemptions which are:
From an allowable personal exemption for a single individual of ₱20,000, to a head of family
of ₱25,000, to a married individual of ₱32,000, both the House and the Senate versions
contain a higher personal exemption of ₱50,000.
Also, by way of personal additional exemption as far as dependents are concerned, up to
four, the House, very much like the Senate, recommended a higher ceiling of ₱25,000 for
each dependent not exceeding four, thereby increasing the maximum additional exemptions
and personal additional exemptions to as high as ₱200,000, depending on one's status in
life.
The House also, very much like the Senate, recommended by way of trying to address the
revenue loss on the part of the government, an optional standard deduction (OSD) on gross
sales, and/or gross receipts as far as individual taxpayers are concerned. However, the
House, unlike the Senate, recommended a Simplified Net Income Tax Scheme (SNITS) in
order to address the remaining balance of the revenue loss.
By way of contrast, the Senate Committee on Ways and Means recommended, in lieu of
SNITS, an optional standard deduction of 40% for corporations as far as their gross income
is concerned.
Mr. President, if we total the revenue loss as well as the gain
brought about by the 40% OSD on individuals on gross sales and receipts and 40% on gross
income as far as corporations are concerned, with a conservative availment rate as
computed by the Department of Finance, the government would still enjoy a gain of ₱.78
billion or ₱780 million if we use the high side of the computation however improbable it may
be.
For the record, we would like to state that if the availment rate is computed at 15% for
individuals and 10% for corporations, the potential high side of a revenue gain would amount
to approximately ₱18.08 billion.
Mr. President, we have received many suggestions increasing the rate of personal
exemptions and personal additional exemptions. We have likewise received various
suggestions pertaining to the expansion of the coverage of the tax exemption granted to
minimum wage earners to encompass as well other income brackets.
However, the only suggestion other than or outside the provisions contained in House Bill
No. 3971 that the Senate Committee on Ways and Means adopted, was an expansion of the
exemption to cover overtime, holiday, nightshift differential, and hazard pay also being
enjoyed by minimum wage earners. It entailed an additional revenue loss of ₱l billion
approximately on the part of the government. However, Mr. President, that was taken into
account when I stated earlier that there will still be a revenue gain on the conservative side
on the part of government of ₱780 million.
Mr. President, [my distinguished colleagues in the Senate, we wish to provide a higher
exemption for our countrymen because of the incessant and constant increase in the
price of goods. Nonetheless, not only Our Committee, but also the Senate and Congress,
must act responsibly in recognizing that much as we would like to give all forms of help that
we can and must provide to our people, we also need to recognize the need of the
government to defray its expenses in providing services to the public. This is the most that
we can give at this time because the government operates on a tight budget and is short on
funds when it comes to the discharge of its main expenses.]23
Mr. President, time will perhaps come and we can improve on this version, but at
present, this is the best, I believe, that we can give our people. But by way of
comparison, it is still ₱10 higher than what the wage boards were able to give minimum
wage earners. Given that, we were able to increase their take-home pay by the amount
equivalent to the tax exemption we have granted.
We urge our colleagues, Mr. President, to pass this bill in earnest so that we can
immediately grant relief to our people.
Thank you, Mr. President. (Emphases Supplied)24
Clearly, Senator Escudero expressed a sense of urgency for passing what would
subsequently become R.A. 9504. He was candid enough to admit that the bill needed
improvement, but because time was of the essence, he urged the Senate to pass the bill
immediately. The idea was immediate tax relief to the individual taxpayers, particularly low-
compensation earners, and an increase in their take-home pay.25
Senator Miriam Defensor-Santiago also remarked during the deliberations that "the increase
in personal exemption from ₱20,000 to ₱50,000 is timely and appropriate given the
increased cost of living. Also, the increase in the additional exemption for dependent children
is necessary and timely."26
Finally, we consider the President's certification of the necessity of the immediate enactment
of Senate Bill No. 2293. That certification became the basis for the Senate to dispense with
the three-day rule27 for passing a bill. It evinced the intent of the President to afford wage
earners immediate tax relief from the impact of a worldwide increase in the prices of
commodities. Specifically, the certification stated that the purpose was to "address the urgent
need to cushion the adverse impact of the global escalation of commodity prices upon the
most vulnerable within the low income group by providing expanded income tax relief."28
In sum, R.A. 9504, like R.A. 7167 in Umali, was a piece of social legislation clearly intended
to afford immediate tax relief to individual taxpayers, particularly low-income compensation
earners. Indeed, if R.A. 9504 was to take effect beginning taxable year 2009 or half of the
year 2008 only, then the intent of Congress to address the increase in the cost of living in
2008 would have been negated.
Therefore, following Umali, the test is whether the new set of personal and additional
exemptions was available at the time of the filing of the income tax return. In other words,
while the status of the individual taxpayers is determined at the close of the taxable
year, 29 their personal and additional exemptions - and consequently the computation of their
taxable income - are reckoned when the tax becomes due, and not while the income is being
earned or received.
The NIRC is clear on these matters. The taxable income of an individual taxpayer shall be
computed on the basis of the calendar year.30 The taxpayer is required to file an income tax
return on the 15th of April of each year covering income of the preceding taxable year. 31 The
tax due thereon shall be paid at the time the return is filed. 32
It stands to reason that the new set of personal and additional exemptions, adjusted as a
form of social legislation to address the prevailing poverty threshold, should be given effect
at the most opportune time as the Court ruled in Umali.
The test provided by Umali is consistent with Ingalls v. Trinidad, 33 in which the Court dealt
with the matter of a married person's reduced exemption. As early as 1923, the Court
already provided the reference point for determining the taxable income:
[T]hese statutes dealing with the manner of collecting the income tax and with the deductions
to be made in favor of the taxpayer have reference to the time when the return is filed and
the tax assessed. If Act No. 2926 took, as it did take, effect on January 1, 1921, its
provisions must be applied to income tax returns filed, and assessments made from that
date. This is the reason why Act No. 2833, and Act No. 2926, in their respective first
sections, refer to income received during the preceding civil year. (Italics in the original)
There, the exemption was reduced, not increased, and the Court effectively ruled that
income tax due from the individual taxpayer is properly determined upon the filing of the
return. This is done after the end of the taxable year, when all the incomes for the
immediately preceding taxable year and the corresponding personal exemptions and/or
deductions therefor have been considered. Therefore, the taxpayer was made to pay a
higher tax for his income earned during 1920, even if the reduced exemption took effect on 1
January 1921.
In the present case, the increased exemptions were already available much earlier than the
required time of filing of the return on 15 April 2009. R.A. 9504 came into law on 6 July 2008,
more than nine months before the deadline for the filing of the income tax return for taxable
year 2008. Hence, individual taxpayers were entitled to claim the increased amounts for the
entire year 2008. This was true despite the fact that incomes were already earned or
received prior to the law's effectivity on 6 July 2008.
Even more compelling is the fact that R.A. 9504 became effective during the taxable year in
question. In Umali, the Court ruled that the application of the law was prospective, even if the
amending law took effect after the close of the taxable year in question, but before the
deadline for the filing of the return and payment of the taxes due for that year. Here, not only
did R.A. 9504 take effect before the deadline for the filing of the return and payment for the
taxes due for taxable year 2008, it took effect way before the close of that taxable year.
Therefore, the operation of the new set of personal and additional exemption in the present
case was all the more prospective.
Additionally, as will be discussed later, the rule of full taxable year treatment for the
availment of personal and additional exemptions was established, not by the amendments
introduced by R.A. 9504, but by the provisions of the 1997 Tax Code itself. The new law
merely introduced a change in the amounts of the basic and additional personal exemptions.
Hence, the fact that R.A. 9504 took effect only on 6 July 2008 is irrelevant.
The present case issubstantially
identical with Umali and not with
Pansacola.
Respondents argue that Umali is not applicable to the present case. They contend that the
increase in personal and additional exemptions were necessary in that case to conform to
the 1991 poverty threshold level; but that in the present case, the amounts under R.A. 9504
far exceed the poverty threshold level. To support their case, respondents cite figures
allegedly coming from the National Statistical Coordination Board. According to those
figures, in 2007, or one year before the effectivity of R.A. 9504, the poverty threshold per
capita was ₱14,866 or ₱89,196 for a family of six. 34
We are not persuaded.
The variance raised by respondents borders on the superficial. The message of Umali is that
there must be an event recognized by Congress that occasions the immediate application of
the increased amounts of personal and additional exemptions. In Umali, that event was the
failure to adjust the personal and additional exemptions to the prevailing poverty threshold
level. In this case, the legislators specified the increase in the price of commodities as the
basis for the immediate availability of the new amounts of personal and additional
exemptions.
We find the facts of this case to be substantially identical to those of Umali.
First, both cases involve an amendment to the prevailing tax code. The present petitions call
for the interpretation of the effective date of the increase in personal and additional
