Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-59431 July 25, 1984
ANTERO M. SISON, JR., petitioner,
vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA,
Deputy Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner,
Bureau of Internal Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO,
Chairman, Commissioner on Audit, and CESAR E. A. VIRATA, Minister of
Finance, respondents.
Antero Sison for petitioner and for his own behalf.
The Solicitor General for respondents.

FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or prohibition proceeding

1 on the
validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The assailed provision further amends
Section 21 of the National Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a) taxable
compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other
monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual partner in the

Petitioner 3 as taxpayer alleges that by virtue thereof, "he

would be unduly discriminated against by the imposition of higher rates of tax upon his income arising
from the exercise of his profession vis-a-vis those which are imposed upon fixed income or salaried
individual taxpayers. 4He characterizes the above sction as arbitrary amounting to class legislation,
oppressive and capricious in character 5 For petitioner, therefore, there is a transgression of both the
equal protection and due process clauses 6 of the Constitution as well as of the rule requiring uniformity in
taxation. 7
net profits of taxable partnership, (f) adjusted gross income.

The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days
from notice. Such an answer, after two extensions were granted the Office of the Solicitor General,
was filed on May 28, 1982. 8The facts as alleged were admitted but not the allegations which to their
mind are "mere arguments, opinions or conclusions on the part of the petitioner, the truth [for them] being
those stated [in their] Special and Affirmative Defenses." 9 The answer then affirmed: "Batas Pambansa
Big. 135 is a valid exercise of the State's power to tax. The authorities and cases cited while correctly
quoted or paraghraph do not support petitioner's stand." 10 The prayer is for the dismissal of the petition for lack of merit.
This Court finds such a plea more than justified. The petition must be dismissed.
1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so
clearly set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to private
enterprise and initiative and which the government was called upon to enter optionally, and only
'because it was better equipped to administer for the public welfare than is any private individual or
group of individuals,' continue to lose their well-defined boundaries and to be absorbed within
activities that the government must undertake in its sovereign capacity if it is to meet the increasing
social challenges of the times." 11 Hence the need for more revenues. The power to tax, an inherent prerogative, has to be
availed of to assure the performance of vital state functions. It is the source of the bulk of public funds. To praphrase a recent decision, taxes
being the lifeblood of the government, their prompt and certain availability is of the essence. 12

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 of government." 13 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 properly rights, both the due
process and equal protection clauses inay properly be invoked, all 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." 14 In
a separate opinion in Graves v. New York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized it as "a
flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free use of absolutes." 16 This is merely to emphasize that
it is riot 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 Holmess pen: 'The power to tax is not the power to destroy while
this Court sits." 17 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 declare and adjudge it null. The injury 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 or its face, he has not
made out a case. This is merely to adhere to the authoritative doctrine that were the due process
and equal protection clauses are invoked, considering that they arc not fixed rules but rather broad
standards, there is a need for of such persuasive character as would lead to such a conclusion.
Absent such a showing, the presumption of validity must prevail. 18
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. 19
6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this
constitutional mandate whether the assailed act is in the exercise of the lice power or the power of
eminent domain is to demonstrated that the governmental act assailed, far from being inspired by
the attainment of the common weal was prompted by the spirit of hostility, or at the very least,
discrimination that finds no support in reason. It suffices then that the laws operate equally and
uniformly on all persons under similar circumstances or that all persons must be treated in the same
manner, the conditions not being different, both in the privileges conferred and the liabilities
imposed. Favoritism and undue preference cannot be allowed. For the principle is that equal
protection and security shall be given to every person under circumtances which if not Identical are
analogous. If law be looked upon in terms of burden or charges, those that fall within a class should
be treated in the same fashion, whatever restrictions cast on some in the group equally binding on
the rest." 20 That same formulation applies as well to taxation measures. The equal protection clause is,
of course, inspired by the noble concept of approximating the Ideal of the laws benefits being available to
all and the affairs of men being governed by that serene and impartial uniformity, which is of the very
essence of the Idea of law. There is, however, wisdom, as well as realism in these words of Justice
Frankfurter: "The equality at which the 'equal protection' clause aims is not a disembodied equality. The
Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws are not abstract propositions.
They do not relate to abstract units A, B and C, but are expressions of policy arising out of specific
difficulties, address to the attainment of specific ends by the use of specific remedies. The Constitution
does not require things which are different in fact or opinion to be treated in law as though they were the
same."21 Hence the constant reiteration of the view that classification if rational in character is allowable.
As a matter of fact, in a leading case of Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes, went
so far as to hold "at any rate, it is inherent in the power to tax that a state be free to select the subjects of
taxation, and it has been repeatedly held that 'inequalities which result from a singling out of one
particular class for taxation, or exemption infringe no constitutional limitation.'" 23

7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The
rule of taxation shag be uniform and equitable." 24 This requirement is met according to Justice Laurel
in Philippine Trust Company v. Yatco, 25 decided in 1940, when the tax "operates with the same force and
effect in every place where the subject may be found. " 26 He likewise added: "The rule of uniformity does
not call for perfect uniformity or perfect equality, because this is hardly attainable." 27 The problem of
classification did not present itself in that case. It did not arise until nine years later, when the Supreme
Court held: "Equality and uniformity in taxation means that all taxable articles or kinds of property of the
same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation, ... . 28 As clarified by Justice Tuason, where "the
differentiation" complained of "conforms to the practical dictates of justice and equity" it "is not
discriminatory within the meaning of this clause and is therefore uniform." 29 There is quite a similarity then
to the standard of equal protection for all that is required is that the tax "applies equally to all persons,
firms and corporations placed in similar situation." 30
8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the
distinction between a tax rate and a tax base. There is no legal objection to a broader tax base or
taxable income by eliminating all deductible items and at the same time reducing the applicable tax
rate. Taxpayers may be classified into different categories. To repeat, it. is enough that the
classification must rest upon substantial distinctions that make real differences. In the case of the
gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of classification
is the susceptibility of the income to the application of generalized rules removing all deductible
items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of
them. Taxpayers who are recipients of compensation income are set apart as a class. As there is
practically no overhead expense, these taxpayers are e not entitled to make deductions for income
tax purposes because they are in the same situation more or less. On the other hand, in the case of
professionals in the practice of their calling and businessmen, there is no uniformity in the costs or
expenses necessary to produce their income. It would not be just then to disregard the disparities by
giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the
basis of gross income. There is ample justification then for the Batasang Pambansa to adopt the
gross system of income taxation to compensation income, while continuing the system of net income
taxation as regards professional and business income.
9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of
factual foundation to show the arbitrary character of the assailed provision; 31 (2) the force of
controlling doctrines on due process, equal protection, and uniformity in taxation and (3) the
reasonableness of the distinction between compensation and taxable net income of professionals and
businessman certainly not a suspect classification,
WHEREFORE, the petition is dismissed. Costs against petitioner.
Makasiar, Concepcion, Jr., Guerero, Melencio-Herrera, Escolin, Relova, Gutierrez, Jr., De la Fuente
and Cuevas, JJ., concur.
Teehankee, J., concurs in the result.
Plana, J., took no part.

SPECIAL FIRST DIVISION

PHILIPPINE HEALTH CARE G.R. No. 167330
PROVIDERS, INC.,
Petitioner, Present:

PUNO, C.J., Chairperson,

CORONA,
- v e r s u s - CHICO-NAZARIO,*
LEONARDO-DE CASTRO and
BERSAMIN, JJ.
COMMISSIONER OF
INTERNAL REVENUE,
Respondent. Promulgated:
September 18, 2009
x - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
R E S O LUTIO N
CORONA, J.:
ARTICLE II
Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right to health
of the people and instill health consciousness among them.
ARTICLE XIII
Social Justice and Human Rights
Section 11. 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. The State
shall endeavor to provide free medical care to paupers. [1]

For resolution are a motion for reconsideration and supplemental motion for
reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by
petitioner Philippine Health Care Providers, Inc.[2]
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is [t]o
establish, maintain, conduct and operate a prepaid group practice health
care delivery system or a health maintenance organization to take care of
the sick and disabled persons enrolled in the health care plan and to
provide for the administrative, legal, and financial responsibilities of the
organization. Individuals enrolled in its health care programs pay an
annual membership fee and are entitled to various preventive, diagnostic
and curative medical services provided by its duly licensed physicians,

specialists and other professional technical staff participating in the

group practice health delivery system at a hospital or clinic owned,
operated or accredited by it.
xxx xxx xxx
On January 27, 2000, respondent Commissioner of Internal
Revenue [CIR] sent petitioner a formal demand letter and the
corresponding assessment notices demanding the payment of deficiency
taxes, including surcharges and interest, for the taxable years 1996 and
1997 in the total amount ofP224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment was
imposed on petitioners health care agreement with the members of its
health care program pursuant to Section 185 of the 1997 Tax Code xxxx
xxx xxx xxx
Petitioner protested the assessment in a letter dated February 23,
2000. As respondent did not act on the protest, petitioner filed a petition
for review in the Court of Tax Appeals (CTA) seeking the cancellation of
the deficiency VAT and DST assessments.

On April 5, 2002, the CTA rendered a decision, the dispositive

portion of which read:
WHEREFORE, in view of the foregoing, the instant
Petition for Review is PARTIALLY GRANTED. Petitioner
is hereby ORDERED to PAY the deficiency VAT
amounting to P22,054,831.75 inclusive of 25% surcharge
plus 20% interest from January 20, 1997 until fully paid for
the 1996 VAT deficiency and P31,094,163.87 inclusive of
25% surcharge plus 20% interest from January 20, 1998
until fully paid for the 1997 VAT deficiency. Accordingly,
VAT Ruling No. [231]-88 is declared void and without
force and effect. The 1996 and 1997 deficiency DST
assessment against petitioner is hereby CANCELLED
AND SET ASIDE. Respondent is ORDERED to DESIST
from collecting the said DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals
(CA)] insofar as it cancelled the DST assessment. He claimed that
petitioners health care agreement was a contract of insurance subject to
DST under Section 185 of the 1997 Tax Code.

On August 16, 2004, the CA rendered its decision. It held that

petitioners health care agreement was in the nature of a non-life
insurance contract subject to DST.
WHEREFORE, the petition for review is
GRANTED. The Decision of the Court of Tax Appeals,
insofar as it cancelled and set aside the 1996 and 1997
deficiency documentary stamp tax assessment and ordered
petitioner to desist from collecting the same is REVERSED
and SET ASIDE.
Respondent is ordered to pay the amounts
of P55,746,352.19 andP68,450,258.73 as deficiency
Documentary Stamp Tax for 1996 and 1997, respectively,
plus 25% surcharge for late payment and 20% interest per
annum from January 27, 2000, pursuant to Sections 248
and 249 of the Tax Code, until the same shall have been
fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence,
petitioner filed this case.
xxx xxx xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed
the CAs decision. We held that petitioners health care agreement during the
pertinent period was in the nature of non-life insurance which is a contract of
indemnity, citing Blue Cross Healthcare, Inc. v. Olivares[3] and Philamcare Health
Systems, Inc. v. CA.[4] We also ruled that petitioners contention that it is a health
maintenance organization (HMO) and not an insurance company is irrelevant
because contracts between companies like petitioner and the beneficiaries under
their plans are treated as insurance contracts. Moreover, DST is not a tax on the
business transacted but an excise on the privilege, opportunity or facility offered at
exchanges for the transaction of the business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration
and supplemental motion for reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National Internal Revenue of 1997
is imposed only on a company engaged in the business of fidelity
bonds and other insurance policies. Petitioner, as an HMO, is a
service provider, not an insurance company.

(b) The Court, in dismissing the appeal in CIR v. Philippine National

Bank, affirmed in effect the CAs disposition that health care
services are not in the nature of an insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from items
subject to DST is clear, especially in the light of the amendments
made in the DST law in 2002.
(e) Assuming arguendo that petitioners agreements are contracts of
indemnity, they are not those contemplated under Section 185.
(f) Assuming arguendo that petitioners agreements are akin to health
insurance, health insurance is not covered by Section 185.
(g) The agreements do not fall under the phrase other branch of
insurance mentioned in Section 185.
(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under RA [5] 9480 for the
taxable year 2005 and all prior years. Therefore, the questioned
assessments on the DST are now rendered moot and academic. [6]

Oral arguments were held in Baguio City on April 22, 2009. The parties
submitted their memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time that it
availed of a tax amnesty under RA 9480[7] (also known as the Tax Amnesty Act of
2007) by fully paying the amount of P5,127,149.08 representing 5% of its net
worth as of the year ending December 31, 2005.[8]
We find merit in petitioners motion for reconsideration.
Petitioner was formally registered and incorporated with the Securities and
Exchange Commission on June 30, 1987.[9] It is engaged in the dispensation of the
following medical services to individuals who enter into health care agreements
with it:
Preventive medical services such as periodic monitoring of health
problems, family planning counseling, consultation and advices on diet,
exercise and other healthy habits, and immunization;

Diagnostic medical services such as routine physical

examinations, x-rays, urinalysis, fecalysis, complete blood count, and the
like and
Curative medical services which pertain to the performing of
other remedial and therapeutic processes in the event of an injury or
sickness on the part of the enrolled member.[10]

Individuals enrolled in its health care program pay an annual membership

fee. Membership is on a year-to-year basis. The medical services are dispensed to
enrolled members in a hospital or clinic owned, operated or accredited by
petitioner, through physicians, medical and dental practitioners under contract with
it. It negotiates with such health care practitioners regarding payment schemes,
financing and other procedures for the delivery of health services. Except in cases
of emergency, the professional services are to be provided only by petitioner's
physicians, i.e. those directly employed by it[11] or whose services are contracted by
it.[12] Petitioner also provides hospital services such as room and board
accommodation, laboratory services, operating rooms, x-ray facilities and general
nursing care.[13] If and when a member avails of the benefits under the agreement,
petitioner pays the participating physicians and other health care providers for the
services rendered, at pre-agreed rates.[14]
To avail of petitioners health care programs, the individual members are
required to sign and execute a standard health care agreement embodying the terms
and conditions for the provision of the health care services. The same agreement
contains the various health care services that can be engaged by the enrolled
member, i.e., preventive, diagnostic and curative medical services. Except for the
curative aspect of the medical service offered, the enrolled member may actually
make use of the health care services being offered by petitioner at any time.

HEALTH MAINTENANCE ORGANIZATIONS

ARE NOT ENGAGED IN THE INSURANCE
BUSINESS

We said in our June 12, 2008 decision that it is irrelevant that petitioner is an
HMO and not an insurer because its agreements are treated as insurance contracts

and the DST is not a tax on the business but an excise on the privilege, opportunity
or facility used in the transaction of the business.[15]
Petitioner, however, submits that it is of critical importance to characterize
the business it is engaged in, that is, to determine whether it is an HMO or an
insurance company, as this distinction is indispensable in turn to the issue of
whether or not it is liable for DST on its health care agreements.[16]
A second hard look at the relevant law and jurisprudence convinces the
Court that the arguments of petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997)
provides:
Section 185. Stamp tax on fidelity bonds and other insurance
policies. On all policies of insurance or bonds or obligations of the
nature of indemnity for loss, damage, or liability made or renewed
by any person, association or company or corporation transacting
the business ofaccident, fidelity, employers liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler,or other branch of
insurance (except life, marine, inland, and fire insurance), and all
bonds, undertakings, or recognizances, conditioned for the performance
of the duties of any office or position, for the doing or not doing of
anything therein specified, and on all obligations guaranteeing the
validity or legality of any bond or other obligations issued by any
province, city, municipality, or other public body or organization, and on
all obligations guaranteeing the title to any real estate, or guaranteeing
any mercantile credits, which may be made or renewed by any such
person, company or corporation, there shall be collected a documentary
stamp tax of fifty centavos (P0.50) on each four pesos (P4.00), or
fractional part thereof, of the premium charged. (Emphasis supplied)

It is a cardinal rule in statutory construction that no word, clause, sentence,

provision or part of a statute shall be considered surplusage or superfluous,
meaningless, void and insignificant. To this end, a construction which renders
every word operative is preferred over that which makes some words idle and
nugatory.[17] This principle is expressed in the maxim Ut magis valeat quam
pereat,that is, we choose the interpretation which gives effect to the whole of the
statute its every word.[18]

From the language of Section 185, it is evident that two requisites must
concur before the DST can apply, namely: (1) the document must be a policy of
insurance or an obligation in the nature of indemnity and (2) the maker
should be transacting the business of accident, fidelity, employers liability, plate,
glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch
of insurance (except life, marine, inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or The National Health
Insurance Act of 1995), an HMO is an entity that provides, offers or arranges for
coverage of designated health services needed by plan members for a fixed prepaid
premium.[19] The payments do not vary with the extent, frequency or type of
services provided.
The question is: was petitioner, as an HMO, engaged in the business of
insurance during the pertinent taxable years? We rule that it was not.
Section 2 (2) of PD[20] 1460 (otherwise known as the Insurance Code)
enumerates what constitutes doing an insurance business or transacting an
insurance business:
a)

making or proposing to make, as insurer, any insurance contract;

b)

making or proposing to make, as surety, any contract of suretyship

as a vocation and not as merely incidental to any other legitimate
business or activity of the surety;

c)

doing any kind of business, including a reinsurance business,

specifically recognized as constituting the doing of an insurance
business within the meaning of this Code;

d)

doing or proposing to do any business in substance equivalent to

any of the foregoing in a manner designed to evade the provisions
of this Code.

