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, 1994in
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. 842431emphasizes
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

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,24while "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.

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.

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.

Separate Opinions
FERNANDO, J., concurring:
The opinion of the Court penned by Justice Martin is impressed with a scholarly and
comprehensive character. Insofar as it shows adherence to tried and tested concepts of the law of
municipal taxation, I am only in agreement. If I limit myself to concurrence in the result, it is
primarily because with the article on Local Autonomy found in the present Constitution, I feel a
sense of reluctance in restating doctrines that arose from a different basic premise as to the scope
of such power in accordance with the 1935 Charter. Nonetheless it is well-nigh unavoidable that I
do so as I am unable to share fully what for me are the nuances and implications that could arise
from the approach taken by my brethren. Likewise as to the constitutional aspect of the thorny
question of double taxation, I would limit myself to what has been set forth in City of Baguio v.
De Leon.1
1. The present Constitution is quite explicit as to the power of taxation vested in local and
municipal corporations. It is therein specifically provided: "Each local government unit shall have
the power to create its own sources of revenue and to levy taxes subject to such limitations as
may be provided by law. 2 That was not the case under the 1935 Charter. The only limitation then
on the authority, plenary in character of the national government, was that while the President of
the Philippines was vested with the power of control over all executive departments, bureaus, or
offices, he could only . It exercise general supervision over all local governments as may be
provided by law ... 3 As far as legislative power over local government was concerned, no
restriction whatsoever was placed on the Congress of the Philippines. It would appear therefore
that the extent of the taxing power was solely for the legislative body to decide. It is true that in
1939, there was a statute that enlarged the scope of the municipal taxing power. 4 Thereafter, in
1959 such competence was further expanded in the Local Autonomy Act. 5 Nevertheless, as late
as December of 1964, five years after its enactment of the Local Autonomy Act, this Court,
through Justice Dizon, in Golden Ribbon Lumber Co. v. City of Butuan, 6 reaffirmed the
traditional concept in these words: "The rule is well-settled that municipal corporations, unlike
sovereign states, after clothed with no power of taxation; that its charter or a statute must clearly
show an intent to confer that power or the municipal corporation cannot assume and exercise it,
and that any such power granted must be construed strictly, any doubt or ambiguity arising from
the terms of the grant to be resolved against the municipality."7
Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of Pagbilao,8 "is an
attribute of sovereignty which municipal corporations do not enjoy." 9 That case left no doubt
either as to weakness of a claim "based merely by inferences, implications and deductions, [as
they have no place in the interpretation of the power to tax of a municipal corporation." 10 As
the conclusion reached by the Court finds support in such grant of the municipal taxing power, I
concur in the result. 2. As to any possible infirmity based on an alleged double taxation, I would
prefer to rely on the doctrine announced by this Court in City of Baguio v. De Leon. 11 Thus: "As
to why double taxation is not violative of due process, Justice Holmes made clear in this language:
'The objection to the taxation as double may be laid down on one side. ... The 14th Amendment
[the due process clause) no more forbids double taxation than it does doubling the amount of a
tax, short of (confiscation or proceedings unconstitutional on other grouse With that decision
rendered at a time when American sovereignty in the Philippines was recognized, it possesses
more than just a persuasive effect. To some, it delivered the coup justice to the bogey of double
taxation as a constitutional bar to the exercise of the taxing power. It would seem though that in
the United States, as with us, its ghost, as noted by an eminent critic, still stalks the juridical stage.
'In a 1947 decision, however, we quoted with approval this excerpt from a leading American
decision: 'Where, as here, Congress has clearly expressed its intention, the statute must be
sustained even though double taxation results. 12
So I would view the issues in this suit and accordingly concur in the result.

Separate Opinions
FERNANDO, J., concurring:
The opinion of the Court penned by Justice Martin is impressed with a scholarly and
comprehensive character. Insofar as it shows adherence to tried and tested concepts of the law of
municipal taxation, I am only in agreement. If I limit myself to concurrence in the result, it is
primarily because with the article on Local Autonomy found in the present Constitution, I feel a
sense of reluctance in restating doctrines that arose from a different basic premise as to the scope
of such power in accordance with the 1935 Charter. Nonetheless it is well-nigh unavoidable that I
do so as I am unable to share fully what for me are the nuances and implications that could arise
from the approach taken by my brethren. Likewise as to the constitutional aspect of the thorny
question of double taxation, I would limit myself to what has been set forth in City of Baguio v.
De Leon.1
1. The present Constitution is quite explicit as to the power of taxation vested in local and
municipal corporations. It is therein specifically provided: "Each local government unit shall have
the power to create its own sources of revenue and to levy taxes subject to such limitations as
may be provided by law. 2 That was not the case under the 1935 Charter. The only limitation then
on the authority, plenary in character of the national government, was that while the President of
the Philippines was vested with the power of control over all executive departments, bureaus, or
offices, he could only . It exercise general supervision over all local governments as may be
provided by law ... 3 As far as legislative power over local government was concerned, no
restriction whatsoever was placed on the Congress of the Philippines. It would appear therefore
that the extent of the taxing power was solely for the legislative body to decide. It is true that in
1939, there was a statute that enlarged the scope of the municipal taxing power. 4 Thereafter, in
1959 such competence was further expanded in the Local Autonomy Act. 5 Nevertheless, as late
as December of 1964, five years after its enactment of the Local Autonomy Act, this Court,
through Justice Dizon, in Golden Ribbon Lumber Co. v. City of Butuan, 6 reaffirmed the
traditional concept in these words: "The rule is well-settled that municipal corporations, unlike
sovereign states, after clothed with no power of taxation; that its charter or a statute must clearly
show an intent to confer that power or the municipal corporation cannot assume and exercise it,
and that any such power granted must be construed strictly, any doubt or ambiguity arising from
the terms of the grant to be resolved against the municipality."7
Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of Pagbilao,8 "is an
attribute of sovereignty which municipal corporations do not enjoy." 9 That case left no doubt
either as to weakness of a claim "based merely by inferences, implications and deductions, [as
they have no place in the interpretation of the power to tax of a municipal corporation." 10 As
the conclusion reached by the Court finds support in such grant of the municipal taxing power, I
concur in the result. 2. As to any possible infirmity based on an alleged double taxation, I would
prefer to rely on the doctrine announced by this Court in City of Baguio v. De Leon. 11 Thus: "As
to why double taxation is not violative of due process, Justice Holmes made clear in this language:
'The objection to the taxation as double may be laid down on one side. ... The 14th Amendment
[the due process clause) no more forbids double taxation than it does doubling the amount of a
tax, short of (confiscation or proceedings unconstitutional on other grouse With that decision
rendered at a time when American sovereignty in the Philippines was recognized, it possesses
more than just a persuasive effect. To some, it delivered the coup justice to the bogey of double
taxation as a constitutional bar to the exercise of the taxing power. It would seem though that in
the United States, as with us, its ghost, as noted by an eminent critic, still stalks the juridical stage.
'In a 1947 decision, however, we quoted with approval this excerpt from a leading American
decision: 'Where, as here, Congress has clearly expressed its intention, the statute must be
sustained even though double taxation results. 12
So I would view the issues in this suit and accordingly concur in the result.

G.R. No. 90776 June 3, 1991

 PHILIPPINE PETROLEUM CORPORATION, petitioner, vs.MUNICIPALITY OF PILILLA, RIZAL,
Represented by MAYOR NICOMEDES F. PATENIA,respondent.

PARAS, J.:
This is a petition for certiorari seeking to annul and set aside: (a) the March 17, 1989 decision * of
the Regional Trial Court, Branch 80, Tanay, Rizal in Civil Case No. 057-T entitled, "Municipality of
Pililla, Rizal, represented by Mayor Nicomedes F. Patenia vs. Philippine Petroleum Corporation",
(PPC for short) upholding the legality of the taxes, fees and charges being imposed in Pililla under
Municipal Tax Ordinance No. 1 and directing the herein petitioner to pay the amount of said
taxes, fees and charges due the respondent: and (b) the November 2, 1989 resolution of the
same court denying petitioner's motion for reconsideration of the said decision.
The undisputed facts of the case are:
Petitioner, Philippine Petroleum Corporation (PPC for short) is a business enterprise engaged in
the manufacture of lubricated oil basestock which is a petroleum product, with its refinery plant
situated at Malaya, Pililla, Rizal, conducting its business activities within the territorial jurisdiction
of the Municipality of Pililla, Rizal and is in continuous operation up to the present (Rollo p. 60).
PPC owns and maintains an oil refinery including forty-nine storage tanks for its petroleum
products in Malaya, Pililla, Rizal (Rollo, p. 12).
Under Section 142 of the National Internal Revenue Code of 1939, manufactured oils and other
fuels are subject to specific tax.
On June 28, 1973, Presidential Decree No. 231, otherwise known as the Local Tax Code was
issued by former President Ferdinand E. Marcos governing the exercise by provinces, cities,
municipalities and barrios of their taxing and other revenue-raising powers. Sections 19 and 19
(a) thereof, provide among others, that the municipality may impose taxes on business, except on
those for which fixed taxes are provided on manufacturers, importers or producers of any article
of commerce of whatever kind or nature, including brewers, distillers, rectifiers, repackers, and
compounders of liquors, distilled spirits and/or wines in accordance with the schedule listed
therein.
The Secretary of Finance issued Provincial Circular No. 26-73 dated December 27, 1973, directed
to all provincial, city and municipal treasurers to refrain from collecting any local tax imposed in
old or new tax ordinances in the business of manufacturing, wholesaling, retailing, or dealing in
petroleum products subject to the specific tax under the National Internal Revenue Code (Rollo, p.
76).
Likewise, Provincial Circular No. 26 A-73 dated January 9, 1973 was issued by the Secretary of
Finance instructing all City Treasurers to refrain from collecting any local tax imposed in tax
ordinances enacted before or after the effectivity of the Local Tax Code on July 1, 1973, on the
businesses of manufacturing, wholesaling, retailing, or dealing in, petroleum products subject to
the specific tax under the National Internal Revenue Code (Rollo, p. 79).
Respondent Municipality of Pililla, Rizal, through Municipal Council Resolution No. 25, S-1974
enacted Municipal Tax Ordinance No. 1, S-1974 otherwise known as "The Pililla Tax Code of
1974" on June 14, 1974, which took effect on July 1, 1974 (Rollo, pp. 181-182). Sections 9 and
10 of the said ordinance imposed a tax on business, except for those for which fixed taxes are
provided in the Local Tax Code on manufacturers, importers, or producers of any article of
commerce of whatever kind or nature, including brewers, distillers, rectifiers, repackers, and
compounders of liquors, distilled spirits and/or wines in accordance with the schedule found in
the Local Tax Code, as well as mayor's permit, sanitary inspection fee and storage permit fee for
flammable, combustible or explosive substances (Rollo, pp. 183-187), while Section 139 of the
disputed ordinance imposed surcharges and interests on unpaid taxes, fees or charges (Ibid., p.
193).
On March 30, 1974, Presidential Decree No. 426 was issued amending certain provisions of P.D.
231 but retaining Sections 19 and 19 (a) with adjusted rates and 22(b).
On April 13, 1974, P.D. 436 was promulgated increasing the specific tax on lubricating oils,
gasoline, bunker fuel oil, diesel fuel oil and other similar petroleum products levied under Sections
142, 144 and 145 of the National Internal Revenue Code, as amended, and granting provinces,
cities and municipalities certain shares in the specific tax on such products in lieu of local taxes
imposed on petroleum products.
The questioned Municipal Tax Ordinance No. 1 was reviewed and approved by the Provincial
Treasurer of Rizal on January 13, 1975 (Rollo, p. 143), but was not implemented and/or enforced
by the Municipality of Pililla because of its having been suspended up to now in view of Provincial
Circular Nos. 26-73 and 26 A-73.
Provincial Circular No. 6-77 dated March 13, 1977 was also issued directing all city and municipal
treasurers to refrain from collecting the so-called storage fee on flammable or combustible
materials imposed under the local tax ordinance of their respective locality, said fee partaking of
the nature of a strictly revenue measure or service charge.
On June 3, 1977, P.D. 1158 otherwise known as the National Internal Revenue Code of 1977 was
enacted, Section 153 of which specifically imposes specific tax on refined and manufactured
mineral oils and motor fuels.
Enforcing the provisions of the above-mentioned ordinance, the respondent filed a complaint on
April 4, 1986 docketed as Civil Case No. 057-T against PPC for the collection of the business tax
from 1979 to 1986; storage permit fees from 1975 to 1986; mayor's permit and sanitary
inspection fees from 1975 to 1984. PPC, however, have already paid the last-named fees starting
1985 (Rollo, p. 74).
After PPC filed its answer, a pre-trial conference was held on August 24, 1988 where the parties
thru their respective counsel, after coming up with certain admissions and stipulations agreed to
the submission of the case for decision based on documentary evidence offered with their
respective comments (Rollo, p. 41).
On March 17, 1987, the trial court rendered a decision against the petitioner, the dispositive part
of which reads as follows:
WHEREFORE, premises considered, this Court hereby renders judgment in favor of the plaintiffs
as against the defendants thereby directing the defendants to 1) pay the plaintiffs the amount of
P5,301,385.00 representing the Tax on Business due from the defendants under Sec. 9 (A) of the
Municipal Tax Ordinance of the plaintiffs for the period from 1979 to 1983 inclusive plus such
amount of tax that may accrue until final determination of case; 2) to pay storage permit fee in
the amount of P3,321,730.00 due from the defendants under Sec. 10, par. z (13) (b) (1 C) of the
Municipal Tax Ordinance of the plaintiffs for the period from 1975 to 1986 inclusive plus such
amount of fee that may accrue until final determination of case; 3) to pay Mayor's Permit Fee due
from the defendants under Sec. 10, par. (P) (2) of the Municipal Tax Ordinance of the plaintiffs
from 1975 to 1984 inclusive in the amount of P12,120.00 plus such amount of fee that may
accrue until final determination of the case; and 4) to pay sanitary inspection fee in the amount of
P1,010.00 for the period from 1975 to 1984 plus such amount that may accrue until final
determination of case and 5) to pay the costs of suit.
SO ORDERED. (Rollo, pp. 49-50)
PPC moved for reconsideration of the decision, but this was denied by the lower court in a
resolution of November 2, 1989, hence, the instant petition.
The Court resolved to give due course to the petition and required both parties to submit
simultaneous memoranda (June 21, 1990 Resolution; Rollo, p. 305).
PPC assigns the following alleged errors:
1. THE RTC ERRED IN ORDERING THE PAYMENT OF THE BUSINESS TAX UNDER SECTION 9 (A) OF
THE TAX ORDINANCE IN THE LIGHT OF PROVINCIAL CIRCULARS NOS. 26-73 AND 26 A-73;.
2. THE RTC ERRED IN HOLDING THAT PETITIONER WAS LIABLE FOR THE PAYMENT OF STORAGE
PERMIT FEE UNDER SECTION 10 Z (13) (b) (1-c) OF THE TAX ORDINANCE CONSIDERING THE
ISSUANCE OF PROVINCIAL CIRCULAR NO. 6-77;
3. THE RTC ERRED IN FAILING TO HOLD THAT RESPONDENTS COMPUTATION OF TAX LIABILITY
HAS ABSOLUTELY NO BASIS;
4. THE RTC ERRED IN ORDERING THE PAYMENT OF MAYOR'S PERMIT AND SANITARY
INSPECTION FEES CONSIDERING THAT THE SAME HAS BEEN VALIDLY AND LEGALLY WAIVED BY
THE MAYOR;
5. THE RTC ERRED IN FAILING TO HOLD THAT THE TAXES AND DUTIES NOT COLLECTED FROM
PETITIONER PRIOR TO THE FIVE (5) YEAR PERIOD FROM THE FILING OF THIS CASE ON APRIL 4,
1986 HAS ALREADY PRESCRIBED.
The crucial issue in this case is whether or not petitioner PPC whose oil products are subject to
specific tax under the NIRC, is still liable to pay (a) tax on business and (b) storage fees,
considering Provincial Circular No. 6-77; and mayor's permit and sanitary inspection fee unto the
respondent Municipality of Pililla, Rizal, based on Municipal Ordinance No. 1.
Petitioner PPC contends that: (a) Provincial Circular No. 2673 declared as contrary to national
economic policy the imposition of local taxes on the manufacture of petroleum products as they
are already subject to specific tax under the National Internal Revenue Code; (b) the above
declaration covers not only old tax ordinances but new ones, as well as those which may be
enacted in the future; (c) both Provincial Circulars (PC) 26-73 and 26 A-73 are still effective,
hence, unless and until revoked, any effort on the part of the respondent to collect the suspended
tax on business from the petitioner would be illegal and unauthorized; and (d) Section 2 of P.D.
436 prohibits the imposition of local taxes on petroleum products.
PC No. 26-73 and PC No. 26 A-73 suspended the effectivity of local tax ordinances imposing a tax
on business under Section 19 (a) of the Local Tax Code (P.D. No. 231), with regard to
manufacturers, retailers, wholesalers or dealers in petroleum products subject to the specific tax
under the National Internal Revenue Code NIRC, in view of Section 22 (b) of the Code regarding
non-imposition by municipalities of taxes on articles, subject to specific tax under the provisions of
the NIRC.
There is no question that Pililla's Municipal Tax Ordinance No. 1 imposing the assailed taxes, fees
and charges is valid especially Section 9 (A) which according to the trial court "was lifted in toto
and/or is a literal reproduction of Section 19 (a) of the Local Tax Code as amended by P.D. No.
426." It conforms with the mandate of said law.
But P.D. No. 426 amending the Local Tax Code is deemed to have repealed Provincial Circular
Nos. 26-73 and 26 A-73 issued by the Secretary of Finance when Sections 19 and 19 (a), were
carried over into P.D. No. 426 and no exemptions were given to manufacturers, wholesalers,
retailers, or dealers in petroleum products.
Well-settled is the rule that administrative regulations must be in harmony with the provisions of
the law. In case of discrepancy between the basic law and an implementing rule or regulation, the
former prevails (Shell Philippines, Inc. v. Central Bank of the Philippines, 162 SCRA 628 [1988]).
As aptly held by the court a quo:
Necessarily, there could not be any other logical conclusion than that the framers of P.D. No. 426
really and actually intended to terminate the effectivity and/or enforceability of Provincial Circulars
Nos. 26-73 and 26 A-73 inasmuch as clearly these circulars are in contravention with Sec. 19 (a)
of P.D. 426-the amendatory law to P.D. No. 231. That intention to terminate is very apparent and
in fact it is expressed in clear and unequivocal terms in the effectivity and repealing clause of P.D.
426 . . .
Furthermore, while Section 2 of P.D. 436 prohibits the imposition of local taxes on petroleum
products, said decree did not amend Sections 19 and 19 (a) of P.D. 231 as amended by P.D. 426,
wherein the municipality is granted the right to levy taxes on business of manufacturers,
importers, producers of any article of commerce of whatever kind or nature. A tax on business is
distinct from a tax on the article itself. Thus, if the imposition of tax on business of manufacturers,
etc. in petroleum products contravenes a declared national policy, it should have been expressly
stated in P.D. No. 436.
The exercise by local governments of the power to tax is ordained by the present
Constitution.1âwphi1To allow the continuous effectivity of the prohibition set forth in PC No. 26-
73 (1) would be tantamount to restricting their power to tax by mere administrative issuances.
Under Section 5, Article X of the 1987 Constitution, only guidelines and limitations that may be
established by Congress can define and limit such power of local governments. Thus:
Each local government unit shall have the power to create its own sources of revenues and to levy
taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy . . .
Provincial Circular No. 6-77 enjoining all city and municipal treasurers to refrain from collecting
the so-called storage fee on flammable or combustible materials imposed in the local tax
ordinance of their respective locality frees petitioner PPC from the payment of storage permit fee.
The storage permit fee being imposed by Pililla's tax ordinance is a fee for the installation and
keeping in storage of any flammable, combustible or explosive substances. Inasmuch as said
storage makes use of tanks owned not by the municipality of Pililla, but by petitioner PPC, same is
obviously not a charge for any service rendered by the municipality as what is envisioned in
Section 37 of the same Code.
Section 10 (z) (13) of Pililla's Municipal Tax Ordinance No. 1 prescribing a permit fee is a permit
fee allowed under Section 36 of the amended Code.
As to the authority of the mayor to waive payment of the mayor's permit and sanitary inspection
fees, the trial court did not err in holding that "since the power to tax includes the power to
exempt thereof which is essentially a legislative prerogative, it follows that a municipal mayor who
is an executive officer may not unilaterally withdraw such an expression of a policy thru the
enactment of a tax." The waiver partakes of the nature of an exemption. It is an ancient rule that
exemptions from taxation are construed in strictissimi juris against the taxpayer and liberally in
favor of the taxing authority (Esso Standard Eastern, Inc. v. Acting Commissioner of Customs, 18
SCRA 488 [1966]). Tax exemptions are looked upon with disfavor (Western Minolco Corp. v.
Commissioner of Internal Revenue, 124 SCRA 121 [1983]). Thus, in the absence of a clear and
express exemption from the payment of said fees, the waiver cannot be recognized. As already
stated, it is the law-making body, and not an executive like the mayor, who can make an
exemption. Under Section 36 of the Code, a permit fee like the mayor's permit, shall be required
before any individual or juridical entity shall engage in any business or occupation under the
provisions of the Code.
However, since the Local Tax Code does not provide the prescriptive period for collection of local
taxes, Article 1143 of the Civil Code applies. Said law provides that an action upon an obligation
created by law prescribes within ten (10) years from the time the right of action accrues. The
Municipality of Pililla can therefore enforce the collection of the tax on business of petitioner PPC
due from 1976 to 1986, and NOT the tax that had accrued prior to 1976.
PREMISES CONSIDERED, with the MODIFICATION that business taxes accruing PRIOR to 1976 are
not to be paid by PPC (because the same have prescribed) and that storage fees are not also to be
paid by PPC (for the storage tanks are owned by PPC and not by the municipality, and therefore
cannot be a charge for service by the municipality), the assailed DECISION is hereby AFFIRMED.
SO ORDERED.