exemptions. Otherwise stated, the present case deals with an amendment (R.A. 9504) to the
prevailing tax code (R.A. 8424 or the 1997 Tax Code). Like the present case, Umali involved
an amendment to the then prevailing tax code - it interpreted the effective date of R.A. 7167,
an amendment to the 1977 NIRC, which also increased personal and additional exemptions.
Second, the amending law in both cases reflects an intent to make the new set of personal
and additional exemptions immediately available after the effectivity of the law. As already
pointed out, in Umali, R.A. 7167 involved social legislation intended to adjust personal and
additional exemptions. The adjustment was made in keeping with the poverty threshold level
prevailing at the time.
Third, both cases involve social legislation intended to cure a social evil - R.A. 7167 was
meant to adjust personal and additional exemptions in relation to the poverty threshold level,
while R.A. 9504 was geared towards addressing the impact of the global increase in the
price of goods.
Fourth, in both cases, it was clear that the intent of the legislature was to hasten the
enactment of the law to make its beneficial relief immediately available.
Pansacola is not applicable.
In lieu of Umali, the OSG relies on our ruling in Pansacola v.Commissioner of Internal
Revenue. 35 In that case, the 1997 Tax Code (R.A. 8424) took effect on 1 January 1998, and
the petitioner therein pleaded for the application of the new set of personal and additional
exemptions provided thereunder to taxable year 1997. R.A. 8424 explicitly provided for its
effectivity on 1 January 1998, but it did not provide for any retroactive application.
We ruled against the application of the new set of personal and additional exemptions to the
previous taxable year 1997, in which the filing and payment of the income tax was due on 15
April 1998, even if the NIRC had already taken effect on 1 January 1998. This court
explained that the NIRC could not be given retroactive application, given the specific
mandate of the law that it shall take effect on 1 January 1998; and given the absence of any
reference to the application of personal and additional exemptions to income earned prior to
1January 1998. We further stated that what the law considers for the purpose of determining
the income tax due is the status at the close of the taxable year, as opposed to the time of
filing of the return and payment of the corresponding tax.
The facts of this case are not identical with those of Pansacola.
First, Pansacola interpreted the effectivity of an entirely new tax code - R.A. 8424, the Tax
Reform Act of 1997. The present case, like Umali, involves a mere amendment of some
specific provisions of the prevailing tax code: R.A. 7167 amending then P.D. 1158 (the 1977
NIRC) in Umali and R.A. 9504 amending R.A. 8424 herein.
Second, in Pansacola, the new tax code specifically provided for an effective date - the
beginning of the following year - that was to apply to all its provisions, including new tax
rates, new taxes, new requirements, as well as new exemptions. The tax code did not make
any exception to the effectivity of the subject exemptions, even if transitory
provisions36 specifically provided for different effectivity dates for certain provisions.
Hence, the Court did not find any legislative intent to make the new rates of personal and
additional exemptions available to the income earned in the year previous to R.A. 8424's
effectivity. In the present case, as previously discussed, there was a clear intent on the part
of Congress to make the new amounts of personal and additional exemptions immediately
available for the entire taxable year 2008. R.A. 9504 does not even need a provision
providing for retroactive application because, as mentioned above, it is actually prospective -
the new law took effect during the taxable year in question.
Third, in Pansacola, the retroactive application of the new rates of personal and additional
exemptions would result in an absurdity - new tax rates under the new law would not apply,
but a new set of personal and additional exemptions could be availed of. This situation does
not obtain in this case, however, precisely because the new law does not involve an entirely
new tax code. The new law is merely an amendment to the rates of personal and additional
exemptions.
Nonetheless, R.A. 9504 can still be made applicable to taxable year 2008, even if we apply
the Pansacola test. We stress that Pansacola considers the close of the taxable year as the
reckoning date for the effectivity of the new exemptions. In that case, the Court refused the
application of the new set of personal exemptions, since they were not yet available at the
close of the taxable year. In this case, however, at the close of the taxable year, the new set
of exemptions was already available. In fact, it was already available during the taxable year
- as early as 6 July 2008 - when the new law took effect.
There may appear to be some dissonance between the Court's declarations in Umali and
those in Pansacola, which held:
Clearly from the abovequoted provisions, what the law should consider for the purpose of
determining the tax due from an individual taxpayer is his status and qualified dependents at
the close of the taxable year and not at the time the return is filed and the tax due thereon is
paid. Now comes Section 35(C) of the NIRC which provides,
xxxx
Emphasis must be made that Section 35(C) of the NIRC allows a taxpayer to still claim the
corresponding full amount of exemption for a taxable year, e.g. if he marries; have additional
dependents; he, his spouse, or any of his dependents die; and if any of his dependents
marry, turn 21 years old; or become gainfully employed. It is as if the changes in his or his
dependents status took place at the close of the taxable year.
Consequently, his correct taxable income and his corresponding allowable
deductions e.g. personal and additional deductions, if any, had already been
determined as of the end of the calendar year.
x x x. Since the NIRC took effect on January 1, 1998, the increased amounts of personal and
additional exemptions under Section 35, can only be allowed as deductions from the
individual taxpayers gross or net income, as the case maybe, for the taxable year 1998 to be
filed in 1999. The NIRC made no reference that the personal and additional exemptions shall
apply on income earned before January 1, 1998.37
It must be remembered, however, that the Court therein emphasized that Umali was
interpreting a social legislation:
In Umali, we noted that despite being given authority by Section 29(1)(4) of the National
Internal Revenue Code of 1977 to adjust these exemptions, no adjustments were made to
cover 1989. Note that Rep. Act No. 7167 is entitled "An Act Adjusting the Basic Personal and
Additional Exemptions Allowable to Individuals for Income Tax Purposes to the Poverty
Threshold Level, Amending for the Purpose Section 29, Paragraph (L), Items (1) and (2) (A),
of the National Internal Revenue Code, As Amended, and For Other Purposes." Thus, we
said in Umali, that the adjustment provided by Rep. Act No. 7167 effective 1992, should
consider the poverty threshold level in 1991, the time it was enacted. And we observed
therein that since the exemptions would especially benefit lower and middle-income
taxpayers, the exemption should be made to cover the past year 1991. To such an extent,
Rep. Act No. 7167 was a social legislation intended to remedy the non-adjustment in 1989.
And as cited in Umali, this legislative intent is also clear in the records of the House of
Representatives' Journal.
This is not so in the case at bar. There is nothing in the NIRC that expresses any such
intent. The policy declarations in its enactment do not indicate it was a social
legislation that adjusted personal and additional exemptions according to the poverty
threshold level nor is there any indication that its application should retroact. x x
x.38 (Emphasis Supplied)
Therefore, the seemingly inconsistent pronouncements in Umali and Pansacola are more
apparent than real. The circumstances of the cases and the laws interpreted, as well as the
legislative intents thereof, were different.
The policy in this jurisdiction is full
taxable year treatment.
We have perused R.A. 9504, and we see nothing that expressly provides or even suggests a
prorated application of the exemptions for taxable year 2008. On the other hand, the policy of
full taxable year treatment, especially of the personal and additional exemptions, is clear
under Section 35, particularly paragraph C of R.A. 8424 or the 1997 Tax Code:
SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -
(A) In General. - For purposes of determining the tax provided in Section 24(A) of this Title,
there shall be allowed a basic personal exemption as follows:
xxxx
(B) Additional Exemption for Dependents.-There shall be allowed an additional exemption
of... for each dependent not exceeding four (4).
x x xx
(C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as
defined above during the taxable year, the taxpayer may claim the corresponding additional
exemption, as the case may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependent(s) as if he died at the close of such
year.
If the spouse or any of the dependents dies or if any of such
dependents marries, becomes twenty-one (21) years old or becomes gainfully employed
during the taxable year, the taxpayer may still claim the same exemptions as if the
spouse or any of the dependents died, or as if such dependents married, became twenty-one
(21) years old or became gainfully employed at the close of such year. (Emphases
supplied)
Note that paragraph C does not allow the prorating of the personal and additional
exemptions provided in paragraphs A and B, even in case a status-changing event occurs
during the taxable year. Rather, it allows the fullest benefit to the individual taxpayer. This
manner of reckoning the taxpayer's status for purposes of the personal and additional
exemptions clearly demonstrates the legislative intention; that is, for the state to give the
taxpayer the maximum exemptions that can be availed, notwithstanding the fact that the
latter's actual status would qualify only for a lower exemption if prorating were employed.
We therefore see no reason why we should make any distinction between the income
earned prior to the effectivity of the amendment (from 1 January 2008 to 5 July 2008) and
that earned thereafter (from 6 July 2008 to 31 December 2008) as none is indicated in the
law. The principle that the courts should not distinguish when the law itself does not
distinguish squarely app1ies to this case. 39
We note that the prorating of personal and additional exemptions was employed in the 1939
Tax Code. Section 23(d) of that law states:
Change of status. - - If the status of the taxpayer insofar as it affects the personal and
additional exemptions for himself or his dependents, changes during the taxable year, the
amount of the personal and additional exemptions shall be apportioned, under rules
and regulations prescribed by the Secretary of Finance, in accordance with the