In the application of the provisions of this Code, the fact that no

profit is derived from the making of insurance contracts, agreements or
transactions or that no separate or direct consideration is received
therefore, shall not be deemed conclusive to show that the making
thereof does not constitute the doing or transacting of an insurance
business.

Various courts in the United States, whose jurisprudence has a persuasive

effect on our decisions,[21] have determined that HMOs are not in the insurance
business. One test that they have applied is whether the assumption of risk and
indemnification of loss (which are elements of an insurance business) are the
principal object and purpose of the organization or whether they are merely
incidental to its business. If these are the principal objectives, the business is that
of insurance. But if they are merely incidental and service is the principal purpose,
then the business is not insurance.
Applying the principal object and purpose test, [22] there is significant
American case law supporting the argument that a corporation (such as an HMO,
whether or not organized for profit), whose main object is to provide the members
of a group with health services, is not engaged in the insurance business.
The rule was enunciated in Jordan v. Group Health Association[23] wherein
the Court of Appeals of the District of Columbia Circuit held that Group Health
Association should not be considered as engaged in insurance activities since it
was created primarily for the distribution of health care services rather than the
assumption of insurance risk.
xxx Although Group Healths activities may be considered in one aspect
as creating security against loss from illness or accident more truly they
constitute the quantity purchase of well-rounded, continuous medical
service by its members. xxx The functions of such an organization are
not identical with those of insurance or indemnity companies. The
latter are concerned primarily, if not exclusively, with risk and the
consequences of its descent, not with service, or its extension in kind,
quantity or distribution; with the unusual occurrence, not the daily
routine of living. Hazard is predominant. On the other hand, the
cooperative is concerned principally with getting service rendered to
its members and doing so at lower prices made possible by quantity
purchasing and economies in operation. Its primary purpose is to
reduce the cost rather than the risk of medical care; to broaden the
service to the individual in kind and quantity; to enlarge the number
receiving it; to regularize it as an everyday incident of living, like
purchasing food and clothing or oil and gas, rather than merely
protecting against the financial loss caused by extraordinary and
unusual occurrences, such as death, disaster at sea, fire and
tornado. It is, in this instance, to take care of colds, ordinary aches and
pains, minor ills and all the temporary bodily discomforts as well as the
more serious and unusual illness. To summarize, the distinctive
features of the cooperative are the rendering of service, its extension,

the bringing of physician and patient together, the preventive

features, the regularization of service as well as payment, the
substantial reduction in cost by quantity purchasing in short, getting
the medical job done and paid for; not, except incidentally to these
features, the indemnification for cost after the services is rendered.
Except the last, these are not distinctive or generally characteristic
of the insurance arrangement. There is, therefore, a substantial
difference between contracting in this way for the rendering of service,
even on the contingency that it be needed, and contracting merely to
stand its cost when or after it is rendered.
That an incidental element of risk distribution or assumption may
be present should not outweigh all other factors. If attention is focused
only on that feature, the line between insurance or indemnity and other
types of legal arrangement and economic function becomes faint, if not
extinct. This is especially true when the contract is for the sale of goods
or services on contingency. But obviously it was not the purpose of the
insurance statutes to regulate all arrangements for assumption or
distribution of risk. That view would cause them to engulf practically all
contracts, particularly conditional sales and contingent service
agreements. The fallacy is in looking only at the risk element, to the
exclusion of all others present or their subordination to it. The
question turns, not on whether risk is involved or assumed, but on
whether that or something else to which it is related in the particular
plan is its principal object purpose.[24] (Emphasis supplied)

In California Physicians Service v. Garrison,[25] the California court felt that,

after scrutinizing the plan of operation as a whole of the corporation, it was service
rather than indemnity which stood as its principal purpose.
There is another and more compelling reason for holding that the
service is not engaged in the insurance business. Absence or presence
of assumption of risk or peril is not the sole test to be applied in
determining its status. The question, more broadly, is whether,
looking at the plan of operation as a whole, service rather than
indemnity is its principal object and purpose. Certainly the objects
and purposes of the corporation organized and maintained by the
California physicians have a wide scope in the field of social
service. Probably there is no more impelling need than that of
adequate medical care on a voluntary, low-cost basis for persons of
small income. The medical profession unitedly is endeavoring to
meet that need. Unquestionably this is service of a high order and
not indemnity.[26] (Emphasis supplied)

American courts have pointed out that the main difference between an HMO
and an insurance company is that HMOs undertake to provide or arrange for the

provision of medical services through participating physicians while insurance

companies simply undertake to indemnify the insured for medical expenses
incurred up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v. Horizon
Blue Cross and Blue Shield of New Jersey[27] is clear on this point:
The basic distinction between medical service corporations and
ordinary health and accident insurers is that the former undertake to
provide
prepaid
medical
services through
participating
physicians, thus relieving subscribers of any further financial burden,
while the latter only undertake to indemnify an insured for medical
expenses up to, but not beyond, the schedule of rates contained in the
policy.
xxx xxx xxx
The primary purpose of a medical service corporation, however, is
an undertaking to provide physicians who will render services to
subscribers on a prepaid basis. Hence, if there are no physicians
participating in the medical service corporations plan, not only will
the subscribers be deprived of the protection which they might
reasonably have expected would be provided,but the corporation
will, in effect, be doing business solely as a health and accident
indemnity insurer without having qualified as such and rendering itself
subject to the more stringent financial requirements of the General
Insurance Laws.
A participating provider of health care services is one who agrees
in writing to render health care services to or for persons covered by a
contract issued by health service corporation in return for which the
health service corporation agrees to make payment directly to the
participating provider.[28] (Emphasis supplied)

Consequently, the mere presence of risk would be insufficient to override the

primary purpose of the business to provide medical services as needed, with
payment made directly to the provider of these services. [29] In short, even if
petitioner assumes the risk of paying the cost of these services even if significantly
more than what the member has prepaid, it nevertheless cannot be considered as
being engaged in the insurance business.
By the same token, any indemnification resulting from the payment for
services rendered in case of emergency by non-participating health providers
would still be incidental to petitioners purpose of providing and arranging for
health care services and does not transform it into an insurer.To fulfill its

obligations to its members under the agreements, petitioner is required to set up a

system and the facilities for the delivery of such medical services. This indubitably
shows that indemnification is not its sole object.
In fact, a substantial portion of petitioners services covers preventive and
diagnostic medical services intended to keep members from developing medical
conditions or diseases.[30] As an HMO, it is its obligation to maintain the good
health of its members. Accordingly, its health care programs are designed to
prevent or to minimize the possibility of any assumption of risk on its
part. Thus, its undertaking under its agreements is not to indemnify its members
against any loss or damage arising from a medical condition but, on the contrary, to
provide the health and medical services needed to prevent such loss or damage.[31]
Overall, petitioner appears to provide insurance-type benefits to its members
(with respect to its curative medical services), but these are incidental to the
principal activity of providing them medical care. The insurance-like aspect of
petitioners

business

is

miniscule

compared

to

its

noninsurance

activities. Therefore, since it substantially provides health care services rather than
insurance services, it cannot be considered as being in the insurance business.
It is important to emphasize that, in adopting the principal purpose test used
in the above-quoted U.S. cases, we are not saying that petitioners operations are
identical in every respect to those of the HMOs or health providers which were
parties to those cases. What we are stating is that, for the purpose of determining
what doing an insurance business means, we have to scrutinize the operations of
the business as a whole and not its mere components. This is of course only
prudent and appropriate, taking into account the burdensome and strict laws, rules
and regulations applicable to insurers and other entities engaged in the insurance
business. Moreover, we are also not unmindful that there are other American
authorities who have found particular HMOs to be actually engaged in insurance
activities.[32]
Lastly, it is significant that petitioner, as an HMO, is not part of the
insurance industry. This is evident from the fact that it is not supervised by the

Insurance Commission but by the Department of Health. [33] In fact, in a letter dated
September 3, 2000, the Insurance Commissioner confirmed that petitioner is not
engaged in the insurance business. This determination of the commissioner must
be accorded great weight. It is well-settled that the interpretation of an
administrative agency which is tasked to implement a statute is accorded great
respect and ordinarily controls the interpretation of laws by the courts. The reason
behind this rule was explained in Nestle Philippines, Inc. v. Court of Appeals:[34]
The rationale for this rule relates not only to the emergence of the
multifarious needs of a modern or modernizing society and the
establishment of diverse administrative agencies for addressing and
satisfying those needs; it also relates to the accumulation of experience
and growth of specialized capabilities by the administrative agency
charged with implementing a particular statute. In Asturias Sugar
Central, Inc. vs. Commissioner of Customs,[35] the Court stressed that
executive officials are presumed to have familiarized themselves with all
the considerations pertinent to the meaning and purpose of the law, and
to have formed an independent, conscientious and competent expert
opinion thereon. The courts give much weight to the government agency
officials charged with the implementation of the law, their competence,
expertness, experience and informed judgment, and the fact that they
frequently are the drafters of the law they interpret. [36]

A HEALTH CARE AGREEMENT IS NOT AN

INSURANCE CONTRACT CONTEMPLATED
UNDER SECTION 185 OF THE NIRC OF 1997

Section 185 states that DST is imposed on all policies of insurance or

obligations of the nature of indemnity for loss, damage, or liability. In our decision
dated June 12, 2008, we ruled that petitioners health care agreements are contracts
of indemnity and are therefore insurance contracts:
It is incorrect to say that the health care agreement is not based on
loss or damage because, under the said agreement, petitioner assumes the
liability and indemnifies its member for hospital, medical and related
expenses (such as professional fees of physicians). The term "loss or
damage" is broad enough to cover the monetary expense or liability a
member will incur in case of illness or injury.
Under the health care agreement, the rendition of hospital,
medical and professional services to the member in case of sickness,
injury or emergency or his availment of so-called "out-patient services"

(including physical examination, x-ray and laboratory tests, medical

consultations, vaccine administration and family planning counseling) is
the contingent event which gives rise to liability on the part of the
member. In case of exposure of the member to liability, he would be
entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from
liability by paying for expenses arising from the stipulated contingencies
belies its claim that its services are prepaid. The expenses to be incurred
by each member cannot be predicted beforehand, if they can be predicted
at all. Petitioner assumes the risk of paying for the costs of the services
even if they are significantly and substantially more than what the
member has "prepaid." Petitioner does not bear the costs alone but
distributes or spreads them out among a large group of persons bearing a
similar risk, that is, among all the other members of the health care
program. This is insurance.[37]

We reconsider. We shall quote once again the pertinent portion of Section

185:
Section 185. Stamp tax on fidelity bonds and other insurance
policies. On all policies of insurance or bonds or obligations of the
nature of indemnity for loss, damage, or liability made or renewed by
any person, association or company or corporation transacting the
business of accident, fidelity, employers liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other branch of insurance
(except life, marine, inland, and fire insurance), xxxx (Emphasis
supplied)

In construing this provision, we should be guided by the principle that tax

statutes are strictly construed against the taxing authority.[38] This is because
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.[39] Hence, tax laws may not be extended by implication beyond
the clear import of their language, nor their operation enlarged so as to embrace
matters not specifically provided.[40]
We are aware that, in Blue Cross and Philamcare, the Court pronounced that
a health care agreement is in the nature of non-life insurance, which is primarily a
contract of indemnity. However, those cases did not involve the interpretation of a
tax provision. Instead, they dealt with the liability of a health service provider to a

member under the terms of their health care agreement.Such contracts, as contracts
of adhesion, are liberally interpreted in favor of the member and strictly against the
HMO.

For

this

reason,

we

reconsider

our

ruling

that Blue

Cross and Philamcare are applicable here.

Section 2 (1) of the Insurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another
against loss, damage or liability arising from an unknown or contingent event. An
insurance contract exists where the following elements concur:
1.

The insured has an insurable interest;

2.

The insured is subject to a risk of loss by the happening of the

designed peril;

3.

The insurer assumes the risk;

4.

Such assumption of risk is part of a general scheme to distribute

actual losses among a large group of persons bearing a similar risk
and

5.

In consideration of the insurers promise, the insured pays a

premium.[41]

Do the agreements between petitioner and its members possess all these
elements? They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed
out that, even if a contract contains all the elements of an insurance contract, if its
primary purpose is the rendering of service, it is not a contract of insurance:
It does not necessarily follow however, that a contract containing
all the four elements mentioned above would be an insurance
contract. The primary purpose of the parties in making the contract
may negate the existence of an insurance contract. For example, a law
firm which enters into contracts with clients whereby in consideration of
periodical payments, it promises to represent such clients in all suits for
or against them, is not engaged in the insurance business. Its contracts
are simply for the purpose of rendering personal services. On the other
hand, a contract by which a corporation, in consideration of a stipulated
amount, agrees at its own expense to defend a physician against all suits
for damages for malpractice is one of insurance, and the corporation will
be deemed as engaged in the business of insurance. Unlike the lawyers

retainer contract, the essential purpose of such a contract is not to render

personal services, but to indemnify against loss and damage resulting
from the defense of actions for malpractice. [42] (Emphasis supplied)

Second. Not all the necessary elements of a contract of insurance are present
in petitioners agreements. To begin with, there is no loss, damage or liability on the
part of the member that should be indemnified by petitioner as an HMO. Under the
agreement, the member pays petitioner a predetermined consideration in exchange
for the hospital, medical and professional services rendered by the petitioners
physician or affiliated physician to him. In case of availment by a member of the
benefits under the agreement, petitioner does not reimburse or indemnify the
member as the latter does not pay any third party. Instead, it is the petitioner who
pays the participating physicians and other health care providers for the services
rendered at pre-agreed rates. The member does not make any such payment.

In other words, there is nothing in petitioner's agreements that gives rise to a

monetary liability on the part of the member to any third party-provider of medical
services which might in turn necessitate indemnification from petitioner. The terms
indemnify or indemnity presuppose that a liability or claim has already been
incurred. There is no indemnity precisely because the member merely avails of
medical services to be paid or already paid in advance at a pre-agreed price under
the agreements.
Third. According to the agreement, a member can take advantage of the bulk
of the benefits anytime, e.g. laboratory services, x-ray, routine annual physical
examination and consultations, vaccine administration as well as family planning
counseling, even in the absence of any peril, loss or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the member
who receives care from a non-participating physician or hospital. However, this is
only a very minor part of the list of services available. The assumption of the
expense by petitioner is not confined to the happening of a contingency but
includes incidents even in the absence of illness or injury.