G.R. No. 168056 September 1, 2005

ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED
VINCENT S. ALBANO, Petitioners, vs.THE HONORABLE EXECUTIVE SECRETARY EDUARDO
ERMITA; HONORABLE SECRETARY OF THE DEPARTMENT OF FINANCE CESAR PURISIMA; and
HONORABLE COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO, JR., Respondent.
x-------------------------x
G.R. No. 168207
AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA, JINGGOY E. ESTRADA, PANFILO M.
LACSON, ALFREDO S. LIM, JAMBY A.S. MADRIGAL, AND SERGIO R. OSMEÑA III, Petitioners,
vs.EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V. PURISIMA, SECRETARY OF FINANCE,
GUILLERMO L. PARAYNO, JR., COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE,
Respondent.
x-------------------------x
G.R. No. 168461
ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by its President, ROSARIO
ANTONIO; PETRON DEALERS’ ASSOCIATION represented by its President, RUTH E. BARBIBI;
ASSOCIATION OF CALTEX DEALERS’ OF THE PHILIPPINES represented by its President,
MERCEDITAS A. GARCIA; ROSARIO ANTONIO doing business under the name and style of "ANB
NORTH SHELL SERVICE STATION"; LOURDES MARTINEZ doing business under the name and style
of "SHELL GATE – N. DOMINGO"; BETHZAIDA TAN doing business under the name and style of
"ADVANCE SHELL STATION"; REYNALDO P. MONTOYA doing business under the name and style
of "NEW LAMUAN SHELL SERVICE STATION"; EFREN SOTTO doing business under the name and
style of "RED FIELD SHELL SERVICE STATION"; DONICA CORPORATION represented by its
President, DESI TOMACRUZ; RUTH E. MARBIBI doing business under the name and style of "R&R
PETRON STATION"; PETER M. UNGSON doing business under the name and style of "CLASSIC
STAR GASOLINE SERVICE STATION"; MARIAN SHEILA A. LEE doing business under the name and
style of "NTE GASOLINE & SERVICE STATION"; JULIAN CESAR P. POSADAS doing business under
the name and style of "STARCARGA ENTERPRISES"; ADORACION MAÑEBO doing business under
the name and style of "CMA MOTORISTS CENTER"; SUSAN M. ENTRATA doing business under
the name and style of "LEONA’S GASOLINE STATION and SERVICE CENTER"; CARMELITA
BALDONADO doing business under the name and style of "FIRST CHOICE SERVICE CENTER";
MERCEDITAS A. GARCIA doing business under the name and style of "LORPED SERVICE
CENTER"; RHEAMAR A. RAMOS doing business under the name and style of "RJRAM PTT GAS
STATION"; MA. ISABEL VIOLAGO doing business under the name and style of "VIOLAGO-PTT
SERVICE CENTER"; MOTORISTS’ HEART CORPORATION represented by its Vice-President for
Operations, JOSELITO F. FLORDELIZA; MOTORISTS’ HARVARD CORPORATION represented by its
Vice-President for Operations, JOSELITO F. FLORDELIZA; MOTORISTS’ HERITAGE CORPORATION
represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA; PHILIPPINE STANDARD
OIL CORPORATION represented by its Vice-President for Operations, JOSELITO F. FLORDELIZA;
ROMEO MANUEL doing business under the name and style of "ROMMAN GASOLINE STATION";
ANTHONY ALBERT CRUZ III doing business under the name and style of "TRUE SERVICE
STATION", Petitioners, vs.CESAR V. PURISIMA, in his capacity as Secretary of the Department of
Finance and GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of Internal
Revenue,Respondent.
x-------------------------x
G.R. No. 168463
FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA,
RODOLFO G. PLAZA, DARLENE ANTONINO-CUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C.
AGARAO, JR. JUAN EDGARDO M. ANGARA, JUSTIN MARC SB. CHIPECO, FLORENCIO G. NOEL,
MUJIV S. HATAMAN, RENATO B. MAGTUBO, JOSEPH A. SANTIAGO, TEOFISTO DL. GUINGONA
III, RUY ELIAS C. LOPEZ, RODOLFO Q. AGBAYANI and TEODORO A. CASIÑO, Petitioners,
vs.CESAR V. PURISIMA, in his capacity as Secretary of Finance, GUILLERMO L. PARAYNO, JR., in
his capacity as Commissioner of Internal Revenue, and EDUARDO R. ERMITA, in his capacity as
Executive Secretary, Respondent.
x-------------------------x
G.R. No. 168730
BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. Petitioner, vs. HON. EDUARDO R. ERMITA, in his
capacity as the Executive Secretary; HON. MARGARITO TEVES, in his capacity as Secretary of
Finance; HON. JOSE MARIO BUNAG, in his capacity as the OIC Commissioner of the Bureau of
Internal Revenue; and HON. ALEXANDER AREVALO, in his capacity as the OIC Commissioner of
the Bureau of Customs, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
The expenses of government, having for their object the interest of all, should be borne by
everyone, and the more man enjoys the advantages of society, the more he ought to hold himself
honored in contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation, inadequate fiscal allocation for education,
increased emoluments for health workers, and wider coverage for full value-added tax benefits …
these are the reasons why Republic Act No. 9337 (R.A. No. 9337)1 was enacted. Reasons, the
wisdom of which, the Court even with its extensive constitutional power of review, cannot probe.
The petitioners in these cases, however, question not only the wisdom of the law, but also
perceived constitutional infirmities in its passage.
Every law enjoys in its favor the presumption of constitutionality. Their arguments
notwithstanding, petitioners failed to justify their call for the invalidity of the law. Hence, R.A. No.
9337 is not unconstitutional.
LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705,
and Senate Bill No. 1950.
House Bill No. 35552 was introduced on first reading on January 7, 2005. The House Committee
on Ways and Means approved the bill, in substitution of House Bill No. 1468, which
Representative (Rep.) Eric D. Singson introduced on August 8, 2004. The President certified the
bill on January 7, 2005 for immediate enactment. On January 27, 2005, the House of
Representatives approved the bill on second and third reading.
House Bill No. 37053 on the other hand, substituted House Bill No. 3105 introduced by Rep.
Salacnib F. Baterina, and House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its "mother bill"
is House Bill No. 3555. The House Committee on Ways and Means approved the bill on February
2, 2005. The President also certified it as urgent on February 8, 2005. The House of
Representatives approved the bill on second and third reading on February 28, 2005.
Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 19504 on
March 7, 2005, "in substitution of Senate Bill Nos. 1337, 1838 and 1873, taking into
consideration House Bill Nos. 3555 and 3705." Senator Ralph G. Recto sponsored Senate Bill No.
1337, while Senate Bill Nos. 1838 and 1873 were both sponsored by Sens. Franklin M. Drilon,
Juan M. Flavier and Francis N. Pangilinan. The President certified the bill on March 11, 2005, and
was approved by the Senate on second and third reading on April 13, 2005.
On the same date, April 13, 2005, the Senate agreed to the request of the House of
Representatives for a committee conference on the disagreeing provisions of the proposed bills.
Before long, the Conference Committee on the Disagreeing Provisions of House Bill No. 3555,
House Bill No. 3705, and Senate Bill No. 1950, "after having met and discussed in full free and
conference," recommended the approval of its report, which the Senate did on May 10, 2005,
and with the House of Representatives agreeing thereto the next day, May 11, 2005.
On May 23, 2005, the enrolled copy of the consolidated House and Senate version was
transmitted to the President, who signed the same into law on May 24, 2005. Thus, came R.A.
No. 9337.
July 1, 2005 is the effectivity date of R.A. No. 9337.5 When said date came, the Court issued a
temporary restraining order, effective immediately and continuing until further orders, enjoining
respondents from enforcing and implementing the law.
Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court speaking
through Mr. Justice Artemio V. Panganiban, voiced the rationale for its issuance of the temporary
restraining order on July 1, 2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a
little background. You know when the law took effect on July 1, 2005, the Court issued a TRO at
about 5 o’clock in the afternoon. But before that, there was a lot of complaints aired on television
and on radio. Some people in a gas station were complaining that the gas prices went up by
10%. Some people were complaining that their electric bill will go up by 10%. Other times
people riding in domestic air carrier were complaining that the prices that they’ll have to pay
would have to go up by 10%. While all that was being aired, per your presentation and per our
own understanding of the law, that’s not true. It’s not true that the e-vat law necessarily increased
prices by 10% uniformly isn’t it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?
ATTY. BANIQUED : It’s not, because, Your Honor, there is an Executive Order that granted the
Petroleum companies some subsidy . . . interrupted
J. PANGANIBAN : That’s correct . . .
ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted
J. PANGANIBAN : . . . mitigating measures . . .
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination
of the Excise Tax and the import duties. That is why, it is not correct to say that the VAT as to
petroleum dealers increased prices by 10%.
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to
cover the E-Vat tax. If you consider the excise tax and the import duties, the Net Tax would
probably be in the neighborhood of 7%? We are not going into exact figures I am just trying to
deliver a point that different industries, different products, different services are hit differently. So
it’s not correct to say that all prices must go up by 10%.
ATTY. BANIQUED : You’re right, Your Honor.
J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present
imposed a Sales Tax of 3%. When this E-Vat law took effect the Sales Tax was also removed as a
mitigating measure. So, therefore, there is no justification to increase the fares by 10% at best
7%, correct?
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the people were complaining on that first day,
were being increased arbitrarily by 10%. And that’s one reason among many others this Court
had to issue TRO because of the confusion in the implementation. That’s why we added as an
issue in this case, even if it’s tangentially taken up by the pleadings of the parties, the confusion in
the implementation of the E-vat. Our people were subjected to the mercy of that confusion of an
across the board increase of 10%, which you yourself now admit and I think even the
Government will admit is incorrect. In some cases, it should be 3% only, in some cases it should
be 6% depending on these mitigating measures and the location and situation of each product,
of each service, of each company, isn’t it?
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : Alright. So that’s one reason why we had to issue a TRO pending the
clarification of all these and we wish the government will take time to clarify all these by means of
a more detailed implementing rules, in case the law is upheld by this Court. . . .6
The Court also directed the parties to file their respective Memoranda.
G.R. No. 168056
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for
prohibition on May 27, 2005. They question the constitutionality of Sections 4, 5 and 6 of R.A.
No. 9337, amending Sections 106, 107 and 108, respectively, of the National Internal Revenue
Code (NIRC). Section 4 imposes a 10% VAT on sale of goods and properties, Section 5 imposes a
10% VAT on importation of goods, and Section 6 imposes a 10% VAT on sale of services and use
or lease of properties. These questioned provisions contain a uniform provisoauthorizing the
President, upon recommendation of the Secretary of Finance, to raise the VAT rate to 12%,
effective January 1, 2006, after any of the following conditions have been satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 ½%).
Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of
its exclusive authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine
Constitution.
G.R. No. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise
assailing the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.
Aside from questioning the so-called stand-by authority of the President to increase the VAT rate
to 12%, on the ground that it amounts to an undue delegation of legislative power, petitioners
also contend that the increase in the VAT rate to 12% contingent on any of the two conditions
being satisfied violates the due process clause embodied in Article III, Section 1 of the
Constitution, as it imposes an unfair and additional tax burden on the people, in that: (1) the
12% increase is ambiguous because it does not state if the rate would be returned to the original
10% if the conditions are no longer satisfied; (2) the rate is unfair and unreasonable, as the
people are unsure of the applicable VAT rate from year to year; and (3) the increase in the VAT
rate, which is supposed to be an incentive to the President to raise the VAT collection to at least 2
4/5 of the GDP of the previous year, should only be based on fiscal adequacy.
Petitioners further claim that the inclusion of a stand-by authority granted to the President by the
Bicameral Conference Committee is a violation of the "no-amendment rule" upon last reading of
a bill laid down in Article VI, Section 26(2) of the Constitution.
G.R. No. 168461
Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas
Shell Dealers, Inc., et al., assailing the following provisions of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on
depreciable goods shall be amortized over a 60-month period, if the acquisition, excluding the
VAT components, exceeds One Million Pesos (₱1, 000,000.00);
2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of
input tax to be credited against the output tax; and
3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its
political subdivisions, instrumentalities or agencies, including GOCCs, to deduct a 5% final
withholding tax on gross payments of goods and services, which are subject to 10% VAT under
Sections 106 (sale of goods and properties) and 108 (sale of services and use or lease of
properties) of the NIRC.
Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive,
excessive, and confiscatory.
Petitioners’ argument is premised on the constitutional right of non-deprivation of life, liberty or
property without due process of law under Article III, Section 1 of the Constitution. According to
petitioners, the contested sections impose limitations on the amount of input tax that may be
claimed. Petitioners also argue that the input tax partakes the nature of a property that may not
be confiscated, appropriated, or limited without due process of law. Petitioners further contend
that like any other property or property right, the input tax credit may be transferred or disposed
of, and that by limiting the same, the government gets to tax a profit or value-added even if there
is no profit or value-added.
Petitioners also believe that these provisions violate the constitutional guarantee of equal
protection of the law under Article III, Section 1 of the Constitution, as the limitation on the
creditable input tax if: (1) the entity has a high ratio of input tax; or (2) invests in capital
equipment; or (3) has several transactions with the government, is not based on real and
substantial differences to meet a valid classification.
Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI,
Section 28(1) of the Constitution, and that it is the smaller businesses with higher input tax to
output tax ratio that will suffer the consequences thereof for it wipes out whatever meager
margins the petitioners make.
G.R. No. 168463
Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed this
petition for certiorari on June 30, 2005. They question the constitutionality of R.A. No. 9337 on
the following grounds:
1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in
violation of Article VI, Section 28(2) of the Constitution;
2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass
onprovisions present in Senate Bill No. 1950 and House Bill No. 3705; and
3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, 121,
125,7 148, 151, 236, 237 and 288, which were present in Senate Bill No. 1950, violates Article
VI, Section 24(1) of the Constitution, which provides that all appropriation, revenue or tariff bills
shall originate exclusively in the House of Representatives
G.R. No. 168730
On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and prohibition on
July 20, 2005, alleging unconstitutionality of the law on the ground that the limitation on the
creditable input tax in effect allows VAT-registered establishments to retain a portion of the taxes
they collect, thus violating the principle that tax collection and revenue should be solely allocated
for public purposes and expenditures. Petitioner Garcia further claims that allowing these
establishments to pass on the tax to the consumers is inequitable, in violation of Article VI, Section
28(1) of the Constitution.
RESPONDENTS’ COMMENT
The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily,
respondents contend that R.A. No. 9337 enjoys the presumption of constitutionality and
petitioners failed to cast doubt on its validity.
Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA
630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the
bicameral proceedings, exclusive origination of revenue measures and the power of the Senate
concomitant thereto, have already been settled. With regard to the issue of undue delegation of
legislative power to the President, respondents contend that the law is complete and leaves no
discretion to the President but to increase the rate to 12% once any of the two conditions
provided therein arise.
Respondents also refute petitioners’ argument that the increase to 12%, as well as the 70%
limitation on the creditable input tax, the 60-month amortization on the purchase or importation
of capital goods exceeding ₱1,000,000.00, and the 5% final withholding tax by government
agencies, is arbitrary, oppressive, and confiscatory, and that it violates the constitutional principle
on progressive taxation, among others.
Finally, respondents manifest that R.A. No. 9337 is the anchor of the government’s fiscal reform
agenda. A reform in the value-added system of taxation is the core revenue measure that will tilt
the balance towards a sustainable macroeconomic environment necessary for economic growth.
ISSUES
The Court defined the issues, as follows:
PROCEDURAL ISSUE
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the
NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC;
and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following
provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
RULING OF THE COURT
As a prelude, the Court deems it apt to restate the general principles and concepts of value-added
tax (VAT), as the confusion and inevitably, litigation, breeds from a fallacious notion of its nature.
The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of
goods or properties and services.8 Being an indirect tax on expenditure, the seller of goods or
services may pass on the amount of tax paid to the buyer,9 with the seller acting merely as a tax
collector.10 The burden of VAT is intended to fall on the immediate buyers and ultimately, the
end-consumers.
In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business
it engages in, without transferring the burden to someone else.11 Examples are individual and
corporate income taxes, transfer taxes, and residence taxes.12
In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a
different mode. Prior to 1978, the system was a single-stage tax computed under the "cost
deduction method" and was payable only by the original sellers. The single-stage system was
subsequently modified, and a mixture of the "cost deduction method" and "tax credit method"
was used to determine the value-added tax payable.13 Under the "tax credit method," an entity
can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its
purchases, inputs and imports.14
It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the
VAT system was rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using
the "tax credit method."15
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law,16 R.A. No. 8241 or the
Improved VAT Law,17 R.A. No. 8424 or the Tax Reform Act of 1997,18 and finally, the presently
beleaguered R.A. No. 9337, also referred to by respondents as the VAT Reform Act.
The Court will now discuss the issues in logical sequence.
PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
A. The Bicameral Conference Committee
Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference Committee
exceeded its authority by:
1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No.
9337;
2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;
3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against
the output tax; and
4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of
taxes in addition to the value-added tax.
Petitioners now beseech the Court to define the powers of the Bicameral Conference Committee.
It should be borne in mind that the power of internal regulation and discipline are intrinsic in any
legislative body for, as unerringly elucidated by Justice Story, "[i]f the power did not exist, it would
be utterly impracticable to transact the business of the nation, either at all, or at least with
decency, deliberation, and order."19 Thus, Article VI, Section 16 (3) of the Constitution provides
that "each House may determine the rules of its proceedings." Pursuant to this inherent
constitutional power to promulgate and implement its own rules of procedure, the respective
rules of each house of Congress provided for the creation of a Bicameral Conference Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows:
Sec. 88. Conference Committee. – In the event that the House does not agree with the Senate on
the amendment to any bill or joint resolution, the differences may be settled by the conference
committees of both chambers.
In resolving the differences with the Senate, the House panel shall, as much as possible, adhere to
and support the House Bill. If the differences with the Senate are so substantial that they
materially impair the House Bill, the panel shall report such fact to the House for the latter’s
appropriate action.
Sec. 89. Conference Committee Reports. – . . . Each report shall contain a detailed, sufficiently
explicit statement of the changes in or amendments to the subject measure.
...
The Chairman of the House panel may be interpellated on the Conference Committee Report
prior to the voting thereon. The House shall vote on the Conference Committee Report in the
same manner and procedure as it votes on a bill on third and final reading.
Rule XII, Section 35 of the Rules of the Senate states:
Sec. 35. In the event that the Senate does not agree with the House of Representatives on the
provision of any bill or joint resolution, the differences shall be settled by a conference committee
of both Houses which shall meet within ten (10) days after their composition. The President shall
designate the members of the Senate Panel in the conference committee with the approval of the
Senate.
Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of
the changes in, or amendments to the subject measure, and shall be signed by a majority of the
members of each House panel, voting separately.
A comparative presentation of the conflicting House and Senate provisions and a reconciled
version thereof with the explanatory statement of the conference committee shall be attached to
the report.
...
The creation of such conference committee was apparently in response to a problem, not
addressed by any constitutional provision, where the two houses of Congress find themselves in
disagreement over changes or amendments introduced by the other house in a legislative bill.
Given that one of the most basic powers of the legislative branch is to formulate and implement
its own rules of proceedings and to discipline its members, may the Court then delve into the
details of how Congress complies with its internal rules or how it conducts its business of passing
legislation? Note that in the present petitions, the issue is not whether provisions of the rules of
both houses creating the bicameral conference committee are unconstitutional, but whether the
bicameral conference committee has strictly complied with the rules of both houses, thereby
remaining within the jurisdiction conferred upon it by Congress.
In the recent case of Fariñas vs. The Executive Secretary,20 the Court En Banc,
unanimouslyreiterated and emphasized its adherence to the "enrolled bill doctrine," thus,
declining therein petitioners’ plea for the Court to go behind the enrolled copy of the bill. Assailed
in said case was Congress’s creation of two sets of bicameral conference committees, the lack of
records of said committees’ proceedings, the alleged violation of said committees of the rules of
both houses, and the disappearance or deletion of one of the provisions in the compromise bill
submitted by the bicameral conference committee. It was argued that such irregularities in the
passage of the law nullified R.A. No. 9006, or the Fair Election Act.
Striking down such argument, the Court held thus:
Under the "enrolled bill doctrine," the signing of a bill by the Speaker of the House and the Senate
President and the certification of the Secretaries of both Houses of Congress that it was passed
are conclusive of its due enactment. A review of cases reveals the Court’s consistent adherence to
the rule. The Court finds no reason to deviate from the salutary rule in this case where the
irregularities alleged by the petitioners mostly involved the internal rules of Congress, e.g.,
creation of the 2nd or 3rd Bicameral Conference Committee by the House. This Court is not the
proper forum for the enforcement of these internal rules of Congress, whether House or Senate.
Parliamentary rules are merely procedural and with their observance the courts have no concern.
Whatever doubts there may be as to the formal validity of Rep. Act No. 9006 must be resolved in
its favor. The Court reiterates its ruling in Arroyo vs. De Venecia, viz.:
But the cases, both here and abroad, in varying forms of expression, all deny to the courts the
power to inquire into allegations that, in enacting a law, a House of Congress failed to comply
with its own rules, in the absence of showing that there was a violation of a constitutional
provision or the rights of private individuals. In Osmeña v. Pendatun, it was held: "At any rate,
courts have declared that ‘the rules adopted by deliberative bodies are subject to revocation,
modification or waiver at the pleasure of the body adopting them.’ And it has been said that
"Parliamentary rules are merely procedural, and with their observance, the courts have no
concern. They may be waived or disregarded by the legislative body." Consequently, "mere failure
to conform to parliamentary usage will not invalidate the action (taken by a deliberative body)
when the requisite number of members have agreed to a particular measure."21 (Emphasis
supplied)
The foregoing declaration is exactly in point with the present cases, where petitioners allege
irregularities committed by the conference committee in introducing changes or deleting
provisions in the House and Senate bills. Akin to the Fariñas case,22 the present petitions also
raise an issue regarding the actions taken by the conference committee on matters regarding
Congress’ compliance with its own internal rules. As stated earlier, one of the most basic and
inherent power of the legislature is the power to formulate rules for its proceedings and the
discipline of its members. Congress is the best judge of how it should conduct its own business
expeditiously and in the most orderly manner. It is also the sole
concern of Congress to instill discipline among the members of its conference committee if it
believes that said members violated any of its rules of proceedings. Even the expanded jurisdiction
of this Court cannot apply to questions regarding only the internal operation of Congress, thus,
the Court is wont to deny a review of the internal proceedings of a co-equal branch of
government.
Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary
of Finance,23 the Court already made the pronouncement that "[i]f a change is desired in the
practice [of the Bicameral Conference Committee] it must be sought in Congress since this
question is not covered by any constitutional provision but is only an internal rule of each house."
24 To date, Congress has not seen it fit to make such changes adverted to by the Court. It seems,
therefore, that Congress finds the practices of the bicameral conference committee to be very
useful for purposes of prompt and efficient legislative action.
Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of the
bicameral conference committees, the Court deems it necessary to dwell on the issue. The Court
observes that there was a necessity for a conference committee because a comparison of the
provisions of House Bill Nos. 3555 and 3705 on one hand, and Senate Bill No. 1950 on the other,
reveals that there were indeed disagreements. As pointed out in the petitions, said disagreements
were as follows:
House Bill No. 3555 House Bill No.3705 Senate Bill No. 1950
With regard to "Stand-By Authority" in favor of President
Provides for 12% VAT on every sale of goods or properties (amending Sec. 106 of NIRC); 12%
VAT on importation of goods (amending Sec. 107 of NIRC); and 12% VAT on sale of services and
use or lease of properties (amending Sec. 108 of NIRC) Provides for 12% VAT in general
on sales of goods or properties and reduced rates for sale of certain locally manufactured goods
and petroleum products and raw materials to be used in the manufacture thereof (amending Sec.
106 of NIRC); 12% VAT on importation of goods and reduced rates for certain imported products
including petroleum products (amending Sec. 107 of NIRC); and 12% VAT on sale of services and
use or lease of properties and a reduced rate for certain services including power generation
(amending Sec. 108 of NIRC) Provides for a single rate of 10% VAT on sale of goods or
properties (amending Sec. 106 of NIRC), 10% VAT on sale of services including sale of electricity
by generation companies, transmission and distribution companies, and use or lease of properties
(amending Sec. 108 of NIRC)
With regard to the "no pass-on" provision
No similar provision Provides that the VAT imposed on power generation and on the
sale of petroleum products shall be absorbed by generation companies or sellers, respectively, and
shall not be passed on to consumers Provides that the VAT imposed on sales of
electricity by generation companies and services of transmission companies and distribution
companies, as well as those of franchise grantees of electric utilities shall not apply to residential
end-users. VAT shall be absorbed by generation, transmission, and distribution companies.
With regard to 70% limit on input tax credit
Provides that the input tax credit for capital goods on which a VAT has been paid shall be equally
distributed over 5 years or the depreciable life of such capital goods; the input tax credit for goods
and services other than capital goods shall not exceed 5% of the total amount of such goods and
services; and for persons engaged in retail trading of goods, the allowable input tax credit shall
not exceed 11% of the total amount of goods purchased. No similar provision
Provides that the input tax credit for capital goods on which a VAT has been paid shall be
equally distributed over 5 years or the depreciable life of such capital goods; the input tax credit
for goods and services other than capital goods shall not exceed 90% of the output VAT.
With regard to amendments to be made to NIRC provisions regarding income and excise taxes
No similar provision No similar provision Provided for amendments to
several NIRC provisions regarding corporate income, percentage, franchise and excise taxes
The disagreements between the provisions in the House bills and the Senate bill were with regard
to (1) what rate of VAT is to be imposed; (2) whether only the VAT imposed on electricity
generation, transmission and distribution companies should not be passed on to consumers, as
proposed in the Senate bill, or both the VAT imposed on electricity generation, transmission and
distribution companies and the VAT imposed on sale of petroleum products should not be passed
on to consumers, as proposed in the House bill; (3) in what manner input tax credits should be
limited; (4) and whether the NIRC provisions on corporate income taxes, percentage, franchise
and excise taxes should be amended.
There being differences and/or disagreements on the foregoing provisions of the House and
Senate bills, the Bicameral Conference Committee was mandated by the rules of both houses of
Congress to act on the same by settling said differences and/or disagreements. The Bicameral
Conference Committee acted on the disagreeing provisions by making the following changes:
1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the
Conference Committee Report that the Bicameral Conference Committee tried to bridge the gap
in the difference between the 10% VAT rate proposed by the Senate, and the various rates with
12% as the highest VAT rate proposed by the House, by striking a compromise whereby the
present 10% VAT rate would be retained until certain conditions arise, i.e., the value-added tax
collection as a percentage of gross domestic product (GDP) of the previous year exceeds 2 4/5%,
or National Government deficit as a percentage of GDP of the previous year exceeds 1½%, when
the President, upon recommendation of the Secretary of Finance shall raise the rate of VAT to
12% effective January 1, 2006.
2. With regard to the disagreement on whether only the VAT imposed on electricity generation,
transmission and distribution companies should not be passed on to consumers or whether both
the VAT imposed on electricity generation, transmission and distribution companies and the VAT
imposed on sale of petroleum products may be passed on to consumers, the Bicameral
Conference Committee chose to settle such disagreement by altogether deleting from its Report
any no pass-on provision.
3. With regard to the disagreement on whether input tax credits should be limited or not, the
Bicameral Conference Committee decided to adopt the position of the House by putting a
limitation on the amount of input tax that may be credited against the output tax, although it
crafted its own language as to the amount of the limitation on input tax credits and the manner
of computing the same by providing thus:
(A) Creditable Input Tax. – . . .
...
Provided, The input tax on goods purchased or imported in a calendar month for use in trade or
business for which deduction for depreciation is allowed under this Code, shall be spread evenly
over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate
acquisition cost for such goods, excluding the VAT component thereof, exceeds one million Pesos
(₱1,000,000.00): PROVIDED, however, that if the estimated useful life of the capital good is less
than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over
such shorter period: . . .
(B) Excess Output or Input Tax. – If at the end of any taxable quarter the output tax exceeds the
input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the
output tax, the excess shall be carried over to the succeeding quarter or quarters: PROVIDED that
the input tax inclusive of input VAT carried over from the previous quarter that may be credited in
every quarter shall not exceed seventy percent (70%) of the output VAT: PROVIDED, HOWEVER,
THAT any input tax attributable to zero-rated sales by a VAT-registered person may at his option
be refunded or credited against other internal revenue taxes, . . .
4. With regard to the amendments to other provisions of the NIRC on corporate income tax,
franchise, percentage and excise taxes, the conference committee decided to include such
amendments and basically adopted the provisions found in Senate Bill No. 1950, with some
changes as to the rate of the tax to be imposed.
Under the provisions of both the Rules of the House of Representatives and Senate Rules, the
Bicameral Conference Committee is mandated to settle the differences between the disagreeing
provisions in the House bill and the Senate bill. The term "settle" is synonymous to "reconcile" and
"harmonize."25 To reconcile or harmonize disagreeing provisions, the Bicameral Conference
Committee may then (a) adopt the specific provisions of either the House bill or Senate bill, (b)
decide that neither provisions in the House bill or the provisions in the Senate bill would
be carried into the final form of the bill, and/or (c) try to arrive at a compromise between the
disagreeing provisions.
In the present case, the changes introduced by the Bicameral Conference Committee on
disagreeing provisions were meant only to reconcile and harmonize the disagreeing provisions for
it did not inject any idea or intent that is wholly foreign to the subject embraced by the original
provisions.
The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT wanted
by the Senate is retained until such time that certain conditions arise when the 12% VAT wanted
by the House shall be imposed, appears to be a compromise to try to bridge the difference in the
rate of VAT proposed by the two houses of Congress. Nevertheless, such compromise is still
totally within the subject of what rate of VAT should be imposed on taxpayers.
The no pass-on provision was deleted altogether. In the transcripts of the proceedings of the
Bicameral Conference Committee held on May 10, 2005, Sen. Ralph Recto, Chairman of the
Senate Panel, explained the reason for deleting the no pass-on provision in this wise:
. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking that
no sector should be a beneficiary of legislative grace, neither should any sector be discriminated
on. The VAT is an indirect tax. It is a pass on-tax. And let’s keep it plain and simple. Let’s not
confuse the bill and put a no pass-on provision. Two-thirds of the world have a VAT system and in
this two-thirds of the globe, I have yet to see a VAT with a no pass-though provision. So, the
thinking of the Senate is basically simple, let’s keep the VAT simple.26(Emphasis supplied)
Rep. Teodoro Locsin further made the manifestation that the no pass-on provision "never really
enjoyed the support of either House."27
With regard to the amount of input tax to be credited against output tax, the Bicameral
Conference Committee came to a compromise on the percentage rate of the limitation or cap on
such input tax credit, but again, the change introduced by the Bicameral Conference Committee
was totally within the intent of both houses to put a cap on input tax that may be
credited against the output tax. From the inception of the subject revenue bill in the House of
Representatives, one of the major objectives was to "plug a glaring loophole in the tax policy and
administration by creating vital restrictions on the claiming of input VAT tax credits . . ." and "[b]y
introducing limitations on the claiming of tax credit, we are capping a major leakage that has
placed our collection efforts at an apparent disadvantage."28
As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in
Senate Bill No. 1950, since said provisions were among those referred to it, the conference
committee had to act on the same and it basically adopted the version of the Senate.
Thus, all the changes or modifications made by the Bicameral Conference Committee were
germane to subjects of the provisions referred
to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion
amounting to lack or excess of jurisdiction committed by the Bicameral Conference Committee. In
the earlier cases of Philippine Judges Association vs. Prado29 and Tolentino vs. Secretary of
Finance,30 the Court recognized the long-standing legislative practice of giving said conference
committee ample latitude for compromising differences between the Senate and the House.
Thus, in the Tolentino case, it was held that:
. . . it is within the power of a conference committee to include in its report an entirely new
provision that is not found either in the House bill or in the Senate bill. If the committee can
propose an amendment consisting of one or two provisions, there is no reason why it cannot
propose several provisions, collectively considered as an "amendment in the nature of a
substitute," so long as such amendment is germane to the subject of the bills before the
committee. After all, its report was not final but needed the approval of both houses of Congress
to become valid as an act of the legislative department. The charge that in this case the
Conference Committee acted as a third legislative chamber is thus without any basis.31 (Emphasis
supplied)
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the "No-
Amendment Rule"
Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall become a law unless it has passed three readings on separate
days, and printed copies thereof in its final form have been distributed to its Members three days
before its passage, except when the President certifies to the necessity of its immediate
enactment to meet a public calamity or emergency. Upon the last reading of a bill, no
amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter,
and the yeas and nays entered in the Journal.
Petitioners’ argument that the practice where a bicameral conference committee is allowed to
add or delete provisions in the House bill and the Senate bill after these had passed three readings
is in effect a circumvention of the "no amendment rule" (Sec. 26 (2), Art. VI of the 1987
Constitution), fails to convince the Court to deviate from its ruling in the Tolentino case that:
Nor is there any reason for requiring that the Committee’s Report in these cases must have
undergone three readings in each of the two houses. If that be the case, there would be no end
to negotiation since each house may seek modification of the compromise bill. . . .
Art. VI. § 26 (2) must, therefore, be construed as referring only to bills introduced for the first time
in either house of Congress, not to the conference committee report.32(Emphasis supplied)
The Court reiterates here that the "no-amendment rule" refers only to the procedure to be
followed by each house of Congress with regard to bills initiated in each of said respective houses,
before said bill is transmitted to the other house for its concurrence or amendment. Verily, to
construe said provision in a way as to proscribe any further changes to a bill after one house has
voted on it would lead to absurdity as this would mean that the other house of Congress would
be deprived of its constitutional power to amend or introduce changes to said bill. Thus, Art. VI,
Sec. 26 (2) of the Constitution cannot be taken to mean that the introduction by the Bicameral
Conference Committee of amendments and modifications to disagreeing provisions in bills that
have been acted upon by both houses of Congress is prohibited.
C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive
Origination of Revenue Bills
Coming to the issue of the validity of the amendments made regarding the NIRC provisions on
corporate income taxes and percentage, excise taxes. Petitioners refer to the following provisions,
to wit:
Section 27 Rates of Income Tax on Domestic Corporation
28(A)(1) Tax on Resident Foreign Corporation
28(B)(1) Inter-corporate Dividends
34(B)(1) Inter-corporate Dividends
116 Tax on Persons Exempt from VAT
117 Percentage Tax on domestic carriers and keepers of Garage
119 Tax on franchises
121 Tax on banks and Non-Bank Financial Intermediaries
148 Excise Tax on manufactured oils and other fuels
151 Excise Tax on mineral products
236 Registration requirements
237 Issuance of receipts or sales or commercial invoices
288 Disposition of Incremental Revenue
Petitioners claim that the amendments to these provisions of the NIRC did not at all originate
from the House. They aver that House Bill No. 3555 proposed amendments only regarding
Sections 106, 107, 108, 110 and 114 of the NIRC, while House Bill No. 3705 proposed
amendments only to Sections 106, 107,108, 109, 110 and 111 of the NIRC; thus, the other
sections of the NIRC which the Senate amended but which amendments were not found in the
House bills are not intended to be amended by the House of Representatives. Hence, they argue
that since the proposed amendments did not originate from the House, such amendments are a
violation of Article VI, Section 24 of the Constitution.
The argument does not hold water.
Article VI, Section 24 of the Constitution reads:
Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills
of local application, and private bills shall originate exclusively in the House of Representatives but
the Senate may propose or concur with amendments.
In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that
initiated the move for amending provisions of the NIRC dealing mainly with the value-added tax.
Upon transmittal of said House bills to the Senate, the Senate came out with Senate Bill No. 1950
proposing amendments not only to NIRC provisions on the value-added tax but also amendments
to NIRC provisions on other kinds of taxes. Is the introduction by the Senate of provisions not
dealing directly with the value- added tax, which is the only kind of tax being amended in the
House bills, still within the purview of the constitutional provision authorizing the Senate to
propose or concur with amendments to a revenue bill that originated from the House?
The foregoing question had been squarely answered in the Tolentino case, wherein the Court
held, thus:
. . . To begin with, it is not the law – but the revenue bill – which is required by the Constitution to
"originate exclusively" in the House of Representatives. It is important to emphasize this, because
a bill originating in the House may undergo such extensive changes in the Senate that the result
may be a rewriting of the whole. . . . At this point, what is important to note is that, as a result of
the Senate action, a distinct bill may be produced. To insist that a revenue statute – and not only
the bill which initiated the legislative process culminating in the enactment of the law – must
substantially be the same as the House bill would be to deny the Senate’s power not only to
"concur with amendments" but also to "propose amendments." It would be to violate the
coequality of legislative power of the two houses of Congress and in fact make the House
superior to the Senate.
…
…Given, then, the power of the Senate to propose amendments, the Senate can propose its own
version even with respect to bills which are required by the Constitution to originate in the House.
...
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax
bills, bills authorizing an increase of the public debt, private bills and bills of local application must
come from the House of Representatives on the theory that, elected as they are from the districts,
the members of the House can be expected to be more sensitive to the local needs and problems.
On the other hand, the senators, who are elected at large, are expected to approach the same
problems from the national perspective. Both views are thereby made to bear on the enactment
of such laws.33 (Emphasis supplied)
Since there is no question that the revenue bill exclusively originated in the House of
Representatives, the Senate was acting within its
constitutional power to introduce amendments to the House bill when it included provisions in
Senate Bill No. 1950 amending corporate income taxes, percentage, excise and franchise taxes.
Verily, Article VI, Section 24 of the Constitution does not contain any prohibition or limitation on
the extent of the amendments that may be introduced by the Senate to the House revenue bill.
Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been
touched in the House bills are still in furtherance of the intent of the House in initiating the
subject revenue bills. The Explanatory Note of House Bill No. 1468, the very first House bill
introduced on the floor, which was later substituted by House Bill No. 3555, stated:
One of the challenges faced by the present administration is the urgent and daunting task of
solving the country’s serious financial problems. To do this, government expenditures must be
strictly monitored and controlled and revenues must be significantly increased. This may be easier
said than done, but our fiscal authorities are still optimistic the government will be operating on a
balanced budget by the year 2009. In fact, several measures that will result to significant
expenditure savings have been identified by the administration. It is supported with a credible
package of revenue measures that include measures to improve tax administration and control
the leakages in revenues from income taxes and the value-added tax (VAT). (Emphasis supplied)
Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:
In the budget message of our President in the year 2005, she reiterated that we all acknowledged
that on top of our agenda must be the restoration of the health of our fiscal system.
In order to considerably lower the consolidated public sector deficit and eventually achieve a
balanced budget by the year 2009, we need to seize windows of opportunities which might seem
poignant in the beginning, but in the long run prove effective and beneficial to the overall status
of our economy. One such opportunity is a review of existing tax rates, evaluating the relevance
given our present conditions.34 (Emphasis supplied)
Notably therefore, the main purpose of the bills emanating from the House of Representatives is
to bring in sizeable revenues for the government
to supplement our country’s serious financial problems, and improve tax administration and
control of the leakages in revenues from income taxes and value-added taxes. As these house bills
were transmitted to the Senate, the latter, approaching the measures from the point of national
perspective, can introduce amendments within the purposes of those bills. It can provide for ways
that would soften the impact of the VAT measure on the consumer, i.e., by distributing the
burden across all sectors instead of putting it entirely on the shoulders of the consumers. The
sponsorship speech of Sen. Ralph Recto on why the provisions on income tax on corporation were
included is worth quoting:
All in all, the proposal of the Senate Committee on Ways and Means will raise ₱64.3 billion in
additional revenues annually even while by mitigating prices of power, services and petroleum
products.
However, not all of this will be wrung out of VAT. In fact, only ₱48.7 billion amount is from the
VAT on twelve goods and services. The rest of the tab – ₱10.5 billion- will be picked by
corporations.
What we therefore prescribe is a burden sharing between corporate Philippines and the
consumer. Why should the latter bear all the pain? Why should the fiscal salvation be only on the
burden of the consumer?
The corporate world’s equity is in form of the increase in the corporate income tax from 32 to 35
percent, but up to 2008 only. This will raise ₱10.5 billion a year. After that, the rate will slide back,
not to its old rate of 32 percent, but two notches lower, to 30 percent.
Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency
provision that will be in effect for 1,200 days, while we put our fiscal house in order. This fiscal
medicine will have an expiry date.
For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their
sacrifice brief. We would like to assure them that not because there is a light at the end of the
tunnel, this government will keep on making the tunnel long.
The responsibility will not rest solely on the weary shoulders of the small man. Big business will be
there to share the burden.35
As the Court has said, the Senate can propose amendments and in fact, the amendments made
on provisions in the tax on income of corporations are germane to the purpose of the house bills
which is to raise revenues for the government.
Likewise, the Court finds the sections referring to other percentage and excise taxes germane to
the reforms to the VAT system, as these sections would cushion the effects of VAT on consumers.
Considering that certain goods and services which were subject to percentage tax and excise tax
would no longer be VAT-exempt, the consumer would be burdened more as they would be
paying the VAT in addition to these taxes. Thus, there is a need to amend these sections to soften
the impact of VAT. Again, in his sponsorship speech, Sen. Recto said:
However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker
fuel, to lessen the effect of a VAT on this product.
For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT.
And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the
VAT chain, we will however bring down the excise tax on socially sensitive products such as diesel,
bunker, fuel and kerosene.
...
What do all these exercises point to? These are not contortions of giving to the left hand what
was taken from the right. Rather, these sprang from our concern of softening the impact of VAT,
so that the people can cushion the blow of higher prices they will have to pay as a result of
VAT.36
The other sections amended by the Senate pertained to matters of tax administration which are
necessary for the implementation of the changes in the VAT system.
To reiterate, the sections introduced by the Senate are germane to the subject matter and
purposes of the house bills, which is to supplement our country’s fiscal deficit, among others.
Thus, the Senate acted within its power to propose those amendments.
SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC,
violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power
Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et al. contend in
common that Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the NIRC giving the President the stand-by authority to raise the VAT rate from
10% to 12% when a certain condition is met, constitutes undue delegation of the legislative
power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties. –
(A) Rate and Base of Tax. – There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor: provided, that the President, upon the recommendation
of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to
twelve percent (12%), after any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 ½%).
SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 107. Value-Added Tax on Importation of Goods. –
(A) In General. – There shall be levied, assessed and collected on every importation of goods a
value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of
Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and
other charges, such tax to be paid by the importer prior to the release of such goods from
customs custody: Provided, That where the customs duties are determined on the basis of the
quantity or volume of the goods, the value-added tax shall be based on the landed cost plus
excise taxes, if any: provided, further, that the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve
percent (12%) after any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 ½%).
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties –
(A) Rate and Base of Tax. – There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services:
provided, that the President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of
the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 ½%). (Emphasis supplied)
Petitioners allege that the grant of the stand-by authority to the President to increase the VAT rate
is a virtual abdication by Congress of its exclusive power to tax because such delegation is not
within the purview of Section 28 (2), Article VI of the Constitution, which provides:
The Congress may, by law, authorize the President to fix within specified limits, and may impose,
tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts
within the framework of the national development program of the government.
They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as
well as on the sale or exchange of services, which cannot be included within the purview of tariffs
under the exempted delegation as the latter refers to customs duties, tolls or tribute payable upon
merchandise to the government and usually imposed on goods or merchandise imported or
exported.
Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President the
legislative power to tax is contrary to republicanism. They insist that accountability, responsibility
and transparency should dictate the actions of Congress and they should not pass to the President
the decision to impose taxes. They also argue that the law also effectively nullified the President’s
power of control, which includes the authority to set aside and nullify the acts of her subordinates
like the Secretary of Finance, by mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or create
the conditions provided by the law to bring about either or both the conditions precedent.
On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the
imposition of the 12% rate would be subject to the whim of the Secretary of Finance, an
unelected bureaucrat, contrary to the principle of no taxation without representation. They
submit that the Secretary of Finance is not mandated to give a favorable recommendation and he
may not even give his recommendation. Moreover, they allege that no guiding standards are
provided in the law on what basis and as to how he will make his recommendation. They claim,
nonetheless, that any recommendation of the Secretary of Finance can easily be brushed aside by
the President since the former is a mere alter ego of the latter, such that, ultimately, it is the
President who decides whether to impose the increased tax rate or not.
A brief discourse on the principle of non-delegation of powers is instructive.
The principle of separation of powers ordains that each of the three great branches of
government has exclusive cognizance of and is supreme in matters falling within its own
constitutionally allocated sphere.37 A logical
corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as
expressed in the Latin maxim: potestas delegata non delegari potest which means "what has been
delegated, cannot be delegated."38 This doctrine is based on the ethical principle that such as
delegated power constitutes not only a right but a duty to be performed by the delegate through
the instrumentality of his own judgment and not through the intervening mind of another.39
With respect to the Legislature, Section 1 of Article VI of the Constitution provides that "the
Legislative power shall be vested in the Congress of the Philippines which shall consist of a Senate
and a House of Representatives." The powers which Congress is prohibited from delegating are
those which are strictly, or inherently and exclusively, legislative. Purely legislative power, which
can never be delegated, has been described as the authority to make a complete law – complete
as to the time when it shall take effect and as to whom it shall be applicable – and to determine
the expediency of its enactment.40 Thus, the rule is that in order that a court may be justified in
holding a statute unconstitutional as a delegation of legislative power, it must appear that the
power involved is purely legislative in nature – that is, one appertaining exclusively to the
legislative department. It is the nature of the power, and not the liability of its use or the manner
of its exercise, which determines the validity of its delegation.
Nonetheless, the general rule barring delegation of legislative powers is subject to the following
recognized limitations or exceptions:
(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the
Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the
Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a showing that the delegation itself is valid.
It is valid only if the law (a) is complete in itself, setting forth therein the policy to be executed,
carried out, or implemented by the delegate;41 and (b) fixes a standard — the limits of which are
sufficiently determinate and determinable — to which the delegate must conform in the
performance of his functions.42 A sufficient standard is one which defines legislative policy,
marks its limits, maps out its boundaries and specifies the public agency to apply it. It indicates the
circumstances under which the legislative command is to be effected.43 Both tests are intended
to prevent a total transference of legislative authority to the delegate, who is not allowed to step
into the shoes of the legislature and exercise a power essentially legislative.44
In People vs. Vera,45 the Court, through eminent Justice Jose P. Laurel, expounded on the
concept and extent of delegation of power in this wise:
In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual
to inquire whether the statute was complete in all its terms and provisions when it left the hands
of the legislature so that nothing was left to the judgment of any other appointee or delegate of
the legislature.
...
‘The true distinction’, says Judge Ranney, ‘is between the delegation of power to make the law,
which necessarily involves a discretion as to what it shall be, and conferring an authority or
discretion as to its execution, to be exercised under and in pursuance of the law. The first cannot
be done; to the latter no valid objection can be made.’
...
It is contended, however, that a legislative act may be made to the effect as law after it leaves the
hands of the legislature. It is true that laws may be made effective on certain contingencies, as by
proclamation of the executive or the adoption by the people of a particular community. In
Wayman vs. Southard, the Supreme Court of the United States ruled that the legislature may
delegate a power not legislative which it may itself rightfully exercise. The power to ascertain facts
is such a power which may be delegated. There is nothing essentially legislative in ascertaining the
existence of facts or conditions as the basis of the taking into effect of a law. That is a mental
process common to all branches of the government. Notwithstanding the apparent tendency,
however, to relax the rule prohibiting delegation of legislative authority on account of the
complexity arising from social and economic forces at work in this modern industrial age, the
orthodox pronouncement of Judge Cooley in his work on Constitutional Limitations finds
restatement in Prof. Willoughby's treatise on the Constitution of the United States in the
following language — speaking of declaration of legislative power to administrative agencies: The
principle which permits the legislature to provide that the administrative agent may determine
when the circumstances are such as require the application of a law is defended upon the ground
that at the time this authority is granted, the rule of public policy, which is the essence of the
legislative act, is determined by the legislature. In other words, the legislature, as it is its duty to
do, determines that, under given circumstances, certain executive or administrative action is to be
taken, and that, under other circumstances, different or no action at all is to be taken. What is
thus left to the administrative official is not the legislative determination of what public policy
demands, but simply the ascertainment of what the facts of the case require to be done
according to the terms of the law by which he is governed. The efficiency of an Act as a
declaration of legislative will must, of course, come from Congress, but the ascertainment of the
contingency upon which the Act shall take effect may be left to such agencies as it may designate.
The legislature, then, may provide that a law shall take effect upon the happening of future
specified contingencies leaving to some other person or body the power to determine when the
specified contingency has arisen. (Emphasis supplied).46
In Edu vs. Ericta,47 the Court reiterated:
What cannot be delegated is the authority under the Constitution to make laws and to alter and
repeal them; the test is the completeness of the statute in all its terms and provisions when it
leaves the hands of the legislature. To determine whether or not there is an undue delegation of
legislative power, the inquiry must be directed to the scope and definiteness of the measure
enacted. The legislative does not abdicate its functions when it describes what job must be done,
who is to do it, and what is the scope of his authority. For a complex economy, that may be the
only way in which the legislative process can go forward. A distinction has rightfully been made
between delegation of power to make the laws which necessarily involves a discretion as to what
it shall be, which constitutionally may not be done, and delegation of authority or discretion as to
its execution to be exercised under and in pursuance of the law, to which no valid objection can
be made. The Constitution is thus not to be regarded as denying the legislature the necessary
resources of flexibility and practicability. (Emphasis supplied).48
Clearly, the legislature may delegate to executive officers or bodies the power to determine
certain facts or conditions, or the happening of contingencies, on which the operation of a
statute is, by its terms, made to depend, but the legislature must prescribe sufficient standards,
policies or limitations on their authority.49 While the power to tax cannot be delegated to
executive agencies, details as to the enforcement and administration of an exercise of such power
may be left to them, including the power to determine the existence of facts on which its
operation depends.50
The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of
legislation is not of itself a legislative function, but is simply ancillary to legislation. Thus, the duty
of correlating information and making recommendations is the kind of subsidiary activity which
the legislature may perform through its members, or which it may delegate to others to perform.
Intelligent legislation on the complicated problems of modern society is impossible in the absence
of accurate information on the part of the legislators, and any reasonable method of securing
such information is proper.51 The Constitution as a continuously operative charter of government
does not require that Congress find for itself
every fact upon which it desires to base legislative action or that it make for itself detailed
determinations which it has declared to be prerequisite to application of legislative policy to
particular facts and circumstances impossible for Congress itself properly to investigate.52
In the present case, the challenged section of R.A. No. 9337 is the common proviso in Sections 4,
5 and 6 which reads as follows:
That the President, upon the recommendation of the Secretary of Finance, shall, effective January
1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following
conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 ½%).
The case before the Court is not a delegation of legislative power. It is simply a delegation of
ascertainment of facts upon which enforcement and administration of the increase rate under the
law is contingent. The legislature has made the operation of the 12% rate effective January 1,
2006, contingent upon a specified fact or condition. It leaves the entire operation or non-
operation of the 12% rate upon factual matters outside of the control of the executive.
No discretion would be exercised by the President. Highlighting the absence of discretion is the
fact that the word shall is used in the common proviso. The use of the word shall connotes a
mandatory order. Its use in a statute denotes an imperative obligation and is inconsistent with the
idea of discretion.53 Where the law is clear and unambiguous, it must be taken to mean exactly
what it says, and courts have no choice but to see to it that the mandate is obeyed.54
Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the
existence of any of the conditions specified by Congress. This is a duty which cannot be evaded by
the President. Inasmuch as the law specifically uses the word shall, the exercise of discretion by
the President does not come into play. It is a clear directive to impose the 12% VAT rate when the
specified conditions are present. The time of taking into effect of the 12% VAT rate is based on
the happening of a certain specified contingency, or upon the ascertainment of certain facts or
conditions by a person or body other than the legislature itself.
The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that
the law effectively nullified the President’s power of control over the Secretary of Finance by
mandating the fixing of the tax rate by the President upon the recommendation of the Secretary
of Finance. The Court cannot also subscribe to the position of petitioners
Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase
"upon the recommendation of the Secretary of Finance." Neither does the Court find persuasive
the submission of petitioners Escudero, et al. that any recommendation by the Secretary of
Finance can easily be brushed aside by the President since the former is a mere alter ego of the
latter.
When one speaks of the Secretary of Finance as the alter ego of the President, it simply means
that as head of the Department of Finance he is the assistant and agent of the Chief Executive.
The multifarious executive and administrative functions of the Chief Executive are performed by
and through the executive departments, and the acts of the secretaries of such departments, such
as the Department of Finance, performed and promulgated in the regular course of business, are,
unless disapproved or reprobated by the Chief Executive, presumptively the acts of the Chief
Executive. The Secretary of Finance, as such, occupies a political position and holds office in an
advisory capacity, and, in the language of Thomas Jefferson, "should be of the President's bosom
confidence" and, in the language of Attorney-General Cushing, is "subject to the direction of the
President."55
In the present case, in making his recommendation to the President on the existence of either of
the two conditions, the Secretary of Finance is not acting as the alter ego of the President or even
her subordinate. In such instance, he is not subject to the power of control and direction of the
President. He is acting as the agent of the legislative department, to determine and declare the
event upon which its expressed will is to take effect.56 The Secretary of Finance becomes the
means or tool by which legislative policy is determined and implemented, considering that he
possesses all the facilities to gather data and information and has a much broader perspective to
properly evaluate them. His function is to gather and collate statistical data and other pertinent
information and verify if any of the two conditions laid out by Congress is present. His personality
in such instance is in reality but a projection of that of Congress. Thus, being the agent of
Congress and not of the President, the President cannot alter or modify or nullify, or set aside the
findings of the Secretary of Finance and to substitute the judgment of the former for that of the
latter.
Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact,
namely, whether by December 31, 2005, the value-added tax collection as a percentage of Gross
Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (24/5%) or the
national government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1½%). If either of these two instances has occurred, the Secretary of Finance, by
legislative mandate, must submit such information to the President. Then the 12% VAT rate must
be imposed by the President effective January 1, 2006. There is no undue delegation of legislative
power but only of the discretion as to the execution of a law. This is constitutionally
permissible.57 Congress does not abdicate its functions or unduly delegate power when it
describes what job must be done, who must do it, and what is the scope of his authority; in our
complex economy that is frequently the only way in which the legislative process can go
forward.58
As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the
President the legislative power to tax is contrary to the principle of republicanism, the same
deserves scant consideration. Congress did not delegate the power to tax but the mere
implementation of the law. The intent and will to increase the VAT rate to 12% came from
Congress and the task of the President is to simply execute the legislative policy. That Congress
chose to do so in such a manner is not within the province of the Court to inquire into, its task
being to interpret the law.59
The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause,
influence or create the conditions to bring about either or both the conditions precedent does not
deserve any merit as this argument is highly speculative. The Court does not rule on allegations
which are manifestly conjectural, as these may not exist at all. The Court deals with facts, not
fancies; on realities, not appearances. When the Court acts on appearances instead of realities,
justice and law will be short-lived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax
Burden
Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and
additional tax burden on the people. Petitioners also argue that the 12% increase, dependent on
any of the 2 conditions set forth in the contested provisions, is ambiguous because it does not
state if the VAT rate would be returned to the original 10% if the rates are no longer satisfied.
Petitioners also argue that such rate is unfair and unreasonable, as the people are unsure of the
applicable VAT rate from year to year.
Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions
set forth therein are satisfied, the President shall increase the VAT rate to 12%. The provisions of
the law are clear. It does not provide for a return to the 10% rate nor does it empower the
President to so revert if, after the rate is increased to 12%, the VAT collection goes below the
24/5 of the GDP of the previous year or that the national government deficit as a percentage of
GDP of the previous year does not exceed 1½%.
Therefore, no statutory construction or interpretation is needed. Neither can conditions or
limitations be introduced where none is provided for. Rewriting the law is a forbidden ground
that only Congress may tread upon.60
Thus, in the absence of any provision providing for a return to the 10% rate, which in this case
the Court finds none, petitioners’ argument is, at best, purely speculative. There is no basis for
petitioners’ fear of a fluctuating VAT rate because the law itself does not provide that the rate
should go back to 10% if the conditions provided in Sections 4, 5 and 6 are no longer present.
The rule is that where the provision of the law is clear and unambiguous, so that there is no
occasion for the court's seeking the legislative intent, the law must be taken as it is, devoid of
judicial addition or subtraction.61
Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the
President to raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should be
based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is
another condition, i.e., the national government deficit as a percentage of GDP of the previous
year exceeds one and one-half percent (1 ½%).
Respondents explained the philosophy behind these alternative conditions:
1. VAT/GDP Ratio > 2.8%
The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is
less than 2.8%, it means that government has weak or no capability of implementing the VAT or
that VAT is not effective in the function of the tax collection. Therefore, there is no value to
increase it to 12% because such action will also be ineffectual.
2. Nat’l Gov’t Deficit/GDP >1.5%
The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition
of government has reached a relatively sound position or is towards the direction of a balanced
budget position. Therefore, there is no need to increase the VAT rate since the fiscal house is in a
relatively healthy position. Otherwise stated, if the ratio is more than 1.5%, there is indeed a need
to increase the VAT rate.62
That the first condition amounts to an incentive to the President to increase the VAT collection
does not render it unconstitutional so long as there is a public purpose for which the law was
passed, which in this case, is mainly to raise revenue. In fact, fiscal adequacy dictated the need for
a raise in revenue.
The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by
Adam Smith in his Canons of Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the
people as little as possible over and above what it brings into the public treasury of the state.63
It simply means that sources of revenues must be adequate to meet government expenditures
and their variations.64
The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe.
During the Bicameral Conference Committee hearing, then Finance Secretary Purisima bluntly
depicted the country’s gloomy state of economic affairs, thus:
First, let me explain the position that the Philippines finds itself in right now. We are in a position
where 90 percent of our revenue is used for debt service. So, for every peso of revenue that we
currently raise, 90 goes to debt service. That’s interest plus amortization of our debt. So clearly,
this is not a sustainable situation. That’s the first fact.
The second fact is that our debt to GDP level is way out of line compared to other peer countries
that borrow money from that international financial markets. Our debt to GDP is approximately
equal to our GDP. Again, that shows you that this is not a sustainable situation.
The third thing that I’d like to point out is the environment that we are presently operating in is
not as benign as what it used to be the past five years.
What do I mean by that?
In the past five years, we’ve been lucky because we were operating in a period of basically global
growth and low interest rates. The past few months, we have seen an inching up, in fact, a rapid
increase in the interest rates in the leading economies of the world. And, therefore, our ability to
borrow at reasonable prices is going to be challenged. In fact, ultimately, the question is our
ability to access the financial markets.
When the President made her speech in July last year, the environment was not as bad as it is
now, at least based on the forecast of most financial institutions. So, we were assuming that
raising 80 billion would put us in a position where we can then convince them to improve our
ability to borrow at lower rates. But conditions have changed on us because the interest rates
have gone up. In fact, just within this room, we tried to access the market for a billion dollars
because for this year alone, the Philippines will have to borrow 4 billion dollars. Of that amount,
we have borrowed 1.5 billion. We issued last January a 25-year bond at 9.7 percent cost. We
were trying to access last week and the market was not as favorable and up to now we have not
accessed and we might pull back because the conditions are not very good.
So given this situation, we at the Department of Finance believe that we really need to front-end
our deficit reduction. Because it is deficit that is causing the increase of the debt and we are in
what we call a debt spiral. The more debt you have, the more deficit you have because interest
and debt service eats and eats more of your revenue. We need to get out of this debt spiral. And
the only way, I think, we can get out of this debt spiral is really have a front-end adjustment in our
revenue base.65
The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable
catastrophe. Whether the law is indeed sufficient to answer the state’s economic dilemma is not
for the Court to judge. In the Fariñas case, the Court refused to consider the various arguments
raised therein that dwelt on the wisdom of Section 14 of R.A. No. 9006 (The Fair Election Act),
pronouncing that:
. . . policy matters are not the concern of the Court. Government policy is within the exclusive
dominion of the political branches of the government. It is not for this Court to look into the
wisdom or propriety of legislative determination. Indeed, whether an enactment is wise or
unwise, whether it is based on sound economic theory, whether it is the best means to achieve
the desired results, whether, in short, the legislative discretion within its prescribed limits should
be exercised in a particular manner are matters for the judgment of the legislature, and the
serious conflict of opinions does not suffice to bring them within the range of judicial
cognizance.66
In the same vein, the Court in this case will not dawdle on the purpose of Congress or the
executive policy, given that it is not for the judiciary to "pass upon questions of wisdom, justice or
expediency of legislation."67
II.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and
Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following
provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No. 9337,
amending Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337, amending Section 114
(C) of the NIRC are arbitrary, oppressive, excessive and confiscatory. Their argument is premised
on the constitutional right against deprivation of life, liberty of property without due process of
law, as embodied in Article III, Section 1 of the Constitution.
Petitioners also contend that these provisions violate the constitutional guarantee of equal
protection of the law.
The doctrine is that where the due process and equal protection clauses are invoked, considering
that they are not fixed rules but rather broad standards, there is a need for proof of such
persuasive character as would lead to such a conclusion. Absent such a showing, the presumption
of validity must prevail.68
Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the
amount of input tax that may be credited against the output tax. It states, in part: "[P]rovided,
that the input tax inclusive of the input VAT carried over from the previous quarter that may be
credited in every quarter shall not exceed seventy percent (70%) of the output VAT: …"
Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due
from or paid by a VAT-registered person on the importation of goods or local purchase of good
and services, including lease or use of property, in the course of trade or business, from a VAT-
registered person, and Output Tax is the value-added tax due on the sale or lease of taxable
goods or properties or services by any person registered or required to register under the law.
Petitioners claim that the contested sections impose limitations on the amount of input tax that
may be claimed. In effect, a portion of the input tax that has already been paid cannot now be
credited against the output tax.
Petitioners’ argument is not absolute. It assumes that the input tax exceeds 70% of the output
tax, and therefore, the input tax in excess of 70% remains uncredited. However, to the extent
that the input tax is less than 70% of the output tax, then 100% of such input tax is still
creditable.
More importantly, the excess input tax, if any, is retained in a business’s books of accounts and
remains creditable in the succeeding quarter/s. This is explicitly allowed by Section 110(B), which
provides that "if the input tax exceeds the output tax, the excess shall be carried over to the
succeeding quarter or quarters." In addition, Section 112(B) allows a VAT-registered person to
apply for the issuance of a tax credit certificate or refund for any unused input taxes, to the extent
that such input taxes have not been applied against the output taxes. Such unused input tax may
be used in payment of his other internal revenue taxes.
The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners
exaggeratedly contend. Their analysis of the effect of the 70% limitation is incomplete and one-
sided. It ends at the net effect that there will be unapplied/unutilized inputs VAT for a given
quarter. It does not proceed further to the fact that such unapplied/unutilized input tax may be
credited in the subsequent periods as allowed by the carry-over provision of Section 110(B) or
that it may later on be refunded through a tax credit certificate under Section 112(B).
Therefore, petitioners’ argument must be rejected.
On the other hand, it appears that petitioner Garcia failed to comprehend the operation of the
70% limitation on the input tax. According to petitioner, the limitation on the creditable input tax
in effect allows VAT-registered establishments to retain a portion of the taxes they collect, which
violates the principle that tax collection and revenue should be for public purposes and
expenditures
As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller, when he
buys goods. Output tax meanwhile is the tax due to the person when he sells goods. In
computing the VAT payable, three possible scenarios may arise:
First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the
input taxes that he paid and passed on by the suppliers, then no payment is required;
Second, when the output taxes exceed the input taxes, the person shall be liable for the excess,
which has to be paid to the Bureau of Internal Revenue (BIR);69 and
Third, if the input taxes exceed the output taxes, the excess shall be carried over to the
succeeding quarter or quarters. Should the input taxes result from zero-rated or effectively zero-
rated transactions, any excess over the output taxes shall instead be refunded to the taxpayer or
credited against other internal revenue taxes, at the taxpayer’s option.70
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person
can credit his input tax only up to the extent of 70% of the output tax. In layman’s term, the
value-added taxes that a person/taxpayer paid and passed on to him by a seller can only be
credited up to 70% of the value-added taxes that is due to him on a taxable transaction. There is
no retention of any tax collection because the person/taxpayer has already previously paid the
input tax to a seller, and the seller will subsequently remit such input tax to the BIR. The party
directly liable for the payment of the tax is the seller.71 What only needs to be done is for the
person/taxpayer to apply or credit these input taxes, as evidenced by receipts, against his output
taxes.
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes
the nature of a property that may not be confiscated, appropriated, or limited without due
process of law.
The input tax is not a property or a property right within the constitutional purview of the due
process clause. A VAT-registered person’s entitlement to the creditable input tax is a mere
statutory privilege.
The distinction between statutory privileges and vested rights must be borne in mind for persons
have no vested rights in statutory privileges. The state may change or take away rights, which
were created by the law of the state, although it may not take away property, which was vested
by virtue of such rights.72
Under the previous system of single-stage taxation, taxes paid at every level of distribution are not
recoverable from the taxes payable, although it becomes part of the cost, which is deductible
from the gross revenue. When Pres. Aquino issued E.O. No. 273 imposing a 10% multi-stage tax
on all sales, it was then that the crediting of the input tax paid on purchase or importation of
goods and services by VAT-registered persons against the output tax was introduced.73 This was
adopted by the Expanded VAT Law (R.A. No. 7716),74 and The Tax Reform Act of 1997 (R.A. No.
8424).75 The right to credit input tax as against the output tax is clearly a privilege created by
law, a privilege that also the law can remove, or in this case, limit.
Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No.
9337, amending Section 110(A) of the NIRC, which provides:
SEC. 110. Tax Credits. –
(A) Creditable Input Tax. – …
Provided, That the input tax on goods purchased or imported in a calendar month for use in trade
or business for which deduction for depreciation is allowed under this Code, shall be spread
evenly over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate
acquisition cost for such goods, excluding the VAT component thereof, exceeds One million pesos
(₱1,000,000.00): Provided, however, That if the estimated useful life of the capital goods is less
than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over
such a shorter period: Provided, finally, That in the case of purchase of services, lease or use of
properties, the input tax shall be creditable to the purchaser, lessee or license upon payment of
the compensation, rental, royalty or fee.
The foregoing section imposes a 60-month period within which to amortize the creditable input
tax on purchase or importation of capital goods with acquisition cost of ₱1 Million pesos,
exclusive of the VAT component. Such spread out only poses a delay in the crediting of the input
tax. Petitioners’ argument is without basis because the taxpayer is not permanently deprived of his
privilege to credit the input tax.
It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in
this case amounts to a 4-year interest-free loan to the government.76 In the same breath,
Congress also justified its move by saying that the provision was designed to raise an annual
revenue of 22.6 billion.77 The legislature also dispelled the fear that the provision will fend off
foreign investments, saying that foreign investors have other tax incentives provided by law, and
citing the case of China, where despite a 17.5% non-creditable VAT, foreign investments were
not deterred.78 Again, for whatever is the purpose of the 60-month amortization, this involves
executive economic policy and legislative wisdom in which the Court cannot intervene.
With regard to the 5% creditable withholding tax imposed on payments made by the government
for taxable transactions, Section 12 of R.A. No. 9337, which amended Section 114 of the NIRC,
reads:
SEC. 114. Return and Payment of Value-added Tax. –
(C) Withholding of Value-added Tax. – The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or controlled corporations (GOCCs)
shall, before making payment on account of each purchase of goods and services which are
subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and
withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof:
Provided, That the payment for lease or use of properties or property rights to nonresident owners
shall be subject to ten percent (10%) withholding tax at the time of payment. For purposes of this
Section, the payor or person in control of the payment shall be considered as the withholding
agent.
The value-added tax withheld under this Section shall be remitted within ten (10) days following
the end of the month the withholding was made.
Section 114(C) merely provides a method of collection, or as stated by respondents, a more
simplified VAT withholding system. The government in this case is constituted as a withholding
agent with respect to their payments for goods and services.
Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to be
withheld -- 3% on gross payments for purchases of goods; 6% on gross payments for services
supplied by contractors other than by public works contractors; 8.5% on gross payments for
services supplied by public work contractors; or 10% on payment for the lease or use of
properties or property rights to nonresident owners. Under the present Section 114(C), these
different rates, except for the 10% on lease or property rights payment to nonresidents, were
deleted, and a uniform rate of 5% is applied.
The Court observes, however, that the law the used the word final. In tax usage, final, as opposed
to creditable, means full. Thus, it is provided in Section 114(C): "final value-added tax at the rate
of five percent (5%)."
In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of 1997),
the concept of final withholding tax on income was explained, to wit:
SECTION 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. – Under the final withholding tax system the amount of income tax
withheld by the withholding agent is constituted as full and final payment of the income tax due
from the payee on the said income. The liability for payment of the tax rests primarily on the payor
as a withholding agent. Thus, in case of his failure to withhold the tax or in case of
underwithholding, the deficiency tax shall be collected from the payor/withholding agent. …
(B) Creditable Withholding Tax. – Under the creditable withholding tax system, taxes withheld on
certain income payments are intended to equal or at least approximate the tax due of the payee
on said income. … Taxes withheld on income payments covered by the expanded withholding tax
(referred to in Sec. 2.57.2 of these regulations) and compensation income (referred to in Sec.
2.78 also of these regulations) are creditable in nature.
As applied to value-added tax, this means that taxable transactions with the government are
subject to a 5% rate, which constitutes as full payment of the tax payable on the transaction. This
represents the net VAT payable of the seller. The other 5% effectively accounts for the standard
input VAT (deemed input VAT), in lieu of the actual input VAT directly or attributable to the
taxable transaction.79
The Court need not explore the rationale behind the provision. It is clear that Congress intended
to treat differently taxable transactions with the government.80 This is supported by the fact that
under the old provision, the 5% tax withheld by the government remains creditable against the
tax liability of the seller or contractor, to wit:
SEC. 114. Return and Payment of Value-added Tax. –
(C) Withholding of Creditable Value-added Tax. – The Government or any of its political
subdivisions, instrumentalities or agencies, including government-owned or controlled
corporations (GOCCs) shall, before making payment on account of each purchase of goods from
sellers and services rendered by contractors which are subject to the value-added tax imposed in
Sections 106 and 108 of this Code, deduct and withhold the value-added tax due at the rate of
three percent (3%) of the gross payment for the purchase of goods and six percent (6%) on
gross receipts for services rendered by contractors on every sale or installment payment which
shall be creditable against the value-added tax liability of the seller or contractor: Provided,
however, That in the case of government public works contractors, the withholding rate shall be
eight and one-half percent (8.5%): Provided, further, That the payment for lease or use of
properties or property rights to nonresident owners shall be subject to ten percent (10%)
withholding tax at the time of payment. For this purpose, the payor or person in control of the
payment shall be considered as the withholding agent.
The valued-added tax withheld under this Section shall be remitted within ten (10) days following
the end of the month the withholding was made. (Emphasis supplied)
As amended, the use of the word final and the deletion of the word creditable exhibits Congress’s
intention to treat transactions with the government differently. Since it has not been shown that
the class subject to the 5% final withholding tax has been unreasonably narrowed, there is no
reason to invalidate the provision. Petitioners, as petroleum dealers, are not the only ones
subjected to the 5% final withholding tax. It applies to all those who deal with the government.
Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue
Regulations No. 14-2005 or the Consolidated Value-Added Tax Regulations 2005 issued by the
BIR, provides that should the actual input tax exceed 5% of gross payments, the excess may form
part of the cost. Equally, should the actual input tax be less than 5%, the difference is treated as
income.81
Petitioners also argue that by imposing a limitation on the creditable input tax, the government
gets to tax a profit or value-added even if there is no profit or value-added.
Petitioners’ stance is purely hypothetical, argumentative, and again, one-sided. The Court will not
engage in a legal joust where premises are what ifs, arguments, theoretical and facts, uncertain.
Any disquisition by the Court on this point will only be, as Shakespeare describes life in
Macbeth,82 "full of sound and fury, signifying nothing."
What’s more, petitioners’ contention assumes the proposition that there is no profit or value-
added. It need not take an astute businessman to know that it is a matter of exception that a
business will sell goods or services without profit or value-added. It cannot be overstressed that a
business is created precisely for profit.
The equal protection clause under the Constitution means that "no person or class of persons
shall be deprived of the same protection of laws which is enjoyed by other persons or other
classes in the same place and in like circumstances."83
The power of the State to make reasonable and natural classifications for the purposes of taxation
has long been established. Whether it relates to the subject of taxation, the kind of property, the
rates to be levied, or the amounts to be raised, the methods of assessment, valuation and
collection, the State’s power is entitled to presumption of validity. As a rule, the judiciary will not
interfere with such power absent a clear showing of unreasonableness, discrimination, or
arbitrariness.84
Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of
input tax, or invests in capital equipment, or has several transactions with the government, is not
based on real and substantial differences to meet a valid classification.
The argument is pedantic, if not outright baseless. The law does not make any classification in the
subject of taxation, the kind of property, the rates to be levied or the amounts to be raised, the
methods of assessment, valuation and collection. Petitioners’ alleged distinctions are based on
variables that bear different consequences. While the implementation of the law may yield varying
end results depending on one’s profit margin and value-added, the Court cannot go beyond what
the legislature has laid down and interfere with the affairs of business.
The equal protection clause does not require the universal application of the laws on all persons
or things without distinction. This might in fact sometimes result in unequal protection. What the
clause requires is equality among equals as determined according to a valid classification. By
classification is meant the grouping of persons or things similar to each other in certain particulars
and different from all others in these same particulars.85
Petitioners brought to the Court’s attention the introduction of Senate Bill No. 2038 by Sens. S.R.
Osmeña III and Ma. Ana Consuelo A.S. – Madrigal on June 6, 2005, and House Bill No. 4493 by
Rep. Eric D. Singson. The proposed legislation seeks to amend the 70% limitation by increasing
the same to 90%. This, according to petitioners, supports their stance that the 70% limitation is
arbitrary and confiscatory. On this score, suffice it to say that these are still proposed legislations.
Until Congress amends the law, and absent any unequivocal basis for its unconstitutionality, the
70% limitation stays.
B. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
system of taxation.
Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be
taxed at the same rate. Different articles may be taxed at different amounts provided that the rate
is uniform on the same class everywhere with all people at all times.86
In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all
goods and services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the NIRC, provide for a rate of 10% (or 12%) on sale of goods and properties,
importation of goods, and sale of services and use or lease of properties. These same sections also
provide for a 0% rate on certain sales and transaction.
Neither does the law make any distinction as to the type of industry or trade that will bear the
70% limitation on the creditable input tax, 5-year amortization of input tax paid on purchase of
capital goods or the 5% final withholding tax by the government. It must be stressed that the rule
of uniform taxation does not deprive Congress of the power to classify subjects of taxation, and
only demands uniformity within the particular class.87
R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0%
or 10% (or 12%) does not apply to sales of goods or services with gross annual sales or receipts
not exceeding ₱1,500,000.00.88 Also, basic marine and agricultural food products in their
original state are still not subject to the tax,89 thus ensuring that prices at the grassroots level will
remain accessible. As was stated in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas,
Inc. vs. Tan:90
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons
engaged in business with an aggregate gross annual sales exceeding ₱200,000.00. Small corner
sari-sari stores are consequently exempt from its application. Likewise exempt from the tax are
sales of farm and marine products, so that the costs of basic food and other necessities, spared as
they are from the incidence of the VAT, are expected to be relatively lower and within the reach
of the general public.
It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and
unduly favors those with high profit margins. Congress was not oblivious to this. Thus, to equalize
the weighty burden the law entails, the law, under Section 116, imposed a 3% percentage tax on
VAT-exempt persons under Section 109(v), i.e., transactions with gross annual sales and/or
receipts not exceeding ₱1.5 Million. This acts as a equalizer because in effect, bigger businesses
that qualify for VAT coverage and VAT-exempt taxpayers stand on equal-footing.
Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the
tax on those previously exempt. Excise taxes on petroleum products91 and natural gas92were
reduced. Percentage tax on domestic carriers was removed.93 Power producers are now exempt
from paying franchise tax.94
Aside from these, Congress also increased the income tax rates of corporations, in order to
distribute the burden of taxation. Domestic, foreign, and non-resident corporations are now
subject to a 35% income tax rate, from a previous 32%.95 Intercorporate dividends of non-
resident foreign corporations are still subject to 15% final withholding tax but the tax credit
allowed on the corporation’s domicile was increased to 20%.96 The Philippine Amusement and
Gaming Corporation (PAGCOR) is not exempt from income taxes anymore.97 Even the sale by an
artist of his works or services performed for the production of such works was not spared.
All these were designed to ease, as well as spread out, the burden of taxation, which would
otherwise rest largely on the consumers. It cannot therefore be gainsaid that R.A. No. 9337 is
equitable.
C. Progressivity of Taxation
Lastly, petitioners contend that the limitation on the creditable input tax is anything but
regressive. It is the smaller business with higher input tax-output tax ratio that will suffer the
consequences.
Progressive taxation is built on the principle of the taxpayer’s ability to pay. This principle was also
lifted from Adam Smith’s Canons of Taxation, and it states:
I. The subjects of every state ought to contribute towards the support of the government, as
nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue
which they respectively enjoy under the protection of the state.
Taxation is progressive when its rate goes up depending on the resources of the person
affected.98
The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of
progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the
consumer or business for every goods bought or services enjoyed is the same regardless of
income. In
other words, the VAT paid eats the same portion of an income, whether big or small. The
disparity lies in the income earned by a person or profit margin marked by a business, such that
the higher the income or profit margin, the smaller the portion of the income or profit that is
eaten by VAT. A converso, the lower the income or profit margin, the bigger the part that the
VAT eats away. At the end of the day, it is really the lower income group or businesses with low-
profit margins that is always hardest hit.
Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the
VAT. What it simply provides is that Congress shall "evolve a progressive system of taxation." The
Court stated in the Tolentino case, thus:
The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are
regressive. What it simply provides is that Congress shall ‘evolve a progressive system of taxation.’
The constitutional provision has been interpreted to mean simply that ‘direct taxes are . . . to be
preferred [and] as much as possible, indirect taxes should be minimized.’ (E. FERNANDO, THE
CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977)) Indeed, the mandate to Congress is
not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which perhaps
are the oldest form of indirect taxes, would have been prohibited with the proclamation of Art.
VIII, §17 (1) of the 1973 Constitution from which the present Art. VI, §28 (1) was taken. Sales
taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not
impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the
case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero
rating of certain transactions (R.A. No. 7716, §3, amending §102 (b) of the NIRC), while granting
exemptions to other transactions. (R.A. No. 7716, §4 amending §103 of the NIRC)99
CONCLUSION
It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a
first-aid measure to resuscitate an economy in distress. The Court is neither blind nor is it turning a
deaf ear on the plight of the masses. But it does not have the panacea for the malady that the law
seeks to remedy. As in other cases, the Court cannot strike down a law as unconstitutional simply
because of its yokes.
Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the
judiciary should stand ready to afford relief. There are undoubtedly many wrongs the judicature
may not correct, for instance, those involving political questions. . . .
Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies
for all political or social ills; We should not forget that the Constitution has judiciously allocated
the powers of government to three distinct and separate compartments; and that judicial
interpretation has tended to the preservation of the independence of the three, and a zealous
regard of the prerogatives of each, knowing full well that one is not the guardian of the others
and that, for official wrong-doing, each may be brought to account, either by impeachment, trial
or by the ballot box.100
The words of the Court in Vera vs. Avelino101 holds true then, as it still holds true now. All things
considered, there is no raison d'être for the unconstitutionality of R.A. No. 9337.
WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos.
168056, 168207, 168461, 168463, and 168730, are hereby DISMISSED.
There being no constitutional impediment to the full enforcement and implementation of R.A.
No. 9337, the temporary restraining order issued by the Court on July 1, 2005 is LIFTED upon
finality of herein decision.
SO ORDERED.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
CONCURRING AND
DISSENTING OPINION
PUNO, J.:
The main opinion of Madam Justice Martinez exhaustively discusses the numerous constitutional
and legal issues raised by the petitioners. Be that as it may, I wish to raise the following points, viz:
First. Petitioners assail sections 4 to 6 of Republic Act No. 9337 as violative of the principle of non-
delegation of legislative power. These sections authorize the President, upon recommendation of
the Secretary of Finance, to raise the value-added tax (VAT) rate to 12% effective January 1,
2006, upon satisfaction of the following conditions: viz:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 ½%).
The power of judicial review under Article VIII, section 5(2) of the 1987 Constitution is limited to
the review of "actual cases and controversies."1 As rightly stressed by retired Justice Vicente V.
Mendoza, this requirement gives the judiciary "the opportunity, denied to the legislature, of
seeing the actual operation of the statute as it is applied to actual facts and thus enables it to
reach sounder judgment" and "enhances public acceptance of its role in our system of
government."2 It also assures that the judiciary does not intrude on areas committed to the other
branches of government and is confined to its role as defined by the Constitution.3Apposite
thereto is the doctrine of ripeness whose basic rationale is "to prevent the courts, through
premature adjudication, from entangling themselves in abstract disagreements."4Central to the
doctrine is the determination of "whether the case involves uncertain or contingent future events
that may not occur as anticipated, or indeed may not occur at all."5The ripeness requirement
must be satisfied for each challenged legal provision and parts of a statute so that those which
are "not immediately involved are not thereby thrown open for a judicial determination of
constitutionality."6
It is manifest that the constitutional challenge to sections 4 to 6 of R.A. No. 9337 cannot hurdle
the requirement of ripeness. These sections give the President the power to raise the VAT rate to
12% on January 1, 2006 upon satisfaction of certain fact-based conditions. We are not endowed
with the infallible gift of prophesy to know whether these conditions are certain to happen. The
power to adjust the tax rate given to the President is futuristic and may or may not be exercised.
The Court is therefore beseeched to render a conjectural judgment based on hypothetical facts.
Such a supplication has to be rejected.
Second. With due respect, I submit that the most important constitutional issue posed by the
petitions at bar relates to the parameters of power of a Bicameral Conference Committee. Most
of the issues in the petitions at bar arose because the Bicameral Conference Committee
concerned exercised powers that went beyond reconciling the differences between Senate Bill
No. 1950 and House Bill Nos. 3705 and 3555. In Tolentino v. Secretary of Finance,7 I ventured the
view that a Bicameral Conference Committee has limited powers and cannot be allowed to act as
if it were a "third house" of Congress. I further warned that unless its roving powers are reigned
in, a Bicameral Conference Committee can wreck the lawmaking process which is a cornerstone
of the democratic, republican regime established in our Constitution. The passage of time fortifies
my faith that there ought to be no legal u-turn on this preeminent principle. I wish, therefore, to
reiterate my reasons for this unbending view, viz:8
Section 209, Rule XII of the Rules of the Senate provides:
In the event that the Senate does not agree with the House of Representatives on the provision of
any bill or joint resolution, the differences shall be settled by a conference committee of both
Houses which shall meet within ten days after their composition.
Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of
the changes in or amendments to the subject measure, and shall be signed by the conferees.
(Emphasis supplied)
The counterpart rule of the House of Representatives is cast in near identical language. Section 85
of the Rules of the House of Representatives pertinently provides:
In the event that the House does not agree with the Senate on the amendments to any bill or
joint resolution, the differences may be settled by a conference committee of both chambers.
x x x. Each report shall contain a detailed, sufficiently explicit statement of the changes in or
amendments to the subject measure. (Emphasis supplied)
The Jefferson’s Manual has been adopted as a supplement to our parliamentary rules and
practice. Section 456 of Jefferson’s Manual similarly confines the powers of a conference
committee, viz:
The managers of a conference must confine themselves to the differences committed to them …
and may not include subjects not within the disagreements, even though germane to a question
in issue.
This rule of antiquity has been honed and honored in practice by the Congress of the United
States. Thus, it is chronicled by Floyd Biddick, Parliamentarian Emeritus of the United States
Senate, viz:
Committees of conference are appointed for the sole purpose of compromising and adjusting the
differing and conflicting opinions of the two Houses and the committees of conference alone can
grant compromises and modify propositions of either Houses within the limits of the
disagreement. Conferees are limited to the consideration of differences between the two Houses.
Congress shall not insert in their report matters not committed to them by either House, nor shall
they strike from the bill matters agreed to by both Houses. No matter on which there is nothing in
either the Senate or House passed versions of a bill may be included in the conference report and
actions to the contrary would subject the report to a point of order. (Emphasis ours)
In fine, there is neither a sound nor a syllable in the Rules of the Senate and the House of
Representatives to support the thesis of the respondents that a bicameral conference committee
is clothed with an ex post veto power.
But the thesis that a Bicameral Conference Committee can wield ex post veto power does not
only contravene the rules of both the Senate and the House. It wages war against our settled
ideals of representative democracy. For the inevitable, catastrophic effect of the thesis is to install
a Bicameral Conference Committee as the Third Chamber of our Congress, similarly vested with
the power to make laws but with the dissimilarity that its laws are not the subject of a free and
full discussion of both Houses of Congress. With such a vagrant power, a Bicameral Conference
Committee acting as a Third Chamber will be a constitutional monstrosity.
It needs no omniscience to perceive that our Constitution did not provide for a Congress
composed of three chambers. On the contrary, section 1, Article VI of the Constitution provides in
clear and certain language: "The legislative power shall be vested in the Congress of the
Philippines which shall consist of a Senate and a House of Representatives …" Note that in vesting
legislative power exclusively to the Senate and the House, the Constitution used the word "shall."
Its command for a Congress of two houses is mandatory. It is not mandatory sometimes.
In vesting legislative power to the Senate, the Constitution means the Senate "… composed of
twenty-four Senators xxx elected at large by the qualified voters of the Philippines …" Similarly,
when the Constitution vested the legislative power to the House, it means the House "…
composed of not more than two hundred and fifty members xxx who shall be elected from
legislative districts xxx and those who xxx shall be elected through a party-list system of registered
national, regional, and sectoral parties or organizations." The Constitution thus, did not vest on a
Bicameral Conference Committee with an ad hoc membership the power to legislate for it
exclusively vested legislative power to the Senate and the House as co-equal bodies. To be sure,
the Constitution does not mention the Bicameral Conference Committees of Congress. No
constitutional status is accorded to them. They are not even statutory creations. They owe their
existence from the internal rules of the two Houses of Congress. Yet, respondents peddle the
disconcerting idea that they should be recognized as a Third Chamber of Congress and with ex
post veto power at that.
The thesis that a Bicameral Conference Committee can exercise law making power with ex post
veto power is freighted with mischief. Law making is a power that can be used for good or for ill,
hence, our Constitution carefully laid out a plan and a procedure for its exercise. Firstly, it
vouchsafed that the power to make laws should be exercised by no other body except the Senate
and the House. It ought to be indubitable that what is contemplated is the Senate acting as a full
Senate and the House acting as a full House. It is only when the Senate and the House act as
whole bodies that they truly represent the people. And it is only when they represent the people
that they can legitimately pass laws. Laws that are not enacted by the people’s rightful
representatives subvert the people’s sovereignty. Bicameral Conference Committees, with their ad
hoc character and limited membership, cannot pass laws for they do not represent the people.
The Constitution does not allow the tyranny of the majority. Yet, the respondents will impose the
worst kind of tyranny – the tyranny of the minority over the majority. Secondly, the Constitution
delineated in deft strokes the steps to be followed in making laws. The overriding purpose of
these procedural rules is to assure that only bills that successfully survive the searching scrutiny of
the proper committees of Congress and the full and unfettered deliberations of both Houses can
become laws. For this reason, a bill has to undergo three (3) mandatory separate readings in each
House. In the case at bench, the additions and deletions made by the Bicameral Conference
Committee did not enjoy the enlightened studies of appropriate committees. It is meet to note
that the complexities of modern day legislations have made our committee system a significant
part of the legislative process. Thomas Reed called the committee system as "the eye, the ear, the
hand, and very often the brain of the house." President Woodrow Wilson of the United States
once referred to the government of the United States as "a government by the Chairmen of the
Standing Committees of Congress …" Neither did these additions and deletions of the Bicameral
Conference Committee pass through the coils of collective deliberation of the members of the
two Houses acting separately. Due to this shortcircuiting of the constitutional procedure of
making laws, confusion shrouds the enactment of R.A. No. 7716. Who inserted the additions and
deletions remains a mystery. Why they were inserted is a riddle. To use a Churchillian phrase,
lawmaking should not be a riddle wrapped in an enigma. It cannot be, for Article II, section 28 of
the Constitution mandates the State to adopt and implement a "policy of full public disclosure of
all its transactions involving public interest." The Constitution could not have contemplated a
Congress of invisible and unaccountable John and Mary Does. A law whose rationale is a riddle
and whose authorship is obscure cannot bind the people.
All these notwithstanding, respondents resort to the legal cosmetology that these additions and
deletions should govern the people as laws because the Bicameral Conference Committee Report
was anyway submitted to and approved by the Senate and the House of Representatives. The
submission may have some merit with respect to provisions agreed upon by the Committee in the
process of reconciling conflicts between S.B. No. 1630 and H.B. No. 11197. In these instances,
the conflicting provisions had been previously screened by the proper committees, deliberated
upon by both Houses and approved by them. It is, however, a different matter with respect to
additions and deletions which were entirely new and which were made not to reconcile
inconsistencies between S.B. No. 1630 and H.B. No. 11197. The members of the Bicameral
Conference Committee did not have any authority to add new provisions or delete provisions
already approved by both Houses as it was not necessary to discharge their limited task of
reconciling differences in bills. At that late stage of law making, the Conference Committee
cannot add/delete provisions which can become laws without undergoing the study and
deliberation of both chambers given to bills on 1st, 2nd, and 3rd readings. Even the Senate and
the House cannot enact a law which will not undergo these mandatory three (3) readings
required by the Constitution. If the Senate and the House cannot enact such a law, neither can
the lesser Bicameral Conference Committee.
Moreover, the so-called choice given to the members of both Houses to either approve or
disapprove the said additions and deletions is more of an optical illusion. These additions and
deletions are not submitted separately for approval. They are tucked to the entire bill. The vote is
on the bill as a package, i.e., together with the insertions and deletions. And the vote is either
"aye" or "nay," without any further debate and deliberation. Quite often, legislators vote "yes"
because they approve of the bill as a whole although they may object to its amendments by the
Conference Committee. This lack of real choice is well observed by Robert Luce:
Their power lies chiefly in the fact that reports of conference committees must be accepted
without amendment or else rejected in toto. The impulse is to get done with the matter and so
the motion to accept has undue advantage, for some members are sure to prefer swallowing
unpalatable provisions rather than prolong controversy. This is the more likely if the report comes
in the rush of business toward the end of a session, when to seek further conference might result
in the loss of the measure altogether. At any time in the session there is some risk of such a result
following the rejection of a conference report, for it may not be possible to secure a second
conference, or delay may give opposition to the main proposal chance to develop more strength.
In a similar vein, Prof. Jack Davies commented that "conference reports are returned to assembly
and Senate on a take-it or leave-it-basis, and the bodies are generally placed in the position that
to leave-it is a practical impossibility." Thus, he concludes that "conference committee action is the
most undemocratic procedure in the legislative process."
The respondents also contend that the additions and deletions made by the Bicameral Conference
Committee were in accord with legislative customs and usages. The argument does not persuade
for it misappreciates the value of customs and usages in the hierarchy of sources of legislative
rules of procedure. To be sure, every legislative assembly has the inherent right to promulgate its
own internal rules. In our jurisdiction, Article VI, section 16(3) of the Constitution provides that
"Each House may determine the rules of its proceedings x x x." But it is hornbook law that the
sources of Rules of Procedure are many and hierarchical in character. Mason laid them down as
follows:
xxx
1. Rules of Procedure are derived from several sources. The principal sources are as follows:
a. Constitutional rules.
b. Statutory rules or charter provisions.
c. Adopted rules.
d. Judicial decisions.
e. Adopted parliamentary authority.
f. Parliamentary law.
g. Customs and usages.
2. The rules from the different sources take precedence in the order listed above except that
judicial decisions, since they are interpretations of rules from one of the other sources, take the
same precedence as the source interpreted. Thus, for example, an interpretation of a
constitutional provision takes precedence over a statute.
3. Whenever there is conflict between rules from these sources the rule from the source listed
earlier prevails over the rule from the source listed later. Thus, where the Constitution requires
three readings of bills, this provision controls over any provision of statute, adopted rules, adopted
manual, or of parliamentary law, and a rule of parliamentary law controls over a local usage but
must give way to any rule from a higher source of authority. (Emphasis ours)
As discussed above, the unauthorized additions and deletions made by the Bicameral Conference
Committee violated the procedure fixed by the Constitution in the making of laws. It is reasonless
for respondents therefore to justify these insertions as sanctioned by customs and usages.
Finally, respondents seek sanctuary in the conclusiveness of an enrolled bill to bar any judicial
inquiry on whether Congress observed our constitutional procedure in the passage of R.A. No.
7716. The enrolled bill theory is a historical relic that should not continuously rule us from the
fossilized past. It should be immediately emphasized that the enrolled bill theory originated in
England where there is no written constitution and where Parliament is supreme. In this
jurisdiction, we have a written constitution and the legislature is a body of limited powers.
Likewise, it must be pointed out that starting from the decade of the 40s, even American courts
have veered away from the rigidity and unrealism of the conclusiveness of an enrolled bill. Prof.
Sutherland observed:
xxx
Where the failure of constitutional compliance in the enactment of statutes is not discoverable
from the face of the act itself but may be demonstrated by recourse to the legislative journals,
debates, committee reports or papers of the governor, courts have used several conflicting
theories with which to dispose of the issue. They have held: (1) that the enrolled bill is conclusive
and like the sheriff’s return cannot be attacked; (2) that the enrolled bill is prima facie correct and
only in case the legislative journal shows affirmative contradiction of the constitutional
requirement will the bill be held invalid; (3) that although the enrolled bill is prima facie correct,
evidence from the journals, or other extrinsic sources is admissible to strike the bill down; (4) that
the legislative journal is conclusive and the enrolled bills is valid only if it accords with the recital in
the journal and the constitutional procedure.
Various jurisdictions have adopted these alternative approaches in view of strong dissent and
dissatisfaction against the philosophical underpinnings of the conclusiveness of an enrolled bill.
Prof. Sutherland further observed:
x x x. Numerous reasons have been given for this rule. Traditionally, an enrolled bill was "a record"
and as such was not subject to attack at common law. Likewise, the rule of conclusiveness was
similar to the common law rule of the inviolability of the sheriff’s return. Indeed, they had the
same origin, that is, the sheriff was an officer of the king and likewise the parliamentary act was a
regal act and no official might dispute the king’s word. Transposed to our democratic system of
government, courts held that as the legislature was an official branch of government the court
must indulge every presumption that the legislative act was valid. The doctrine of separation of
powers was advanced as a strong reason why the court should treat the acts of a co-ordinate
branch of government with the same respect as it treats the action of its own officers; indeed, it
was thought that it was entitled to even greater respect, else the court might be in the position of
reviewing the work of a supposedly equal branch of government. When these arguments failed,
as they frequently did, the doctrine of convenience was advanced, that is, that it was not only an
undue burden upon the legislature to preserve its records to meet the attack of persons not
affected by the procedure of enactment, but also that it unnecessarily complicated litigation and
confused the trial of substantive issues.
Although many of these arguments are persuasive and are indeed the basis for the rule in many
states today, they are not invulnerable to attack. The rule most relied on – the sheriff’s return or
sworn official rule – did not in civil litigation deprive the injured party of an action, for always he
could sue the sheriff upon his official bond. Likewise, although collateral attack was not
permitted, direct attack permitted raising the issue of fraud, and at a later date attack in equity
was also available; and that the evidence of the sheriff was not of unusual weight was
demonstrated by the fact that in an action against the sheriff no presumption of its authenticity
prevailed.
The argument that the enrolled bill is a "record" and therefore unimpeachable is likewise
misleading, for the correction of records is a matter of established judicial procedure. Apparently,
the justification is either the historical one that the king’s word could not be questioned or the
separation of powers principle that one branch of the government must treat as valid the acts of
another.
Persuasive as these arguments are, the tendency today is to avoid reaching results by artificial
presumptions and thus it would seem desirable to insist that the enrolled bill stand or fall on the
basis of the relevant evidence which may be submitted for or against it. (Emphasis ours)
Thus, as far back as the 1940s, Prof. Sutherland confirmed that "x x x the tendency seems to be
toward the abandonment of the conclusive presumption rule and the adoption of the third rule
leaving only a prima facie presumption of validity which may be attacked by any authoritative
source of information.
Third. I respectfully submit that it is only by strictly following the contours of powers of a
Bicameral Conference Committee, as delineated by the rules of the House and the Senate, that
we can prevent said Committee from acting as a "third" chamber of Congress. Under the clear
rules of both the Senate and House, its power can go no further than settling differences in their
bills or joint resolutions. Sections 88 and 89, Rule XIV of the Rules of the House of Representatives
provide as follows:
Sec. 88. Conference Committee. – In the event that the House does not agree with the Senate on
the amendment to any bill or joint resolution, the differences may be settled by the conference
committees of both chambers.
In resolving the differences with the Senate, the House panel shall, as much as possible, adhere to
and support the House Bill. If the differences with the Senate are so substantial that they
materially impair the House Bill, the panel shall report such fact to the House for the latter’s
appropriate action.
Sec. 89. Conference Committee Reports. - . . . Each report shall contain a detailed, sufficiently
explicit statement of the changes in or amendments to the subject measure.
...
The Chairman of the House panel may be interpellated on the Conference Committee Report
prior to the voting thereon. The House shall vote on the Conference Committee Report in the
same manner and procedure as it votes a bill on third and final reading.
Section 35, Rule XII of the Rules of the Senate states:
Sec. 35. In the event that the Senate does not agree with the House of Representatives on the
provision of any bill or joint resolution, the differences shall be settled by a conference committee
of both Houses which shall meet within ten (10) days after their composition. The President shall
designate the members of the Senate Panel in the conference committee with the approval of the
Senate.
Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of
the changes in, or amendments to the subject measure, and shall be signed by a majority of the
members of each House panel, voting separately.
The House rule brightlines the following: (1) the power of the Conference Committee is
limited. . . it is only to settle differences with the Senate; (2) if the differences are substantial, the
Committee must report to the House for the latter’s appropriate action; and (3) the Committee
report has to be voted upon in the same manner and procedure as a bill on third and final
reading. Similarly, the Senate rule underscores in crimson that (1) the power of the Committee is
limited - - - to settle differences with the House; (2) it can make changes or amendments only in
the discharge of this limited power to settle differences with the House; and (3) the changes or
amendments are merely recommendatory for they still have to be approved by the Senate.
Under both rules, it is obvious that a Bicameral Conference Committee is a mere agent of the
House or the Senate with limited powers. The House contingent in the Committee cannot, on its
own, settle differences which are substantial in character. If it is confronted with substantial
differences, it has to go back to the chamber that created it "for the latter’s appropriate action." In
other words, it must take the proper instructions from the chambers that created it. It cannot
exercise its unbridled discretion. Where there is no difference between the bills, it cannot make
any change. Where the difference is substantial, it has to return to the chamber of its origin and
ask for appropriate instructions. It ought to be indubitable that it cannot create a new law, i.e.,
that which has never been discussed in either chamber of Congress. Its parameters of power are
not porous, for they are hedged by the clear limitation that its only power is to settle differences
in bills and joint resolutions of the two chambers of Congress.
Fourth. Prescinding from these premises, I respectfully submit that the following acts of the
Bicameral Conference Committee constitute grave abuse of discretion amounting to lack or
excess of jurisdiction and should be struck down as unconstitutional nullities, viz:
a. Its deletion of the pro poor "no pass on provision" which is common in both Senate Bill No.
1950 and House Bill No. 3705.
Sec. 1 of House Bill No. 37059 provides:
Section 106 of the National Internal Revenue Code of 1997, as amended, is hereby further
amended to read as follows:
SEC. 106. Value-added Tax on Sale of Goods or Properties. –
xxx
Provided, further, that notwithstanding the provision of the second paragraph of Section 105 of
this Code, the Value-added Tax herein levied on the sale of petroleum products under
Subparagraph (1) hereof shall be paid and absorbed by the sellers of petroleum products who
shall be prohibited from passing on the cost of such tax payments, either directly or indirectly[,] to
any consumer in whatever form or manner, it being the express intent of this act that the Value-
added Tax shall be borne and absorbed exclusively by the sellers of petroleum products x x x.
Sec. 3 of the same House bill provides:
Section 108 of the National Internal Revenue Code of 1997, as amended, is hereby further
amended to read as follows:
Sec. 108. Value-added Tax on Sale of Goods or Properties. –
Provided, further, that notwithstanding the provision of the second paragraph of Section 105 of
this Code, the Value-added Tax imposed under this paragraph shall be paid and absorbed by the
subject generation companies who shall be prohibited from passing on the cost of such tax
payments, either directly or indirectly[,] to any consumer in whatever form or manner, it being the
express intent of this act that the Value-added Tax shall be borne and absorbed exclusively [by]
the power-generating companies.
In contrast and comparison, Sec. 5 of Senate Bill No. 1950 provides:
Value-added Tax on sale of Services and Use or Lease of Properties. –
x x x Provided, that the VAT on sales of electricity by generation companies, and services of
transmission companies and distribution companies, as well as those of franchise grantees of
electrical utilities shall not apply to residential end-users: Provided, that the Value-added Tax
herein levied shall be absorbed and paid by the generation, transmission and distribution
companies concerned. The said companies shall not pass on such tax payments to NAPOCOR or
ultimately to the consumers, including but not limited to residential end users, either as costs or in
any other form whatsoever, directly or indirectly. x x x.
Even the faintest eye contact with the above provisions will reveal that: (a) both the House bill
and the Senate bill prohibited the passing on to consumers of the VAT on sales of electricityand
(b) the House bill prohibited the passing on to consumers of the VAT on sales of
petroleumproducts while the Senate bill is silent on the prohibition.
In the guise of reconciling disagreeing provisions of the House and the Senate bills on the matter,
the Bicameral Conference Committee deleted the "no pass on provision" on both the sales of
electricity and petroleum products. This action by the Committee is not warranted by the rules of
either the Senate or the House. As aforediscussed, the only power of a Bicameral Conference
Committee is to reconcile disagreeing provisions in the bills or joint resolutions of the two houses
of Congress. The House and the Senate bills both prohibited the passing on to consumers of the
VAT on sales of electricity. The Bicameral Conference Committee cannot override this unequivocal
decision of the Senate and the House. Nor is it clear that there is a conflict between the House
and Senate versions on the "no pass on provisions" of the VAT on sales of petroleum products.
The House version contained a "no pass on provision" but the Senate had none. Elementary logic
will tell us that while there may be a difference in the two versions, it does not necessarily mean
that there is a disagreement or conflict between the Senate and the House. The silence of the
Senate on the issue cannot be interpreted as an outright opposition to the House decision
prohibiting the passing on of the VAT to the consumers on sales of petroleum products. Silence
can even be conformity, albeit implicit in nature. But granting for the nonce that there is conflict
between the two versions, the conflict cannot escape the characterization as a substantial
difference. The seismic consequence of the deletion of the "no pass on provision" of the VAT on
sales of petroleum products on the ability of our consumers, especially on the roofless and the
shirtless of our society, to survive the onslaught of spiraling prices ought to be beyond quibble.
The rules require that the Bicameral Conference Committee should not, on its own, act on this
substantial conflict. It has to seek guidance from the chamber that created it. It must receive
proper instructions from its principal, for it is the law of nature that no spring can rise higher than
its source. The records of both the Senate and the House do not reveal that this step was taken by
the members of the Bicameral Conference Committee. They bypassed their principal and ran riot
with the exercise of powers that the rules never bestowed on them.
b. Even more constitutionally obnoxious are the added restrictions on local government’s use of
incremental revenue from the VAT in Section 21 of R.A. No. 9337 which were not present in the
Senate or House Bills. Section 21 of R.A. No. 9337 provides:
Fifty percent of the local government unit’s share from VAT shall be allocated and used exclusively
for the following purposes:
1. Fifteen percent (15%) for public elementary and secondary education to finance the
construction of buildings, purchases of school furniture and in-service teacher trainings;
2. Ten percent (10%) for health insurance premiums of enrolled indigents as a counterpart
contribution of the local government to sustain the universal coverage of the national health
insurance program;
3. Fifteen percent (15%) for environmental conservation to fully implement a comprehensive
national reforestation program; and
4. Ten percent (10%) for agricultural modernization to finance the construction of farm-to-
market roads and irrigation facilities.
Such allocations shall be segregated as separate trust funds by the national treasury and shall be
over and above the annual appropriation for similar purposes.
These amendments did not harmonize conflicting provisions between the constituent bills of R.A.
No. 9337 but are entirely new and extraneous concepts which fall beyond the median thereof.
They transgress the limits of the Bicameral Conference Committee’s authority and must be struck
down.
I cannot therefore subscribe to the thesis of the majority that "the changes introduced by the
Bicameral Conference Committee on disagreeing provisions were meant only to reconcile and
harmonize the disagreeing provisions for it did not inject any idea or intent that is wholly foreign
to the subject embraced by the original provisions."
Fifth. The majority further defends the constitutionality of the above provisions by holding that
"all the changes or modifications were germane to subjects of the provisions referred to it for
reconciliation."
With due respect, it is high time to re-examine the test of germaneness proffered in Tolentino.
The test of germaneness is overly broad and is the fountainhead of mischief for it allows the
Bicameral Conference Committee to change provisions in the bills of the House and the Senate
when they are not even in disagreement. Worse still, it enables the Committee to introduce
amendments which are entirely new and have not previously passed through the coils of scrutiny
of the members of both houses. The Constitution did not establish a Bicameral Conference
Committee that can act as a "third house" of Congress with super veto power over bills passed by
the Senate and the House. We cannot concede that super veto power without wrecking the
delicate architecture of legislative power so carefully laid down in our Constitution. The clear
intent of our fundamental law is to install a lawmaking structurecomposed only of two houses
whose members would thoroughly debate proposed legislations in representation of the will of
their respective constituents. The institution of this lawmaking structure is unmistakable from the
following provisions: (1) requiring that legislative power shall be vested in a bicameral
legislature;10 (2) providing for quorum requirements;11 (3) requiring that appropriation, revenue
or tariff bills, bills authorizing increase of public debt, bills of local application, and private bills
originate exclusively in the House of Representatives;12 (4) requiring that bills embrace one
subject expressed in the title thereof;13 and (5) mandating that bills undergo three readings on
separate days in each House prior to passage into law and prohibiting amendments on the last
reading thereof.14 A Bicameral Conference Committee with untrammeled powers will destroy
this lawmaking structure. At the very least, it will diminish the free and open debate of proposed
legislations and facilitate the smuggling of what purports to be laws.
On this point, Mr. Robert Luce’s disconcerting observations are apropos:
"Their power lies chiefly in the fact that reports of conference committees must be accepted
without amendment or else rejected in toto. The impulse is to get done with the matters and so
the motion to accept has undue advantage, for some members are sure to prefer swallowing
unpalatable provisions rather than prolong controversy. This is more likely if the report comes in
the rush of business toward the end of the session, when to seek further conference might result
in the loss of the measure altogether. At any time in the session there is some risk of such a result
following the rejection of a conference report, for it may not be possible to secure a second
conference, or delay may give opposition to the main proposal chance to develop more strength.
xxx xxx xxx
Entangled in a network of rule and custom, the Representative who resents and would resist this
theft of his rights, finds himself helpless. Rarely can be vote, rarely can he voice his mind, in the
matter of any fraction of the bill. Usually he cannot even record himself as protesting against
some one feature while accepting the measure as whole. Worst of all, he cannot by argument or
suggested change, try to improve what the other branch has done.
This means more than the subversion of individual rights. It means to a degree the abandonment
of whatever advantage the bicameral system may have. By so much it in effect transfers the
lawmaking power to small group of members who work out in private a decision that almost
always prevails. What is worse, these men are not chosen in a way to ensure the wisest choice. It
has become the practice to name as conferees the ranking members of the committee, so that
the accident of seniority determines. Exceptions are made, but in general it is not a question of
who are most competent to serve. Chance governs, sometimes giving way to favor, rarely to
merit.
xxx xxx xxx
Speaking broadly, the system of legislating by conference committee is unscientific and therefore
defective. Usually it forfeits the benefit of scrutiny and judgment by all the wisdom available.
Uncontrolled, it is inferior to that process by which every amendment is secured independent
discussion and vote. . . ."15
It cannot be overemphasized that in a republican form of government, laws can only be enacted
by all the duly elected representatives of the people. It cuts against conventional wisdom in
democracy to lodge this power in the hands of a few or in the claws of a committee. It is for these
reasons that the argument that we should overlook the excesses of the Bicameral Conference
Committee because its report is anyway approved by both houses is a futile attempt to square the
circle for an unconstitutional act is void and cannot be redeemed by any subsequent ratification.
Neither can we shut our eyes to the unconstitutional acts of the Bicameral Conference Committee
by holding that the Court cannot interpose its checking powers over mere violations of the
internal rules of Congress. In Arroyo, et al. v. de Venecia, et al.,16 we ruled that when the
violations affect private rights or impair the Constitution, the Court has all the power, nay, the
duty to strike them down.
In conclusion, I wish to stress that this is not the first time nor will it be last that arguments will be
foisted for the Court to merely wink at assaults on the Constitution on the ground of some
national interest, sometimes clear and at other times inchoate. To be sure, it cannot be gainsaid
that the country is in the vortex of a financial crisis. The broadsheets scream the disconcerting
news that our debt payments for the year 2006 will exceed Pph1 billion daily for interest alone.
Experts underscore some factors that will further drive up the debt service expenses such as the
devaluation of the peso, credit downgrades and a spike in interest rates.17 But no doomsday
scenario will ever justify the thrashing of the Constitution. The Constitution is meant to be our
rule both in good times as in bad times. It is the Court’s uncompromising obligation to defend the
Constitution at all times lest it be condemned as an irrelevant relic.
WHEREFORE, I concur with the majority but dissent on the following points:
a) I vote to withhold judgment on the constitutionality of the "standby authority" in Sections 4 to
6 of Republic Act No. 9337 as this issue is not ripe for adjudication.;
b) I vote to declare unconstitutional the deletion by the Bicameral Conference Committee of the
pro poor "no pass on provision" on electricity to residential consumers as it contravened the
unequivocal intent of both Houses of Congress; and
c) I vote to declare Section 21 of Republic Act No. 9337 as unconstitutional as it contains
extraneous provisions not found in its constituent bills.
REYNATO S. PUNO
Associate Justice

x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x
SEPARATE OPINION
PANGANIBAN, J.:
The ponencia written by the esteemed Madame Justice Ma. Alicia Austria-Martinez declares that
the enrolled bill doctrine has been historically and uniformly upheld in our country. Cited as recent
reiterations of this doctrine are the two Tolentino v. Secretary of Finance judgments1 and Fariñas
v. Executive Secretary.2
Precedence of Mandatory
Constitutional Provisions
Over the Enrolled Bill Doctrine
I believe, however, that the enrolled bill doctrine3 is not absolute. It may be all-encompassing in
some countries like Great Britain,4 but as applied to our jurisdiction, it must yield to mandatory
provisions of our 1987 Constitution. The Court can take judicial notice of the form of
government5 in Great Britain.6 It is unlike that in our country and, therefore, the doctrine from
which it originated7 could be modified accordingly by our Constitution.
In fine, the enrolled bill doctrine applies mainly to the internal rules and processes followed by
Congress in its principal duty of lawmaking. However, when the Constitution imposes certain
conditions, restrictions or limitations on the exercise of congressional prerogatives, the judiciary
has both the power and the duty to strike down congressional actions that are done in plain
contravention of such conditions, restrictions or limitations.8 Insofar as the present case is
concerned, the three most important restrictions or limitations to the enrolled bill doctrine are the
"origination," "no-amendment" and "three-reading" rules which I will discuss later.
Verily, these restrictions or limitations to the enrolled bill doctrine are safeguarded by the
expanded9 constitutional mandate of the judiciary "to determine whether or not there has been a
grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or
instrumentality of the government."10 Even the ponente of Tolentino,11 the learned Mr. Justice
Vicente V. Mendoza, concedes in another decision that each house "may not by its rules ignore
constitutional restraints or violate fundamental rights, and there should be a reasonable relation
between the mode or method of proceeding established by the rule and the result which is
sought to be attained."12
The Bicameral Conference Committee (BCC) created by Congress to iron out differences between
the Senate and the House of Representatives versions of the E-VAT bills13 is one such "branch or
instrumentality of the government," over which this Court may exercise certiorari review to
determine whether or not grave abuse of discretion has been committed; and, specifically, to find
out whether the constitutional conditions, restrictions and limitations on law-making have been
violated.
In general, the BCC has at least five options in performing its functions: (1) adopt the House
version in part or in toto, (2) adopt the Senate version in part or in toto, (3) consolidate the two
versions, (4) reject non-conflicting provisions, and (5) adopt completely new provisions not found
in either version. This, therefore, is the simple question: In the performance of its function of
reconciling conflicting provisions, has the Committee blatantly violated the Constitution?
My short answer is: No, except those relating to income taxes referred to in Sections 1, 2 and 3 of
Republic Act (RA) No. 9337. Let me explain.
Adopting the House
Version in Part or in Toto
First, the BCC had the option of adopting the House bills either in part or in toto, endorsing them
without changes. Since these bills had passed the three-reading requirement14 under the
Constitution,15 it readily becomes apparent that no procedural impediment would arise. There
would also be no question as to their origination,16 because the bills originated exclusively from
the House of Representatives itself.
In the present case, the BCC did not ignore the Senate and adopt any of the House bills in part or
in toto. Therefore, this option was not taken by the BCC.
Adopting the Senate
Version in Part or in Toto
Second, the BCC may choose to adopt the Senate version either in part or in toto, endorsing it
also without changes. In so doing, the question of origination arises. Under the 1987
Constitution, all "revenue x x x bills x x x shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with amendments."17
If the revenue bill originates exclusively from the Senate, then obviously the origination
provision18 of the Constitution would be violated. If, however, it originates exclusively from the
House and presumably passes the three-reading requirement there, then the question to contend
with is whether the Senate amendments complied with the "germane" principle.
While in the Senate, the House version may, per Tolentino, undergo extensive changes, such that
the Senate may rewrite not only portions of it but even all of it.19 I believe that such rewriting is
limited by the "germane" principle: although "relevant"20 or "related"21 to the general subject of
taxation, the Senate version is not necessarily "germane" all the time. The "germane" principle
requires a legal -- not necessarily an economic22 or political -- interpretation. There must be an
"inherent logical connection."23 What may be germane in an economic or political sense is not
necessarily germane in the legal sense. Otherwise, any provision in the Senate version that is
entirely new and extraneous, or that is remotely or even slightly connected, to the vast and
perplexing subject of taxation, would always be germane. Under this interpretation, the
origination principle would surely be rendered inutile.
To repeat, in Tolentino, the Court said that the Senate may even write its own version, which in
effect would be an amendment by substitution.24 The Court went further by saying that "the
Constitution does not prohibit the filing in the Senate of a substitute bill in anticipation of its
receipt of the bill from the House, so long as action by the Senate as a body is withheld pending
receipt of the House bill."25 After all, the initiative for filing a revenue bill must come from the
House26 on the theory that, elected as its members are from their respective districts, the House
is more sensitive to local needs and problems. By contrast, the Senate whose members are elected
at large approaches the matter from a national perspective,27 with a broader and more
circumspect outlook.28
Even if I have some reservations on the foregoing sweeping pronouncements in Tolentino, I shall
not comment any further, because the BCC, in reconciling conflicting provisions, also did not take
the second option of ignoring the House bills completely and of adopting only the Senate version
in part or in toto. Instead, the BCC used or applied the third option as will be discussed below.
Compromising
by Consolidating
As a third option, the BCC may reach a compromise by consolidating both the Senate and the
House versions. It can adopt some parts and reject other parts of both bills, and craft new
provisions or even a substitute bill. I believe this option is viable, provided that there is no violation
of the origination and germane principles, as well as the three-reading rule. After all, the report
generated by the BCC will not become a final valid act of the Legislative Department until the BCC
obtains the approval of both houses of Congress.29
Standby Authority. I believe that the BCC did not exceed its authority when it crafted the so-called
"standby authority" of the President. The originating bills from the House imposed a 12 percent
VAT rate,30 while the bill from the Senate retained the original 10 percent.31 The BCC opted to
initially use the 10 percent Senate provision and to increase this rate to the 12 percent House
provision, effective January 1, 2006, upon the occurrence of a predetermined factual scenario as
follows:
"(i) [VAT] collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or
(ii) National Government Deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 1/2%)."32
In the computation of the percentage requirements in the alternative conditions under the law,
the amounts of the VAT collection, National Deficit,33 and GDP34 -- as well as the
interrelationship among them -- can easily be derived by the finance secretary from the proper
government bodies charged with their determination. The law is complete and standards have
been fixed.35 Only the fact-finding mathematical computation for its implementation on January
1, 2006, is necessary.
Once either of the factual and mathematical events provided in the law takes place, the President
has no choice but to implement the increase of the VAT rate to 12 percent.36 This eventuality has
been predetermined by Congress.37
The taxing power has not been delegated by Congress to either or both the President and the
finance secretary. What was delegated
was only the power to ascertain the facts in order to bring the law into operation. In fact, there
was really no "delegation’ to speak of;
__________________
Culled from the same record, the following excerpts show the position of public respondents:
"Justice Panganiban: It will be based on actual figures?
"Usec. Bonoan: It will be based on actual figures.
"Justice Panganiban: That creates a problem[,] because where do you get the actual figures[?]
"Usec. Bonoan: I understand that[,] traditionally[,] we can come in March, but there is no
impediment to speeding up the gathering.
"Justice Panganiban: Speed it up. February 15?
"Usec. Bonoan: Even within January, Your Honor, I think this can be….
"Justice Panganiban: Alright at the end of January, it’s just estimate to get the figures in January.
"Usec. Bonoan: Yes, Your Honor (pp. 661-662); and
xxx
"Justice Panganiban: My only point is, I raised this earlier and I promised counsel for the petitioner
whom I was questionin[g] that I will raise it with you, whether the date January 1, 2006 would
present an impossibility of a condition happening.
"Usec. Bonoan: It will not, Your Honor.
"Justice Panganiban: So, your position [is] it will not present an impossibility. Elaborate on it in
your memorandum.
"Usec. Bonoan: Yes, Your Honor.
"Justice Panganiban: Because it is important. The administrative regulations are important[,]
because they clarify the law and it will guide taxpayers. So[,] by January 1[,] [taxpayers] would not
be wondering. Do we charge the end consumers 10 [percent] or 12 [percent]? The regulations
should be able to spell that out [i]n the same manner that even now the various consumers of
various products and services must be able to get from your
there was merely a declaration of an administrative, not a legislative, function.38
I concur with the ponencia in that there was no undue delegation of legislative power in the
increase from 10 percent to 12 percent of the VAT rate. I respectfully disagree, however, with the
statements therein that, first, the secretary of finance is "acting as the agent of the legislative
department" or an "agent of Congress" in determining and declaring the event upon which its
expressed will is to take effect; and, second, that the secretary’s personality "is in reality but a
projection of that of Congress."