number of months before and after such change. For the purpose of such apportionment
a fractional part of a month shall be disregarded unless it amounts to more than half a
month, in which case it shall be considered as a month.40 (Emphasis supplied)
On 22 September 1950, R.A. 590 amended Section 23(d) of the 1939 Tax Code by
restricting the operation of the prorating of personal exemptions. As amended, Section 23(d)
reads:
(d) Change of status. - If the status of the taxpayer insofar as it affects the personal and
additional exemption for himself or his dependents, changes during the taxable year by
reason of his death, the amount of the personal and additional exemptions shall be
apportioned, under rules and regulations prescribed by the Secretary of Finance, in
accordance with the number of months before and after such change. For the purpose of
such apportionment a fractional part of a month shall be disregarded unless it amounts to
more than half a month, in which case it shall be considered as a month.41 (Emphasis
supplied)
Nevertheless, in 1969, R. A. 6110 ended the operation of the prorating scheme in our
jurisdiction when it amended Section 23(d) of the 1939 Tax Code and adopted a full taxable
year treatment of the personal and additional exemptions. Section 23(d), as amended, reads:
(d) Change of status. -
If the taxpayer married or should have additional dependents as defined in subsection (c)
above during the taxable year the taxpayer may claim the corresponding personal
exemptions in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the personal and
additional deductions for himself and his dependents as if he died at the close of such year.
If the spouse or any of the dependents should die during the year, the taxpayer may still
claim the same deductions as if they died at the close of such year.
P.D. 69 followed in 1972, and it retained the full taxable year scheme. Section 23(d) thereof
reads as follows:
(d) Change of status. - If the taxpayer marries or should have additional dependents as
defined in subsection (c) above during the taxable year the taxpayer may claim the
corresponding personal exemptions in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the personal and
additional deductions for himself and his dependents as if he died at the close of such year.
If the spouse or any of the dependents should die or become twenty-one years old during the
taxable year, the taxpayer may still claim the same exemptions as if they died, or as if such
dependents became twenty-one years old at the close of such year.
The 1977 Tax Code continued the policy of full taxable year treatment. Section 23(d) thereof
states:
(d) Change of status.- If the taxpayer married or should have additional dependents as
defined in subsection (c) above during the taxable year, the taxpayer may claim the
corresponding personal exemption in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependents as if he died at the close of such year.
If the spouse or any of the dependents should die or become
twenty-one years old during the taxable year, the taxpayer may still claim the same
exemptions as if they died, or as if such dependents became twenty-one years old at the
close of such year.
While Section 23 of the 1977 Tax Code underwent changes, the provision on full taxable
year treatment in case of the taxpayer's change of status was left untouched.42 Executive
Order No. 37, issued on 31 July 1986, retained the change of status provision verbatim. The
provision appeared under Section 30(1)(3) of the NIRC, as amended:
(3) Change of status.- If the taxpayer married or should have additional dependents as
defined above during the taxable year, the taxpayer may claim the corresponding personal
and additional exemptions, as the case may be, in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependents as if he died at the close of such year.
If the spouse or any of the dependents should die or if any of such
dependents becomes twenty-one years old during the taxable year, the taxpayer may still
claim the same exemptions as if they died, or if such dependents become twenty-one years
old at the close of such year.
Therefore, the legislative policy of full taxable year treatment of the personal and additional
exemptions has been in our jurisdiction continuously since 1969. The prorating approach has
long since been abandoned. Had Congress intended to revert to that scheme, then it should
have so stated in clear and unmistakeable terms. There is nothing, however, in R.A. 9504
that provides for the reinstatement of the prorating scheme. On the contrary, the change-of-
status provision utilizing the full-year scheme in the 1997 Tax Code was left untouched by
R.A. 9504.
We now arrive at this important point: the policy of full taxable year treatment is established,
not by the amendments introduced by R.A. 9504, but by the provisions of the 1997 Tax
Code, which adopted the policy from as early as 1969.
There is, of course, nothing to prevent Congress from again adopting a policy that prorates
the effectivity of basic personal and additional exemptions. This policy, however, must be
explicitly provided for by law - to amend the prevailing law, which provides for full-year
treatment. As already pointed out, R.A. 9504 is totally silent on the matter. This silence
cannot be presumed by the BIR as providing for a half-year application of the new exemption
levels. Such presumption is unjust, as incomes do not remain the same from month to
month, especially for the MWEs.
Therefore, there is no legal basis for the BIR to reintroduce the prorating of the new personal
and additional exemptions. In so doing, respondents overstepped the bounds of their rule-
making power. It is an established rule that administrative regulations are valid only when
these are consistent with the law. 43 Respondents cannot amend, by mere regulation, the
laws they administer.44 To do so would violate the principle of non-delegability of legislative
powers.45
The prorated application of the new set of personal and additional exemptions for the year
2008, which was introduced by respondents, cannot even be justified under the exception to
the canon of non-delegability; that is, when Congress makes a delegation to the executive
branch.46 The delegation would fail the two accepted tests for a valid delegation of legislative
power; the completeness test and the sufficient standard test.47 The first test requires the law
to be complete in all its terms and conditions, such that the only thing the delegate will have
to do is to enforce it.48 The sufficient standard test requires adequate guidelines or limitations
in the law that map out the boundaries of the delegate's authority and canalize the
delegation.49
In this case, respondents went beyond enforcement of the law, given the absence of a
provision in R.A. 9504 mandating the prorated application of the new amounts of personal
and additional exemptions for 2008. Further, even assuming that the law intended a prorated
application, there are no parameters set forth in R.A. 9504 that would delimit the legislative
power surrendered by Congress to the delegate. In contrast, Section 23(d) of the 1939 Tax
Code authorized not only the prorating of the exemptions in case of change of status of the
taxpayer, but also authorized the Secretary of Finance to prescribe the corresponding rules
and regulations.
II.
Whether an MWE is exempt for the entire taxable
year 2008 or from 6 July 2008 only
The MWE is exempt for the entire taxable year 2008.
As in the case of the adjusted personal and additional exemptions, the MWE exemption
should apply to the entire taxable year 2008, and not only from 6 July 2008 onwards. We see
no reason why Umali cannot be made applicable to the MWE exemption, which is
undoubtedly a piece of social legislation. It was intended to alleviate the plight of the working
class, especially the low-income earners. In concrete terms, the exemption translates to a
₱34 per day benefit, as pointed out by Senator Escudero in his sponsorship speech.50
As it stands, the calendar year 2008 remained as one taxable year for an individual taxpayer.
Therefore, RR 10-2008 cannot declare the income earned by a minimum wage earner from 1
January 2008 to 5 July 2008 to be taxable and those earned by him for the rest of that year
to be tax-exempt. To do so would be to contradict the NIRC and jurisprudence, as taxable
income would then cease to be determined on a yearly basis.
Respondents point to the letter of former Commissioner of Internal Revenue Lilia B. Hefti
dated 5 July 2008 and petitioner Sen. Escudero's signature on the Conforme portion thereof.
This letter and the conforme supposedly establish the legislative intent not to make the
benefits of R.A. 9504 effective as of 1 January 2008.
We are not convinced. The conforme is irrelevant in the determination of legislative intent.
We quote below the relevant portion of former Commissioner Hefti's letter:
Attached herewith are salient features of the proposed regulations to implement RA 9504 x x
x. We have tabulated critical issues raised during the public hearing and comments received
from the public which we need immediate written resolution based on the inten[t]ion of the
law more particularly the effectivity clause. Due to the expediency and clamor of the public
for its immediate implementation, may we request your confirmation on the proposed
recommendation within five (5) days from receipt hereof. Otherwise, we shall construe your
affirmation. 51
We observe that a Matrix of Salient Features of Proposed Revenue Regulations per R.A.
9504 was attached to the letter.52 The Matrix had a column entitled "Remarks" opposite the
Recommended Resolution. In that column, noted was a suggestion coming from petitioner
TMAP:
TMAP suggested that it should be retroactive considering that it was [for] the benefit of the
majority and to alleviate the plight of workers. Exemption should be applied for the whole
taxable year as provided in the NIRC. x x x Umali v. Estanislao [ruled] that the increase[d]
exemption in 1992 [was applicable] [to] 1991.
Majority issues raised during the public hearing last July 1, 2008 and emails received
suggested [a] retroactive implementation. 53(Italics in the original)
The above remarks belie the claim that the conforme is evidence of the legislative intent to
make the benefits available only from 6 July 2008 onwards. There would have been no need
to make the remarks if the BIR had merely wanted to confirm was the availability of the law's
benefits to income earned starting 6 July 2008. Rather, the implication is that the BIR was
requesting the conformity of petitioner Senator Escudero to the proposed implementing
rules, subject to the remarks contained in the Matrix. Certainly, it cannot be said that Senator
Escudero's conforme is evidence of legislative intent to the effect that the benefits of the law
would not apply to income earned from 1 January 2008 to 5 July 2008.
Senator Escudero himself states in G.R. No. 185234:
In his bid to ensure that the BIR would observe the effectivity dates of the grant of tax