In Michigan Podiatric Medical Association v. National Foot Care Program,

Inc.,[43] although the health care contracts called for the defendant to partially
reimburse a subscriber for treatment received from a non-designated doctor, this
did not make defendant an insurer. Citing Jordan, the Court determined that the
primary activity of the defendant (was) the provision of podiatric services to
subscribers in consideration of prepayment for such services.[44] Since indemnity of
the insured was not the focal point of the agreement but the extension of medical
services to the member at an affordable cost, it did not partake of the nature of a
contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not
necessarily true that risk alone is sufficient to establish it. Almost anyone who
undertakes a contractual obligation always bears a certain degree of financial
risk. Consequently, there is a need to distinguish prepaid service contracts (like
those of petitioner) from the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to
provide health services: the risk that it might fail to earn a reasonable return on its
investment. But it is not the risk of the type peculiar only to insurance
companies. Insurance risk, also known as actuarial risk, is the risk that the cost of
insurance claims might be higher than the premiums paid. The amount of premium
is calculated on the basis of assumptions made relative to the insured.[45]
However, assuming that petitioners commitment to provide medical services
to its members can be construed as an acceptance of the risk that it will shell out
more than the prepaid fees, it still will not qualify as an insurance contract because
petitioners objective is to provide medical services at reduced cost, not to distribute
risk like an insurer.
In sum, an examination of petitioners agreements with its members leads us
to conclude that it is not an insurance contract within the context of our Insurance
Code.

THERE WAS NO LEGISLATIVE INTENT TO

IMPOSE
DST
ON
HEALTH
CARE
AGREEMENTS OF HMOS

Furthermore, militating in convincing fashion against the imposition of DST on

petitioners health care agreements under Section 185 of the NIRC of 1997 is the
provisions legislative history. The text of Section 185 came into U.S. law as early
as 1904 when HMOs and health care agreements were not even in existence in this
jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189
(otherwise known as the Internal Revenue Law of 1904) [46] enacted on July 2, 1904
and became effective on August 1, 1904. Except for the rate of tax, Section 185 of
the NIRC of 1997 is a verbatim reproduction of the pertinent portion of Section
116, to wit:

ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in
respect to the several bonds, debentures, or certificates of stock and
indebtedness, and other documents, instruments, matters, and things
mentioned and described in this section, or for or in respect to the
vellum, parchment, or paper upon which such instrument, matters, or
things or any of them shall be written or printed by any person or
persons who shall make, sign, or issue the same, on and after January
first, nineteen hundred and five, the several taxes following:
xxx xxx xxx
Third xxx (c) on all policies of insurance or bond or obligation of the
nature of indemnity for loss, damage, or liability made or renewed
by any person, association, company, or corporation transacting the
business of accident, fidelity, employers liability, plate glass, steam
boiler, burglar, elevator, automatic sprinkle, or other branch of
insurance
(except
life,
marine,
inland,
and
fire
insurance) xxxx (Emphasis supplied)

On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914)
was enacted revising and consolidating the laws relating to internal revenue. The
aforecited pertinent portion of Section 116, Article XI of Act No. 1189 was

completely reproduced as Section 30 (l), Article III of Act No. 2339. The very
detailed and exclusive enumeration of items subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again
reproduced as Section 1604 (l), Article IV of Act No. 2657 (Administrative Code).
Upon its amendment on March 10, 1917, the pertinent DST provision became
Section 1449 (l) of Act No. 2711, otherwise known as the Administrative Code of
1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No.
466 (the NIRC of 1939), which codified all the internal revenue laws of the
Philippines. In an amendment introduced by RA 40 on October 1, 1946, the DST
rate was increased but the provision remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST rate was
reproduced in PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959,
enacted on June 11, 1978 and October 10, 1984 respectively, the DST rate was
again increased.
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the
NIRC of 1977 was renumbered as Section 198. And under Section 23 of EO [47] 273
dated July 25, 1987, it was again renumbered and became Section 185.
On December 23, 1993, under RA 7660, Section 185 was amended but, again, only
with respect to the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424
(or the NIRC of 1997), the subject legal provision was retained as the present
Section 185. In 2004, amendments to the DST provisions were introduced by RA
9243[48] but Section 185 was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines
with the formation of Bancom Health Care Corporation in 1974. The same pioneer
HMO was later reorganized and renamed Integrated Health Care Services, Inc. (or
Intercare). However, there are those who claim that Health Maintenance, Inc. is the
HMO industry pioneer, having set foot in the Philippines as early as 1965 and
having been formally incorporated in 1991. Afterwards, HMOs proliferated

quickly and currently, there are 36 registered HMOs with a total enrollment of
more than 2 million.[49]
We can clearly see from these two histories (of the DST on the one hand and
HMOs on the other) that when the law imposing the DST was first passed, HMOs
were yet unknown in the Philippines. However, when the various amendments to
the DST law were enacted, they were already in existence in the Philippines and
the term had in fact already been defined by RA 7875. If it had been the intent of
the legislature to impose DST on health care agreements, it could have done so in
clear and categorical terms. It had many opportunities to do so. But it did not. The
fact that the NIRC contained no specific provision on the DST liability of health
care agreements of HMOs at a time they were already known as such, belies any
legislative intent to impose it on them. As a matter of fact, petitioner was
assessed its DST liability only on January 27, 2000, after more than a decade
in the business as an HMO.[50]
Considering that Section 185 did not change since 1904 (except for the rate
of tax), it would be safe to say that health care agreements were never, at any time,
recognized as insurance contracts or deemed engaged in the business of insurance
within the context of the provision.

THE POWER TO TAX IS NOT

THE POWER TO DESTROY

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 is to pay it. [51]So potent indeed is the power that it was
once opined that the power to tax involves the power to destroy.[52]
Petitioner claims that the assessed DST to date which amounts to P376 million[53] is
way beyond its net worth of P259 million.[54] Respondent never disputed these
assertions. Given the realities on the ground, imposing the DST on petitioner
would be highly oppressive. It is not the purpose of the government to throttle

private business. On the contrary, the government ought to encourage private

enterprise.[55] Petitioner, just like any concern organized for a lawful economic
activity, has a right to maintain a legitimate business. [56] As aptly held in Roxas, et
al. v. CTA, et al.:[57]
The power of taxation is sometimes called also the power to
destroy. Therefore it should be exercised with caution to minimize injury
to the proprietary rights of a taxpayer. It must be exercised fairly, equally
and uniformly, lest the tax collector kill the hen that lays the golden egg.
[58]

Legitimate enterprises enjoy the constitutional protection not to be taxed out of

existence. Incurring losses because of a tax imposition may be an acceptable
consequence but killing the business of an entity is another matter and should not
be allowed. It is counter-productive and ultimately subversive of the nations thrust
towards a better economy which will ultimately benefit the majority of our people.
[59]

PETITIONERS TAX LIABILITY

WAS EXTINGUISHED UNDER
THE PROVISIONS OF RA 9840

Petitioner asserts that, regardless of the arguments, the DST assessment for
taxable years 1996 and 1997 became moot and academic[60] when it availed of the
tax

amnesty

under

RA

9480

on

December

10,

2007.

It

paid P5,127,149.08 representing 5% of its net worth as of the year ended

December 31, 2005 and complied with all requirements of the tax amnesty. Under
Section 6(a) of RA 9480, it is entitled to immunity from payment of taxes as well
as additions thereto, and the appurtenant civil, criminal or administrative penalties
under the 1997 NIRC, as amended, arising from the failure to pay any and all
internal revenue taxes for taxable year 2005 and prior years.[61]
Far from disagreeing with petitioner, respondent manifested in its
memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty
entitles a taxpayer to immunity from payment of the tax involved,
including the civil, criminal, or administrative penalties provided under

the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding
years.
In view of petitioners availment of the benefits of [RA 9840], and
without conceding the merits of this case as discussed
above, respondent concedes that such tax amnesty extinguishes the
tax liabilities of petitioner. This admission, however, is not meant to
preclude a revocation of the amnesty granted in case it is found to have
been granted under circumstances amounting to tax fraud under Section
10 of said amnesty law.[62] (Emphasis supplied)

Furthermore, we held in a recent case that DST is one of the taxes covered
by the tax amnesty program under RA 9480.[63] There is no other conclusion to
draw than that petitioners liability for DST for the taxable years 1996 and 1997
was totally extinguished by its availment of the tax amnesty under RA 9480.

IS THE COURT BOUND BY A MINUTE

RESOLUTION IN ANOTHER CASE?

Petitioner raises another interesting issue in its motion for reconsideration: whether
this Court is bound by the ruling of the CA [64] in CIR v. Philippine National
Bank[65] that a health care agreement of Philamcare Health Systems is not an
insurance contract for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001 minute resolution
of this Court dismissing the appeal in Philippine National Bank (G.R. No.
148680).[66] Petitioner argues that the dismissal of G.R. No. 148680 by minute
resolution was a judgment on the merits; hence, the Court should apply the CA
ruling there that a health care agreement is not an insurance contract.
It is true that, although contained in a minute resolution, our dismissal of the
petition was a disposition of the merits of the case. When we dismissed the
petition, we effectively affirmed the CA ruling being questioned. As a result, our
ruling in that case has already become final. [67] When a minute resolution denies or
dismisses a petition for failure to comply with formal and substantive
requirements, the challenged decision, together with its findings of fact and legal
conclusions, are deemed sustained.[68] But what is its effect on other cases?

With respect to the same subject matter and the same issues concerning the
same parties, it constitutes res judicata.[69] However, if other parties or another
subject matter (even with the same parties and issues) is involved, the minute
resolution is not binding precedent. Thus, in CIR v. Baier-Nickel,[70] the Court noted
that a previous case, CIR v. Baier-Nickel[71] involving the same parties and the
same issues, was previously disposed of by the Court thru a minute resolution
dated February 17, 2003 sustaining the ruling of the CA. Nonetheless, the Court
ruled that the previous case ha(d) no bearing on the latter case because the two
cases involved different subject matters as they were concerned with the taxable
income of different taxable years.[72]
Besides, there are substantial, not simply formal, distinctions between a minute
resolution and a decision. The constitutional requirement under the first paragraph
of Section 14, Article VIII of the Constitution that the facts and the law on which
the judgment is based must be expressed clearly and distinctly applies only to
decisions, not to minute resolutions. A minute resolution is signed only by the clerk
of court by authority of the justices, unlike a decision. It does not require the
certification of the Chief Justice. Moreover, unlike decisions, minute resolutions
are not published in the Philippine Reports. Finally, the proviso of Section 4(3) of
Article VIII speaks of a decision. [73]Indeed, as a rule, this Court lays down
doctrines or principles of law which constitute binding precedent in a decision duly
signed by the members of the Court and certified by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since
petitioners liability for DST on its health care agreement was not the subject matter
of G.R. No. 148680, petitioner cannot successfully invoke the minute resolution in
that case (which is not even binding precedent) in its favor. Nonetheless, in view of
the reasons already discussed, this does not detract in any way from the fact that
petitioners health care agreements are not subject to DST.
A FINAL NOTE

Taking into account that health care agreements are clearly not within the
ambit of Section 185 of the NIRC and there was never any legislative intent to

impose the same on HMOs like petitioner, the same should not be arbitrarily and
unjustly included in its coverage.
It is a matter of common knowledge that there is a great social need for
adequate medical services at a cost which the average wage earner can
afford. HMOs arrange, organize and manage health care treatment in the
furtherance of the goal of providing a more efficient and inexpensive health care
system made possible by quantity purchasing of services and economies of
scale. They offer advantages over the pay-for-service system (wherein individuals
are charged a fee each time they receive medical services), including the ability to
control costs. They protect their members from exposure to the high cost of
hospitalization and other medical expenses brought about by a fluctuating
economy. Accordingly, they play an important role in society as partners of the
State in achieving its constitutional mandate of providing its citizens with
affordable health services.
The rate of DST under Section 185 is equivalent to 12.5% of the premium
charged.[74] Its imposition will elevate the cost of health care services. This will in
turn necessitate an increase in the membership fees, resulting in either placing
health services beyond the reach of the ordinary wage earner or driving the
industry to the ground. At the end of the day, neither side wins, considering the
indispensability of the services offered by HMOs.
WHEREFORE, the motion for reconsideration is GRANTED. The August
16,

2004

decision

of

the

Court

of

Appeals

in

CA-G.R.

SP

No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997 deficiency DST
assessment

against

petitioner

is

hereby CANCELLED and SET

ASIDE. Respondent is ordered to desist from collecting the said tax.

No costs.

EN BANC
CHAMBER OF REAL G.R. No. 160756

ESTATE AND BUILDERS

ASSOCIATIONS, INC.,
Petitioner, Present:
PUNO, C.J.,
CARPIO,
CORONA,
CARPIO MORALES,
VELASCO, JR.,
NACHURA,
- v e r s u s - LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ and
MENDOZA, JJ.
THE HON. EXECUTIVE
SECRETARY ALBERTO ROMULO,
THE HON. ACTING SECRETARY OF
FINANCE JUANITA D. AMATONG,
and THE HON. COMMISSIONER OF
INTERNAL REVENUE GUILLERMO
PARAYNO, JR.,
Respondents. Promulgated:
March 9, 2010

x-------------------------------------------------x
DECISION
CORONA, J.:

In this original petition for certiorari and mandamus,[1] petitioner Chamber of Real
Estate and Builders Associations, Inc. is questioning the constitutionality of
Section 27 (E) of Republic Act (RA) 8424[2] and the revenue regulations (RRs)

issued by the Bureau of Internal Revenue (BIR) to implement said provision and
those involving creditable withholding taxes.[3]
Petitioner is an association of real estate developers and builders in the
Philippines. It impleaded former Executive Secretary Alberto Romulo, then acting
Secretary of Finance Juanita D. Amatong and then Commissioner of Internal
Revenue Guillermo Parayno, Jr. as respondents.
Petitioner assails the validity of the imposition of minimum corporate income tax
(MCIT) on corporations and creditable withholding tax (CWT) on sales of real
properties classified as ordinary assets.
Section 27(E) of RA 8424 provides for MCIT on domestic corporations and
is implemented by RR 9-98. Petitioner argues that the MCIT violates the due
process clause because it levies income tax even if there is no realized gain.
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and
2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which
prescribe the rules and procedures for the collection of CWT on the sale of real
properties categorized as ordinary assets. Petitioner contends that these revenue
regulations are contrary to law for two reasons: first, they ignore the different
treatment by RA 8424 of ordinary assets and capital assets and second, respondent
Secretary of Finance has no authority to collect CWT, much less, to base the CWT
on the gross selling price or fair market value of the real properties classified as
ordinary assets.
Petitioner also asserts that the enumerated provisions of the subject revenue
regulations violate the due process clause because, like the MCIT, the government
collects income tax even when the net income has not yet been determined. They
contravene the equal protection clause as well because the CWT is being levied
upon real estate enterprises but not on other business enterprises, more particularly
those in the manufacturing sector.
The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;
(2) whether or not the imposition of the MCIT on domestic corporations is
unconstitutional and
(3) whether or not the imposition of CWT on income from sales of real
properties classified as ordinary assets under RRs 2-98, 6-2001 and 72003, is unconstitutional.