The secretary of finance is not an alter ego of Congress, but of the President. The mandate given
by RA 9337 to the secretary is not equipollent to an authority to make laws. In passing this law,
Congress did not restrict or curtail the constitutional power of the President to retain control and
supervision over the entire Executive Department. The law should be construed to be merely
asking the President, with a recommendation from the President’s alter ego in finance matters, to
determine the factual bases for making the increase in VAT rate operative.39Indeed, as I have
mentioned earlier, the fact-finding condition is a mere administrative, not legislative, function.
The ponencia states that Congress merely delegates the implementation of the law to the
secretary of finance. How then can the latter be its agent? Making a law is different from
implementing it. While the first (the making of laws) may be delegated under certain conditions
and only in specific instances provided under the Constitution, the second (the implementation of
laws) may not be done by Congress. After all, the legislature does not have the power to
implement laws. Therefore, congressional agency arises only in the first, not in the second. The
first is a legislative function; the second, an executive one.
Petitioners’ argument is that because the GDP does not account for the economic effects of so-
called underground businesses, it is an inaccurate indicator of either economic growth or
slowdown in transitional economies.40 Clearly, this matter is within the confines of lawmaking.
This Court is neither a substitute for the wisdom, or lack of it, in Congress,41 nor an arbiter of
flaws within the latter’s internal rules.42 Policy matters lie within the domain of the political
branches of government,43 outside the range of judicial cognizance.44 "[T]he right to select the
measure and objects of taxation devolves upon the Congress, and not upon the courts, and such
selections are valid unless constitutional limitations are overstepped."45 Moreover, each house of
Congress has the power and authority to determine the rules of its proceedings.46 The
contention that this case is not ripe for determination because there is no violation yet of the
Constitution regarding the exercise of the President’s standby authority has no basis. The question
raised is whether the BCC, in passing the law, committed grave abuse of discretion, not whether
the provision in question had been violated. Hence, this case is not premature and is, in fact,
subject to judicial determination.
Amendments on Income Taxes. I respectfully submit that the amendments made by the BCC (that
were culled from the Senate version) regarding income taxes47 are not legally germane to the
subject matter of the House bills. Revising the income tax rates on domestic, resident foreign and
nonresident foreign corporations; increasing the tax credit against taxes due from nonresident
foreign corporations on intercorporate dividends; and reducing the allowable deduction for
interest expense are legally unrelated and not germane to the subject matter contained in the
House bills; they violate the origination principle.48 The reasons are as follows:
One, an income tax is a direct tax imposed on actual or presumed income -- gross or net --
realized by a taxpayer during a given taxable year,49 while a VAT is an indirect tax not in the
context of who is directly and legally liable for its payment, but in terms of its nature as "a tax on
consumption."50 The former cannot be passed on to the consumer, but the latter can.51 It is too
wide a stretch of the imagination to even relate one concept with the other. In like manner, it is
inconceivable how the provisions that increase corporate income taxes can be considered
asmitigating measures for increasing the VAT and, as I will explain later, for effectively imposing a
maximum of 3 percent tax on gross sales or revenues because of the 70 percent cap. Even the
argument that the corporate income tax rates will be reduced to 30 percent does not hold water.
This reduction will take effect only in 2009, not 2006 when the 12 percent VAT rate will have
been implemented.
Two, taxes on intercorporate dividends are final, but the input VAT is generally creditable. Under a
final withholding tax system, the amount of income tax that is withheld by a withholding agent is
constituted as a full and final payment of the income tax due from the payee on said income.52
The liability for the tax primarily rests upon the payor as a withholding agent.53Under a creditable
withholding tax system, taxes withheld on certain payments are meant to approximate the tax
that is due of the payee on said payments.54 The liability for the tax rests upon the payee who is
mandated by law to still file a tax return, report the tax base, and pay the difference between the
tax withheld and the tax due.55
From this observation alone, it can already be seen that not only are dividends alien to the tax
base upon which the VAT is imposed, but their respective methods of withholding are totally
different. VAT-registered persons may not always be nonresident foreign corporations that
declare and pay dividends, while intercorporate dividends are certainly not goods or properties for
sale, barter, exchange, lease or importation. Certainly, input VAT credits are different from tax
credits on dividends received by nonresident foreign corporations.
Three, itemized deductions from gross income partake of the nature of a tax
exemption.56Interest -- which is among such deductions -- refers to the amount paid by a debtor
to a creditor for the use or forbearance of money.57 It is an expense item that is paid or incurred
within a given taxable year on indebtedness in connection with a taxpayer’s trade, business or
exercise of profession.58 In order to reduce revenue losses, Congress enacted RA 842459 which
reduces the amount of interest expense deductible by a taxpayer from gross income, equal to the
applicable percentage of interest income subject to final tax.60 To assert that reducing the
allowable deduction in interest expense is a matter that is legally related to the proposed VAT
amendments is too far-fetched. Interest expenses are not allowed as credits against output VAT.
Neither are VAT-registered persons always liable for interest.
Having argued on the unconstitutionality (non-germaneness) of the BCC insertions on income
taxes, let me now proceed to the other provisions that were attacked by petitioners.
No Pass-on Provisions. I agree with the ponencia that the BCC did not exceed its authority when it
deleted the no pass-on provisions found in the congressional bills. Its authority to make
amendments not only implies the power to make insertions, but also deletions, in order to resolve
conflicting provisions.
The no pass-on provision in House Bill (HB) No. 3705 referred to the petroleum products subject
to excise tax (and the raw materials used in the manufacture of such products), the sellers of
petroleum products, and the generation companies.61 The analogous provision in Senate Bill (SB)
No. 1950 dealt with electricity, businesses other than generation companies, and services of
franchise grantees of electric utilities.62 In contrast, there was a marked absence of the no pass-
on provision in HB 3555. Faced with such variances, the BCC had the option of retaining or
modifying the no pass-on provisions and determining their extent, or of deleting them altogether.
In opting for deletion to resolve the variances, it was merely acting within its discretion. No grave
abuse may be imputed to the BCC.
The 70 Percent Cap on Input Tax and the 5 Percent Final Withholding VAT. Deciding on the 70
percent cap and the 5 percent final withholding VAT in the consolidated bill is also within the
power of the BCC. While HB 3555 included limits of 5 percent and 11 percent on input tax,63 SB
1950 proposed an even spread over 60 months.64 The decision to put a cap and fix its rate, so as
to harmonize or to find a compromise in settling the apparent differences in these versions,65
was within the sound discretion of the BCC.
In like manner, HB 3555 contained provisions on the withholding of creditable VAT at the rates of
5 percent, 8 percent, 10.5 percent, and 12 percent.66 HB 3705 had no such equivalent
amendment, and SB 1950 pegged the rates at only 5 percent and 10 percent.67 I believe that the
decision to impose a final (not creditable) VAT and to fix the rates at 5 percent and 10 percent, so
as to harmonize the apparent differences in all three versions, was also within the sound
discretion of the BCC.
Indeed, the tax credit method under our VAT system is not only practical, but also principally used
in almost all taxing jurisdictions. This does not mean, however, that in the eyes of Congress
through the BCC, our country can neither deviate from this method nor modify its application to
suit our fiscal requirements. The VAT is usually collected through the tax credit method (and in
the past, even through the cost deduction method or a mixture of these two methods),68 but
there is no hard and fast rule that 100 percent of the input taxes will always be allowed as a tax
credit.
In fact, it was Maurice Lauré, a French engineer,69 who invented the VAT. In 1954, he had the
idea of imposing an indirect tax on consumption, called taxe sur la valeur ajoutée,70 which was
quickly adopted by the Direction Générale des Impost, the new French tax authority of which he
became joint director. Consequently, taxpayers at all levels in the production process, rather than
retailers or tax authorities, were forced to administer and account for the tax themselves.71
Since the unutilized input VAT can be carried over to succeeding quarters, there is no undue
deprivation of property. Alternatively, it can be passed on to the consumers;72 there is no law
prohibiting that. Merely speculative and unproven, therefore, is the contention that the law is
arbitrary and oppressive.73 Laws that impose taxes are necessarily burdensome, compulsory, and
involuntary.
The deferred input tax account -- which accumulates the unutilized input VAT -- remains an asset
in the accounting records of a business. It is not at all confiscated by the government. By deleting
Section 112(B) of the Tax Code,74 Congress no longer made available tax credit certificates for
such asset account until retirement from or cessation of business, or changes in or cessation of
VAT-registered status.75 This is a matter of policy, not legality. The Court cannot step beyond the
confines of its constitutional power, if there is absolutely no clear showing of grave abuse of
discretion in the enactment of the law.
That the unutilized input VAT would be rendered useless is merely speculative.76 Although it is
recorded as a deferred asset in the books of a company, it remains to be a mere privilege. It may
be written off or expensed outright; it may also be denied as a tax credit.
There is no vested right in a deferred input tax account; it is a mere statutory privilege.77 The
State may modify or withdraw such privilege, which is merely an asset granted by operation of
law.78 Moreover, there is no vested right in generally accepted accounting principles.79 These
refer to accounting concepts, measurement techniques, and standards of presentation in a
company’s financial statements, and are not rooted in laws of nature, as are the laws of physical
science, for these are merely developed and continually modified by local and international
regulatory accounting bodies.80 To state otherwise and recognize such asset account as a vested
right is to limit the taxing power of the State. Unlimited, plenary, comprehensive and supreme,
this power cannot be unduly restricted by mere creations of the State.
That the unutilized input VAT would also have an unequal effect on businesses -- some with low,
others with high, input-output ratio -- is not a legal ground for invalidating the law. Profit margins
are a variable of sound business judgment, not of legal doctrine. The law applies equally to all
businesses; it is up to each of them to determine the best formula for selling their goods or
services in the face of stiffer competition. There is, thus, no violation of the equal protection
clause. If the implementation of the 70 percent cap would cause an ad infinitumdeferment of
input taxes or an unequal effect upon different types of businesses with varying profit margins
and capital requirements, then the remedy would be an amendment of the law -- not an
unwarranted and outright declaration of unconstitutionality.
The matter of business establishments shouldering 30 percent of output tax and remitting the
amount, as computed, to the government is in effect imposing a tax that is equivalent to a
maximum of 3 percent of gross sales or revenues.81 This imposition is arguably another tax on
gross -- not net -- income and thus a deviation from the concept of VAT as a tax on consumption;
it also assumes that sales or revenues are on cash basis or, if on credit, given credit terms shorter
than a quarter of a year. However, such additional imposition and assumption are also arguably
within the power of Congress to make. The State may in fact choose to impose an additional 3
percent tax on gross income, in lieu of the 70 percent cap, and thus subject the income of
businesses to two types of taxes -- one on gross, the other on net. These impositions may
constitute double taxation,82 which is not constitutionally proscribed.83
Besides, prior to the amendments introduced by the BCC, already extant in the Tax Code was a 3
percent percentage tax on the gross quarterly sales or receipts of persons who were not VAT-
registered, and whose sales or receipts were exempt from VAT.84 This is another type of tax
imposed by the Tax Code, in addition to the tax on their respective incomes. No question as to its
validity was raised before; none is being brought now. More important, there is a presumption in
favor of constitutionality,85 "rooted in the doctrine of separation of powers which enjoins upon
the three coordinate departments of the Government a becoming courtesy for each other’s
acts."86
As to the argument that Section 8 of RA 9337 contravenes Section 1 of Article III and Section 20
of Article II of the 1987 Constitution, I respectfully disagree.
One, petitioners have not been denied due process or, as I have illustrated earlier, equal
protection. In the exercise of its inherent power to tax, the State validly interferes with the right to
property of persons, natural or artificial. Those similarly situated are affected in the same way and
treated alike, "both as to privileges conferred and liabilities enforced."87
RA 9337 was enacted precisely to achieve the objective of raising revenues to defray the
necessary expenses of government.88 The means that this law employs are reasonably related to
the accomplishment of such objective, and not unduly oppressive. The reduction of tax credits is a
question of economic policy, not of legal perlustration. Its determination is vested in Congress,
not in this Court. Since the purpose of the law is to raise revenues, it cannot be denied that the
means employed is reasonably related to the achievement of that purpose. Moreover, the proper
congressional procedure for its enactment was followed;89 neither public notice nor public
hearings were denied.
Two, private enterprises are not discouraged. Tax burdens are never delightful, but with the
imposition of the 70 percent cap, there will be an assurance of a steady cash flow to the
government, which can be translated to the production of improved goods, rendition of better
services, and construction of better facilities for the people, including all private enterprises.
Perhaps, Congress deems it best to make our economy depend more on businesses that are easier
to monitor, so there will be a more efficient collection of taxes. Whatever is expected of the
outcome of the law, or its wisdom, should be the sole responsibility of the representatives chosen
by the electorate.
The profit margin rates of various industries generally do not change. However, the profit margin
figures do, because these are obviously monetary variables that affect business, along with the
level of competition, the quality of goods and services offered, and the cost of their production.
And there will inevitably be a conscious desire on the part of those who engage in business and
those who consume their output to adapt or adjust accordingly to any congressional modification
of the VAT system.
In addition, it is contended that the VAT should be proportional in nature. I submit that this
proportionality pertains to the rate imposable, not the credit allowable. Private enterprises are
subjected to a proportional VAT rate, but VAT credits need not be. The VAT is, after all, a human
concept that is neither immutable nor invariable. In fact, it has changed after it was adopted as a
system of indirect taxation by other countries. Again unlike the laws of physical science, the VAT
system can always be modified to suit modern fiscal demands. The State, through the Legislative
Department, may even choose to do away with it and revert to our previous system of turnover
taxes, sales taxes and compensating taxes, in which credits may be disallowed altogether.
Not expensed, but amortized over its useful life, is capital equipment, which is purchased or
treated as capital leases by private enterprises. Aimed at achieving the twin objectives of
profitability and solvency, such purchase or lease is a matter of prudence in business decision-
making.
Hence, business judgments, sales volume, and their effect on competition are for businesses to
determine and for Congress to regulate -- not for this Court to interfere with, absent a clear
showing that constitutional provisions have been violated. Tax collection and administrative
feasibility are for the executive branch to focus on, again not for this Court to dwell upon.
The Transcript of the Oral Arguments on July 14, 2005 clearly point out in a long line of relevant
questioning that, absent a violation of constitutional provisions, the Court cannot interfere with
the 70 percent cap, the 5 percent final withholding tax, and the 60-month amortization, there
being other extra-judicial remedies available to petitioners, thus:
"Atty. Baniqued: But if your profit margin is low as i[n] the case of the petroleum dealers, x x x
then we would have a serious problem, Your Honor.
"Justice Panganiban: Isn’t the solution to increase the price then?
"Atty. Baniqued: If you increase the price which you can very well do, Your Honor, then that [will]
be deflationary and it [will] have a cascading effect on all other basic commodities[, especially]
because what is involved here is petroleum, Your Honor.
"Justice Panganiban: That may be true[,] but it’s not unconstitutional?
"Atty. Baniqued: That may be true, Your Honor, but the very limitation of the [seventy percent]
input [VAT], when applied to the case of the petroleum dealers[,] is oppressive[.] [I]t’s unjust and
it’s unreasonable, Your Honor.
"Justice Panganiban: But it can be passed as a part of sales, sales costs rather.
"Atty. Baniqued: But the petroleum dealers here themselves…… interrupted
"Justice Panganiban: In your [b]alance [s]heet, it could be reflected as Cost of Sales and therefore
the price will go up?
"Atty. Baniqued: Even if it were to be reflected as part of the Cost of Sales, Your Honor, the [input
VAT] that you cannot claim, the benefit to you is only to the extent of the corporate tax rate
which is 32 now 35 [percent].
"Justice Panganiban: Yes.
"Atty. Baniqued: It’s not 100 [percent] credi[ta]bility[,] unlike if it were applied against your
[output VAT], you get to claim 100 [percent] of it, Your Honor.
"Justice Panganiban: That might be true, but we are talking about whether that particular
provision would be unconstitutional. You say it’s oppressive, but you have a remedy, you just pass
it on to the customer. I am not sayin[g] it’s good[.] [N]either am I saying it’s wise[.] [A]ll I’m talking
about is, whether it’s constitutional or not.
"Atty. Baniqued: Yes, in fact we acknowledge, Your Honor, that that is a remedy available to the
petroleum dealers, but considering the impact of that limitation[,] and were just talking of the 70
[percent cap] on [input VAT] in the level of the petroleum dealers. Were not even talking yet of
the limitation on the [input VAT] available to the manufacturers, so, what if they pass that on as
well?
"Justice Panganiban: Yes.
"Atty. Baniqued: Then, it would complicate… interrupted
"Justice Panganiban: What I am saying is, there is a remedy, which is business in character. The
mere fact that the government is imposing that [seventy percent] cap does not make the law
unconstitutional, isn’t it?
"Atty. Baniqued: It does, Your Honor, if it can be shown. And as we have shown, it is oppressive
and unreasonable, it is excessive, Your Honor… interrupted
"Justice Panganiban: If you have no way of recouping it. If you have no way of recouping that
amount, then it will be oppressive, but you have a business way of recouping it[.] I am saying that,
not advising that it’s good. All I am saying is, is it constitutional or not[?] We’re not here to
determine the wisdom of the law, that’s up for Congress. As pointed out earlier, if the law is not
wise, the law makers will be changed by the people[.] [T]hat is their solution t[o] the lack of
wisdom of a law. If the law is unconstitutional[,] then the Supreme Court will declare it
unconstitutional and void it, but[,] in this case[,] there seems to be a business remedy in the same
manner that Congress may just impose that tax straight without saying it’s [VAT]. If Congress will
just say all petroleum will pay 3 [percent] of their Gross Sales, but you don’t bear that, you pass
that on, isn’t it?
"Atty. Baniqued: We acknowledge your concern, Your Honor, but we should not forget that
when the petroleum dealers pass these financial burden or this tax differential to the consumers,
they themselves are consumers in their own right. As a matter of fact, they filed this case both as
petroleum dealer[s] and as taxpayers. If they pass if on, they themselves would ultimately bear the
burden[, especially] in increase[d] cost of electricity, land transport, food, everything, Your Honor.
"Justice Panganiban: Yes, but the issue here in this Court, is whether that act of Congress is
unconstitutional.
"Atty. Baniqued: Yes, we believe it is unconstitutional, Your Honor.
"Justice Panganiban: You have a right to complain that it is oppressive, it is excessive, it burdens
the people too much, but is it unconstitutional?
"Atty. Baniqued: Besides, passing it on, Your Honor, may not be as simple as it may seem. As a
matter of fact, at the strike of midnight on June 30, when petroleum prices were being changed
upward, the [s]ecretary of [the] Department of Energy was going around[.] [H]e was seen on TV
going around just to check that prices don’t go up. And as a matter of fact, he had
pronouncements that, the increase in petroleum price should only be limited to the effect of 10
[percent] E-VAT.
"Justice Panganiban: It’s becaus[e] the implementing rules were not clear and were not extensive
enough to cover how much really should be the increase for various oil products, refined oil
products. It’s up for the dealers to guess, and the dealers were guessing to their advantage by
saying plus 10 [percent] anyway, right?
"Atty. Baniqued: In fact, the petroleum dealers, Your Honors, are not only faced with
constitutional issues before this Court. They are also faced with a possibility of the Department of
Energy not allowing them to pass it on[,] because this would be an unreasonable price increase.
And so, they are being hit from both sides…interrupted
"Justice Panganiban: That’s why I say, that there is need to refine the implementing rules so that
everyone will know, the customers will know how much to pay for gasoline, not only gasoline,
gasoline, and so on, diesel and all kinds of products, so there’ll be no confusion and there’ll be no
undue taking advantage. There will be a smooth implementation[,] if the law were to be upheld
by the Court. In your case, as I said, it may be unwise to pass that on to the customers, but
definitely, the dealers will not bear that [--] to suffer the loss that you mentioned in your
consolidated balance sheets. Certainly, the dealers will not bear that [cost], isn’t it?
"Atty. Baniqued: It will be a very hard decision to make, Your Honor.
"Justice Panganiban: Why, you will not pass it on?
"Atty. Baniqued: I cannot speak for the dealers…. interrupted.
"Justice Panganiban: As a consumer, I will thank you if you don’t pass it on[;] but you or your
clients as businessm[e]n, I know, will pass it on.
"Atty. Baniqued: As I have said, Your Honor, there are many constraints on their ability to do
that[,] and that is why the first step that we are seeking is to seek redress from this Honorable
Court[,] because we feel that the imposition is excessive and oppressive….. interrupted
"Justice Panganiban: You can find redress here, only if you can show that the law is
unconstitutional.
"Atty. Baniqued: We realized that, Your Honor.
"Justice Panganiban: Alright. Let’s talk about the 5 [percent] [d]epreciation rate, but that applies
only to the capital equipment worth over a million?
"Atty. Baniqued: Yes, Your Honor.
"Justice Panganiban: And that doesn’t apply at all times, isn’t it?
"Atty. Baniqued: Well……
"Justice Panganiban: That doesn’t at all times?
"Atty. Baniqued: For capital goods costing less than 1 million, Your Honor, then….
"Justice Panganiban: That will not apply?
"Atty. Baniqued: That will not apply, but you will have the 70 [percent] cap on input [VAT], Your
Honor.
"Justice Panganiban: Yes, but we talked already about the 70 [percent].
"Atty. Baniqued: Yes, Your Honor.
"Justice Panganiban: When you made your presentation on the balance sheet, it is as if every
capital expenditure you made is subject to the 5 [percent,] rather the [five year] depreciation
schedule[.] [T]hat’s not so. So, the presentation you made is a little inaccurate and misleading.
"Atty. Baniqued: At the start of our presentation, Your Honor[,] we stated clearly that this applies
only to capital goods costing more than one [million].
"Justice Panganiban: Yes, but you combined it later on with the 70 [percent] cap to show that the
dealers are so disadvantaged. But you didn’t tell us that that will apply only when capital
equipment or goods is one million or more. And in your case, what kind of capital goods will be
worth one million or more in your existing gas stations?
"Atty. Baniqued: Well, you would have petroleum dealers, Your Honor, who would have[,] aside
from sale of petroleum[,] they would have their service centers[,] like[…] to service cars and they
would have those equipments, they are, Your Honor.
"Justice Panganiban: But that’s a different profit center, that’s not from the sale of…
"Atty. Baniqued: No, they would form part of their [VATable] sale, Your Honor.
Justice Panganiban: It’s a different profit center[;] it’s not in the sale of petroleum products. In fact
the mode now is to put up super stores in huge gas stations. I do not begrudge the gas station[.]
[A]ll I am saying is it should be presented to us in perspective. Neither am I siding with the
government. All I am saying is, when I saw your complicated balance sheet and mathematics, I
saw that you were to put in all the time the depreciation that should be spread over [five] years.
But we have agreed that that applies only to capital equipment [-- ]not to any kind of goods [--]
but to capital equipment costing over 1 million pesos.
"Atty. Baniqued: Yes, Your Honor, we apologize if it has caused a little confusion….
"Justice Panganiban: Again the solution could b[e] to pass that on, because that’s an added cost,
isn’t it?
"Atty. Baniqued: Well, yes, you can pass it on….
"Justice Panganiban: I am not teaching you, I am just saying that you have a remedy… I am not
saying either that the remedy is wise or should be done, because[,] as a consumer[,] I wouldn’t
want that to be done to me.
"Atty. Baniqued: We realiz[e] that, Your Honor, but the fact remain[s] that whether it is in the
hands of the petroleum dealers or in the hands of the consumers[,] if this imposition is
unreasonable and oppressive, it will remain so, even after it is passed on, Your Honor.
"Justice Panganiban: Alright. Let’s go to the third. The 5 [percent] withholding tax, [f]inal
[w]ithholding [t]ax, but this applies to sales to government?
"Atty. Baniqued: Yes, Your Honor.
"Justice Panganiban: So, you can pass on this 5 [percent] to the [g]overnment. After all, that 5
[percent] will still go back to the government.
"Atty. Baniqued: Then it will come back to haunt us, Your Honor…..
"Justice Panganiban: Why?
"Atty. Baniqued: By way of, for example sales to NAPOCOR or NTC…. interrupted
"Justice Panganiban: Sales of petroleum products….
"Atty. Baniqued: ………… in the case of NTC, Your Honor, it would come back to us by way of
increase[d] cost, Your Honor.
"Justice Panganiban: Okay, let’s see. You sell, let’s say[,] your petroleum products to the Supreme
Court, as a gas station that sells gasoline to us here. Under this law, the 5 [percent] withholding
tax will have to be charged, right?
"Atty. Baniqued: Yes, Your Honor.
"Justice Panganiban: You will charge that[.] [T]herefore[,] the sales to the Supreme Court by that
gas station will effectively be higher?
"Atty. Baniqued: Yes, Your Honor.
"Justice Panganiban: So, the Supreme Court will pay more, you will not [be] going to [absorb]
that 5 [percent], will you?
"Atty. Baniqued; If it is passed on, Your Honor, that’s of course we agree…. Interrupted.
"Justice Panganiban: Not if, you can pass it on….
"Atty. Baniqued: Yes, we can…. interrupted
"Justice Panganiban: There is no prohibition to passing it on[.] [P]robably the gas station will
simply pass it on to the Supreme Court and say[,] well[,] there is this 5 [percent] final VAT on you
so[,] therefore, for every tank full you buy[,] we’ll just have to [charge] you 5 [percent] more.
Well, the Supreme Court will probably say, well, anyway, that 5 [percent] that we will pay the gas
dealer, will be paid back to the government, isn’t it[?] So, how [will] you be affected?
"Atty. Baniqued: I hope the passing on of the burden, Your Honor, doesn’t come back to party
litigants by way of increase in docket fees, Your Honor.
"Justice Panganiban: But that’s quite another m[a]tter, though…(laughs) [W]hat I am saying, Mr.
[C]ounsel is, you still have to show to us that your remedy is to declare the law unconstitutional[,]
and it’s not business in character.
"Atty. Baniqued: Yes, Your Honor, it is our submission that this limitation in the input [VAT] credit
as well as the amortization…….
"Justice Panganiban: All you talk about is equal protection clause, about due process, depreciation
of property without observance of due process[,] could really be a remedy than a business way.
"Atty. Baniqued: Business in the level of the petroleum dealers, Your Honor, or in the level of
Congress, Your Honor.
"Justice Panganiban: Yes, you can pass them on to customers[,] in other words. It’s the customers
who should [complain].
"Atty. Baniqued: Yes, Your Honor… interrupted
"Justice Panganiban: And perhaps will not elect their representatives anymore[.]
"Atty. Baniqued: Yes, Your Honor…..
"Justice Panganiban: For agreeing to it, because the wisdom of a law is not for the Supreme Court
to pass upon.
"Atty. Baniqued: It just so happens, Your Honor, that what is [involved] here is a commodity that
when it goes up, it affects everybody….
"Justice Panganiban: Yes, inflationary and inflammatory….
"Atty. Baniqued: …just like what Justice Puno says it shakes the entire economic foundation, Your
Honor.
"Justice Panganiban: Yes, it’s inflationary[,] brings up the prices of everything…
"Atty. Baniqued: And it is our submission that[,] if the petroleum dealers cannot absorb it and
they pass it on to the customers, a lot of consumers would neither be in a position to absorb it too
and that[’s] why we patronize, Your Honor.
"Justice Panganiban: There might be wisdom in what you’re saying, but is that unconstitutional?
"Atty. Baniqued: Yes, because as I said, Your Honor, there are even constraints in the petroleum
dealers to pass it on, and we[‘]re not even sure whether….interrupted
"Justice Panganiban: Are these constraints [--] legal constraints?
"Atty. Baniqued: Well, it would be a different story, Your Honor[.] [T]hat’s something we probably
have to take up with the Department of Energy, lest [we may] be accused of …..
"Justice Panganiban: In other words, that’s your remedy
[--] to take it up with the Department of Energy
"Atty. Baniqued: …..unreasonable price increases, Your Honor.
"Justice Panganiban: Not for us to declare those provisions unconstitutional.
"Atty. Baniqued: We, again, wish to stress that the petroleum dealers went to this Court[,] both
as businessmen and as consumers. And as consumers, [we’re] also going to bear the burden of
whatever they themselves pass on.
"Justice Panganiban: You know[,] as a consumer, I wish you can really show that the laws are
unconstitutional, so I don’t have to pay it. But as a magistrate of this Court, I will have to pass
upon judgment on the basis of [--] whether the law is unconstitutional or not. And I hope you can
in your memorandum show that.
"Atty. Baniqued: We recognized that, Your Honor." (boldface supplied, pp. 386-410).
Amendments on Other Taxes and Administrative Matters. Finally, the BCC’s amendments
regarding other taxes90 are both germane in a legal sense and reasonably necessary in an
economic sense. This fact is evident, considering that the proposed changes in the VAT law will
have inevitable implications and repercussions on such taxes, as well as on the procedural
requirements and the disposition of incremental revenues, in the Tax Code. Either mitigating
measures91 have to be put in place or increased rates imposed, in order to achieve the purpose of
the law, cushion the impact of increased taxation, and still maintain the equitability desired of any
other revenue law.92 Directly related to the proposed VAT changes, these amendments are
expected also to have a salutary effect on the national economy.
The no-amendment rule93 in the Constitution was not violated by the BCC, because no
completely new provision was inserted in the approved bill. The amendments may be unpopular
or even work hardship upon everyone (this writer included). If so, the remedy cannot be
prescribed by this Court, but by Congress.
Rejecting Non-Conflicting
Provisions
Fourth, the BCC may choose neither to adopt nor to consolidate the versions presented to it by
both houses of Congress, but instead to reject non-conflicting provisions in those versions. In
other words, despite the lack of conflict in them, such provisions are still eliminated entirely from
the consolidated bill. There may be a constitutional problem here.
The no pass-on provisions in the congressional bills are the only item raised by petitioners
concerning deletion.94 As I have already mentioned earlier, these provisions were in conflict.
Thus, the BCC exercised its prerogative to remove them. In fact, congressional rules give the BCC
the power to reconcile disagreeing provisions, and in the process of reconciliation, to delete them.
No other non-conflicting provision was deleted.
At this point, and after the extensive discussion above, it can readily be seen no non-
conflictingprovisions of the E-VAT bills were rejected indiscriminately by the BCC.
Approving and Inserting
Completely New Provisions
Fifth, the BCC had the option of inserting completely new provisions not found in any of the
provisions of the bills of either house of Congress, or make and endorse an entirely new bill as a
substitute. Taking this option may be a blatant violation of the Constitution, for not only will the
surreptitious insertion or unwarranted creation contravene the "origination" principle; it may
likewise desecrate the three-reading requirement and the no-amendment rule.95
Fortunately, however, the BCC did not approve or insert completely new provisions. Thus, no
violation of the Constitution was committed in this regard.
Summary
The enrolled bill doctrine is said to be conclusive not only as to the provisions of a law, but also to
its due enactment. It is not absolute, however, and must yield to mandatory provisions of the
1987 Constitution. Specifically, this Court has the duty of striking down provisions of a law that in
their enactment violate conditions, restrictions or limitations imposed by the Constitution.96The
Bicameral Conference Committee (BCC) is a mere creation of Congress. Hence, the BCC may
resolve differences only in conflicting provisions of congressional bills that are referred to it; and it
may do so only on the condition that such resolution does not violate the origination, the three-
reading, and the no-amendment rules of the Constitution.
In crafting RA 9337, the BCC opted to reconcile the conflicting provisions of the Senate and
House bills, particularly those on the 70 percent cap on input tax; the 5 percent final withholding
tax; percentage taxes on domestic carriers, keepers of garages and international carriers; franchise
taxes; amusement taxes; excise taxes on manufactured oils and other fuels; registration
requirements; issuance of receipts or sales or commercial invoices; and disposition of incremental
revenues. To my mind, these changes do not violate the origination or the germaneness
principles.
Neither is there undue delegation of legislative power in the standby authority given by Congress
to the President. The law is complete, and the standards are fixed. While I concur with the
ponencia’s view that the President was given merely the power to ascertain the facts to bring the
law into operation -- clearly an administrative, not a legislative, function -- I stress that the finance
secretary remains the Chief Executive’s alter ego, not an agent of Congress.
The BCC exercised its prerogative to delete the no pass-on provisions, because these were in
conflict. I believe, however, that it blatantly violated the origination and the germaneness
principles when it inserted provisions not found in the House versions of the E-VAT Law: (1)
increasing the tax rates on domestic, resident foreign and nonresident foreign corporations; (2)
increasing the tax credit against taxes due from nonresident foreign corporations on
intercorporate dividends; and (3) reducing the allowable deduction for interest expense. Hence, I
find these insertions unconstitutional.
Some have criticized the E-VAT Law as oppressive to our already suffering people. On the other
hand, respondents have justified it by comparing it to bitter medicine that patients must endure
to be healed eventually of their maladies. The advantages and disadvantages of the E-VAT Law, as
well as its long-term effects on the economy, are beyond the reach of judicial review. The
economic repercussions of the statute are policy in nature and are beyond the power of the courts
to pass upon.
I have combed through the specific points raised in the Petitions. Other than the three items on
income taxes that I respectfully submit are unconstitutional, I cannot otherwise attribute grave
abuse of discretion to the BCC, or Congress for that matter, for passing the law.
"[T]he Court -- as a rule -- is deferential to the actions taken by the other branches of government
that have primary responsibility for the economic development of our country."97Thus, in
upholding the Philippine ratification of the treaty establishing the World Trade Organization
(WTO), Tañada v. Angara held that "this Court never forgets that the Senate, whose act is under
review, is one of two sovereign houses of Congress and is thus entitled to great respect in its
actions. It is itself a constitutional body, independent and coordinate, and thus its actions are
presumed regular and done in good faith. Unless convincing proof and persuasive arguments are
presented to overthrow such presumption, this Court will resolve every doubt in its favor."98 As
pointed our in Cawaling Jr. v. Comelec, the grounds for nullity of the law "must be beyond
reasonable doubt, for to doubt is to sustain."99 Indeed, "there must be clear and unequivocal
showing that what the Constitutions prohibits, the statute permits."100
WHEREFORE, I vote to GRANT the Petitions in part and to declare Sections 1, 2, and 3 of Republic
Act No. 9337 unconstitutional, insofar as these sections (a) amend the rates of income tax on
domestic, resident foreign, and nonresident foreign corporations; (b) amend the tax credit against
taxes due from nonresident foreign corporations on intercorporate dividends; and (c) reduce the
allowable deduction for interest expense. The other provisions are constitutional, and as to these I
vote to DISMISS the Petitions.
ARTEMIO V. PANGANIBAN
Associate Justic

x ---------------------------------------------------------------------------------------- x
CONCURRING AND DISSENTING OPINION
YNARES-SANTIAGO, J.:
The ponencia states that under the provisions of the Rules of the House of Representatives and
the Senate Rules, the Bicameral Conference Committee is mandated to settle differences between
the disagreeing provisions in the House bill and Senate bill. However, the ponencia construed the
term "settle" as synonymous to "reconcile" and "harmonize," and as such, the Bicameral
Conference Committee may either (a) adopt the specific provisions of either the House bill or
Senate bill, (b) decide that neither provisions in the House bill or the provisions in the Senate bill
would be carried into the final form of the bill, and/or (c) try to arrive at a compromise between
the disagreeing provisions.
I beg to differ on the third proposition.
Indeed, Section 16(3), Article VI of the 1987 Constitution explicitly allows each House to
determine the rules of its proceedings. However, the rules must not contravene constitutional
provisions. The rule-making power of Congress should take its bearings from the Constitution. If
in the exercise of this rule-making power, Congress failed to set parameters in the functions of
the committee and allowed the latter unbridled authority to perform acts which Congress itself is
prohibited, like the passage of a law without undergoing the requisite three-reading and the so-
called no-amendment rule, then the same amount to grave abuse of discretion which this Court is
empowered to correct under its expanded certiorari jurisdiction. Notwithstanding the doctrine of
separation of powers, therefore, it is the duty of the Court to declare as void a legislative
enactment, either from want of constitutional power to enact or because the constitutional forms
or conditions have not been observed.1 When the Court declares as unconstitutional a law or a
specific provision thereof because procedural requirements for its passage were not complied, the
Court is by no means asserting its ascendancy over the Legislature, but simply affirming the
supremacy of the Constitution as repository of the sovereign will.2 The judicial branch must
ensure that constitutional norms for the exercise of powers vested upon the two other branches
are properly observed. This is the very essence of judicial authority conferred upon the Court
under Section 1, Article VII of the 1987 Constitution.
The Rules of the House of Representatives and the Rules of the Senate provide that in the event
there is disagreement between the provisions of the House and Senate bills, the differences shall
be settled by a bicameral conference committee.
By this, I fully subscribe to the theory advanced in the Dissenting Opinion of Chief Justice Hilario
G. Davide, Jr. in Tolentino v. Secretary of Finance3 that the authority of the bicameral conference
committee was limited to the reconciliation of disagreeing provisions or the resolution of
differences or inconsistencies. Thus, it could only either (a) restore, wholly or partly, the specific
provisions of the House bill amended by the Senate bill, (b) sustain, wholly or partly, the Senate’s
amendments, or (c) by way of a compromise, to agree that neither provisions in the House bill
amended by the Senate nor the latter’s amendments thereto be carried into the final form of the
former.
Otherwise stated, the Bicameral Conference Committee is authorized only to adopt either the
version of the House bill or the Senate bill, or adopt neither. It cannot, as the ponencia proposed,
"try to arrive at a compromise", such as introducing provisions not included in either the House or
Senate bill, as it would allow a mere ad hoc committee to substitute the will of the entire
Congress and without undergoing the requisite three-reading, which are both constitutionally
proscribed. To allow the committee unbridled discretion to overturn the collective will of the
whole Congress defies logic considering that the bills are passed presumably after study,
deliberation and debate in both houses. A lesser body like the Bicameral Conference Committee
should not be allowed to substitute its judgment for that of the entire Congress, whose will is
expressed collectively through the passed bills.
When the Bicameral Conference Committee goes beyond its limited function by substituting its
own judgment for that of either of the two houses, it violates the internal rules of Congress and
contravenes material restrictions imposed by the Constitution, particularly on the passage of law.
While concededly, the internal rules of both Houses do not explicitly limit the Bicameral
Conference Committee to a consideration only of conflicting provisions, it is understood that the
provisions of the Constitution should be read into these rules as imposing limits on what the
committee can or cannot do. As such, it cannot perform its delegated function in violation of the
three-reading requirement and the no-amendment rule.
Section 26(2) of Article VI of the 1987 Constitution provides that:
(2) No bill shall be passed by either House shall become a law unless it has passed three readings
on separate days, and printed copies thereof in its final form have been distributed to its Members
three days before its passage, except when the President certifies to the necessity of its immediate
enactment to meet a public calamity or emergency. Upon the last reading of a bill, no
amendment hereto shall be allowed, and the vote thereon shall be taken immediately thereafter,
and the yeas and nays entered in the Journal.
Thus, before a bill becomes a law, it must pass three readings. Hence, the ponencia’ssubmission
that despite its limited authority, the Bicameral Conference Committee could "compromise the
disagreeing provisions" by substituting it with its own version – clearly violate the three-reading
requirement, as the committee’s version would no longer undergo the same since it would be
immediately put into vote by the respective houses. In effect, it is not a bill that was passed by the
entire Congress but by the members of the ad hoc committee only, which of course is
constitutionally infirm.
I disagree that the no-amendment rule referred only to "the procedure to be followed by each
house of Congress with regard to bills initiated in each of said respective houses" because it
would relegate the no-amendment rule to a mere rule of procedure. To my mind, the no-
amendment rule should be construed as prohibiting the Bicameral Conference Committee from
introducing amendments and modifications to non-disagreeing provisions of the House and
Senate bills. In sum, the committee could only either adopt the version of the House bill or the
Senate bill, or adopt neither. As Justice Reynato S. Puno said in his Dissenting Opinion in
Tolentino v. Secretary of Finance,4 there is absolutely no legal warrant for the bold submission
that a Bicameral Conference Committee possesses the power to add/delete provisions in bills
already approved on third reading by both Houses or an ex post veto power.
In view thereof, it is my submission that the amendments introduced by the Bicameral Conference
Committee which are not found either in the House or Senate versions of the VAT reform bills,
but are inserted merely by the Bicameral Conference Committee and thereafter included in
Republic Act No. 9337, should be declared unconstitutional. The insertions and deletions made
do not merely settle conflicting provisions but materially altered the bill, thus giving rise to the
instant petitions.
I, therefore, join the concurring and dissenting opinion of Mr. Justice Reynato S. Puno.
CONSUELO YNARES-SANTIAGO
Associate Justice

x----------------------------------------------------------------------------------------------x
CONCURRING AND DISSENTING OPINION
SANDOVAL – GUTIERREZ, J.:
Adam Smith, the great 18th – century political economist, enunciated the dictum that "the
subjects of every state ought to contribute to the support of government, as nearly as possible, in
proportion to their respective abilities; that is, in proportion to the revenue which they respectively
enjoy under the protection of the state."1 At no other time this dictum becomes more urgent and
obligatory as in the present time, when the Philippines is in its most precarious fiscal position.
At this juncture, may I state that I join Mr. Senior Justice Reynato S. Puno in his Opinion,
specifically on the following points:
1. It is "high time to re-examine the test of germaneness proffered in Tolentino;"
2. The Bicameral Conference Committee "cannot exercise its unbridled discretion," "it cannot
create a new law," and its deletion of the "no pass on provision" common in both Senate Bill No.
1950 and House Bill No. 3705 is "unconstitutional."
In addition to the above points raised by Mr. Senior Justice Puno, may I expound on the issues
specified hereunder:
There is no reason to rush and stamp the imprimatur of validity to a tax law, R.A. 9337, that
contains patently unconstitutional provisions. I refer to Sections 4 to 6 which violate the principle
of non-delegation of legislative power. These Sections authorize the President, upon
recommendation of the Secretary of Finance, to raise the VAT rate from 10% to 12% effective
January 1, 2006, if the conditions specified therein are met, thus:
. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added tax to twelve percent (12%) after any of the
following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 ½%).
This proviso on the authority of the President is uniformly appended to Sections 4, 5 and 6 of R.A.
No. 9337, provisions amending Sections 106, 107 and 108 of the NIRC, respectively. Section 4
imposes a 10% VAT on sales of goods and properties, Section 5 imposes a 10% VAT on
importation of goods, and Section 6 imposes a 10% VAT on sale of services and use or lease of
properties.
Petitioners in G.R. Nos. 168056,2 1682073 and 1684634 assail the constitutionality of the above
provisions on the ground that such stand-by authority granted to the President constitutes: (1)
undue delegation of legislative power; (2) violation of due process; and (3) violation of the
principle of "exclusive origination." They cited as their basis Article VI, Section 28 (2); Article III,
Section 1; and Article VI, Section 24 of the Constitution.
I
Undue Delegation of Legislative Power
Taxation is an inherent attribute of sovereignty.5 It is a power that is purely legislative and which
the central legislative body cannot delegate either to the executive or judicial department of
government without infringing upon the theory of separation of powers.6 The rationale of this
doctrine may be traced from the democratic principle of "no taxation without representation."
The power of taxation being so pervasive, it is in the best interest of the people that such power
be lodged only in the Legislature. Composed of the people’s representatives, it is "closer to the
pulse of the people and… are therefore in a better position to determine both the extent of the
legal burden the people are capable of bearing and the benefits they need."7 Also, this set-up
provides security against the abuse of power. As Chief Justice Marshall said: "In imposing a tax,
the legislature acts upon its constituents. The power may be abused; but the interest, wisdom,
and justice of the representative body, and its relations with its constituents, furnish a sufficient
security."
Consequently, Section 24, Article VI of our Constitution enshrined the principle of "no taxation
without representation" by providing that "all… revenue bills… shall originate exclusively in the
House of Representatives, but the Senate may propose or concur with amendments." This
provision generally confines the power of taxation to the Legislature.
R.A. No. 9337, in granting to the President the stand-by authority to increase the VAT rate from
10% to 12%, the Legislature abdicated its power by delegating it to the President. This is
constitutionally impermissible. The Legislature may not escape its duties and responsibilities by
delegating its power to any other body or authority. Any attempt to abdicate the power is
unconstitutional and void, on the principle that potestas delegata non delegare potest.8 As Judge
Cooley enunciated:
"One of the settled maxims in constitutional law is, that the power conferred upon the legislature
to make laws cannot be delegated by that department to any other body or authority. Where the
sovereign power of the state has located the authority, there it must remain; and by the
constitutional agency alone the laws must be made until the Constitution itself is changed. The
power to whose judgment, wisdom, and patriotism this high prerogative has been entrusted
cannot relieve itself of the responsibility by choosing other agencies upon which the power shall
be devolved, nor can it substitute the judgment, wisdom, and patriotism of any other body for
those to which alone the people have seen fit to confide this sovereign trust."9
Of course, the rule which forbids the delegation of the power of taxation is not absolute and
inflexible. It admits of exceptions. Retired Justice Jose C. Vitug enumerated such exceptions, to
wit: (1) delegations to local governments (to be exercised by the local legislative bodies thereof)
or political subdivisions; (2) delegations allowed by the Constitution; and (3) delegations relating
merely to administrative implementation that may call for some degree of discretionary powers
under a set of sufficient standards expressed by law.10
Patently, the act of the Legislature in delegating its power to tax does not fall under any of the
exceptions.
First, it does not involve a delegation of taxing power to the local government. It is a delegation to
the President.
Second, it is not allowed by the Constitution. Section 28 (2), Article VI of the Constitution
enumerates the charges or duties, the rates of which may be fixed by the President pursuant to a
law passed by Congress, thus:
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.
Noteworthy is the absence of tax rates or VAT rates in the enumeration. If the intention of the
Framers of the Constitution is to permit the delegation of the power to fix tax rates or VAT ratesto
the President, such could have been easily achieved by the mere inclusion of the term "tax rates"
or "VAT rates" in the enumeration. It is a dictum in statutory construction that what is expressed
puts an end to what is implied. Expressium facit cessare tacitum.11 This is a derivative of the more
familiar maxim express mention is implied exclusion or expressio unius est exclusio alterius.
Considering that Section 28 (2), Article VI expressly speaks only of "tariff rates,12 import13 and
export quotas,14 tonnage15 and wharfage dues16 and other duties and imposts,17" by no
stretch of imagination can this enumeration be extended to include the VAT.
And third, it does not relate merely to the administrative implementation of R.A. No. 9337.
In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual
to inquire whether the statute was complete in all its terms and provisions when it left the hands
of the Legislature so that nothing was left to the judgment of any other appointee or delegate of
the legislature.18
In the present case, the President is the delegate of the Legislature, endowed with the power to
raise the VAT rate from 10 % to 12% if any of the following conditions, to reiterate, has been
satisfied: (i) value-added tax collection as a percentage of gross domestic product (GDP) of the
previous year exceeds two and four-fifths percent (2 4/5%) or (ii) National Government deficit as
a percentage of GDP of the previous year exceeds one and one-half percent (1 ½%).
At first glance, the two conditions may appear to be definite standards sufficient to guide the
President. However, to my mind, they are ineffectual and malleable as they give the President
ample opportunity to exercise her authority in arbitrary and discretionary fashion.
The two conditions set forth by law would have been sufficient had it not been for the fact that
the President, being at the helm of the entire officialdom, has more than enough power of
control to bring about the existence of such conditions. Obviously, R.A. No. 9337 allows the
President to determine for herself whether the VAT rate shall be increased or not at all. The
fulfillment of the conditions is entirely placed in her hands. If she wishes to increase the VAT rate,
all she has to do is to strictly enforce the VAT collection so as to exceed the 2 4/5% ceiling. The
same holds true with the national government deficit. She will just limit government expenses so
as not to exceed the 1 ½% ceiling. On the other hand, if she does not wish to increase the VAT
rate, she may discourage the Secretary of Finance from making the recommendation.
That the President’s exercise of an authority is practically within her control is tantamount to
giving no conditions at all. I believe this amounts to a virtual surrender of legislative power to her.
It must be stressed that the validity of a law is not tested by what has been done but by what may
be done under its provisions.19
II
Violation of Due Process
The constitutional safeguard of due process is briefly worded in Section 1, Article III of the
Constitution which states that, "no person shall be deprived of life, liberty or property without due
process of law."20
Substantive due process requires the intrinsic validity of the law in interfering with the rights of
the person to his property. The inquiry in this regard is not whether or not the law is being
enforced in accordance with the prescribed manner but whether or not, to begin with, it is a
proper exercise of legislative power.
To be so, the law must have a valid governmental objective, i.e., the interest of the public as
distinguished from those of a particular class, requires the intervention of the State. This objective
must be pursued in a lawful manner, or in other words, the means employed must be reasonably
related to the accomplishment of the purpose and not unduly oppressive.
There is no doubt that R.A. No. 9337 was enacted pursuant to a valid governmental objective, i.e.
to raise revenues for the government. However, with respect to the means employed to
accomplish such objective, I am convinced that R.A. No. 9337, particularly Sections 4, 5 and 6
thereof, are arbitrary and unduly oppressive.
A reading of the Senate deliberation reveals that the first condition constitutes a reward to the
President for her effective collection of VAT. Thus, the President may increase the VAT rate from
10% to 12% if her VAT collection during the previous year exceeds 2 4/5% of the Gross
Domestic Product. I quote the deliberation:
Senator Lacson. Thank you, Mr. President. Now, I will go back to my original question, my first
question. Who are we threatening to punish on the imposed condition No. 1 – the public or the
President?
Senator Recto. That is not a punishment, that is supposed to be a reward system.
Senator Lacson. Yes, an incentive. So we are offering an incentive to the Chief Executive.
Senator Recto. That is right.
Senator Lacson. – in order for her to be able to raise the VAT to 12 %.
Senator Recto. That is right. That is the intention, yes.
xxxxxx
Senator Osmena. All right. Therefore, with the lifting of exemptions it stands to reason that
Value-added tax collections as a percentage of GDP will be much higher than… Now, if it is
higher than 2.5%, in other words, because they collected more, we will allow them to even tax
more. Is that the meaning of this particular phrase?
Senator Recto. Yes, Mr. President, that is why it is as low as 2.8%. It is like if a person has a son
and his son asks him for an allowance, I do not think that he would immediately give his son an
increase in allowance unless he tells his son, You better improve your grades and I will give you an
allowance. That is the analogy of this.
xxxxxx
Senator Osmena. So the gentleman is telling the President, If you collect more than 138 billion, I
will give you additional powers to tax the people.
Senator Recto. x x x We are saying, kung mataas and grade mo, dadagdagan ko an allowance
mo. Katulad ng sinabi natin ditto. What we are saying here is you prove to me that you can collect
it, then we will increase your rate, you can raise your rate. It is an incentive.21
Why authorize the President to increase the VAT rate on the premise alone that she deserves an
"incentive" or "reward"? Indeed, why should she be rewarded for performing a duty reposed
upon her by law?
The rationale stated by Senator Recto is flawed. One of the principles of sound taxation is fiscal
adequacy. The proceeds of tax revenue should coincide with, and approximate the needs of,
government expenditures. Neither an excess nor a deficiency of revenue vis-à-vis the needs of
government would be in keeping with the principle.22
Equating the grant of authority to the President to increase the VAT rate with the grant of
additional allowance to a studious son is highly inappropriate. Our Senators must have forgotten
that for every increase of taxes, the burden always redounds to the people. Unlike the additional
allowance given to a studious son that comes from the pocket of the granting parent alone, the
increase in the VAT rate would be shouldered by the masses. Indeed, mandating them to pay the
increased rate as an award to the President is arbitrary and unduly oppressive. Taxation is not a
power to be exercised at one’s whim.
III
Exclusive Origination from the
House of Representatives
Section 24, Article VI of the Constitution provides:
SEC. 24. All appropriations, revenue or tariff bills, bills authorizing increase of the public debt, bills
of local application, and private bills shall originate exclusively in the House of Representatives,
but the Senate may propose or concur with amendments.
In Tolentino vs. Secretary of Finance,23 this Court expounded on the foregoing provision by
holding that:
"x x x To begin with, it is not the law – but the revenue bill – which is required by the Constitution
to ‘originate exclusively in the House of Representatives. It is important to emphasize this, because
a bill originating the in the House may undergo such extensive changes in the Senate that the
result may be a rewriting of the whole x x x. At this point, what is important to note is that, as a
result of the Senate action, a distinct bill may be produced. To insist that a revenue statute -- and
not only the bill which initiated the legislative process culminating in the enactment of the law –
must substantially be the same as the House Bill would be to deny the Senate’s power not only to
‘concur with amendments: but also to ‘propose amendments.’ It would be to violate the co-
equality of the legislative power of the two houses of Congress and in fact, make the House
superior to the Senate."
The case at bar gives us an opportunity to take a second hard look at the efficacy of the foregoing
jurisprudence.
Section 25, Article VI is a verbatim re-enactment of Section 18, Article VI of the 1935
Constitution. The latter provision was modeled from Section 7 (1), Article I of the United States
Constitution, which states:
"All bills for raising revenue shall originate in the House of Representatives, but the Senate may
propose or concur with amendments, as on other bills."
The American people, in entrusting what James Madison termed "the power of the purse" to their
elected representatives, drew inspiration from the British practice and experience with the House
of Commons. As one commentator puts it:
"They knew the inestimable value of the House of Commons, as a component branch of the
British parliament; and they believed that it had at all times furnished the best security against the
oppression of the crown and the aristocracy. While the power of taxation, of revenue, and of
supplies remained in the hands of a popular branch, it was difficult for usurpation to exist for any
length of time without check, and prerogative must yield of that necessity which controlled at
once the sword and the purse."
But while the fundamental principle underlying the vesting of the power to propose revenue bills
solely in the House of Representatives is present in both the Philippines and US Constitutions,
stress must be laid on the differences between the two quoted provisions. For one, the word
"exclusively" appearing in Section 24, Article VI of our Constitution is nowhere to be found in
Section 7 (1), Article I of the US Constitution. For another, the phrase "as on other bills," present
in the same provision of the US Constitution, is not written in our Constitution.
The adverb "exclusively" means "in an exclusive manner."24 The term "exclusive" is defined as
"excluding or having power to exclude; limiting to or limited to; single, sole, undivided,
whole."25In one case, this Court define the term "exclusive" as "possessed to the exclusion of
others; appertaining to the subject alone, not including, admitting, or pertaining to another or
others."26
As for the term "originate," its meaning are "to cause the beginning of; to give rise to; to initiate;
to start on a course or journey; to take or have origin; to be deprived; arise; begin or start."27
With the foregoing definitions in mind, it can be reasonably concluded that when Section 24,
Article VI provides that revenue bills shall originate exclusively from the House of Representatives,
what the Constitution mandates is that any revenue statute must begin or start solely and only in
the House. Not the Senate. Not both Chambers of Congress. But there is more to it than that. It
also means that "an act for taxation must pass the House first." It is no consequence what
amendments the Senate adds.28
A perusal of the legislative history of R.A. No. 9337 shows that it did not "exclusively originate"
from the House of Representatives.
The House of Representatives approved House Bill Nos. 355529 and 370530. These Bills intended
to amend Sections 106, 107, 108, 109, 110, 111 and 114 of the NIRC. For its part, the Senate
approved Senate Bill No. 1950,31 taking into consideration House Bill Nos. 3555 and3705. It
intended to amend Sections 27, 28, 34, 106, 108, 109, 110, 112, 113, 114, 116, 117, 119, 121,
125, 148, 151, 236, 237 and 288 of the NIRC.
Thereafter, on April 13, 2005, a Committee Conference was created to thresh out the disagreeing
provisions of the three proposed bills.
In less than a month, the Conference Committee "after having met and discussed in full free and
conference," came up with a report and recommended the approval of the consolidated version
of the bills. The Senate and the House of Representatives approved it.
On May 23, 2005, the enrolled copy of the consolidated version of the bills was transmitted to
President Arroyo, who signed it into law. Thus, the enactment of R.A. No. 9337, entitled "An Act
Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119,
121, 148, 151, 236, 237 and 288 of the National Internal Revenue Code of 1997, As Amended
and For Other Purposes."
Clearly, Senate Bill No. 1950 is not based on any bill passed by the House of Representatives. It
has a legislative identity and existence separate and apart from House Bills No. 3555 and 3705.
Instead of concurring or proposing amendments, Senate Bill No. 1950 merely "takes into
consideration" the two House Bills. To take into consideration means "to take into account."
Consideration, in this sense, means "deliberation, attention, observation or
contemplation.32Simply put, the Senate in passing Senate Bill No. 1950, a tax measure, merely
took into account House Bills No. 3555 and 3705, but did not concur with or amend either or
both bills. As a matter of fact, it did not even take these two House Bills as a frame of reference.
In Tolentino, the majority subscribed to the view that Senate may amend the House revenue bill
by substitution or by presenting its own version of the bill. In either case, the result is "two bills on
the same subject."33 This is the source of the "germaneness" rule which states that the Senate bill
must be germane to the bill originally passed by the House of Representatives. In Tolentino, this
was not really an issue as both the House and Senate Bills in question had one subject – the VAT.
The facts obtaining here is very much different from Tolentino. It is very apparent that House Bills
No. 3555 and 3705 merely intended to amend Sections 106, 107, 108, 109, 110, 111 and 114 of
the NIRC of 1997, pertaining to the VAT provisions. On the other hand, Senate Bill No. 1950
intended to amend Sections 27, 28, 34, 106, 108, 109, 110, 112, 113, 114, 116, 117, 119, 121,
125, 148, 151, 236, 237 and 288 of the NIRC, pertaining to matters outside of VAT, such as
income tax, percentage tax, franchise tax, taxes on banks and other financial intermediaries,
excise taxes, etc.
Thus, I am of the position that the Senate could not, without violating the germaneness rule and
the principle of "exclusive origination," propose tax matters not included in the House Bills.
WHEREFORE, I vote to CONCUR with the majority opinion except with respect to the points
above-mentioned.
ANGELINA SANDOVAL-GUTIERREZ
Associate Justice