exemptions and increased basic personal and additional exemptions under Republic Act No.
9504, Petitioner Escudero, as Co-Chairperson of the Congressional Oversight Committee on
Comprehensive Tax Reform Program, and his counterpart in the House of Representatives,
Hon. Exequiel B. Javier, conveyed through a letter, dated 16 September 2008, to
Respondent Teves the legislative intent that "Republic Act (RA) No. 9504 must be made
applicable to the entire taxable year 2008" considering that it was "a social legislation
intended to somehow alleviate the plight of minimum wage earners or low income
taxpayers". They also jointly expressed their "fervent hope that the corresponding Revenue
Regulations that will be issued reflect the true legislative intent and rightful statutory
interpretation of R.A. No. 9504." 54
Senator Escudero repeats in his Memorandum:
On 16 September 2008, the Chairpersons (one of them being herein Petitioner Sen.
Escudero) of the Congressional Oversight Committee on Comprehensive Tax Reform
Program of both House of Congress wrote Respondent DOF Sec. Margarito Teves, and
requested that the revenue regulations (then yet still to be issued)55 to implement Republic
Act No. 9504 reflect the true intent and rightful statutory interpretation thereof, specifically
that the grant of tax exemption and increased basic personal and additional exemptions be
made available for the entire taxable year 2008. Yet, the DOF promulgated Rev. Reg. No.
10-2008 in contravention of such legislative intent.x x x.56
We have gone through the records and we do not see anything that would to suggest that
respondents deny the senator's assertion.
Clearly, Senator Escudero's assertion is that the legislative intent is to make the MWE' s tax
exemption and the increased basic personal and additional exemptions available for the
entire year 2008. In the face of his assertions, respondents' claim that his conforme to
Commissioner Hefti's letter was evidence of legislative intent becomes baseless and
specious. The remarks described above and the subsequent letter sent to DOF Secretary
Teves, by no less than the Chairpersons of the Bi-camera! Congressional Oversight
Committee on Comprehensive Tax Reform Program, should have settled for respondents
the matter of what the legislature intended for R.A. 9504's exemptions.
Accordingly, we agree with petitioners that RR 10-2008, insofar as it allows the availment of
the MWE's tax exemption and the increased personal and additional exemptions beginning
only on 6 July 2008 is in contravention of the law it purports to implement.
A clarification is proper at this point. Our ruling that the MWE exemption is available for the
entire taxable year 2008 is premised on the fact of one's status as an MWE; that is, whether
the employee during the entire year of 2008 was an MWE as defined by R.A. 9504. When
the wages received exceed the minimum wage anytime during the taxable year, the
employee necessarily loses the MWE qualification. Therefore, wages become taxable as the
employee ceased to be an MWE. But the exemption of the employee from tax on the income
previously earned as an MWE remains.
This rule reflects the understanding of the Senate as gleaned from the exchange between
Senator Miriam Defensor-Santiago and Senator Escudero:
Asked by Senator Defensor-Santiago on how a person would be taxed if, during the year, he
is promoted from Salary Grade 5 to Salary Grade 6 in July and ceases to be a minimum
wage employee, Senator Escudero said that the tax computation would be based starting on
the new salary in July. 57
As the exemption is based on the employee's status as an MWE, the operative phrase is
"when the employee ceases to be an MWE. Even beyond 2008, it is therefore possible for
one employee to be exempt early in the year for being an MWE for that period, and
subsequently become taxable in the middle of the same year with respect to the
compensation income, as when the pay is increased higher than the minimum wage. The
improvement of one's lot, however, cannot justly operate to make the employee liable for tax
on the income earned as an MWE.
Additionally, on the question of whether one who ceases to be an MWE may still be entitled
to the personal and additional exemptions, the answer must necessarily be yes. The MWE
exemption is separate and distinct from the personal and additional exemptions. One's
status as an MWE does not preclude enjoyment of the personal and additional exemptions.
Thus, when one is an MWE during a part of the year and later earns higher than the
minimum wage and becomes a non-MWE, only earnings for that period when one is a non-
MWE is subject to tax. It also necessarily follows that such an employee is entitled to the
personal and additional exemptions that any individual taxpayer with taxable gross income is
entitled.
A different interpretation will actually render the MWE exemption a totally oppressive
legislation. It would be a total absurdity to disqualify an MWE from enjoying as much as
₱150,00058 in personal and additional exemptions just because sometime in the year, he or
she ceases to be an MWE by earning a little more in wages. Laws cannot be interpreted with
such absurd and unjust outcome. It is axiomatic that the legislature is assumed to intend
right and equity in the laws it passes.59
Critical, therefore, is how an employee ceases to become an MWE and thus ceases to be
entitled to an MWE's exemption.
III.
Whether Sections 1 and 3 of RR 10-2008 are consistent with the law in
declaring that an MWE who receives other benefits in excess of the
statutory limit of ₱30,000 is no longer entitled to the exemption provided
by R.A. 9504, is consistent with the law.
Sections 1 and 3 of RR 10-2008 add a requirement not found in the law by effectively
declaring that an MWE who receives other benefits in excess of the statutory limit of ₱30,000
is no longer entitled to the exemption provided by R.A. 9504.
The BIR added a requirement not
found in the law.
The assailed Sections 1 and 3 of RR 10-2008 are reproduced hereunder for easier
reference.
SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read as
follows:
Sec. 2.78.1. Withholding of Income Tax on Compensation Income. -
(A) Compensation Income Defined. – x x x
xxxx
(3) Facilities and privileges of relatively small value. - Ordinarily, facilities, and privileges
(such as entertainment, medical services, or so-called "courtesy" discounts on purchases),
otherwise known as "de minimis benefits," furnished or offered by an employer to his
employees, are not considered as compensation subject to income tax and consequently to
withholding tax, if such facilities or privileges are of relatively small value and are offered or
furnished by the employer merely as means of promoting the health, goodwill, contentment,
or efficiency of his employees.
The following shall be considered as "de minimis" benefits not subject to income tax, hence,
not subject to withholding tax on compensation income of both managerial and rank and file
employees:
(a) Monetized unused vacation leave credits of employees not exceeding ten (10) days
during the year and the monetized value of leave credits paid to government officials and
employees;
(b) Medical cash allowance to dependents of employees not exceeding ₱750.00 per
employee per semester or ₱125 per month;
(c) Rice subsidy of ₱l,500.00 or one (1) sack of 50-kg. rice per month amounting to not more
than ₱l,500.00;
(d) Uniforms and clothing allowance not exceeding ₱4,000.00 per annum;
(e) Actual yearly medical benefits not exceeding ₱10,000.00 per annum;
(f) Laundry allowance not exceeding ₱300.00 per month;
(g) Employees achievement awards, e.g., for length of service or safety achievement, which
must be in the form of a tangible personal property other than cash or gift certificate, with an
annual monetary value not exceeding ₱10,000.00 received by the employee under an
established written plan which does not discriminate in favor of highly paid employees;
(h) Gifts given during Christmas and major anniversary celebrations not exceeding
₱5,000.00per employee per annum;
(i) Flowers, fruits, books, or similar items given to employees under special circumstances,
e.g., on account of illness, marriage, birth of a baby, etc.; and
(j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the
basic minimum wage.60
The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not be
considered in determining the ₱30,000.00 ceiling of 'other benefits' excluded from gross
income under Section 32(b)(7)(e) of the Code. Provided that, the excess of the 'de
minimis' benefits over their respective ceilings prescribed by these regulations shall be
considered as part of 'other benefits' and the employee receiving it will be subject to tax only
on the excess over the ₱30,000.00 ceiling. Provided, further, that MWEs receiving 'other
benefits' exceeding the P30,000.00 limit shall be taxable on the excess benefits, as
well as on his salaries, wages and allowances, just like an employee receiving
compensation income beyond the SMW.
Any amount given by the employer as benefits to its employees, whether classified as 'de
minimis' benefits or fringe benefits, shall constitute [a] deductible expense upon such
employer.
Where compensation is paid in property other than money, the employer shall make
necessary arrangements to ensure that the amount of the tax required to be withheld is
available for payment to the Bureau of Internal Revenue.
xxxx
(B) Exemptions from Withholding Tax on Compensation. - The following income
payments are exempted from the requirements of withholding tax on compensation:
xxxx
(13) Compensation income of MWEs who work
in the private sector and being paid the Statutory Minimum Wage (SMW), as fixed by
Regional Tripartite Wage and Productivity Board (RTWPB)/National Wages and Productivity
Commission (NWPC), applicable to the place where he/she is assigned.
The aforesaid income shall likewise be exempted from income tax.
"Statutory Minimum Wage" (SMW) shall refer to the rate fixed by the Regional Tripartite
Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment
Statistics (BLES) of the Department of Labor and Employment (DOLE). The RTWPB of each
region shall determine the wage rates in the different regions based on established criteria
and shall be the basis of exemption from income tax for this purpose.
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided, however,
that an employee who receives/earns additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the allowable statutory amount of
₱30,000.00, taxable allowances and other taxable income other than the SMW, holiday
pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the
privilege of being a MWE and, therefore, his/her entire earnings are not exempt form
income tax, and consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the taxable
year. This rule, notwithstanding, the [statutory minimum wage], [h]oliday pay,
overtime pay, night shift differential pay and hazard pay shall still be exempt from
withholding tax.
For purposes of these regulations, hazard pay shall mean x x x.
In case of hazardous employment, x x x
The NWPC shall officially submit a Matrix of Wage Order by region x x x