OVERVIEW OF THE ASSAILED PROVISIONS

Under the MCIT scheme, a corporation, beginning on its fourth year of

operation, is assessed an MCIT of 2% of its gross income when such MCIT is
greater than the normal corporate income tax imposed under Section 27(A). [4] If the
regular income tax is higher than the MCIT, the corporation does not pay the
MCIT. Any excess of the MCIT over the normal tax shall be carried forward and
credited against the normal income tax for the three immediately succeeding
taxable years. Section 27(E) of RA 8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. (1) Imposition of Tax. A [MCIT] of two percent (2%) of the
gross income as of the end of the taxable year, as defined
herein, is hereby imposed on a corporation taxable under this
Title, beginning on the fourth taxable year immediately
following the year in which such corporation commenced its
business operations, when the minimum income tax is greater
than the tax computed under Subsection (A) of this Section
for the taxable year.
(2) Carry Forward of Excess Minimum Tax. Any excess of the
[MCIT] over the normal income tax as computed under
Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3)
immediately succeeding taxable years.
(3) Relief from the [MCIT] under certain conditions. The
Secretary of Finance is hereby authorized to suspend the
imposition of the [MCIT] on any corporation which suffers
losses on account of prolonged labor dispute, or because
of force majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to

promulgate, upon recommendation of the Commissioner, the
necessary rules and regulations that shall define the terms and
conditions under which he may suspend the imposition of the
[MCIT] in a meritorious case.
(4) Gross Income Defined. For purposes of applying the [MCIT]
provided under Subsection (E) hereof, the term gross income
shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. Cost of goods sold shall
include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.
For trading or merchandising concern, cost of goods
sold shall include the invoice cost of the goods sold, plus
import duties, freight in transporting the goods to the place
where the goods are actually sold including insurance while
the goods are in transit.
For a manufacturing concern, cost of goods
manufactured and sold shall include all costs of production of
finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and
other costs incurred to bring the raw materials to the factory or
warehouse.
In the case of taxpayers engaged in the sale of service,
gross income means gross receipts less sales returns,
allowances, discounts and cost of services. Cost of services
shall mean all direct costs and expenses necessarily incurred
to provide the services required by the customers and clients
including (A) salaries and employee benefits of personnel,
consultants and specialists directly rendering the service
and (B) cost of facilities directly utilized in providing the
service such as depreciation or rental of equipment used and
cost of supplies: Provided, however, that in the case of banks,
cost of services shall include interest expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the

recommendation of the Commissioner of Internal Revenue (CIR), promulgated RR
9-98 implementing Section 27(E).[5]The pertinent portions thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the
gross income as of the end of the taxable year (whether
calendar or fiscal year, depending on the accounting period

employed) is hereby imposed upon any domestic corporation

beginning the fourth (4th) taxable year immediately following
the taxable year in which such corporation commenced its
business operations. The MCIT shall be imposed whenever
such corporation has zero or negative taxable income or
whenever the amount of minimum corporate income tax is
greater than the normal income tax due from such
corporation.
For purposes of these Regulations, the term, normal
income tax means the income tax rates prescribed under Sec.
27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective
January 1, 2000 and thereafter.
xxx xxx xxx
(2) Carry forward of excess [MCIT]. Any excess of the [MCIT]
over the normal income tax as computed under Sec. 27(A) of
the Code shall be carried forward on an annual basis and
credited against the normal income tax for the three (3)
immediately succeeding taxable years.
xxx xxx xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of

respondent CIR, promulgated RR 2-98 implementing certain provisions of RA
8424 involving the withholding of taxes.[6] Under Section 2.57.2(J) of RR No. 298, income payments from the sale, exchange or transfer of real property, other
than capital assets, by persons residing in the Philippines and habitually engaged in
the real estate business were subjected to CWT:
Sec. 2.57.2. Income payment subject to [CWT] and rates
prescribed thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its
equivalent paid to the seller/owner for the sale, exchange or transfer of.
Real property, other than capital assets, sold by an individual,
corporation, estate, trust, trust fund or pension fund and the
seller/transferor is habitually engaged in the real estate business in
accordance with the following schedule

Those which are exempt from a

withholding tax at source as
prescribed in Sec. 2.57.5 of these
regulations.

Exempt

With a selling price of five

hundred
thousand
pesos
(P500,000.00) or less.

1.5%

With a selling price of more than

five hundred thousand pesos
(P500,000.00) but not more than
two
million
pesos
(P2,000,000.00).

3.0%

xxx xxx xx
x

With selling price of more than

two million pesos (P2,000,000.00)
5.0%

Gross selling price shall mean the consideration stated in the sales
document or the fair market value determined in accordance with
Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in exchange, as
determined in the Income Tax Regulations shall be used.
Where the consideration or part thereof is payable on installment, no
withholding tax is required to be made on the periodic installment
payments where the buyer is an individual not engaged in trade or
business. In such a case, the applicable rate of tax based on the entire
consideration shall be withheld on the last installment or installments to
be paid to the seller.
However, if the buyer is engaged in trade or business, whether a
corporation or otherwise, the tax shall be deducted and withheld by the
buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates
prescribed thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its
equivalent paid to the seller/owner for the sale, exchange or
transfer of real property classified as ordinary asset. - A
[CWT] based on the gross selling price/total amount of
consideration or the fair market value determined in
accordance with Section 6(E) of the Code, whichever is
higher, paid to the seller/owner for the sale, transfer or
exchange of real property, other than capital asset, shall be
imposed upon the withholding agent,/buyer, in accordance
with the following schedule:
Where the seller/transferor is exempt from

[CWT] in accordance with Sec. 2.57.5 of these

regulations.

Exempt

Upon the following values of real property,

where the seller/transferor is habitually
engaged in the real estate business.
With a selling price of Five Hundred Thousand
Pesos (P500,000.00) or less.

1.5%

With a selling price of more than Five Hundred

Thousand Pesos (P500,000.00) but not more
than Two Million Pesos (P2,000,000.00).
3.0%
With a selling price of more than two Million
Pesos (P2,000,000.00).

5.0%

xxx xxx xxx

Gross selling price shall remain the consideration stated in the
sales document or the fair market value determined in accordance with
Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in
exchange shall be considered as the consideration.
xxx xxx xxx
However, if the buyer is engaged in trade or business, whether a
corporation or otherwise, these rules shall apply:
(i) If the sale is a sale of property on the installment plan
(that is, payments in the year of sale do not exceed 25% of
the selling price), the tax shall be deducted and withheld
by the buyer on every installment.
(ii) If, on the other hand, the sale is on a cash basis or is a
deferred-payment sale not on the installment plan (that is,
payments in the year of sale exceed 25% of the selling
price), the buyer shall withhold the tax based on the gross
selling price or fair market value of the property,
whichever is higher, on the first installment.
In any case, no Certificate Authorizing Registration (CAR) shall
be issued to the buyer unless the [CWT] due on the sale, transfer or
exchange of real property other than capital asset has been fully
paid. (Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides

that any sale, barter or exchange subject to the CWT will not be recorded by the

Registry of Deeds until the CIR has certified that such transfers and conveyances
have been reported and the taxes thereof have been duly paid:[7]
Sec. 2.58.2. Registration with the Register of Deeds. Deeds of
conveyances of land or land and building/improvement thereon arising
from sales, barters, or exchanges subject to the creditable expanded
withholding tax shall not be recorded by the Register of Deeds unless
the [CIR] or his duly authorized representative has certified that such
transfers and conveyances have been reported and the expanded
withholding tax, inclusive of the documentary stamp tax, due thereon
have been fully paid xxxx.

On February 11, 2003, RR No. 7-2003[8] was promulgated, providing for the
guidelines in determining whether a particular real property is a capital or an
ordinary asset for purposes of imposing the MCIT, among others. The pertinent
portions thereof state:
Section 4. Applicable taxes on sale, exchange or other
disposition of real property. -Gains/Income derived from sale,
exchange, or other disposition of real properties shall, unless
otherwise exempt, be subject to applicable taxes imposed under
the Code, depending on whether the subject properties are
classified as capital assets or ordinary assets;
a.

In the case of individual citizen (including estates and

trusts), resident aliens, and non-resident aliens engaged in
trade or business in the Philippines;
xxx xxx xxx
(ii)

The sale of real property located in the Philippines,

classified as ordinary assets, shall be subject to the
[CWT] (expanded) under Sec. 2.57..2(J) of [RR 298], as amended, based on the gross selling price or
current fair market value as determined in
accordance with Section 6(E) of the Code,
whichever is higher, and consequently, to the
ordinary income tax imposed under Sec. 24(A)(1)
(c) or 25(A)(1) of the Code, as the case may be,
based on net taxable income.
xxx xxx xxx

c. In the case of domestic corporations.

xxx xxx xxx

(ii)

The sale of land and/or building classified as ordinary

asset and other real property (other than land and/or
building treated as capital asset), regardless of the
classification thereof, all of which are located in the
Philippines, shall be subject to the [CWT] (expanded)
under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to the ordinary income tax under Sec. 27(A)
of the Code. In lieu of the ordinary income tax, however,
domestic corporations may become subject to the [MCIT]
under Sec. 27(E) of the Code, whichever is applicable.
xxx xxx xxx

We shall now tackle the issues raised.

EXISTENCE OF A JUSTICIABLE CONTROVERSY

Courts will not assume jurisdiction over a constitutional question unless the
following requisites are satisfied: (1) there must be an actual case calling for the
exercise of judicial review; (2) the question before the court must be ripe for
adjudication; (3) the person challenging the validity ofthe act must have standing
to do so; (4) the question of constitutionality must have been raised at the earliest
opportunity and (5) the issue of constitutionality must be the very lis mota of the
case.[9]
Respondents aver that the first three requisites are absent in this
case. According to them, there is no actual case calling for the exercise of judicial
power and it is not yet ripe for adjudication because
[petitioner] did not allege that CREBA, as a corporate entity, or any of
its members, has been assessed by the BIR for the payment of [MCIT] or
[CWT] on sales of real property. Neither did petitioner allege that its
members have shut down their businesses as a result of the payment of
the MCIT or CWT. Petitioner has raised concerns in mere abstract and
hypothetical form without any actual, specific and concrete instances
cited that the assailed law and revenue regulations have actually and
adversely affected it. Lacking empirical data on which to base any
conclusion, any discussion on the constitutionality of the MCIT or CWT
on sales of real property is essentially an academic exercise.
Perceived or alleged hardship to taxpayers alone is not an adequate
justification for adjudicating abstract issues. Otherwise, adjudication

would be no different from the giving of advisory opinion that does not
really settle legal issues.[10]

An actual case or controversy involves a conflict of legal rights or an

assertion of opposite legal claims which is susceptible of judicial resolution as
distinguished from a hypothetical or abstract difference or dispute. [11] On the other
hand, a question is considered ripe for adjudication when the act being challenged
has a direct adverse effect on the individual challenging it.[12]
Contrary to respondents assertion, we do not have to wait until petitioners
members have shut down their operations as a result of the MCIT or CWT. The
assailed provisions are already being implemented. As we stated in Didipio EarthSavers Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:[13]
By the mere enactment of the questioned law or the approval of
the challenged act, the dispute is said to have ripened into a judicial
controversy even without any other overt act. Indeed, even a singular
violation of the Constitution and/or the law is enough to awaken judicial
duty.[14]

If the assailed provisions are indeed unconstitutional, there is no better time than
the present to settle such question once and for all.
Respondents next argue that petitioner has no legal standing to sue:
Petitioner is an association of some of the real estate developers
and builders in the Philippines. Petitioners did not allege that [it] itself is
in the real estate business. It did not allege any material interest or any
wrong that it may suffer from the enforcement of [the assailed
provisions].[15]

Legal standing or locus standi is a partys personal and substantial interest in

a case such that it has sustained or will sustain direct injury as a result of the
governmental act being challenged.[16] InHoly Spirit Homeowners Association, Inc.
v. Defensor,[17] we held that the association had legal standing because its members
stood to be injured by the enforcement of the assailed provisions:
Petitioner association has the legal standing to institute the instant
petition xxx. There is no dispute that the individual members of
petitioner association are residents of the NGC. As such they are covered

and stand to be either benefited or injured by the enforcement of the

IRR, particularly as regards the selection process of beneficiaries and lot
allocation to qualified beneficiaries. Thus, petitioner association may
assail those provisions in the IRR which it believes to be unfavorable to
the rights of its members. xxx Certainly, petitioner and its members have
sustained direct injury arising from the enforcement of the IRR in that
they have been disqualified and eliminated from the selection process. [18]

In any event, this Court has the discretion to take cognizance of a suit which does
not satisfy the requirements of an actual case, ripeness or legal standing when
paramount public interest is involved.[19] The questioned MCIT and CWT affect not
only petitioners but practically all domestic corporate taxpayers in our country. The
transcendental importance of the issues raised and their overreaching significance
to society make it proper for us to take cognizance of this petition.[20]
CONCEPT AND RATIONALE OF THE MCIT

The MCIT on domestic corporations is a new concept introduced by RA

8424 to the Philippine taxation system. It came about as a result of the perceived
inadequacy of the self-assessment system in capturing the true income of
corporations.[21] It was devised as a relatively simple and effective revenue-raising
instrument compared to the normal income tax which is more difficult to control
and enforce. It is a means to ensure that everyone will make some minimum
contribution to the support of the public sector. The congressional deliberations on
this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice of
certain corporations of reporting constantly a loss in their operations to
avoid the payment of taxes, and thus avoid sharing in the cost of
government. In this regard, the Tax Reform Act introduces for the first
time a new concept called the [MCIT] so as to minimize tax evasion, tax
avoidance, tax manipulation in the country and for administrative
convenience. This will go a long way in ensuring that corporations will
pay their just share in supporting our public life and our economic
advancement.[22]

Domestic corporations owe their corporate existence and their privilege to

do business to the government. They also benefit from the efforts of the
government to improve the financial market and to ensure a favorable business

climate. It is therefore fair for the government to require them to make a reasonable
contribution to the public expenses.
Congress intended to put a stop to the practice of corporations which, while
having large turn-overs, report minimal or negative net income resulting in
minimal or zero income taxes year in and year out, through under-declaration of
income or over-deduction of expenses otherwise called tax shelters.[23]
Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that
is why they have proposed the [MCIT]. Because from experience too,
you have corporations which have been losing year in and year out and
paid no tax. So, if the corporation has been losing for the past five years
to ten years, then that corporation has no business to be in business. It is
dead. Why continue if you are losing year in and year out? So, we have
this provision to avoid this type of tax shelters, Your Honor.[24]

The primary purpose of any legitimate business is to earn a profit. Continued

and repeated losses after operations of a corporation or consistent reports of
minimal net income render its financial statements and its tax payments
suspect. For sure, certain tax avoidance schemes resorted to by corporations are
allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters.As a
tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes
achieved through sophisticated and artful manipulations of deductions and other
stratagems. Since the tax base was broader, the tax rate was lowered.
To further emphasize the corrective nature of the MCIT, the following safeguards
were incorporated into the law:
First, recognizing the birth pangs of businesses and the reality of the need to
recoup initial major capital expenditures, the imposition of the MCIT commences
only on the fourth taxable year immediately following the year in which the
corporation commenced its operations.[25] This grace period allows a new business
to stabilize first and make its ventures viable before it is subjected to the MCIT.[26]
Second, the law allows the carrying forward of any excess of the MCIT paid
over the normal income tax which shall be credited against the normal income tax
for the three immediately succeeding years.[27]

Third, since certain businesses may be incurring genuine repeated losses, the
law authorizes the Secretary of Finance to suspend the imposition of MCIT if a
corporation suffers losses due to prolonged labor dispute, force majeure and
legitimate business reverses.[28]
Even before the legislature introduced the MCIT to the Philippine taxation
system, several other countries already had their own system of minimum
corporate income taxation. Our lawmakers noted that most developing countries,
particularly Latin American and Asian countries, have the same form of safeguards
as we do. As pointed out during the committee hearings:
[Mr. Medalla:] Note that most developing countries where you have of
course quite a bit of room for underdeclaration of gross receipts have
this same form of safeguards.
In the case of Thailand, half a percent (0.5%), theres a minimum of
income tax of half a percent (0.5%) of gross assessable income. In
Korea a 25% of taxable income before deductions and exemptions. Of
course the different countries have different basis for that minimum
income tax.
The other thing youll notice is the preponderance of Latin American
countries that employed this method. Okay, those are additional Latin
American countries.[29]

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and
Hungary have their own versions of the MCIT.[30]
MCIT IS NOT VIOLATIVE OF DUE PROCESS