X--------------------------------------------------X
CONCURRING AND DISSENTING OPINION
CALLEJO, SR., J.:
I join the concurring and dissenting opinion of Mr. Justice Reynato S. Puno as I concur with the
majority opinion but vote to declare as unconstitutional the deletion of the "no-pass on provision"
contained in Senate Bill No. 1950 and House Bill No. 3705 (the constituent bills of Republic Act
No. 9337).
The present petitions provide an opportune
occasion for the Court to re-examine
Tolentino v. Secretary of Finance
In ruling that Congress, in enacting R.A. No. 9337, complied with the formal requirements of the
Constitution, the ponencia relies mainly on the Court’s rulings in Tolentino v. Secretary of
Finance.1 To recall, Tolentino involved Republic Act No. 7716, which similarly amended the NIRC
by widening the tax base of the VAT system. The procedural attacks against R.A. No. 9337 are
substantially the same as those leveled against R.A. No. 7716, e.g., violation of the "Origination
Clause" (Article VI, Section 24) and the "Three-Reading Rule" and the "No-Amendment Rule"
(Article VI, Section 26[2]) of the Constitution.
The present petitions provide an opportune occasion for the Court to re-examine its rulings in
Tolentino particularly with respect to the scope of the powers of the Bicameral Conference
Committee vis-à-vis Article VI, Section 26(2) of the Constitution.
The crucial issue posed by the present petitions is whether the Bicameral Conference Committee
may validly introduce amendments that were not contained in the respective bills of the Senate
and the House of Representatives. As a corollary, whether it may validly delete provisions
uniformly contained in the respective bills of the Senate and the House of Representatives.
In Tolentino, the Court declared as valid amendments introduced by the Bicameral Conference
Committee even if these were not contained in the Senate and House bills. The majority opinion
therein held:
As to the possibility of an entirely new bill emerging out of a Conference Committee, it has been
explained:
Under congressional rules of procedures, conference committees are not expected to make any
material change in the measure at issue, either by deleting provisions to which both houses have
already agreed or by inserting new provisions. But this is a difficult provision to enforce. Note the
problem when one house amends a proposal originating in either house by striking out everything
following the enacting clause and substituting provisions which make it an entirely new bill. The
versions are now altogether different, permitting a conference committee to draft essentially a
new bill …
The result is a third version, which is considered an "amendment in the nature of a substitute,"
the only requirement for which being that the third version be germane to the subject of the
House and Senate bills.
Indeed, this Court recently held that it is within the power of a conference committee to include
in its report an entirely new provision that is not found either in the House bill or in the Senate Bill.
If the committee can propose an amendment consisting of one or two provisions, collectively
considered as an "amendment in the nature of a substitute," so long as such an amendment is
germane to the subject of the bills before the committee. After all, its report was not final but
needed the approval of both houses of Congress to become valid as an act of the legislative
department. The charge that in this case the Conference Committee acted a third legislative
chamber is thus without any basis.2
The majority opinion in Tolentino relied mainly on the practice of the United States legislature in
making the foregoing disquisition. It was held, in effect, that following the US Congress’ practice
where a conference committee is permitted to draft a bill that is entirely different from the bills of
either the House of Representatives or Senate, the Bicameral Conference Committee is similarly
empowered to make amendments not found in either the House or Senate bills.
The ponencia upholds the acts of the Bicameral Conference Committee with respect to R.A. No.
9337, following the said ruling in Tolentino.
To my mind, this unqualified adherence by the majority opinion in Tolentino, and now by the
ponencia, to the practice of the US Congress and its conference committee system ought to be
re-examined. There are significant textual differences between the US Federal Constitution’s and
our Constitution’s prescribed congressional procedure for enacting laws. Accordingly, the degree
of freedom accorded by the US Federal Constitution to the US Congress markedly differ from that
accorded by our Constitution to the Philippine Congress.
Section 7, Article I of the US Federal Constitution reads:
[1] All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may
propose or concur with Amendments as on other Bills.
[2] Every Bill which shall have passed the House of Representatives and the Senate, shall, before it
become a Law, be presented to the President of the United States; If he approve he shall it, but if
not he shall return it, with his Objections to the House in which it shall have originated, who shall
enter the Objections at large on their Journal, and proceed to reconsider it. If after such
Reconsideration two thirds of that House shall agree to pass the Bill, it shall be sent together with
the Objections, to the other House, by which it shall, likewise, be reconsidered, and if approved by
two thirds of that House, it shall become a Law. But in all such Cases the Votes of both Houses
shall be determined by yeas and Nays, and the Names of the Persons voting for and against the
Bill shall be entered on the Journal of each House respectively. If any Bill shall not be returned by
the President within ten Days (Sundays excepted) after it shall have been presented to him, the
Same shall be a Law, in like Manner as if he had signed it, unless the Congress by their
Adjournment prevent its return in which Case it shall not be a Law.
[3] Every Order, Resolution, or Vote to Which the Concurrence of the Senate and House of
Representatives may be necessary (except on a question of Adjournment) shall be presented to
the President of the United States; and before the Same shall take Effect, shall be approved by
him, or being disapproved by him, shall be repassed by two thirds of the Senate and House of
Representatives, according to the Rules and Limitations prescribed in the Case of a Bill.
On the other hand, Article VI of our Constitution prescribes for the following procedure for
enacting a law:
Sec. 26. (1) Every bill passed by Congress shall embrace only one subject which shall be expressed
in the title thereof.
(2) No bill passed by either House shall become a law unless it has passed three readings on
separate days, and printed copies thereof in its final form have been distributed to its Members
three days before its passage, except when the President certifies to the necessity of its immediate
enactment to meet a public calamity or emergency. Upon the last reading of a bill, no
amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter,
and the yeas and nays entered in the Journal.
Sec. 27. (1) Every bill passed by Congress shall, before it becomes a law, be presented to the
President. If he approves the same, he shall sign it; otherwise, he shall veto it and return the same
with his objections to the House where it originated, which shall enter the objections at large in
its Journal and proceed to reconsider it. If, after such reconsideration, two-thirds of all the
Members of such House shall agree to pass the bill, it shall be sent, together with the objections,
to the other House by which it shall likewise be reconsidered, and if approved by two-thirds of all
the Members of that House, it shall become a law. In all such cases, the votes of each House shall
be determined by yeas and nays, and the names of the Members voting for or against shall be
entered in its Journal. The President shall communicate his veto of any bill to the House where it
originated within thirty days after the date of receipt thereof; otherwise, it shall become a law as
if he had signed it.
(2) The President shall have the power to veto any particular item or items in an appropriation,
revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object.
Two distinctions are readily apparent between the two procedures:
1. Unlike the US Federal Constitution, our Constitution prescribes the "three-reading" rule or that
no bill shall become a law unless it shall have been read on three separate days in each house
except when its urgency is certified by the President; and
2. Unlike the US Federal Constitution, our Constitution prescribes the "no-amendment" rule or
that no amendments shall be allowed upon the last reading of the bill.
American constitutional experts have lamented that certain congressional procedures have not
been entrenched in the US Federal Constitution. According to a noted constitutional law
professor, the absence of the "three-reading" requirement as well as similar legislative-procedure
rules from the US Federal Constitution is a "cause for regret."3
In this connection, it is interesting to note that the conference committee system in the US
Congress has been described in this wise:
Conference Committees
Another main mechanism of joint House and Senate action is the conference committee.
Inherited from the English Constitution, the conference committee system is an evolutionary
product whose principal threads were woven on the loom of congressional practice into a unified
pattern by the middle of the nineteenth century. "By 1852," writes Ada McCown, historian of the
origin and development of the conference committee, "the customs of presenting identical
reports from the committees of conference in both houses, of granting high privilege to these
conference reports, of voting upon the conference report as a whole and permitting no
amendment of it, of keeping secret the discussions carried on in the meetings of the conference
committee, had become established in American parliamentary practice."
Conference committees are composed of Senators and Representatives, usually three each,
appointed by the presiding officers of both houses, for the purpose of adjusting differences
between bills they have passed. This device has been extensively used by every Congress since
1789. Of the 1157 laws enacted by the 78th Congress, for example, 107 went through
conference and, of these, 36 were appropriation bills on which the House had disagreed to
Senate amendments. In practice, most important legislation goes through the conference closet
and is there revised, sometimes beyond recognition, by the all-powerful conferees or managers,
as they are styled. A large body of law and practice has been built up over the years governing
conference procedure and reports.
Suffice it to say here that serious evils have marked the development of the conference committee
system. In the first place, it is highly prodigal of members’ time. McConachie calculated that the
average time consumed in conference was 33 days per bill. Bills are sent to conference without
reading the amendments of the other chamber. Despite rules to the contrary, conferees do not
confine themselves to matters in dispute, but often initiate entirely new legislation and even strike
out identical provisions previously approved by both houses. This happened during the 78th
Congress, for instance, when an important amendment to the surplus property bill, which had
been approved by both houses, was deleted in conference.
Conference committees, moreover, suffer like other committees from the seniority rule. The
senior members of the committees concerned, who are customarily appointed as managers on
the part of the House and Senate, are not always the best informed on the questions at issue, nor
do they always reflect the majority sentiment of their houses. Furthermore, conference reports
must be accepted or rejected in toto without amendment and they are often so complex and
obscure that they are voted upon without knowledge of their contents. What happens in practice
is that Congress surrenders its legislative function to irresponsible committees of conference. The
standing rules against including new and extraneous matter in conference reports have been
gradually whittled away in recent years by the decisions of presiding officers. Senate riders
attached to appropriation bills enable conference committees to legislate and the House usually
accepts them rather than withhold supply, thus putting it, as Senator Hoar once declared, under a
degrading duress.
It is also alleged that under this secret system lobbyist are able to kill legislation they dislike and
that "jokers" designed to defeat the will of Congress can be inserted without detection. Senator
George W. Norris once characterized the conference committee as a third house of Congress.
"The members of this ‘house,’ he said, "are not elected by the people. The people have no voice as
to who these members shall be ... This conference committee is many times, in very important
matters of legislation, the most important branch of our legislature. There is no record kept of the
workings of the conference committee. Its work is performed, in the main, in secret. No
constituent has any definite knowledge as to how members of this conference committee vote,
and there is no record to prove the attitude of any member of the conference committee ... As a
practical proposition we have legislation, then, not by the voice of the members of the Senate,
not by the members of the House of Representatives, but we have legislation by the voice of five
or six men. And for practical purposes, in most cases, it is impossible to defeat the legislation
proposed by this conference committee. Every experienced legislator knows that it is the hardest
thing in the world to defeat a conference report."
Despite these admitted evils, impartial students of the conference committee system defend it on
net balance as an essential part of the legislative process. Some mechanism for reconciling
differences under bicameral system is obviously indispensable. The remedy for the defects of the
device is not to abolish it, but to keep it under congressional control. This can be done by
enforcing the rules which prohibit the inclusion in conference reports of matter not committed to
them by either house and forbid the deletion of items approved by both bodies; by permitting
conference managers to report necessary new matter separately and the houses to consider it
apart from the conference report; by fixing a deadline toward the close of a session after which
no bills could be sent to conference, so as to eliminate congestion at the end of the session – a
suggestion made by the elder Senator La Follete in 1919; by holding conferences in sessions open
to the public, letting conference reports lie over longer, and printing them in bill form (with
conference changes in italics) so as to allow members more time to examine them and discover
"jokers."4
The "three-reading" and "no-amendment" rules, absent in the US Federal Constitution, but
expressly mandated by Article VI, Section 26(2) of our Constitution are mechanisms instituted to
remedy the "evils" inherent in a bicameral system of legislature, including the conference
committee system.
Sadly, the ponencia’s refusal to apply Article VI, Section 26(2) of the Constitution on the Bicameral
Conference Committee and the amendments it introduced to R.A. No. 9337 has "effectively
dismantled" the "three-reading rule" and "no-amendment rule." As posited by Fr. Joaquin Bernas,
a member of the Constitutional Commission:
In a bicameral system, bills are independently processed by both House of Congress. It is not
unusual that the final version approved by one House differs from what has been approved by the
other. The "conference committee," consisting of members nominated from both Houses, is an
extra-constitutional creation of Congress whose function is to propose to Congress ways of
reconciling conflicting provisions found in the Senate version and in the House version of a bill. It
performs a necessary function in a bicameral system. However, since conference committees have
merely delegated authority from Congress, they should not perform functions that Congress itself
may not do. Moreover, their proposals need confirmation by both Houses of Congress.
In Tolentino v. Secretary of Finance, the Court had the opportunity to delve into the limits of what
conference committees may do. The petitioners contended that the consolidation of the House
and Senate bills made by the conference committee contained provisions which neither the
Senate bill nor the House bill had. In her dissenting opinion, Justice Romero laid out in great detail
the provisions that had been inserted by the conference committee. These provisions, according
to the petitioners had been introduced "surreptitiously" during a closed door meeting of the
committee.
The Court’s answer to this was that in United States practice conference committees could be held
in executive sessions and amendments germane to the purpose of the bill could be introduced
even if these were not in either original bill. But the Court did not bother to check whether
perhaps the American practice was based on a constitutional text different from that of the
Philippine Constitution.
There are as a matter of fact significant differences in the degree of freedom American and
Philippine legislators have. The only rule that binds the Federal Congress is that it may formulate
its own rules of procedure. For this reason, the Federal Congress is master of its own procedures.
It is different with the Philippine Congress. Our Congress indeed is also authorized to formulate its
own rules of procedure – but within limits not found in American law. For instance, there is the
"three readings on separate days" rule. Another important rule is that no amendments may be
introduced by either house during third reading. These limitations were introduced by the 1935
and 1973 Constitutions and confirmed by the 1987 Constitution as a defense against the
inventiveness of the stealthy and surreptitious. These, however, were disregarded by the Court in
Tolentino in favor of contrary American practice.
This is not to say that conference committees should not be allowed. But an effort should be
made to lay out the scope of what conference committees may do according to the requirements
and the reasons of the Philippine Constitution and not according to the practice of the American
Congress. For instance, if the two Houses are not allowed to introduce and debate amendments
on third reading, can they circumvent this rule by coursing new provisions through the
instrumentality of a conference committee created by Congress and meeting in secret? The effect
of the Court’s uncritical embrace of the practice of the American Congress and its conference
committees is to dismantle the no-amendment rule.5
The task at hand for the Court, but which the ponencia eschews, is to circumscribe the powers of
the Bicameral Conference Committee in light of the "three-reading" and "no-amendment" rules in
Article VI, Section 26(2) of the Constitution.
The Bicameral Conference Committee, in
deleting the "no pass on provision" contained in
Senate Bill No. 1950 and House Bill No. 3705,
violated Article VI , Section 26(2) of the Constitution
Pertinently, in his dissenting opinion in Tolentino, Justice Davide (now Chief Justice) opined that
the duty of the Bicameral Conference Committee was limited to the reconciliation of disagreeing
provisions or the resolution of differences or inconsistencies. This proposition still applies as can
be gleaned from the following text of Sections 88 and 89, Rule XIV of the Rules of the House of
Representatives:
Sec. 88. Conference Committee. – In the event that the House does not agree with the Senate on
the amendments to any bill or joint resolution, the differences may be settled by the conference
committees of both chambers.
In resolving the differences with the Senate, the House panel shall, as much as possible, adhere to
and support the House Bill. If the differences with the Senate are so substantial that they
materially impair the House Bill, the panel shall report such fact to the House for the latter’s
appropriate action.
Sec. 89. Conference Committee Reports. - …Each report shall contain a detailed, sufficiently
explicit statement of the changes in or amendments to the subject measure.
…
The Chairman of the House panel may be interpellated on the Conference Committee Report
prior to the voting thereon. The House shall vote on the Conference Committee report in the
same manner and procedure as it votes on a bill on third and final reading.
and Rule XII, Section 35 of the Rules of the Senate:
Sec. 35. In the event that the Senate does not agree with the House of Representatives on the
provision of any bill or joint resolution, the differences shall be settled by a conference committee
of both Houses which shall meet within ten (10) days after their composition. The President shall
designate the members of the Senate Panel in the conference committee with the approval of the
Senate.
Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of
the changes in, or amendments to the subject measure, and shall be signed by a majority of the
members of each House panel, voting separately.
Justice Davide further explained that under its limited authority, the Bicameral Conference
Committee could only (a) restore, wholly or partly, the specific provisions of the House Bill
amended by the Senate Bill; (b) sustain, wholly or partly, the Senate’s amendments, or (c) by way
of compromise, to agree that neither provisions in the House Bill amended by the Senate nor the
latter’s amendments thereto be carried into the final form of the former. Justice Romero, who
also dissented in Tolentino, added that the conference committee is not authorized to initiate or
propose completely new matters although under certain legislative rules like the Jefferson’s
Manual, a conference committee may introduce germane matters in a particular bill. However,
such matters should be circumscribed by the committee’s sole authority and function to reconcile
differences.
In the case of R.A. No. 9337, the Bicameral Conference Committee made an "amendment by
deletion" with respect to the "no pass on provision" contained in both House Bill (HB) No. 3705
and Senate Bill (SB) No. 1950. HB 3705 proposed to amend Sections 106 and 108 of the NIRC by
expressly stating therein that sellers of petroleum products and power generation companies
selling electricity are prohibited from passing on the VAT to the consumers. SB 1950 proposed to
amend Section 108 by likewise prohibiting power generation companies from passing on the VAT
to the consumers. However, these "no pass on provisions" were altogether deleted by the
Bicameral Conference Committee. At the least, since there was no disagreement between HB
3705 and SB 1950 with respect to the "no pass on provision" on the sale of electricity, the
Bicameral Conference Committee acted beyond the scope of its authority in deleting the pertinent
proviso.
At this point, it is well to recall the rationale for the "no-amendment rule" and the "three-reading
rule" in Article VI, Section 26(2) of the Constitution. The proscription on amendments upon the
last reading is intended to subject all bills and their amendments to intensive deliberation by the
legislators and the ample ventilation of issues to afford the public an opportunity to express their
opinions or objections thereon.6 Analogously, it is said that the "three-reading rule" operates "as
a self-binding mechanism that allows the legislature to guard against the consequences of its own
future passions, myopia, or herd behavior. By requiring that bills be read and debated on
successive days, legislature may anticipate and forestall future occasions on which it will be seized
by deliberative pathologies."7 As Jeremy Bentham, a noted political analyst, put it: "[t]he more
susceptible a people are of excitement and being led astray, so much the more ought they to
place themselves under the protection of forms which impose the necessity of reflection, and
prevent surprises."8
Reports of the Bicameral Conference Committee, especially in cases where substantial
amendments, or in this case deletions, have been made to the respective bills of either house of
Congress, ought to undergo the "three-reading" requirement in order to give effect to the letter
and spirit of Article VI, Section 26(2) of the Constitution.
The Bicameral Conference Committee Report that eventually became R.A. No. 9337, in fact,
bolsters the argument for the strict compliance by Congress of the legislative procedure
prescribed by the Constitution. As can be gleaned from the said Report, of the 9 Senators-
Conferees,9 only 5 Senators10 unqualifiedly approved it. Senator Joker P. Arroyo expressed his
qualified dissent while Senators Sergio R. Osmeña III and Juan Ponce Enrile approved it with
reservations. On the other hand, of the twenty-eight (28) Members of the House of
Representatives-Conferees,11 fourteen (14)12 approved the same with reservations while
three13 voted no. All the reservations expressed by the conferees relate to the deletion of the "no
pass on provision." Only eleven (11) unqualifiedly approved it. In other words, even among
themselves, the conferees were not unanimous on their Report. Nonetheless, Congress approved
it without even thoroughly discussing the reservations or qualifications expressed by the conferees
therein.
This "take it or leave it" stance vis-à-vis conference committee reports opens the possibility of
amendments, which are substantial and not even germane to the original bills of either house,
being introduced by the conference committees and voted upon by the legislators without
knowledge of their contents. This practice cannot be countenanced as it patently runs afoul of the
essence of Article VI, Section 26(2) of the Constitution. Worse, it is tantamount to Congress
surrendering its legislative functions to the conference committees.
Ratification by Congress did not cure the
unconstitutional act of the Bicameral Conference
Committee of deleting the "no pass on provision"
That both the Senate and the House of Representatives approved the Bicameral Conference
Committee Report which deleted the "no pass on provision" did not cure the unconstitutional act
of the said committee. As succinctly put by Chief Justice Davide in his dissent in Tolentino, "[t]his
doctrine of ratification may apply to minor procedural flaws or tolerable breaches of the
parameters of the bicameral conference committee’s limited powers but never to violations of the
Constitution. Congress is not above the Constitution."14
Enrolled Bill Doctrine is not applicable where, as in
this case, there is grave violation of the Constitution
As expected, the ponencia invokes the enrolled bill doctrine to buttress its refusal to pass upon
the validity of the assailed acts of the Bicameral Conference Committee. Under the "enrolled bill
doctrine," the signing of a bill by the Speaker of the House and the Senate President and the
certification of the Secretaries of both houses of Congress that it was passed are conclusive of its
due enactment. In addition to Tolentino, the ponencia cites Fariñas v. Executive Secretary15where
the Court declined to go behind the enrolled bill vis-à-vis the allegations of the petitioners therein
that irregularities attended the passage of Republic Act No. 9006, otherwise known as the Fair
Election Act.
Reliance by the ponencia on Fariñas is quite misplaced. The Court’s adherence to the enrolled bill
doctrine in the said case was justified for the following reasons:
The Court finds no reason to deviate from the salutary in this case where the irregularities alleged
by the petitioners mostly involved the internal rules of Congress, whether House or Senate.
Parliamentary rules are merely procedural and with their observance the courts have no concern.
Whatever doubts there may be as to the formal validity of Rep. Act No. 9006 must be resolved in
its favor. The Court reiterates its ruling in Arroyo v. De Venecia, viz.:
But the cases, both here and abroad, in varying forms of expression, all deny to the courts the
power to inquire into the allegations that, in enacting a law, a House of Congress failed to comply
with its own rules, in the absence of showing that there was a violation of a constitutional
provision or the rights of private individuals. In Osmeña v. Pendatun, it was held: "At any rate,
courts have declared that ‘the rules adopted by deliberative bodies are subject to revocation,
modification or waiver at the pleasure of the body adopting them.’ And it has been said that
‘Parliamentary rules are merely procedural, and with their observance, the courts have no concern.
They may be waived or disregarded by the legislative body.’ Consequently, ‘mere failure to
conform to parliamentary usage will not invalidate the action (taken by a deliberative body) when
the requisite number of members have agreed to a particular measure.16
Thus, in Fariñas, the Court’s refusal to go behind the enrolled bill was based on the fact that the
alleged irregularities that attended the passage of R.A. No. 9006 merely involved the internal rules
of both houses of Congress. The procedural irregularities allegedly committed by the conference
committee therein did not amount to a violation of a provision of the Constitution.17
In contrast, the act of the Bicameral Conference Committee of deleting the "no pass on provision"
of SB 1950 and HB 3705 infringe Article VI, Section 26(2) of the Constitution. The violation of this
constitutional provision warrants the exercise by the Court of its constitutionally-ordained power
to strike down any act of a branch or instrumentality of government or any of its officials done
with grave abuse of discretion amounting to lack or excess of jurisdiction.18
ACCORDINGLY, I join the concurring and dissenting opinion of Mr. Justice Reynato S. Puno and
vote to dismiss the petitions with respect to Sections 4, 5 and 6 of Republic Act No. 9337 for
being premature. Further, I vote to declare as unconstitutional Section 21 thereof and the
deletion of the "no pass on provision" contained in the constituent bills of Republic Act No. 9337.
ROMEO J. CALLEJO, SR.
Associate Justice

X----------------------------------------------------------------------------------------X
CONCURRING AND DISSENTING OPINION
AZCUNA, J.:
Republic Act No. 9337, the E-VAT law, is assailed as an unconstitutional abdication of Congress of
its power to tax through its delegation to the President of the decision to increase the rate of the
tax from 10% to 12%, effective January 1, 2006, after any of two conditions has been satisfied.1
The two conditions are:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 ½%).2
A scrutiny of these "conditions" shows that one of them is certain to happen on January 1, 2006.
The first condition is that the collection from the E-VAT exceeds 2 4/5% of the Gross Domestic
Product (GDP) of the previous year, a ratio that is known as the tax effort.
The second condition is that the national government deficit exceeds 1 ½% of the GDP of the
previous year.
Note that the law says that the rate shall be increased if any of the two conditions happens, i.e.,if
condition (i) or condition (ii) occurs.
Now, in realistic terms, considering the short time-frame given, the only practicable way that the
present deficit of the national government can be reduced to 1 ½% or lower, thus preventing
condition (ii) from happening, is to increase the tax effort, which mainly has to come from the E-
VAT. But increasing the tax effort through the E-VAT, to the extent needed to reduce the national
deficit to 1 ½% or less, will trigger the happening of condition (i) under the law. Thus, the
happening of condition (i) or condition (ii) is in reality certain and unavoidable, as of January 1,
2006.
This becomes all the more clear when we consider the figures provided during the oral
arguments.
The Gross Domestic Product for 2005 is estimated at ₱5.3 Trillion pesos.
The tax effort of the present VAT is now at 1.5%.
The national budgetary deficit against the GDP is now at 3%.
So to reduce the deficit to 1.5% from 3%, one has to increase the tax effort from VAT, now at
1.5%, to at least 3%, thereby exceeding the 2 4/5 percent ceiling in condition (i), making
condition (i) happen. If, on the other hand, this is not done, then condition (ii) happens – the
budget deficit remains over 1.5%.
What is the result of this? The result is that in reality, the law does not impose any condition, or
the rate increase thereunder, from 10% to 12%, effective January 1, 2006, is unconditional. For a
condition is an event that may or may not happen, or one whose occurrence is uncertain.3Now
while condition (i) is indeed uncertain and condition (ii) is likewise uncertain, the combination of
both makes the occurrence of one of them certain.
Accordingly, there is here no abdication by Congress of its power to fix the rate of the tax since
the rate increase provided under the law, from 10% to 12%, is definite and certain to occur,
effective January 1, 2006. All that the President will do is state which of the two conditions
occurred and thereupon implement the rate increase.
At first glance, therefore, it would appear that the decision to increase the rate is to be made by
the President, or that the increase is still uncertain, as it is subject to the happening of any of two
conditions.
Nevertheless, the contrary is true and thus it would be best in these difficult and critical times to
let our people know precisely what burdens they are being asked to bear as the necessary means
to recover from a crisis that calls for a heroic sacrifice by all.
It is for this reason that the Court required respondents to submit a copy of the rules to
implement the E-VAT, particularly as to the impact of the tax on prices of affected commodities,
specially oil and electricity. For the onset of the law last July 1, 2005 was confusing, resulting in
across-the-board increases of 10% in the prices of commodities. This is not supposed to be the
effect of the law, as was made clear during the oral arguments, because the law also contains
provisions that mitigate the impact of the E-VAT through reduction of other kinds of taxes and
duties, and other similar measures, specially as to goods that go into the supply chain of the
affected products. A proper implementation of the E-VAT, therefore, should cause only the
appropriate incremental increase in prices, reflecting the net incremental effect of the tax, which
is not necessarily 10%, but possibly less, depending on the products involved.
The introduction of the mitigating or cushioning measures through the Senate or through the
Bicameral Conference Committee, is also being questioned by petitioners as unconstitutional for
violating the rule against amendments after third reading and the rule that tax measures must
originate exclusively in the House of Representatives (Art. VI, Secs. 24 and 26 [2], Constitution).
For my part, I would rather give the necessary leeway to Congress, as long as the changes are
germane to the bill being changed, the bill which originated from the House of Representatives,
and these are so, since these were precisely the mitigating measures that go hand-on-hand with
the E-VAT, and are, therefore, essential -- and hopefully sufficient -- means to enable our people
to bear the sacrifices they are being asked to make. Such an approach is in accordance with the
Enrolled Bill Doctrine that is the prevailing rule in this jurisdiction. (Tolentino v. Secretary of
Finance, 249 SCRA 628 [1994]). The exceptions I find are the provisions on corporate income
taxes, which are not germane to the E-VAT law, and are not found in the Senate and House bills.
I thus agree with Chief Justice Hilario G. Davide, Jr. in his separate opinion that the following are
not germane to the E-VAT legislation:
Amended TAX
CODE Provision Subject Matter
Section 27 Rate of income tax on domestic corporations
Section 28(A)(1) Rate of income tax on resident foreign corporations
Section 28(B)(1) Rate of income tax on non-resident foreign corporations
Section 28(B)(5-b) Rate of income tax on intercorporate dividends received by non-resident
foreign corporations
Section 34(B)(1) Deduction from gross income
Similarly, I agree with Justice Artemio V. Panganiban in his separate opinion that the following are
not germane to the E-VAT law:
"Sections 1, 2, and 3 of the Republic Act No. 9337…, in so far as these sections (a) amend the
rates of income tax on domestic, resident foreign, and nonresident foreign corporations; (b)
amend the tax credit against taxes due from nonresident foreign corporations on the
intercorporate dividends; and (c) reduce the allowable deduction from interest expense."
Respondents should, in any case, now be able to implement the E-VAT law without confusion
and thereby achieve its purpose.4
I vote to GRANT the petitions to the extent of declaring unconstitutional the provisions in
Republic Act. No. 9337 that are not germane to the subject matter and DENY said petitions as to
the rest of the law, which are constitutional.
ADOLFO S. AZCUNA
Associate Justice
x-------------------------------------------------------------------x
DISSENTING OPINION
Tinga, J.:
The E-VAT Law,1 as it stands, will exterminate our country’s small to medium enterprises. This will
be the net effect of affirming Section 8 of the law, which amends Sections 110 of the National
Internal Revenue Code (NIRC) by imposing a seventy percent (70%) cap on the creditable input
tax a VAT-registered person may apply every quarter and a mandatory sixty (60) -month
amortization period on the input tax on goods purchased or imported in a calendar month if the
acquisition cost of such goods exceeds One Million Pesos ( ₱1,000,000.00).
Taxes may be inherently punitive, but when the fine line between damage and destruction is
crossed, the courts must step forth and cut the hangman’s noose. Justice Holmes once confidently
asserted that "the power to tax is not the power to destroy while this Court sits", and we should
very well live up to this expectation not only of the revered Holmes, but of the Filipino people who
rely on this Court as the guardian of their rights. At stake is the right to exist and subsist despite
taxes, which is encompassed in the due process clause.
I respectfully submit these views while maintaining the deepest respect for the prerogative of the
legislature to impose taxes, and of the national government to chart economic policy. Such
respect impels me to vote to deny the petitions in G.R. Nos. 168056, 168207, 168463,2 and
168730, even as I acknowledge certain merit in the challenges against the E-VAT law that are
asserted in those petitions. In the final analysis, petitioners therein are unable to convincingly
demonstrate the constitutional infirmity of the provisions they seek to assail. The only exception is
Section 21 of the law, which I consider unconstitutional, for reasons I shall later elaborate.
However, I see the petition in G.R. No. 168461 as meritorious and would vote to grant it.
Accordingly, I dissent and hold as unconstitutional Section 8 of Republic Act No. 9337, insofar as
it amends Section 110(A) and (B) of the National Internal Revenue Code (NIRC) as well as Section
12 of the same law, with respect to its amendment of Section 114(C) of the NIRC.
The first part of my discussion pertains to the petitions in G.R. Nos. 168056, 168207, 168463,
and 168730, while the second part is devoted to what I deem the most crucial issue before the
Court, the petition in G.R. No. 168461.
I.
Undue Delegation and the Increase
Of the VAT Rate
My first point pertains to whether or not Sections 4, 5 and 6 of the E-VAT Law constitutes an
undue delegation of legislative power. In appreciating the aspect of undue delegation as regards
taxation statutes, the fundamental point remains that the power of taxation is inherently
legislative,3 and may be imposed or revoked only by the legislature.4 In tandem with Section 1,
Article VI of the Constitution which institutionalizes the law-making power of Congress, Section
24 under the same Article crystallizes this principle, as it provides that "[a]ll appropriation, revenue
or tariff bills … shall originate exclusively in the House of Representatives."5
Consequently, neither the executive nor judicial branches of government may originate tax
measures. Even if the President desires to levy new taxes, the imposition cannot be done by mere
executive fiat. In such an instance, the President would have to rely on Congress to enact tax
laws.
Moreover, this plenary power of taxation cannot be delegated by Congress to any other branch of
government or private persons, unless its delegation is authorized by the Constitution itself.6In
this regard, the situation stands different from that in the recent case Southern Cross v.
PHILCEMCOR,7 wherein I noted in my ponencia that the Tariff Commission and the DTI Secretary
may be regarded as agents of Congress for the purpose of imposing safeguard measures. That
pronouncement was made in light of Section 28(2) Article VI, which allows Congress to delegate
to the President through law the power to impose tariffs and imposts, subject to limitations and
restrictions as may be ordained by Congress. In the case of taxes, no such constitutional
authorization exists, and the discretion to ascertain the rates, subjects, and conditions of taxation
may not be delegated away by Congress.
However, as the majority correctly points out, the power to ascertain the facts or conditions as the
basis of the taking into effect of a law may be delegated by Congress,8 and that the details as to
the enforcement and administration of an exercise of taxing power may be delegated to
executive agencies, including the power to determine the existence of facts on which its
operation depends.9
Proceeding from these principles, Sections 4, 5, and 6 of the E-VAT Law warrant examination.
The provisions read:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties. —
(A) Rate and Base of Tax. — There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the goods or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor; provided, that the President, upon the recommendation
of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to
twelve percent (12%), after any of the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent 1 ½%).
Sec. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 107. Value-Added Tax on Importation of Goods.—
(a) In General.— There shall be levied, assessed and collected on every importation of goods a
value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of
Customs in determining tariff and customs duties, plus customs duties, excise taxes, if any, and
other charges, such tax to be paid by the importer prior to the release of such goods from
customs custody: Provided, That where the customs duties are determined on the basis of the
quantity or volume of the goods, the value-added tax shall be based on the landed cost plus
excise taxes, if any: provided, further, that the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve
percent (12%) after any of the following conditions has been satisfied.
(i) national value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%) or
(ii) government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 ½%).
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 108. Value-added Tax on Sale of Services and Use of Lease of Properties-
(A) Rate and Base of Tax. – There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services;
provided, that the President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of
the following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceed same and on-
half percent (1 ½%).
The petitioners deem as noxious the proviso common to these provisions that "the President,
upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the
rate of value-added tax to twelve percent (12%)," after the satisfaction of the twin conditions
that value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%); or that the national government deficit as a
percentage of GDP of the previous year exceed same and on-half percent (1 ½%).
At first blush, it does seem that the assailed provisions are constitutionally deficient. It is Congress,
and not the President, which is authorized to raise the rate of VAT from 10% to 12%, no matter
the circumstance. Yet a closer analysis of the proviso reveals that this is not exactly the operative
effect of the law. The qualifier "shall" denotes a mandatory, rather than discretionary function on
the part of the President to raise the rate of VAT to 12% upon the existence of any of the two
listed conditions.
Since the President is not given any discretion in refusing to raise the VAT rate to 12%, there is
clearly no delegation of the legislative power to tax by Congress to the executive branch. The use
of the word "shall" obviates any logical construction that would allow the President leeway in not
raising the tax rate. More so, it is accepted that the principle of constitutional construction that
every presumption should be indulged in favor of constitutionality and the court in considering
the validity of the 'statute in question should give it such reasonable construction as can be
reached to bring it within the fundamental law.10 While all reasonable doubts should be resolved
in favor, of the constitutionality of a statute,11 it should necessarily follow that the construction
upheld should be one that is not itself noxious to the Constitution.
Congress should be taken to task for imperfect draftsmanship at least. Much trouble would have
been avoided had the provisos instead read: "that effective January 1, 2006, the rate of value-
added tax shall be raised to twelve percent (12%), after any of the following conditions has been
satisfied xxx." This, after all is the operative effect of the provision as it stands. In relation to the
operation of the tax increase, the denominated role of the President and the Secretary of Finance
may be regarded as a superfluity, as their imprimatur as a precondition to the increase of the VAT
rate must have no bearing.
Nonetheless, I cannot ignore the fact that both the President and the Secretary of Finance have
designated roles in the implementation of the tax increase. Considering that it is Congress, and
not these officials, which properly have imposed the increase in the VAT rate, how should these
roles be construed?
The enactment of a law should be distinguished from its implementation. Even if it is Congress
which exercises the plenary power of taxation, it is not the body that administers the
implementation of the tax. Under Section 2 of the National Internal Revenue Code (NIRC), the
assessment and collection of all national internal revenue taxes, and the enforcement of all
forefeitures, penalties and fines connected therewith had been previously delegated to the
Bureau of Internal Revenue, under the supervision and control of the Department of Finance.12
Moreover, as intimated earlier, Congress may delegate to other components of the government
the power to ascertain the facts or conditions as the basis of the taking into effect of a law. It
follows that ascertainment of the existence of the two conditions precedent for the increase as
stated in the law could very well be delegated to the President or the Secretary of Finance.13
Nonetheless, the apprehensions arise that the process of ascertainment of the listed conditions
delegated to the Secretary of Finance and the President effectively vest discretionary authority to
raise the VAT rate on the President, through the subterfuges that may be employed to delay the
determination, or even to manipulate the factual premises. Assuming arguendo that these feared
abuses may arise, I think it possible to seek judicial enforcement of the increased VAT rate, even
without the participation or consent of the President or Secretary of Finance, upon indubitable
showing that any of the two listed conditions do exist. After all, the Court is ruling that the
increase in the VAT rate is mandatory and beyond the discretion of the President to impose or
delay.
The majority states that in making the recommendation to the President on the existence of either
of the two conditions, the Secretary of Finance is acting as the agent of the legislative branch, to
determine and declare the event upon which its expressed will is to take effect.14This recognition
of agency must be qualified. I do not doubt the ability of Congress to delegate to the Secretary of
Finance administrative functions in the implementation of tax laws, as it does under Section 2 of
the NIRC. Yet it would be impermissible for Congress to delegate to the Secretary of Finance the
plenary function of enacting a tax law. As stated earlier, the situation stands different from that in
Southern Cross wherein the Constitution itself authorizes the delegation by Congress through a
law to the President of the discretion to impose tariff measures, subject to restrictions and
limitations provided in the law.15 Herein, Congress cannot delegate to either the President or the
Secretary of Finance the discretion to raise the tax, as such power belongs exclusively to the
legislative branch.
Perhaps the term "agency" is not most suitable in describing the delegation exercised by Congress
in this case, for agency implies that the agent takes on attributes of the principal by reason of
representative capacity. In this case, whatever "agency" that can be appreciated would be of
severely limited capacity, encompassing as it only could the administration, not enactment, of the
tax measure.
I do not doubt the impression left by the provisions that it is the President, and not Congress,
which is authorized to raise the VAT rate. On paper at least, these imperfect provisions could be
multiple sources of mischief. On the political front, whatever blame or scorn that may be attended
with the increase of the VAT rate would fall on the President, and not on Congress which actually
increased the tax rate. On the legal front, a President averse to increasing the VAT rate despite the
existence of the two listed conditions may take refuge in the infelicities of the provision, and
refuse to do so on the ground that the law, as written, implies some form of discretion on the
part of the President who was, after all, "authorized" to increase the tax rate. It is critical for the
Court to disabuse this notion right now.
The Continued Viability of
Tolentino v. Secretary of Finance
One of the more crucial issues now before us, one that has seriously divided the Court, pertains to
the ability of the Bicameral Conference Committee to introduce amendments to the final bill
which were not contained in the House bill from which the E-VAT Law originated. Most of the
points addressed by the petitioners have been settled in our ruling in Tolentino v. Secretary of
Finance,16 yet a revisit of that precedent is urged upon this Court. On this score, I offer my
qualified concurrence with the ponencia.
Two key provisions of the Constitution come into play: Sections 24 and 26(2), Article VI of the
Constitution. They read:
Section 24: All appropriation, revenue or tariff bills, bills authorizing increase of the public debt,
bills of local application, and private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with amendments.
Section 26(2): No bill passed by either House shall become a law unless it has passed three
readings on separate days, and printed copies thereof in its final form have been distributed to its
Members three days before its passage, except when the President certifies to the necessity of its
immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, no
amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter,
and the yeas and nays entered in the Journal.
Section 24 is also known as the origination clause, which derives origin from British practice. From
the assertion that the power to tax the public at large must reside in the representatives of the
people, the principle evolved that money bills must originate in the House of Commons and may
not be amended by the House of Lords.17 The principle was adopted across the shores in the
United States, and was famously described by James Madison in The Federalist Papers as follows:
This power over the purse, may in fact be regarded as the most compleat and effectual weapon
with which any constitution can arm the immediate representatives of the people, for obtaining a
redress of every grievance, and for carrying into effect every just and salutary measure.18
There is an eminent difference from the British system from which the principle emerged, and
from our own polity. To this day, only members of the British House of Commons are directly
elected by the people, with the members of the House of Lords deriving their seats from
hereditary peerage. Even in the United States, members of the Senate were not directly elected by
the people, but chosen by state legislatures, until the adoption of the Seventeenth Amendment in
1913. Hence, the rule assured the British and American people that tax legislation arises with the
consent of the sovereign people, through their directly elected representatives. In our country
though, both members of the House and Senate are directly elected by the people, hence the
vitality of the original conception of the rule has somewhat lost luster.
Still, the origination clause deserves obeisance in this jurisdiction, simply because it is provided in
the Constitution. At the same time, its proper interpretation is settled precedent, as enunciated in
Tolentino:
To begin with, it is not the law — but the revenue bill — which is required by the Constitution to
"originate exclusively" in the House of Representatives. It is important to emphasize this, because
a bill originating in the House may undergo such extensive changes in the Senate that the result
may be a rewriting of the whole. The possibility of a third version by the conference committee
will be discussed later. At this point, what is important to note is that, as a result of the Senate
action, a distinct bill may be produced. To insist that a revenue statute — and not only the bill
which initiated the legislative process culminating in the enactment of the law — must
substantially be the same as the House bill would be to deny the Senate's power not only to
"concur with amendments" but also to " propose amendments." It would be to violate the
coequality of legislative power of the two houses of Congress and in fact make the House
superior to the Senate.19
The vested power of the Senate to " propose or concur with amendments" necessarily implies the
ability to adduce transformations from the original House bill into the final law. Since the House
and Senate sit separately in sessions, the only opportunity for the Senate to introduce its
amendments would be in the Bicameral Conference Committee, which emerges only after both
the House and the Senate have approved their respective bills.
In the present petitions, Tolentino comes under fire on two fronts. The first controversy arises
from the adoption in Tolentino of American legislative practices relating to bicameral committees
despite the difference in constitutional frameworks, particularly the limitation under Section
26(2), Article VI which does not exist in the American Constitution.
The majority points out that the "no amendment rule" refers only to the procedure to be followed
by each house of Congress with regard to bills initiated in the house concerned, before said bills
are transmitted to the other house for its concurrence or amendment. I agree with this statement.
Clearly, the procedure under Section 26(2), Article VI only relates to the passage of a bill before
the House and Senate, and not the process undertaken afterwards in the Bicameral Conference
Committee.
Indeed, Sections 26 and 27 of Article VI, which detail the procedure how a bill becomes a law, are
silent as to what occurs between the passage by both houses of their respective bills, and the
presentation to the President of
"every bill passed by the Congress".20 Evidently, "Congress" means both Houses, such that a bill
approved by the Senate but not by the House is not presented to the President for approval.
There is obviously a need for joint concurrence by the House and Senate of a bill before it is
transmitted to the President, but the Constitution does not provide how such concurrence is
acquired. This lacuna has to be filled, otherwise no bill may be transmitted to the President.
Even if the Bicameral Conference Committee is not a constitutionally organized body, it has
existed as the necessary conclave for both chambers of Congress to reconcile their respective
versions of a prospective law. The members of the Bicameral Conference Committee may possess
in them the capacity to represent their particular chamber, yet the collective is neither the House
nor the Senate. Hence, the procedure contained in Section 26(2), Article VI cannot apply to the
Bicameral Conference Committee.
Tellingly, the version approved by the Bicameral Conference Committee still undergoes
deliberation and approval by both Houses. Only one vote is taken to approve the reconciled bill,
just as only one vote is taken in order to approve the original bill. Certainly, it could not be
contended that this final version surreptitiously evades approval of either the House or Senate.
The second front concerns the scope and limitations of the Bicameral Conference Committee to
amend, delete, or otherwise modify the bills as approved by the House and the Senate.
Tolentino adduced the principle, adopted from American practice, that the version as approved by
the Bicameral Conference Committee need only be germane to the subject of the House and
Senate bills in order to be valid.21 The majority, in applying the test of germaneness, upholds the
contested provisions of the E-VAT Law. Even the members of the Court who prepared to strike
down provisions of the law applying germaneness nonetheless accept the basic premise that such
test is controlling.
I agree that any amendment made by the Bicameral Conference Committee that is not germane
to the subject matter of the House or Senate Bills is not valid. It is the only valid ground by which
an amendment introduced by the Bicameral Conference Committee may be judicially stricken.
The germaneness standard which should guide Congress or the Bicameral Conference Committee
should be appreciated in its normal but total sense. In that regard, my views contrast with that of
Justice Panganiban, who asserts that provisions that are not "legally germane" should be stricken
down. The legal notion of germaneness is just but one component, along with other factors such
as economics and politics, which guides the Bicameral Conference Committee, or the legislature
for that matter, in the enactment of laws. After all, factors such as economics or politics are
expected to cast a pervasive influence on the legislative process in the first place, and it is essential
as well to allow such "non-legal" elements to be considered in ascertaining whether Congress has
complied with the criteria of germaneness.
Congress is a political body, and its rationale for legislating may be guided by factors other than
established legal standards. I deem it unduly restrictive on the plenary powers of Congress to
legislate, to coerce the body to adhere to judge-made standards, such as a standard of "legal
germaneness". The Constitution is the only legal standard that Congress is required to abide by in
its enactment of laws.
Following these views, I cannot agree with the position maintained by the Chief Justice, Justices
Panganiban and Azcuna that the provisions of the law that do not pertain to VAT should be
stricken as unconstitutional. These would include, for example, the provisions raising corporate
income taxes. The Bicameral Conference Committee, in evaluating the proposed amendments,
necessarily takes into account not just the provisions relating to the VAT, but the entire revenue
generating mechanism in place. If, for example, amendments to non-VAT related provisions of
the NIRC were intended to offset the expanded coverage for the VAT, then such amendments are
germane to the purpose of the House and Senate Bills.
Moreover, it would be myopic to consider that the subject matter of the House Bill is solely the
VAT system, rather than the generation of revenue. The majority has sufficiently demonstrated
that the legislative intent behind the bills that led to the E-VAT Law was the generation of
revenue to counter the country’s dire fiscal situation.
The mere fact that the law is popularly known as the E-VAT Law, or that most of its provisions
pertain to the VAT, or indirect taxes, does not mean that any and all amendments which are
introduced by the Bicameral Conference Committee must pertain to the VAT system. As the Court
noted in Tatad v. Secretary of Energy:22
[I]t is contended that section 5(b) of R.A. No. 8180 on tariff differential violates the provision 17
of the Constitution requiring every law to have only one subject which should be expressed in its
title. We do not concur with this contention. As a policy, this Court has adopted a liberal
construction of the one title - one subject rule. We have consistently ruled that the title need not
mirror, fully index or catalogue all contents and minute details of a law. A law having a single
general subject indicated in the title may contain any number of provisions, no matter how
diverse they may be, so long as they are not inconsistent with or foreign to the general subject,
and may be considered in furtherance of such subject by providing for the method and means of
carrying out the general subject. We hold that section 5(b) providing for tariff differential is
germane to the subject of R.A. No. 8180 which is the deregulation of the downstream oil
industry. The section is supposed to sway prospective investors to put up refineries in our country
and make them rely less on imported petroleum.23
I submit that if the amendments are attuned to the goal of revenue generation, the stated
purpose of the original House Bills, then the test of germaneness is satisfied. It might seem that
the goal of revenue generation, which is stated in virtually all tax or tariff bills, is so encompassing
in scope as to justify the inclusion by the Bicameral Conference Committee of just about any
revenue generation measure. This may be so, but it does not mean that the test of germaneness
would be rendered inutile when it comes to revenue laws.
I do believe that the test of germaneness was violated by the E-VAT Law in one regard. Section 21
of the law, which was not contained in either the House or Senate Bills, imposes restrictions on
the use by local government units of their incremental revenue from the VAT. These restrictions
are alien to the principal purposes of revenue generation, or the purposes of restructuring the
VAT system. I could not see how the provision, which relates to budgetary allocations, is germane
to the E-VAT Law. Since it was introduced only in the Bicameral Conference Committee, the test
of germaneness is essential, and the provision does not pass muster. I join Justice Puno and the
Chief Justice in voting to declare Section 21 as unconstitutional.
I also offer this brief comment regarding the deletion of the so-called "no pass on" provisions,
which several of my colleagues deem unconstitutional. Both the House and Senate Bills contained
these provisions that would prohibit the seller/producer from passing on the cost of the VAT
payments to the consumers. However, an examination of the said bills reveal that the "no pass
on" provisions in the House Bill affects a different subject of taxation from that of the Senate Bill.
In the House Bill No. 3705, the taxpayers who are prohibited from passing on the VAT payments
are the sellers of petroleum products and electricity/power generation companies. In Senate Bill
No. 1950, no prohibition was adopted as to sellers of petroleum products, but enjoined therein
are electricity/power generation companies but also transmission and distribution companies.
I consider such deletions as valid, for the same reason that I deem the amendments valid. The
deletion of the two disparate "no pass on" provisions which were approved by the House in one
instance, and only by the Senate in the other, remains in the sphere of compromise that ultimately
guides the approval of the final version. Again, I point out that even while the two provisions may
have been originally approved by the House and Senate respectively, their subsequent deletion by
the Bicameral Conference Committee is still subject to approval by both chambers of Congress
when the final version is submitted for deliberation and voting.
Moreover, the fact that the nature of the "no pass on" provisions adopted by the House
essentially differs from that of the Senate necessarily required the corrective relief from the
Bicameral Conference Committee. The Committee could have either insisted on the House
version, the Senate version, or both versions, and it is not difficult to divine that any of these steps
would have obtained easy approval. Hence, the deletion altogether of the "no pass on" provisions
existed as a tangible solution to the possible impasse, and the Committee should be accorded
leeway to implement such a compromise, especially considering that the deletion would have
remained germane to the law, and would not be constitutionally prohibited since the prohibition
on amendments under Section 26(2), Article VI does not apply to the Committee.
An outright declaration that the deletion of the two elementally different "no-pass on" provisions
is unconstitutional, is of dubious efficacy in this case. Had such pronouncement gained
endorsement of a majority of the Court, it could not result in the ipso facto restoration of the
provision, the omission of which was ultimately approved in both the House and Senate.
Moreover, since the House version of the "no pass on" is quite different from that of the Senate,
there would be a question as to whether the House version, the Senate version, or both versions
would be reinstated. And of course, if it were the Court which would be called upon to choose,
such would be way beyond the bounds of judicial power.
Indeed, to intimate that the Court may require Congress to reinstate a provision that failed to
meet legislative approval would result in a blatant violation of the principle of separation of
powers, with the Court effectively dictating to Congress the content of its legislation. The Court
cannot simply decree to Congress what laws or provisions to enact, but is limited to reviewing
those enactments which are actually ratified by the legislature.
II.
My earlier views, as are the submissions I am about to offer, are rooted in nothing more than
constitutional interpretation. Perhaps my preceding discussion may lead to an impression that I
whole-heartedly welcome the passage of the E-VAT Law. Yet whatever relief I may have over the
enactment of a law designed to relieve our country’s financial woes are sadly obviated with the
realization that a key amendment introduced in the law is not only unconstitutional, but of fatal
consequences. The clarion call of judicial review is most critical when it stands as the sole barrier
against the deprivation of life, liberty and property without due process of law. It becomes even
more impelling now as we are faced with provisions of the E-VAT Law which, though in bland
disguise, would operate as the most destructive of tax measures enacted in generations.
Tax Statutes and the Due Process Clause
It is the duty of the courts to nullify laws that contravene the due process clause of the Bill of
Rights. This task is at the heart not only of judicial review, but of the democratic system, for the
fundamental guarantees in the Bill of Rights become merely hortatory if their judicial enforcement
is unavailing. Even if the void law in question is a tax statute, or one that encompasses national
economic policy, the courts should not shirk from striking it down notwithstanding any notion of
deference to the executive or legislative branch on questions of policy. Neither Congress nor the
President has the right to enact or enforce unconstitutional laws.
The Bill of Rights is by no means the only constitutional yardstick by which the validity of a tax law
can be measured. Nonetheless, it stands as the most unyielding of constitutional standards, given
its position of primacy in the fundamental law way above the articles on governmental power.24
If the question lodged, for example, hinges on the proper exercise of legislative powers in the
enactment of the tax law, leeway can be appreciated in favor of affirming the legislature’s
inherent power to levy taxes. On the other hand, no quarter can be ceded, no concession yielded,
on the people’s fundamental rights as enshrined in the Bill of Rights, even if the sacrifice is
ostensibly made "in the national interest." It is my understanding that "the national interests,"
however comported, always subsumes in the first place recognition and enforcement of the Bill of
Rights, which manifests where we stand as a democratic society.
The constitutional safeguard of due process is embodied in the fiat "No person shall be deprived
of life, liberty or property without due process of law".25 The purpose of the guaranty is to
prevent governmental encroachment against the life, liberty and property of individuals; to secure
the individual from the arbitrary exercise of the powers of the government, unrestrained by the
established principles of private rights and distributive justice; to protect property from
confiscation by legislative enactments, from seizure, forfeiture, and destruction without a trial and
conviction by the ordinary mode of judicial procedure; and to secure to all persons equal and
impartial justice and the benefit of the general law.26
In Magnano Co. v. Hamilton,27 the U.S. Supreme Court recognized that the due process clause
may be utilized to strike down a taxation statute, "if the act be so arbitrary as to compel the
conclusion that it does not involve an exertion of the taxing power, but constitutes, in substance
and effect, the direct exertion of a different and forbidden power, as, for example, the
confiscation of property."28 Locally, Sison v. Ancheta29 has long provided sanctuary for persons
assailing the constitutionality of taxing statutes. The oft-quoted pronouncement of Justice
Fernando follows:
2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It
is the strongest of all the powers of government." It is, of course, to be admitted that for all its
plenitude, the power to tax is not unconfined. There are restrictions. The Constitution sets forth
such limits. Adversely affecting as it does property rights, both the due process and equal
protection clauses may properly be invoked, as petitioner does, to invalidate in appropriate cases a
revenue measure. If it were otherwise, there would be truth to the 1803 dictum of Chief Justice
Marshall that "the power to tax involves the power to destroy." In a separate opinion in Graves v.
New York, Justice Frankfurter, after referring to it as an "unfortunate remark," characterized it as
"a flourish of rhetoric [attributable to] the intellectual fashion of the times [allowing] a free use of
absolutes." This is merely to emphasize that it is not and there cannot be such a constitutional
mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from Marshall's
famous dictum was brushed away by one stroke of Mr. Justice Holmes's pen: 'The power to tax is
not the power to destroy while this Court sits.'" So it is in the Philippines.
3. This Court then is left with no choice. The Constitution as the fundamental law overrides any
legislative or executive act that runs counter to it. In any case therefore where it can be
demonstrated that the challenged statutory provision — as petitioner here alleges — fails to abide
by its command, then this Court must so declared and adjudge it null. The inquiry thus is centered
on the question of whether the imposition of a higher tax rate on taxable net income derived
from business or profession than on compensation is constitutionally infirm.
4. The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere
allegation, as here, does not suffice. There must be a factual foundation of such unconstitutional
taint. Considering that petitioner here would condemn such a provision as void on its face, he has
not made out a case. This is merely to adhere to the authoritative doctrine that where the due
process and equal protection clauses are invoked, considering that they are not fixed rules but
rather broad standards, there is a need for proof of such persuasive character as would lead to
such a conclusion. Absent such a showing, the presumption of validity must prevail.
5. It is undoubted that the due process clause may be invoked where a taxing statute is so
arbitrary that it finds no support in the Constitution. An obvious example is where it can be
shown to amount to the confiscation of property. That would be a clear abuse of power. It then
becomes the duty of this Court to say that such an arbitrary act amounted to the exercise of an
authority not conferred. That properly calls for the application of the Holmes dictum. It has also
been held that where the assailed tax measure is beyond the jurisdiction of the state, or is not for
a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to
attack on due process grounds.30
Sison pronounces more concretely how a tax statute may contravene the due process clause.
Arbitrariness, confiscation, overstepping the state’s jurisdiction, and lack of a public purpose are
all grounds for nullity encompassed under the due process invocation.
Yet even these more particular standards as enunciated in Sison are quite exacting, and difficult
to reach. Even the constitutional challenge posed in Sison failed to pass muster. The majority cites
Sison in asserting that due process and equal protection are broad standards which need proof of
such persuasive character to lead to such a conclusion.
It is difficult though to put into quantifiable terms how onerous a taxation statute must be before
it contravenes the due process clause.31 After all, the inherent nature of taxation is to cause pain
and injury to the taxpayer, albeit for the greater good of society. Perhaps whatever collective
notion there may be of what constitutes an arbitrary, confiscatory, and unreasonable tax might
draw more from the fairy tale/legend traditions of absolute monarchs and the oppressed peasants
they tax. Indeed, it is easier to jump to the conclusion that a tax is oppressive and unfair if it is
imposed by a tyrant or an authoritarian state.
But could an arbitrary, confiscatory or unreasonable tax actually be enacted by a democratic state
such as ours? Of course it could, but these would exist in more palatable guises. In a democratic
society wherein statutes are enacted by a representative legislature only after debate and
deliberation, tax statutes will most likely, on their face, seem fair and even-handed. After all, if
Congress passes a tax law that on facial examination is obviously harsh and unfair, it faces the
wrath of the voting public, to say nothing of the media.
In testing the validity of a tax statute as against the due process clause, I think that the Court
should go beyond a facial examination of the statute, and seek to understand how exactly it
would operate. The express terms of a statute, especially tax laws, are usually inadequate in
spelling out the practical effects of its implementation. The devil is usually in the details.
Admittedly, the degree of difficulty involved of judicial review of tax laws has increased with the
growing complexities of business, economic and accounting practices. These are sciences which
laymen are not normally equipped by their general education to fully grasp, hence the possible
insecurity on their part when confronted with such questions on these fields.
However, we should not cede ground to those transgressions of the people’s fundamental rights
simply because the mechanism employed to violate constitutional guarantees is steeped in
disciplines not normally associated with the legal profession. Venality cannot be allowed to
triumph simply due to its sophistication. This petition imputes in the E-VAT Law unconstitutional
oppression of the fatal variety, but in order to comprehend exactly how and why that is so, one
has to delve into the complex milieu of the VAT system. The party alleging the law’s
unconstitutionality of course has the burden to demonstrate the violations in understandable
terms, but if such proof is presented, the Court’s duty is to engage accordingly.
The Viability of the Clear and Present
Danger Doctrine as Counterweight
To the Shibboleths of Speculation
and Wisdom
I do not see as an impediment to the annulment of a tax law the fact that it has yet to be
implemented, or the fear that doing so constitutes an undue attack on the wisdom, rather than
the legality of a statute. However, my position in this petition has been challenged on those
grounds, and I see it fit to refute these preemptive allegations before delving into the operative
aspect of the E-VAT Law.
If there is cause to characterize my arguments as speculative, it is only because the E-VAT Law has
yet to be implemented. No person as of yet can claim to have sustained actual injury by reason of
the implementation of the assailed provisions in G.R. No. 168461. Yet this should not mean that
the Court is impotent from declaring a provision of law as violative of the due process clause if it is
clear that its implementation will cause the illegal deprivation of life, liberty or property without
due process of
law. This is especially so if, as in this case, the injury is of mathematical certainty, and the extent of
the loss quantifiable through easy reference to the most basic of business practices.
These arguments are conjectural for the same reason that the bare statement "firing a gunshot
into the head will cause a fatal wound" would be conjectural. Some people are lucky enough to
survive gunshot wounds to the head, while many others are not. Yet just because the fear of
mortality would be merely speculative, it does not mean that there should be less compulsion to
avoid a situation of getting shot in the head.
Indeed, the Court has long responded to strike down prospective actions, even if the injury has
not yet even occurred. One of the most significant legal principles of the last century, the "clear
and present danger" doctrine in free speech cases, in fact emanates from the prospectivity, and
not the actuality of danger. The Court has not been hesitant to nullify acts which might cause
injury, owing to the presence of a clear and present danger of a substantive evil which the State
has the right to prevent. It has even extended the "clear and present danger rule" beyond the
confines of freedom of expression to the
realm of freedom of religion, as noted by Justice Puno in his ponencia in Estrada v. Escritor.32
Justice Teodoro Padilla goes further in his concurring opinion in Basco v. PAGCOR, and asserts
that the clear and present danger test squarely applies to the due process clause: "The courts, as
the decision states, cannot inquire into the wisdom, morality or expediency of policies adopted by
the political departments of government in areas which fall within their authority, except only
when such policies pose a clear and present danger to the life, liberty or property of the
individual."
I see no reason why the clear and present danger test cannot apply in this case, or any case
wherein a taxing statute poses a clear and present danger to the life, liberty or property of the
individual. The application of this standard frees the Court from inutility in the face of patently
unconstitutional tax laws that have been enacted but are yet to be fully operational.
If for example, Congress deems it wise to impose the most draconian of tax measures ─ such as
trebling the income taxes of all persons over 40, raising the gross sales tax rate to 50%, or
penalizing delinquent taxpayers with 50 lashes of the whip ─ there certainly would be a massive
public outcry, and an expectation that the Court would immediately nullify the offensive measures
even before they are actually imposed. Applying the clear and present danger test, the Court is
empowered to strike down the noxious measures even before they are implemented. Yet with
this "bar on speculativeness" as argued by the majority, the Court could easily refuse to pay heed
to the prayers for injunctive relief, and instead demand that the taxing subjects must first suffer
before the Court can act.
In the same vein, the claim that my arguments strike at the wisdom, rather than the
constitutionality of the law are misplaced. Concededly, the assailed provisions of the E-VAT law
are basically unwise. But any provision of law that directly contradicts the Constitution, especially
the Bill of Rights, are similarly unwise, as they run inconsistent with the fundamental law of the
land, the enunciated state policies and the elemental guarantees assured by the State to its
people. Not every unwise law is unconstitutional, but every unconstitutional law is unwise, for an
unconstitutional law contravenes a primordial principle or guarantee on which our polity is
founded.
If it can be shown that the E-VAT Law violates these provisions of the Constitution, especially the
due process clause, then the Court should accordingly act and nullify. Such is the essence of
judicial review, which stands as the sole barrier to the implementation of an unconstitutional law.
The Separate Opinion of Justice Panganiban notes that "[t]he Court cannot step beyond the
confines of its constitutional power, if there is absolutely no clear showing of grave abuse of
discretion in the enactment of the law"33. This, I feel, is an unduly narrow view of judicial review,
implying that such merely encompasses the procedural aspect by which a law is enacted. If the
policy of the law, and/or the means by which such policy is implemented run counter to the
Constitution, then the Court is empowered to strike down the law, even if the legislative and
executive branches act within their discretion in legislating and signing the law.
It is also asserted that if the implementation of the 70% cap imposes an unequal effect on
different types of businesses with varying profit margins and capital requirements, then the
remedy would be an amendment of the law.34 Of course, the remedy of legislative amendment
applies to even the most unconstitutional of laws. But if our society can take cold comfort in the
ability of the legislature to amend its enactments as the defense against unconstitutional laws,
what remains then as the function of judicial review? This legislative capacity to amend
unconstitutional laws runs concurrently with the judicial capacity to strike down unconstitutional
laws. In fact, the long-standing tradition has been reliance on the judicial branch, and not the
legislative branch, for salvation from unconstitutional laws.
I do recognize that the Separate Opinion of Justice Panganiban ultimately proceeds from the
premise that the assailed provisions of the E-VAT Law may be merely unwise, but not
unconstitutional. Hence, its preference to rely on Congress to amend the offending provisions
rather than judicial nullification. But I maintain that the assailed provisions of the E-VAT Law
violate the due process clause of the Constitution and must be stricken down.
The Nature of VAT
To understand why Sections 8 and 12 of the E-VAT law contravenes the due process clause, it is
essential to understand the nature of the value-added tax itself. Filipino consumers may
comprehend VAT at its elemental form, having been accustomed for several years now in paying
an extra 10% of the listed selling price for a wide class of consumer goods. From the perspective
of the end consumer, such as the patron who purchases a meal from a fastfood restaurant, VAT is
simply a tax on transactions involving the sale of goods. The tax is shouldered by the buyer, and is
based on a percentage of the purchase price. Since an excise or percentage tax shares the same
characteristics, there could be some confusion as between such taxes and the VAT.
However, VAT is distinguishable from the standard excise or percentage taxes in that it is
imposable not only on the final transaction involving the end user, but on previous stages as well
so long as there was a sale involved. Thus, VAT does not simply pertain to the extra percentage
paid by the buyer of a fast-food meal, but also that paid by restaurant itself to its suppliers of raw
food products. This multi-stage system is more acclimated to the vagaries of the modern industrial
climate, which has long surpassed the stage when there was only one level of transfer between
the farmer who harvests the crop and the person who eats the crop. Indeed, from the extraction
or production of the raw material to its final consumption by a user, several transactions or sales
materialize. The VAT system assures that the government shall reap income for every transaction
that is had, and not just on the final sale or transfer.
The European Union, which has long required its member states to apply the VAT system,
provided the following definition of the tax which I deem clear and comprehensive:
The principle of the common system of value added tax involves the application to goods and
services of a general tax on consumption exactly proportional to the price of the goods and
services, whatever the number of transactions that take place in the production and distribution
process before the stage at which tax is charged.
On each transaction, value added tax, calculated on the price of the goods or services at the rate
applicable to such goods or services, shall be chargeable after deduction of the amount of value
added tax borne directly by the various cost components.35
The above definition alludes to a key characteristic of the VAT system, that the imposable tax
remains proportional to the price of goods and services no matter the number of transactions that
takes place.
There is another key characteristic of the VAT ─ that no matter how many the taxable
transactions that precede the final purchase or sale, it is the end-user, or the consumer, that
ultimately shoulders the tax. Despite its name, VAT is generally not intended to be a tax on value
added, but rather as a tax on consumption. Hence, there is a mechanism in the VAT system that
enables firms to offset the tax they have paid on their own purchases of goods and services
against the tax they charge on their sales of goods and services.36 Section 105 of the NIRC
assures that "the amount of tax may be shifted or passed on to the buyer, transferee or lessee of
the goods, properties or services." The assailed provisions of the E-VAT law strike at the heart of
this accepted principle.
And there is one final basic element of the VAT system integral to this disquisition: the mode by
which the tax is remitted to the government. In simple theory, the VAT payable can be remitted to
the government immediately upon the occurrence of the transaction, but such a demand proves
excessively unwieldy. The number of VAT covered transactions a modern enterprise may contract
in a single day, plus the recognized principle that it is the final end user who ultimately shoulders
the tax; render the remittance of the tax on a per transaction basis impossible.
Thus, the VAT is delivered by the purchaser not directly to the government but to the seller, who
then collates the VAT received and remits it to the government every quarter. The process may
seem simple if cast in this manner, but there is a wrinkle, due to the offsetting mechanism
designed to ultimately make the end consumer bear the cost of the VAT.
The Concepts of Input and
Output VAT
This mechanism is employed through the introduction of two concepts, the input tax and the
output tax. Section 110(A) of the National Internal Revenue Code defines the input tax as the
VAT due from or paid by a VAT-registered person on the importation of goods or local purchase
of goods and services in the course of trade or business, from a VAT registered person.
Let us put this in operational terms. A VAT registered person, engaged in an enterprise,
necessarily purchases goods such as raw materials and machinery in order to produce consumer
goods. The purchase of such raw materials and machineries is subject to VAT, hence the
enterprise pays an additional 10% of the purchase price to the supplier as VAT. This extra amount
paid by the enterprise constitutes its input VAT. The enterprise likewise pays input VAT when it
purchases services covered by the tax, or rentals of property.
Since VAT is a final tax that is supposed to be ultimately shouldered by the end consumer, the
VAT system allows for a mechanism by which the business is able to recover the input VAT that it
paid. This comes into play when the business, having transformed the raw materials into
consumer goods, sells these goods to the public. As widely known, the consumer pays to the
business an additional amount of 10% of the purchase price as VAT. As to the business, this VAT
payments it collects from the consumer represents output VAT, which is formally described under
Section 110(A) of the NIRC as "the value-added tax due on the sale or lease of taxable goods or
properties or services by" by any VAT-registered person.
The output VAT collected by the business from the consumers accumulates, until the end of every
quarter, when the enterprise is obliged to remit the collected output VAT to the government. This
is where the crediting mechanism comes into play. Since the business is entitled to recover the
prepaid input VAT, it does so in every quarter by applying the amount of prepaid input VAT
against the collected output VAT which is to be remitted. If the output VAT collected exceeds the
prepaid input VAT, then the amount of input VAT is deducted from the output VAT, and it is
entitled to remit only the remainder as output VAT to the government. To illustrate, if Business X
collects ₱1,000,000.00 as output VAT and incurs ₱500,000.00 as input VAT, the ₱500,000.00 is
deducted from the ₱1,000,000.00 output VAT, and X is required to remit only ₱500,000.00 of
the output VAT it collected from customers.
On the other hand, if the input VAT prepaid exceeds the output VAT collected, then the business
need not remit any amount as output VAT for the quarter. Moreover, the difference between the
input VAT and the output VAT may be credited as input VAT by the business in the succeeding
quarter. Thus, if in the First Quarter of a year, Business X prepays ₱1,000,000.00 as input VAT,
and collects only ₱500,000.00 as output VAT, it need not remit any amount of output VAT to the
government. Moreover, in the Second Quarter, Business X can credit the remaining ₱500,000.00
as part of its input VAT for that quarter. Hence, if in the Second Quarter, X actually prepays
₱400,000.00 as input VAT, and collects ₱500,000.00 as output VAT, it may add the ₱500,000.00
input VAT from the previous quarter to the ₱400,000.00 prepaid in the current quarter, bringing
the total input VAT it could claim to ₱900,000.00. Since the input VAT of ₱900,000.00 now
exceeds the output VAT collected of ₱500,000, then X need not remit any output VAT as well to
the government for the Second Quarter.
However, reality is far bleaker than that befaced by Business X. The VAT collected and remitted is
not the most relevant statistic evaluated by the business. The figure of primary concern of the
enterprise would be the profit margin, which is simply the excess of revenue less expenditures.
Revenue is derived from the gross sales of the business. Expenditures encompass all expenses
incurred by the business including overhead expenses, wages and purchases of capital goods.
Crucially, expenditures would include the input VAT prepaid by the business on its capital
expenditures.
Since a significant amount of the capital outlay incurred by a business is subjected to the
prepayment of input taxes, the necessity of recovering these losses through the output VAT
collected becomes more impelling. These output taxes are obviously proportional to the volume
of gross sales ― the higher the gross sales, the higher the output VAT collected. The output taxes
collected on sales answer for not only those input taxes paid on the purchase of the raw
materials, but also for the input taxes paid on the multifarious overhead expenses covered by
VAT. The burden carried by the sales volume on the stability, if not survival of the business thus
just became more crucial. The maintenance of the proper equilibrium is not an easy matter.
Increasing the selling price of the goods sold does not necessarily increase the gross sales, as it
could have the counter-effect of repelling the consumer and diminishing the number of goods
sold. At the same time, keeping the selling price low may increase the volume of goods sold, but
not necessarily the amount of gross sales.
Profit is a chancy matter, and in cases of small to medium enterprises, usually small if any. It is
quite common for retail and distribution enterprises to incur profits of less than 1% of their gross
revenues. Low profitability is not an automatic badge of poor business skills, but a reality dictated
by the laws of the marketplace. The probability of profit is lower than that of capital expenditures,
and ultimately, many business establishments end up with a higher input tax than output tax in a
given quarter. This would be especially true for small to medium enterprises who do not reap
sufficient profits from its business in the first place, and for those firms that opt to also invest in
capital expenses in addition to the overhead. Whatever miniscule profit margins that can be
obtained usually spell the difference between life and death of the business.
The possibility of profit is further diminished by the fact that businesses have to shoulder the input
VAT in the purchase of their capital expenses. Yet the erstwhile VAT system was not tainted by
the label of oppressiveness and neither did it bear the confiscatory mode. This was because of the
immediate relief afforded from the input taxes paid by the crediting system. In theory, VAT is not
supposed to affect the profit margin. If such margin is affected, it is only because of the
prepayment of the input taxes, and this should be remedied by the immediate recovery through
the crediting system of the settled input taxes.
The new E-VAT law changes all that, and puts in jeopardy the survival of small to medium
enterprises.
The Effects of the 70% Cap on Creditable Input VAT
The first radical shift introduced by the E-VAT law to the creditable input system ─ the 70% cap
on the creditable input tax that may be carried over into the next quarter ─ is provided in Section
8 of the law, which amends Section 110(A) of the NIRC, among others. Section 110(A) as
amended would now read:
Sec. 110. Tax Credits. –
(B) Excess Output or Input Tax. – If at the end of any taxable quarter the output tax exceeds the
input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the
output tax, the excess shall be carried over to the succeeding quarter or quarters. Provided, That
the input tax inclusive of input VAT carried over from the previous quarter that may be credited in
every quarter shall not exceed seventy percent (70%) of the output VAT: Provided, however, That
any input tax attributable to zero rated sales by a VAT-registered person may at his option be
refunded or credited against other internal revenue taxes, subject to the provisions of Section
112. (emphasis supplied)
All hope for entrepreneurial stability is dashed with the imposition of the 70% cap. Under the E-
VAT Law, the business, regardless of stability or financial capability, is obliged to remit to the
government every quarter at least 30% of the output VAT collected from customers, or roughly
3% of the amount of gross sales. Thus, if a quarterly gross sales of Y Business totaled ₱1,000,000,
and Y is prudent enough to keep its capital expenses down to ₱980,000, it would then appear on
paper that Y incurred a profit of ₱20,000. However, with the 70% cap, Y would be obliged to
remit to the government ₱30,000, thus wiping out the profit margin for the quarter. Y would be
entitled to credit the excess input VAT it prepaid for the next quarter, but the continuous
operation of the 70% cap obviates whatever benefits this may give, and cause the accumulation
of the unutilized creditable input VAT which should be returned to the business.
The difference is even more dramatic if seen how the unutilized creditable input VAT accumulates
over a one year period. To illustrate, Business Y prepays the following amounts of input VAT over
a one-year period: ₱100,000.00 - First Quarter; ₱100,000.00 – 2nd Quarter; ₱34,000.00 – 3rd
Quarter; and ₱50,000.00 – 4th Quarter. On the other hand, Y collects the following amounts of
output VAT from consumers: ₱60,000.00 - First Quarter; ₱60,000.00 – 2nd Quarter; ₱100,000.00
– 3rd Quarter; and ₱50,000.00 – 4th Quarter. Applying the 70% cap, which would limit the
amount of the declarable input VAT to 70% in a quarter, the following results obtain, as
presented in tabular form:
Particulars 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Output VAT 60,000 60,000 100,000 50,000
Input VAT (Actual) + Carry Over 100,000 100,000 [input] +58,000
[excess creditable]
158,000 34,000
[input]
+116,000
[excess creditable]
150,000 50,000
[input]
+80,000
[excess creditable]
130,000
DeclarableInput VAT (70% of output VAT) (60,000x70%)
42,000 (60,000x70%)
42,000 (100,000x70%)
70,000 (50,000x70%)
35,000
Lower of actual and 70% cap – allowable
VAT
Payable (60,000 -42,000)
18,000 (60,000 -42,000)
18,000 (100,000-70,000)
30,000 (50,000- 35,000)
15,000
CreditableInput VAT (100,000 – 42,000)
58,000 (158,000 – 42,000)
116,000 (150,000-
70,000)
80,000 (130,000- 35,000)
95,000
This stands in contrast to same business VAT accountability under the present system, using the
same variables of output VAT and input VAT. The need to distinguish a declarable input VAT is
obviated with the elimination of the 70% cap.
Particulars 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Output VAT 60,000 60,000 100,000 50,000
Input VAT (Actual) + Carry Over 100,000 100,000 [input]
+40,000
[excess creditable]
140,000 34,000
[input]
+80,000
[excess creditable]
114,000 50,000
[input]
+ 14,000
(excess
creditable)
50,000
VAT Payable 0 0 0 0
Creditable
Input VAT 40,000 80,000 14,000 14,000
The difference is dramatic, as is the impact on the business’s profit margin and available cash on
hand. Under normal conditions, small to medium enterprises are already encumbered with the
likelihood of obtaining only a minimal profit margin. Without the 70% cap, those businesses
would nonetheless be able to expect an immediate return on its input taxes earlier advanced,
taxes which under the VAT system it is not supposed to shoulder in the first place. However, with
the 70% cap in place, the unutilized input taxes would continue to accumulate, and the
enterprise precluded from immediate recovery thereof. The inability to utilize these input taxes,
which could spell the difference between profit and loss, solvency and insolvency, will eventually
impair, if not kill off the enterprise.
The majority fails to consider one of the most important concepts in finance, time value for
money.37 Simply put, the value of one peso is worth more today than in 2006. Money that you
hold today is worth more because you can invest it and earn interest.38 By reason of the 70%
cap, the amount of input VAT credit that remains unutilized would continue accumulate for
months and years. The longer the amount remains unutilized, the higher the degree of its
depreciation in value, in accordance with the concept of time value of money. Even assuming that
the business eventually recovers the input VAT credit, the sum recovered would have decreased in
practical value.
It would be sad, but fair, if a business ceases because of its inability to compete with other
businesses. It would be utter malevolence to condemn an enterprise to death solely through the
employment of a deceptive accounting wizardry. For the raison d’etreof this 70% cap is to make it
appear on paper that the government is more solvent than it actually is. Conceding for the nonce,
there is a temporary advantage gained by the government by this 70% cap, as the steady
remittance by businesses of the 30% output VAT would assure a cash flow. Such collection may
only momentarily resolve an endemic problem in our local tax system, the problem of collection
itself.
If the 70% cap was designed in order to enhance revenue collection, then I submit that the
means employed stand beyond reason. If sheer will proves insufficient in assuring that the State
all taxes due it, there should be allowable discretion for the government to formulate creative
means to enhance collection. But to do so by depriving low profit enterprises of whatever meager
income earned and consequently assuring the death of these industries goes beyond any valid
State purpose.
Only stable businesses with substantial cash flows, or extraordinarily successful enterprises will be
able to remain in operation should the 70% cap be retained. The effect of the 70% cap is to
effectively impose a tax amounting to 3% of gross revenue. The amount may seem insignificant
to those without working knowledge of the ways of business, but anybody who is actually familiar
with business would be well aware the profit margins of the retailing and distribution sectors
typically amount to less than 1% of the gross revenues. A taxpayer has to earn a margin of at
least 3% on gross revenue in order to recoup the losses sustained due to the 70% cap. But as
stated earlier, profits are chancy, and the entrepreneur does not have full control of the
conditions that lead to profit.
Even more galling is the fact that the 70% cap, oppressive as it already is to the business
establishment, even limits the options of the business to recover the unutilized input VAT credit.
During the deliberations, the argument was raised that the problem presented by the 70% cap
was a business problem, which can only be solved by business. Yet there is only one viable option
for the enterprise to resolve the problem, and that is to increase the selling price of goods.39 It
would be incorrect to assume that increase the volume of the goods sold could solve the problem,
since for items with the same purchasing cost, the effect of the 70% cap remains constant
regardless of an increase in volume.
But the additional burden is not limited to the increase of prices by the retailer to the end
consumer. Since VAT is a transaction tax, every level of distribution becomes subject not only to
the VAT, but also to the 70% cap. The problem increases due to a cascading effect as the number
of distribution levels increases since it will result in the collection of an effective 3% percentage
tax at every distribution level.
In analyzing the effects of the 70% cap, and appreciating how it violates the due process clause,
we should not focus solely on the end consumers. Undoubtedly, consumers will face hardships
due to the increased prices, but their threshold of physical survival, as individual people, is
significantly less than that of enterprises. Somehow, I do not think the new E-VAT would
generally deprive consumers of the bare necessities such as food, water, shelter and clothing.
There may be significant deprivation of comfort as a result, but not of life.
The same does not hold true for businesses. The standard of "deprivation of life" of juridical
persons employs different variables than that of natural persons. What food and water may be for
persons, profit is for an enterprise ―― the bare necessity for survival. For businesses, the
implementation of the same law, with the 70% cap and 60-month amortization period, would
mean the deprivation of profit, which is the determinative necessity for the survival of a business.
It is easy to admonish both the consumer and the enterprise to cut back on expenditures to
survive the new E-VAT Law. However, this can be realistically expected only of the consumer. The
small/medium enterprise cannot just cut back easily on expenditures in order to survive the
implementation of the E-VAT Law. For such businesses, expenditures do not normally
contemplate unnecessary expenses such as executive perks which can be dispensed with without
injury to the enterprises. These expenditures pertain to expenses necessary for the survival of the
enterprise, such as wages, overhead and purchase of raw materials. Those three basic items of
expenditure cannot simply be reduced, as to do so with impair the ability of the business to
operate on a daily basis.
And reduction of expenditures is not the exclusive antidote to these impositions under the E-VAT
Law, as there must also be a corresponding increase in the amount of gross sales. To do so
though, would require an increase in the selling price, dampening consumer enthusiasm, and
further impairing the ability of the enterprise to recover from the E-VAT Law. This is your basic
Catch-2240 situation — no matter which means the enterprise employs to recover from the E-VAT
Law, it will still go down in flames.
Section 8 of the E-VAT law, while ostensibly even-handed in application, fails to appreciate valid
substantial distinctions between large scale enterprises and small and medium enterprises. The
latter group, owing to the limited capability for capital investment, subsists on modest profit
margins, whereas the former expects, by reason of its substantial capital investments, a high
margin. In essentially prohibiting the recovery of small profit margins, the E-VAT law effectively
sends the message that only high margin businesses are welcome to do business in the
Philippines. It stifles any entrepreneurial ambitions of Filipinos unfortunate enough to have been
born poor yet seek a better life by sacrificing all to start a small business.
Among the enunciated State policies in the Constitution, as stated in Section 20, Article II, is that
"the State recognizes the indispensable role of the private sector, encourages private enterprise,
and provides incentives to needed investments."41 The provision, as with other declared State
policies in the Constitution, have sufficient import and consequence such that in assessing the
constitutionality of the governmental action, these provisions should be considered and weighed
as against the rationale for the assailed State action.42 The incompatibility of the 70% cap with
this provision is patent.
Pilipinas Shell Dealers, on whom the burden to establish the violation of due process and equal
protection lies, offers the following chart of the income statement of a typical petroleum dealer:
QUARTERLY PROFIT AND LOSS STATEMENT
DEALER "A"
Price VAT (without 70% cap) VAT (with 70% cap)
Sales/Output 32,748,534 3,274,853.40 3,274,853.40
Cost of Sales 31,834,717 3,183,471.70
Gross Margin 913,817
Operating Expenses Non-vatable items
Vatable Items 536,249
317,584 31,758.40
Total Cost 853,833
Net Profit 59,984
Total Input Tax 3,215,230.10 2,292,397.38
VAT Payable 59,623.30 982,456.02
Unutilized Input VAT 922,832.72
*computed by multiplying output VAT by 70% [3,274,853.40 x 70% = 2,292.397.38]
The presentation of the Pilipinas Shell Dealers more or less jibes with my own observations on the
impact of the 70% cap. The dealer whose income is illustrated above has to outlay a cash amount
of ₱922,832.72 more than what would have been shelled out if the 70% cap were not in place.
Considering that the net profit of the dealer is only ₱59,984.00, the consequences could very well
be fatal, especially if these state of events persist in succeeding quarters.
The burden of proof was on the Pilipinas Shell Dealers’ to prove their allegations, and accordingly,
these figures have been duly presented to the Court for appreciation and evaluation. Instead, the
majority has shunted aside these presentations as being merely theoretical, despite the fact that
they present a clear and present danger to the very life of our nation’s enterprises. The majority’s
position would have been more credible had it faced the issue squarely, and endeavored to
demonstrate in like numerical fashion why the 70% cap is not oppressive, confiscatory, or
otherwise violative of the due process clause.
Sadly, the majority refuses to confront the figures or engage in a meaningful demonstration of
how these assailed provisions truly operate. Instead, it counters with platitudes and bromides that
do not intellectually satisfy. Considering that the very vitality, if not life of our domestic economy is
at stake, I think it derelict to our duty to block out these urgent concerns presented to the Court
with blind faith tinged with irrational Panglossian43 optimism.
The obligation of the majority to refute on the merits the arguments of the Petroleum Dealers
becomes even more grave considering that the respondents have abjectly failed to convincingly
dispute the claims. During oral arguments, respondents attempted to counter the arguments that
the 70% cap was oppressive and confiscatory by presenting the following illustration, which I fear
is severely misleading:
Slide 1