Any reduction or diminution of wages for purposes of exemption from income tax shall
constitute misrepresentation and therefore, shall result to the automatic disallowance of
expense, i.e. compensation and benefits account, on the part of the employer. The offenders
may be criminally prosecuted under existing laws.
(14) Compensation income of employees in the public sector with compensation income
of not more than the SMW in the non-agricultural sector, as fixed by RTWPB/NWPC,
applicable to the place where he/she is assigned.
The aforesaid income shall likewise be exempted from income tax.
The basic salary of MWEs in the public sector shall be equated to the SMW in the non-
agricultural sector applicable to the place where he/she is assigned. The determination of the
SMW in the public sector shall likewise adopt the same procedures and consideration as
those of the private sector.
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE in the public sector shall likewise be covered by the above
exemption. Provided, however, that a public sector employee who receives additional
compensation such as commissions, honoraria, fringe benefits, benefits in excess of
the allowable statutory amount of ₱30,000.00, taxable allowances and other taxable
income other than the SMW, holiday pay, overtime pay, night shift differential pay and
hazard pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire
earnings are not exempt from income tax and, consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the taxable
year. This rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift
differential pay and hazard pay shall still be exempt from withholding tax.
For purposes of these regulations, hazard pay shall mean xxx
In case of hazardous employment, x x x
xxxx
SECTION 3. Section 2.79 of RR 2-98, as amended, is hereby further amended to read as
follows:
Sec. 2.79. Income Tax Collected at Source on Compensation Income. -
(A) Requirement of Withholding. - Every employer must withhold from compensation paid an
amount computed in accordance with these Regulations. Provided, that no withholding of tax
shall be required on the SMW, including holiday pay, overtime pay, night shift differential and
hazard pay of MWEs in the private/public sectors as defined in these Regulations. Provided,
further, that an employee who receives additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of₱30,000.00, taxable allowances and other taxable income other than the
SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not
enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not
exempt from income tax and, consequently, shall be subject to withholding tax.
xxxx
For the year 2008, however, being the initial year of implementation of R.A. 9504, there shall
be a transitory withholding tax table for the period from July 6 to December 31, 2008 (Annex
"D") determined by prorating the annual personal and additional exemptions under R.A. 9504
over a period of six months. Thus, for individuals, regardless of personal status, the prorated
personal exemption is ₱25,000, and for each qualified dependent child (QDC), ₱12,500.
On the other hand, the pertinent provisions of law, which are supposed to be implemented by
the above-quoted sections of RR10-2008, read as follows:
SECTION 1. Section 22 of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended by adding the following
definitions after Subsection (FF) to read as follows:
Section 22. Definitions.- when used in this Title:61
(A) x x x
(FF) x x x
(GG) The term 'statutory minimum wage' shall refer to the rate fixed by the Regional
Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and
Employment Statistics (BLES) of the Department of Labor and Employment (DOLE).
(HH) The term 'minimum wage earner' shall refer to a worker in the private sector paid
the statutory minimum wage, or to an employee in the public sector with
compensation income of not more than the statutory minimum wage in the non-
agricultural sector where he/she is assigned.
SECTION 2. Section 24(A) of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended to read as follows:
SEC. 24. Income Tax Rates. -
(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the
Philippines. -
(l)x x x
x x x x; and
(c) On the taxable income defined in Section 31 of this Code, other than income subject to
tax under Subsections (B), (C) and (D)of this Section, derived for each taxable year from all
sources within the Philippines by an individual alien who is a resident of the Philippines.
(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in
accordance with and at the rates established in the following schedule:
xxxx
For married individuals, the husband and wife, subject to the provision of Section 51 (D)
hereof, shall compute separately their individual income tax based on their respective total
taxable income: Provided, That if any income cannot be definitely attributed to or identified
as income exclusively earned or realized by either of the spouses, the same shall be divided
equally between the spouses for the purpose of determining their respective taxable income.
Provided, That mm1mum wage earners as defined in Section 22(HH) of this Code shall
be exempt from the payment of income tax on their taxable income: Provided, further,
That the holiday pay, ovr.rtime pay, night shift differential pay and hazard pay
received by such minimum wage earners shall likewise be exempt from income tax.
xxxx
SECTION 5. Section 51(A)(2) of Republic Act No. 8424, as amended, otherwise known as
the National Internal Revenue Code of 1997, is hereby further amended to read as follows:
SEC. 51. Individual Return. -
(A) Requirements. -
(1) Except as provided in paragraph (2) of this Subsection, the following individuals are
required to file an income tax return:
(a) x x x
xxxx
(2) The following individuals shall not be required to file an income tax return:
(a) x x x
(b) An individual with respect to pure compensation income, as defined in Section 32(A)(l),
derived from sources within the Philippines, the income tax on which has been correctly
withheld under the provisions of Section 79 of this Code:
Provided, That an individual deriving compensation concurrently from two or more employers
at any time during the taxable year shall file an income tax return;
(c) x x x; and
(d) A minimum wage earner as defined in Section 22(HH) of this Code or an individual
who is exempt from income tax pursuant to the provisions of this Code and other laws,
general or special.
xxxx
SECTION 6. Section 79(A) of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended to read as follows:
SEC. 79. Income Tax Collected at Source. –
(A) Requirement of Withholding. - Except in the case of a minimum wage earner as
defined in Section 22(HH) of this Code, every employer making payment of wages shall
deduct and withhold upon such wages a tax determined in accordance with the rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation of the
Commissioner. (Emphases supplied)
Nowhere in the above provisions of R.A. 9504 would one find the qualifications prescribed by
the assailed provisions of RR 10-2008. The provisions of the law are clear and precise; they
leave no room for interpretation - they do not provide or require any other qualification as to
who are MWEs.
To be exempt, one must be an MWE, a term that is clearly defined. Section 22(HH) says
he/she must be one who is paid the statutory minimum wage if he/she works in the private
sector, or not more than the statutory minimum wage in the non-agricultural sector where
he/she is assigned, if he/she is a government employee. Thus, one is either an MWE or
he/she is not. Simply put, MWE is the status acquired upon passing the litmus test - whether
one receives wages not exceeding the prescribed minimum wage.
The minimum wage referred to in the definition has itself a clear and definite meaning. The
law explicitly refers to the rate fixed by the Regional Tripartite Wage and Productivity Board,
which is a creation of the Labor Code.62 The Labor Code clearly describes wages and
Minimum Wage under Title II of the Labor Code. Specifically, Article 97 defines "wage" as
follows:
(f) "Wage" paid to any employee shall mean the remuneration or earnings, however
designated, capable of being expressed in terms of money, whether fixed or ascertained on
a time, task, piece, or commission basis, or other method of calculating the same, which is
payable by an employer to an employee under a written or unwritten contract of employment
for work done or to be done, or for services rendered or to be rendered and includes the fair
and reasonable value, as determined by the Secretary of Labor and Employment, of board,
lodging, or other facilities customarily furnished by the employer to the employee. "Fair and
reasonable value" shall not include any profit to the employer, or to any person affiliated with
the employer.
While the Labor Code's definition of "wage" appears to encompass any payments of any
designation that an employer pays his or her employees, the concept of minimum wage is
distinct.63 "Minimum wage" is wage mandated; one that employers may not freely choose on
their own to designate in any which way.
In Article 99, minimum wage rates are to be prescribed by the
Regional Tripartite Wages and Productivity Boards. In Articles 102 to 105, specific
instructions are given in relation to the payment of wages. They must be paid in legal tender
at least once every two weeks, or twice a month, at intervals not exceeding 16 days, directly
to the worker, except in case of force majeure or death of the worker.
These are the wages for which a minimum is prescribed. Thus, the minimum wage exempted
by R.A. 9504 is that which is referred to in the Labor Code. It is distinct and different from
other payments including allowances, honoraria, commissions, allowances or benefits that
an employer may pay or provide an employee.
Likewise, the other compensation incomes an MWE receives that are also exempted by R.A.
9504 are all mandated by law and are based on this minimum wage. Additional
compensation in the form of overtime pay is mandated for work beyond the normal hours
based on the employee's regular wage.64 Those working between ten o'clock in the evening
and six o'clock in the morning are required to be paid a night shift differential based on their
regular wage.65 Holiday/premium pay is mandated whether one works on regular holidays or
on one's scheduled rest days and special holidays. In all of these cases, additional
compensation is mandated, and computed based on the employee's regular wage.66
R.A. 9504 is explicit as to the coverage of the exemption: the wages that are not in excess of
the minimum wage as determined by the wage boards, including the corresponding holiday,
overtime, night differential and hazard pays.
In other words, the law exempts from income taxation the most basic compensation an
employee receives - the amount afforded to the lowest paid employees by the mandate of
law. In a way, the legislature grants to these lowest paid employees additional income by no
longer demanding from them a contribution for the operations of government. This is the