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is

unconstitutional because it is highly oppressive, arbitrary and confiscatory which
amounts to deprivation of property without due process of law. It explains that
gross income as defined under said provision only considers the cost of goods sold
and other direct expenses; other major expenditures, such as administrative and
interest expenses which are equally necessary to produce gross income, were not
taken into account.[31] Thus, pegging the tax base of the MCIT to a corporations
gross income is tantamount to a confiscation of capital because gross income,
unlike net income, is not realized gain.[32]

We disagree.
Taxes are the lifeblood of the government. Without taxes, the government
can neither exist nor endure. 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 the common good.[33]
Taxation is an inherent attribute of sovereignty.[34] It is a power that is purely
legislative.[35]Essentially, this means that in the legislature primarily lies the
discretion to determine the nature (kind), object (purpose), extent (rate), coverage
(subjects) and situs (place) of taxation. [36] It has the authority to prescribe a certain
tax at a specific rate for a particular public purpose on persons or things within its
jurisdiction. In other words, the legislature wields the power to define what tax
shall be imposed, why it should be imposed, how much tax shall be imposed,
against whom (or what) it shall be imposed and where it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its range,
acknowledging in its very nature no limits, so that the principal check against its
abuse is to be found only in the responsibility of the legislature (which imposes the
tax) to its constituency who are to pay it. [37] Nevertheless, it is circumscribed by
constitutional limitations. At the same time, like any other statute, tax legislation
carries a presumption of constitutionality.
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. In Sison, Jr. v. Ancheta, et al.,[38] we held that the due process clause may
properly be invoked to invalidate, in appropriate cases, a revenue measure [39] when
it amounts to a confiscation of property.[40] But in the same case, we also explained
that we will not strike down a revenue measure as unconstitutional (for being
violative of the due process clause) on the mere allegation of arbitrariness by the
taxpayer.[41] There must be a factual foundation to such an unconstitutional taint.
[42]

This merely adheres to the authoritative doctrine that, where the due process

clause is invoked, considering that it is not a fixed rule but rather a broad standard,
there is a need for proof of such persuasive character.[43]
Petitioner is correct in saying that income is distinct from capital. [44] Income
means all the wealth which flows into the taxpayer other than a mere return on
capital. Capital is a fund or property existing at one distinct point in time while
income denotes a flow of wealth during a definite period of time. [45] Income is gain
derived and severed from capital.[46] For income to be taxable, the following
requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from
taxation.[47]
Certainly, an income tax is arbitrary and confiscatory if it taxes capital because
capital is not income.In other words, it is income, not capital, which is subject to
income tax. However, the MCIT is not a tax on capital.
The MCIT is imposed on gross income which is arrived at by deducting the
capital spent by a corporation in the sale of its goods, i.e., the cost of goods[48] and
other direct expenses from gross sales. Clearly, the capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed in
lieu of the normal net income tax, and only if the normal income tax is
suspiciously low. The MCIT merely approximates the amount of net income tax
due from a corporation, pegging the rate at a very much reduced 2% and uses as
the base the corporations gross income.
Besides, there is no legal objection to a broader tax base or taxable income by
eliminating all deductible items and at the same time reducing the applicable tax
rate.[49]
Statutes taxing the gross "receipts," "earnings," or "income" of
particular corporations are found in many jurisdictions. Tax thereon is
generally held to be within the power of a state to impose; or

constitutional, unless it interferes with interstate commerce or violates

the requirement as to uniformity of taxation. [50]

The United States has a similar alternative minimum tax (AMT) system
which is generally characterized by a lower tax rate but a broader tax base. [51] Since
our income tax laws are of American origin, interpretations by American courts of
our parallel tax laws have persuasive effect on the interpretation of these laws.
[52]

Although our MCIT is not exactly the same as the AMT, the policy behind them

and the procedure of their implementation are comparable. On the question of the
AMTs constitutionality, the United States Court of Appeals for the Ninth Circuit
stated in Okin v. Commissioner:[53]
In enacting the minimum tax, Congress attempted to remedy general
taxpayer distrust of the system growing from large numbers of taxpayers
with large incomes who were yet paying no taxes.
xxx xxx xxx
We thus join a number of other courts in upholding the constitutionality
of the [AMT]. xxx [It] is a rational means of obtaining a broad-based
tax, and therefore is constitutional.[54]

The U.S. Court declared that the congressional intent to ensure that corporate
taxpayers would contribute a minimum amount of taxes was a legitimate
governmental end to which the AMT bore a reasonable relation.[55]
American courts have also emphasized that Congress has the power to condition,
limit or deny deductions from gross income in order to arrive at the net that it
chooses to tax.[56] This is because deductions are a matter of legislative grace.[57]
Absent any other valid objection, the assignment of gross income, instead of
net income, as the tax base of the MCIT, taken with the reduction of the tax rate
from 32% to 2%, is not constitutionally objectionable.
Moreover, petitioner does not cite any actual, specific and concrete negative
experiences of its members nor does it present empirical data to show that the
implementation of the MCIT resulted in the confiscation of their property.

In sum, petitioner failed to support, by any factual or legal basis, its

allegation that the MCIT is arbitrary and confiscatory. The Court cannot strike
down a law as unconstitutional simply because of its yokes. [58] Taxation is
necessarily burdensome because, by its nature, it adversely affects property rights.
[59]

The party alleging the laws unconstitutionality has the burden to demonstrate

the supposed violations in understandable terms.[60]

RR 9-98 MERELY CLARIFIES

SECTION 27(E) OF RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due

process of law because the MCIT is being imposed and collected even when there
is actually a loss, or a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever
such corporation has zero or negative taxable income or whenever the
amount of [MCIT] is greater than the normal income tax due from such
corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such

corporation has zero or negative taxable income, merely defines the coverage of
Section 27(E). This means that even if a corporation incurs a net loss in its
business operations or reports zero income after deducting its expenses, it is still
subject to an MCIT of 2% of its gross income. This is consistent with the law
which imposes the MCIT on gross income notwithstanding the amount of the net
income. But the law also states that the MCIT is to be paid only if it is greater than
the normal net income.Obviously, it may well be the case that the MCIT would be
less than the net income of the corporation which posts a zero or negative taxable
income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which taxes (including
income taxes) are collected.[61] Under Section 57 of RA 8424, the types of income

subject to withholding tax are divided into three categories: (a) withholding of final
tax on certain incomes; (b) withholding of creditable tax at source and (c) tax-free
covenant bonds. Petitioner is concerned with the second category (CWT) and
maintains that the revenue regulations on the collection of CWT on sale of real
estate categorized as ordinary assets are unconstitutional.
Petitioner, after enumerating the distinctions between capital and ordinary
assets under RA 8424, contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and
Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated with grave abuse of
discretion amounting to lack of jurisdiction and patently in contravention of
law[62] because they ignore such distinctions. Petitioners conclusion is based on the
following premises: (a) the revenue regulations use gross selling price (GSP) or
fair market value (FMV) of the real estate as basis for determining the income tax
for the sale of real estate classified as ordinary assets and (b) they mandate the
collection of income tax on a per transaction basis, i.e., upon consummation of the
sale via the CWT, contrary to RA 8424 which calls for the payment of the net
income at the end of the taxable period.[63]
Petitioner theorizes that since RA 8424 treats capital assets and ordinary
assets differently, respondents cannot disregard the distinctions set by the
legislators as regards the tax base, modes of collection and payment of taxes on
income from the sale of capital and ordinary assets.
Petitioners arguments have no merit.
AUTHORITY OF THE SECRETARY OF
FINANCE TO ORDER THE COLLECTION OF
CWT ON SALES OF REAL PROPERTY
CONSIDERED AS ORDINARY ASSETS

The Secretary of Finance is granted, under Section 244 of RA 8424, the

authority to promulgate the necessary rules and regulations for the effective
enforcement of the provisions of the law. Such authority is subject to the limitation
that the rules and regulations must not override, but must remain consistent and in
harmony with, the law they seek to apply and implement. [64] It is well-settled that
an administrative agency cannot amend an act of Congress.[65]

We have long recognized that the method of withholding tax at source is a

procedure of collecting income tax which is sanctioned by our tax laws. [66] The
withholding tax system was devised for three primary reasons: first, to provide the
taxpayer a convenient manner to meet his probable income tax liability; second, to
ensure the collection of income tax which can otherwise be lost or substantially
reduced through failure to file the corresponding returns and third, to improve the
governments cash flow.[67] This results in administrative savings, prompt and
efficient collection of taxes, prevention of delinquencies and reduction of
governmental effort to collect taxes through more complicated means and
remedies.[68]
Respondent Secretary has the authority to require the withholding of a tax on
items of income payable to any person, national or juridical, residing in the
Philippines. Such authority is derived from Section 57(B) of RA 8424 which
provides:
SEC. 57. Withholding of Tax at Source.
xxx xxx xxx
(B) Withholding of Creditable Tax at Source. The [Secretary]
may, upon the recommendation of the [CIR], require the
withholding of a tax on the items of income payable to
natural or juridical persons, residing in the Philippines, by
payor-corporation/persons as provided for by law, at the rate
of not less than one percent (1%) but not more than thirtytwo percent (32%) thereof, which shall be credited against
the income tax liability of the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the

authority given by Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%5% is between the 1%-32% range; the withholding tax is imposed on the income
payable and the tax is creditable against the income tax liability of the taxpayer for
the taxable year.
EFFECT OF RRS ON THE TAX BASE FOR THE
INCOME
TAX
OF
INDIVIDUALS
OR
CORPORATIONS ENGAGED IN THE REAL
ESTATE BUSINESS

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a
real estate business income tax from net income to GSP or FMV of the property
sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by a taxpayer in
order to extinguish its possible tax obligation. [69] They are installments on the
annual tax which may be due at the end of the taxable year.[70]
Under RR 2-98, the tax base of the income tax from the sale of real property
classified as ordinary assets remains to be the entitys net income imposed under
Section 24 (resident individuals) or Section 27 (domestic corporations) in relation
to Section 31 of RA 8424, i.e. gross income less allowable deductions. The CWT is
to be deducted from the net income tax payable by the taxpayer at the end of the
taxable year.[71] Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the
tax base for the sale of real property classified as ordinary assets remains to be the
net taxable income:
Section 4. Applicable taxes on sale, exchange or other disposition of
real property. - Gains/Income derived from sale, exchange, or other
disposition of real properties shall unless otherwise exempt, be subject
to applicable taxes imposed under the Code, depending on whether the
subject properties are classified as capital assets or ordinary assets;
xxx xxx xxx
a. In the case of individual citizens (including estates and trusts),
resident aliens, and non-resident aliens engaged in trade or
business in the Philippines;
xxx xxx xxx
(ii) The sale of real property located in the Philippines, classified as
ordinary assets, shall be subject to the [CWT] (expanded) under Sec.
2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current
[FMV] as determined in accordance with Section 6(E) of the Code,
whichever is higher, and consequently, to the ordinary income tax
imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case
may be, based on net taxable income.
xxx xxx xxx

c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other
real property (other than land and/or building treated as capital asset),
regardless of the classification thereof, all of which are located in the
Philippines, shall be subject to the [CWT] (expanded) under Sec.
2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary
income tax under Sec. 27(A) of the Code. In lieu of the ordinary
income tax, however, domestic corporations may become subject to the
[MCIT] under Sec. 27(E) of the same Code, whichever is
applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax
return and credit the taxes withheld (by the withholding agent/buyer) against its tax
due. If the tax due is greater than the tax withheld, then the taxpayer shall pay the
difference. If, on the other hand, the tax due is less than the tax withheld, the
taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is
taxed on its net income.
The use of the GSP/FMV as basis to determine the withholding taxes is
evidently for purposes of practicality and convenience. Obviously, the withholding
agent/buyer who is obligated to withhold the tax does not know, nor is he privy to,
how much the taxpayer/seller will have as its net income at the end of the taxable
year. Instead, said withholding agents knowledge and privity are limited only to the
particular transaction in which he is a party. In such a case, his basis can only be
the GSP or FMV as these are the only factors reasonably known or knowable by
him in connection with the performance of his duties as a withholding agent.
NO
BLURRING
OF
DISTINCTIONS
BETWEEN ORDINARY ASSETS AND CAPITAL
ASSETS

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the
real property categorized as ordinary assets. On the other hand, Section 27(D)(5) of
RA 8424 imposes a final tax and flat rate of 6% on the gain presumed to be
realized from the sale of a capital asset based on its GSP or FMV. This final tax is
also withheld at source.[72]

The differences between the two forms of withholding tax, i.e., creditable
and final, show that ordinary assets are not treated in the same manner as capital
assets. Final withholding tax (FWT) and CWT are distinguished as follows:

FWT
a) The amount of income tax
withheld by the withholding agent
is constituted as a full and final
payment of the income tax due
from the payee on the said
income.

CWT
a) Taxes withheld on certain income
payments are intended to equal or at
least approximate the tax due of the
payee on said income.

b)The liability for payment of the

tax rests primarily on the payor as
a withholding agent.

b) Payee of income is required to

report the income and/or pay the
difference between the tax withheld
and the tax due on the income. The
payee also has the right to ask for a
refund if the tax withheld is more
than the tax due.

c) The payee is not required to

file an income tax return for the
particular income.[73]

c) The income recipient is still

required to file an income tax
return, as prescribed in Sec. 51 and
Sec. 52 of the NIRC, as amended.[74]

As previously stated, FWT is imposed on the sale of capital assets. On the other
hand, CWT is imposed on the sale of ordinary assets. The inherent and substantial
differences between FWT and CWT disprove petitioners contention that ordinary
assets are being lumped together with, and treated similarly as, capital assets in
contravention of the pertinent provisions of RA 8424.
Petitioner insists that the levy, collection and payment of CWT at the time of
transaction are contrary to the provisions of RA 8424 on the manner and time of
filing of the return, payment and assessment of income tax involving ordinary
assets.[75]
The fact that the tax is withheld at source does not automatically mean that it
is treated exactly the same way as capital gains. As aforementioned, the mechanics
of the FWT are distinct from those of the CWT. The withholding agent/buyers act
of collecting the tax at the time of the transaction by withholding the tax due from
the income payable is the essence of the withholding tax method of tax collection.

NO RULE THAT ONLY PASSIVE

INCOMES CAN BE SUBJECT TO CWT

Petitioner submits that only passive income can be subjected to withholding

tax, whether final or creditable. According to petitioner, the whole of Section 57
governs the withholding of income tax on passive income. The enumeration in
Section 57(A) refers to passive income being subjected to FWT. It follows that
Section 57(B) on CWT should also be limited to passive income:
SEC. 57. Withholding of Tax at Source.
(A) Withholding of Final Tax on Certain Incomes. Subject to rules and
regulations, the [Secretary] may promulgate, upon the recommendation
of the [CIR], requiring the filing of income tax return by certain income
payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2),
24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)
(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a),
28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)
(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified
items of income shall be withheld by payor-corporation and/or person
and paid in the same manner and subject to the same conditions as
provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. The [Secretary] may,
upon the recommendation of the [CIR], require the withholding of a tax
on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as provided
for by law, at the rate of not less than one percent (1%) but not more than
thirty-two percent (32%) thereof, which shall be credited against the
income tax liability of the taxpayer for the taxable year. (Emphasis
supplied)

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds
of income and enumerates these as passive income. The BIR defines passive
income by stating what it is not:
if the income is generated in the active pursuit and performance of
the corporations primary purposes, the same is not passive income [76]

It is income generated by the taxpayers assets. These assets can be in the form of
real properties that return rental income, shares of stock in a corporation that earn
dividends or interest income received from savings.
On the other hand, Section 57(B) provides that the Secretary can require a
CWT on income payable to natural or juridical persons, residing in the
Philippines. There is no requirement that this income be passive income. If that
were the intent of Congress, it could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while
Section 57(B) pertains to CWT. The former covers the kinds of passive income
enumerated therein and the latter encompasses any income other than those listed
in 57(A). Since the law itself makes distinctions, it is wrong to regard 57(A) and
57(B) in the same way.
To repeat, the assailed provisions of RR 2-98, as amended, do not modify or
deviate from the text of Section 57(B). RR 2-98 merely implements the law by
specifying what income is subject to CWT. It has been held that, where a statute
does not require any particular procedure to be followed by an administrative
agency, the agency may adopt any reasonable method to carry out its functions.
[77]

Similarly, considering that the law uses the general term income, the Secretary

and CIR may specify the kinds of income the rules will apply to based on what is
feasible. In addition, administrative rules and regulations ordinarily deserve to be
given weight and respect by the courts[78] in view of the rule-making authority
given to those who formulate them and their specific expertise in their respective
fields.