Item Cost VAT

Sales 1,000,000.00 100,000.00

Purchases 800,000.00 80,000.00
Due BIR without cap Due BIR with 70% cap
Output VAT 100,000.00 Output VAT 100,000.00
Actual Input VAT 80,000.00 Allowable Input VAT 70,000.00
Net VAT Payable 20,000.00 Net VAT Payable 30,000.00
Excess Input VAT 10,000.00
Carry-over to next quarter
Slide 2
___________________________________________Item Cost VAT

Sales 1,000,000.00 100,000.00

Purchases 600,000.00 60,000.00
Due BIR without cap Due BIR with 70% cap

Output VAT 100,000.00 Output VAT 100,000.00

Actual Input VAT (60% of output VAT) 60,000.00 Allowable Input VAT 60,000.00
Net VAT Payable 40,000.00 Net VAT Payable 40,000.00
Excess Input VAT 0
Carry-over to next quarter
This presentation of the respondents is grossly deceptive, as it fails to account for the excess
creditable input VAT that remains unutilized due to the 70% cap. This excess or creditable input
VAT is supposed to be carried over for the computation of the input VAT of the next quarter.
Instead, this excess or creditable input VAT magically disappears from the table of the
respondents. In their memorandum, the Pilipinas Shell Dealers counter with their own
presentation using the same variables as respondents’, but taking into account the excess
creditable input VAT and extending the situation over a one-year period. I cite with approval the
following chart44 of the Pilipinas Shell Dealers:
Slide 1
Quarter 1
Item No. Cost VAT
Sales 1,000,000.00 100,000.00
Purchases 800,000.00 80,000.00
Due BIR with 70% cap
Output VAT 100,000.00
Allowable Input VAT 70,000.00
Net VAT Payable 30,000.00
Excess Input Vat
Carry-over to next quarter 10,000.00
Quarter 2
Cost VAT
Sales 1,000,000.00 100,000.00
Purchases 800,000.00 80,000.00
Due BIR with 7-% cap
Output VAT 100,000.00
Less: Input VAT
Excess Input VAT fr. 1st Quarter 10,000.00
Input VAT-Current Qtr. 80,000.00
Total Available Input VAT 90,000.00
Allowable Input VAT (100,000 x 70%) 70,000.00 70,000.00
Net VAT Payable 30,000.00
=========
Total Available Input VAT 90,000.00
Allowable Input VAT 70,000.00
Excess Input VAT to be carried over to next
Quarter 20,000.00
=========
Quarter 3
Cost VAT
Sales 1,000,000.00 100,000.00
Purchases 800,000.00 80,000.00
Due BIR with 70% cap
Output VAT 100,000.00
Less: Input VAT
Excess Input VAT fr. 2nd Qtr. 20,000.00
Input VAT-Current Qtr. 80,000.00
Total Available Input VAT 100,000.00
Allowable Input VAT (100,000 x 70%) 70,000.00 70,000.00
Net VAT Payable 30,000.00
=========
Total Available Input VAT 100,000.00
Allowable Input VAT 70,000.00
Excess Input VAT to be carried over to next quarter 30,000.00
==========
Quarter 4
Cost VAT
Sales 1,000,000.00 100,000.00
Purchases 800,000.00 80,000.00
Due BIR with 70% cap
Output VAT 100,000.00
Less: Input VAT
Excess Input VAT fr. 3rd Qtr. 30,000.00
Input VAT-Current Qtr. 80,000.00
Total Available Input VAT 110,000.00
Allowable Input VAT (100,000 x 70%) 70,000.00 70,000.00
Net VAT Payable 30,000.00
========
Total Available Input VAT 110,000.00
Allowable Input VAT 70,000.00
Excess Input VAT to be carried over to next quarter 40,000.00
==========
The 70% cap is not merely an unwise imposition. It is a burden designed, either through sheer
heedlessness or cruel calculation, to kill off the small and medium enterprises that are the soul, if
not the heart, of our economy. It is not merely an undue taking of property, but constitutes an
unjustified taking of life as well.
And what legitimate, germane purposes does this lethal 70% cap serve? It certainly does not
increase the government’s revenue since the unutilized creditable input VAT should be entered in
the government books as a debt payable as it is supposed to be eventually repaid to the taxpayer,
and so on the contrary it increases the government’s debts. I do see that the 70% cap temporarily
allows the government to brag to the world of an increased cash flow. But this situation would be
akin to the provincial man who borrows from everybody in the barrio in order to show off money
and maintain the pretense of prosperity to visiting city relatives. The illusion of wealth is hardly a
legitimate state purpose, especially if projected at the expense of the very business life of the
country.
The majority, in an effort to belittle these concerns, points out that that the excess input tax
remains creditable in succeeding quarters. However, as seen in the above illustration, the actual
application of the excess input tax will always be limited by the amount of output taxes collected
in a quarter, as a result of the 70% cap. Thus, it is entirely possible that a VAT-registered person,
through the accumulation of unutilized input taxes, would have in a quarter an express creditable
input tax of ₱50,000,000, but would be allowed to actually credit only ₱70,000 if the output tax
collected for that quarter were only ₱100,000.
The burden of the VAT may fall at first to the immediate buyers, but it is supposed to be
eventually shifted to the end-consumer. The 70% cap effectively prevents this from happening, as
it limits the ability of the business to recover the prepaid input taxes. This is unconscionable, since
in the first place, these intervening
players ─ the manufacturers, producers, traders, retailers ─ are not even supposed to sustain the
losses incurred by reason of the prepayment of the input taxes. Worse, they would be obliged
every quarter to pay to the government from out of their own pockets the equivalent of 30% of
the output taxes, no matter their own particular financial condition. Worst, this twin yoke on the
taxpayer of having to sustain a debit equivalent to 30% of output taxes, and having to await
forever in order to recover the prepaid taxes would impair the cash flow and prove fatal for a
shocking number of businesses which, as they now stand, have to make do with a minimum
profit that stands to be wiped out with the introduction of the 70% cap.
Nonetheless, the majority notes that the excess creditable input tax may be the subject of a tax
credit certificate, which then could be used in payment of internal revenue taxes, or a refund to
the extent that such input taxes have not been applied against output taxes.45 What the majority
fails to mention is that under Section 10 of the E-VAT Law, which amends Section 112 of the
NIRC, such credit or refund may not be done while the enterprise remains operational:
SEC. 10. Section 112 of the same Code, as amended, is hereby further amended to read as
follows:
SEC. 112. Refunds or Tax Credits of Input Tax.—
xxx
"(B) Cancellation of VAT Registration.— A person whose registration has been cancelled due to
retirement from or cessation of business or due to changes or cessation of status under Section
106(C) of this Code may, within two (2) years from the date of cancellation, apply for the
issuance of a tax credit certificate for any unused input tax which may be used in payment of his
other internal revenue taxes.
xxx
This stands in marked contrast to Section 112(B) of the NIRC as it read prior to this amendment.
Under the previous rule, a VAT-registered person was entitled to apply for the tax credit certificate
or refund paid on capital goods even while it remained in operation:
SEC. 112. Refunds or Tax Credits of Input Tax.—
xxx
"(B) Capital Goods .— A VAT-registered person may apply for the issuance of a tax credit
certificate or refund of input taxes paid on capital goods imported or locally purchased, to the
extent that such input taxes have not been applied against output taxes. The application may be
made only within two (2) years after the close of the taxable quarter when the importation or
purchase was made.
This provision, which could have provided foreseeable and useful relief to the VAT-registered
person, was deleted under the new E-VAT Law. At present, the refund or tax credit certificate
may only be issued upon two instances: on zero-rated or effectively zero-rated sales, and upon
cancellation of VAT registration due to retirement from or cessation of business.46 This is the
cruelest cut of all. Only after the business ceases to be may the State be compelled to repay the
entire amount of the unutilized input tax. It is like a macabre form of sweepstakes wherein the
winner is to be paid his fortune only when he is already dead. Aanhin pa ang damo kung patay na
ang kabayo.
Moreover, the inability to immediately credit or otherwise recover the unutilized input VAT could
cause such prepaid amount to actually be recognized in the accounting books as a loss. Under
international accounting practices, the unutilized input VAT due to the 70% cap would not even
be recognized as a deferred asset. The same would not hold true if the 70% cap were eliminated.
Under the International Accounting Standards47, the unutilized input VAT credit is recognized as
an asset "to the extent that it is probable that future taxable profit will be available against which
the unused tax losses and unused tax credits can be utili[z]ed"48 Thus, if the immediate
accreditation of the input VAT credit can be obtained, as it would without the 70% cap, the asset
could be recognized.
However, the same Standards hold that "[t]o the extent that it is not probable that taxable profit
will be available against which the unused tax losses or unused tax credits can be utilised, the
deferred tax asset is not recognised".49 As demonstrated, the continuous operation of the 70%
cap precludes the recovery of input VAT prepaid months or years prior. Moreover, the inability to
claim a refund or tax credit certificate until after the business has already ceased virtually renders
it improbable for the input VAT to be recovered. As such, under the International Accounting
Standards, it is with all likelihood that the prepaid input VAT, ostensibly creditable, would actually
be reflected as a loss.50 What heretofore was recognized as an asset would now, with the
imposition of the 70% cap, be now considered as a loss, enhancing the view that the 70% cap is
ultimately confiscatory in nature.
This leads to my next point. The majority asserts that the input tax is not a property or property
right within the purview of the due process clause.51 I respectfully but strongly disagree.
Tellingly, the BIR itself has recognized that unutilized input VAT is one of those assets, corporate
attributes or property rights that, in the event of a merger, are transferred to the surviving
corporation by operation of law.52 Assets would fall under the purview of property under the due
process clause, and if the taxing arm of the State recognizes that such property belongs to the
taxpayer and not to the State, then due respect should be given to such expert opinion.
Even under the International Accounting Standards I adverted to above, the unutilized input VAT
credit may be recognized as an asset "to the extent that it is probable that future taxable profit
will be available against which the unused tax losses and unused tax credits can be utilised"53 If
not probable, it would be recognized as a loss.54 Since these international standards, duly
recognized by the Securities and Exchange Commission as controlling in this jurisdiction, attribute
tangible gain or loss to the VAT credit, it necessarily follows that there is proprietary value
attached to such gain or loss.
Moreover, the prepaid input tax represents unutilized profit, which can only be utilized if it is
refunded or credited to output taxes. To assert that the input VAT is merely a privilege is to
correspondingly claim that the business profit is similarly a mere privilege. The Constitution itself
recognizes the right to profit by private enterprises. As I stated earlier, one of the enunciated State
policies under the Constitution is the recognition of the indispensable role of the private sector,
the encouragement of private enterprise, and the provision of incentives to needed
investments.55 Moreover, the Constitution also requires the State to recognize the right of
enterprises to reasonable returns on investments, and to expansion and growth.56 This, I believe,
encompasses profit.
60-Month Amortization Period
Another portion of Section 8 of the E-VAT Law is unconstitutional, essentially for the same
reasons as above. The relevant portion reads:
SEC. 8. Section 110 of the same Code, as amended, is hereby further amended to read as follows:
"SEC. 110. Tax Credits. –
(A) Creditable Input Tax. –
....
Provided, That the input tax on goods purchased or imported in a calendar month for use in trade
or business for which deduction for depreciation is allowed under this Code, shall be spread
evenly over the month of acquisition and the fifty-nine (59) succeeding months if the aggregate
acquisition cost for such goods, excluding the VAT component thereof, exceeds One million pesos
(₱1,000,000): Provided, however, That if the estimated useful life of the capital good is less than
five (5) years, as used for depreciation purposes, then the input VAT shall be spread over such a
shorter period: Provided, finally, that in the case of purchase of services, lease or use of properties,
the input tax shall be creditable to the purchaser, lessee or licensee upon payment of the
compensation, rental, royalty or fee.
Again, this provision unreasonably severely limits the ability of an enterprise to recover its prepaid
input VAT. On its face, it might appear injurious primarily to high margin enterprises, whose
purchase of capital goods in a given quarter would routinely exceed ₱1,000,000.00. The
amortization over a five-year period of the input VAT on these capital goods would definitely eat
up into their profit margin. But it is still possible for such big businesses to survive despite this new
restriction, and their financial pain alone may not be sufficient to cause the invalidity of a taxing
statute.
However, this amortization plan will prove especially fatal to start-ups and other new businesses,
which need to purchase capital goods in order to start up their new businesses. It is a known fact
in the financial community that a majority of businesses start earning profit only after the second
or third year, and many enterprises do not even get to survive that long. The first few years of a
business are the most crucial to its survival, and any financial benefits it can obtain in those years,
no matter how miniscule, may spell the difference between life and death. For such emerging
businesses, it is already difficult under the present system to recover the prepaid input VAT from
the output VAT collected from customers because initial sales volumes are usually low. With this
further limitation, diminishing as it does any opportunity to have a sustainable cash flow, the
ability of new businesses to survive the first three years becomes even more endangered.
Even existing small to medium enterprises are imperiled by this 60 month amortization restriction,
especially considering the application of the 70% cap. The additional purchase of capital goods
bears as a means of adding value to the consumer good, as a means to justify the increased
selling price. However, the purchase of capital goods in excess of ₱1,000,000.00 would impose
another burden on the small to medium enterprise by further restricting their ability to
immediately recover the entire prepaid input VAT (which would exceed at least ₱100,000.00), as
they would be compelled to wait for at least five years before they can do so. Another hurdle is
imposed for such small to medium enterprise to obtain the profit margin critical to survival. For
some lucky enterprises who may be able to survive the injury brought about by the 70% cap, this
60 month amortization period might instead provide the mortal head wound.
Moreover, the increased administrative burden on the taxpayer should not be discounted,
considering this Court’s previous recognition of the aims of the VAT system to "rationalize the
system of taxes on goods and services, [and] simplify tax administration".57 With the
amortization requirement, the taxpayer would be forced to segregate assets into several classes
and strictly monitor the useful life of assets so that proper classification can be made. The
administrative requirements of the taxpayer in order to monitor the input VAT from the purchase
of capital assets thus has exponentially increased.
5% Withholding VAT on Sales
Pilipinas Shell Dealers argue that Section 12 of the E-VAT law, which amends Section 114(C) of
the NIRC, is also unconstitutional. The provision is supremely unwise, oppressive and confiscatory
in nature, and ruinous to private enterprise and even State development. The provision reads:
SEC. 12. Section 114 of the same Code, as amended, is hereby further amended to read as
follows:
"SEC. 114. Return and Payment of Value-Added Tax. –
xxx
"(C) Withholding of Value-added Tax. – The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or –controlled corporations (GOCCs)
shall, before making payment on account of each purchase of goods and services which are
subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and
withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof:
Provided, That the payment for lease or use of properties or property rights to nonresident owners
shall be subject to ten percent (10%) withholding tax at the time of payment. For purposes of this
Section, the payor or person in control of the payment shall be considered as the withholding
payment. xxx
The principle that the Government and its subsidiaries may deduct and withhold a final value-
added tax on its purchase of goods and services is not new, as the NIRC had allowed such
deduction and withholding at the rate of 3% of the gross payment for the purchase of goods,
and 6% of the gross receipts for services. However, the NIRC had also provided that this tax
withheld would also be creditable against the VAT liability of the seller or contractor, a
mechanism that was deleted by the E-VAT law. The deletion of this credit apparatus effectively
compels the private enterprise transacting with the government to shoulder the output VAT that
should have been paid by the government in excess of 5% of the gross selling price, and at the
same time unduly burdens the private enterprise by precluding it from applying any creditable
input VAT on the same transaction.
Notably, the removal of the credit mechanism runs contrary to the essence of the VAT system,
which characteristically allows the crediting of input taxes against output taxes. Without such
crediting mechanism, which allows the shifting of the VAT to only the final end user, the tax
becomes a straightforward tax on business or income. The effect on the enterprise doing business
with the government would be that two taxes would be imposed on the income by the business
derived on such transaction: the regular personal or corporate income tax on such income, and
this final withholding tax of 5%.
Granted that Congress is not bound to adopt with strict conformity the VAT system, and that it
has to power to impose new taxes on business income, this amendment to Section 114(C) of the
NIRC still remains unconstitutional. It unfairly discriminates against entities which contract with
the government by imposing an additional tax on the income derived from such transactions. The
end result of such discrimination is double taxation on income that is both oppressive and
confiscatory.
It is a legitimate purpose of a tax law to devise a manner by which the government could save
money on its own transactions, but it is another matter if a private enterprise is punished for
doing business with the government. The erstwhile NIRC worked towards such advantage, by
allowing the government to reduce its cash outlay on purchases of goods and services by
withholding the payment of a percentage thereof. While the new E-VAT law retains this benefit
to the government, at the same time it burdens the private enterprise with an additional tax by
refusing to allow the crediting of this tax withheld to the business’s input VAT.
This imposition would be grossly unfair for private entities that transact with the government,
especially on a regular basis. It might be argued that the provision, even if concededly unwise,
nonetheless fails to meet the standard of unconstitutionality, as it affects only those persons or
establishments that choose to do business with the government. However, it is an acknowledged
fact that the government and its subsidiaries rely on contracts with private enterprises in order to
be able to carry out innumerable functions of the State. This provision effectively discourages
private enterprises to do business with the State, as it would impose on the business a higher rate
of tax if it were to transact with the State, as compared to transactions with other private entities.
Established industries with track records of quality performance could very well be dissuaded from
doing further business with government entities as the higher tax rate would make no economic
sense. Only those enterprises which really need the money, such as those with substandard track
records that have affected their viability in the marketplace, would bother seeking out
government contracts. The corresponding sacrifice in quality would eventually prove detrimental
to the State. Our society can ill afford shoddy infrastructures such as roads, bridges and buildings
that would unnecessarily pose danger to the public at large simply because the government
wanted to skimp on expenses.
The provision squarely contradicts Section 20, Article II of the Constitution as it vacuously
discourages private enterprise, and provides disincentives to needed investments such as those
expected by the State from private businesses. Whatever advantages may be gained by the
temporary increase in the government coffers would be overturned by the disadvantages of
having a reduced pool of private enterprises willing to do business with the government.
Moreover, since government contracts with private enterprises will still remain a necessary fact of
life, the amendment to Section 114(C) of the NIRC introduced by the E-VAT Law.
Double taxation means taxing for the same tax period the same thing or activity twice, when it
should be taxed but once, for the same purpose and with the same kind of character of
tax.58Double taxation is not expressly forbidden in our constitution, but the Court has recognized
it as obnoxious "where the taxpayer is taxed twice for the benefit of the same governmental
entity or by the same jurisdiction for the same purpose."59 Certainly, both the 5% final tax
withheld and the general corporate income tax are both paid for the benefit of the national
government, and for the same incidence of taxation, the sale/lease of goods and services to the
government.
The Court, in Re: Request of Atty. Bernardo Zialcita60 had cause to make the following
observation I submit apropos to the case at bar, on double taxation in a case involving the
attempt of the BIR to tax the commuted accumulated leave credits of a government lawyer upon
his retirement:
Section 284 of the Revised Administrative Code grants to a government employee 15 days
vacation leave and 15 days sick leave for every year of service. Hence, even if the government
employee absents himself and exhausts his leave credits, he is still deemed to have worked and to
have rendered services. His leave benefits are already imputed in, and form part of, his salary
which in turn is subject to withholding tax on income. He is taxed on the entirety of his salaries
without any deductions for any leaves not utilized. It follows then that the money values
corresponding to these leave benefits both the used and unused have already been taxed during
the year that they were earned. To tax them again when the retiring employee receives their
money value as a form of government concern and appreciation plainly constitutes an attempt to
tax the employee a second time. This is tantamount to double taxation.61
Conclusions
The VAT system, in itself, is intelligently designed, and stands as a fair means to raise revenue. It
has been adopted worldwide by countries hoping to employ an efficient means of taxation. The
concerns I have raised do not detract from my general approval of the VAT system.
I do lament though that our government’s wholehearted adoption of the VAT system is endemic
of what I deem a flaw in our national tax policy in the last few decades. The power of taxation,
inherent in the State and ever so powerful, has been generally employed by our financial planners
for a solitary purpose: the raising of revenue. Revenue generation is a legitimate purpose of
taxation, but standing alone, it is a woefully unsophisticated design. Intelligent tax policy should
extend beyond the singular-minded goal of raising State funds ─ the old-time philosophy behind
the taxing schemes of war-mongering monarchs and totalitarian states ─ and should sincerely
explore the concept of taxation as a means of providing genuine incentives to private enterprise
to spur economic growth; of promoting egalitarian social justice that would allow everyone to
their fair share of the nation’s wealth.
Instead, we are condemned by a national policy driven by the monomania for State revenue. It
may be beyond my oath as a Justice to compel the government to adopt an economic policy in
consonance with my personal views, but I offer these observations since they lie at the very heart
of the noxiousness of the assailed provisions of the E-VAT law. The 70% cap, the 60-month
amortization period and the 5% withholding tax on government transactions were selfishly
designed to increase government revenue at the expense of the survival of local industries.
I am not insensitive to the concerns raised by the respondents as to the dire consequences to the
economy should the E-VAT law be struck down. I am aware that the granting of the petition in
G.R. No. 168461 will negatively affect the cash flow of the government. If that were the only
relevant concern at stake, I would have no problems denying the petition. Unfortunately, under
the device employed in the E-VAT law, the price to be paid for a more sustainable liquidity of the
government’s finances will be the death of local business, and correspondingly, the demise of our
society. It is a measure just as draconian as the standard issue taxes of medieval tyrants.
I am not normally inclined towards the language of the overwrought, yet if the sky were indeed
truly falling, how else could that fact be communicated. The E-VAT Law is of multiple fatal
consequences. How are we to survive as a nation without the bulwark of private industries?
Perhaps the larger scale, established businesses may ultimately remain standing, but they will be
unable to sustain the void left by the demise of small to medium enterprises. Or worse, domestic
industry would be left in the absolute control of monopolies, combines or cartels, whether
dominated by foreigners or local oligarchs. The destruction of subsisting industries would be bad
enough, the destruction of opportunity and the entrepreneurial spirit would be even more
grievous and tragic, as it would mark as well the end of hope. Taxes may be the lifeblood of the
state, but never at the expense of the life of its subjects.
Accordingly, I VOTE to:
1) DENY the Petitions in G.R. Nos. 168056, 168207, and 168730 for lack of merit;
2) PARTIALLY GRANT the Petition in G.R. Nos. 168463 and declare Section 21 of the E-VAT Law
as unconstitutional;
3) GRANT the Petition in G.R. No. 168461 and declare as unconstitutional Section 8 of Republic
Act No. 9337, insofar as it amends Section 110(A) and (B) of the National Internal Revenue Code
(NIRC) as well as Section 12 of the same law, with respect to its amendment of Section 114(C) of
the NIRC.
DANTE O. TINGA
Associate Justice

x--------------------------------------------------x
CONCURRING OPINION
CHICO-NAZARIO, J.:
Five petitions were filed before this Court questioning the constitutionality of Republic Act No.
9337. Rep. Act No. 9337, which amended certain provisions of the National Internal Revenue
Code of 1997,1 by essentially increasing the tax rates and expanding the coverage of the Value-
Added Tax (VAT). Undoubtedly, during these financially difficult times, more taxes would be
additionally burdensome to the citizenry. However, like a bitter pill, all Filipino citizens must bear
the burden of these new taxes so as to raise the much-needed revenue for the ailing Philippine
economy. Taxation is the indispensable and inevitable price for a civilized society, and without
taxes, the government would be paralyzed.2 Without the tax reforms introduced by Rep. Act No.
9337, the then Secretary of the Department of Finance, Cesar V. Purisima, assessed that "all
economic scenarios point to the National Government’s inability to sustain its precarious fiscal
position, resulting in severe erosion of investor confidence and economic stagnation."3
Finding Rep. Act No. 9337 as not unconstitutional, both in its procedural enactment and in its
substance, I hereby concur in full in the foregoing majority opinion, penned by my esteemed
colleague, Justice Ma. Alicia Austria-Martinez.
According to petitioners, the enactment of Rep. Act No. 9337 by Congress was riddled with
irregularities and violations of the Constitution. In particular, they alleged that: (1) The Bicameral
Conference Committee exceeded its authority to merely settle or reconcile the differences among
House Bills No. 3555 and 3705 and Senate Bill No. 1950, by including in Rep. Act No. 9337
provisions not found in any of the said bills, or deleting from Rep. Act No. 9337 or amending
provisions therein even though they were not in conflict with the provisions of the other bills; (2)
The amendments introduced by the Bicameral Conference Committee violated Article VI, Section
26(2), of the Constitution which forbids the amendment of a bill after it had passed third reading;
and (3) Rep. Act No. 9337 contravened Article VI, Section 24, of the Constitution which
prescribes that revenue bills should originate exclusively from the House of Representatives.
Invoking the expanded power of judicial review granted to it by the Constitution of 1987,
petitioners are calling upon this Court to look into the enactment of Rep. Act No. 9337 by
Congress and, consequently, to review the applicability of the enrolled bill doctrine in this
jurisdiction. Under the said doctrine, the enrolled bill, as signed by the Speaker of the House of
Representatives and the Senate President, and certified by the Secretaries of both Houses of
Congress, shall be conclusive proof of its due enactment.4
Petitioners’ arguments failed to convince me of the wisdom of abandoning the enrolled bill
doctrine. I believe that it is more prudent for this Court to remain conservative and to continue its
adherence to the enrolled bill doctrine, for to abandon the said doctrine would be to open a
Pandora’s Box, giving rise to a situation more fraught with evil and mischief. Statutes enacted by
Congress may not attain finality or conclusiveness unless declared so by this Court. This would
undermine the authority of our statutes because despite having been signed and certified by the
designated officers of Congress, their validity would still be in doubt and their implementation
would be greatly hampered by allegations of irregularities in their passage by the Legislature. Such
an uncertainty in the statutes would indubitably result in confusion and disorder. In all probability,
it is the contemplation of such a scenario that led an American judge to proclaim, thus –
. . . Better, far better, that a provision should occasionally find its way into the statute through
mistake, or even fraud, than, that every Act, state and national, should at any and all times be
liable to put in issue and impeached by the journals, loose papers of the Legislature, and parol
evidence. Such a state of uncertainty in the statute laws of the land would lead to mischiefs
absolutely intolerable. . . .5
Moreover, this Court must attribute good faith and accord utmost respect to the acts of a co-
equal branch of government. While it is true that its jurisdiction has been expanded by the
Constitution, the exercise thereof should not violate the basic principle of separation of powers.
The expanded jurisdiction does not contemplate judicial supremacy over the other branches of
government. Thus, in resolving the procedural issues raised by the petitioners, this Court should
limit itself to a determination of compliance with, or conversely, the violation of a specified
procedure in the Constitution for the passage of laws by Congress, and not of a mere internal rule
of proceedings of its Houses.
It bears emphasis that most of the irregularities in the enactment of Rep. Act No. 9337 concern
the amendments introduced by the Bicameral Conference Committee. The Constitution is silent
on such a committee, it neither prescribes the creation thereof nor does it prohibit it. The creation
of the Bicameral Conference Committee is authorized by the Rules of both Houses of Congress.
That the Rules of both Houses of Congress provide for the creation of a Bicameral Conference
Committee is within the prerogative of each House under the Constitution to determine its own
rules of proceedings.
The Bicameral Conference Committee is a creation of necessity and practicality considering that
our Congress is composed of two Houses, and it is highly improbable that their respective bills on
the same subject matter shall always be in accord and consistent with each other. Instead of all
their members, only the appointed representatives of both Houses shall meet to reconcile or settle
the differences in their bills. The resulting bill from their meetings, embodied in the Bicameral
Conference Report, shall be subject to approval and ratification by both Houses, voting separately.
It does perplex me that members of both Houses would again ask the Court to define and limit
the powers of the Bicameral Conference Committee when such committee is of their own
creation. In a number of cases,6 this Court already made a determination of the extent of the
powers of the Bicameral Conference Committee after taking into account the existing Rules of
both Houses of Congress. In gist, the power of the Bicameral Conference Committee to reconcile
or settle the differences in the two Houses’ respective bills is not limited to the conflicting
provisions of the bills; but may include matters not found in the original bills but germane to the
purpose thereof. If both Houses viewed the pronouncement made by this Court in such cases as
extreme or beyond what they intended, they had the power to amend their respective Rules to
clarify or limit even further the scope of the authority which they grant to the Bicameral
Conference Committee. Petitioners’ grievance that, unfortunately, they cannot bring about such
an amendment of the Rules on the Bicameral Conference Committee because they are members
of the minority, deserves scant consideration. That the majority of the members of both Houses
refuses to amend the Rules on the Bicameral Conference Committee is an indication that it is still
satisfied therewith. At any rate, this is how democracy works – the will of the majority shall be
controlling.
Worth reiterating herein is the concluding paragraph in Arroyo v. De Venecia,7 which reads –
It would be unwarranted invasion of the prerogative of a coequal department for this Court either
to set aside a legislative action as void because the Court thinks the house has disregarded its own
rules of procedure, or to allow those defeated in the political arena to seek a rematch in the
judicial forum when petitioners can find remedy in that department. The Court has not been
invested with a roving commission to inquire into complaints, real or imagined, of legislative
skullduggery. It would be acting in excess of its power and would itself be guilty of grave abuse of
its discretion were it to do so. . . .
Present jurisprudence allows the Bicameral Conference Committee to amend, add, and delete
provisions of the Bill under consideration, even in the absence of conflict thereon between the
Senate and House versions, but only so far as said provisions are germane to the purpose of the
Bill.8 Now, there is a question as to whether the Bicameral Conference Committee, which
produced Rep. Act No. 9337, exceeded its authority when it included therein amendments of
provisions of the National Internal Revenue Code of 1997 not related to VAT.
Although House Bills No. 3555 and 3705 were limited to the amendments of the provisions on
VAT of the National Internal Revenue Code of 1997, Senate Bill No. 1950 had a much wider
scope and included amendments of other provisions of the said Code, such as those on income,
percentage, and excise taxes. It should be borne in mind that the very purpose of these three Bills
and, subsequently, of Rep. Act No. 9337, was to raise additional revenues for the government to
address the dire economic situation of the country. The National Internal Revenue Code of 1997,
as its title suggests, is the single Code that governs all our national internal revenue taxes. While it
does cover different taxes, all of them are imposed and collected by the national government to
raise revenues. If we have one Code for all our national internal revenue taxes, then there is no
reason why we cannot have a single statute amending provisions thereof even if they involve
different taxes under separate titles. I hereby submit that the amendments introduced by the
Bicameral Conference Committee to non-VAT provisions of the National Internal Revenue Code of
1997 are not unconstitutional for they are germane to the purpose of House Bills No. 3555 and
3705 and Senate Bill No. 1950, which is to raise national revenues.
Furthermore, the procedural issues raised by the petitioners were already addressed and resolved
by this Court in Tolentino v. Executive Secretary.9 Since petitioners failed to proffer novel factual
or legal argument in support of their positions that were not previously considered by this Court in
the same case, then I am not compelled to depart from the conclusions made therein.
The majority opinion has already thoroughly discussed each of the substantial issues raised by the
petitioners. I would just wish to discuss additional matters pertaining to the petition of the
petroleum dealers in G.R. No. 168461.
They claim that the provision of Rep. Act No. 9337 limiting their input VAT credit to only 70% of
their output VAT deprives them of their property without due process of law. They argue further
that such 70% cap violates the equal protection and uniformity of taxation clauses under Article
III, Section 1, and Article VI, Section 28(1), respectively, of the Constitution, because it will unduly
prejudice taxpayers who have high input VAT and who, because of the cap, cannot fully utilize
their input VAT as credit.
I cannot sustain the petroleum dealers’ position for the following reasons –
First, I adhere to the view that the input VAT is not a property to which the taxpayer has vested
rights. Input VAT consists of the VAT a VAT-registered person had paid on his purchases or
importation of goods, properties, and services from a VAT-registered supplier; more simply, it is
VAT paid. It is not, as averred by petitioner petroleum dealers, a property that the taxpayer
acquired for valuable consideration.10 A VAT-registered person incurs input VAT because he
complied with the National Internal Revenue Code of 1997, which imposed the VAT and made
the payment thereof mandatory; and not because he paid for it or purchased it for a price.
Generally, when one pays taxes to the government, he cannot expect any direct and concrete
benefit to himself for such payment. The benefit of payment of taxes shall redound to the society
as a whole. However, by virtue of Section 110(A) of the National Internal Revenue Code of 1997,
prior to its amendment by Rep. Act No. 9337, a VAT-registered person is allowed, subject to
certain substantiation requirements, to credit his input VAT against his output VAT.
Output VAT is the VAT imposed by the VAT-registered person on his own sales of goods,
properties, and services or the VAT he passes on to his buyers. Hence, the VAT-registered person
selling the goods, properties, and services does not pay for the output VAT; said output VAT is
paid for by his consumers and he only collects and remits the same to the government.
The crediting of the input VAT against the output VAT is a statutory privilege, granted by Section
110 of the National Internal Revenue Code of 1997. It gives the VAT-registered person the
opportunity to recover the input VAT he had paid, so that, in effect, the input VAT does not
constitute an additional cost for him. While it is true that input VAT credits are reported as assets
in a VAT-registered person’s financial statements and books of account, this accounting treatment
is still based on the statutory provision recognizing the input VAT as a credit. Without Section 110
of the National Internal Revenue Code of 1997, then the accounting treatment of any input VAT
will also change and may no longer be booked outright as an asset. Since the privilege of an input
VAT credit is granted by law, then an amendment of such law may limit the exercise of or may
totally withdraw the privilege.
The amendment of Section 110 of the National Internal Revenue Code of 1997 by Rep. Act No.
9337, which imposed the 70% cap on input VAT credits, is a legitimate exercise by Congress of
its law-making power. To say that Congress may not trifle with Section 110 of the National
Internal Revenue Code of 1997 would be to violate a basic precept of constitutional law – that no
law is irrepealable.11 There can be no vested right to the continued existence of a statute, which
precludes its change or repeal.12
It bears to emphasize that Rep. Act No. 9337 does not totally remove the privilege of crediting the
input VAT against the output VAT. It merely limits the amount of input VAT one may credit
against his output VAT per quarter to an amount equivalent to 70% of the output VAT. What is
more, any input VAT in excess of the 70% cap may be carried-over to the next quarter.13 It is
certainly a departure from the VAT crediting system under Section 110 of the National Internal
Revenue Code of 1997, but it is an innovation that Congress may very well introduce, because –
VAT will continue to evolve from its pioneering original structure. Dynamically, it will be subjected
to reforms that will make it conform to many factors, among which are: the changing
requirements of government revenue; the social, economic and political vicissitudes of the times;
and the conflicting interests in our society. In the course of its evolution, it will be injected with
some oddities and inevitably transformed into a structure which its revisionists believe will be an
improvement overtime.14
Second, assuming for the sake of argument, that the input VAT credit is indeed a property, the
petroleum dealers’ right thereto has not vested. A right is deemed vested and subject to
constitutional protection when –
". . . [T]he right to enjoyment, present or prospective, has become the property of some particular
person or persons as a present interest. The right must be absolute, complete, and unconditional,
independent of a contingency, and a mere expectancy of future benefit, or a contingent interest
in property founded on anticipated continuance of existing laws, does not constitute a vested
right. So, inchoate rights which have not been acted on are not vested." (16 C. J. S. 214-215)15
Under the National Internal Revenue Code of 1997, before it was amended by Rep. Act No. 9337,
the sale or importation of petroleum products were exempt from VAT, and instead, were subject
to excise tax.16 Petroleum dealers did not impose any output VAT on their sales to consumers.
Since they had no output VAT against which they could credit their input VAT, they shouldered
the costs of the input VAT that they paid on their purchases of goods, properties, and services.
Their sales not being subject to VAT, the petroleum dealers had no input VAT credits to speak of.
It is only under Rep. Act No. 9337 that the sales by the petroleum dealers have become subject to
VAT and only in its implementation may they use their input VAT as credit against their output
VAT. While eager to use their input VAT credit accorded to it by Rep. Act No. 9337, the
petroleum dealers reject the limitation imposed by the very same law on such use.
It should be remembered that prior to Rep. Act No. 9337, the petroleum dealers’ input VAT
credits were inexistent – they were unrecognized and disallowed by law. The petroleum dealers
had no such property called input VAT credits. It is only rational, therefore, that they cannot
acquire vested rights to the use of such input VAT credits when they were never entitled to such
credits in the first place, at least, not until Rep. Act No. 9337.
My view, at this point, when Rep. Act No. 9337 has not yet even been implemented, is that
petroleum dealers’ right to use their input VAT as credit against their output VAT unlimitedly has
not vested, being a mere expectancy of a future benefit and being contingent on the continuance
of Section 110 of the National Internal Revenue Code of 1997, prior to its amendment by Rep.
Act No. 9337.
Third, although the petroleum dealers presented figures and computations to support their
contention that the cap shall lead to the demise of their businesses, I remain unconvinced.
Rep. Act No. 9337, while imposing the 70% cap on input VAT credits, allows the taxpayer to
carry-over to the succeeding quarters any excess input VAT. The petroleum dealers presented a
situation wherein their input VAT would always exceed 70% of their output VAT, and thus, their
excess input VAT will be perennially carried-over and would remain unutilized. Even though they
consistently questioned the 70% cap on their input VAT credits, the petroleum dealers failed to
establish what is the average ratio of their input VAT vis-à-vis their output VAT per quarter.
Without such fact, I consider their objection to the 70% cap arbitrary because there is no basis
therefor.
On the other, I find that the 70% cap on input VAT credits was not imposed by Congress
arbitrarily. Members of the Bicameral Conference Committee settled on the said percentage so as
to ensure that the government can collect a minimum of 30% output VAT per taxpayer. This is to
put a VAT-taxpayer, at least, on equal footing with a VAT-exempt taxpayer under Section 109(V)
of the National Internal Revenue Code, as amended by Rep. Act No. 9337.17 The latter taxpayer
is exempt from VAT on the basis that his sale or lease of goods or properties or services do not
exceed ₱1,500,000; instead, he is subject to pay a three percent (3%) tax on his gross receipts in
lieu of the VAT.18 If a taxpayer with presumably a smaller business is required to pay three
percent (3%) gross receipts tax, a type of tax which does not even allow for any crediting, a VAT-
taxpayer with a bigger business should be obligated, likewise, to pay a minimum of 30% output
VAT (which should be equivalent to 3% of the gross selling price per good or property or service
sold). The cap assures the government a collection of at least 30% output VAT, contributing to an
improved cash flow for the government.
Attention is further called to the fact that the output VAT is the VAT imposed on the sales by a
VAT-taxpayer; it is paid by the purchasers of the goods, properties, and services, and merely
collected through the VAT-registered seller. The latter, therefore, serves as a collecting agent for
the government. The VAT-registered seller is merely being required to remit to the government a
minimum of 30% of his output VAT collection.
Fourth, I give no weight to the figures and computations presented before this Court by the
petroleum dealers, particularly the supposed quarterly profit and loss statement of a "typical
dealer." How these data represent the financial status of a typical dealer, I would not know when
there was no effort to explain the manner by which they were surveyed, collated, and averaged
out. Without establishing their source therefor, the figures and computations presented by the
petroleum dealers are merely self-serving and unsubstantiated, deserving scant consideration by
this Court. Even assuming that these figures truly represent the financial standing of petroleum
dealers, the introduction and application thereto of the VAT factor, which forebode the collapse
of said petroleum dealers’ businesses, would be nothing more than an anticipated damage – an
injury that may or may not happen. To resolve their petition on this basis would be premature and
contrary to the established tenet of ripeness of a cause of action before this Court could validly
exercise its power of judicial review.
Fifth, in response to the contention of the petroleum dealers during oral arguments before this
Court that they cannot pass on to the consumers the VAT burden and increase the prices of their
goods, it is worthy to quote below this Court’s ruling in Churchill v. Concepcion,19 to wit –
It will thus be seen that the contention that the rates charged for advertising cannot be raised is
purely hypothetical, based entirely upon the opinion of the plaintiffs, unsupported by actual test,
and that the plaintiffs themselves admit that a number of other persons have voluntarily and
without protest paid the tax herein complained of. Under these circumstances, can it be held as a
matter of fact that the tax is confiscatory or that, as a matter of law, the tax is unconstitutional? Is
the exercise of the taxing power of the Legislature dependent upon and restricted by the opinion
of two interested witnesses? There can be but one answer to these questions, especially in view
of the fact that others are paying the tax and presumably making reasonable profit from their
business.
As a final observation, I perceive that what truly underlies the opposition to Rep. Act No. 9337 is
not the question of its constitutionality, but rather the wisdom of its enactment. Would it truly
raise national revenue and benefit the entire country, or would it only increase the burden of the
Filipino people? Would it contribute to a revival of our economy or only contribute to the
difficulties and eventual closure of businesses? These are issues that we cannot resolve as the
Supreme Court. As this Court explained in Agustin v. Edu,20 to wit –
It does appear clearly that petitioner’s objection to this Letter of Instruction is not premised on lack
of power, the justification for a finding of unconstitutionality, but on the pessimistic, not to say
negative, view he entertains as to its wisdom. That approach, it put it at its mildest, is
distinguished, if that is the appropriate word, by its unorthodoxy. It bears repeating "that this
Court, in the language of Justice Laurel, ‘does not pass upon questions of wisdom, justice or
expediency of legislation.’ As expressed by Justice Tuason: ‘It is not the province of the courts to
supervise legislation and keep it within the bounds of propriety and common sense. That is
primarily and exclusively a legislative concern.’ There can be no possible objection then to the
observation of Justice Montemayor: ‘As long as laws do not violate any Constitutional provision,
the Courts merely interpret and apply them regardless of whether or not they are wise or salutary.’
For they, according to Justice Labrador, ‘are not supposed to override legitimate policy and * * *
never inquire into the wisdom of the law.’ It is thus settled, to paraphrase Chief Justice
Concepcion in Gonzales v. Commission on Elections, that only congressional power or
competence, not the wisdom of the action taken, may be the basis for declaring a statute invalid.
This is as it ought to be. The principle of separation of powers has in the main wisely allocated the
respective authority of each department and confined its jurisdiction to such sphere. There would
then be intrusion not allowable under the Constitution if on a matter left to the discretion of a
coordinate branch, the judiciary would substitute its own…"21
To reiterate, we cannot substitute our discretion for Congress, and even though there are
provisions in Rep. Act No. 9337 which we may believe as unwise or iniquitous, but not
unconstitutional, we cannot strike them off by invoking our power of judicial review. In such a
situation, the recourse of the people is not judicial, but rather political. If they severely doubt the
wisdom of the present Congress for passing a statute such as Rep. Act No. 9337, then they have
the power to hold the members of said Congress accountable by using their voting power in the
next elections.
In view of the foregoing, I vote for the denial of the present petitions and the upholding of the
constitutionality of Rep. Act No. 9337 in its entirety.
MINITA V. CHICO-NAZARIO
Associate Justice

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 issubstantiallyidentical with Umali and not withPansacola.
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 taxableyear 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 notfound 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.65Holiday/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 theRR avoids a tax distortion has nomerit.
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
Law Effective NCR Minimum Daily Wage85 Taxable Income86 Tax Due
(Annual) Tax Burden87
RA 716788
RA 749689 1992 WO 3 (1993 Dec) ₱135.00 ₱24,255 ₱1,343.05
3.2%
WO 5 (1997 May) ₱185.00 ₱39,905 ₱3,064.55 5.3%
RA 842490
(1997 NIRC) 1998 WO 6 (1998 Feb) ₱198.00 ₱29,974 ₱2,497.40
40.%
WO 13 (2007 Aug) ₱362.00 ₱81,306 ₱10,761.20 9.5%
WO 14 (2008 June) ₱382.00 ₱87,566 ₱12,013.20 10.0%
RA 950491 2008 WO 14 (2008 Aug) ₱382.00 ₱69,566 ₱8,434.90
7.1%
WO 20 (2016 June) ₱491.00 ₱103,683 ₱15,236.60 9.9%
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
Law Effective NCR Minimum Daily Wage95 Highest Applicable Tax Rate (Bracket
Creep) Tax Due (Annual) Tax Burden96
RA 716797 1992 WO 3 (1993 Dec) ₱135.00 11% ₱1,343.05 3.2%
RA 749698 WO 5 (1997 May) ₱185.00 11% ₱3,064.55 5.3%
RA 842499
(1997 NIRC) 1998 WO 6 (1998 Feb) ₱198.00 10% ₱2,497.40 4.0%
WO 13 (2007 Aug) ₱362.00 20% ₱10,761.20 9.5%
WO 14 (2008 June) ₱382.00 20% ₱12,013.20 10.0%
RA 9504100 2008 WO 14 (2008 Aug) ₱382.00 15% ₱8,434.90 7.1%
WO 20 (2016 June) ₱491.00 20% ₱15,236.60 9.9%
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 Bracket Rates under R. A. 7496 (1992) Rates under R. A. 8424 (1998)
Rates under R. A. 9504 (2008)
Not Over ₱2,500 0% 5% 5%
Over ₱2,500 but not over ₱5,000 1%
Over ₱5,000 but not over ₱10,000 3%
Over ₱10,000 but not over ₱20,000 7% 10% 10%
Over ₱20,000 but not over ₱30,000 11%
Over ₱30,000 but not over ₱40,000 15% 15%
Over ₱40,000 but not over ₱60,000 15%
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 ₱250,000 25% 25%
Over ₱250,000 but not over ₱500,000 29% 30% 30%
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.

G.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.ALGUE, INC., and THE COURT OF TAX
APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile
the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of
taxation, which is the promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed
the P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in
its income tax returns. The corollary issue is whether or not the appeal of the private respondent
from the decision of the Collector of Internal Revenue was made on time and in accordance with
law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation
engaged in engineering, construction and other allied activities, received a letter from the
petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the
years 1958 and 1959.1 On January 18, 1965, Algue flied a letter of protest or request for
reconsideration, which letter was stamp received on the same day in the office of the petitioner. 2
On March 12, 1965, a warrant of distraint and levy was presented to the private respondent,
through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the
pending protest. 3 A search of the protest in the dockets of the case proved fruitless. Atty.
Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred
service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was
not taking any action on the protest and it was only then that he accepted the warrant of distraint
and levy earlier sought to be served.5 Sixteen days later, on April 23, 1965, Algue filed a petition
for review of the decision of the Commissioner of Internal Revenue with the Court of Tax
Appeals.6
The above chronology shows that the petition was filed seasonably. According to Rep. Act No.
1125, the appeal may be made within thirty days after receipt of the decision or ruling
challenged.7 It is true that as a rule the warrant of distraint and levy is "proof of the finality of the
assessment" 8 and renders hopeless a request for reconsideration," 9 being "tantamount to an
outright denial thereof and makes the said request deemed rejected." 10 But there is a special
circumstance in the case at bar that prevents application of this accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was apparently not taken into account before the
warrant of distraint and levy was issued; indeed, such protest could not be located in the office of
the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at
all, considered by the tax authorities. During the intervening period, the warrant was premature
and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not
pro forma and was based on strong legal considerations. It thus had the effect of suspending on
January 18, 1965, when it was filed, the reglementary period which started on the date the
assessment was received, viz., January 14, 1965. The period started running again only on April 7,
1965, when the private respondent was definitely informed of the implied rejection of the said
protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23,
1965, only 20 days of the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed
because it was not an ordinary reasonable or necessary business expense. The Court of Tax
Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been
legitimately paid by the private respondent for actual services rendered. The payment was in the
form of promotional fees. These were collected by the Payees for their work in the creation of the
Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional
fees to be personal holding company income 12 but later conformed to the decision of the
respondent court rejecting this assertion.13 In fact, as the said court found, the amount was
earned through the joint efforts of the persons among whom it was distributed It has been
established that the Philippine Sugar Estate Development Company had earlier appointed Algue
as its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant to
such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo
Sanchez, worked for the formation of the Vegetable Oil Investment Corporation, inducing other
persons to invest in it.14 Ultimately, after its incorporation largely through the promotion of the
said persons, this new corporation purchased the PSEDC properties.15 For this sale, Algue
received as agent a commission of P126,000.00, and it was from this commission that the
P75,000.00 promotional fees were paid to the aforenamed individuals.16
There is no dispute that the payees duly reported their respective shares of the fees in their
income tax returns and paid the corresponding taxes thereon.17 The Court of Tax Appeals also
found, after examining the evidence, that no distribution of dividends was involved.18
The petitioner claims that these payments are fictitious because most of the payees are members
of the same family in control of Algue. It is argued that no indication was made as to how such
payments were made, whether by check or in cash, and there is not enough substantiation of
such payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President,
Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not
made in one lump sum but periodically and in different amounts as each payee's need arose. 19 It
should be remembered that this was a family corporation where strict business procedures were
not applied and immediate issuance of receipts was not required. Even so, at the end of the year,
when the books were to be closed, each payee made an accounting of all of the fees received by
him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal.
This arrangement was understandable, however, in view of the close relationship among the
persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive.
The total commission paid by the Philippine Sugar Estate Development Co. to the private
respondent was P125,000.00. 21 After deducting the said fees, Algue still had a balance of
P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total
commission. This was a reasonable proportion, considering that it was the payees who did
practically everything, from the formation of the Vegetable Oil Investment Corporation to the
actual purchase by it of the Sugar Estate properties. This finding of the respondent court is in
accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as
deductions —
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid
or incurred in carrying on any trade or business may be included a reasonable allowance for
salaries or other compensation for personal services actually rendered. The test of deductibility in
the case of compensation payments is whether they are reasonable and are, in fact, payments
purely for service. This test and deductibility in the case of compensation payments is whether
they are reasonable and are, in fact, payments purely for service. This test and its practical
application may be further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price of services, is
not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend
on stock. This is likely to occur in the case of a corporation having few stockholders, Practically all
of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for
similar services, and the excessive payment correspond or bear a close relationship to the
stockholdings of the officers of employees, it would seem likely that the salaries are not paid
wholly for services rendered, but the excessive payments are a distribution of earnings upon the
stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of Algue
nor were they its controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the
validity of the claimed deduction. In the present case, however, we find that the onus has been
discharged satisfactorily. The private respondent has proved that the payment of the fees was
necessary and reasonable in the light of the efforts exerted by the payees in inducing investors
and prominent businessmen to venture in an experimental enterprise and involve themselves in a
new business requiring millions of pesos. This was no mean feat and should be, as it was,
sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the government would
be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the taxing authorities, every person
who is able to must contribute his share in the running of the government. The government for
its part, is expected to respond in the form of tangible and intangible benefits intended to
improve the lives of the people and enhance their moral and material values. This symbiotic
relationship is the rationale of taxation and should dispel the erroneous notion that it is an
arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to
his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if
the taxpayer can demonstrate, as it has here, that the law has not been observed.
We hold that the appeal of the private respondent from the decision of the petitioner was filed on
time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the
claimed deduction by the private respondent was permitted under the Internal Revenue Code and
should therefore not have been disallowed by the petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto,without
costs.
SO ORDERED.