essence of R.A. 9504 as a social legislation. The government, by way of the tax exemption,
affords increased purchasing power to this sector of the working class.
This intent is reflected in the Explanatory Note to Senate Bill No. 103 of Senator Roxas:
This bill seeks to exempt minimum wage earners in the private sector and government
workers in Salary Grades 1 to 3, amending certain provisions of Republic Act 8424,
otherwise known as the National Internal Revenue Code of 1997, as amended.
As per estimates by the National Wages and Productivity Board, there are 7 million
workers earning the minimum wage and even below. While these workers are in the
verge of poverty, it is unfair and unjust that the Government, under the law, is taking
away a portion of their already subsistence-level income.
Despite this narrow margin from poverty, the Government would still be mandated to
take a slice away from that family's meager resources. Even if the Government has
recently exempted minimum wage earners from withholding taxes, they are still liable
to pay income taxes at the end of the year. The law must be amended to correct this
injustice. (Emphases supplied)
The increased purchasing power is estimated at about ₱9,500 a year.67 RR 10-2008,
however, takes this away. In declaring that once an MWE receives other forms of taxable
income like commissions, honoraria, and fringe benefits in excess of the non-taxable
statutory amount of ₱30,000, RR 10-2008 declared that the MWE immediately becomes
ineligible for tax exemption; and otherwise non-taxable minimum wage, along with the other
taxable incomes of the MWE, becomes taxable again.
Respondents acknowledge that R.A.9504 is a social legislation meant for social justice,68 but
they insist that it is too generous, and that consideration must be given to the fiscal position
and financial capability of the government.69 While they acknowledge that the intent of the
income tax exemption of MWEs is to free low-income earners from the burden of taxation,
respondents, in the guise of clarification, proceed to redefine which incomes may or may not
be granted exemption. These respondents cannot do without encroaching on purely
legislative prerogatives.
By way of review, this ₱30,000 statutory ceiling on benefits has its beginning in 1994 under
R. A. 7833, which amended then Section 28(b )(8) of the 1977 NIRC. It is substantially
carried over as Section 32(B) (Exclusion from Gross Income) of Chapter VI (Computation of
Gross Income) of Title II (Tax on Income) in the 1997 NIRC (R.A. 8424). R.A. 9504 does not
amend that provision of R.A. 8424, which reads:
SEC. 32. Gross Income.-
(A) General Definition.- x x x
(B) Exclusions from Gross Income.- The following items shall not be included in gross
income and shall be exempt from taxation under this title:
(1) x x x
xxxx
(7) Miscellaneous Items. -
(a) x x x
xxxx
(e) 13th Month Pay and Other Benefits.- Gross benefits received by officials and employees
of public and private entities: Provided, however, That the total exclusion under this
subparagraph shall not exceed Thirty thousand pesos (₱30,000) which shall cover:
(i) Benefits received by officials and employees of the national and local government
pursuant to Republic Act No. 668670;
(ii) Benefits received by employees pursuant to Presidential Decree No. 85171, as amended
by Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential decree No. 851,
as amended by Memorandum Order No. 28, dated August 13, 1986;and
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further,
That the ceiling of Thirty thousand pesos (₱30,000) may be increased through rules and
regulations issued by the Secretary of Finance, upon recommendation of the Commissioner,
after considering among others, the effect on the same of the inflation rate at the end of the
taxable year.
(f) x x x
The exemption granted to MWEs by R.A. 9504 reads:
Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall be
exempt from the payment of income tax on their taxable income: Provided, further, That
the holiday pay, overtime pay, night shift differential pay and hazard pay received by such
minimum wage earners shall likewise be exempt from income tax.
"Taxable income" is defined as follows:
SEC. 31. Taxable Income Defined.- The term taxable income means the pertinent items of
gross income specified in this Code, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by this Code or other special laws.
A careful reading of these provisions will show at least two distinct groups of items of
compensation. On one hand are those that are further exempted from tax by R.A. 9504; on
the other hand are items of compensation that R.A. 9504 does not amend and are thus
unchanged and in no need to be disturbed.
First are the different items of compensation subject to tax prior to R.A. 9504. These are
included in the pertinent items of gross income in Section 31. "Gross income" in Section
32 includes, among many other items, "compensation for services in whatever form paid,
including, but not limited to salaries, wages, commissions, and similar items." R.A. 9504
particularly exempts the minimum wage and its incidents; it does not provide exemption for
the many other forms of compensation.
Second are the other items of income that, prior to R.A. 9504, were excluded from gross
income and were therefore not subject to tax. Among these are other payments that
employees may receive from employers pursuant to their employer-employee relationship,
such as bonuses and other benefits. These are either mandated by law (such as the
13th month pay) or granted upon the employer's prerogative or are pursuant to collective
bargaining agreements (as productivity incentives). These items were not changed by R.A.
9504.
It becomes evident that the exemption on benefits granted by law in 1994 are now extended
to wages of the least paid workers under R.A. 9504. Benefits not beyond ₱30,000 were
exempted; wages not beyond the SMW are now exempted as well. Conversely, benefits in
excess of ₱30,000 are subject to tax and now, wages in excess of the SMW are still subject
to tax.
What the legislature is exempting is the MWE's minimum wage and other forms statutory
compensation like holiday pay, overtime pay, night shift differential pay, and hazard pay.
These are not bonuses or other benefits; these are wages. Respondents seek to frustrate
this exemption granted by the legislature.
In respondents' view, anyone receiving 13th month pay and other benefits in excess of
₱30,000 cannot be an MWE. They seek to impose their own definition of "MWE" by arguing
thus:
It should be noted that the intent of the income tax exemption of MWEs is to free the low-
income earner from the burden of tax. R.A. No. 9504 and R.R. No. 10-2008 define who are
the low-income earners. Someone who earns beyond the incomes and benefits above-
enumerated is definitely not a low-income earner. 72
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 ₱30,000 threshold would make an
MWE lose exemption. R.A. 9504 has given definite criteria for what constitutes an MWE, and
R.R. 10-2008 cannot change this.
An administrative agency may not enlarge, alter or restrict a provision of law. It cannot add to
the requirements provided by law. To do so constitutes lawmaking, which is generally
reserved for Congress. 73 In CIR v. Fortune Tobacco, 74 we applied the plain meaning rule
when the Commissioner of Internal Revenue ventured into unauthorized administrative
lawmaking:
[A]n administrative agency issuing regulations may not enlarge, alter or restrict the provisions
of the law it administers, and it cannot engraft additional requirements not contemplated by
the legislature. The Court emphasized that tax administrators are not allowed to expand
or contract the legislative mandate and that the "plain meaning rule" or verba legis in
statutory construction should be applied such that where the words of a statute are
clear, plain and free from ambiguity, it must be given its literal meaning and applied
without attempted interpretation.
As we have previously declared, rule-making power must be confined to details for regulating
the mode or proceedings in order to carry into effect the law as it has been enacted, and it
cannot be extended to amend or expand the statutory requirements or to embrace matters
not covered by the statute. Administrative regulations must always be in harmony with the
provisions of the law because any resulting discrepancy between the two will always be
resolved in favor of the basic law. 75 (Emphases supplied)
We are not persuaded that RR 10-2008 merely clarifies the law. The CIR' s clarification is not
warranted when the language of the law is plain and clear. 76
The deliberations of the Senate reflect its understanding of the outworking of this MWE
exemption in relation to the treatment of benefits, both those for the ₱30,000 threshold and
the de minimis benefits:
Senator Defensor Santiago. Thank you. Next question: How about employees who are only
receiving a minimum wage as base pay, but are earning significant amounts of income from
sales, commissions which may be even higher than their base pay? Is their entire income
from commissions also tax-free? Because strictly speaking, they are minimum wage
earners. For purposes of ascertaining entitlement to tax exemption, is the basis only the
base pay or should it be the aggregate compensation that is being received, that is, inclusive
of commissions, for example?
Senator Escudero. Mr. President, what is included would be only the base pay and, if any,
the hazard pay, holiday pay, overtime pay and night shift differential received by a minimum
wage earner. As far as commissions are concerned, only to the extent of ₱30,000
would be exempted. Anything in excess of ₱30,000 would already be taxable if it is
being received by way of commissions. Add to that de minimis benefits being received by
an employee, such as rice subsidy or clothing allowance or transportation allowance would
also be exempted; but they are exempted already under the existing law.
Senator Defensor Santiago. I would like to thank the sponsor. That makes it
clear. 77 (Emphases supplied)
Given the foregoing, the treatment of bonuses and other benefits that an employee receives
from the employer in excess of the ₱30,000 ceiling cannot but be the same as the prevailing
treatment prior to R.A. 9504 - anything in excess of ₱30,000 is taxable; no more, no less.
The treatment of this excess cannot operate to disenfranchise the MWE from enjoying the
exemption explicitly granted by R.A. 9504.
The government's argument that the
RR avoids a tax distortion has no
merit.
The government further contends that the "clarification" avoids a situation akin to wage
distortion and discourages tax evasion. They claim that MWE must be treated equally as
other individual compensation income earners "when their compensation does not warrant
exemption under R.A. No. 9504. Otherwise, there would be gross inequity between and
among individual income taxpayers."78 For illustrative purposes, respondents present three
scenarios:
37.1. In the first scenario, a minimum wage earner in the National Ca[ital Region receiving