NO DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS

Petitioner avers that the imposition of CWT on GSP/FMV of real estate

classified as ordinary assets deprives its members of their property without due
process of law because, in their line of business, gain is never assured by mere

receipt of the selling price. As a result, the government is collecting tax from net
income not yet gained or earned.
Again, it is stressed that the CWT is creditable against the tax due from the seller
of the property at the end of the taxable year. The seller will be able to claim a tax
refund if its net income is less than the taxes withheld. Nothing is taken that is not
due so there is no confiscation of property repugnant to the constitutional
guarantee of due process. More importantly, the due process requirement applies to
the power to tax.[79] The CWT does not impose new taxes nor does it increase
taxes.[80]It relates entirely to the method and time of payment.
Petitioner protests that the refund remedy does not make the CWT less
burdensome because taxpayers have to wait years and may even resort to litigation
before they are granted a refund. [81]This argument is misleading. The practical
problems encountered in claiming a tax refund do not affect the constitutionality
and validity of the CWT as a method of collecting the tax.
Petitioner complains that the amount withheld would have otherwise been
used by the enterprise to pay labor wages, materials, cost of money and other
expenses which can then save the entity from having to obtain loans entailing
considerable interest expense. Petitioner also lists the expenses and pitfalls of the
trade which add to the burden of the realty industry: huge investments and
borrowings; long gestation period; sudden and unpredictable interest rate surges;
continually spiraling development/construction costs; heavy taxes and prohibitive
up-front regulatory fees from at least 20 government agencies.[82]
Petitioners lamentations will not support its attack on the constitutionality of
the CWT.Petitioners complaints are essentially matters of policy best addressed to
the executive and legislative branches of the government. Besides, the CWT is
applied only on the amounts actually received or receivable by the real estate
entity. Sales on installment are taxed on a per-installment basis. [83] Petitioners
desire to utilize for its operational and capital expenses money earmarked for the
payment of taxes may be a practical business option but it is not a fundamental
right which can be demanded from the court or from the government.

NO VIOLATION OF EQUAL PROTECTION

Petitioner claims that the revenue regulations are violative of the equal protection
clause

because

the

CWT

is

being

levied

only

on

real

estate

enterprises. Specifically, petitioner points out that manufacturing enterprises are

not similarly imposed a CWT on their sales, even if their manner of doing business
is not much different from that of a real estate enterprise. Like a manufacturing
concern, a real estate business is involved in a continuous process of production
and it incurs costs and expenditures on a regular basis. The only difference is that
goods produced by the real estate business are house and lot units.[84]
Again, we disagree.
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.
[85]

Stated differently, all persons belonging to the same class shall be taxed alike. It

follows that the guaranty of the equal protection of the laws is not violated by
legislation based on a reasonable classification. Classification, to be valid, must (1)
rest on substantial distinctions; (2) be germane to the purpose of the law; (3) not be
limited to existing conditions only and (4) apply equally to all members of the
same class.[86]
The taxing power has the authority to make reasonable classifications for purposes
of taxation.[87]Inequalities which result from a singling out of one particular class
for taxation, or exemption, infringe no constitutional limitation. [88] The real estate
industry is, by itself, a class and can be validly treated differently from other
business enterprises.
Petitioner, in insisting that its industry should be treated similarly as manufacturing
enterprises, fails to realize that what distinguishes the real estate business from
other manufacturing enterprises, for purposes of the imposition of the CWT, is not
their production processes but the prices of their goods sold and the number of

transactions involved. The income from the sale of a real property is bigger and its
frequency of transaction limited, making it less cumbersome for the parties to
comply with the withholding tax scheme.
On the other hand, each manufacturing enterprise may have tens of thousands of
transactions with several thousand customers every month involving both minimal
and substantial amounts. To require the customers of manufacturing enterprises, at
present, to withhold the taxes on each of their transactions with their tens or
hundreds of suppliers may result in an inefficient and unmanageable system of
taxation and may well defeat the purpose of the withholding tax system.
Petitioner counters that there are other businesses wherein expensive items are also
sold infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other
capital goods yet these are not similarly subjected to the CWT.[89] As already
discussed, the Secretary may adopt any reasonable method to carry out its
functions.[90] Under Section 57(B), it may choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners
argument is not accurate.The sales of manufacturers who have clients within the
top 5,000 corporations, as specified by the BIR, are also subject to CWT for their
transactions with said 5,000 corporations.[91]

SECTION 2.58.2 OF RR NO. 2-98 MERELY

IMPLEMENTS SECTION 58 OF RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the
Registry of Deeds should not effect the regisration of any document transferring
real property unless a certification is issued by the CIR that the withholding tax has
been paid. Petitioner proffers hardly any reason to strike down this rule except to
rely on its contention that the CWT is unconstitutional. We have ruled that it is
not. Furthermore, this provision uses almost exactly the same wording as Section
58(E) of RA 8424 and is unquestionably in accordance with it:
Sec. 58. Returns and Payment of Taxes Withheld at Source.
(E) Registration with Register of Deeds. - No registration of any
document transferring real property shall be effected by the

Register of Deeds unless the [CIR] or his duly authorized

representative has certified that such transfer has been reported,
and the capital gains or [CWT], if any, has been paid: xxxx any
violation of this provision by the Register of Deeds shall be subject to
the penalties imposed under Section 269 of this Code. (Emphasis
supplied)

CONCLUSION

The renowned genius Albert Einstein was once quoted as saying [the] hardest thing
in the world to understand is the income tax.[92] When a party questions the
constitutionality of an income tax measure, it has to contend not only with
Einsteins observation but also with the vast and well-established jurisprudence in
support of the plenary powers of Congress to impose taxes. Petitioner has
miserably failed to discharge its burden of convincing the Court that the imposition
of MCIT and CWT is unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.
Costs against petitioner.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-24813

April 28, 1969

DR. HERMENEGILDO SERAFICA, plaintiff-appellant,

vs.
THE TREASURER OF ORMOC CITY, THE MUNICIPAL BOARD OF ORMOC CITY, HON.
ESTEBAN C. CONEJOS, as Mayor of Ormoc City and ORMOC CITY, defendants-appellees.
Cleto P. Evangelista for plaintiff-appellant.
The City Fiscal of Ormoc City for defendant-appellees.
CONCEPCION, C.J.:
Direct appeal from a decision of the Court of First Instance of Leyte dismissing plaintiff's complaint,
without pronouncement as to costs.

Plaintiff, Dr. Hermenegildo Serafica, seeks a declaration of nullity of Ordinance No. 13, Series of
1964, of Ormoc City, imposing a "tax of five pesos (P5.00) for every one thousand (1,000) board feet
of lumber sold at Ormoc City by any person, partnership, firm, association, corporation, or entities",
pursuant to which the Treasurer of said City levied on and collected from said plaintiff, as owner of
the Serafica Sawmill, the aggregate sum of P1,837.84, as tax on 367,568 board feet of lumber sold,
in said City, during the third quarter of 1964. After appropriate proceedings, the lower court rendered
judgment upholding the validity of said ordinance and denying the relief prayed for by Dr. Serafica.
Hence, this appeal by the latter.
The contested ordinance reads:
ORDINANCE NO. 13
AN ORDINANCE IMPOSING A TAX OF FIVE PESOS (P5.00) FOR EVERY ONE
THOUSAND BOARD FEET OF LUMBER SOLD AT ORMOC CITY AND FOR OTHER
PURPOSES.
BE IT ORDAINED, by authority of the Municipal Board of Ormoc City, Philippines, pursuant
to the provisions of Republic Act 179, as amended by RA 429, otherwise known as the
Charter of Ormoc City, That:
SECTION 1. City tax. There shall be paid to the City Treasurer a city tax of five pesos
(P5.00) for every one thousand (1,000) board feet of lumber sold at Ormoc City by any
person, partnership, firm, association, corporation or entity.
SECTION 2. Time and manner of payment and penalty for delinquency. The city tax
herein prescribed shall be payable without penalty within twenty (20) days after the close of
every quarter for which the tax is due. Failure to pay the tax within the prescribed time shall
render the taxpayer subject to a surcharge of fifty percentum (50%) for the first offense and
one hundred percentum (100%) for subsequent failures to pay within the prescribed period.
SECTION 3. Payment to be rendered by taxpayer. The taxpayer is hereby obliged to
include the tax due in every invoice issued for the sale of lumber which tax shall be
submitted for payment to the City Treasurer within twenty (20) days after the close of every
quarter.
SECTION 4. Inspection of taxpayer's books and records. For the purpose of enforcing the
provisions of this Ordinance, the City Treasurer or any of his deputies specifically authorized
in writing for the purpose, shall have authority to examine the books and records of any
person, partnership, firm, association, corporation or entity subject to the tax herein imposed,
PROVIDED, HOWEVER, That such examination shall be made only during regular business
hours, unless the person, partnership, firm, association, corporation or entity concerned shall
consent otherwise.
SEC. 5. Penalty for violation. Any violation of the provisions of the Ordinance shall be
punishable by a fine of not more than five hundred (P500.00) pesos and an imprisonment of
not more than three (3) months.
SEC. 6. Construction of this Ordinance. If any part or section of this Ordinance shall be
declared unconstitutional or ultra vires, such part or section shall not invalidate any other
provision hereof.
SEC. 7. Effectivity. This Ordinance shall take effect immediately upon approval.
ENACTED, June 17, 1964.
lawphi1.nt

RESOLVED, FURTHER, to authorize the City Treasurer to copies of this Ordinance for
issuance to all concerned;

RESOLVED, FINALLY, to furnish a copy of this resolution-ordinance each to the City

Treasurer, the City Auditor, the City Fiscal, the City Judge, and all concerned;
CARRIED. Six affirmative votes registered by Councilors Tugonon, Alfaro, Kierulf, Abas,
Besabella, and Du; one abstention registered by Councilor Aviles.
xxx

xxx

xxx

Plaintiff assails this ordinance as null and void upon the grounds that: (1) the Charter of Ormoc City
(Republic Acts Nos. 179 and 429) authorizes the same to "regulate", but not to "tax" lumber yards;
(2) the ordinance in question imposes, in effect, double taxation, because the business of
lumberyard is already regulated under said Charter and the sale of lumber is "a mere incident to the
business of lumber yard"; (3) the tax imposed is "unfair, unjust, arbitrary, unreasonable, oppressive
and contrary to the principles of taxation"; and (4) "the public was not heard and given a chance to
air its views" thereon.
With respect to the first ground, We have held in Ormoc Sugar Co. v. Municipal Board of Ormoc
City, 1 that the taxing power of the City of Ormoc, under section 2 of the Local Autonomy Act 2 is
"broad" and "sufficiently plenary to cover everything, excepting those mentioned therein". 3 It should
be noted that in said case of Ormoc Sugar Co., We upheld the validity of a sales tax.
As regards the second ground, suffice it to say that regulation and taxation are two different things,
the first being an exercise of police power, whereas the latter is not, apart from the fact that double
taxation is not prohibited in the Philippines. 4
The third objection is premised upon the fact that the tax in question is imposed regardless of the
class of lumber sold, although there are several categories thereof, commanding different prices.
Plaintiff has not proven, however, or even alleged the prices corresponding to each category, so that,
like the lower court, We have no means to ascertain the accuracy of the conclusion drawn by him,
and must, accordingly, rely upon the presumption that the City Council had merely complied with its
duty and that the ordinance is valid, unless and until the contrary has been duly established. 5
The last objection is based upon Provincial Circular No. 24 of the Department of Finance, dated
March 31, 1960,suggesting that, "in the enactment of tax ordinances .. under the Local Autonomy
Act ... where practicable, public hearings be held wherein the views of the public ... may be heard."
This is, however, a mere suggestion, compliance with which is not obligatory, so that failure to act in
accordance therewith can not and does not affect the validity of the tax ordinance.
Indeed, since local governments are subject, not to the control, but merely to the general supervision
of the President, it is to say the least, doubtful that the latter could have made compliance with said
circular obligatory. 6
We have not overlooked the fact that, pursuant to Sec. 2 of Republic Act No. 2264 as amended "no
city, municipality or municipal district may levy or impose ...
xxx

xxx

xxx

(e) Taxes on forest products or forest concessions."

Although lumber is a forest product, this imitation has no application to the case at bar, the tax in
question being imposed, not upon lumber, but upon its sale. Said tax is not levied upon the lumber in
plaintiff's sawmill and does not become due until after the lumber has been sold. Hence, the case at
bar is distinguishable from Golden Ribbon Lumber Co., Inc. v. City of Butuan 7 in that the ordinance
involved therein provided that "every person, association or corporation operating a lumber mill
and/or lumber yard within the territory of the City of Butuan shall pay to the City a tax of two-fifths
(P.004) centavo for every board foot of lumber sawn, manufactured and/or produced." In short, the
tax in that case was imposed upon the "lumber" a forest product, not subject to local taxation

whether sold or not. Similarly, Santos Lumber Co. v. City of Cebu 8 and Jose S. Johnston & Sons v.
Ramon Regondola 9 cited by the plaintiff, refer to situations arising before the enactment of Republic
Act No. 2264, 10 and, hence, are inapplicable to the present case.
Neither have We overlooked the proviso in Sec. 2 of said Act prohibiting the imposition of "any
percentage tax on sales or other taxes in any form based thereon," for this injunction is directed
exclusively to "municipalities and municipal districts," and does not apply to cities.
WHEREFORE, the decision appealed from should be, as it is hereby affirmed, with costs against
plaintiff herein. It is so ordered.
Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Fernando and Barredo, JJ., concur.
Castro and Capistrano, JJ., took no part.
Teehankee, J., concurs in the result.

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio Jayme
Ledesma, Plaintiff-Appellant, v. J. ANTONIO ARANETA, as the Collector of Internal
Revenue, Defendant-Appellee.
Ernesto J. Gonzaga for Appellant.
Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E. Torres and
Solicitor Felicisimo R. Rosete for Appellee.

SYLLABUS

1. CONSTITUTIONAL LAW; TAXATION; POWER OF STATE TO LEVY TAX IN AND SUPPORT OF SUGAR
INDUSTRY. As the protection and promotion of the sugar industry is a matter of public concern the
Legislature may determine within reasonable bounds what is necessary for its protection and expedient for
its promotion. Here, the legislative must be allowed full play, subject only to the test of reasonableness; and
it is not contended that the means provided in section 6 of Commonwealth Act No. 567 bear no relation to
the objective pursued or are oppressive in character. If objective an methods are alike constitutionally valid,
no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment.
Taxation may be made the implement. Taxation may be made the implement of the states police power
(Great Atl. & Pac. Tea Co. v. Grosjean, 301 U.S. 412, 81 L. Ed. 1193; U.S. v. Butler, 297 U.S. 1, 80 L. Ed.
477; MCulloch v. Maryland, 4 Wheat, 316, 4 L. Ed. 579).
2. ID.; ID.; POWER OF STATE TO SELECT SUBJECT OF TAXATION. It is inherent in the power to tax that a
state be free to select the subjects of taxation, and it has been repeatedly held that "inequalities which
result from a singling out of one particular class for taxation or exemption infringe no constitutional
limitation (Carmicheal v. Southern Coal & Coke Co., 301 U.S. 495, 81 L. Ed. 1245, citing numerous
authorities, at 1251).