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 resolution4of
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 tax ₱ 7, 270,892.88
Add: 25% surcharge 1,817,723.22
20% interest from 1-21-87 to 10-28-88 3,215,825.03
Compromise penalty 15,000.00

TOTAL AMOUNT DUE AND COLLECTIBLE ₱12,319,441.13

1986 – Deficiency Documentary Stamp Tax
Deficiency percentage tax ₱93,723,372.40
Add: 25% surcharge 23,430,843.10
Compromise penalty 15,000.00

TOTAL AMOUNT DUE AND COLLECTIBLE ₱117,169,215.50.5

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.
 January 11, 2016. G.R. No. 169507
AIR CANADA, Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
LEONEN, J.:
An offline international air carrier selling passage tickets in the Philippines, through a general sales
agent, is a resident foreign corporation doing business in the Philippines. As such, it is taxable
under Section 28(A)(l), and not Section 28(A)(3) of the 1997 National Internal Revenue Code,
subject to any applicable tax treaty to which the Philippines is a signatory. Pursuant to Article 8 of
the Republic of the Philippines-Canada Tax Treaty, Air Canada may only be imposed a maximum
tax of 1 ½% of its gross revenues earned from the sale of its tickets in the Philippines.
This is a Petition for Review1 appealing the August 26, 2005 Decision2 of the Court of Tax
Appeals En Banc, which in turn affirmed the December 22, 2004 Decision3 and April 8, 2005
Resolution4 of the Court of Tax Appeals First Division denying Air Canada’s claim for refund.
Air Canada is a "foreign corporation organized and existing under the laws of Canada[.]"5 On
April 24, 2000, it was granted an authority to operate as an offline carrier by the Civil Aeronautics
Board, subject to certain conditions, which authority would expire on April 24, 2005.6 "As an off-
line carrier, [Air Canada] does not have flights originating from or coming to the Philippines [and
does not] operate any airplane [in] the Philippines[.]"7
On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general
sales agent in the Philippines.8 Aerotel "sells [Air Canada’s] passage documents in the
Philippines."9
For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada,
through Aerotel, filed quarterly and annual income tax returns and paid the income tax on Gross
Philippine Billings in the total amount of ₱5,185,676.77,10 detailed as follows:
1âwphi1
Applicable Quarter[/]Year Date Filed/Paid Amount of Tax
3rd Qtr 2000 November 29, 2000 P 395,165.00
Annual ITR 2000 April 16, 2001 381,893.59
1st Qtr 2001 May 30, 2001 522,465.39
2nd Qtr 2001 August 29, 2001 1,033,423.34
3rd Qtr 2001 November 29, 2001 765,021.28
Annual ITR 2001 April 15, 2002 328,193.93
1st Qtr 2002 May 30, 2002 594,850.13
2nd Qtr 2002 August 29, 2002 1,164,664.11
TOTAL P 5,185,676.7711
On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid
income taxes amounting to ₱5,185,676.77 before the Bureau of Internal Revenue,12 Revenue
District Office No. 47-East Makati.13 It found basis from the revised definition14 of Gross
Philippine Billings under Section 28(A)(3)(a) of the 1997 National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
....
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax
of two and onehalf percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined hereunder:
(a) International Air Carrier. - ‘Gross Philippine Billings’ refers to the amount of gross revenue
derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines
in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of
payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross Philippine Billings if the passenger
boards a plane in a port or point in the Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger takes place at any port outside
the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding
to the leg flown from the Philippines to the point of transshipment shall form part of Gross
Philippine Billings. (Emphasis supplied)
To prevent the running of the prescriptive period, Air Canada filed a Petition for Review before
the Court of Tax Appeals on November 29, 2002.15 The case was docketed as C.T.A. Case No.
6572.16
On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision denying the
Petition for Review and, hence, the claim for refund.17 It found that Air Canada was engaged in
business in the Philippines through a local agent that sells airline tickets on its behalf. As such, it
should be taxed as a resident foreign corporation at the regular rate of 32%.18 Further,
according to the Court of Tax Appeals First Division, Air Canada was deemed to have established
a "permanent establishment"19 in the Philippines under Article V(2)(i) of the Republic of the
Philippines-Canada Tax Treaty20 by the appointment of the local sales agent, "in which [the]
petitioner uses its premises as an outlet where sales of [airline] tickets are made[.]"21
Air Canada seasonably filed a Motion for Reconsideration, but the Motion was denied in the
Court of Tax Appeals First Division’s Resolution dated April 8, 2005 for lack of merit.22 The First
Division held that while Air Canada was not liable for tax on its Gross Philippine Billings under
Section 28(A)(3), it was nevertheless liable to pay the 32% corporate income tax on income
derived from the sale of airline tickets within the Philippines pursuant to Section 28(A)(1).23
On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Banc.24 The appeal was
docketed as CTA EB No. 86.25
In the Decision dated August 26, 2005, the Court of Tax Appeals En Banc affirmed the findings of
the First Division.26 The En Banc ruled that Air Canada is subject to tax as a resident foreign
corporation doing business in the Philippines since it sold airline tickets in the Philippines.27 The
Court of Tax Appeals En Banc disposed thus:
WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE, and
accordingly, DISMISSED for lack of merit.28
Hence, this Petition for Review29 was filed.
The issues for our consideration are:
First, whether petitioner Air Canada, as an offline international carrier selling passage documents
through a general sales agent in the Philippines, is a resident foreign corporation within the
meaning of Section 28(A)(1) of the 1997 National Internal Revenue Code;
Second, whether petitioner Air Canada is subject to the 2½% tax on Gross Philippine Billings
pursuant to Section 28(A)(3). If not, whether an offline international carrier selling passage
documents through a general sales agent can be subject to the regular corporate income tax of
32%30 on taxable income pursuant to Section 28(A)(1);
Third, whether the Republic of the Philippines-Canada Tax Treaty applies, specifically:
a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;
b. Whether the appointment of a local general sales agent in the Philippines falls under the
definition of "permanent establishment" under Article V(2)(i) of the Republic of the Philippines-
Canada Tax Treaty; and
Lastly, whether petitioner Air Canada is entitled to the refund of ₱5,185,676.77 pertaining
allegedly to erroneously paid tax on Gross Philippine Billings from the third quarter of 2000 to the
second quarter of 2002.
Petitioner claims that the general provision imposing the regular corporate income tax on resident
foreign corporations provided under Section 28(A)(1) of the 1997 National Internal Revenue
Code does not apply to "international carriers,"31 which are especially classified and taxed under
Section 28(A)(3).32 It adds that the fact that it is no longer subject to Gross Philippine Billings tax
as ruled in the assailed Court of Tax Appeals Decision "does not render it ipso facto subject to
32% income tax on taxable income as a resident foreign corporation."33Petitioner argues that to
impose the 32% regular corporate income tax on its income would violate the Philippine
government’s covenant under Article VIII of the Republic of the Philippines-Canada Tax Treaty not
to impose a tax higher than 1½% of the carrier’s gross revenue derived from sources within the
Philippines.34 It would also allegedly result in "inequitable tax treatment of on-line and off-line
international air carriers[.]"35
Also, petitioner states that the income it derived from the sale of airline tickets in the Philippines
was income from services and not income from sales of personal property.36 Petitioner cites the
deliberations of the Bicameral Conference Committee on House Bill No. 9077 (which eventually
became the 1997 National Internal Revenue Code), particularly Senator Juan Ponce Enrile’s
statement,37 to reveal the "legislative intent to treat the revenue derived from air carriage as
income from services, and that the carriage of passenger or cargo as the activity that generates
the income."38 Accordingly, applying the principle on the situs of taxation in taxation of services,
petitioner claims that its income derived "from services rendered outside the Philippines [was] not
subject to Philippine income taxation."39
Petitioner further contends that by the appointment of Aerotel as its general sales agent,
petitioner cannot be considered to have a "permanent establishment"40 in the Philippines
pursuant to Article V(6) of the Republic of the Philippines-Canada Tax Treaty.41 It points out that
Aerotel is an "independent general sales agent that acts as such for . . . other international airline
companies in the ordinary course of its business."42 Aerotel sells passage tickets on behalf of
petitioner and receives a commission for its services.43 Petitioner states that even the Bureau of
Internal Revenue—through VAT Ruling No. 003-04 dated February 14, 2004—has conceded that
an offline international air carrier, having no flight operations to and from the Philippines, is not
deemed engaged in business in the Philippines by merely appointing a general sales agent.44
Finally, petitioner maintains that its "claim for refund of erroneously paid Gross Philippine Billings
cannot be denied on the ground that [it] is subject to income tax under Section 28 (A) (1)"45
since it has not been assessed at all by the Bureau of Internal Revenue for any income tax
liability.46
On the other hand, respondent maintains that petitioner is subject to the 32% corporate income
tax as a resident foreign corporation doing business in the Philippines. Petitioner’s total payment
of ₱5,185,676.77 allegedly shows that petitioner was earning a sizable income from the sale of its
plane tickets within the Philippines during the relevant period.47 Respondent further points out
that this court in Commissioner of Internal Revenue v. American Airlines, Inc.,48 which in turn
cited the cases involving the British Overseas Airways Corporation and Air India, had already
settled that "foreign airline companies which sold tickets in the Philippines through their local
agents . . . [are] considered resident foreign corporations engaged in trade or business in the
country."49 It also cites Revenue Regulations No. 6-78 dated April 25, 1978, which defined the
phrase "doing business in the Philippines" as including "regular sale of tickets in the Philippines by
offline international airlines either by themselves or through their agents."50
Respondent further contends that petitioner is not entitled to its claim for refund because the
amount of ₱5,185,676.77 it paid as tax from the third quarter of 2000 to the second quarter of
2001 was still short of the 32% income tax due for the period.51 Petitioner cannot allegedly
claim good faith in its failure to pay the right amount of tax since the National Internal Revenue
Code became operative on January 1, 1998 and by 2000, petitioner should have already been
aware of the implications of Section 28(A)(3) and the decided cases of this court’s ruling on the
taxability of offline international carriers selling passage tickets in the Philippines.52
I
At the outset, we affirm the Court of Tax Appeals’ ruling that petitioner, as an offline international
carrier with no landing rights in the Philippines, is not liable to tax on Gross Philippine Billings
under Section 28(A)(3) of the 1997 National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations. –
(A) Tax on Resident Foreign Corporations. -
....
(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax
of two and one-half percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue
derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines
in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of
payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or
indorsed to another international airline form part of the Gross Philippine Billings if the passenger
boards a plane in a port or point in the Philippines: Provided, further, That for a flight which
originates from the Philippines, but transshipment of passenger takes place at any port outside
the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding
to the leg flown from the Philippines to the point of transshipment shall form part of Gross
Philippine Billings. (Emphasis supplied)
Under the foregoing provision, the tax attaches only when the carriage of persons, excess
baggage, cargo, and mail originated from the Philippines in a continuous and uninterrupted
flight, regardless of where the passage documents were sold.
Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross
Philippine Billings tax.
II
Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes. Petitioner
falls within the definition of resident foreign corporation under Section 28(A)(1) of the 1997
National Internal Revenue Code, thus, it may be subject to 32%53 tax on its taxable income:
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized,
or existing under the laws of any foreign country, engaged in trade or business within the
Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the
taxable income derived in the preceding taxable year from all sources within the Philippines:
Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent
(34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective
January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%54). (Emphasis supplied)
The definition of "resident foreign corporation" has not substantially changed throughout the
amendments of the National Internal Revenue Code. All versions refer to "a foreign corporation
engaged in trade or business within the Philippines."
Commonwealth Act No. 466, known as the National Internal Revenue Code and approved on
June 15, 1939, defined "resident foreign corporation" as applying to "a foreign corporation
engaged in trade or business within the Philippines or having an office or place of business
therein."55
Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic Act No. 6110,
approved on August 4, 1969, reads:
Sec. 24. Rates of tax on corporations. — . . .
(b) Tax on foreign corporations. — . . .
(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of
any foreign country, except a foreign life insurance company, engaged in trade or business within
the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net
income received in the preceding taxable year from all sources within the Philippines.56
(Emphasis supplied)
Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain sections of the
1939 National Internal Revenue Code. Section 24(b)(2) on foreign resident corporations was
amended, but it still provides that "[a] corporation organized, authorized, or existing under the
laws of any foreign country, engaged in trade or business within the Philippines, shall be taxable
as provided in subsection (a) of this section upon the total net income received in the preceding
taxable year from all sources within the Philippines[.]"57
As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas Airways
Corporation58 declared British Overseas Airways Corporation, an international air carrier with no
landing rights in the Philippines, as a resident foreign corporation engaged in business in the
Philippines through its local sales agent that sold and issued tickets for the airline company.59This
court discussed that:
There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting"
business. Each case must be judged in the light of its peculiar environmental circumstances. The
term implies a continuity of commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of commercial gain or for the purpose and object of
the business organization. "In order that a foreign corporation may be regarded as doing business
within a State, there must be continuity of conduct and intention to establish a continuous
business, such as the appointment of a local agent, and not one of a temporary character.["]
BOAC, during the periods covered by the subject-assessments, maintained a general sales agent
in the Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1) selling and
issuing tickets; (2) breaking down the whole trip into series of trips — each trip in the series
corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the basis of their participation in the
services rendered through the mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." Those activities were in exercise of the functions
which are normally incident to, and are in progressive pursuit of, the purpose and object of its
organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is
the very lifeblood of the airline business, the generation of sales being the paramount objective.
There should be no doubt then that BOAC was "engaged in" business in the Philippines through a
local agent during the period covered by the assessments. Accordingly, it is a resident foreign
corporation subject to tax upon its total net income received in the preceding taxable year from
all sources within the Philippines.60 (Emphasis supplied, citations omitted)
Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance with its
definition of "doing business" with regard to foreign corporations. Section 3(d) of the law
enumerates the activities that constitute doing business:
d. the phrase "doing business" shall include soliciting orders, service contracts, opening offices,
whether called "liaison" offices or branches; appointing representatives or distributors domiciled
in the Philippines or who in any calendar year stay in the country for a period or periods totalling
one hundred eighty (180) days or more; participating in the management, supervision or control
of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts
that imply a continuity of commercial dealings or arrangements, and contemplate to that extent
the performance of acts or works, or the exercise of some of the functions normally incident to,
and in progressive prosecution of, commercial gain or of the purpose and object of the business
organization: Provided, however, That the phrase "doing business" shall not be deemed to include
mere investment as a shareholder by a foreign entity in domestic corporations duly registered to
do business, and/or the exercise of rights as such investor; nor having a nominee director or
officer to represent its interests in such corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for its own
account[.]61 (Emphasis supplied)
While Section 3(d) above states that "appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for its own account" is not considered as
"doing business," the Implementing Rules and Regulations of Republic Act No. 7042 clarifies that
"doing business" includes "appointing representatives or distributors, operating under full control
of the foreign corporation, domiciled in the Philippines or who in any calendar year stay in the
country for a period or periods totaling one hundred eighty (180) days or more[.]"62
An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics] Board, but
who maintains office or who has designated or appointed agents or employees in the Philippines,
who sells or offers for sale any air transportation in behalf of said foreign air carrier and/or others,
or negotiate for, or holds itself out by solicitation, advertisement, or otherwise sells, provides,
furnishes, contracts, or arranges for such transportation."63
"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil
Aeronautics] Board for such authority."64 Each offline carrier must file with the Civil Aeronautics
Board a monthly report containing information on the tickets sold, such as the origin and
destination of the passengers, carriers involved, and commissions received.65
Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the Philippines.
Aerotel performs acts or works or exercises functions that are incidental and beneficial to the
purpose of petitioner’s business. The activities of Aerotel bring direct receipts or profits to
petitioner.66 There is nothing on record to show that Aerotel solicited orders alone and for its
own account and without interference from, let alone direction of, petitioner. On the contrary,
Aerotel cannot "enter into any contract on behalf of [petitioner Air Canada] without the express
written consent of [the latter,]"67 and it must perform its functions according to the standards
required by petitioner.68 Through Aerotel, petitioner is able to engage in an economic activity in
the Philippines.
Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an offline
carrier in the Philippines for a period of five years, or from April 24, 2000 until April 24, 2005.69
Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from
sources within the Philippines. Petitioner’s income from sale of airline tickets, through Aerotel, is
income realized from the pursuit of its business activities in the Philippines.
III
However, the application of the regular 32% tax rate under Section 28(A)(1) of the 1997
National Internal Revenue Code must consider the existence of an effective tax treaty between the
Philippines and the home country of the foreign air carrier.
In the earlier case of South African Airways v. Commissioner of Internal Revenue,70 this court
held that Section 28(A)(3)(a) does not categorically exempt all international air carriers from the
coverage of Section 28(A)(1). Thus, if Section 28(A)(3)(a) is applicable to a taxpayer, then the
general rule under Section 28(A)(1) does not apply. If, however, Section 28(A)(3)(a) does not
apply, an international air carrier would be liable for the tax under Section 28(A)(1).71
This court in South African Airways declared that the correct interpretation of these provisions is
that: "international air carrier[s] maintain[ing] flights to and from the Philippines . . . shall be
taxed at the rate of 2½% of its Gross Philippine Billings[;] while international air carriers that do
not have flights to and from the Philippines but nonetheless earn income from other activities in
the country [like sale of airline tickets] will be taxed at the rate of 32% of such [taxable]
income."72
In this case, there is a tax treaty that must be taken into consideration to determine the proper tax
rate.
A tax treaty is an agreement entered into between sovereign states "for purposes of eliminating
double taxation on income and capital, preventing fiscal evasion, promoting mutual trade and
investment, and according fair and equitable tax treatment to foreign residents or
nationals."73Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc.74 explained the
purpose of a tax treaty:
The purpose of these international agreements is to reconcile the national fiscal legislations of the
contracting parties in order to help the taxpayer avoid simultaneous taxation in two different
jurisdictions. More precisely, the tax conventions are drafted with a view towards the elimination
of international juridical double taxation, which is defined as the imposition of comparable taxes
in two or more states on the same taxpayer in respect of the same subject matter and for identical
periods.
The apparent rationale for doing away with double taxation is to encourage the free flow of
goods and services and the movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies. Foreign investments will only
thrive in a fairly predictable and reasonable international investment climate and the protection
against double taxation is crucial in creating such a climate.75 (Emphasis in the original, citations
omitted)
Observance of any treaty obligation binding upon the government of the Philippines is anchored
on the constitutional provision that the Philippines "adopts the generally accepted principles of
international law as part of the law of the land[.]"76 Pacta sunt servanda is a fundamental
international law principle that requires agreeing parties to comply with their treaty obligations in
good faith.77
Hence, the application of the provisions of the National Internal Revenue Code must be subject to
the provisions of tax treaties entered into by the Philippines with foreign countries.
In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue,78 this court stressed
the binding effects of tax treaties. It dealt with the issue of "whether the failure to strictly comply
with [Revenue Memorandum Order] RMO No. 1-200079 will deprive persons or corporations of
the benefit of a tax treaty."80 Upholding the tax treaty over the administrative issuance, this court
reasoned thus:
Our Constitution provides for adherence to the general principles of international law as part of
the law of the land. The time-honored international principle of pacta sunt servanda demands the
performance in good faith of treaty obligations on the part of the states that enter into the
agreement. Every treaty in force is binding upon the parties, and obligations under the treaty
must be performed by them in good faith. More importantly, treaties have the force and effect of
law in this jurisdiction.
Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties
and, in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions." CIR v.
S.C. Johnson and Son, Inc. further clarifies that "tax conventions are drafted with a view towards
the elimination of international juridical double taxation, which is defined as the imposition of
comparable taxes in two or more states on the same taxpayer in respect of the same subject
matter and for identical periods. The apparent rationale for doing away with double taxation is to
encourage the free flow of goods and services and the movement of capital, technology and
persons between countries, conditions deemed vital in creating robust and dynamic economies.
Foreign investments will only thrive in a fairly predictable and reasonable international investment
climate and the protection against double taxation is crucial in creating such a climate." Simply
put, tax treaties are entered into to minimize, if not eliminate the harshness of international
juridical double taxation, which is why they are also known as double tax treaty or double tax
agreements.
"A state that has contracted valid international obligations is bound to make in its legislations
those modifications that may be necessary to ensure the fulfillment of the obligations
undertaken." Thus, laws and issuances must ensure that the reliefs granted under tax treaties are
accorded to the parties entitled thereto. The BIR must not impose additional requirements that
would negate the availment of the reliefs provided for under international agreements. More so,
when the RPGermany Tax Treaty does not provide for any pre-requisite for the availment of the
benefits under said agreement.
....
Bearing in mind the rationale of tax treaties, the period of application for the availment of tax
treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief
as it would constitute a violation of the duty required by good faith in complying with a tax treaty.
The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed
period under the administrative issuance would impair the value of the tax treaty. At most, the
application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of
the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-
2000. Logically, noncompliance with tax treaties has negative implications on international
relations, and unduly discourages foreign investors. While the consequences sought to be
prevented by RMO No. 1-2000 involve an administrative procedure, these may be remedied
through other system management processes, e.g., the imposition of a fine or penalty. But we
cannot totally deprive those who are entitled to the benefit of a treaty for failure to strictly comply
with an administrative issuance requiring prior application for tax treaty relief.81(Emphasis
supplied, citations omitted)
On March 11, 1976, the representatives82 for the government of the Republic of the Philippines
and for the government of Canada signed the Convention between the Philippines and Canada
for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes
on Income (Republic of the Philippines-Canada Tax Treaty). This treaty entered into force on
December 21, 1977.
Article V83 of the Republic of the Philippines-Canada Tax Treaty defines "permanent
establishment" as a "fixed place of business in which the business of the enterprise is wholly or
partly carried on."84
Even though there is no fixed place of business, an enterprise of a Contracting State is deemed to
have a permanent establishment in the other Contracting State if under certain conditions there is
a person acting for it.
Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states that "[a]
person acting in a Contracting State on behalf of an enterprise of the other Contracting State
(other than an agent of independent status to whom paragraph 6 applies) shall be deemed to be
a permanent establishment in the first-mentioned State if . . . he has and habitually exercises in
that State an authority to conclude contracts on behalf of the enterprise, unless his activities are
limited to the purchase of goods or merchandise for that enterprise[.]" The provision seems to
refer to one who would be considered an agent under Article 186885 of the Civil Code of the
Philippines.
On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting State shall not be
deemed to have a permanent establishment in the other Contracting State merely because it
carries on business in that other State through a broker, general commission agent or any other
agent of an independent status, where such persons are acting in the ordinary course of their
business."
Considering Article XV86 of the same Treaty, which covers dependent personal services, the term
"dependent" would imply a relationship between the principal and the agent that is akin to an
employer-employee relationship.
Thus, an agent may be considered to be dependent on the principal where the latter exercises
comprehensive control and detailed instructions over the means and results of the activities of the
agent.87
Section 3 of Republic Act No. 776, as amended, also known as The Civil Aeronautics Act of the
Philippines, defines a general sales agent as "a person, not a bonafide employee of an air carrier,
who pursuant to an authority from an airline, by itself or through an agent, sells or offers for sale
any air transportation, or negotiates for, or holds himself out by solicitation, advertisement or
otherwise as one who sells, provides, furnishes, contracts or arranges for, such air
transportation."88 General sales agents and their property, property rights, equipment, facilities,
and franchise are subject to the regulation and control of the Civil Aeronautics Board.89A permit
or authorization issued by the Civil Aeronautics Board is required before a general sales agent may
engage in such an activity.90
Through the appointment of Aerotel as its local sales agent, petitioner is deemed to have created
a "permanent establishment" in the Philippines as defined under the Republic of the Philippines-
Canada Tax Treaty.
Petitioner appointed Aerotel as its passenger general sales agent to perform the sale of
transportation on petitioner and handle reservations, appointment, and supervision of
International Air Transport Associationapproved and petitioner-approved sales agents, including
the following services:
ARTICLE 7GSA SERVICES
The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the following services:
a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit of AC in every
matter relating to this Agreement;
....
c) Promotion of passenger transportation on AC;
....
e) Without the need for endorsement by AC, arrange for the reissuance, in the Territory of the
GSA [Philippines], of traffic documents issued by AC outside the said territory of the GSA
[Philippines], as required by the passenger(s);
....
h) Distribution among passenger sales agents and display of timetables, fare sheets, tariffs and
publicity material provided by AC in accordance with the reasonable requirements of AC;
....
j) Distribution of official press releases provided by AC to media and reference of any press or
public relations inquiries to AC;
....
o) Submission for AC’s approval, of an annual written sales plan on or before a date to be
determined by AC and in a form acceptable to AC;
....
q) Submission of proposals for AC’s approval of passenger sales agent incentive plans at a
reasonable time in advance of proposed implementation.
r) Provision of assistance on request, in its relations with Governmental and other authorities,
offices and agencies in the Territory [Philippines].
....
u) Follow AC guidelines for the handling of baggage claims and customer complaints and, unless
otherwise stated in the guidelines, refer all such claims and complaints to AC.91
Under the terms of the Passenger General Sales Agency Agreement, Aerotel will "provide at its
own expense and acceptable to [petitioner Air Canada], adequate and suitable premises, qualified
staff, equipment, documentation, facilities and supervision and in consideration of the
remuneration and expenses payable[,] [will] defray all costs and expenses of and incidental to the
Agency."92 "[I]t is the sole employer of its employees and . . . is responsible for [their] actions . . .
or those of any subcontractor."93 In remuneration for its services, Aerotel would be paid by
petitioner a commission on sales of transportation plus override commission on flown
revenues.94 Aerotel would also be reimbursed "for all authorized expenses supported by original
supplier invoices."95
Aerotel is required to keep "separate books and records of account, including supporting
documents, regarding all transactions at, through or in any way connected with [petitioner Air
Canada] business."96
"If representing more than one carrier, [Aerotel must] represent all carriers in an unbiased
way."97 Aerotel cannot "accept additional appointments as General Sales Agent of any other
carrier without the prior written consent of [petitioner Air Canada]."98
The Passenger General Sales Agency Agreement "may be terminated by either party without
cause upon [no] less than 60 days’ prior notice in writing[.]"99 In case of breach of any provisions
of the Agreement, petitioner may require Aerotel "to cure the breach in 30 days failing which
[petitioner Air Canada] may terminate [the] Agreement[.]"100
The following terms are indicative of Aerotel’s dependent status:
First, Aerotel must give petitioner written notice "within 7 days of the date [it] acquires or takes
control of another entity or merges with or is acquired or controlled by another person or
entity[.]"101 Except with the written consent of petitioner, Aerotel must not acquire a substantial
interest in the ownership, management, or profits of a passenger sales agent affiliated with the
International Air Transport Association or a non-affiliated passenger sales agent nor shall an
affiliated passenger sales agent acquire a substantial interest in Aerotel as to influence its
commercial policy and/or management decisions.102 Aerotel must also provide petitioner "with a
report on any interests held by [it], its owners, directors, officers, employees and their immediate
families in companies and other entities in the aviation industry or . . . industries related to
it[.]"103 Petitioner may require that any interest be divested within a set period of time.104
Second, in carrying out the services, Aerotel cannot enter into any contract on behalf of petitioner
without the express written consent of the latter;105 it must act according to the standards
required by petitioner;106 "follow the terms and provisions of the [petitioner Air Canada] GSA
Manual [and all] written instructions of [petitioner Air Canada;]"107 and "[i]n the absence of an
applicable provision in the Manual or instructions, [Aerotel must] carry out its functions in
accordance with [its own] standard practices and procedures[.]"108
Third, Aerotel must only "issue traffic documents approved by [petitioner Air Canada] for all
transportation over [its] services[.]"109 All use of petitioner’s name, logo, and marks must be with
the written consent of petitioner and according to petitioner’s corporate standards and guidelines
set out in the Manual.110
Fourth, all claims, liabilities, fines, and expenses arising from or in connection with the
transportation sold by Aerotel are for the account of petitioner, except in the case of negligence
of Aerotel.111
Aerotel is a dependent agent of petitioner pursuant to the terms of the Passenger General Sales
Agency Agreement executed between the parties. It has the authority or power to conclude
contracts or bind petitioner to contracts entered into in the Philippines. A third-party liability on
contracts of Aerotel is to petitioner as the principal, and not to Aerotel, and liability to such third
party is enforceable against petitioner. While Aerotel maintains a certain independence and its
activities may not be devoted wholly to petitioner, nonetheless, when representing petitioner
pursuant to the Agreement, it must carry out its functions solely for the benefit of petitioner and
according to the latter’s Manual and written instructions. Aerotel is required to submit its annual
sales plan for petitioner’s approval.
In essence, Aerotel extends to the Philippines the transportation business of petitioner. It is a
conduit or outlet through which petitioner’s airline tickets are sold.112
Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax Treaty, the
"business profits" of an enterprise of a Contracting State is "taxable only in that State[,] unless the
enterprise carries on business in the other Contracting State through a permanent
establishment[.]"113 Thus, income attributable to Aerotel or from business activities effected by
petitioner through Aerotel may be taxed in the Philippines. However, pursuant to the last
paragraph114 of Article VII in relation to Article VIII115 (Shipping and Air Transport) of the same
Treaty, the tax imposed on income derived from the operation of ships or aircraft in international
traffic should not exceed 1½% of gross revenues derived from Philippine sources.
IV
While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of the 1997
National Internal Revenue Code on its taxable income116 from sale of airline tickets in the
Philippines, it could only be taxed at a maximum of 1½% of gross revenues, pursuant to Article
VIII of the Republic of the Philippines-Canada Tax Treaty that applies to petitioner as a "foreign
corporation organized and existing under the laws of Canada[.]"117
Tax treaties form part of the law of the land,118 and jurisprudence has applied the statutory
construction principle that specific laws prevail over general ones.119
The Republic of the Philippines-Canada Tax Treaty was ratified on December 21, 1977 and
became valid and effective on that date. On the other hand, the applicable provisions120 relating
to the taxability of resident foreign corporations and the rate of such tax found in the National
Internal Revenue Code became effective on January 1, 1998.121 Ordinarily, the later provision
governs over the earlier one.122 In this case, however, the provisions of the Republic of the
Philippines-Canada Tax Treaty are more specific than the provisions found in the National Internal
Revenue Code.
These rules of interpretation apply even though one of the sources is a treaty and not simply a
statute.
Article VII, Section 21 of the Constitution provides:
SECTION 21. No treaty or international agreement shall be valid and effective unless concurred in
by at least two-thirds of all the Members of the Senate.
This provision states the second of two ways through which international obligations become
binding. Article II, Section 2 of the Constitution deals with international obligations that are
incorporated, while Article VII, Section 21 deals with international obligations that become
binding through ratification.
"Valid and effective" means that treaty provisions that define rights and duties as well as definite
prestations have effects equivalent to a statute. Thus, these specific treaty provisions may amend
statutory provisions. Statutory provisions may also amend these types of treaty obligations.
We only deal here with bilateral treaty state obligations that are not international obligations erga
omnes. We are also not required to rule in this case on the effect of international customary
norms especially those with jus cogens character.
The second paragraph of Article VIII states that "profits from sources within a Contracting State
derived by an enterprise of the other Contracting State from the operation of ships or aircraft in
international traffic may be taxed in the first-mentioned State but the tax so charged shall not
exceed the lesser of a) one and one-half per cent of the gross revenues derived from sources in
that State; and b) the lowest rate of Philippine tax imposed on such profits derived by an
enterprise of a third State."
The Agreement between the government of the Republic of the Philippines and the government
of Canada on Air Transport, entered into on January 14, 1997, reiterates the effectivity of Article
VIII of the Republic of the Philippines-Canada Tax Treaty:
ARTICLE XVI(Taxation)
The Contracting Parties shall act in accordance with the provisions of Article VIII of the Convention
between the Philippines and Canada for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income, signed at Manila on March 31, 1976 and entered
into force on December 21, 1977, and any amendments thereto, in respect of the operation of
aircraft in international traffic.123
Petitioner’s income from sale of ticket for international carriage of passenger is income derived
from international operation of aircraft. The sale of tickets is closely related to the international
operation of aircraft that it is considered incidental thereto.
"[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our right to tax
limited to a certain extent[.]"124 Thus, we are bound to extend to a Canadian air carrier doing
business in the Philippines through a local sales agent the benefit of a lower tax equivalent to 1½
% on business profits derived from sale of international air transportation.
V
Finally, we reject petitioner’s contention that the Court of Tax Appeals erred in denying its claim
for refund of erroneously paid Gross Philippine Billings tax on the ground that it is subject to
income tax under Section 28(A)(1) of the National Internal Revenue Code because (a) it has not
been assessed at all by the Bureau of Internal Revenue for any income tax liability;125 and (b)
internal revenue taxes cannot be the subject of set-off or compensation,126 citing Republic v.
Mambulao Lumber Co., et al.127 and Francia v. Intermediate Appellate Court.128
In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue,129 we have ruled
that "[i]n an action for the refund of taxes allegedly erroneously paid, the Court of Tax Appeals
may determine whether there are taxes that should have been paid in lieu of the taxes
paid."130The determination of the proper category of tax that should have been paid is incidental
and necessary to resolve the issue of whether a refund should be granted.131 Thus:
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capital
gains tax or other taxes at the first instance. The Court of Tax Appeals has no power to make an
assessment.
As earlier established, the Court of Tax Appeals has no assessment powers. In stating that
petitioner’s transactions are subject to capital gains tax, however, the Court of Tax Appeals was
not making an assessment. It was merely determining the proper category of tax that petitioner
should have paid, in view of its claim that it erroneously imposed upon itself and paid the 5%
final tax imposed upon PEZA-registered enterprises.
The determination of the proper category of tax that petitioner should have paid is an incidental
matter necessary for the resolution of the principal issue, which is whether petitioner was entitled
to a refund.
The issue of petitioner’s claim for tax refund is intertwined with the issue of the proper taxes that
are due from petitioner. A claim for tax refund carries the assumption that the tax returns filed
were correct. If the tax return filed was not proper, the correctness of the amount paid and,
therefore, the claim for refund become questionable. In that case, the court must determine if a
taxpayer claiming refund of erroneously paid taxes is more properly liable for taxes other than
that paid.
In South African Airways v. Commissioner of Internal Revenue, South African Airways claimed for
refund of its erroneously paid 2½% taxes on its gross Philippine billings. This court did not
immediately grant South African’s claim for refund. This is because although this court found that
South African Airways was not subject to the 2½% tax on its gross Philippine billings, this court
also found that it was subject to 32% tax on its taxable income.
In this case, petitioner’s claim that it erroneously paid the 5% final tax is an admission that the
quarterly tax return it filed in 2000 was improper. Hence, to determine if petitioner was entitled
to the refund being claimed, the Court of Tax Appeals has the duty to determine if petitioner was
indeed not liable for the 5% final tax and, instead, liable for taxes other than the 5% final tax. As
in South African Airways, petitioner’s request for refund can neither be granted nor denied
outright without such determination.
If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the amount
of the taxpayer’s liability should be computed and deducted from the refundable amount.
Any liability in excess of the refundable amount, however, may not be collected in a case involving
solely the issue of the taxpayer’s entitlement to refund. The question of tax deficiency is distinct
and unrelated to the question of petitioner’s entitlement to refund. Tax deficiencies should be
subject to assessment procedures and the rules of prescription. The court cannot be expected to
perform the BIR’s duties whenever it fails to do so either through neglect or oversight. Neither can
court processes be used as a tool to circumvent laws protecting the rights of taxpayers.132
Hence, the Court of Tax Appeals properly denied petitioner’s claim for refund of allegedly
erroneously paid tax on its Gross Philippine Billings, on the ground that it was liable instead for
the regular 32% tax on its taxable income received from sources within the Philippines. Its
determination of petitioner’s liability for the 32% regular income tax was made merely for the
purpose of ascertaining petitioner’s entitlement to a tax refund and not for imposing any
deficiency tax.
In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the cases cited are
based on different circumstances. In both cited cases,133 the taxpayer claimed that his (its) tax
liability was off-set by his (its) claim against the government.
Specifically, in Republic v. Mambulao Lumber Co., et al., Mambulao Lumber contended that the
amounts it paid to the government as reforestation charges from 1947 to 1956, not having been
used in the reforestation of the area covered by its license, may be set off or applied to the
payment of forest charges still due and owing from it.134 Rejecting Mambulao’s claim of legal
compensation, this court ruled:
[A]ppellant and appellee are not mutually creditors and debtors of each other. Consequently, the
law on compensation is inapplicable. On this point, the trial court correctly observed:
Under Article 1278, NCC, compensation should take place when two persons in their own right
are creditors and debtors of each other. With respect to the forest charges which the defendant
Mambulao Lumber Company has paid to the government, they are in the coffers of the
government as taxes collected, and the government does not owe anything to defendant
Mambulao Lumber Company. So, it is crystal clear that the Republic of the Philippines and the
Mambulao Lumber Company are not creditors and debtors of each other, because compensation
refers to mutual debts. * * *.
And the weight of authority is to the effect that internal revenue taxes, such as the forest charges
in question, can not be the subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state or municipality to one who is
liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since
they do not arise out of the contract or transaction sued on. * * *. (80 C.J.S. 73–74.)
The general rule, based on grounds of public policy is well-settled that no set-off is admissible
against demands for taxes levied for general or local governmental purposes. The reason on
which the general rule is based, is that taxes are not in the nature of contracts between the party
and party but grow out of a duty to, and are the positive acts of the government, to the making
and enforcing of which, the personal consent of individual taxpayers is not required. * * * If the
taxpayer can properly refuse to pay his tax when called upon by the Collector, because he has a
claim against the governmental body which is not included in the tax levy, it is plain that some
legitimate and necessary expenditure must be curtailed. If the taxpayer’s claim is disputed, the
collection of the tax must await and abide the result of a lawsuit, and meanwhile the financial
affairs of the government will be thrown into great confusion. (47 Am. Jur. 766–767.)135
(Emphasis supplied)
In Francia, this court did not allow legal compensation since not all requisites of legal
compensation provided under Article 1279 were present.136 In that case, a portion of Francia’s
property in Pasay was expropriated by the national government,137 which did not immediately
pay Francia. In the meantime, he failed to pay the real property tax due on his remaining property
to the local government of Pasay, which later on would auction the property on account of such
delinquency.138 He then moved to set aside the auction sale and argued, among others, that his
real property tax delinquency was extinguished by legal compensation on account of his unpaid
claim against the national government.139 This court ruled against Francia:
There is no legal basis for the contention. By legal compensation, obligations of persons, who in
their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278,
Civil Code). The circumstances of the case do not satisfy the requirements provided by Article
1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time a principal
creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there can
be no off-setting of taxes against the claims that the taxpayer may have against the government.
A person cannot refuse to pay a tax on the ground that the government owes him an amount
equal to or greater than the tax being collected. The collection of a tax cannot await the results of
a lawsuit against the government.
....
There are other factors which compel us to rule against the petitioner. The tax was due to the city
government while the expropriation was effected by the national government. Moreover, the
amount of ₱4,116.00 paid by the national government for the 125 square meter portion of his lot
was deposited with the Philippine National Bank long before the sale at public auction of his
remaining property. Notice of the deposit dated September 28, 1977 was received by the
petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about
the ₱4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy
matter to withdraw ₱2,400.00 from the deposit so that he could pay the tax obligation thus
aborting the sale at public auction.140
The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc. v. Commission
on Audit141 and Philex Mining Corporation v. Commissioner of Internal Revenue.142 In Caltex,
this court reiterated:
[A] taxpayer may not offset taxes due from the claims that he may have against the government.
Taxes cannot be the subject of compensation because the government and taxpayer are not
mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.143 (Citations omitted)
Philex Mining ruled that "[t]here is a material distinction between a tax and debt. Debts are due
to the Government in its corporate capacity, while taxes are due to the Government in its
sovereign capacity."144 Rejecting Philex Mining’s assertion that the imposition of surcharge and
interest was unjustified because it had no obligation to pay the excise tax liabilities within the
prescribed period since, after all, it still had pending claims for VAT input credit/refund with the
Bureau of Internal Revenue, this court explained:
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it
has a pending tax claim for refund or credit against the government which has not yet been
granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than
a matter of bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any tax
payer can defer the payment of taxes by raising the defense that it still has a pending claim for
refund or credit, this would adversely affect the government revenue system. A taxpayer cannot
refuse to pay his taxes when they fall due simply because he has a claim against the government
or that the collection of the tax is contingent on the result of the lawsuit it filed against the
government. Moreover, Philex’s theory that would automatically apply its VAT input credit/refund
against its tax liabilities can easily give rise to confusion and abuse, depriving the government of
authority over the manner by which taxpayers credit and offset their tax liabilities.145 (Citations
omitted)
In sum, the rulings in those cases were to the effect that the taxpayer cannot simply refuse to pay
tax on the ground that the tax liabilities were off-set against any alleged claim the taxpayer may
have against the government. Such would merely be in keeping with the basic policy on prompt
collection of taxes as the lifeblood of the government.1âwphi1
Here, what is involved is a denial of a taxpayer’s refund claim on account of the Court of Tax
Appeals’ finding of its liability for another tax in lieu of the Gross Philippine Billings tax that was
allegedly erroneously paid.
Squarely applicable is South African Airways where this court rejected similar arguments on the
denial of claim for tax refund:
Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of a
tax refund with a tax deficiency in this wise:
Further, it is also worth noting 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. 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, 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 [be] 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.
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above
pronouncements are, therefore, still applicable today.
Here, petitioner's similar tax refund claim assumes that the tax return that it filed was correct.
Given, however, the finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a)
of the 1997 NIRC, is liable under Sec. 28(A)(l), the correctness of the return filed by petitioner is
now put in doubt. As such, we cannot grant the prayer for a refund.146 (Emphasis supplied,
citation omitted)
In the subsequent case of United Airlines, Inc. v. Commissioner of Internal Revenue, 147 this court
upheld the denial of the claim for refund based on the Court of Tax Appeals' finding that the
taxpayer had, through erroneous deductions on its gross income, underpaid its Gross Philippine
Billing tax on cargo revenues for 1999, and the amount of underpayment was even greater than
the refund sought for erroneously paid Gross Philippine Billings tax on passenger revenues for the
same taxable period.148
In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed at
the rate of 1 ½% of its gross revenues amounting to P345,711,806.08149 from the third quarter
of 2000 to the second quarter of 2002. It is quite apparent that the tax imposable under Section
28(A)(l) of the 1997 National Internal Revenue Code [32% of t.axable income, that is, gross
income less deductions] will exceed the maximum ceiling of 1 ½% of gross revenues as decreed in
Article VIII of the Republic of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming.
WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and Resolution dated
April 8, 2005 of the Court of Tax Appeals En Banc are AFFIRMED.
SO ORDERED.

G.R. No. L-57767 January 31, 1984

ALBERTO S. SUNIO and ILOCOS COMMERCIAL CORPORATION, petitioners, vs.NATIONAL LABOR
RELATIONS COMMISSION, NEMESIO VALENTON, SANTOS DEL ROSARIO, VICENTE TAPUCOL,
ANDRES SOLIS, CRESCENCIO SOLLER, CECILIO LABUNI, SOTERO L. TUMANG, in his capacity as
Asst. Regional Director for Arbitration, Regional Office No. 1, Ministry of Labor & Employment,
and AMBROSIO B. SISON, in his capacity as Acting Regional Sheriff, Regional Office No. 1,
Ministry of Labor & Employment, respondents.
Yolanda Bustamante for petitioners.
The Solicitor General for respondent NLRC.
Benjamin F. Baterina for private respondents,

MELENCIO-HERRERA, J.:
In this special civil action for certiorari and Prohibition with Preliminary Injunction, petitioners
Alberto Sunio and Ilocos Commercial Corporation seek to set aside the Resolution of March 24,
1981 of the National Labor Relations Commission (NLRC), which affirmed the Decision of the
Assistant Regional Director, dated November 5, 1979, in NLRC Case No. RB-1-1228-78, directing
petitioners and Cabugao Ice Plant Incorporated to reinstate private respondents to their former
position without loss of seniority and privileges and to pay them backwages from February 1,
1978 to the date of their actual reinstatement.
The controversy arose from the following antecedents:
On July 30,1973, EM Ramos & Company, Inc. (EMRACO for brevity) and Cabugao Ice Plant, Inc.
(CIPI for short), sister corporations, sold an ice plant to Rizal Development and Finance
Corporation RDFC with a mortgage on the same properties constituted by the latter in favor of
the former to secure the payment of the balance of the purchase price. 1
By virtue of that sale, EMRACO-CIPI terminated the services of all their employees including
private respondents herein, and paid them their separation pay. RDFC hired its own own
employees and operated the plant.
On November 28, 1973, RDFC sold the ice plant to petitioner Ilocos Commercial Corporation ICC
headed by its President and General Manager, petitioner Alberto S. Sunio. Petitioners also hired
their own employees as private respondents were no longer in the plant. The sale was subject to
the mortgage in favor of EMRACO-CIPI. Both RDFC-ICC failed to pay the balance of the purchase
price, as a consequence of which, EMRACO-CIPI instituted extrajudicial foreclosure proceedings.
The properties were sold at public auction on August 30, 1974, the highest bidders being
EMRACO CIPI. On the same date, said companies obtained an ex-parte Writ of Possession from
the Court of First Instance of Ilocos Sur in Civil Case No. 3026-V.
On the same date, August 30, 1974, EMRACO-CIPI sold the ice plant to Nilo Villanueva, suspect
to the right of redemption of RDFC. Nilo Villanueva then re-hired private respondents.
On August 27, 1975, RDFC redeemed the ice plant. Because of the gate to Nilo Villanueva,
EMRACO-CIPI were unable to turn over possession to RDFC and/or petitioners, prompting the
latter to file a complaint for recovery of possession against EMRACO-CIPI with the then Court of
First Instance of Ilocos Sur (Civil Case No. 81-KC). Nilo Villanueva intervened
Said Court ordered the issuance of a Writ of Preliminary Mandatory Injunction placing RDFC in
possession of the ice plant. EMPRACO-CIPI and Villanueva appealed to the Court of Appeals (CA-
GR No. 05880- SP which upheld the questionee, Order. A Petition for certiorari with this Court (L-
46376) assailing that Resolution was denied for lack of merit or January 6, 1978.
On February 1, 1978, RDFC and petitioners finally obtains possession of the ice plant by virtue of
the Mandatory Injunction previously issued, which ordered defendant "particularly Nilo C.
Villanueva and his agents representatives, or any person found in the premises to vacate and
surrender the property in litigation." 2 Petitioners did not re-employ private respondents.
Private respondents filed complaints against petitioners for illegal dismissal with the Regional
Office, Ministry of Labor & Employment, San Fernando, La Union.
On November 5, 1979, the Assistant Regional Director rendered a decision the decretal portion of
which reads:
IN VIEW OF THE FOREGOING CONSIDERATIONS, respondents Cabugao Ice Plant, Inc., Ilocos
Commercial Corporation and/or Alberto Sunio, are hereby directed to reinstate the complainants
to their former positions without loss of seniority privileges and to pay their backwages from
February 1, 1978 to the date when they are actually reinstated
Petitioners appealed to the NLRC, which affirmed the Regional Director's decision and dismissed
the appeal for lack of merit on March 24, 1981 reasoning that when RDFC took possession of the
property and private respondents were terminated in 1973, the latter already had a vested right
to their security of tenure, and when they were rehired those rights continued. 3
Petitioners are now before us assailing the Asst. Regional Director's Decision, dated November 5,
1979, the Resolution of the NLRC, Second Division, dated March 24, 1981, as well as the Writ of
Execution issued pursuant thereto dated July 14, 1981, for P156,720.80 representing backwages.
They raise as lone issue:
That respondent National Labor Relations Commission and/or Asst. Regional Director Sotero
Tumang acted in excess of jurisdiction and/or with grave abuse of discretion amounting to lack of
jurisdiction in rendering the decision and the resolution in NLRC Case No. RB-1-1228-78, and in
ordering the execution of said decision
We issued a Temporary Restraining Order to maintain the status quo, resolved to give due course
to the Petition, and required the parties to submit their respective Briefs. Only petitioners have
complied.
Did public respondents' act with grave abuse of on amounting to lack of jurisdiction in ordering
the reinstatement of private respondents and the payment of their backwages?
Petitioners deny any employer-employee relationship with private respondents arguing that no
privity of contract exists between them, the latter being the employees of Nilo Villanueva who re-
hired them when he took over the operation of the ice plant from CIPI; that private respondents
should go after Nilo Villanueva for whatever rights they may be entitled to, or the CIPI which is still
existing, that no succession of rights and obligations took place between Villanueva and
petitioners as the transfer of possession was a consequence of the exercise of the right of
redemption; that the amount of backwages was determined without petitioners being given a
chance to be heard and that granting that respondents are entitled to the reliefs adjudged, such
award cannot be enforced against petitioner Sunio, who was impleaded in the complaint as the
General Manager of ICC.
Public respondent, in its Comment, countered that the sale of a business of 'a going concern does
not ipso facto terminate employer-employee relations when the successor-employer continues the
business operation of the predecessor-employer in an essentially unchanged manner. Private
respondents argue that the change of management or ownership of a business entity is not one
of the just causes for the termination of services of employees under Article 283 of the Labor
Code, as amended. Both respondents additionally claim that petitioner Sunio, as the General
Manager of ICC and owner of one half (1/2) of its interest, is personally liable for his malicious act
of illegally dismissing private respondents, for no ground exists to justify their termination.
We sustain petitioners.
It is true that the sale of a business of a going concern does not ipso facto terminate the
employer-employee relations insofar as the successor-employer is concerned, and that change of
ownership or management of an establishment or company is not one of the just causes provided
by law for termination of employment. The situation here, however, was not one of simple
change of ownership. Of note is the fact that when, on July 30, 1973, EMRACO-CIPI sold the
plant to RDFC, CIPI had terminated the services of its employees, including herein private
respondents, giving them their separation pay which they had accepted. When RDFC took over
ownership and management, therefore, it hired its own employees, not the private respondents,
who were no longer there. RDFC subsequently sold the property to petitioners on November 28,
1973. But by reason of their failure to pay the balance of the purchase price, EMRACO-CIPI
foreclosed on the mortgage over the ice plant; the property was sold at public auction to
EMRACO-CIPI as the highest bidders, and they eventually re-possessed the plant on August 30,
1974. During all the period that RDFC and petitioners were operating the plant from July 30,
1973 to August 30, 1974, they had their own employees. CIPI-EMRACO then sold the plant, also
on August 30, 1974, to Nilo Villanueva, subject to RDFC's right of redemption. Nilo Villanueva
then rehired private respondents as employees of the plant, also in 1974.
In 1975, RDFC redeemed the property and demanded possession but EMRACO-CIPI and Nilo
Villanueva resisted so that petitioners were compelled to sue for recovery of possession, obtaining
it, however, only in 1978.
Under those circumstances, it cannot be justifiably said that the plant together with its staff and
personnel moved from one ownership to another. No succession of employment rights and
obligations can be said to have taken place between EMRACO-CIPI-Nilo Villanueva, on the one
hand, and petitioners on the other. Petitioners eventually acquired possession by virtue of the
exercise of their right of redemption and of a Mandatory Injunction in their favor which ordered
Nilo Villanueva and "any person found in the premises" to vacate. What is more, when EMRACO-
CIPI sold the ice plant to RDFC in 1973, private respondents' employment was terminated by
EMRACO-CIPI and they were given their separation pay, which they accepted. During the thirteen
months, therefore, that RDFC and petitioners were in possession and operating the plant up to
August, 1974, they hired their own employees, not the private respondents. In fact, it may even
be said that private respondents had slept on their rights when they failed to contest such
termination at the time of sale, if they believed they had rights to protect. Further, Nilo Villanueva
rehired private respondents in August, 1974, subject to a resolutory condition. That condition
having arisen, the rights of private respondents who claim under him mast be deemed to have
also ceased.
Private respondents can neither successfully invoke security of tenure in their favor. Their tenure
should not be reckoned from 1967 because they were already terminated in 1973. Private
respondents were only rehired in 1974 by Nilo Villanueva. Petitioners took over by judicial process
in 1978 so that private respondents had actually only four years of rehired employment with Nilo
Villanueva, during all of which period, petitioners fought hard against Nilo Villanueva to recover
possession of the plant. Insofar as petitioners are concerned therefore, there was no tenurial
security to speak of that would entitle private respondents to reinstatement and backwages. We
come now to the personal liability of petitioner, Sunio, who was made jointly and severally
responsible with petitioner company and CIPI for the payment of the backwages of private
respondents. This is reversible error. The Assistant Regional Director's Decision failed to disclose
the reason why he was made personally liable. Respondents, however, alleged as grounds
thereof, his being the owner of one-half (1/2) interest of said corporation, and his alleged
arbitrary dismissal of private respondents. Petitioner Sunio was impleaded in the Complaint his
capacity as General Manager of petitioner corporation. where appears to be no evidence on
record that he acted maliciously or in bad faith in terminating the services of private respondents.
His act, therefore, was within the scope of his authority and was a corporate act.
It is basic that a corporation is invested by law with a personality separate and distinct from those
of the persons composing it as well as from that of any other legal entity to which it may be
related. 4 Mere ownership by a single stockholder or by another corporation of all or nearly all of
the capital stock of a corporation is not of itself sufficient ground for disregarding the separate
corporate personality. 5 Petitioner Sunio, therefore, should not have been made personally
answerable for the payment of private respondents' back salaries.
WHEREFORE, the assailed Decision and Resolution, dated November 5, 1979 and March 24,
1981, respectively, and the consequent Writ of Execution are hereby SET ASIDE and the
Temporary Restraining Order heretofore issued by this Court hereby made permanent. Public
respondents are hereby ordered to return to petitioners the latter's levied properties in their
possession. No costs.
SO ORDERED.

G.R. No. 76778 June 6, 1990

FRANCISCO I. CHAVEZ, petitioner, vs.JAIME B. ONGPIN, in his capacity as Minister of Finance and
FIDELINA CRUZ, in her capacity as Acting Municipal Treasurer of the Municipality of Las Piñas,
respondents, REALTY OWNERS ASSOCIATION OF THE PHILIPPINES, INC., petitioner-intervenor.
Brotherhood of Nationalistic, Involved and Free Attorneys to Combat Injustice and Oppression
(Bonifacio) for petitioner.
Ambrosia Padilla, Mempin and Reyes Law Offices for movant Realty Owners Association.

MEDIALDEA, J.:
The petition seeks to declare unconstitutional Executive Order No. 73 dated November 25, 1986,
which We quote in full, as follows (78 O.G. 5861):
EXECUTIVE ORDER No. 73
PROVIDING FOR THE COLLECTION OF REAL PROPERTY TAXES BASED ON THE 1984 REAL
PROPERTY VALUES, AS PROVIDED FOR UNDER SECTION 21 OF THE REAL PROPERTY TAX CODE,
AS AMENDED
WHEREAS, the collection of real property taxes is still based on the 1978 revision of property
values;
WHEREAS, the latest general revision of real property assessments completed in 1984 has
rendered the 1978 revised values obsolete;
WHEREAS, the collection of real property taxes based on the 1984 real property values was
deferred to take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local
government units of an additional source of revenue;
WHEREAS, there is an urgent need for local governments to augment their financial resources to
meet the rising cost of rendering effective services to the people;
NOW, THEREFORE, I. CORAZON C. AQUINO, President of the Philippines, do hereby order:
SECTION 1. Real property values as of December 31, 1984 as determined by the local assessors
during the latest general revision of assessments shall take effect beginning January 1, 1987 for
purposes of real property tax collection.
SEC. 2. The Minister of Finance shall promulgate the necessary rules and regulations to implement
this Executive Order.
SEC. 3. Executive Order No. 1019, dated April 18, 1985, is hereby repealed.
SEC. 4. All laws, orders, issuances, and rules and regulations or parts thereof inconsistent with this
Executive Order are hereby repealed or modified accordingly.
SEC. 5. This Executive Order shall take effect immediately.
On March 31, 1987, Memorandum Order No. 77 was issued suspending the implementation of
Executive Order No. 73 until June 30, 1987.
The petitioner, Francisco I. Chavez, 1 is a taxpayer and an owner of three parcels of land. He
alleges the following: that Executive Order No. 73 accelerated the application of the general
revision of assessments to January 1, 1987 thereby mandating an excessive increase in real
property taxes by 100% to 400% on improvements, and up to 100% on land; that any increase
in the value of real property brought about by the revision of real property values and assessments
would necessarily lead to a proportionate increase in real property taxes; that sheer oppression is
the result of increasing real property taxes at a period of time when harsh economic conditions
prevail; and that the increase in the market values of real property as reflected in the schedule of
values was brought about only by inflation and economic recession.
The intervenor Realty Owners Association of the Philippines, Inc. (ROAP), which is the national
association of owners-lessors, joins Chavez in his petition to declare unconstitutional Executive
Order No. 73, but additionally alleges the following: that Presidential Decree No. 464 is
unconstitutional insofar as it imposes an additional one percent (1%) tax on all property owners
to raise funds for education, as real property tax is admittedly a local tax for local governments;
that the General Revision of Assessments does not meet the requirements of due process as
regards publication, notice of hearing, opportunity to be heard and insofar as it authorizes
"replacement cost" of buildings (improvements) which is not provided in Presidential Decree No.
464, but only in an administrative regulation of the Department of Finance; and that the Joint
Local Assessment/Treasury Regulations No. 2-86 2 is even more oppressive and unconstitutional
as it imposes successive increase of 150% over the 1986 tax.
The Office of the Solicitor General argues against the petition.
The petition is not impressed with merit.
Petitioner Chavez and intervenor ROAP question the constitutionality of Executive Order No. 73
insofar as the revision of the assessments and the effectivity thereof are concerned. It should be
emphasized that Executive Order No. 73 merely directs, in Section 1 thereof, that:
SECTION 1. Real property values as of December 31, 1984 as determined by the local assessors
during the latest general revision of assessments shall take effect beginning January 1, 1987 for
purposes of real property tax collection. (emphasis supplied)
The general revision of assessments completed in 1984 is based on Section 21 of Presidential
Decree No. 464 which provides, as follows:
SEC. 21. General Revision of Assessments. — Beginning with the assessor shall make a calendar
year 1978, the provincial or city general revision of real property assessments in the province or
city to take effect January 1, 1979, and once every five years thereafter: Provided; however, That
if property values in a province or city, or in any municipality, have greatly changed since the last
general revision, the provincial or city assesor may, with the approval of the Secretary of Finance
or upon bis direction, undertake a general revision of assessments in the province or city, or in any
municipality before the fifth year from the effectivity of the last general revision.
Thus, We agree with the Office of the Solicitor General that the attack on Executive Order No. 73
has no legal basis as the general revision of assessments is a continuing process mandated by
Section 21 of Presidential Decree No. 464. If at all, it is Presidential Decree No. 464 which should
be challenged as constitutionally infirm. However, Chavez failed to raise any objection against said
decree. It was ROAP which questioned the constitutionality thereof. Furthermore, Presidential
Decree No. 464 furnishes the procedure by which a tax assessment may be questioned:
SEC. 30. Local Board of Assessment Appeals. — Any owner who is not satisfied with the action of
the provincial or city assessor in the assessment of his property may, within sixty days from the
date of receipt by him of the written notice of assessment as provided in this Code, appeal to the
Board of Assessment Appeals of the province or city, by filing with it a petition under oath using
the form prescribed for the purpose, together with copies of the tax declarations and such
affidavit or documents submitted in support of the appeal.
xxx xxx xxx
SEC. 34. Action by the Local Board of assessment Appeals. — The Local Board of Assessment
Appeals shall decide the appeal within one hundred and twenty days from the date of receipt of
such appeal. The decision rendered must be based on substantial evidence presented at the
hearing or at least contained in the record and disclosed to the parties or such relevant evidence
as a reasonable mind might accept as adequate to support the conclusion.
In the exercise of its appellate jurisdiction, the Board shall have the power to summon witnesses,
administer oaths, conduct ocular inspection, take depositions, and issue subpoena and subpoena
duces tecum. The proceedings of the Board shall be conducted solely for the purpose of
ascertaining the truth without-necessarily adhering to technical rules applicable in judicial
proceedings.
The Secretary of the Board shall furnish the property owner and the Provincial or City Assessor
with a copy each of the decision of the Board. In case the provincial or city assessor concurs in the
revision or the assessment, it shall be his duty to notify the property owner of such fact using the
form prescribed for the purpose. The owner or administrator of the property or the assessor who
is not satisfied with the decision of the Board of Assessment Appeals, may, within thirty days after
receipt of the decision of the local Board, appeal to the Central Board of Assessment Appeals by
filing his appeal under oath with the Secretary of the proper provincial or city Board of
Assessment Appeals using the prescribed form stating therein the grounds and the reasons for
the appeal, and attaching thereto any evidence pertinent to the case. A copy of the appeal should
be also furnished the Central Board of Assessment Appeals, through its Chairman, by the
appellant.
Within ten (10) days from receipt of the appeal, the Secretary of the Board of Assessment Appeals
concerned shall forward the same and all papers related thereto, to the Central Board of
Assessment Appeals through the Chairman thereof.
xxx xxx xxx
SEC. 36. Scope of Powers and Functions. — The Central Board of Assessment Appeals shall have
jurisdiction over appealed assessment cases decided by the Local Board of Assessment Appeals.
The said Board shall decide cases brought on appeal within twelve (12) months from the date of
receipt, which decision shall become final and executory after the lapse of fifteen (15) days from
the date of receipt of a copy of the decision by the appellant.
In the exercise of its appellate jurisdiction, the Central Board of Assessment Appeals, or upon
express authority, the Hearing Commissioner, shall have the power to summon witnesses,
administer oaths, take depositions, and issue subpoenas andsubpoenas duces tecum.
The Central Board of assessment Appeals shall adopt and promulgate rules of procedure relative
to the conduct of its business.
Simply stated, within sixty days from the date of receipt of the, written notice of assessment, any
owner who doubts the assessment of his property, may appeal to the Local Board of Assessment
Appeals. In case the, owner or administrator of the property or the assessor is not satisfied with
the decision of the Local Board of Assessment Appeals, he may, within thirty days from the receipt
of the decision, appeal to the Central Board of Assessment Appeals. The decision of the Central
Board of Assessment Appeals shall become final and executory after the lapse of fifteen days from
the date of receipt of the decision.
Chavez argues further that the unreasonable increase in real property taxes brought about by
Executive Order No. 73 amounts to a confiscation of property repugnant to the constitutional
guarantee of due process, invoking the cases of Ermita-Malate Hotel, et al. v. Mayor of Manila
(G.R. No. L-24693, July 31, 1967, 20 SCRA 849) and Sison v. Ancheta, et al. (G.R. No. 59431, July
25, 1984, 130 SCRA 654).
The reliance on these two cases is certainly misplaced because the due process requirement called
for therein applies to the "power to tax." Executive Order No. 73 does not impose new taxes nor
increase taxes.
Indeed, the government recognized the financial burden to the taxpayers that will result from an
increase in real property taxes. Hence, Executive Order No. 1019 was issued on April 18, 1985,
deferring the implementation of the increase in real property taxes resulting from the revised real
property assessments, from January 1, 1985 to January 1, 1988. Section 5 thereof is quoted
herein as follows:
SEC. 5. The increase in real property taxes resulting from the revised real property assessments as
provided for under Section 21 of Presidential Decree No. 464, as amended by Presidential Decree
No. 1621, shall be collected beginning January 1, 1988 instead of January 1, 1985 in order to
enable the Ministry of Finance and the Ministry of Local Government to establish the new systems
of tax collection and assessment provided herein and in order to alleviate the condition of the
people, including real property owners, as a result of temporary economic difficulties. (emphasis
supplied)
The issuance of Executive Order No. 73 which changed the date of implementation of the
increase in real property taxes from January 1, 1988 to January 1, 1987 and therefore repealed
Executive Order No. 1019, also finds ample justification in its "whereas' clauses, as follows:
WHEREAS, the collection of real property taxes based on the 1984 real property values was
deferred to take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local
government units of an additional source of revenue;
WHEREAS, there is an urgent need for local governments to augment their financial resources to
meet the rising cost of rendering effective services to the people; (emphasis supplied)
xxx xxx xxx
The other allegation of ROAP that Presidential Decree No. 464 is unconstitutional, is not proper to
be resolved in the present petition. As stated at the outset, the issue here is limited to the
constitutionality of Executive Order No. 73. Intervention is not an independent proceeding, but an
ancillary and supplemental one which, in the nature of things, unless otherwise provided for by
legislation (or Rules of Court), must be in subordination to the main proceeding, and it may be
laid down as a general rule that an intervention is limited to the field of litigation open to the
original parties (59 Am. Jur. 950. Garcia, etc., et al. v. David, et al., 67 Phil. 279).
We agree with the observation of the Office of the Solicitor General that without Executive Order
No. 73, the basis for collection of real property taxes win still be the 1978 revision of property
values. Certainly, to continue collecting real property taxes based on valuations arrived at several
years ago, in disregard of the increases in the value of real properties that have occurred since
then, is not in consonance with a sound tax system. Fiscal adequacy, which is one of the
characteristics of a sound tax system, requires that sources of revenues must be adequate to meet
government expenditures and their variations.
ACCORDINGLY, the petition and the petition-in-intervention are hereby DISMISSED.
SO ORDERED.