₱382.00 per day has an annual salary of ₱119,566.00, while a non-minimum wage earner
with a basic pay of ₱385.00 per day has an annual salary of ₱120,505.00. The difference in
their annual salaries amounts to only ₱939.00, but the non-minimum wage earner is liable
for a tax of ₱8,601.00, while the minimum wage earner is tax-exempt?
37.2. In the second scenario, the minimum wage earner's "other benefits" exceed the
threshold of ₱30,000.00 by ₱20,000.00. The non-minimum wage earner is liable for
₱8,601.00, while the minimum wage earner is still tax-exempt.
37.3. In the third scenario, both workers earn "other benefits" at ₱50,000.00 more than the
₱30,000 threshold. The non-minimum wage earner is liable for the tax of ₱l8,601.00, while
the minimum wage earner is still tax-exempt.79 (Underscoring in the original)
Again, respondents are venturing into policy-making, a function that properly belongs to
Congress. In British American Tobacco v. Camacho, we explained:80
We do not sit in judgment as a supra-legislature to decide, after a law is passed by
Congress, which state interest is superior over another, or which method is better suited to
achieve one, some or all of the state's interests, or what these interests should be in the first
place. This policy-determining power, by constitutional fiat, belongs to Congress as it is its
function to determine and balance these interests or choose which ones to pursue. Time and
again we have ruled that the judiciary does not settle policy issues. The Court can only
declare what the law is and not what the law should be. Under our system of government,
policy issues are within the domain of the political branches of government and of the people
themselves as the repository of all state power. Thus, the legislative classification under
the classification freeze provision, after having been shown to be rationally related to achieve
certain legitimate state interests and done in good faith, must, perforce, end our inquiry.
Concededly, the finding that the assailed law seems to derogate, to a limited extent, one of
its avowed objectives (i.e. promoting fair competition among the players in the industry)
would suggest that, by Congress's own standards, the current excise tax system on sin
products is imperfect. But, certainly, we cannot declare a statute unconstitutional merely
because it can be improved or that it does not tend to achieve all of its stated objectives. This
is especially true for tax legislation which simultaneously addresses and impacts multiple
state interests. Absent a clear showing of breach of constitutional limitations, Congress,
owing to its vast experience and expertise in the field of taxation, must be given sufficient
leeway to formulate and experiment with different tax systems to address the complex issues
and problems related to tax administration. Whatever imperfections that may occur, the
same should be addressed to the democratic process to refine and evolve a taxation
system which ideally will achieve most, if not all, of the state's objectives.
In fine, petitioner may have valid reasons to disagree with the policy decision of
Congress and the method by which the latter sought to achieve the same. But its
remedy is with Congress and not this Court. (Emphases supplied and citations deleted)
Respondents cannot interfere with the wisdom of R.A. 9504. They must respect and
implement it as enacted.
Besides, the supposed undesirable "income distortion" has been addressed in the Senate
deliberations. The following exchange between Senators Santiago and Escudero reveals the
view that the distortion impacts only a few - taxpayers who are single and have no
dependents:
Senator Santiago.... It seems to me awkward that a person is earning just Pl above the
minimum wage is already taxable to the full extent simply because he is earning ₱l more
each day, or o more than P30 a month, or ₱350 per annum. Thus, a single individual earning
₱362 daily in Metro Manila pays no tax but the same individual if he earns ₱363 a day will be
subject to tax, under the proposed amended provisions, in the amount of ₱4,875 - I no
longer took into account the deductions of SSS, e cetera- although that worker is just ₱360
higher than the minimum wage.
xxxx
I repeat, I am raising respectfully the point that a person who is earning just Pl above the
minimum wage is already taxable to the full extent just for a mere Pl. May I please have the
Sponsor's comment. Senator Escudero...I fully subscribe and accept the analysis and
computation of the distinguished Senator, Mr. President, because this was the very concern
of this representation when we were discussing the bill. It will create wage distortions up to
the extent wherein a person is paying or rather receiving a salary which is only higher by
₱6,000 approximately from that of a minimum wage earner. So anywhere between P1 to
approximately ₱6,000 higher, there will be a wage distortion, although distortions disappears
as the salary goes up.
However, Mr. President, as computed by the distinguished Senator, the distortion is only
made apparent if the taxpayer is single or is not married and has no dependents.
Because at two dependents, the distortion would already disappear; at three
dependents, it would not make a difference anymore because the exemption would
already cover approximately the wage distortion that would be created as far as
individual or single taxpayers are concerned.81 (Emphases in the original)
Indeed, there is a distortion, one that RR 10-2008 actually engenders. While respondents
insist that MWEs who are earning purely compensation income will lose their MWE
exemption the moment they receive benefits in excess of ₱30,000, RR 10-2008 does not
withdraw the MWE exemption from those who are earning other income outside of their
employer-employee relationship. Consider the following provisions of RR 10-2008:
Section 2.78.l (B):
(B) Exemptions from Withholding Tax on Compensation. -
The following income payments are exempted from the requirements of withholding tax on
compensation:
 xxxx
(13) Compensation income of MWEs who work in the private sector and being paid the
Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity
Board (RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the
place where he/she is assigned.
xxxx
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided, however,
that an employee who receives/earns additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the allowable statutory amount of
₱30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay,
overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of being
a MWE and, therefore, his/her entire earnings are not exempt from income tax, and
consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the taxable
year. This rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift
differential pay and hazard pay shall still be exempt from withholding tax.
xxxx
(14) Compensation income of employees in the public sector with compensation income
of not more than the SMW in the nonagricultural sector, as fixed by RTWPB/NWPC,
applicable to the place where he/she is assigned.
xxxx
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE in the public sector shall likewise be covered by the above exemption.
Provided, however, that a public sector employee who receives additional compensation
such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of ₱30,000.00, taxable allowances and other taxable income other than the SMW,
holiday pay, overtime pay, night shift differential pay and hazard pay shall not enjoy the
privilege of being a MWE and, therefore, his/her entire earnings are not exempt from income
tax and, consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the taxable
year. This rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift
differential pay and hazard pay shall still be exempt from withholding tax.
These provisions of RR 10-2008 reveal a bias against those who are purely compensation
earners. In their consolidated comment, respondents reason:
Verily, the interpretation as to who is a minimum wage earner as petitioners advance
will open the opportunity for tax evasion by the mere expedient of pegging the salary or
wage of a worker at the minimum and reflecting a worker's other incomes as some other
benefits. This situation will not only encourage tax evasion, it will likewise discourage
able employers from paying salaries or wages higher than the statutory minimum. This
should never be countenanced. 82
Again, respondents are delving into policy-making they presume bad faith on the part of the
employers, and then shift the burden of this presumption and lay it on the backs of the lowest
paid workers. This presumption of bad faith does not even reflect pragmatic reality. It must
be remembered that a worker's holiday, overtime and night differential pays are all based on
the worker's regular wage. Thus, there will always be pressure from the workers to increase,
not decrease, their basic pay.
What is not acceptable is the blatant inequity between the treatment that RR 10-2008 gives
to those who earn purely compensation income and that given to those who have other
sources of income. Respondents want to tax the MWEs who serve their employer well and
thus receive higher bonuses or performance incentives; but exempts the MWEs who serve,
in addition to their employer, their other business or professional interests.
We cannot sustain respondent’s position.
In sum, the proper interpretation of R.A. 9504 is that it imposes taxes only on the taxable
income received in excess of the minimum wage, but the MWEs will not lose their exemption
as such. Workers who receive the statutory minimum wage their basic pay remain MWEs.
The receipt of any other income during the year does not disqualify them as MWEs. They
remain MWEs, entitled to exemption as such, but the taxable income they receive other than
as MWEs may be subjected to appropriate taxes.
R.A. 9504 must be liberally construed.
We are mindful of the strict construction rule when it comes to the interpretation of tax
exemption laws. 83 The canon, however, is tempered by several exceptions, one of which is
when the taxpayer falls within the purview of the exemption by clear legislative intent. In this
situation, the rule of liberal interpretation applies in favor of the grantee and against the
government. 84
In this case, there is a clear legislative intent to exempt the minimum wage received by an
MWE who earns additional income on top of the minimum wage. As previously discussed,
this intent can be seen from both the law and the deliberations.
Accordingly, we see no reason why we should not liberally interpret R.A. 9504 in favor of the
taxpayers.
R.A. 9504 is a grant of tax relief long overdue.
We do not lose sight of the fact that R.A. 9504 is a tax relief that is long overdue.
Table 1 below shows the tax burden of an MWE over the years. We use as example one
who is a married individual without dependents and is working in the National Capital Region
(NCR). For illustration purposes, R.A. 9504 is applied as if the worker being paid the
statutory minimum wage is not tax exempt:
Table 1 -Tax Burden of MWE over the years