DECISION

REYES, J. B. L., J.:

This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the taxes
imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.
Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due to the
threat to our industry by the imminent imposition of export taxes upon sugar as provided in the TydingsMcDuffie Act, and the "eventual loss of its preferential position in the United States market" ; wherefore, the
national policy was expressed "to obtain a readjustment of the benefits derived from the sugar industry by
the component elements thereof" and "to stabilize the sugar industry so as to prepare it for the eventuality
of the loss of its preferential position in the United States market and the imposition of the export taxes."
cralaw virtua1aw library

In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the manufacture of
sugar, on a graduated basis, on each picul of sugar manufactures; while section 3 levies on owners or
persons in control of lands devoted to the cultivation of sugar cane and ceded to others for a consideration,
on lease or otherwise

"a tax equivalent to the difference between the money value of the rental or consideration collected and the
amount representing 12 per centum of the assessed value of such land."
cralaw virtua1aw library

According to section 6 of the law

SEC. 6. All collections made under this Act shall accrue to a special fund in the Philippine Treasury, to be
known as the Sugar Adjustment and Stabilization Fund, and shall be paid out only for any or all of the
following purposes or to attain any or all of the following objectives, as may be provided by law.
First, to place the sugar industry in a position to maintain itself despite the gradual loss of the preferential
position of the Philippine sugar in the United States market, and ultimately to insure its continued existence
notwithstanding the loss of that market and the consequent necessity of meeting competition in the free
markets of the world;
Second, to readjust the benefits derived from the sugar industry by all of the component elements thereof
the mill, the landowner, the planter of the sugar cane, and the laborers in the factory and in the field so
that all might continue profitably to engage therein;
Third, to limit the production of sugar to areas more economically suited to the production thereof; and
Fourth, to afford labor employed in the industry a living wage and to improve their living and working
conditions: Provided, That the President of the Philippines may, until the adjournment of the next regular
session of the National Assembly, make the necessary disbursements from the fund herein created (1) for
the establishment and operation of sugar experiment station or stations and the undertaking of researchers
(a)to increase the recoveries of the centrifugal sugar factories with the view of reducing manufacturing
costs, (b) to produce and propagate higher yielding varieties of sugar cane more adaptable to different
distinct conditions in the Philippines, (c) to lower the costs of raising sugar cane, (d) to improve the buying
quality of denatured alcohol from molasses for motor fuel, (e) to determine the possibility of utilizing the
other by-products of the industry, (f) to determine what crop or crops are suitable for rotation and for the
utilization of excess cane lands, and (g) on other problems the solution of which would help rehabilitated
and stabilize the industry, and (2) for the improvement of living and working conditions in sugar mills and
sugar plantations, authorizing him to organize the necessary agency or agencies to take charge of the
expenditure and allocation of said funds to carry out the purpose hereinbefore enumerated, and, likewise,
authorizing the disbursement from the fund herein created of the necessary amount of amounts needed for
salaries, wages, travelling expenses, equipment, and other sundry expenses or said agency or agencies."

cralaw virtua1aw library

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme
Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the estate
as taxes, under section 3 of the Act, for the crop years 1948-1949 and 1949-1950; alleging that such tax is
unconstitutional and void, being levied for the aid and support of the sugar industry exclusively, which in
plaintiffs opinion is not a public purpose for which a tax may be constitutionally levied. The action having
been dismissed by the Court of First Instance, the plaintiffs appealed the case directly to this Court
(Judiciary Act, section 17).
The basic defect in the plaintiffs position is his assumption that the tax provided for in Commonwealth Act
No. 567 is a pure exercise of the taxing power. Analysis of the Act, and particularly of section 6 (heretofore
quoted in full), will show that the tax is levied with a regulatory purpose, to provide means for the
rehabilitation and stabilization of the threatened sugar industry. In other words, the act is primarily an
exercise of the police power.
This Court can take judicial notice of the fact that sugar production in one of the great industries of our
nation, sugar occupying a leading position among its export products; that it gives employment to
thousands of laborers in fields and factories; that it is a great source of the states wealth, is one of the
important sources of foreign exchange needed by our government, and is thus pivotal in the plans of a
regime committed to a policy of currency stability. Its promotion, protection and advancement, therefore
redounds greatly to the general welfare. Hence it was competent for the legislature to find that the general
welfare demanded that the sugar industry should be stabilized in turn; and in the wide field of its police
power, the law-making body could provide that the distribution of benefits therefrom be readjusted among
its components to enable it to resist the added strain of the increase in taxes that it had to sustain (Sligh v.
Kirkwood, 237 U. S. 52, 59 L. Ed. 835; Johnson v. State ex rel. Marey, 99 Fla. 1311, 128 So 853; Maxcy Inc.
v. Mayo, 103 Fla. 552, 139 So. 121).
As stated in Johnson v. State ex rel. Marey, with reference to the citrus industry in Florida
"The protection of a large industry constituting one of the great sources of the states wealth and therefore
directly or indirectly affecting the welfare of so great a portion of the population of the State is affected to
such an extent by public interests as to be within the police power of the sovereign." (128 So. 857)
Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter of public
concern, it follows that the Legislature may determine within reasonable bounds what is necessary for its
protection and expedient for its promotion. Here, the legislative discretion must be allowed full play, subject
only to the test of reasonableness; and it is not contended that the means provided in section 6 of the law
(above quoted) bear no relation to the objective pursued or are oppressive in character. If objective and
methods are alike constitutionally valid, no reason is seen why the state may not be levy taxes to raise
funds for their prosecution and attainment. Taxation may be made the implement of the states police power
(Great Atl. & Pac. Tea Co. v. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. v. Butler, 297 U. S. 1, 80 L. Ed.

477; MCulloch v. Maryland, 4 Wheat. 318, 4 L. Ed. 579).

That the tax to be levied should burden the sugar producers themselves can hardly be a ground of
complaint; indeed, it appears rational that the tax be obtained precisely from those who are to be benefited
from the expenditure of the funds derived from it. At any rate, it is inherent in the power to tax that a state
be free to select the subjects of taxation, and it has been repeatedly held that "inequalities which result from
a singling out of one particular class for taxation, or exemption infringe no constitutional limitation"
(Carmichael v. Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing numerous authorities, at p.
1251).
From the point of view we have taken it appears of no moment that the funds raised under the Sugar
Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry, since it is that
very enterprise that is being protected. It may be that other industries are also in need of similar protection;
but the legislature is not required by the Constitution to adhere to a policy of "all or none." As ruled in
Minnesota ex rel. Pearson v. Probate Court, 309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the evil
where it is most felt, it is not to be overthrown because there are other instances to which it might have
been applied;" and that the legislative authority, exerted within its proper field, need not embrace all the
evils within its reach" (N. L. R. B. v. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).
Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of tax
money to experimental stations to seek increase of efficiency in sugar production, utilization of by- products
and solution of allied problems, as well as to the improvement of living and working conditions in sugar mills
or plantations, without any part of such money being channeled directly to private persons, constitutes
expenditure of tax money for private purposes, (compare Everson v. Board of Education, 91 L. Ed. 472, 168
ALR 1392, 1400).
The decision appealed from is affirmed, with costs against appellant. So ordered.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
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. 21After 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.

EN BANC
COMMISSIONER
INTERNAL REVENUE,
Petitioner,

OF G. R. No. 163653

-versus-

FILINVEST DEVELOPMENT
CORPORATION,
Respondent.
x-------------------------------------x
COMMISSIONER

G. R. No. 167689

OF Present:

INTERNAL REVENUE,
Petitioner,

CORONA, C.J.,
CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
-versusPERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
FILINVEST DEVELOPMENT VILLARAMA, JR.,
CORPORATION,
PEREZ,
Respondent.
MENDOZA, and
SERENO,* JJ.

Promulgated:
July 19, 2011
x----------------------------------------------------------------------------------------------- x
DECISION
PEREZ, J.:
Assailed in these twin petitions for review on certiorari filed pursuant to
Rule 45 of the 1997 Rules of Civil Procedure are the decisions rendered by the
Court of Appeals (CA) in the following cases: (a) Decision dated 16 December
2003 of the then Special Fifth Division in CA-G.R. SP No. 72992; [1] and, (b)
Decision dated 26 January 2005 of the then Fourteenth Division in CA-G.R. SP
No. 74510.[2]

The Facts
The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc.
(FAI), respondent Filinvest Development Corporation (FDC) is a holding company
which also owned 67.42% of the outstanding shares of Filinvest Land, Inc.
(FLI). On 29 November 1996, FDC and FAI entered into a Deed of Exchange with
FLI whereby the former both transferred in favor of the latter parcels of land
appraised at P4,306,777,000.00. In exchange for said parcels which were intended
to facilitate development of medium-rise residential and commercial buildings,
463,094,301 shares of stock of FLI were issued to FDC and FAI. [3] As a result of

the exchange, FLIs ownership structure was changed to the extent reflected in the
following tabular prcis, viz.:
Number and Percentage
of Shares Held After the
Exchange

FDC

Number and Percentage Number of

of Shares Held Prior to Additional
the Exchange
Shares
Issued
2,537,358,000 67.42%
42,217,000

FAI

00

420,877,000

420,877,000 9.96%

OTHERS

1,226,177,000 32.58%

1,226,177,000 29.01%

----------------- -----------

--------------

---------------

3,763,535,000 100%

463,094,301

4,226,629,000 (100%)

Stockholde
r

2,579,575,000 61.03%

On 13 January 1997, FLI requested a ruling from the Bureau of Internal Revenue
(BIR) to the effect that no gain or loss should be recognized in the aforesaid
transfer of real properties. Acting on the request, the BIR issued Ruling No. S-34046-97 dated 3 February 1997, finding that the exchange is among those
contemplated under Section 34 (c) (2) of the old National Internal Revenue Code
(NIRC)[4] which provides that (n)o gain or loss shall be recognized if property is
transferred to a corporation by a person in exchange for a stock in such corporation
of which as a result of such exchange said person, alone or together with others,
not exceeding four (4) persons, gains control of said corporation."[5] With the BIRs
reiteration of the foregoing ruling upon the 10 February 1997 request for
clarification filed by FLI,[6] the latter, together with FDC and FAI, complied with
all the requirements imposed in the ruling.[7]
On various dates during the years 1996 and 1997, in the meantime, FDC also
extended advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar Central
Corporation (DSCC) and Filinvest Capital, Inc. (FCI).[8] Duly evidenced by
instructional letters as well as cash and journal vouchers, said cash advances
amounted to P2,557,213,942.60 in 1996[9] and P3,360,889,677.48 in 1997.[10]On 15
November 1996, FDC also entered into a Shareholders Agreement with Reco
Herrera PTE Ltd. (RHPL) for the formation of a Singapore-based joint venture
company called Filinvest Asia Corporation (FAC), tasked to develop and manage
FDCs 50% ownership of its PBCom Office Tower Project (the Project). With their
equity participation in FAC respectively pegged at 60% and 40% in the
Shareholders Agreement, FDC subscribed to P500.7 million worth of shares in said
joint venture company to RHPLs subscription worth P433.8 million. Having paid
its subscription by executing a Deed of Assignment transferring to FAC a portion
of its rights and interest in the Project worth P500.7 million, FDC eventually
reported a net loss of P190,695,061.00 in its Annual Income Tax Return for the
taxable year 1996.[11]

On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to
pay deficiency income and documentary stamp taxes, plus interests and
compromise penalties,[12] covered by the following Assessment Notices, viz.: (a)
Assessment Notice No. SP-INC-96-00018-2000 for deficiency income taxes in the
sum of P150,074,066.27 for 1996; (b) Assessment Notice No. SP-DST-96-000202000 for deficiency documentary stamp taxes in the sum of P10,425,487.06 for
1996; (c) Assessment Notice No. SP-INC-97-00019-2000 for deficiency income
taxes in the sum ofP5,716,927.03 for 1997; and (d) Assessment Notice No. SPDST-97-00021-2000 for deficiency documentary stamp taxes in the sum
of P5,796,699.40 for 1997.[13] The foregoing deficiency taxes were assessed on the
taxable gain supposedly realized by FDC from the Deed of Exchange it executed
with FAI and FLI, on the dilution resulting from the Shareholders Agreement FDC
executed with RHPL as well as the arms-length interest rate and documentary
stamp taxes imposable on the advances FDC extended to its affiliates.[14]
On 3 January 2000, FAI similarly received from the BIR a Formal Letter of
Demand for deficiency income taxes in the sum of P1,477,494,638.23 for the year
1997.[15] Covered by Assessment Notice No. SP-INC-97-0027-2000, [16] said
deficiency tax was also assessed on the taxable gain purportedly realized by FAI
from the Deed of Exchange it executed with FDC and FLI. [17] On 26 January 2000
or within the reglementary period of thirty (30) days from notice of the assessment,
both FDC and FAI filed their respective requests for reconsideration/protest, on the
ground that the deficiency income and documentary stamp taxes assessed by the
BIR were bereft of factual and legal basis.[18] Having submitted the relevant
supporting documents pursuant to the 31 January 2000 directive from the BIR
Appellate Division, FDC and FAI filed on 11 September 2000 a letter requesting
an early resolution of their request for reconsideration/protest on the ground that
the 180 days prescribed for the resolution thereof under Section 228 of the NIRC
was going to expire on 20 September 2000.[19]
In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to
resolve their request for reconsideration/protest within the aforesaid period, FDC
and FAI filed on 17 October 2000 a petition for review with the Court of Tax
Appeals (CTA) pursuant to Section 228 of the 1997 NIRC.Docketed before said
court as CTA Case No. 6182, the petition alleged, among other matters, that as
previously opined in BIR Ruling No. S-34-046-97, no taxable gain should have
been assessed from the subject Deed of Exchange since FDC and FAI collectively
gained further control of FLI as a consequence of the exchange; that correlative to
the CIR's lack of authority to impute theoretical interests on the cash advances
FDC extended in favor of its affiliates, the rule is settled that interests cannot be
demanded in the absence of a stipulation to the effect; that not being promissory
notes or certificates of obligations, the instructional letters as well as the cash and
journal vouchers evidencing said cash advances were not subject to documentary

stamp taxes; and, that no income tax may be imposed on the prospective gain from
the supposed appreciation of FDC's shareholdings in FAC. As a consequence, FDC
and FAC both prayed that the subject assessments for deficiency income and
documentary stamp taxes for the years 1996 and 1997 be cancelled and annulled.
[20]

On 4 December 2000, the CIR filed its answer, claiming that the transfer of
property in question should not be considered tax free since, with the resultant
diminution of its shares in FLI, FDC did not gain further control of said
corporation. Likewise calling attention to the fact that the cash advances FDC
extended to its affiliates were interest free despite the interest bearing loans it
obtained from banking institutions, the CIR invoked Section 43 of the old NIRC
which, as implemented by Revenue Regulations No. 2, Section 179 (b) and (c),
gave him "the power to allocate, distribute or apportion income or deductions
between or among such organizations, trades or business in order to prevent
evasion of taxes." The CIR justified the imposition of documentary stamp taxes on
the instructional letters as well as cash and journal vouchers for said cash advances
on the strength of Section 180 of the NIRC and Revenue Regulations No. 9-94
which provide that loan transactions are subject to said tax irrespective of whether
or not they are evidenced by a formal agreement or by mere office memo. The CIR
also argued that FDC realized taxable gain arising from the dilution of its shares in
FAC as a result of its Shareholders' Agreement with RHPL.[21]
At the pre-trial conference, the parties filed a Stipulation of Facts, Documents and
Issues[22] which was admitted in the 16 February 2001 resolution issued by the
CTA. With the further admission of the Formal Offer of Documentary Evidence
subsequently filed by FDC and FAI[23] and the conclusion of the testimony of
Susana Macabelda anent the cash advances FDC extended in favor of its affiliates,
[24]
the CTA went on to render the Decision dated 10 September 2002 which, with
the exception of the deficiency income tax on the interest income FDC supposedly
realized from the advances it extended in favor of its affiliates, cancelled the rest of
deficiency income and documentary stamp taxes assessed against FDC and FAI for
the years 1996 and 1997,[25] thus:
WHEREFORE, in view of all the foregoing, the court finds the
instant petition partly meritorious. Accordingly, Assessment Notice No.
SP-INC-96-00018-2000 imposing deficiency income tax on FDC for
taxable year 1996, Assessment Notice No. SP-DST-96-00020-2000 and
SP-DST-97-00021-2000 imposing deficiency documentary stamp tax on
FDC for taxable years 1996 and 1997, respectively and Assessment
Notice No. SP-INC-97-0027-2000 imposing deficiency income tax on
FAI for the taxable year 1997 are hereby CANCELLED and SET
ASIDE. However, [FDC] is hereby ORDERED to PAY the amount
of P5,691,972.03 as deficiency income tax for taxable year 1997. In
addition, petitioner is also ORDERED to PAY 20% delinquency interest

computed from February 16, 2000 until full payment thereof pursuant to
Section 249 (c) (3) of the Tax Code.[26]