G.R. No. 175356 December 3, 2013

MANILA MEMORIAL PARK, INC. AND LA FUNERARIA PAZ-SUCAT, INC., Petitioners,
vs.SECRETARY OF THE DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT and THE
SECRETARY OF THE DEPARTMENT OF FINANCE, Respondents.
DECISION
DEL CASTILLO, J.:
When a party challeges the constitutionality of a law, the burden of proof rests upon him.
Before us is a Petition for Prohibition2 under Rule 65 of the Rules of Court filed by petitioners
Manila Memorial Park, Inc. and La Funeraria Paz-Sucat, Inc., domestic corporations engaged in
the business of providing funeral and burial services, against public respondents Secretaries of the
Department of Social Welfare and Development (DSWD) and the Department of Finance (DOF).
Petitioners assail the constitutionality of Section 4 of Republic Act (RA) No. 7432,3 as amended by
RA 9257,4 and the implementing rules and regulations issued by the DSWD and DOF insofar as
these allow business establishments to claim the 20% discount given to senior citizens as a tax
deduction.
Factual Antecedents
On April 23, 1992, RA 7432 was passed into law, granting senior citizens the following privileges:
SECTION 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the
following:
a) the grant of twenty percent (20%) discount from all establishments relative to utilization of
transportation services, hotels and similar lodging establishment[s], restaurants and recreation
centers and purchase of medicine anywhere in the country: Provided, That private establishments
may claim the cost as tax credit;
b) a minimum of twenty percent (20%) discount on admission fees charged by theaters, cinema
houses and concert halls, circuses, carnivals and other similar places of culture, leisure, and
amusement;
c) exemption from the payment of individual income taxes: Provided, That their annual taxable
income does not exceed the property level as determined by the National Economic and
Development Authority (NEDA) for that year;
d) exemption from training fees for socioeconomic programs undertaken by the OSCA as part of
its work;
e) free medical and dental services in government establishment[s] anywhere in the country,
subject to guidelines to be issued by the Department of Health, the Government Service Insurance
System and the Social Security System;
f) to the extent practicable and feasible, the continuance of the same benefits and privileges given
by the Government Service Insurance System (GSIS), Social Security System (SSS) and PAG-IBIG,
as the case may be, as are enjoyed by those in actual service.
On August 23, 1993, Revenue Regulations (RR) No. 02-94 was issued to implement RA 7432.
Sections 2(i) and 4 of RR No. 02-94 provide:
Sec. 2. DEFINITIONS. – For purposes of these regulations: i. Tax Credit – refers to the amount
representing the 20% discount granted to a qualified senior citizen by all establishments relative
to their utilization of transportation services, hotels and similar lodging establishments,
restaurants, drugstores, recreation centers, theaters, cinema houses, concert halls, circuses,
carnivals and other similar places of culture, leisure and amusement, which discount shall be
deducted by the said establishments from their gross income for income tax purposes and from
their gross sales for value-added tax or other percentage tax purposes. x x x x Sec. 4.
RECORDING/BOOKKEEPING REQUIREMENTS FOR PRIVATE ESTABLISHMENTS. – Private
establishments, i.e., transport services, hotels and similar lodging establishments, restaurants,
recreation centers, drugstores, theaters, cinema houses, concert halls, circuses, carnivals and
other similar places of culture[,] leisure and amusement, giving 20% discounts to qualified senior
citizens are required to keep separate and accurate record[s] of sales made to senior citizens,
which shall include the name, identification number, gross sales/receipts, discounts, dates of
transactions and invoice number for every transaction. The amount of 20% discount shall be
deducted from the gross income for income tax purposes and from gross sales of the business
enterprise concerned for purposes of the VAT and other percentage taxes.
In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,5 the Court declared
Sections 2(i) and 4 of RR No. 02-94 as erroneous because these contravene RA 7432,6 thus:
RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts
they grant. In turn, the Implementing Rules and Regulations, issued pursuant thereto, provide the
procedures for its availment. To deny such credit, despite the plain mandate of the law and the
regulations carrying out that mandate, is indefensible. First, the definition given by petitioner is
erroneous. It refers to tax credit as the amount representing the 20 percent discount that "shall be
deducted by the said establishments from their gross income for income tax purposes and from
their gross sales for value-added tax or other percentage tax purposes." In ordinary business
language, the tax credit represents the amount of such discount. However, the manner by which
the discount shall be credited against taxes has not been clarified by the revenue regulations. By
ordinary acceptation, a discount is an "abatement or reduction made from the gross amount or
value of anything." To be more precise, it is in business parlance "a deduction or lowering of an
amount of money;" or "a reduction from the full amount or value of something, especially a
price." In business there are many kinds of discount, the most common of which is that affecting
the income statement or financial report upon which the income tax is based.
xxxx
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent
discount deductible from gross income for income tax purposes, or from gross sales for VAT or
other percentage tax purposes. In effect, the tax credit benefit under RA 7432 is related to a sales
discount. This contrived definition is improper, considering that the latter has to be deducted
from gross sales in order to compute the gross income in the income statement and cannot be
deducted again, even for purposes of computing the income tax. When the law says that the cost
of the discount may be claimed as a tax credit, it means that the amount — when claimed — shall
be treated as a reduction from any tax liability, plain and simple. The option to avail of the tax
credit benefit depends upon the existence of a tax liability, but to limit the benefit to a sales
discount — which is not even identical to the discount privilege that is granted by law — does not
define it at all and serves no useful purpose. The definition must, therefore, be stricken down.
Laws Not Amended by Regulations
Second, the law cannot be amended by a mere regulation. In fact, a regulation that "operates to
create a rule out of harmony with the statute is a mere nullity;" it cannot prevail. It is a cardinal
rule that courts "will and should respect the contemporaneous construction placed upon a statute
by the executive officers whose duty it is to enforce it x x x." In the scheme of judicial tax
administration, the need for certainty and predictability in the implementation of tax laws is
crucial. Our tax authorities fill in the details that "Congress may not have the opportunity or
competence to provide." The regulations these authorities issue are relied upon by taxpayers, who
are certain that these will be followed by the courts. Courts, however, will not uphold these
authorities’ interpretations when clearly absurd, erroneous or improper. In the present case, the
tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-94 a meaning utterly in
contrast to what RA 7432 provides. Their interpretation has muddled x x x the intent of Congress
in granting a mere discount privilege, not a sales discount. The administrative agency issuing these
regulations may not enlarge, alter or restrict the provisions of the law it administers; it cannot
engraft additional requirements not contemplated by the legislature.
In case of conflict, the law must prevail. A "regulation adopted pursuant to law is law."
Conversely, a regulation or any portion thereof not adopted pursuant to law is no law and has
neither the force nor the effect of law.7
On February 26, 2004, RA 92578 amended certain provisions of RA 7432, to wit:
SECTION 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the
following:
(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization
of services in hotels and similar lodging establishments, restaurants and recreation centers, and
purchase of medicines in all establishments for the exclusive use or enjoyment of senior citizens,
including funeral and burial services for the death of senior citizens;
xxxx
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction
based on the net cost of the goods sold or services rendered: Provided, That the cost of the
discount shall be allowed as deduction from gross income for the same taxable year that the
discount is granted. Provided, further, That the total amount of the claimed tax deduction net of
value added tax if applicable, shall be included in their gross sales receipts for tax purposes and
shall be subject to proper documentation and to the provisions of the National Internal Revenue
Code, as amended.
To implement the tax provisions of RA 9257, the Secretary of Finance issued RR No. 4-2006, the
pertinent provision of which provides:
SEC. 8. AVAILMENT BY ESTABLISHMENTS OF SALES DISCOUNTS AS DEDUCTION FROM GROSS
INCOME. – Establishments enumerated in subparagraph (6) hereunder granting sales discounts to
senior citizens on the sale of goods and/or services specified thereunder are entitled to deduct the
said discount from gross income subject to the following conditions:
(1) Only that portion of the gross sales EXCLUSIVELY USED, CONSUMED OR ENJOYED BY THE
SENIOR CITIZEN shall be eligible for the deductible sales discount.
(2) The gross selling price and the sales discount MUST BE SEPARATELY INDICATED IN THE
OFFICIAL RECEIPT OR SALES INVOICE issued by the establishment for the sale of goods or services
to the senior citizen.
(3) Only the actual amount of the discount granted or a sales discount not exceeding 20% of the
gross selling price can be deducted from the gross income, net of value added tax, if applicable,
for income tax purposes, and from gross sales or gross receipts of the business enterprise
concerned, for VAT or other percentage tax purposes.
(4) The discount can only be allowed as deduction from gross income for the same taxable year
that the discount is granted.
(5) The business establishment giving sales discounts to qualified senior citizens is required to
keep separate and accurate record[s] of sales, which shall include the name of the senior citizen,
TIN, OSCA ID, gross sales/receipts, sales discount granted, [date] of [transaction] and invoice
number for every sale transaction to senior citizen.
(6) Only the following business establishments which granted sales discount to senior citizens on
their sale of goods and/or services may claim the said discount granted as deduction from gross
income, namely:
xxxx
(i) Funeral parlors and similar establishments – The beneficiary or any person who shall shoulder
the funeral and burial expenses of the deceased senior citizen shall claim the discount, such as
casket, embalmment, cremation cost and other related services for the senior citizen upon
payment and presentation of [his] death certificate.
The DSWD likewise issued its own Rules and Regulations Implementing RA 9257, to wit:
RULE VI DISCOUNTS AS TAX DEDUCTION OF ESTABLISHMENTS
Article 8. Tax Deduction of Establishments. – The establishment may claim the discounts granted
under Rule V, Section 4 – Discounts for Establishments, Section 9, Medical and Dental Services in
Private Facilities and Sections 10 and 11 – Air, Sea and Land Transportation as tax deduction
based on the net cost of the goods sold or services rendered.
Provided, That the cost of the discount shall be allowed as deduction from gross income for the
same taxable year that the discount is granted; Provided, further, That the total amount of the
claimed tax deduction net of value added tax if applicable, shall be included in their gross sales
receipts for tax purposes and shall be subject to proper documentation and to the provisions of
the National Internal Revenue Code, as amended; Provided, finally, that the implementation of
the tax deduction shall be subject to the Revenue Regulations to be issued by the Bureau of
Internal Revenue (BIR) and approved by the Department of Finance (DOF).
Feeling aggrieved by the tax deduction scheme, petitioners filed the present recourse, praying
that Section 4 of RA 7432, as amended by RA 9257, and the implementing rules and regulations
issued by the DSWD and the DOF be declared unconstitutional insofar as these allow business
establishments to claim the 20% discount given to senior citizens as a tax deduction; that the
DSWD and the DOF be prohibited from enforcing the same; and that the tax credit treatment of
the 20% discount under the former Section 4 (a) of RA 7432 be reinstated.
Issues
Petitioners raise the following issues:
A.
WHETHER THE PETITION PRESENTS AN ACTUAL CASE OR CONTROVERSY.
B.
WHETHER SECTION 4 OF REPUBLIC ACT NO. 9257 AND X X X ITS IMPLEMENTING RULES AND
REGULATIONS, INSOFAR AS THEY PROVIDE THAT THE TWENTY PERCENT (20%) DISCOUNT TO
SENIOR CITIZENS MAY BE CLAIMED AS A TAX DEDUCTION BY THE PRIVATE ESTABLISHMENTS,
ARE INVALID AND UNCONSTITUTIONAL.9
Petitioners’ Arguments
Petitioners emphasize that they are not questioning the 20% discount granted to senior citizens
but are only assailing the constitutionality of the tax deduction scheme prescribed under RA 9257
and the implementing rules and regulations issued by the DSWD and the DOF.10
Petitioners posit that the tax deduction scheme contravenes Article III, Section 9 of the
Constitution, which provides that: "[p]rivate property shall not be taken for public use without
just compensation."11
In support of their position, petitioners cite Central Luzon Drug Corporation,12 where it was ruled
that the 20% discount privilege constitutes taking of private property for public use which
requires the payment of just compensation,13 and Carlos Superdrug Corporation v. Department
of Social Welfare and Development,14 where it was acknowledged that the tax deduction
scheme does not meet the definition of just compensation.15
Petitioners likewise seek a reversal of the ruling in Carlos Superdrug Corporation16 that the tax
deduction scheme adopted by the government is justified by police power.17
They assert that "[a]lthough both police power and the power of eminent domain have the
general welfare for their object, there are still traditional distinctions between the two"18 and
that "eminent domain cannot be made less supreme than police power."19
Petitioners further claim that the legislature, in amending RA 7432, relied on an erroneous
contemporaneous construction that prior payment of taxes is required for tax credit.20
Petitioners also contend that the tax deduction scheme violates Article XV, Section 421 and
Article XIII, Section 1122 of the Constitution because it shifts the State’s constitutional mandate or
duty of improving the welfare of the elderly to the private sector.23
Under the tax deduction scheme, the private sector shoulders 65% of the discount because only
35%24 of it is actually returned by the government.25
Consequently, the implementation of the tax deduction scheme prescribed under Section 4 of RA
9257 affects the businesses of petitioners.26
Thus, there exists an actual case or controversy of transcendental importance which deserves
judicious disposition on the merits by the highest court of the land.27
Respondents’ Arguments
Respondents, on the other hand, question the filing of the instant Petition directly with the
Supreme Court as this disregards the hierarchy of courts.28
They likewise assert that there is no justiciable controversy as petitioners failed to prove that the
tax deduction treatment is not a "fair and full equivalent of the loss sustained" by them.29
As to the constitutionality of RA 9257 and its implementing rules and regulations, respondents
contend that petitioners failed to overturn its presumption of constitutionality.30
More important, respondents maintain that the tax deduction scheme is a legitimate exercise of
the State’s police power.31
Our Ruling
The Petition lacks merit.
There exists an actual case or controversy.
We shall first resolve the procedural issue. When the constitutionality of a law is put in issue,
judicial review may be availed of only if the following requisites concur: "(1) the existence of an
actual and appropriate case; (2) the existence of personal and substantial interest on the part of
the party raising the [question of constitutionality]; (3) recourse to judicial review is made at the
earliest opportunity; and (4) the [question of constitutionality] is the lis mota of the case."32
In this case, petitioners are challenging the constitutionality of the tax deduction scheme provided
in RA 9257 and the implementing rules and regulations issued by the DSWD and the DOF.
Respondents, however, oppose the Petition on the ground that there is no actual case or
controversy. We do not agree with respondents. An actual case or controversy exists when there
is "a conflict of legal rights" or "an assertion of opposite legal claims susceptible of judicial
resolution."33
The Petition must therefore show that "the governmental act being challenged has a direct
adverse effect on the individual challenging it."34
In this case, the tax deduction scheme challenged by petitioners has a direct adverse effect on
them. Thus, it cannot be denied that there exists an actual case or controversy.
The validity of the 20% senior citizen discount and tax deduction scheme under RA 9257, as an
exercise of police power of the State, has already been settled in Carlos Superdrug Corporation.
Petitioners posit that the resolution of this case lies in the determination of whether the legally
mandated 20% senior citizen discount is an exercise of police power or eminent domain. If it is
police power, no just compensation is warranted. But if it is eminent domain, the tax deduction
scheme is unconstitutional because it is not a peso for peso reimbursement of the 20% discount
given to senior citizens. Thus, it constitutes taking of private property without payment of just
compensation. At the outset, we note that this question has been settled in Carlos Superdrug
Corporation.35
In that case, we ruled:
Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation
of private property. Compelling drugstore owners and establishments to grant the discount will
result in a loss of profit and capital because 1) drugstores impose a mark-up of only 5% to 10%
on branded medicines; and 2) the law failed to provide a scheme whereby drugstores will be
justly compensated for the discount. Examining petitioners’ arguments, it is apparent that what
petitioners are ultimately questioning is the validity of the tax deduction scheme as a
reimbursement mechanism for the twenty percent (20%) discount that they extend to senior
citizens. Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully
reimburse petitioners for the discount privilege accorded to senior citizens. This is because the
discount is treated as a deduction, a tax-deductible expense that is subtracted from the gross
income and results in a lower taxable income. Stated otherwise, it is an amount that is allowed by
law to reduce the income prior to the application of the tax rate to compute the amount of tax
which is due. Being a tax deduction, the discount does not reduce taxes owed on a peso for peso
basis but merely offers a fractional reduction in taxes owed. Theoretically, the treatment of the
discount as a deduction reduces the net income of the private establishments concerned. The
discounts given would have entered the coffers and formed part of the gross sales of the private
establishments, were it not for R.A. No. 9257. The permanent reduction in their total revenues is
a forced subsidy corresponding to the taking of private property for public use or benefit. This
constitutes compensable taking for which petitioners would ordinarily become entitled to a just
compensation. Just compensation is defined as the full and fair equivalent of the property taken
from its owner by the expropriator. The measure is not the taker’s gain but the owner’s loss. The
word just is used to intensify the meaning of the word compensation, and to convey the idea that
the equivalent to be rendered for the property to be taken shall be real, substantial, full and
ample. A tax deduction does not offer full reimbursement of the senior citizen discount. As such,
it would not meet the definition of just compensation. Having said that, this raises the question of
whether the State, in promoting the health and welfare of a special group of citizens, can impose
upon private establishments the burden of partly subsidizing a government program. The Court
believes so. The Senior Citizens Act was enacted primarily to maximize the contribution of senior
citizens to nation-building, and to grant benefits and privileges to them for their improvement
and well-being as the State considers them an integral part of our society. The priority given to
senior citizens finds its basis in the Constitution as set forth in the law itself.1âwphi1 Thus, the Act
provides: SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:
SECTION 1. Declaration of Policies and Objectives. — Pursuant to Article XV, Section 4 of the
Constitution, it is the duty of the family to take care of its elderly members while the State may
design programs of social security for them. In addition to this, Section 10 in the Declaration of
Principles and State Policies provides: "The State shall provide social justice in all phases of
national development." Further, Article XIII, Section 11, provides: "The State shall adopt an
integrated and comprehensive approach to health development which shall endeavor to make
essential goods, health and other social services available to all the people at affordable cost.
There shall be priority for the needs of the underprivileged sick, elderly, disabled, women and
children." Consonant with these constitutional principles the following are the declared policies of
this Act:
xxx xxx xxx
(f) To recognize the important role of the private sector in the improvement of the welfare of
senior citizens and to actively seek their partnership.
To implement the above policy, the law grants a twenty percent discount to senior citizens for
medical and dental services, and diagnostic and laboratory fees; admission fees charged by
theaters, concert halls, circuses, carnivals, and other similar places of culture, leisure and
amusement; fares for domestic land, air and sea travel; utilization of services in hotels and similar
lodging establishments, restaurants and recreation centers; and purchases of medicines for the
exclusive use or enjoyment of senior citizens. As a form of reimbursement, the law provides that
business establishments extending the twenty percent discount to senior citizens may claim the
discount as a tax deduction. The law is a legitimate exercise of police power which, similar to the
power of eminent domain, has general welfare for its object. Police power is not capable of an
exact definition, but has been purposely veiled in general terms to underscore its
comprehensiveness to meet all exigencies and provide enough room for an efficient and flexible
response to conditions and circumstances, thus assuring the greatest benefits. Accordingly, it has
been described as "the most essential, insistent and the least limitable of powers, extending as it
does to all the great public needs." It is "[t]he power vested in the legislature by the constitution
to make, ordain, and establish all manner of wholesome and reasonable laws, statutes, and
ordinances, either with penalties or without, not repugnant to the constitution, as they shall
judge to be for the good and welfare of the commonwealth, and of the subjects of the same."
For this reason, when the conditions so demand as determined by the legislature, property rights
must bow to the primacy of police power because property rights, though sheltered by due
process, must yield to general welfare. Police power as an attribute to promote the common
good would be diluted considerably if on the mere plea of petitioners that they will suffer loss of
earnings and capital, the questioned provision is invalidated. Moreover, in the absence of
evidence demonstrating the alleged confiscatory effect of the provision in question, there is no
basis for its nullification in view of the presumption of validity which every law has in its favor.
Given these, it is incorrect for petitioners to insist that the grant of the senior citizen discount is
unduly oppressive to their business, because petitioners have not taken time to calculate correctly
and come up with a financial report, so that they have not been able to show properly whether or
not the tax deduction scheme really works greatly to their disadvantage. In treating the discount
as a tax deduction, petitioners insist that they will incur losses because, referring to the DOF
Opinion, for every ₱1.00 senior citizen discount that petitioners would give, P0.68 will be
shouldered by them as only P0.32 will be refunded by the government by way of a tax deduction.
To illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive maintenance drug
Norvasc as an example. According to the latter, it acquires Norvasc from the distributors at ₱37.57
per tablet, and retails it at ₱39.60 (or at a margin of 5%). If it grants a 20% discount to senior
citizens or an amount equivalent to ₱7.92, then it would have to sell Norvasc at ₱31.68 which
translates to a loss from capital of ₱5.89 per tablet. Even if the government will allow a tax
deduction, only ₱2.53 per tablet will be refunded and not the full amount of the discount which is
₱7.92. In short, only 32% of the 20% discount will be reimbursed to the drugstores. Petitioners’
computation is flawed. For purposes of reimbursement, the law states that the cost of the
discount shall be deducted from gross income, the amount of income derived from all sources
before deducting allowable expenses, which will result in net income. Here, petitioners tried to
show a loss on a per transaction basis, which should not be the case. An income statement,
showing an accounting of petitioners' sales, expenses, and net profit (or loss) for a given period
could have accurately reflected the effect of the discount on their income. Absent any financial
statement, petitioners cannot substantiate their claim that they will be operating at a loss should
they give the discount. In addition, the computation was erroneously based on the assumption
that their customers consisted wholly of senior citizens. Lastly, the 32% tax rate is to be imposed
on income, not on the amount of the discount.
Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the prices of
their medicines given the cutthroat nature of the players in the industry. It is a business decision
on the part of petitioners to peg the mark-up at 5%. Selling the medicines below acquisition cost,
as alleged by petitioners, is merely a result of this decision. Inasmuch as pricing is a property right,
petitioners cannot reproach the law for being oppressive, simply because they cannot afford to
raise their prices for fear of losing their customers to competition. The Court is not oblivious of the
retail side of the pharmaceutical industry and the competitive pricing component of the business.
While the Constitution protects property rights, petitioners must accept the realities of business
and the State, in the exercise of police power, can intervene in the operations of a business which
may result in an impairment of property rights in the process.
Moreover, the right to property has a social dimension. While Article XIII of the Constitution
provides the precept for the protection of property, various laws and jurisprudence, particularly on
agrarian reform and the regulation of contracts and public utilities, continuously serve as x x x
reminder[s] that the right to property can be relinquished upon the command of the State for the
promotion of public good. Undeniably, the success of the senior citizens program rests largely on
the support imparted by petitioners and the other private establishments concerned. This being
the case, the means employed in invoking the active participation of the private sector, in order to
achieve the purpose or objective of the law, is reasonably and directly related. Without sufficient
proof that Section 4 (a) of R.A. No. 9257 is arbitrary, and that the continued implementation of
the same would be unconscionably detrimental to petitioners, the Court will refrain from
quashing a legislative act.36 (Bold in the original; underline supplied)
We, thus, found that the 20% discount as well as the tax deduction scheme is a valid exercise of
the police power of the State.
No compelling reason has been proffered to overturn, modify or abandon the ruling in Carlos
Superdrug Corporation.
Petitioners argue that we have previously ruled in Central Luzon Drug Corporation37 that the
20% discount is an exercise of the power of eminent domain, thus, requiring the payment of just
compensation. They urge us to re-examine our ruling in Carlos Superdrug Corporation38 which
allegedly reversed the ruling in Central Luzon Drug Corporation.39
They also point out that Carlos Superdrug Corporation40 recognized that the tax deduction
scheme under the assailed law does not provide for sufficient just compensation. We agree with
petitioners’ observation that there are statements in Central Luzon Drug Corporation41describing
the 20% discount as an exercise of the power of eminent domain, viz.:
[T]he privilege enjoyed by senior citizens does not come directly from the State, but rather from
the private establishments concerned. Accordingly, the tax credit benefit granted to these
establishments can be deemed as their just compensation for private property taken by the State
for public use. The concept of public use is no longer confined to the traditional notion of use by
the public, but held synonymous with public interest, public benefit, public welfare, and public
convenience. The discount privilege to which our senior citizens are entitled is actually a benefit
enjoyed by the general public to which these citizens belong. The discounts given would have
entered the coffers and formed part of the gross sales of the private establishments concerned,
were it not for RA 7432. The permanent reduction in their total revenues is a forced subsidy
corresponding to the taking of private property for public use or benefit. As a result of the 20
percent discount imposed by RA 7432, respondent becomes entitled to a just compensation. This
term refers not only to the issuance of a tax credit certificate indicating the correct amount of the
discounts given, but also to the promptness in its release. Equivalent to the payment of property
taken by the State, such issuance — when not done within a reasonable time from the grant of
the discounts — cannot be considered as just compensation. In effect, respondent is made to
suffer the consequences of being immediately deprived of its revenues while awaiting actual
receipt, through the certificate, of the equivalent amount it needs to cope with the reduction in
its revenues. Besides, the taxation power can also be used as an implement for the exercise of the
power of eminent domain. Tax measures are but "enforced contributions exacted on pain of
penal sanctions" and "clearly imposed for a public purpose." In recent years, the power to tax has
indeed become a most effective tool to realize social justice, public welfare, and the equitable
distribution of wealth. While it is a declared commitment under Section 1 of RA 7432, social
justice "cannot be invoked to trample on the rights of property owners who under our
Constitution and laws are also entitled to protection. The social justice consecrated in our
[C]onstitution [is] not intended to take away rights from a person and give them to another who
is not entitled thereto." For this reason, a just compensation for income that is taken away from
respondent becomes necessary. It is in the tax credit that our legislators find support to realize
social justice, and no administrative body can alter that fact. To put it differently, a private
establishment that merely breaks even — without the discounts yet — will surely start to incur
losses because of such discounts. The same effect is expected if its mark-up is less than 20
percent, and if all its sales come from retail purchases by senior citizens. Aside from the
observation we have already raised earlier, it will also be grossly unfair to an establishment if the
discounts will be treated merely as deductions from either its gross income or its gross
sales.1âwphi1 Operating at a loss through no fault of its own, it will realize that the tax credit
limitation under RR 2-94 is inutile, if not improper. Worse, profit-generating businesses will be put
in a better position if they avail themselves of tax credits denied those that are losing, because no
taxes are due from the latter.42 (Italics in the original; emphasis supplied)
The above was partly incorporated in our ruling in Carlos Superdrug Corporation43 when we
stated preliminarily that—
Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation
of private property. Compelling drugstore owners and establishments to grant the discount will
result in a loss of profit and capital because 1) drugstores impose a mark-up of only 5% to 10%
on branded medicines; and 2) the law failed to provide a scheme whereby drugstores will be
justly compensated for the discount. Examining petitioners’ arguments, it is apparent that what
petitioners are ultimately questioning is the validity of the tax deduction scheme as a
reimbursement mechanism for the twenty percent (20%) discount that they extend to senior
citizens. Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully
reimburse petitioners for the discount privilege accorded to senior citizens. This is because the
discount is treated as a deduction, a tax-deductible expense that is subtracted from the gross
income and results in a lower taxable income. Stated otherwise, it is an amount that is allowed by
law to reduce the income prior to the application of the tax rate to compute the amount of tax
which is due. Being a tax deduction, the discount does not reduce taxes owed on a peso for peso
basis but merely offers a fractional reduction in taxes owed. Theoretically, the treatment of the
discount as a deduction reduces the net income of the private establishments concerned. The
discounts given would have entered the coffers and formed part of the gross sales of the private
establishments, were it not for R.A. No. 9257. The permanent reduction in their total revenues is
a forced subsidy corresponding to the taking of private property for public use or benefit. This
constitutes compensable taking for which petitioners would ordinarily become entitled to a just
compensation. Just compensation is defined as the full and fair equivalent of the property taken
from its owner by the expropriator. The measure is not the taker’s gain but the owner’s loss. The
word just is used to intensify the meaning of the word compensation, and to convey the idea that
the equivalent to be rendered for the property to be taken shall be real, substantial, full and
ample. A tax deduction does not offer full reimbursement of the senior citizen discount. As such,
it would not meet the definition of just compensation. Having said that, this raises the question of
whether the State, in promoting the health and welfare of a special group of citizens, can impose
upon private establishments the burden of partly subsidizing a government program. The Court
believes so.44
This, notwithstanding, we went on to rule in Carlos Superdrug Corporation45 that the 20%
discount and tax deduction scheme is a valid exercise of the police power of the State. The
present case, thus, affords an opportunity for us to clarify the above-quoted statements in Central
Luzon Drug Corporation46 and Carlos Superdrug Corporation.47
First, we note that the above-quoted disquisition on eminent domain in Central Luzon Drug
Corporation48 is obiter dicta and, thus, not binding precedent. As stated earlier, in Central Luzon
Drug Corporation,49 we ruled that the BIR acted ultra vires when it effectively treated the 20%
discount as a tax deduction, under Sections 2.i and 4 of RR No. 2-94, despite the clear wording of
the previous law that the same should be treated as a tax credit. We were, therefore, not
confronted in that case with the issue as to whether the 20% discount is an exercise of police
power or eminent domain. Second, although we adverted to Central Luzon Drug Corporation50in
our ruling in Carlos Superdrug Corporation,51 this referred only to preliminary matters. A fair
reading of Carlos Superdrug Corporation52 would show that we categorically ruled therein that
the 20% discount is a valid exercise of police power. Thus, even if the current law, through its tax
deduction scheme (which abandoned the tax credit scheme under the previous law), does not
provide for a peso for peso reimbursement of the 20% discount given by private establishments,
no constitutional infirmity obtains because, being a valid exercise of police power, payment of just
compensation is not warranted. We have carefully reviewed the basis of our ruling in Carlos
Superdrug Corporation53 and we find no cogent reason to overturn, modify or abandon it. We
also note that petitioners’ arguments are a mere reiteration of those raised and resolved in Carlos
Superdrug Corporation.54 Thus, we sustain Carlos Superdrug Corporation.55
Nonetheless, we deem it proper, in what follows, to amplify our explanation in Carlos Superdrug
Corporation56 as to why the 20% discount is a valid exercise of police power and why it may not,
under the specific circumstances of this case, be considered as an exercise of the power of
eminent domain contrary to the obiter in Central Luzon Drug Corporation.57
Police power versus eminent domain.
Police power is the inherent power of the State to regulate or to restrain the use of liberty and
property for public welfare.58
The only limitation is that the restriction imposed should be reasonable, not oppressive.59
In other words, to be a valid exercise of police power, it must have a lawful subject or objective
and a lawful method of accomplishing the goal.60
Under the police power of the State, "property rights of individuals may be subjected to restraints
and burdens in order to fulfill the objectives of the government."61
The State "may interfere with personal liberty, property, lawful businesses and occupations to
promote the general welfare [as long as] the interference [is] reasonable and not arbitrary."62
Eminent domain, on the other hand, is the inherent power of the State to take or appropriate
private property for public use.63
The Constitution, however, requires that private property shall not be taken without due process
of law and the payment of just compensation.64
Traditional distinctions exist between police power and eminent domain. In the exercise of police
power, a property right is impaired by regulation,65 or the use of property is merely prohibited,
regulated or restricted66 to promote public welfare. In such cases, there is no compensable
taking, hence, payment of just compensation is not required. Examples of these regulations are
property condemned for being noxious or intended for noxious purposes (e.g., a building on the
verge of collapse to be demolished for public safety, or obscene materials to be destroyed in the
interest of public morals)67 as well as zoning ordinances prohibiting the use of property for
purposes injurious to the health, morals or safety of the community (e.g., dividing a city’s territory
into residential and industrial areas).68
It has, thus, been observed that, in the exercise of police power (as distinguished from eminent
domain), although the regulation affects the right of ownership, none of the bundle of rights
which constitute ownership is appropriated for use by or for the benefit of the public.69
On the other hand, in the exercise of the power of eminent domain, property interests are
appropriated and applied to some public purpose which necessitates the payment of just
compensation therefor. Normally, the title to and possession of the property are transferred to the
expropriating authority. Examples include the acquisition of lands for the construction of public
highways as well as agricultural lands acquired by the government under the agrarian reform law
for redistribution to qualified farmer beneficiaries. However, it is a settled rule that the acquisition
of title or total destruction of the property is not essential for "taking" under the power of
eminent domain to be present.70
Examples of these include establishment of easements such as where the land owner is
perpetually deprived of his proprietary rights because of the hazards posed by electric
transmission lines constructed above his property71 or the compelled interconnection of the
telephone system between the government and a private company.72
In these cases, although the private property owner is not divested of ownership or possession,
payment of just compensation is warranted because of the burden placed on the property for the
use or benefit of the public.
The 20% senior citizen discount is an exercise of police power.
It may not always be easy to determine whether a challenged governmental act is an exercise of
police power or eminent domain. The very nature of police power as elastic and responsive to
various social conditions73 as well as the evolving meaning and scope of public use74 and just
compensation75 in eminent domain evinces that these are not static concepts. Because of the
exigencies of rapidly changing times, Congress may be compelled to adopt or experiment with
different measures to promote the general welfare which may not fall squarely within the
traditionally recognized categories of police power and eminent domain. The judicious approach,
therefore, is to look at the nature and effects of the challenged governmental act and decide, on
the basis thereof, whether the act is the exercise of police power or eminent domain. Thus, we
now look at the nature and effects of the 20% discount to determine if it constitutes an exercise
of police power or eminent domain. The 20% discount is intended to improve the welfare of
senior citizens who, at their age, are less likely to be gainfully employed, more prone to illnesses
and other disabilities, and, thus, in need of subsidy in purchasing basic commodities. It may not be
amiss to mention also that the discount serves to honor senior citizens who presumably spent the
productive years of their lives on contributing to the development and progress of the nation. This
distinct cultural Filipino practice of honoring the elderly is an integral part of this law. As to its
nature and effects, the 20% discount is a regulation affecting the ability of private establishments
to price their products and services relative to a special class of individuals, senior citizens, for
which the Constitution affords preferential concern.76
In turn, this affects the amount of profits or income/gross sales that a private establishment can
derive from senior citizens. In other words, the subject regulation affects the pricing, and, hence,
the profitability of a private establishment. However, it does not purport to appropriate or burden
specific properties, used in the operation or conduct of the business of private establishments, for
the use or benefit of the public, or senior citizens for that matter, but merely regulates the pricing
of goods and services relative to, and the amount of profits or income/gross sales that such
private establishments may derive from, senior citizens. The subject regulation may be said to be
similar to, but with substantial distinctions from, price control or rate of return on investment
control laws which are traditionally regarded as police power measures.77
These laws generally regulate public utilities or industries/enterprises imbued with public interest
in order to protect consumers from exorbitant or unreasonable pricing as well as temper
corporate greed by controlling the rate of return on investment of these corporations considering
that they have a monopoly over the goods or services that they provide to the general public. The
subject regulation differs therefrom in that (1) the discount does not prevent the establishments
from adjusting the level of prices of their goods and services, and (2) the discount does not apply
to all customers of a given establishment but only to the class of senior citizens. Nonetheless, to
the degree material to the resolution of this case, the 20% discount may be properly viewed as
belonging to the category of price regulatory measures which affect the profitability of
establishments subjected thereto. On its face, therefore, the subject regulation is a police power
measure. The obiter in Central Luzon Drug Corporation,78 however, describes the 20% discount
as an exercise of the power of eminent domain and the tax credit, under the previous law,
equivalent to the amount of discount given as the just compensation therefor. The reason is that
(1) the discount would have formed part of the gross sales of the establishment were it not for
the law prescribing the 20% discount, and (2) the permanent reduction in total revenues is a
forced subsidy corresponding to the taking of private property for public use or benefit. The flaw
in this reasoning is in its premise. It presupposes that the subject regulation, which impacts the
pricing and, hence, the profitability of a private establishment, automatically amounts to a
deprivation of property without due process of law. If this were so, then all price and rate of
return on investment control laws would have to be invalidated because they impact, at some
level, the regulated establishment’s profits or income/gross sales, yet there is no provision for
payment of just compensation. It would also mean that overnment cannot set price or rate of
return on investment limits, which reduce the profits or income/gross sales of private
establishments, if no just compensation is paid even if the measure is not confiscatory. The obiter
is, thus, at odds with the settled octrine that the State can employ police power measures to
regulate the pricing of goods and services, and, hence, the profitability of business establishments
in order to pursue legitimate State objectives for the common good, provided that the regulation
does not go too far as to amount to "taking."79
In City of Manila v. Laguio, Jr.,80 we recognized that— x x x a taking also could be found if
government regulation of the use of property went "too far." When regulation reaches a certain
magnitude, in most if not in all cases there must be an exercise of eminent domain and
compensation to support the act. While property may be regulated to a certain extent, if
regulation goes too far it will be recognized as a taking. No formula or rule can be devised to
answer the questions of what is too far and when regulation becomes a taking. In Mahon, Justice
Holmes recognized that it was "a question of degree and therefore cannot be disposed of by
general propositions." On many other occasions as well, the U.S. Supreme Court has said that the
issue of when regulation constitutes a taking is a matter of considering the facts in each case. The
Court asks whether justice and fairness require that the economic loss caused by public action
must be compensated by the government and thus borne by the public as a whole, or whether
the loss should remain concentrated on those few persons subject to the public action.81
The impact or effect of a regulation, such as the one under consideration, must, thus, be
determined on a case-to-case basis. Whether that line between permissible regulation under
police power and "taking" under eminent domain has been crossed must, under the specific
circumstances of this case, be subject to proof and the one assailing the constitutionality of the
regulation carries the heavy burden of proving that the measure is unreasonable, oppressive or
confiscatory. The time-honored rule is that the burden of proving the unconstitutionality of a law
rests upon the one assailing it and "the burden becomes heavier when police power is at issue."82
The 20% senior citizen discount has not been shown to be unreasonable, oppressive or
confiscatory.
In Alalayan v. National Power Corporation,83 petitioners, who were franchise holders of electric
plants, challenged the validity of a law limiting their allowable net profits to no more than 12%
per annum of their investments plus two-month operating expenses. In rejecting their plea, we
ruled that, in an earlier case, it was found that 12% is a reasonable rate of return and that
petitioners failed to prove that the aforesaid rate is confiscatory in view of the presumption of
constitutionality.84
We adopted a similar line of reasoning in Carlos Superdrug Corporation85 when we ruled that
petitioners therein failed to prove that the 20% discount is arbitrary, oppressive or confiscatory.
We noted that no evidence, such as a financial report, to establish the impact of the 20%
discount on the overall profitability of petitioners was presented in order to show that they would
be operating at a loss due to the subject regulation or that the continued implementation of the
law would be unconscionably detrimental to the business operations of petitioners. In the case at
bar, petitioners proceeded with a hypothetical computation of the alleged loss that they will
suffer similar to what the petitioners in Carlos Superdrug Corporation86 did. Petitioners went
directly to this Court without first establishing the factual bases of their claims. Hence, the present
recourse must, likewise, fail. Because all laws enjoy the presumption of constitutionality, courts
will uphold a law’s validity if any set of facts may be conceived to sustain it.87
On its face, we find that there are at least two conceivable bases to sustain the subject
regulation’s validity absent clear and convincing proof that it is unreasonable, oppressive or
confiscatory. Congress may have legitimately concluded that business establishments have the
capacity to absorb a decrease in profits or income/gross sales due to the 20% discount without
substantially affecting the reasonable rate of return on their investments considering (1) not all
customers of a business establishment are senior citizens and (2) the level of its profit margins on
goods and services offered to the general public. Concurrently, Congress may have, likewise,
legitimately concluded that the establishments, which will be required to extend the 20%
discount, have the capacity to revise their pricing strategy so that whatever reduction in profits or
income/gross sales that they may sustain because of sales to senior citizens, can be recouped
through higher mark-ups or from other products not subject of discounts. As a result, the
discounts resulting from sales to senior citizens will not be confiscatory or unduly oppressive. In
sum, we sustain our ruling in Carlos Superdrug Corporation88 that the 20% senior citizen
discount and tax deduction scheme are valid exercises of police power of the State absent a clear
showing that it is arbitrary, oppressive or confiscatory.
Conclusion
In closing, we note that petitioners hypothesize, consistent with our previous ratiocinations, that
the discount will force establishments to raise their prices in order to compensate for its impact on
overall profits or income/gross sales. The general public, or those not belonging to the senior
citizen class, are, thus, made to effectively shoulder the subsidy for senior citizens. This, in
petitioners’ view, is unfair.
As already mentioned, Congress may be reasonably assumed to have foreseen this eventuality.
But, more importantly, this goes into the wisdom, efficacy and expediency of the subject law
which is not proper for judicial review. In a way, this law pursues its social equity objective in a
non-traditional manner unlike past and existing direct subsidy programs of the government for
the poor and marginalized sectors of our society. Verily, Congress must be given sufficient leeway
in formulating welfare legislations given the enormous challenges that the government faces
relative to, among others, resource adequacy and administrative capability in implementing social
reform measures which aim to protect and uphold the interests of those most vulnerable in our
society. In the process, the individual, who enjoys the rights, benefits and privileges of living in a
democratic polity, must bear his share in supporting measures intended for the common good.
This is only fair. In fine, without the requisite showing of a clear and unequivocal breach of the
Constitution, the validity of the assailed law must be sustained.
Refutation of the Dissent
The main points of Justice Carpio’s Dissent may be summarized as follows: (1) the discussion on
eminent domain in Central Luzon Drug Corporation89 is not obiter dicta ; (2) allowable taking, in
police power, is limited to property that is destroyed or placed outside the commerce of man for
public welfare; (3) the amount of mandatory discount is private property within the ambit of
Article III, Section 990 of the Constitution; and (4) the permanent reduction in a private
establishment’s total revenue, arising from the mandatory discount, is a taking of private property
for public use or benefit, hence, an exercise of the power of eminent domain requiring the
payment of just compensation. I We maintain that the discussion on eminent domain in Central
Luzon Drug Corporation91 is obiter dicta. As previously discussed, in Central Luzon Drug
Corporation,92 the BIR, pursuant to Sections 2.i and 4 of RR No. 2-94, treated the senior citizen
discount in the previous law, RA 7432, as a tax deduction instead of a tax credit despite the clear
provision in that law which stated –
SECTION 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the
following:
a) The grant of twenty percent (20%) discount from all establishments relative to utilization of
transportation services, hotels and similar lodging establishment, restaurants and recreation
centers and purchase of medicines anywhere in the country: Provided, That private establishments
may claim the cost as tax credit; (Emphasis supplied)
Thus, the Court ruled that the subject revenue regulation violated the law, viz:
The 20 percent discount required by the law to be given to senior citizens is a tax credit, not
merely a tax deduction from the gross income or gross sale of the establishment concerned. A tax
credit is used by a private establishment only after the tax has been computed; a tax deduction,
before the tax is computed. RA 7432 unconditionally grants a tax credit to all covered entities.
Thus, the provisions of the revenue regulation that withdraw or modify such grant are void. Basic
is the rule that administrative regulations cannot amend or revoke the law.93
As can be readily seen, the discussion on eminent domain was not necessary in order to arrive at
this conclusion. All that was needed was to point out that the revenue regulation contravened the
law which it sought to implement. And, precisely, this was done in Central Luzon Drug
Corporation94 by comparing the wording of the previous law vis-à-vis the revenue regulation;
employing the rules of statutory construction; and applying the settled principle that a regulation
cannot amend the law it seeks to implement. A close reading of Central Luzon Drug
Corporation95 would show that the Court went on to state that the tax credit "can be deemed"
as just compensation only to explain why the previous law provides for a tax credit instead of a
tax deduction. The Court surmised that the tax credit was a form of just compensation given to
the establishments covered by the 20% discount. However, the reason why the previous law
provided for a tax credit and not a tax deduction was not necessary to resolve the issue as to
whether the revenue regulation contravenes the law. Hence, the discussion on eminent domain is
obiter dicta.
A court, in resolving cases before it, may look into the possible purposes or reasons that impelled
the enactment of a particular statute or legal provision. However, statements made relative
thereto are not always necessary in resolving the actual controversies presented before it. This was
the case in Central Luzon Drug Corporation96 resulting in that unfortunate statement that the tax
credit "can be deemed" as just compensation. This, in turn, led to the erroneous conclusion, by
deductive reasoning, that the 20% discount is an exercise of the power of eminent domain. The
Dissent essentially adopts this theory and reasoning which, as will be shown below, is contrary to
settled principles in police power and eminent domain analysis. II The Dissent discusses at length
the doctrine on "taking" in police power which occurs when private property is destroyed or
placed outside the commerce of man. Indeed, there is a whole class of police power measures
which justify the destruction of private property in order to preserve public health, morals, safety
or welfare. As earlier mentioned, these would include a building on the verge of collapse or
confiscated obscene materials as well as those mentioned by the Dissent with regard to property
used in violating a criminal statute or one which constitutes a nuisance. In such cases, no
compensation is required. However, it is equally true that there is another class of police power
measures which do not involve the destruction of private property but merely regulate its use. The
minimum wage law, zoning ordinances, price control laws, laws regulating the operation of
motels and hotels, laws limiting the working hours to eight, and the like would fall under this
category. The examples cited by the Dissent, likewise, fall under this category: Article 157 of the
Labor Code, Sections 19 and 18 of the Social Security Law, and Section 7 of the Pag-IBIG Fund
Law. These laws merely regulate or, to use the term of the Dissent, burden the conduct of the
affairs of business establishments. In such cases, payment of just compensation is not required
because they fall within the sphere of permissible police power measures. The senior citizen
discount law falls under this latter category. III The Dissent proceeds from the theory that the
permanent reduction of profits or income/gross sales, due to the 20% discount, is a "taking" of
private property for public purpose without payment of just compensation. At the outset, it must
be emphasized that petitioners never presented any evidence to establish that they were forced to
suffer enormous losses or operate at a loss due to the effects of the assailed law. They came
directly to this Court and provided a hypothetical computation of the loss they would allegedly
suffer due to the operation of the assailed law. The central premise of the Dissent’s argument that
the 20% discount results in a permanent reduction in profits or income/gross sales, or forces a
business establishment to operate at a loss is, thus, wholly unsupported by competent evidence.
To be sure, the Court can invalidate a law which, on its face, is arbitrary, oppressive or
confiscatory.97
But this is not the case here.
In the case at bar, evidence is indispensable before a determination of a constitutional violation
can be made because of the following reasons. First, the assailed law, by imposing the senior
citizen discount, does not take any of the properties used by a business establishment like, say,
the land on which a manufacturing plant is constructed or the equipment being used to produce
goods or services. Second, rather than taking specific properties of a business establishment, the
senior citizen discount law merely regulates the prices of the goods or services being sold to
senior citizens by mandating a 20% discount. Thus, if a product is sold at ₱10.00 to the general
public, then it shall be sold at ₱8.00 ( i.e., ₱10.00 less 20%) to senior citizens. Note that the law
does not impose at what specific price the product shall be sold, only that a 20% discount shall
be given to senior citizens based on the price set by the business establishment. A business
establishment is, thus, free to adjust the prices of the goods or services it provides to the general
public. Accordingly, it can increase the price of the above product to ₱20.00 but is required to sell
it at ₱16.00 (i.e. , ₱20.00 less 20%) to senior citizens. Third, because the law impacts the prices of
the goods or services of a particular establishment relative to its sales to senior citizens, its profits
or income/gross sales are affected. The extent of the impact would, however, depend on the
profit margin of the business establishment on a particular good or service. If a product costs
₱5.00 to produce and is sold at ₱10.00, then the profit98 is ₱5.0099 or a profit margin100 of
50%.101
Under the assailed law, the aforesaid product would have to be sold at ₱8.00 to senior citizens yet
the business would still earn ₱3.00102 or a 30%103 profit margin. On the other hand, if the
product costs ₱9.00 to produce and is required to be sold at ₱8.00 to senior citizens, then the
business would experience a loss of ₱1.00.104
But note that since not all customers of a business establishment are senior citizens, the business
establishment may continue to earn ₱1.00 from non-senior citizens which, in turn, can offset any
loss arising from sales to senior citizens.
Fourth, when the law imposes the 20% discount in favor of senior citizens, it does not prevent
the business establishment from revising its pricing strategy.
By revising its pricing strategy, a business establishment can recoup any reduction of profits or
income/gross sales which would otherwise arise from the giving of the 20% discount. To
illustrate, suppose A has two customers: X, a senior citizen, and Y, a non-senior citizen. Prior to
the law, A sells his products at ₱10.00 a piece to X and Y resulting in income/gross sales of
₱20.00 (₱10.00 + ₱10.00). With the passage of the law, A must now sell his product to X at
₱8.00 (i.e., ₱10.00 less 20%) so that his income/gross sales would be ₱18.00 ( ₱8.00 + ₱10.00) or
lower by ₱2.00. To prevent this from happening, A decides to increase the price of his products to
₱11.11 per piece. Thus, he sells his product to X at ₱8.89 (i.e. , ₱11.11 less 20%) and to Y at
₱11.11. As a result, his income/gross sales would still be ₱20.00105 ( ₱8.89 + ₱11.11). The
capacity, then, of business establishments to revise their pricing strategy makes it possible for
them not to suffer any reduction in profits or income/gross sales, or, in the alternative, mitigate
the reduction of their profits or income/gross sales even after the passage of the law. In other
words, business establishments have the capacity to adjust their prices so that they may remain
profitable even under the operation of the assailed law.
The Dissent, however, states that – The explanation by the majority that private establishments
can always increase their prices to recover the mandatory discount will only encourage private
establishments to adjust their prices upwards to the prejudice of customers who do not enjoy the
20% discount. It was likewise suggested that if a company increases its prices, despite the
application of the 20% discount, the establishment becomes more profitable than it was before
the implementation of R.A. 7432. Such an economic justification is self-defeating, for more
consumers will suffer from the price increase than will benefit from the 20% discount. Even then,
such ability to increase prices cannot legally validate a violation of the eminent domain clause.106
But, if it is possible that the business establishment, by adjusting its prices, will suffer no reduction
in its profits or income/gross sales (or suffer some reduction but continue to operate profitably)
despite giving the discount, what would be the basis to strike down the law? If it is possible that
the business establishment, by adjusting its prices, will not be unduly burdened, how can there be
a finding that the assailed law is an unconstitutional exercise of police power or eminent domain?
That there may be a burden placed on business establishments or the consuming public as a result
of the operation of the assailed law is not, by itself, a ground to declare it unconstitutional for this
goes into the wisdom and expediency of the law.
The cost of most, if not all, regulatory measures of the government on business establishments is
ultimately passed on to the consumers but that, by itself, does not justify the wholesale
nullification of these measures. It is a basic postulate of our democratic system of government
that the Constitution is a social contract whereby the people have surrendered their sovereign
powers to the State for the common good.107
All persons may be burdened by regulatory measures intended for the common good or to serve
some important governmental interest, such as protecting or improving the welfare of a special
class of people for which the Constitution affords preferential concern. Indubitably, the one
assailing the law has the heavy burden of proving that the regulation is unreasonable, oppressive
or confiscatory, or has gone "too far" as to amount to a "taking." Yet, here, the Dissent would
have this Court nullify the law without any proof of such nature.
Further, this Court is not the proper forum to debate the economic theories or realities that
impelled Congress to shift from the tax credit to the tax deduction scheme. It is not within our
power or competence to judge which scheme is more or less burdensome to business
establishments or the consuming public and, thereafter, to choose which scheme the State should
use or pursue. The shift from the tax credit to tax deduction scheme is a policy determination by
Congress and the Court will respect it for as long as there is no showing, as here, that the subject
regulation has transgressed constitutional limitations. Unavoidably, the lack of evidence constrains
the Dissent to rely on speculative and hypothetical argumentation when it states that the 20%
discount is a significant amount and not a minimal loss (which erroneously assumes that the
discount automatically results in a loss when it is possible that the profit margin is greater than
20% and/or the pricing strategy can be revised to prevent or mitigate any reduction in profits or
income/gross sales as illustrated above),108 and not all private establishments make a 20% profit
margin (which conversely implies that there are those who make more and, thus, would not be
greatly affected by this regulation).109
In fine, because of the possible scenarios discussed above, we cannot assume that the 20%
discount results in a permanent reduction in profits or income/gross sales, much less that business
establishments are forced to operate at a loss under the assailed law. And, even if we gratuitously
assume that the 20% discount results in some degree of reduction in profits or income/gross
sales, we cannot assume that such reduction is arbitrary, oppressive or confiscatory. To repeat,
there is no actual proof to back up this claim, and it could be that the loss suffered by a business
establishment was occasioned through its fault or negligence in not adapting to the effects of the
assailed law. The law uniformly applies to all business establishments covered thereunder. There
is, therefore, no unjust discrimination as the aforesaid business establishments are faced with the
same constraints. The necessity of proof is all the more pertinent in this case because, as similarly
observed by Justice Velasco in his Concurring Opinion, the law has been in operation for over nine
years now. However, the grim picture painted by petitioners on the unconscionable losses to be
indiscriminately suffered by business establishments, which should have led to the closure of
numerous business establishments, has not come to pass. Verily, we cannot invalidate the assailed
law based on assumptions and conjectures. Without adequate proof, the presumption of
constitutionality must prevail. IV At this juncture, we note that the Dissent modified its original
arguments by including a new paragraph, to wit:
Section 9, Article III of the 1987 Constitution speaks of private property without any distinction. It
does not state that there should be profit before the taking of property is subject to just
compensation. The private property referred to for purposes of taking could be inherited,
donated, purchased, mortgaged, or as in this case, part of the gross sales of private
establishments. They are all private property and any taking should be attended by corresponding
payment of just compensation. The 20% discount granted to senior citizens belong to private
establishments, whether these establishments make a profit or suffer a loss. In fact, the 20%
discount applies to non-profit establishments like country, social, or golf clubs which are open to
the public and not only for exclusive membership. The issue of profit or loss to the establishments
is immaterial.110
Two things may be said of this argument. First, it contradicts the rest of the arguments of the
Dissent. After it states that the issue of profit or loss is immaterial, the Dissent proceeds to argue
that the 20% discount is not a minimal loss111 and that the 20% discount forces business
establishments to operate at a loss.112
Even the obiter in Central Luzon Drug Corporation,113 which the Dissent essentially adopts and
relies on, is premised on the permanent reduction of total revenues and the loss that business
establishments will be forced to suffer in arguing that the 20% discount constitutes a "taking"
under the power of eminent domain. Thus, when the Dissent now argues that the issue of profit
or loss is immaterial, it contradicts itself because it later argues, in order to justify that there is a
"taking" under the power of eminent domain in this case, that the 20% discount forces business
establishments to suffer a significant loss or to operate at a loss. Second, this argument suffers
from the same flaw as the Dissent's original arguments. It is an erroneous characterization of the
20% discount. According to the Dissent, the 20% discount is part of the gross sales and, hence,
private property belonging to business establishments. However, as previously discussed, the 20%
discount is not private property actually owned and/or used by the business establishment. It
should be distinguished from properties like lands or buildings actually used in the operation of a
business establishment which, if appropriated for public use, would amount to a "taking" under
the power of eminent domain. Instead, the 20% discount is a regulatory measure which impacts
the pricing and, hence, the profitability of business establishments. At the time the discount is
imposed, no particular property of the business establishment can be said to be "taken." That is,
the State does not acquire or take anything from the business establishment in the way that it
takes a piece of private land to build a public road. While the 20% discount may form part of the
potential profits or income/gross sales114 of the business establishment, as similarly characterized
by Justice Bersamin in his Concurring Opinion, potential profits or income/gross sales are not
private property, specifically cash or money, already belonging to the business establishment. They
are a mere expectancy because they are potential fruits of the successful conduct of the business.
Prior to the sale of goods or services, a business establishment may be subject to State
regulations, such as the 20% senior citizen discount, which may impact the level or amount of
profits or income/gross sales that can be generated by such establishment. For this reason, the
validity of the discount is to be determined based on its overall effects on the operations of the
business establishment.
Again, as previously discussed, the 20% discount does not automatically result in a 20%
reduction in profits, or, to align it with the term used by the Dissent, the 20% discount does not
mean that a 20% reduction in gross sales necessarily results. Because (1) the profit margin of a
product is not necessarily less than 20%, (2) not all customers of a business establishment are
senior citizens, and (3) the establishment may revise its pricing strategy, such reduction in profits
or income/gross sales may be prevented or, in the alternative, mitigated so that the business
establishment continues to operate profitably. Thus, even if we gratuitously assume that some
degree of reduction in profits or income/gross sales occurs because of the 20% discount, it does
not follow that the regulation is unreasonable, oppressive or confiscatory because the business
establishment may make the necessary adjustments to continue to operate profitably. No
evidence was presented by petitioners to show otherwise. In fact, no evidence was presented by
petitioners at all. Justice Leonen, in his Concurring and Dissenting Opinion, characterizes "profits"
(or income/gross sales) as an inchoate right. Another way to view it, as stated by Justice Velasco
in his Concurring Opinion, is that the business establishment merely has a right to profits. The
Constitution adverts to it as the right of an enterprise to a reasonable return on investment.115
Undeniably, this right, like any other right, may be regulated under the police power of the State
to achieve important governmental objectives like protecting the interests and improving the
welfare of senior citizens. It should be noted though that potential profits or income/gross sales
are relevant in police power and eminent domain analyses because they may, in appropriate
cases, serve as an indicia when a regulation has gone "too far" as to amount to a "taking" under
the power of eminent domain. When the deprivation or reduction of profits or income/gross sales
is shown to be unreasonable, oppressive or confiscatory, then the challenged governmental
regulation may be nullified for being a "taking" under the power of eminent domain. In such a
case, it is not profits or income/gross sales which are actually taken and appropriated for public
use. Rather, when the regulation causes an establishment to incur losses in an unreasonable,
oppressive or confiscatory manner, what is actually taken is capital and the right of the business
establishment to a reasonable return on investment. If the business losses are not halted because
of the continued operation of the regulation, this eventually leads to the destruction of the
business and the total loss of the capital invested therein. But, again, petitioners in this case failed
to prove that the subject regulation is unreasonable, oppressive or confiscatory.
V.
The Dissent further argues that we erroneously used price and rate of return on investment
control laws to justify the senior citizen discount law. According to the Dissent, only profits from
industries imbued with public interest may be regulated because this is a condition of their
franchises. Profits of establishments without franchises cannot be regulated permanently because
there is no law regulating their profits. The Dissent concludes that the permanent reduction of
total revenues or gross sales of business establishments without franchises is a taking of private
property under the power of eminent domain. In making this argument, it is unfortunate that the
Dissent quotes only a portion of the ponencia – The subject regulation may be said to be similar
to, but with substantial distinctions from, price control or rate of return on investment control
laws which are traditionally regarded as police power measures. These laws generally regulate
public utilities or industries/enterprises imbued with public interest in order to protect consumers
from exorbitant or unreasonable pricing as well as temper corporate greed by controlling the rate
of return on investment of these corporations considering that they have a monopoly over the
goods or services that they provide to the general public. The subject regulation differs therefrom
in that (1) the discount does not prevent the establishments from adjusting the level of prices of
their goods and services, and (2) the discount does not apply to all customers of a given
establishment but only to the class of senior citizens. x x x116
The above paragraph, in full, states –
The subject regulation may be said to be similar to, but with substantial distinctions from, price
control or rate of return on investment control laws which are traditionally regarded as police
power measures. These laws generally regulate public utilities or industries/enterprises imbued
with public interest in order to protect consumers from exorbitant or unreasonable pricing as well
as temper corporate greed by controlling the rate of return on investment of these corporations
considering that they have a monopoly over the goods or services that they provide to the general
public. The subject regulation differs therefrom in that (1) the discount does not prevent the
establishments from adjusting the level of prices of their goods and services, and (2) the discount
does not apply to all customers of a given establishment but only to the class of senior citizens.
Nonetheless, to the degree material to the resolution of this case, the 20% discount may be
properly viewed as belonging to the category of price regulatory measures which affects the
profitability of establishments subjected thereto. (Emphasis supplied)
The point of this paragraph is to simply show that the State has, in the past, regulated prices and
profits of business establishments. In other words, this type of regulatory measures is traditionally
recognized as police power measures so that the senior citizen discount may be considered as a
police power measure as well. What is more, the substantial distinctions between price and rate
of return on investment control laws vis-à-vis the senior citizen discount law provide greater
reason to uphold the validity of the senior citizen discount law. As previously discussed, the ability
to adjust prices allows the establishment subject to the senior citizen discount to prevent or
mitigate any reduction of profits or income/gross sales arising from the giving of the discount. In
contrast, establishments subject to price and rate of return on investment control laws cannot
adjust prices accordingly. Certainly, there is no intention to say that price and rate of return on
investment control laws are the justification for the senior citizen discount law. Not at all. The
justification for the senior citizen discount law is the plenary powers of Congress. The legislative
power to regulate business establishments is broad and covers a wide array of areas and subjects.
It is well within Congress’ legislative powers to regulate the profits or income/gross sales of
industries and enterprises, even those without franchises. For what are franchises but mere
legislative enactments? There is nothing in the Constitution that prohibits Congress from
regulating the profits or income/gross sales of industries and enterprises without franchises. On
the contrary, the social justice provisions of the Constitution enjoin the State to regulate the
"acquisition, ownership, use, and disposition" of property and its increments.117
This may cover the regulation of profits or income/gross sales of all businesses, without
qualification, to attain the objective of diffusing wealth in order to protect and enhance the right
of all the people to human dignity.118
Thus, under the social justice policy of the Constitution, business establishments may be
compelled to contribute to uplifting the plight of vulnerable or marginalized groups in our society
provided that the regulation is not arbitrary, oppressive or confiscatory, or is not in breach of
some specific constitutional limitation. When the Dissent, therefore, states that the "profits of
private establishments which are non-franchisees cannot be regulated permanently, and there is
no such law regulating their profits permanently,"119 it is assuming what it ought to prove. First,
there are laws which, in effect, permanently regulate profits or income/gross sales of
establishments without franchises, and RA 9257 is one such law. And, second, Congress can
regulate such profits or income/gross sales because, as previously noted, there is nothing in the
Constitution to prevent it from doing so. Here, again, it must be emphasized that petitioners
failed to present any proof to show that the effects of the assailed law on their operations has
been unreasonable, oppressive or confiscatory. The permanent regulation of profits or
income/gross sales of business establishments, even those without franchises, is not as
uncommon as the Dissent depicts it to be. For instance, the minimum wage law allows the State
to set the minimum wage of employees in a given region or geographical area. Because of the
added labor costs arising from the minimum wage, a permanent reduction of profits or
income/gross sales would result, assuming that the employer does not increase the prices of his
goods or services. To illustrate, suppose it costs a company ₱5.00 to produce a product and it sells
the same at ₱10.00 with a 50% profit margin. Later, the State increases the minimum wage. As a
result, the company incurs greater labor costs so that it now costs ₱7.00 to produce the same
product. The profit per product of the company would be reduced to ₱3.00 with a profit margin
of 30%. The net effect would be the same as in the earlier example of granting a 20% senior
citizen discount. As can be seen, the minimum wage law could, likewise, lead to a permanent
reduction of profits. Does this mean that the minimum wage law should, likewise, be declared
unconstitutional on the mere plea that it results in a permanent reduction of profits? Taking it a
step further, suppose the company decides to increase the price of its product in order to offset
the effects of the increase in labor cost; does this mean that the minimum wage law, following
the reasoning of the Dissent, is unconstitutional because the consuming public is effectively made
to subsidize the wage of a group of laborers, i.e., minimum wage earners? The same reasoning
can be adopted relative to the examples cited by the Dissent which, according to it, are valid
police power regulations. Article 157 of the Labor Code, Sections 19 and 18 of the Social Security
Law, and Section 7 of the Pag-IBIG Fund Law would effectively increase the labor cost of a
business establishment.1âwphi1 This would, in turn, be integrated as part of the cost of its goods
or services. Again, if the establishment does not increase its prices, the net effect would be a
permanent reduction in its profits or income/gross sales. Following the reasoning of the Dissent
that "any form of permanent taking of private property (including profits or income/gross
sales)120 is an exercise of eminent domain that requires the State to pay just compensation,"121
then these statutory provisions would, likewise, have to be declared unconstitutional. It does not
matter that these benefits are deemed part of the employees’ legislated wages because the net
effect is the same, that is, it leads to higher labor costs and a permanent reduction in the profits
or income/gross sales of the business establishments.122
The point then is this – most, if not all, regulatory measures imposed by the State on business
establishments impact, at some level, the latter’s prices and/or profits or income/gross sales.123
If the Court were to sustain the Dissent’s theory, then a wholesale nullification of such measures
would inevitably result. The police power of the State and the social justice provisions of the
Constitution would, thus, be rendered nugatory. There is nothing sacrosanct about profits or
income/gross sales. This, we made clear in Carlos Superdrug Corporation:124
Police power as an attribute to promote the common good would be diluted considerably if on
the mere plea of petitioners that they will suffer loss of earnings and capital, the questioned
provision is invalidated. Moreover, in the absence of evidence demonstrating the alleged
confiscatory effect of the provision in question, there is no basis for its nullification in view of the
presumption of validity which every law has in its favor.
xxxx
The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive
pricing component of the business. While the Constitution protects property rights petitioners
must the realities of business and the State, in the exercise of police power, can intervene in the
operations of a business which may result in an impairment of property rights in the process.
Moreover, the right to property has a social dimension. While Article XIII of the Constitution
provides the percept for the protection of property, various laws and jurisprudence, particularly on
agrarian reform and the regulation of contracts and public utilities, continously serve as a
reminder for the promotion of public good.
Undeniably, the success of the senior citizens program rests largely on the support imparted by
petitioners and the other private establishments concerned. This being the case, the means
employed in invoking the active participation of the private sector, in order to achieve the purpose
or objective of the law, is reasonably and directly related. Without sufficient proof that Section
4(a) of R.A. No. 9257 is arbitrary, and that the continued implementation of the same would be
unconscionably detrimental to petitioners, the Court will refrain form quashing a legislative
act.125
In conclusion, we maintain that the correct rule in determining whether the subject regulatory
measure has amounted to a "taking" under the power of eminent domain is the one laid down in
Alalayan v. National Power Corporation126 and followed in Carlos Superdurg
Corporation127consistent with long standing principles in police power and eminent domain
analysis. Thus, the deprivation or reduction of profits or income. Gross sales must be clearly
shown to be unreasonable, oppressive or confiscatory. Under the specific circumstances of this
case, such determination can only be made upon the presentation of competent proof which
petitioners failed to do. A law, which has been in operation for many years and promotes the
welfare of a group accorded special concern by the Constitution, cannot and should not be
summarily invalidated on a mere allegation that it reduces the profits or income/gross sales of
business establishments.
WHEREFORE, the Petition is hereby DISMISSED for lack of merit.
SO ORDERED.