La Eff NCR Minimum Taxa Tax Tax

w ect Daily Wage85 ble Due Bur
ive Inco (Ann den
me86 ual)
87

RA 19 WO 3 ₱13 ₱24, ₱1,3 3.2

71 92 (1993 Dec) 5.0 255 43.05 %
67 0
88

RA WO 5 ₱18 ₱39, ₱3,0 5.3

74 (1997 May) 5.0 905 64.55 %
96 0
89

RA 19 WO 6 ₱19 ₱29, ₱2,4 40.

84 98 (1998 Feb) 8.0 974 97.40 %
24 0
90

(19 WO 13 ₱36 ₱81, ₱10, 9.5

97 (2007 Aug) 2.0 306 761.2 %
NI 0 0
 RC WO 14 ₱38 ₱87, ₱12, 10.
) (2008 2.0 566 013.2 0%
June) 0 0

RA 20 WO 14 ₱38 ₱69, ₱8,4 7.1

95 08 (2008 Aug) 2.0 566 34.90 %
04 0
91

WO 20 ₱49 ₱10 ₱15, 9.9

(2016 1.0 3,68 236.6 %
June) 0 3 0

As shown on Table 1, we note that in 1992, the tax burden upon an MWE was just about
3.2%, when Congress passed R.A. 7167, which increased the personal exemptions for a
married individual without dependents from ₱12,000 to ₱18,000; and R.A. 7496, which
revised the table of graduated tax rates (tax table).
Over the years, as the minimum wage increased, the tax burden of the MWE likewise
increased. In 1997, the MWE's tax burden was about 5.3%. When R.A. 8424 became
effective in 1998, some relief in the MWE's tax burden was seen as it was reduced to 4.0%.
This was mostly due to the increase in personal exemptions, which were increased from
₱18,000 to ₱32,000 for a married individual without dependents. It may be noted that while
the tax table was revised, a closer scrutiny of Table 3 below would show that the rates
actually increased for those who were earning less.
As the minimum wage continued to increase, the MWE's tax burden likewise did - by August
2007, it was 9.5%. This means that in 2007, of the ₱362 minimum wage, the MWE's take-
home pay was only ₱327.62, after a tax of ₱34.38.
This scenario does not augur well for the wage earners. Over the years, even with the
occasional increase in the basic personal and additional exemptions, the contribution the
government exacts from its MWEs continues to increase as a portion of their income. This is
a serious social issue, which R.A. 9504 partly addresses. With the ₱20 increase in minimum
wage from ₱362 to ₱382 in 2008, the tax due thereon would be about ₱30. As seen in their
deliberations, the lawmakers wanted all of this amount to become additional take-home pay
for the MWEs in 2008.92
The foregoing demonstrates the effect of inflation. When tax tables do not get adjusted,
inflation has a profound impact in terms of tax burden. "Bracket creep," "the process by
which inflation pushes individuals into higher tax brackets,"93 occurs, and its deleterious
results may be explained as follows:
[A]n individual whose dollar income increases from one year to the next might be obliged to
pay tax at a higher marginal rate (say 25% instead of 15%) on the increase, this being a
natural consequence of rate progression. If, however, due to inflation the benefit of the
increase is wiped out by a corresponding increase in the cost of living, the effect would be a
heavier tax burden with no real improvement in the taxpayer's economic position.
Wage and salary-earners are especially vulnerable. Even if a worker gets a raise in
wages this year, the raise will be illusory if the prices of consumer goods rise in the
same proportion. If her marginal tax rate also increased, the result would actually be a
decrease in the taxpayer's real disposable income.94
Table 2 shows how MWEs get pushed to higher tax brackets with higher tax rates due only
to the periodic increases in the minimum wage. This unfortunate development illustrates how
"bracket creep" comes about and how inflation alone increases their tax burden:
Table 2

Highe
st
Applic
Tax
Eff NCR able Tax
Due
Law ect Minimum Tax Burd
(Ann
ive Daily Wage95 Rate en96
ual)
(Brack
et
Creep)

RA WO 3 ₱13 11%
19 ₱1,3 3.2
716 (1993 5.0
92 43.05 %
797 Dec) 0

RA WO 5 ₱18 11%
₱3,0 5.3
749 (1997 5.0
64.55 %
698 May) 0
 RA WO 6 ₱19 10%
19 ₱2,4 4.0
842 (1998 8.0
98 97.40 %
499 Feb) 0
(199
7 WO 20%
NIR 13 ₱36 ₱10,
9.5
C) (200 2.0 761.2
%
7 0 0
Aug)

WO 14 ₱38 20% ₱12,

10.0
(2008 2.0 013.2
%
June) 0 0

RA 20 WO 14 ₱38 15%
₱8,4 7.1
950 08 (2008 2.0
34.90 %
4100 Aug) 0

WO 20 ₱49 20% ₱15,

9.9
(2016 1.0 236.6
%
June) 0 0

The overall effect is the diminution, if not elimination, of the progressivity of the rate structure
under the present Tax Code. We emphasize that the graduated tax rate schedule for
individual taxpayers, which takes into account the ability to pay, is intended to breathe life
into the constitutional requirement of equity. 101
R.A. 9504 provides relief by declaring that an MWE, one who is paid the statutory minimum
wage (SMW), is exempt from tax on that income, as well as on the associated statutory
payments for hazardous, holiday, overtime and night work.
R.R. 10-2008, however, unjustly removes this tax relief. While R.A. 9504 grants MWEs zero
tax rights from the beginning or for the whole year 2008, RR 10-2008 declares that certain
workers - even if they are being paid the SMW, "shall not enjoy the privilege."
Following RR10-2008's "disqualification" injunction, the MWE will continue to be pushed
towards the higher tax brackets and higher rates. As Table 2 shows, as of June 2016, an
MWE would already belong to the 4th highest tax bracket of 20% (see also Table 3),
resulting in a tax burden of 9.9%. This means that for every ₱100 the MWE earns, the
government takes back ₱9.90.
Further, a comparative view of the tax tables over the years (Table 3) shows that while the
highest tax rate was reduced from as high as 70% under the 1977 NTRC, to 35% in 1992,
and 32% presently, the lower income group actually gets charged higher taxes. Before R.A.
8424, one who had taxable income of less than ₱2,500 did not have to pay any income tax;
under R.A. 8424, he paid 5% thereof. The MWEs now pay 20% or even more, depending on
the other benefits they receive including overtime, holiday, night shift, and hazard pays.
Table 3 – Tax Tables: Comparison of Tax Brackets and Rates

Taxable Income Rates Rates Rates

Bracket under under under
R. A. R. A. R. A.
7496 8424 9504
(1992) (1998) (2008)

Not Over ₱2,500 0%

Over ₱2,500 but

1%
not over ₱5,000 5% 5%

Over ₱5,000 but

3%
not over ₱10,000

Over ₱10,000
but not over 7%
₱20,000
10% 10%
Over ₱20,000
but not over 11%
₱30,000

Over ₱30,000
but not over 15% 15%
₱40,000
 Over ₱40,000
but not over 15%
₱60,000

Over ₱60,000
but not over
₱70,000
19%
Over ₱70,000
but not over
₱100,000
20% 20%
Over ₱100,000
but not over
₱140,000
24%
Over ₱140,000
but not over 25% 25%
₱250,000

Over ₱250,000
but not over 29% 30% 30%
₱500,000

Over ₱500,00 35% 34% 32%

The relief afforded by R.A.9504 is thus long overdue. The law must be now given full effect
for the entire taxable year 2008, and without the qualification introduced by RR 10-2008. The
latter cannot disqualify MWEs from exemption from taxes on SMW and on their on his SMW,
holiday, overtime, night shift differential, and hazard pay.
CONCLUSION
The foregoing considered, we find that respondents committed grave abuse of discretion in
promulgating Sections 1 and 3 of RR 10-2008, insofar as they provide for (a) the prorated
application of the personal and additional exemptions for taxable year 2008 and for the
period of applicability of the MWE exemption for taxable year 2008 to begin only on 6 July
2008; and (b) the disqualification of MWEs who earn purely compensation income, whether
in the private or public sector, from the privilege of availing themselves of the MWE
exemption in case they receive compensation-related benefits exceeding the statutory ceiling
of ₱30,000.
As an aside, we stress that the progressivity of the rate structure under the present Tax
Code has lost its strength. In the main, it has not been updated since its revision in 1997, or
for a period of almost 20 years. The phenomenon of "bracket creep" could be prevented
through the inclusion of an indexation provision, in which the graduated tax rates are
adjusted periodically without need of amending the tax law. The 1997 Tax Code, however,
has no such indexation provision. It should be emphasized that indexation to inflation is now
a standard feature of a modern tax code. 102
We note, however, that R.A. 8424 imposes upon respondent Secretary of Finance and
Commissioner of Internal Revenue the positive duty to periodically review the other benefits,
in consideration of the effect of inflation thereon, as provided under Section 32(B)(7)(e)
entitled" 13th Month Pay and Other Benefits":
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further,
That the ceiling of Thirty thousand pesos (₱30,000) may be increased through rules and
regulations issued by the Secretary of Finance, upon recommendation of the Commissioner,
after considering among others, the effect on the same of the inflation rate at the end of the
taxable year.
This same positive duty, which is also imposed upon the same officials regarding the de
minimis benefits provided under Section 33(C)(4), is a duty that has been exercised several
times. The provision reads:
(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this
Section:
(l) x x x
xxxx
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.
WHEREFORE, the Court resolves to
(a) GRANT the Petitions for Certiorari, Prohibition, and Mandamus; and
(b) DECLARE NULL and VOID the following provisions of Revenue Regulations No. 10-
2008:
(i) Sections 1 and 3, insofar as they disqualify MWEs who earn purely compensation income
from the privilege of the MWE exemption in case they receive bonuses and other
compensation-related benefits exceeding the statutory ceiling of ₱30,000;
(ii) Section 3 insofar as it provides for the prorated application of the personal and additional
exemptions under R.A. 9504 for taxable year 2008, and for the period of applicability of the
MWE exemption to begin only on 6 July 2008.
(c) DIRECT respondents Secretary of Finance and Commissioner of Internal Revenue to
grant a refund, or allow the application of the refund by way of withholding tax adjustments,
or allow a claim for tax credits by (i) all individual taxpayers whose incomes for taxable year
2008 were the subject of the prorated increase in personal and additional tax exemption; and
(ii) all MWEs whose minimum wage incomes were subjected to tax for their receipt of the
13th month pay and other bonuses and benefits exceeding the threshold amount under
Section 32(B)(7)(e) of the 1997 Tax Code.
SO ORDERED.