G.R. No. L-26521 December 28, 1968

EUSEBIO VILLANUEVA, ET AL., plaintiff-appellee, vs.CITY OF ILOILO, defendants-appellants.
Pelaez, Jalandoni and Jamir for plaintiff-appellees.Assistant City Fiscal Vicente P. Gengos for
defendant-appellant.
CASTRO, J.:
Appeal by the defendant City of Iloilo from the decision of the Court of First Instance of Iloilo
declaring illegal Ordinance 11, series of 1960, entitled, "An Ordinance Imposing Municipal License
Tax On Persons Engaged In The Business Of Operating Tenement Houses," and ordering the City
to refund to the plaintiffs-appellees the sums of collected from them under the said ordinance.
On September 30, 1946 the municipal board of Iloilo City enacted Ordinance 86, imposing license
tax fees as follows: (1) tenement house (casa de vecindad), P25.00 annually; (2) tenement house,
partly or wholly engaged in or dedicated to business in the streets of J.M. Basa, Iznart and
Aldeguer, P24.00 per apartment; (3) tenement house, partly or wholly engaged in business in any
other streets, P12.00 per apartment. The validity and constitutionality of this ordinance were
challenged by the spouses Eusebio Villanueva and Remedies Sian Villanueva, owners of four
tenement houses containing 34 apartments. This Court, in City of Iloilo vs. Remedios Sian
Villanueva and Eusebio Villanueva, L-12695, March 23, 1959, declared the ordinance ultra vires,
"it not appearing that the power to tax owners of tenement houses is one among those clearly
and expressly granted to the City of Iloilo by its Charter."
On January 15, 1960 the municipal board of Iloilo City, believing, obviously, that with the passage
of Republic Act 2264, otherwise known as the Local Autonomy Act, it had acquired the authority
or power to enact an ordinance similar to that previously declared by this Court as ultra vires,
enacted Ordinance 11, series of 1960, hereunder quoted in full:
AN ORDINANCE IMPOSING MUNICIPAL LICENSE TAX ON PERSONS ENGAGED IN THE BUSINESS
OF OPERATING TENEMENT HOUSES
Be it ordained by the Municipal Board of the City of Iloilo, pursuant to the provisions of Republic
Act No. 2264, otherwise known as the Autonomy Law of Local Government, that:
Section 1. — A municipal license tax is hereby imposed on tenement houses in accordance with
the schedule of payment herein provided.
Section 2. — Tenement house as contemplated in this ordinance shall mean any building or
dwelling for renting space divided into separate apartments or accessorias.
Section 3. — The municipal license tax provided in Section 1 hereof shall be as follows:
I. Tenement houses:
(a) Apartment house made of strong materials P20.00 per door p.a.
(b) Apartment house made of mixed materials P10.00 per door p.a.
II Rooming house of strong materials P10.00 per door p.a.
Rooming house of mixed materials P5.00 per door p.a.
III. Tenement house partly or wholly engaged in or dedicated to business in the following streets:
J.M. Basa, Iznart, Aldeguer, Guanco and Ledesma from Plazoleto Gay to Valeria. St. P30.00 per
door p.a.
IV. Tenement house partly or wholly engaged in or dedicated to business in any other street
P12.00 per door p.a.
V. Tenement houses at the streets surrounding the super market as soon as said place is declared
commercial P24.00 per door p.a.
Section 4. — All ordinances or parts thereof inconsistent herewith are hereby amended.
Section 5. — Any person found violating this ordinance shall be punished with a fine note
exceeding Two Hundred Pesos (P200.00) or an imprisonment of not more than six (6) months or
both at the discretion of the Court.
Section 6 — This ordinance shall take effect upon approval.ENACTED, January 15, 1960.
In Iloilo City, the appellees Eusebio Villanueva and Remedios S. Villanueva are owners of five
tenement houses, aggregately containing 43 apartments, while the other appellees and the same
Remedios S. Villanueva are owners of ten apartments. Each of the appellees' apartments has a
door leading to a street and is rented by either a Filipino or Chinese merchant. The first floor is
utilized as a store, while the second floor is used as a dwelling of the owner of the store. Eusebio
Villanueva owns, likewise, apartment buildings for rent in Bacolod, Dumaguete City, Baguio City
and Quezon City, which cities, according to him, do not impose tenement or apartment taxes.
By virtue of the ordinance in question, the appellant City collected from spouses Eusebio
Villanueva and Remedios S. Villanueva, for the years 1960-1964, the sum of P5,824.30, and from
the appellees Pio Sian Melliza, Teresita S. Topacio, and Remedios S. Villanueva, for the years
1960-1964, the sum of P1,317.00. Eusebio Villanueva has likewise been paying real estate taxes
on his property.
On July 11, 1962 and April 24, 1964, the plaintiffs-appellees filed a complaint, and an amended
complaint, respectively, against the City of Iloilo, in the aforementioned court, praying that
Ordinance 11, series of 1960, be declared "invalid for being beyond the powers of the Municipal
Council of the City of Iloilo to enact, and unconstitutional for being violative of the rule as to
uniformity of taxation and for depriving said plaintiffs of the equal protection clause of the
Constitution," and that the City be ordered to refund the amounts collected from them under the
said ordinance.
On March 30, 1966,1 the lower court rendered judgment declaring the ordinance illegal on the
grounds that (a) "Republic Act 2264 does not empower cities to impose apartment taxes," (b) the
same is "oppressive and unreasonable," for the reason that it penalizes owners of tenement
houses who fail to pay the tax, (c) it constitutes not only double taxation, but treble at that and
(d) it violates the rule of uniformity of taxation.
The issues posed in this appeal are:
1. Is Ordinance 11, series of 1960, of the City of Iloilo, illegal because it imposes double taxation?
2. Is the City of Iloilo empowered by the Local Autonomy Act to impose tenement taxes?
3. Is Ordinance 11, series of 1960, oppressive and unreasonable because it carries a penal clause?
4. Does Ordinance 11, series of 1960, violate the rule of uniformity of taxation?
1. The pertinent provisions of the Local Autonomy Act are hereunder quoted:
SEC. 2. Any provision of law to the contrary notwithstanding, all chartered cities, municipalities
and municipal districts shall have authority to impose municipal license taxes or fees upon persons
engaged in any occupation or business, or exercising privileges in chartered cities, municipalities
or municipal districts by requiring them to secure licences at rates fixed by the municipal board or
city council of the city, the municipal council of the municipality, or the municipal district council
of the municipal district; to collect fees and charges for services rendered by the city, municipality
or municipal district; to regulate and impose reasonable fees for services rendered in connection
with any business, profession or occupation being conducted within the city, municipality or
municipal district and otherwise to levy for public purposes, just and uniform taxes, licenses or
fees; Provided, That municipalities and municipal districts shall, in no case, impose any percentage
tax on sales 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;
Provided, however, That no city, municipality or municipal district may levy or impose any of the
following:
(a) Residence tax;
(b) Documentary stamp tax;
(c) Taxes on the business of persons engaged in the printing and publication of any newspaper,
magazine, review or bulletin appearing at regular intervals and having fixed prices for for
subscription and sale, and which is not published primarily for the purpose of publishing
advertisements;
(d) Taxes on persons operating waterworks, irrigation and other public utilities except electric
light, heat and power;
(e) Taxes on forest products and forest concessions;
(f) Taxes on estates, inheritance, gifts, legacies, and other acquisitions mortis causa;
(g) Taxes on income of any kind whatsoever;
(h) Taxes or fees for the registration of motor vehicles and for the issuance of all kinds of licenses
or permits for the driving thereof;
(i) Customs duties registration, wharfage dues on wharves owned by the national government,
tonnage, and all other kinds of customs fees, charges and duties;
(j) Taxes of any kind on banks, insurance companies, and persons paying franchise tax; and
(k) Taxes on premiums paid by owners of property who obtain insurance directly with foreign
insurance companies.
A tax ordinance shall go into effect on the fifteenth day after its passage, unless the ordinance
shall provide otherwise: Provided, however, That the Secretary of Finance shall have authority to
suspend the effectivity of any ordinance within one hundred and twenty days after its passage, if,
in his opinion, the tax or fee therein levied or imposed is unjust, excessive, oppressive, or
confiscatory, and when the said Secretary exercises this authority the effectivity of such ordinance
shall be suspended.
In such event, the municipal board or city council in the case of cities and the municipal council or
municipal district council in the case of municipalities or municipal districts may appeal the
decision of the Secretary of Finance to the court during the pendency of which case the tax levied
shall be considered as paid under protest.
It is now settled that the aforequoted provisions of Republic Act 2264 confer on local
governments broad taxing authority which extends to almost "everything, excepting those which
are mentioned therein," provided that the tax so levied is "for public purposes, just and uniform,"
and does not transgress any constitutional provision or is not repugnant to a controlling statute.2
Thus, when a tax, levied under the authority of a city or municipal ordinance, is not within the
exceptions and limitations aforementioned, the same comes within the ambit of the general rule,
pursuant to the rules of expressio unius est exclusio alterius, and exceptio firmat regulum in
casibus non excepti.
Does the tax imposed by the ordinance in question fall within any of the exceptions provided for
in section 2 of the Local Autonomy Act? For this purpose, it is necessary to determine the true
nature of the tax. The appellees strongly maintain that it is a "property tax" or "real estate
tax,"3and not a "tax on persons engaged in any occupation or business or exercising privileges,"
or a license tax, or a privilege tax, or an excise tax.4 Indeed, the title of the ordinance designates it
as a "municipal license tax on persons engaged in the business of operating tenement houses,"
while section 1 thereof states that a "municipal license tax is hereby imposed on tenement
houses." It is the phraseology of section 1 on which the appellees base their contention that the
tax involved is a real estate tax which, according to them, makes the ordinance ultra vires as it
imposes a levy "in excess of the one per centum real estate tax allowable under Sec. 38 of the
Iloilo City Charter, Com. Act 158."5.
It is our view, contrary to the appellees' contention, that the tax in question is not a real estate
tax. Obviously, the appellees confuse the tax with the real estate tax within the meaning of the
Assessment Law,6 which, although not applicable to the City of Iloilo, has counterpart provisions
in the Iloilo City Charter.7 A real estate tax is a direct tax on the ownership of lands and buildings
or other improvements thereon, not specially exempted,8 and is payable regardless of whether
the property is used or not, although the value may vary in accordance with such factor.9 The tax
is usually single or indivisible, although the land and building or improvements erected thereon
are assessed separately, except when the land and building or improvements belong to separate
owners.10 It is a fixed proportion11 of the assessed value of the property taxed, and requires,
therefore, the intervention of assessors.12 It is collected or payable at appointed times,13 and it
constitutes a superior lien on and is enforceable against the property14 subject to such taxation,
and not by imprisonment of the owner.
The tax imposed by the ordinance in question does not possess the aforestated attributes. It is not
a tax on the land on which the tenement houses are erected, although both land and tenement
houses may belong to the same owner. The tax is not a fixed proportion of the assessed value of
the tenement houses, and does not require the intervention of assessors or appraisers. It is not
payable at a designated time or date, and is not enforceable against the tenement houses either
by sale or distraint. Clearly, therefore, the tax in question is not a real estate tax.
"The spirit, rather than the letter, or an ordinance determines the construction thereof, and the
court looks less to its words and more to the context, subject-matter, consequence and effect.
Accordingly, what is within the spirit is within the ordinance although it is not within the letter
thereof, while that which is in the letter, although not within the spirit, is not within the
ordinance."15 It is within neither the letter nor the spirit of the ordinance that an additional real
estate tax is being imposed, otherwise the subject-matter would have been not merely tenement
houses. On the contrary, it is plain from the context of the ordinance that the intention is to
impose a license tax on the operation of tenement houses, which is a form of business or calling.
The ordinance, in both its title and body, particularly sections 1 and 3 thereof, designates the tax
imposed as a "municipal license tax" which, by itself, means an "imposition or exaction on the
right to use or dispose of property, to pursue a business, occupation, or calling, or to exercise a
privilege."16.
"The character of a tax is not to be fixed by any isolated words that may beemployed in the
statute creating it, but such words must be taken in the connection in which they are used and
the true character is to be deduced from the nature and essence of the subject."17 The subject-
matter of the ordinance is tenement houses whose nature and essence are expressly set forth in
section 2 which defines a tenement house as "any building or dwelling for renting space divided
into separate apartments or accessorias." The Supreme Court, in City of Iloilo vs. Remedios Sian
Villanueva, et al., L-12695, March 23, 1959, adopted the definition of a tenement house18 as
"any house or building, or portion thereof, which is rented, leased, or hired out to be occupied, or
is occupied, as the home or residence of three families or more living independently of each other
and doing their cooking in the premises or by more than two families upon any floor, so living and
cooking, but having a common right in the halls, stairways, yards, water-closets, or privies, or
some of them." Tenement houses, being necessarily offered for rent or lease by their very nature
and essence, therefore constitute a distinct form of business or calling, similar to the hotel or
motel business, or the operation of lodging houses or boarding houses. This is precisely one of the
reasons why this Court, in the said case of City of Iloilo vs. Remedios Sian Villanueva, et al., supra,
declared Ordinance 86 ultra vires, because, although the municipal board of Iloilo City is
empowered, under sec. 21, par. j of its Charter, "to tax, fix the license fee for, and regulate
hotels, restaurants, refreshment parlors, cafes, lodging houses, boarding houses, livery garages,
public warehouses, pawnshops, theaters, cinematographs," tenement houses, which constitute a
different business enterprise,19 are not mentioned in the aforestated section of the City Charter
of Iloilo. Thus, in the aforesaid case, this Court explicitly said:.
"And it not appearing that the power to tax owners of tenement houses is one among those
clearly and expressly granted to the City of Iloilo by its Charter, the exercise of such power cannot
be assumed and hence the ordinance in question is ultra vires insofar as it taxes a tenement house
such as those belonging to defendants." .
The lower court has interchangeably denominated the tax in question as a tenement tax or an
apartment tax. Called by either name, it is not among the exceptions listed in section 2 of the
Local Autonomy Act. On the other hand, the imposition by the ordinance of a license tax on
persons engaged in the business of operating tenement houses finds authority in section 2 of the
Local Autonomy Act which provides that chartered cities have the authority to impose municipal
license taxes or fees upon persons engaged in any occupation or business, or exercising privileges
within their respective territories, and "otherwise to levy for public purposes, just and uniform
taxes, licenses, or fees." .
2. The trial court condemned the ordinance as constituting "not only double taxation but treble at
that," because "buildings pay real estate taxes and also income taxes as provided for in Sec. 182
(A) (3) (s) of the National Internal Revenue Code, besides the tenement tax under the said
ordinance." Obviously, what the trial court refers to as "income taxes" are the fixed taxes on
business and occupation provided for in section 182, Title V, of the National Internal Revenue
Code, by virtue of which persons engaged in "leasing or renting property, whether on their
account as principals or as owners of rental property or properties," are considered "real estate
dealers" and are taxed according to the amount of their annual income.20.
While it is true that the plaintiffs-appellees are taxable under the aforesaid provisions of the
National Internal Revenue Code as real estate dealers, and still taxable under the ordinance in
question, the argument against double taxation may not be invoked. The same tax may be
imposed by the national government as well as by the local government. There is nothing
inherently obnoxious in the exaction of license fees or taxes with respect to the same occupation,
calling or activity by both the State and a political subdivision thereof.21.
The contention that the plaintiffs-appellees are doubly taxed because they are paying the real
estate taxes and the tenement tax imposed by the ordinance in question, is also devoid of merit. It
is a well-settled rule that a license tax may be levied upon a business or occupation although the
land or property used in connection therewith is subject to property tax. The State may collect an
ad valorem tax on property used in a calling, and at the same time impose a license tax on that
calling, the imposition of the latter kind of tax being in no sensea double tax.22.
"In order to constitute double taxation in the objectionable or prohibited sense the same property
must be taxed twice when it should be taxed but once; both taxes must be imposed on the same
property or subject-matter, for the same purpose, by the same State, Government, or taxing
authority, within the same jurisdiction or taxing district, during the same taxing period, and they
must be the same kind or character of tax."23 It has been shown that a real estate tax and the
tenement tax imposed by the ordinance, although imposed by the sametaxing authority, are not
of the same kind or character.
At all events, there is no constitutional prohibition against double taxation in the Philippines.24 It
is something not favored, but is permissible, provided some other constitutional requirement is
not thereby violated, such as the requirement that taxes must be uniform."25.
3. The appellant City takes exception to the conclusion of the lower court that the ordinance is
not only oppressive because it "carries a penal clause of a fine of P200.00 or imprisonment of 6
months or both, if the owner or owners of the tenement buildings divided into apartments do not
pay the tenement or apartment tax fixed in said ordinance," but also unconstitutional as it
subjects the owners of tenement houses to criminal prosecution for non-payment of an obligation
which is purely sum of money." The lower court apparently had in mind, when it made the above
ruling, the provision of the Constitution that "no person shall be imprisoned for a debt or non-
payment of a poll tax."26 It is elementary, however, that "a tax is not a debt in the sense of an
obligation incurred by contract, express or implied, and therefore is not within the meaning of
constitutional or statutory provisions abolishing or prohibiting imprisonment for debt, and a
statute or ordinance which punishes the non-payment thereof by fine or imprisonment is not, in
conflict with that prohibition."27 Nor is the tax in question a poll tax, for the latter is a tax of a
fixed amount upon all persons, or upon all persons of a certain class, resident within a specified
territory, without regard to their property or the occupations in which they may be
engaged.28Therefore, the tax in question is not oppressive in the manner the lower court puts it.
On the other hand, the charter of Iloilo City29 empowers its municipal board to "fix penalties for
violations of ordinances, which shall not exceed a fine of two hundred pesos or six months'
imprisonment, or both such fine and imprisonment for each offense." In Punsalan, et al. vs. Mun.
Board of Manila, supra, this Court overruled the pronouncement of the lower court declaring
illegal and void an ordinance imposing an occupation tax on persons exercising various
professions in the City of Manilabecause it imposed a penalty of fine and imprisonment for its
violation.30.
4. The trial court brands the ordinance as violative of the rule of uniformity of taxation.
"... because while the owners of the other buildings only pay real estate tax and income taxes the
ordinance imposes aside from these two taxes an apartment or tenement tax. It should be noted
that in the assessment of real estate tax all parts of the building or buildings are included so that
the corresponding real estate tax could be properly imposed. If aside from the real estate tax the
owner or owners of the tenement buildings should pay apartment taxes as required in the
ordinance then it will violate the rule of uniformity of taxation.".
Complementing the above ruling of the lower court, the appellees argue that there is "lack of
uniformity" and "relative inequality," because "only the taxpayers of the City of Iloilo are singled
out to pay taxes on their tenement houses, while citizens of other cities, where their councils do
not enact a similar tax ordinance, are permitted to escape such imposition." .
It is our view that both assertions are undeserving of extended attention. This Court has already
ruled that tenement houses constitute a distinct class of property. It has likewise ruled that "taxes
are uniform and equal when imposed upon all property of the same class or character within the
taxing authority."31 The fact, therefore, that the owners of other classes of buildings in the City
of Iloilo do not pay the taxes imposed by the ordinance in question is no argument at all against
uniformity and equality of the tax imposition. Neither is the rule of equality and uniformity
violated by the fact that tenement taxesare not imposed in other cities, for the same rule does not
require that taxes for the same purpose should be imposed in different territorial subdivisions at
the same time.32 So long as the burden of the tax falls equally and impartially on all owners or
operators of tenement houses similarly classified or situated, equality and uniformity of taxation is
accomplished.33 The plaintiffs-appellees, as owners of tenement houses in the City of Iloilo, have
not shown that the tax burden is not equally or uniformly distributed among them, to overthrow
the presumption that tax statutes are intended to operate uniformly and equally.34.
5. The last important issue posed by the appellees is that since the ordinance in the case at bar is a
mere reproduction of Ordinance 86 of the City of Iloilo which was declared by this Court in L-
12695, supra, as ultra vires, the decision in that case should be accorded the effect of res judicata
in the present case or should constitute estoppel by judgment. To dispose of this contention, it
suffices to say that there is no identity of subject-matter in that case andthis case because the
subject-matter in L-12695 was an ordinance which dealt not only with tenement houses but also
warehouses, and the said ordinance was enacted pursuant to the provisions of the City charter,
while the ordinance in the case at bar was enacted pursuant to the provisions of the Local
Autonomy Act. There is likewise no identity of cause of action in the two cases because the main
issue in L-12695 was whether the City of Iloilo had the power under its charter to impose the tax
levied by Ordinance 11, series of 1960, under the Local Autonomy Act which took effect on June
19, 1959, and therefore was not available for consideration in the decision in L-12695 which was
promulgated on March 23, 1959. Moreover, under the provisions of section 2 of the Local
Autonomy Act, local governments may now tax any taxable subject-matter or object not included
in the enumeration of matters removed from the taxing power of local governments.Prior to the
enactment of the Local Autonomy Act the taxes that could be legally levied by local governments
were only those specifically authorized by law, and their power to tax was construed in strictissimi
juris. 35.
ACCORDINGLY, the judgment a quo is reversed, and, the ordinance in question being valid, the
complaint is hereby dismissed. No pronouncement as to costs..
G.R. No. 139786 September 27, 2006
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.CITYTRUST INVESTMENT PHILS., INC.,
respondent.
x---------------------------------------------x
G.R. No. 140857 September 27, 2006
ASIANBANK CORPORATION, petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
Does the twenty percent (20%) final withholding tax (FWT) on a bank's passive income1 form
part of the taxable gross receipts for the purpose of computing the five percent (5%) gross
receipts tax (GRT)? This is the central issue in the present two (2) consolidated petitions for
review.
In G.R. No. 139786, petitioner Commissioner of Internal Revenue (Commissioner) assails the
Court of Appeals Decision dated August 17, 1999 in CA-G.R. SP No. 527072 affirming the Court
of Tax Appeals (CTA) Decision3 ordering the refund or issuance of tax credit certificate in favor of
respondent Citytrust Investment Philippines., Inc. (Citytrust). In G.R. No. 140857, petitioner
Asianbank Corporation (Asianbank) challenges the Court of Appeals Decision dated November
22, 1999 in CA-G.R. SP No. 512484 reversing the CTA Decision5 ordering a tax refund in its
(Asianbank's) favor.
A brief review of the taxation laws provides an adequate backdrop for our subsequent narration
of facts.
Under Section 27(D), formerly Section 24(e)(1) of the National Internal Revenue Code of 1997
(Tax Code), the earnings of banks from passive income are subject to a 20% FWT,6 thus:
(D) Rates of Tax on Certain Passive Incomes –
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and
from Trust Funds and Similar Arrangements, and Royalties. – A final taxat the rate of twenty
percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield
or any other monetary benefit from deposit substitutes and from trust funds and similar
arrangements received by domestic corporation and royalties, derived from sources within the
Philippines: x x x
Apart from the 20% FWT, banks are also subject to the 5% GRT on their gross receipts, which
includes their passive income. Section 121 (formerly Section 119) of the Tax Code reads:
SEC. 121. Tax on banks and Non-bank financial intermediaries. – There shall be collected a tax on
gross receipts derived from sources within the Philippines by all banks and non-bank financial
intermediaries in accordance with the following schedule:
(a) On interest, commissions and discounts from lending activities as well as income from financial
leasing, on the basis of remaining maturities of instruments from which such receipts are derived:
Short-term maturity (not in excess of two [2] years) 5%
Medium-term maturity (over two [2] years but not exceeding four [4] years) 3%
Long-term maturity –
(1) Over four (4) years but not exceeding seven (7) years 1%
(2) Over seven (7) years 0%
(b) On dividends 0%
(c) On royalties, rentals of property, real or personal, profits from exchange and all other items
treated as gross income under Section 32 of this Code 5%
Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru
pretermination, then the maturity period shall be reckoned to end as of the date of
pretermination for purposes of classifying the transaction as short, medium or long-term and the
correct rate of tax shall be applied accordingly.
Nothing in this Code shall preclude the Commissioner from imposing the same tax herein
provided on persons performing similar banking activities.
I - G.R. No. 139786
Citytrust, respondent, is a domestic corporation engaged in quasi-banking activities. In 1994,
Citytrust reported the amount of P110,788,542.30 as its total gross receipts and paid the amount
of P5,539,427.11 corresponding to its 5% GRT.
Meanwhile, on January 30, 1996, the CTA, in Asian Bank Corporation v. Commissioner of Internal
Revenue7 (ASIAN BANK case), ruled that the basis in computing the 5% GRT is the gross receipts
minus the 20% FWT. In other words, the 20% FWT on a bank's passive income does not form
part of the taxable gross receipts.
On July 19, 1996, Citytrust, inspired by the above-mentioned CTA ruling, filed with the
Commissioner a written claim for the tax refund or credit in the amount of P326,007.01. It
alleged that its reported total gross receipts included the 20% FWT on its passive income
amounting to P32,600,701.25. Thus, it sought to be reimbursed of the 5% GRT it paid on the
portion of 20% FWT or the amount of P326,007.01.
On the same date, Citytrust filed a petition for review with the CTA, which eventually granted its
claim.8
On appeal by the Commissioner, the Court of Appeals affirmed the CTA Decision, citing as main
bases Commissioner of Internal Revenue v. Tours Specialist Inc.9 and Commissioner of Internal
Revenue v. Manila Jockey Club,10 holding that monies or receipts that do not redound to the
benefit of the taxpayer are not part of its gross receipts, thus:
Patently, as expostulated by our Supreme Court, monies or receipts that do not redound to the
benefit of the taxpayer are not part of its gross receipts for the purpose of computing its taxable
gross receipts. In Manila Jockey Club, a portion of the wager fund and the ten-peso contribution,
although actually received by the Club, was not considered as part of its gross receipts for the
purpose of imposing the amusement tax. Similarly, in Tours Specialists, the room or hotel charges
actually received by them from the foreign travel agency was, likewise, not included in its gross
receipts for the imposition of the 3% contractor's tax. In both cases, the fees, bets or hotel
charges, as the case may be, were actually received and held in trust by the taxpayers. On the
other hand, the 20% final tax on the Respondent's passive income was already deducted and
withheld by various withholding agents. Hence, the actual or the exact amount received by the
Respondent, as its passive income in the year 1994, was less the 20% final tax already withheld
by various withholding agents. The various withholding agents at source were required under
section 50 (a), of the National Internal Revenue Code of 1986, to withhold the 20% final tax on
certain passive income x x x.
Moreover, under Section 51 (g) of the said Code, all taxes withheld pursuant to the provisions of
this Code and its implementing regulations are considered trust funds and shall be maintained in
a separate account and not commingled with any other funds of the withholding agent.
Accordingly, the 20% final tax withheld against the Respondent's passive income was already
remitted to the Bureau of Internal Revenue, for the corresponding year that the same was actually
withheld and considered final withholding taxes under Section 50 of the same Code. Indubitably,
to include the same to the Respondent's gross receipts for the year 1994 would be to tax twice
the passive income derived by Respondent for the said year, which would constitute double
taxation anathema to our taxation laws.
II - G.R. No. 140857
Asianbank, petitioner, is a domestic corporation also engaged in banking business. For the taxable
quarters ending June 30, 1994 to June 30, 1996, Asianbank filed and remitted to the Bureau of
Internal Revenue (BIR) the 5% GRT on its total gross receipts.
On the strength of the January 30, 1996 CTA Decision in the ASIAN BANK case, Asianbank filed
with the Commissioner a claim for refund of the overpaid GRT amounting to P2,022,485.78.
To toll the running of the two-year prescriptive period for filing of claims, Asianbank also filed a
petition for review with the CTA.
On February 3, 1999, the CTA allowed refund in the reduced amount of P1,345,743.01,11 the
amount proven by Asianbank. Unsatisfied, the Commissioner filed with the Court of Appeals a
petition for review.
On November 22, 1999, the Court of Appeals reversed the CTA Decision and ruled in favor of the
Commissioner, thus:
It is true that Revenue Regulation No. 12-80 provides that the gross receipts tax on banks and
other financial institutions should be based on all items of income actually received. Actual receipt
here is used in opposition to mere accrual. Accrued income refers to income already earned but
not yet received. (Rep. v. Lim Tian Teng Sons & Co., 16 SCRA 584).
But receipt may be actual or constructive. Article 531 of the Civil Code provides that possession is
acquired by the material occupation of a thing or the exercise of a right, or by the fact that it is
subject to the action of one will, or by the proper acts and legal formalities established for
acquiring such right. Moreover, taxation income may be received by the taxpayer himself or by
someone authorized to receive it for him (Art. 532, Civil Code). The 20% final tax withheld from
interest income of banks and other similar institutions is not income that they have not received; it
is simply withheld from them and paid to the government, for their benefit. Thus, the 20%
income tax withheld from the interest income is, in fact, money of the taxpayer bank but paid by
the payor to the government in satisfaction of the bank's obligation to pay the tax on interest
earned. It is the bank's obligation to pay the tax. Hence, the withholding of the said tax and its
payment to the government is for its benefit.
xxx
The case of Collector of Internal Revenue vs. Manila Jockey Club is inapplicable. In that case, a
percentage of the gross receipts to be collected by the Manila Jockey Club was earmarked by law
to be turned over to the Board on Races and distributed as prizes among owners of winning
horses and authorized bonus for jockeys. The Manila Jockey Club itself derives no benefit at all
from earmarked percentage. That is why it cannot be considered as part of its gross receipts.
WHEREFORE, the C.T.A's judgment herein appealed from is hereby REVERSED, and judgment is
hereby rendered DISMISSING the respondent's Petition for Review in C.T.A Case No. 5412.
SO ORDERED.
Hence, the present consolidated petitions.
The Commissioner's arguments in the two (2) petitions may be synthesized as follows:
first, there is no law which excludes the 20% FWT from the taxable gross receipts for the purpose
of computing the 5% GRT;
second, the imposition of the 20% FWT on the bank's passive income and the 5% GRT on its
taxable gross receipts, which include the bank's passive income, does not constitute double
taxation;
third, the ruling by this Court in Manila Jockey Club,12 cited in the ASIAN BANK case, is not
applicable; and
fourth, in the computation of the 5% GRT, the passive income need not be actually received in
order to form part of the taxable gross receipts.
In its Resolution13 dated January 17, 2000, this Court adopted as Citytrust's Comment on the
instant petition for review its Memorandum submitted to the CTA and its Comment submitted to
the Court of Appeals. Citytrust contends therein that: first, Section 4(e) of Revenue Regulations
No. 12-80 dated November 7, 1980 provides that the rates of taxes on the gross receipts of
financial institutions shall be based only on all items of income actually received; and, second, this
Court's ruling in Manila Jockey Club14 is applicable. Asianbank echoes similar arguments.
We rule in favor of the Commissioner.
The issue of whether the 20% FWT on a bank's interest income forms part of the taxable gross
receipts for the purpose of computing the 5% GRT is no longer novel. This has been previously
resolved by this Court in a catena of cases, such as China Banking Corporation v. Court of
Appeals,15 Commissioner of Internal Revenue v. Solidbank Corporation,16 Commissioner of
Internal Revenue v. Bank of Commerce,17 and the latest, Commissioner of Internal Revenue v.
Bank of the Philippine Islands.18
The above cases are unanimous in defining "gross receipts" as "the entire receipts without any
deduction." We quote the Court's enlightening ratiocination in Bank of the Philippines Islands,19
thus:
The Tax Code does not provide a definition of the term "gross receipts". Accordingly, the term is
properly understood in its plain and ordinary meaning and must be taken to comprise of the
entire receipts without any deduction. We, thus, made the following disquisition in Bank of
Commerce:
The word "gross" must be used in its plain and ordinary meaning. It is defined as "whole, entire,
total, without deduction." A common definition is "without deduction." "Gross" is also defined as
"taking in the whole; having no deduction or abatement; whole, total as opposed to a sum
consisting of separate or specified parts." Gross is the antithesis of net. Indeed, in China Banking
Corporation v. Court of Appeals, the Court defined the term in this wise:
As commonly understood, the term "gross receipts" means the entire receipts without any
deduction. Deducting any amount from the gross receipts changes the result, and the meaning,
to net receipts. Any deduction from gross receipts is inconsistent with a law that mandates a tax
on gross receipts, unless the law itself makes an exception. As explained by the Supreme Court of
Pennsylvania in Commonwealth of Pennsylvania v. Koppers Company, Inc. –
Highly refined and technical tax concepts have been developed by the accountant and legal
technician primarily because of the impact of federal income tax legislation. However, this is no
way should affect or control the normal usage of words in the construction of our statutes; and
we see nothing that would require us not to include the proceeds here in question in the gross
receipts allocation unless statutorily such inclusion is prohibited. Under the ordinary basic methods
of handling accounts, the term gross receipts, in the absence of any statutory definition of the
term, must be taken to include the whole total gross receipts without any deductions, x x x.
[Citations omitted] (Emphasis supplied)"
Likewise, in Laclede Gas Co. v. City of St. Louis, the Supreme Court of Missouri held:
The word "gross" appearing in the term "gross receipts," as used in the ordinance, must have
been and was there used as the direct antithesis of the word "net." In its usual and ordinary
meaning, "gross receipts" of a business is the whole and entire amount of the receipts without
deduction, x x x. On the ordinary, "net receipts" usually are the receipts which remain after
deductions are made from the gross amount thereof of the expenses and cost of doing business,
including fixed charges and depreciation. Gross receipts become net receipts after certain proper
deductions are made from the gross. And in the use of the words "gross receipts," the instant
ordinance, or course, precluded plaintiff from first deducting its costs and expenses of doing
business, etc., in arriving at the higher base figure upon which it must pay the 5% tax under this
ordinance. (Emphasis supplied)
xxxxxx
Additionally, we held in Solidbank, to wit:
[W]e note that US cases have persuasive effect in our jurisdiction because Philippine income tax
law is patterned after its US counterpart.
[G]ross receipts with respect to any period means the sum of: (a) The total amount received or
accrued during such period from the sale, exchange, or other disposition of x x x other property
of a kind which would properly be included in the inventory of the taxpayer if on hand at the
close of the taxable year, or property held by the taxpayer primarily for sale to customers in the
ordinary course of its trade or business, and (b) The gross income, attributable to a trade or
business, regularly carried on by the taxpayer, received or accrued during such period x x x.
x x x [B]y gross earnings from operations x x x was intended all operations x x x including
incidental, subordinate, and subsidiary operations, as well as principal operations.
When we speak of the "gross earnings" of a person or corporation, we mean the entire earnings
or receipts of such person or corporation from the business or operation to which we refer.
From these cases, "gross receipts" refer to the total, as opposed to the net income. These are
therefore the total receipts before any deduction for the expenses of management. Webster's
New International Dictionary, in fact, defines gross as "whole or entire."
In China Banking Corporation,20 this Court further explained that the legislative intent to apply
the term in its plain and ordinary meaning may be surmised from a historical perspective of the
levy on gross receipts. From the time the GRT on banks was first imposed in 1946 under Republic
Act No. 3921 and throughout its successive re-enactments,22 the legislature has not established a
definition of the term "gross receipts." Under Revenue Regulations No. 12-80 and No. 17-84, as
well as several numbered rulings, the BIR has consistently ruled that the term "gross receipts" does
not admit of any deduction. This interpretation has remained unchanged throughout the various
re-enactments of the present Section 121 of the Tax Code. On the presumption that the
legislature is familiar with the contemporaneous interpretation of a statute given by the
administrative agency tasked to enforce the statute, the reasonable conclusion is that the
legislature has adopted the BIR's interpretation. In other words, the subsequent re-enactments of
the present Section 121, without changes in the term interpreted by the BIR, confirm that its
interpretation carries out the legislative purpose.
Now, bereft of any laudable statutory basis, Citytrust and Asianbank simply anchor their argument
on Section 4(e) of Revenue Regulations No. 12-80 stating that "the rates of taxes to be imposed
on the gross receipts of such financial institutions shall be based on all items of income actually
received." They contend that since the 20% FWT is withheld at source and is paid directly to the
government by the entities from which the banks derived the income, the same cannot be
considered actually received, hence, must be excluded from the taxable gross receipts.
The argument is bereft of merit.
First, Section 4(e) merely recognizes that income may be taxable either at the time of its actual
receipt or its accrual, depending on the accounting method of the taxpayer. It does not really
exclude accrued interest income from the taxable gross receipts but merely postpones its inclusion
until actual payment of the interest to the lending bank. Thus, while it is true that Section 4(e)
states that "the rates of taxes to be imposed on the gross receipts of such financial institutions
shall be based on all items of income actually received," it goes on to distinguish actual receipt
from accrual, i.e., that "mere accrual shall not be considered, but once payment is received in
such accrual or in case of prepayment, then the amount actually received shall be included in the
tax base of such financial institutions."
And second, Revenue Regulations No. 12-80, issued on November 7, 1980, had been superseded
by Revenue Regulations No. 17-84 issued on October 12, 1984. Section 4(e) of Revenue
Regulations No. 12-80 provides that only items of income actually received shall be included in
the tax base for computing the GRT. On the other hand, Section 7(c) of Revenue Regulations No.
17-84 includes all interest income in computing the GRT, thus:
SECTION 7. Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes. –
(a) The interest earned on Philippine Currency bank deposits and yield from deposit substitutes
subjected to the withholding taxes in accordance with these regulations need not be included in
the gross income in computing the depositor's/investor's income tax liability in accordance with
the provision of Section 29 (b), (c) and (d) of the National Internal Revenue Code, as amended.
(b) Only interest paid or accrued on bank deposits, or yield from deposit substitutes declared for
purposes of imposing the withholding taxes in accordance with these regulations shall be allowed
as interest expense deductible for purposes of computing taxable net income of the payor.
(c) If the recipient of the above-mentioned items of income are financial institutions, the same
shall be included as part of the tax base upon which the gross receipt tax is imposed.
Revenue Regulations No. 17-84 categorically states that if the recipient of the above-mentioned
items of income are financial institutions, the same shall be included as part of the tax base upon
which the gross receipt tax is imposed. There is, therefore, an implied repeal of Section 4(e).
There exists a disparity between Section 4(e) which imposes the GRT only on all items of income
actually received (as opposed to their mere accrual) and Section 7(c) which includes all interest
income (whether actual or accrued) in computing the GRT. As held by this Court in Commissioner
of Internal Revenue v. Solidbank Corporation,23 "the exception having been eliminated, the clear
intent is that the later R.R. No. 17-84 includes the exception within the scope of the general rule."
Clearly, then, the current Revenue Regulations require interest income, whether actually received
or merely accrued, to form part of the bank's taxable gross receipts.2
Moreover, this Court, in Bank of Commerce,25 settled the matter by holding that "actual receipt
may either be physical receipt or constructive receipt," thus:
Actual receipt of interest income is not limited to physical receipt. Actual receipt may either be
physical receipt or constructive receipt. When the depositary bank withholds the final tax to pay
the tax liability of the lending bank, there is prior to the withholding a constructive receipt by the
lending bank of the amount withheld.From the amount constructively received by the lending
bank, the depositary bank deducts the final withholding tax and remits it to the government for
the account of the lending bank. Thus, the interest income actually received by the lending bank,
both physically and constructively, is the net interest plus the amount withheld as final tax.
The concept of a withholding tax on income obviously and necessarily implies that the amount of
the tax withheld comes from the income earned by the taxpayer. Since the amount of the tax
withheld constitute income earned by the taxpayer, then that amount manifestly forms part of
the taxpayer's gross receipts. Because the amount withheld belongs to the taxpayer, he can
transfer its ownership to the government in payment of his tax liability. The amount withheld
indubitably comes from the income of the taxpayer, and thus forms part of his gross receipts.
Corollarily, the Commissioner contends that the imposition of the 20% FWT and 5% GRT does
not constitute double taxation.
We agree.
Double taxation means taxing for the same tax period the same thing or activity twice, when it
should be taxed but once, for the same purpose and with the same kind of character of
tax.26This is not the situation in the case at bar. The GRT is a percentage tax under Title V of the
Tax Code ([Section 121], Other Percentage Taxes), while the FWT is an income tax under Title II of
the Code (Tax on Income). The two concepts are different from each other. In Solidbank
Corporation,27 this Court defined that a percentage tax is a national tax measured by a certain
percentage of the gross selling price or gross value in money of goods sold, bartered or imported;
or of the gross receipts or earnings derived by any person engaged in the sale of services. It is not
subject to withholding. An income tax, on the other hand, is a national tax imposed on the net or
the gross income realized in a taxable year. It is subject to withholding. Thus, there can be no
double taxation here as the Tax Code imposes two different kinds of taxes.
Now, both Asianbank and Citytrust rely on Manila Jockey Club28 in support of their positions. We
are not convinced. In said case, Manila Jockey Club paid amusement tax on its commission in the
total amount of bets called wager funds from the period November 1946 to October 1950. But
such payment did not include the 5 ½ % of the funds which went to the Board on Races and to
the owners of horses and jockeys. We ruled that the gross receipts of the Manila Jockey Club
should not include the 5 ½% because although delivered to the Club, such money has been
especially earmarked by law or regulation for other persons.
The Manila Jockey Club29 does not apply to the cases at bar because what happened there is
earmarking and not withholding. Earmarking is not the same as withholding. Amounts earmarked
do not form part of gross receipts because these are by law or regulation reserved for some
person other than the taxpayer, although delivered or received. On the contrary, amounts
withheld form part of gross receipts because these are in constructive possession and not subject
to any reservation, the withholding agent being merely a conduit in the collection process.30 The
distinction was explained in Solidbank, thus:
"The Manila Jockey Club had to deliver to the Board on Races, horse owners and jockeys amounts
that never became the property of the race track (Manila Jockey Club merely held that these
amounts were held in trust and did not form part of gross receipts). Unlike these amounts, the
interest income that had been withheld for the government became property of the financial
institutions upon constructive possession thereof. Possession was indeed acquired, since it was
ratified by the financial institutions in whose name the act of possession had been executed. The
money indeed belonged to the taxpayers; merely holding it in trust was not enough (A trustee
does not own money received in trust.) It is a basic concept in taxation that such money does not
constitute taxable income to the trustee [China Banking Corp. v. Court of Appeals, supra, p. 27]).
The government subsequently becomes the owner of the money when the financial institutions
pay the FWT to extinguish their obligation to the government. As this Court has held before, this
is the consideration for the transfer of ownership of the FWT from these institutions to the
government (Ibid., p. 26). It is ownership that determines whether interest income forms part of
taxable gross receipts (Ibid., p. 27). Being originally owned by these financial institutions as part of
their interest income, the FWT should form part of their taxable gross receipts.
In fine, let it be stressed that tax exemptions are highly disfavored. It is a governing principle in
taxation that tax exemptions are to be construed in strictissimi juris against the taxpayer and
liberally in favor of the taxing authority and should be granted only by clear and unmistakable
terms.
WHEREFORE, in G.R. No. 139786, we GRANT the petition of the Commissioner of Internal
Revenue and REVERSE the Decision of the Court of Appeals dated August 17, 1999 in CA-G.R. SP
No. 52707.
In G.R. No. 140857, we DENY the petition of Asianbank Corporation and AFFIRM in toto the
Decision of the Court of Appeals in CA-G.R. SP No. 51248. Costs against petitioner.
SO ORDERED.

G.R. No. 147188 September 14, 2004

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.THE ESTATE OF BENIGNO P. TODA, JR.,
Represented by Special Co-administrators Lorna Kapunan and Mario Luza Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the tax planning scheme adopted by a
corporation constitutes tax evasion that would justify an assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision1 of the Court of Appeals of 31 January 2001 in
CA-G.R. SP No. 57799 affirming the 3 January 2000 Decision2 of the Court of Tax Appeals (CTA)
in C.T.A. Case No. 5328,3 which held that the respondent Estate of Benigno P. Toda, Jr. is not
liable for the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount of
₱79,099,999.22 for the year 1989, and ordered the cancellation and setting aside of the
assessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January
1995.
The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of
Internal Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey
commercial building known as Cibeles Building, situated on two parcels of land on Ayala Avenue,
Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its
issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on
which the building stands for an amount of not less than ₱90 million.4
On 30 August 1989, Toda purportedly sold the property for ₱100 million to Rafael A. Altonaga,
who, in turn, sold the same property on the same day to Royal Match Inc. (RMI) for ₱200 million.
These two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by
the same notary public.5
For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of ₱10 million.6
On 16 April 1990, CIC filed its corporate annual income tax return7 for the year 1989, declaring,
among other things, its gain from the sale of real property in the amount of ₱75,728.021. After
crediting withholding taxes of ₱254,497.00, it paid ₱26,341,2078 for its net taxable income of
₱75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for ₱12.5 million,
as evidenced by a Deed of Sale of Shares of Stocks.9 Three and a half years later, or on 16 January
1994, Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice10 and
demand letter to the CIC for deficiency income tax for the year 1989 in the amount of
₱79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should be directed against
the old CIC, and not against the new CIC, which is owned by an entirely different set of
stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC
free from all tax liabilities for the fiscal years 1987-1989.11
On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators
Lorna Kapunan and Mario Luza Bautista, received a Notice of Assessment12dated 9 January 1995
from the Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the
amount of ₱79,099,999.22, computed as follows:
Income Tax – 1989
Net Income per return ₱75,987,725.00
Add: Additional gain on sale of real property taxable under ordinary corporate income but were
substituted with individual capital gains( ₱200M – 100M) 100,000,000.00

Total Net Taxable Income per investigation ₱175,987,725.00

Tax Due thereof at 35% ₱ 61,595,703.75
Less: Payment already made
1. Per return ₱26,595,704.00
2. Thru Capital Gains Tax made by R.A. Altonaga 10,000,000.00 36,595,704.00 Balance of
tax due

₱ 24,999,999.75
Add: 50% Surcharge 12,499,999.88
25% Surcharge6,249,999.94

Total ₱ 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808) 35,349,999.65
TOTAL AMT. DUE & COLLECTIBLE
₱ 79,099,999.22==============
The Estate thereafter filed a letter of protest.13
In the letter dated 19 October 1995,14 the Commissioner dismissed the protest, stating that a
fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda
by covering up the additional gain of ₱100 million, which resulted in the change in the income
structure of the proceeds of the sale of the two parcels of land and the building thereon to an
individual capital gains, thus evading the higher corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for review15 with the CTA alleging that the
Commissioner erred in holding the Estate liable for income tax deficiency; that the inference of
fraud of the sale of the properties is unreasonable and unsupported; and that the right of the
Commissioner to assess CIC had already prescribed.
In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions
actually constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the
buyer of the property from CIC nor the seller of the same property to RMI. The additional gain of
₱100 million (the difference between the second simulated sale for ₱200 million and the first
simulated sale for ₱100 million) realized by CIC was taxed at the rate of only 5% purportedly as
capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The
income tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or
fraudulent. Since such falsity or fraud was discovered by the BIR only on 8 March 1991, the
assessment issued on 9 January 1995 was well within the prescriptive period prescribed by Section
223 (a) of the National Internal Revenue Code of 1986, which provides that tax may be assessed
within ten years from the discovery of the falsity or fraud. With the sale being tainted with fraud,
the separate corporate personality of CIC should be disregarded. Toda, being the registered
owner of the 99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009%
shares registered in the name of the individual directors of CIC, should be held liable for the
deficiency income tax, especially because the gains realized from the sale were withdrawn by him
as cash advances or paid to him as cash dividends. Since he is already dead, his estate shall answer
for his liability.
In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC
committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a
pre-conceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax
evasion. There being no proof of fraudulent transaction, the applicable period for the BIR to
assess CIC is that prescribed in Section 203 of the NIRC of 1986, which is three years after the last
day prescribed by law for the filing of the return. Thus, the government’s right to assess CIC
prescribed on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer
valid. The CTA also ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC
was not in itself sufficient ground for piercing the separate corporate personality of CIC. Hence,
the CTA declared that the Estate is not liable for deficiency income tax of ₱79,099,999.22 and,
accordingly, cancelled and set aside the assessment issued by the Commissioner on 9 January
1995.
In its motion for reconsideration,19 the Commissioner insisted that the sale of the property
owned by CIC was the result of the connivance between Toda and Altonaga. She further alleged
that the latter was a representative, dummy, and a close business associate of the former, having
held his office in a property owned by CIC and derived his salary from a foreign corporation
(Aerobin, Inc.) duly owned by Toda for representation services rendered. The CTA denied20 the
motion for reconsideration, prompting the Commissioner to file a petition for review21 with the
Court of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the
CTA, reasoning that the CTA, being more advantageously situated and having the necessary
expertise in matters of taxation, is "better situated to determine the correctness, propriety, and
legality of the income tax assessments assailed by the Toda Estate."22
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition
invoking the following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD
WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES INSURANCE
CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE
PERSONALITY OF CIBELES INSURANCE CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS
RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by
CIC of the Cibeles property was in connivance with its dummy Rafael Altonaga, who was
financially incapable of purchasing it. She further points out that the documents themselves prove
the fact of fraud in that (1) the two sales were done simultaneously on the same date, 30 August
1989; (2) the Deed of Absolute Sale between Altonaga and RMI was notarized ahead of the
alleged sale between CIC and Altonaga, with the former registered in the Notarial Register of
Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No.
92, Page 20, Book I, Series of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC
received ₱40 million from RMI, and not from Altonaga. The said amount was debited by RMI in its
trial balance as of 30 June 1989 as investment in Cibeles Building. The substantial portion of ₱40
million was withdrawn by Toda through the declaration of cash dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present the income tax
return of Altonaga to prove that the latter is financially incapable of purchasing the Cibeles
property.
To resolve the grounds raised by the Commissioner, the following questions are pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and
3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if
any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion or tax avoidance?
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping
from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This
method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the
other hand, is a scheme used outside of those lawful means and when availed of, it usually
subjects the taxpayer to further or additional civil or criminal liabilities.23
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the
payment of less than that known by the taxpayer to be legally due, or the non-payment of tax
when it is shown that a tax is due; (2) an accompanying state of mind which is described as being
"evil," in "bad faith," "willfull," or "deliberate and not accidental"; and (3) a course of action or
failure of action which is unlawful.24
All these factors are present in the instant case. It is significant to note that as early as 4 May
1989, prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989,
CIC received ₱40 million from RMI,25 and not from Altonaga. That ₱40 million was debited by
RMI and reflected in its trial balance26 as "other inv. – Cibeles Bldg." Also, as of 31 July 1989,
another ₱40 million was debited and reflected in RMI’s trial balance as "other inv. – Cibeles Bldg."
This would show that the real buyer of the properties was RMI, and not the intermediary
Altonaga.lavvphi1.net
The investigation conducted by the BIR disclosed that Altonaga was a close business associate and
one of the many trusted corporate executives of Toda. This information was revealed by Mr. Boy
Prieto, the assistant accountant of CIC and an old timer in the company.27 But Mr. Prieto did not
testify on this matter, hence, that information remains to be hearsay and is thus inadmissible in
evidence. It was not verified either, since the letter-request for investigation of Altonaga was
unserved,28 Altonaga having left for the United States of America in January 1990. Nevertheless,
that Altonaga was a mere conduit finds support in the admission of respondent Estate that the
sale to him was part of the tax planning scheme of CIC. That admission is borne by the records. In
its Memorandum, respondent Estate declared:
Petitioner, however, claims there was a "change of structure" of the proceeds of sale. Admitted
one hundred percent. But isn’t this precisely the definition of tax planning? Change the structure
of the funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free
transfers of property for stock, changing the structure of the property and the tax to be paid. As
long as it is done legally, changing the structure of a transaction to achieve a lower tax is not
against the law. It is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic]
cannot be faulted for wanting to reduce the tax from 35% to 5%.29 [Underscoring supplied].
The scheme resorted to by CIC in making it appear that there were two sales of the subject
properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a
legitimate tax planning. Such scheme is tainted with fraud.
Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all
acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence
justly reposed, resulting in the damage to another, or by which an undue and unconscionable
advantage is taken of another."30
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to
be paid especially that the transfer from him to RMI would then subject the income to only 5%
individual capital gains tax, and not the 35% corporate income tax. Altonaga’s sole purpose of
acquiring and transferring title of the subject properties on the same day was to create a tax
shelter. Altonaga never controlled the property and did not enjoy the normal benefits and
burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business
purpose and economic substance. Doubtless, the execution of the two sales was calculated to
mislead the BIR with the end in view of reducing the consequent income tax liability.lavvphi1.net
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more
on the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax
evasion.31
Generally, a sale or exchange of assets will have an income tax incidence only when it is
consummated.32 The incidence of taxation depends upon the substance of a transaction. The tax
consequences arising from gains from a sale of property are not finally to be determined solely by
the means employed to transfer legal title. Rather, the transaction must be viewed as a whole,
and each step from the commencement of negotiations to the consummation of the sale is
relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by
using the latter as a conduit through which to pass title. To permit the true nature of the
transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would
seriously impair the effective administration of the tax policies of Congress.33
To allow a taxpayer to deny tax liability on the ground that the sale was made through another
and distinct entity when it is proved that the latter was merely a conduit is to sanction a
circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax
purposes.34 The two sale transactions should be treated as a single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as
amended (now 27 (A) of the Tax Reform Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. – (a) Tax on domestic corporations.- A tax is hereby
imposed upon the taxable net income received during each taxable year from all sources by every
corporation organized in, or existing under the laws of the Philippines, and partnerships, no
matter how created or organized but not including general professional partnerships, in
accordance with the following:
Twenty-five percent upon the amount by which the taxable net income does not exceed one
hundred thousand pesos; and
Thirty-five percent upon the amount by which the taxable net income exceeds one hundred
thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5%
individual capital gains tax provided for in Section 34 (h) of the NIRC of 198635 (now 6% under
Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the
deficiency income tax issued by the BIR must be upheld.
Has the period of assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the
case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax
may be assessed, or a proceeding in court after the collection of such tax may be begun without
assessment, at any time within ten years after the discovery of the falsity, fraud or omission:
Provided, That in a fraud assessment which has become final and executory, the fact of fraud
shall be judicially taken cognizance of in the civil or criminal action for collection thereof… .
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3)
failure to file a return, the period within which to assess tax is ten years from discovery of the
fraud, falsification or omission, as the case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion
of the BIR on the tax consequence of the two sale transactions.36 Thus, the BIR was amply
informed of the transactions even prior to the execution of the necessary documents to effect the
transfer. Subsequently, the two sales were openly made with the execution of public documents
and the declaration of taxes for 1989. However, these circumstances do not negate the existence
of fraud. As earlier discussed those two transactions were tainted with fraud. And even assuming
arguendo that there was no fraud, we find that the income tax return filed by CIC for the year
1989 was false. It did not reflect the true or actual amount gained from the sale of the Cibeles
property. Obviously, such was done with intent to evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten
years from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity
thereof was claimed to have been discovered only on 8 March 1991.37 The assessment for the
1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the
correct assessment for deficiency income tax was well within the prescriptive period.
Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation?
A corporation has a juridical personality distinct and separate from the persons owning or
composing it. Thus, the owners or stockholders of a corporation may not generally be made to
answer for the liabilities of a corporation and vice versa. There are, however, certain instances in
which personal liability may arise. It has been held in a number of cases that personal liability of a
corporate director, trustee, or officer along, albeit not necessarily, with the corporation may
validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence
in directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its
stockholders, or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action.38
It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he
knowingly and voluntarily held himself personally liable for all the tax liabilities of CIC and the
buyer for the years 1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks
specifically provides:
g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or
obligations, contingent or otherwise, for taxes, sums of money or insurance claims other than
those reported in its audited financial statement as of December 31, 1989, attached hereto as
"Annex B" and made a part hereof. The business of Cibeles has at all times been conducted in full
compliance with all applicable laws, rules and regulations. SELLER undertakes and agrees to hold
the BUYER and Cibeles free from any and all income tax liabilities of Cibeles for the fiscal years
1987, 1988 and 1989.39 [Underscoring Supplied].
When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all
income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily
held himself personally liable therefor. Respondent estate cannot, therefore, deny liability for CIC’s
deficiency income tax for the year 1989 by invoking the separate corporate personality of CIC,
since its obligation arose from Toda’s contractual undertaking, as contained in the Deed of Sale of
Shares of Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the
Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and
another one is hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to pay
₱79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989, plus
legal interest from 1 May 1994 until the amount is fully paid.
Costs against respondent.
SO ORDERED.
G.R. No. L-17725 February 28, 1962
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs.MAMBULAO LUMBER COMPANY, ET AL.,
defendants-appellants.
Office of the Solicitor General for plaintiff-appellee.Arthur Tordesillas for defendants-appellants.
BARRERA, J.:
From the decision of the Court of First Instance of Manila (in Civil Case No. 34100) ordering it to
pay to plaintiff Republic of the Philippines the sum of P4,802.37 with 6% interest thereon from
the date of the filing of the complaint until fully paid, plus costs, defendant Mambulao Lumber
Company interposed the present appeal.1
The facts of the case are briefly stated in the decision of the trial court, to wit: .
The facts of this case are not contested and may be briefly summarized as follows: (a) under the
first cause of action, for forest charges covering the period from September 10, 1952 to May 24,
1953, defendants admitted that they have a liability of P587.37, which liability is covered by a
bond executed by defendant General Insurance & Surety Corporation for Mambulao Lumber
Company, jointly and severally in character, on July 29, 1953, in favor of herein plaintiff; (b) under
the second cause of action, both defendants admitted a joint and several liability in favor of
plaintiff in the sum of P296.70, also covered by a bond dated November 27, 1953; and (c) under
the third cause of action, both defendants admitted a joint and several liability in favor of plaintiff
for P3,928.30, also covered by a bond dated July 20, 1954. These three liabilities aggregate to
P4,802.37. If the liability of defendants in favor of plaintiff in the amount already mentioned is
admitted, then what is the defense interposed by the defendants? The defense presented by the
defendants is quite unusual in more ways than one. It appears from Exh. 3 that from July 31,
1948 to December 29, 1956, defendant Mambulao Lumber Company paid to the Republic of the
Philippines P8,200.52 for 'reforestation charges' and for the period commencing from April 30,
1947 to June 24, 1948, said defendant paid P927.08 to the Republic of the Philippines for
'reforestation charges'. These reforestation were paid to the plaintiff in pursuance of Section 1 of
Republic Act 115 which provides that there shall be collected, in addition to the regular forest
charges provided under Section 264 of Commonwealth Act 466 known as the National Internal
Revenue Code, the amount of P0.50 on each cubic meter of timber... cut out and removed from
any public forest for commercial purposes. The amount collected shall be expended by the
director of forestry, with the approval of the secretary of agriculture and commerce, for
reforestation and afforestation of watersheds, denuded areas ... and other public forest lands,
which upon investigation, are found needing reforestation or afforestation .... The total amount
of the reforestation charges paid by Mambulao Lumber Company is P9,127.50, and it is the
contention of the defendant Mambulao Lumber Company that since the Republic of the
Philippines has not made use of those reforestation charges collected from it for reforesting the
denuded area of the land covered by its license, the Republic of the Philippines should refund said
amount, or, if it cannot be refunded, at least it should be compensated with what Mambulao
Lumber Company owed the Republic of the Philippines for reforestation charges. In line with this
thought, defendant Mambulao Lumber Company wrote the director of forestry, on February 21,
1957 letter Exh. 1, in paragraph 4 of which said defendant requested "that our account with your
bureau be credited with all the reforestation charges that you have imposed on us from July 1,
1947 to June 14, 1956, amounting to around P2,988.62 ...". This letter of defendant Mambulao
Lumber Company was answered by the director of forestry on March 12, 1957, marked Exh. 2, in
which the director of forestry quoted an opinion of the secretary of justice, to the effect that he
has no discretion to extend the time for paying the reforestation charges and also explained why
not all denuded areas are being reforested.
The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by defendant-
appellant company to plaintiff-appellee as reforestation charges from 1947 to 1956 may be set
off or applied to the payment of the sum of P4,802.37 as forest charges due and owing from
appellant to appellee. It is appellant's contention that said sum of P9,127.50, not having been
used in the reforestation of the area covered by its license, the same is refundable to it or may be
applied in compensation of said sum of P4,802.37 due from it as forest charges.1äwphï1.ñët
We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115, provides:
SECTION 1. There shall be collected, in addition to the regular forest charges provided for under
Section two hundred and sixty-four of Commonwealth Act Numbered Four Hundred Sixty-six,
known as the National Internal Revenue Code, the amount of fifty centavos on each cubic meter
of timber for the first and second groups and forty centavos for the third and fourth groups cut
out and removed from any public forest for commercial purposes. The amount collected shall be
expended by the Director of Forestry, with the approval of the Secretary of Agriculture and
Natural Resources (commerce), for reforestation and afforestation of watersheds, denuded areas
and cogon and open lands within forest reserves, communal forest, national parks, timber lands,
sand dunes, and other public forest lands, which upon investigation, are found needing
reforestation or afforestation, or needing to be under forest cover for the growing of economic
trees for timber, tanning, oils, gums, and other minor forest products or medicinal plants, or for
watersheds protection, or for prevention of erosion and floods and preparation of necessary plans
and estimate of costs and for reconnaisance survey of public forest lands and for such other
expenses as may be deemed necessary for the proper carrying out of the purposes of this Act.
All revenues collected by virtue of, and pursuant to, the provisions of the preceding paragraph
and from the sale of barks, medical plants and other products derived from plantations as herein
provided shall constitute a fund to be known as Reforestation Fund, to be expended exclusively in
carrying out the purposes provided for under this Act. All provincial or city treasurers and their
deputies shall act as agents of the Director of Forestry for the collection of the revenues or
incomes derived from the provisions of this Act. (Emphasis supplied.)
Under this provision, it seems quite clear that the amount collected as reforestation charges from
a timber licenses or concessionaire shall constitute a fund to be known as the Reforestation Fund,
and that the same shall be expended by the Director of Forestry, with the approval of the
Secretary of Agriculture and Natural Resources for the reforestation or afforestation, among
others, of denuded areas which, upon investigation, are found to be needing reforestation or
afforestation. Note that there is nothing in the law which requires that the amount collected as
reforestation charges should be used exclusively for the reforestation of the area covered by the
license of a licensee or concessionaire, and that if not so used, the same should be refunded to
him. Observe too, that the licensee's area may or may not be reforested at all, depending on
whether the investigation thereof by the Director of Forestry shows that said area needs
reforestation. The conclusion seems to be that the amount paid by a licensee as reforestation
charges is in the nature of a tax which forms a part of the Reforestation Fund, payable by him
irrespective of whether the area covered by his license is reforested or not. Said fund, as the law
expressly provides, shall be expended in carrying out the purposes provided for thereunder,
namely, the reforestation or afforestation, among others, of denuded areas needing reforestation
or afforestation.
Appellant maintains that the principle of a compensation in Article 1278 of the new Civil Code2is
applicable, such that the sum of P9,127.50 paid by it as reforestation charges may compensate its
indebtedness to appellee in the sum of P4,802.37 as forest charges. But in the view we take of
this case, appellant and appellee are not mutually creditors and debtors of each other.
Consequently, the law on compensation is inapplicable. On this point, the trial court correctly
observed: .
Under Article 1278, NCC, compensation should take place when two persons in their own right
are creditors and debtors of each other. With respect to the forest charges which the defendant
Mambulao Lumber Company has paid to the government, they are in the coffers of the
government as taxes collected, and the government does not owe anything, crystal clear that the
Republic of the Philippines and the Mambulao Lumber Company are not creditors and debtors of
each other, because compensation refers to mutual debts. ..
And the weight of authority is to the effect that internal revenue taxes, such as the forest charges
in question, can be the subject of set-off or compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state or municipality to one who is
liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since
they do not arise out of the contract or transaction sued on. ... (80 C.J.S. 73-74. ) .
The general rule, based on grounds of public policy is well-settled that no set-off is admissible
against demands for taxes levied for general or local governmental purposes. The reason on
which the general rule is based, is that taxes are not in the nature of contracts between the party
and party but grow out of a duty to, and are the positive acts of the government, to the making
and enforcing of which, the personal consent of individual taxpayers is not required. ... If the
taxpayer can properly refuse to pay his tax when called upon by the Collector, because he has a
claim against the governmental body which is not included in the tax levy, it is plain that some
legitimate and necessary expenditure must be curtailed. If the taxpayer's claim is disputed, the
collection of the tax must await and abide the result of a lawsuit, and meanwhile the financial
affairs of the government will be thrown into great confusion. (47 Am. Jur. 766-767.)
WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in all respects,
with costs against the defendant-appellant. So ordered.
G.R. No. L-18994 June 29, 1963
MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner, vs.HON. LORENZO C.
GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte, and SIMEONA K. PRICE,
as Administratrix of the Intestate Estate of the late Walter Scott Price, respondents.
Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.Benedicto and Martinez
for respondents.
LABRADOR, J.:
This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of
Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and for an
order in this Court directing the respondent court below to execute the judgment in favor of the
Government against the estate of Walter Scott Price for internal revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January
30, 1960, this Court declared as final and executory the order for the payment by the estate of
the estate and inheritance taxes, charges and penalties, amounting to P40,058.55, issued by the
Court of First Instance of Leyte in, special proceedings No. 14 entitled "In the matter of the
Intestate Estate of the Late Walter Scott Price." In order to enforce the claims against the estate
the fiscal presented a petition dated June 21, 1961, to the court below for the execution of the
judgment. The petition was, however, denied by the court which held that the execution is not
justifiable as the Government is indebted to the estate under administration in the amount of
P262,200. The orders of the court below dated August 20, 1960 and September 28, 1960,
respectively, are as follows:
Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price, Administratrix
of the estate of her late husband Walter Scott Price and Director Zoilo Castrillo of the Bureau of
Lands dated September 19, 1956 and acknowledged before Notary Public Salvador V. Esguerra,
legal adviser in Malacañang to Executive Secretary De Leon dated December 14, 1956, the note
of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated August 2, 1958, directing the
latter to pay to Mrs. Price the sum ofP368,140.00, and an extract of page 765 of Republic Act
No. 2700 appropriating the sum of P262.200.00 for the payment to the Leyte Cadastral Survey,
Inc., represented by the administratrix Simeona K. Price, as directed in the above note of the
President. Considering these facts, the Court orders that the payment of inheritance taxes in the
sum of P40,058.55 due the Collector of Internal Revenue as ordered paid by this Court on July 5,
1960 in accordance with the order of the Supreme Court promulgated July 30, 1960 in G.R. No.
L-14674, be deducted from the amount of P262,200.00 due and payable to the Administratrix
Simeona K. Price, in this estate, the balance to be paid by the Government to her without further
delay. (Order of August 20, 1960)
The Court has nothing further to add to its order dated August 20, 1960 and it orders that the
payment of the claim of the Collector of Internal Revenue be deferred until the Government shall
have paid its accounts to the administratrix herein amounting to P262,200.00. It may not be
amiss to repeat that it is only fair for the Government, as a debtor, to its accounts to its citizens-
creditors before it can insist in the prompt payment of the latter's account to it, specially taking
into consideration that the amount due to the Government draws interests while the credit due
to the present state does not accrue any interest. (Order of September 28, 1960)
The petition to set aside the above orders of the court below and for the execution of the claim of
the Government against the estate must be denied for lack of merit. The ordinary procedure by
which to settle claims of indebtedness against the estate of a deceased person, as an inheritance
tax, is for the claimant to present a claim before the probate court so that said court may order
the administrator to pay the amount thereof. To such effect is the decision of this Court in
Aldamiz vs. Judge of the Court of First Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949,
thus:
. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the payment
of debts and expenses of administration. The proper procedure is for the court to order the sale of
personal estate or the sale or mortgage of real property of the deceased and all debts or expenses
of administrator and with the written notice to all the heirs legatees and devisees residing in the
Philippines, according to Rule 89, section 3, and Rule 90, section 2. And when sale or mortgage
of real estate is to be made, the regulations contained in Rule 90, section 7, should be complied
with.1äwphï1.ñët
Execution may issue only where the devisees, legatees or heirs have entered into possession of
their respective portions in the estate prior to settlement and payment of the debts and expenses
of administration and it is later ascertained that there are such debts and expenses to be paid, in
which case "the court having jurisdiction of the estate may, by order for that purpose, after
hearing, settle the amount of their several liabilities, and order how much and in what manner
each person shall contribute, and may issue execution if circumstances require" (Rule 89, section
6; see also Rule 74, Section 4; Emphasis supplied.) And this is not the instant case.
The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle
the estate of a deceased person, the properties belonging to the estate are under the jurisdiction
of the court and such jurisdiction continues until said properties have been distributed among the
heirs entitled thereto. During the pendency of the proceedings all the estate is in custodia legis
and the proper procedure is not to allow the sheriff, in case of the court judgment, to seize the
properties but to ask the court for an order to require the administrator to pay the amount due
from the estate and required to be paid.
Another ground for denying the petition of the provincial fiscal is the fact that the court having
jurisdiction of the estate had found that the claim of the estate against the Government has been
recognized and an amount of P262,200 has already been appropriated for the purpose by a
corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim of the
Government for inheritance taxes and the claim of the intestate for services rendered have already
become overdue and demandable is well as fully liquidated. Compensation, therefore, takes place
by operation of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil
Code, and both debts are extinguished to the concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes
effect by operation of law, and extinguished both debts to the concurrent amount, eventhough
the creditors and debtors are not aware of the compensation.
It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes
against the estate of the deceased Walter Scott Price. Furthermore, the petition for certiorari and
mandamus is not the proper remedy for the petitioner. Appeal is the remedy.
The petition is, therefore, dismissed, without costs.

G.R. No. L-67649 June 28, 1988

 ENGRACIO FRANCIA, petitioner, vs.INTERMEDIATE APPELLATE COURT and HO FERNANDEZ,
respondents.

GUTIERREZ, JR., J.:

The petitioner invokes legal and equitable grounds to reverse the questioned decision of the
Intermediate Appellate Court, to set aside the auction sale of his property which took place on
December 5, 1977, and to allow him to recover a 203 square meter lot which was, sold at public
auction to Ho Fernandez and ordered titled in the latter's name.
The antecedent facts are as follows:
Engracio Francia is the registered owner of a residential lot and a two-story house built upon it
situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an
area of about 328 square meters, is described and covered by Transfer Certificate of Title No.
4739 (37795) of the Registry of Deeds of Pasay City.
On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the
Republic of the Philippines for the sum of P4,116.00 representing the estimated amount
equivalent to the assessed value of the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5,
1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant to
Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy
a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at that time helping his
uncle ship bananas.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for
Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739
(37795) and the issuance in his name of a new certificate of title. Upon verification through his
lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by the
City Treasurer on December 11, 1978. The auction sale and the final bill of sale were both
annotated at the back of TCT No. 4739 (37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his
complaint on January 24, 1980.
On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the amended
complaint and ordering:
(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title in favor of the
defendant Ho Fernandez over the parcel of land including the improvements thereon, subject to
whatever encumbrances appearing at the back of TCT No. 4739 (37795) and ordering the same
TCT No. 4739 (37795) cancelled.
(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's fees. (p. 30,
Record on Appeal)
The Intermediate Appellate Court affirmed the decision of the lower court in toto.
Hence, this petition for review.
Francia prefaced his arguments with the following assignments of grave errors of law:
I
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW IN NOT
HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX DELINQUENCY
WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS INDEBTED TO THE
FORMER.
II
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS ERROR
IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED THAT AN
AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977 TO SATISFY AN
ALLEGED TAX DELINQUENCY OF P2,400.00.
III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS ERROR AND
GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF P2,400.00 PAID BY
RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO SHOCK ONE'S CONSCIENCE
AMOUNTING TO FRAUD AND A DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW,
AND CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)
We gave due course to the petition for a more thorough inquiry into the petitioner's allegations
that his property was sold at public auction without notice to him and that the price paid for the
property was shockingly inadequate, amounting to fraud and deprivation without due process of
law.
A careful review of the case, however, discloses that Mr. Francia brought the problems raised in
his petition upon himself. While we commiserate with him at the loss of his property, the law and
the facts militate against the grant of his petition. We are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his land
was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of
law as of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of persons, who in
their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278,
Civil Code). The circumstances of the case do not satisfy the requirements provided by Article
1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time a principal
creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have consistently ruled that there can
be no off-setting of taxes against the claims that the taxpayer may have against the government.
A person cannot refuse to pay a tax on the ground that the government owes him an amount
equal to or greater than the tax being collected. The collection of a tax cannot await the results of
a lawsuit against the government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal
Revenue Taxes can not be the subject of set-off or compensation. We stated that:
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state or municipality to one who is
liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since
they do not arise out of the contract or transaction sued on. ... (80 C.J.S., 7374). "The general rule
based on grounds of public policy is well-settled that no set-off admissible against demands for
taxes levied for general or local governmental purposes. The reason on which the general rule is
based, is that taxes are not in the nature of contracts between the party and party but grow out
of duty to, and are the positive acts of the government to the making and enforcing of which, the
personal consent of individual taxpayers is not required. ..."
We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because
he has a claim against the governmental body not included in the tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "...
internal revenue taxes can not be the subject of compensation: Reason: government and taxpayer
are not mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a
"claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off."
There are other factors which compel us to rule against the petitioner. The tax was due to the city
government while the expropriation was effected by the national government. Moreover, the
amount of P4,116.00 paid by the national government for the 125 square meter portion of his lot
was deposited with the Philippine National Bank long before the sale at public auction of his
remaining property. Notice of the deposit dated September 28, 1977 was received by the
petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about
the P4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy
matter to withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus
aborting the sale at public auction.
Petitioner had one year within which to redeem his property although, as well be shown later, he
claimed that he pocketed the notice of the auction sale without reading it.
Petitioner contends that "the auction sale in question was made without complying with the
mandatory provisions of the statute governing tax sale. No evidence, oral or otherwise, was
presented that the procedure outlined by law on sales of property for tax delinquency was
followed. ... Since defendant Ho Fernandez has the affirmative of this issue, the burden of proof
therefore rests upon him to show that plaintiff was duly and properly notified ... .(Petition for
Review, Rollo p. 18; emphasis supplied)
We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the
burden of proof to show that there was compliance with all the prescribed requisites for a tax
sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
xxx xxx xxx
... [D]ue process of law to be followed in tax proceedings must be established by proof and the
general rule is that the purchaser of a tax title is bound to take upon himself the burden of
showing the regularity of all proceedings leading up to the sale. (emphasis supplied)
There is no presumption of the regularity of any administrative action which results in depriving a
taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular
Government, 19 Phil. 261). This is actually an exception to the rule that administrative
proceedings are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal prerequisites have
been complied with, the petitioner can not, however, deny that he did receive the notice for the
auction sale. The records sustain the lower court's finding that:
[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not properly
notified of the auction sale. Surprisingly, however, he admitted in his testimony that he received
the letter dated November 21, 1977 (Exhibit "I") as shown by his signature (Exhibit "I-A") thereof.
He claimed further that he was not present on December 5, 1977 the date of the auction sale
because he went to Iligan City. As long as there was substantial compliance with the requirements
of the notice, the validity of the auction sale can not be assailed ... .
We quote the following testimony of the petitioner on cross-examination, to wit:
Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified you that the
property in question shall be sold at public auction to the highest bidder on December 5, 1977
pursuant to Sec. 74 of PD 464. Will you tell the Court whether you received the original of this
letter?
A. I just signed it because I was not able to read the same. It was just sent by mail carrier.
Q. So you admit that you received the original of Exhibit I and you signed upon receipt thereof but
you did not read the contents of it?
A. Yes, sir, as I was in a hurry.
Q. After you received that original where did you place it?
A. I placed it in the usual place where I place my mails.
Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he
ignored such notice. By his very own admission that he received the notice, his now coming to
court assailing the validity of the auction sale loses its force.
Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross
inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v.
Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See
also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held that "alleged gross
inadequacy of price is not material when the law gives the owner the right to redeem as when a
sale is made at public auction, upon the theory that the lesser the price, the easier it is for the
owner to effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:
... [R]espondent treasurer now claims that the prices for which the lands were sold are
unconscionable considering the wide divergence between their assessed values and the amounts
for which they had been actually sold. However, while in ordinary sales for reasons of equity a
transaction may be invalidated on the ground of inadequacy of price, or when such inadequacy
shocks one's conscience as to justify the courts to interfere, such does not follow when the law
gives to the owner the right to redeem, as when a sale is made at public auction, upon the theory
that the lesser the price the easier it is for the owner to effect the redemption. And so it was aptly
said: "When there is the right to redeem, inadequacy of price should not be material, because the
judgment debtor may reacquire the property or also sell his right to redeem and thus recover the
loss he claims to have suffered by reason of the price obtained at the auction sale."
The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et
al. (188 Wash. 162, 61 P. 2d, 1290):
If mere inadequacy of price is held to be a valid objection to a sale for taxes, the collection of
taxes in this manner would be greatly embarrassed, if not rendered altogether impracticable. In
Black on Tax Titles (2nd Ed.) 238, the correct rule is stated as follows: "where land is sold for
taxes, the inadequacy of the price given is not a valid objection to the sale." This rule arises from
necessity, for, if a fair price for the land were essential to the sale, it would be useless to offer the
property. Indeed, it is notorious that the prices habitually paid by purchasers at tax sales are
grossly out of proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73
P. 367, 369).
In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P.
555):
Like most cases of this character there is here a certain element of hardship from which we would
be glad to relieve, but do so would unsettle long-established rules and lead to uncertainty and
difficulty in the collection of taxes which are the life blood of the state. We are convinced that the
present rules are just, and that they bring hardship only to those who have invited it by their own
neglect.
We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in
value. Precisely because of the widening of Buendia Avenue in Pasay City, which necessitated the
expropriation of adjoining areas, real estate values have gone up in the area. However, the price
quoted by the petitioner for a 203 square meter lot appears quite exaggerated. At any rate, the
foregoing reasons which answer the petitioner's claims lead us to deny the petition.
And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are
no strong considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for
14 years from 1963 up to the date of the auction sale. He claims to have pocketed the notice of
sale without reading it which, if true, is still an act of inexplicable negligence. He did not withdraw
from the expropriation payment deposited with the Philippine National Bank an amount sufficient
to pay for the back taxes. The petitioner did not pay attention to another notice sent by the City
Treasurer on November 3, 1978, during the period of redemption, regarding his tax delinquency.
There is furthermore no showing of bad faith or collusion in the purchase of the property by Mr.
Fernandez. The petitioner has no standing to invoke equity in his attempt to regain the property
by belatedly asking for the annulment of the sale.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision of
the respondent court is affirmed.
SO ORDERED.