Finding that the collective increase of the equity participation of FDC and
FAI in FLI rendered the gain derived from the exchange tax-free, the CTA also
ruled that the increase in the value of FDC's shares in FAC did not result in
economic advantage in the absence of actual sale or conversion thereof. While
likewise finding that the documents evidencing the cash advances FDC extended to
its affiliates cannot be considered as loan agreements that are subject to
documentary stamp tax, the CTA enunciated, however, that the CIR was justified in
assessing undeclared interests on the same cash advances pursuant to his authority
under Section 43 of the NIRC in order to forestall tax evasion. For persuasive
effect, the CTA referred to the equivalent provision in the Internal Revenue Code
of the United States (IRC-US), i.e., Sec. 482, as implemented by Section 1.482-2
of 1965-1969 Regulations of the Law of Federal Income Taxation.[27]
Dissatisfied with the foregoing decision, FDC filed on 5 November 2002 the
petition for review docketed before the CA as CA-G.R. No. 72992, pursuant to
Rule 43 of the 1997 Rules of Civil Procedure. Calling attention to the fact that the
cash advances it extended to its affiliates were interest-free in the absence of the
express stipulation on interest required under Article 1956 of theCivil Code, FDC
questioned the imposition of an arm's-length interest rate thereon on the ground,
among others, that the CIR's authority under Section 43 of the NIRC: (a) does not
include the power to impute imaginary interest on said transactions; (b) is directed
only against controlled taxpayers and not against mother or holding corporations;
and, (c) can only be invoked in cases of understatement of taxable net income or
evident tax evasion.[28] Upholding FDC's position, the CA's then Special Fifth
Division rendered the herein assailed decision dated 16 December 2003, [29]the
decretal portion of which states:
WHEREFORE, premises considered, the instant petition is
hereby GRANTED. The assailed Decision dated September 10, 2002
rendered by the Court of Tax Appeals in CTA Case No. 6182 directing
petitioner Filinvest Development Corporation to pay the amount
of P5,691,972.03 representing deficiency income tax on allegedly
undeclared interest income for the taxable year 1997, plus 20%
delinquency interest computed from February 16, 2000 until full
payment thereof isREVERSED and SET ASIDE and, a new one
entered annulling Assessment Notice No. SP-INC-97-00019-2000
imposing deficiency income tax on petitioner for taxable year 1997. No
pronouncement as to costs.[30]

With the denial of its partial motion for reconsideration of the same 11
December 2002 resolution issued by the CTA,[31] the CIR also filed the petition for

review docketed before the CA as CA-G.R. No. 74510. In essence, the CIR argued
that the CTA reversibly erred in cancelling the assessment notices: (a) for
deficiency income taxes on the exchange of property between FDC, FAI and FLI;
(b) for deficiency documentary stamp taxes on the documents evidencing FDC's
cash advances to its affiliates; and (c) for deficiency income tax on the gain FDC
purportedly realized from the increase of the value of its shareholdings in FAC.
[32]
The foregoing petition was, however, denied due course and dismissed for lack
of merit in the herein assailed decision dated 26 January 2005 [33] rendered by the
CA's then Fourteenth Division, upon the following findings and conclusions, to
wit:
1. As affirmed in the 3 February 1997 BIR Ruling No. S-34-046-97, the
29 November 1996 Deed of Exchange resulted in the combined
control by FDC and FAI of more than 51% of the outstanding
shares of FLI, hence, no taxable gain can be recognized from the
transaction under Section 34 (c) (2) of the old NIRC;
2. The instructional letters as well as the cash and journal vouchers
evidencing the advances FDC extended to its affiliates are not
subject to documentary stamp taxes pursuant to BIR Ruling No.
116-98, dated 30 July 1998, since they do not partake the nature
of loan agreements;
3. Although BIR Ruling No. 116-98 had been subsequently modified by
BIR Ruling No. 108-99, dated 15 July 1999, to the effect that
documentary stamp taxes are imposable on inter-office memos
evidencing cash advances similar to those extended by FDC, said
latter ruling cannot be given retroactive application if to do so
would be prejudicial to the taxpayer;
4. FDC's alleged gain from the increase of its shareholdings in FAC as a
consequence of the Shareholders' Agreement it executed with
RHPL cannot be considered taxable income since, until actually
converted thru sale or disposition of said shares, they merely
represent unrealized increase in capital. [34]

Respectively docketed before this Court as G.R. Nos. 163653 and 167689,
the CIR's petitions for review on certiorari assailing the 16 December 2003
decision in CA-G.R. No. 72992 and the 26 January 2005 decision in CA-G.R. SP
No. 74510 were consolidated pursuant to the 1 March 2006 resolution issued by
this Courts Third Division.
The Issues
In G.R. No. 163653, the CIR urges the grant of its petition on the following
ground:

THE COURT OF APPEALS ERRED IN REVERSING THE

DECISION OF THE COURT OF TAX APPEALS AND IN
HOLDING THAT THE ADVANCES EXTENDED BY
RESPONDENT TO ITS AFFILIATES ARE NOT SUBJECT TO
INCOME TAX.[35]

In G.R. No. 167689, on the other hand, petitioner proffers the following issues for
resolution:
I
THE HONORABLE COURT OF APPEALS COMMITTED
GRAVE ABUSE OF DISCRETION IN HOLDING THAT THE
EXCHANGE OF SHARES OF STOCK FOR PROPERTY AMONG
FILINVEST
DEVELOPMENT
CORPORATION
(FDC),
FILINVEST
ALABANG,
INCORPORATED
(FAI)
AND
FILINVEST LAND INCORPORATED (FLI) MET ALL THE
REQUIREMENTS FOR THE NON-RECOGNITION OF
TAXABLE GAIN UNDER SECTION 34 (c) (2) OF THE OLD
NATIONAL INTERNAL REVENUE CODE (NIRC) (NOW
SECTION 40 (C) (2) (c) OF THE NIRC.
II
THE HONORABLE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR IN HOLDING THAT THE LETTERS OF
INSTRUCTION OR CASH VOUCHERS EXTENDED BY FDC TO
ITS AFFILIATES ARE NOT DEEMED LOAN AGREEMENTS
SUBJECT TO DOCUMENTARY STAMP TAXES UNDER
SECTION 180 OF THE NIRC.
III
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
HOLDING THAT GAIN ON DILUTION AS A RESULT OF THE
INCREASE IN THE VALUE OF FDCS SHAREHOLDINGS IN
FAC IS NOT TAXABLE.[36]

The Courts Ruling

While the petition in G.R. No. 163653 is bereft of merit, we find the CIRs petition
in G.R. No. 167689 impressed with partial merit.
In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTAs
finding that theoretical interests can be imputed on the advances FDC extended to
its affiliates in 1996 and 1997 considering that, for said purpose, FDC resorted to
interest-bearing fund borrowings from commercial banks. Since considerable
interest expenses were deducted by FDC when said funds were borrowed, the CIR

theorizes that interest income should likewise be declared when the same funds
were sourced for the advances FDC extended to its affiliates. Invoking Section 43
of the 1993 NIRC in relation to Section 179(b) of Revenue Regulation No. 2, the
CIR maintains that it is vested with the power to allocate, distribute or apportion
income or deductions between or among controlled organizations, trades or
businesses even in the absence of fraud, since said power is intended to prevent
evasion of taxes or clearly to reflect the income of any such organizations, trades
or businesses. In addition, the CIR asseverates that the CA should have accorded
weight and respect to the findings of the CTA which, as the specialized court
dedicated to the study and consideration of tax matters, can take judicial notice of
US income tax laws and regulations.[37]
Admittedly, Section 43 of the 1993 NIRC[38] provides that, (i)n any case of
two or more organizations, trades or businesses (whether or not incorporated and
whether or not organized in the Philippines) owned or controlled directly or
indirectly by the same interests, the Commissioner of Internal Revenue is
authorized to distribute, apportion or allocate gross income or deductions between
or among such organization, trade or business, if he determines that such
distribution, apportionment or allocation is necessary in order to prevent evasion of
taxes or clearly to reflect the income of any such organization, trade or business. In
amplification of the equivalent provision[39]under Commonwealth Act No. 466,
[40]
Sec. 179(b) of Revenue Regulation No. 2 states as follows:
Determination of the taxable net income of controlled
taxpayer. (A) DEFINITIONS. When used in this section
(1)
The term organization includes any kind, whether it be a
sole proprietorship, a partnership, a trust, an estate, or a corporation or
association, irrespective of the place where organized, where operated,
or where its trade or business is conducted, and regardless of whether
domestic or foreign, whether exempt or taxable, or whether affiliated or
not.
(2)
The terms trade or business include any trade or business
activity of any kind, regardless of whether or where organized, whether
owned individually or otherwise, and regardless of the place where
carried on.
(3)
The term controlled includes any kind of control, direct or
indirect, whether legally enforceable, and however exercisable or
exercised. It is the reality of the control which is decisive, not its form or
mode of exercise. A presumption of control arises if income or
deductions have been arbitrarily shifted.
(4)
The term controlled taxpayer means any one of two or
more organizations, trades, or businesses owned or controlled directly or
indirectly by the same interests.
(5)
The term group and group of controlled taxpayers means
the organizations, trades or businesses owned or controlled by the same
interests.

(6)
The term true net income means, in the case of a
controlled taxpayer, the net income (or as the case may be, any item or
element affecting net income) which would have resulted to the
controlled taxpayer, had it in the conduct of its affairs (or, as the case
may be, any item or element affecting net income) which would have
resulted to the controlled taxpayer, had it in the conduct of its affairs (or,
as the case may be, in the particular contract, transaction, arrangement or
other act) dealt with the other members or members of the group at arms
length. It does not mean the income, the deductions, or the item or
element of either, resulting to the controlled taxpayer by reason of the
particular contract, transaction, or arrangement, the controlled taxpayer,
or the interest controlling it, chose to make (even though such contract,
transaction, or arrangement be legally binding upon the parties thereto).
(B) SCOPE AND PURPOSE. - The purpose of Section 44 of the
Tax Code is to place a controlled taxpayer on a tax parity with an
uncontrolled taxpayer, by determining, according to the standard of an
uncontrolled taxpayer, the true net income from the property and
business of a controlled taxpayer. The interests controlling a group of
controlled taxpayer are assumed to have complete power to cause each
controlled taxpayer so to conduct its affairs that its transactions and
accounting records truly reflect the net income from the property and
business of each of the controlled taxpayers. If, however, this has not
been done and the taxable net income are thereby understated, the statute
contemplates that the Commissioner of Internal Revenue shall intervene,
and, by making such distributions, apportionments, or allocations as he
may deem necessary of gross income or deductions, or of any item or
element affecting net income, between or among the controlled
taxpayers constituting the group, shall determine the true net income of
each controlled taxpayer. The standard to be applied in every case is that
of an uncontrolled taxpayer. Section 44 grants no right to a controlled
taxpayer to apply its provisions at will, nor does it grant any right to
compel the Commissioner of Internal Revenue to apply its provisions.
(C) APPLICATION Transactions between controlled taxpayer and
another will be subjected to special scrutiny to ascertain whether the
common control is being used to reduce, avoid or escape taxes. In
determining the true net income of a controlled taxpayer, the
Commissioner of Internal Revenue is not restricted to the case of
improper accounting, to the case of a fraudulent, colorable, or sham
transaction, or to the case of a device designed to reduce or avoid tax by
shifting or distorting income or deductions. The authority to determine
true net income extends to any case in which either by inadvertence or
design the taxable net income in whole or in part, of a controlled
taxpayer, is other than it would have been had the taxpayer in the
conduct of his affairs been an uncontrolled taxpayer dealing at arms
length with another uncontrolled taxpayer.[41]

As may be gleaned from the definitions of the terms controlled and

"controlled taxpayer" under paragraphs (a) (3) and (4) of the foregoing provision, it

would appear that FDC and its affiliates come within the purview of Section 43 of
the 1993 NIRC. Aside from owning significant portions of the shares of stock of
FLI, FAI, DSCC and FCI, the fact that FDC extended substantial sums of money as
cash advances to its said affiliates for the purpose of providing them financial
assistance for their operational and capital expenditures seemingly indicate that the
situation sought to be addressed by the subject provision exists. From the tenor of
paragraph (c) of Section 179 of Revenue Regulation No. 2, it may also be seen that
the CIR's power to distribute, apportion or allocate gross income or deductions
between or among controlled taxpayers may be likewise exercised whether or not
fraud inheres in the transaction/s under scrutiny. For as long as the controlled
taxpayer's taxable income is not reflective of that which it would have realized had
it been dealing at arm's length with an uncontrolled taxpayer, the CIR can make the
necessary rectifications in order to prevent evasion of taxes.
Despite the broad parameters provided, however, we find that the CIR's
powers of distribution, apportionment or allocation of gross income and deductions
under Section 43 of the 1993 NIRC and Section 179 of Revenue Regulation No. 2
does not include the power to impute "theoretical interests" to the controlled
taxpayer's transactions. Pursuant to Section 28 of the 1993 NIRC, [42] after all, the
term gross income is understood to mean all income from whatever sourcederived,
including, but not limited to the following items: compensation for services,
including fees, commissions, and similar items; gross income derived from
business; gains derived from dealings in property; interest; rents;
royalties; dividends; annuities; prizes and winnings; pensions; and partners
distributive share of the gross income of general professional partnership. [43] While
it has been held that the phrase "from whatever source derived" indicates a
legislative policy to include all income not expressly exempted within the class of
taxable income under our laws, the term "income" has been variously interpreted to
mean "cash received or its equivalent", "the amount of money comingto a person
within a specific time" or "something distinct from principal or
capital."[44] Otherwise stated, there must be proof of the actual or, at the very least,
probable receipt or realization by the controlled taxpayer of the item of gross
income sought to be distributed, apportioned or allocated by the CIR.
Our circumspect perusal of the record yielded no evidence of actual or
possible showing that the advances FDC extended to its affiliates had resulted to
the interests subsequently assessed by the CIR. For all its harping upon the
supposed fact that FDC had resorted to borrowings from commercial banks, the
CIR had adduced no concrete proof that said funds were, indeed, the source of the
advances the former provided its affiliates. While admitting that FDC obtained
interest-bearing loans from commercial banks,[45] Susan Macabelda - FDC's Funds
Management Department Manager who was the sole witness presented before the
CTA - clarified that the subject advances were sourced from the corporation's rights
offering in 1995 as well as the sale of its investment in Bonifacio Land in 1997.

[46]

More significantly, said witness testified that said advances: (a) were extended
to give FLI, FAI, DSCC and FCI financial assistance for their operational and
capital expenditures; and, (b) were all temporarily in nature since they were repaid
within the duration of one week to three months and were evidenced by mere
journal entries, cash vouchers and instructional letters.[47]
Even if we were, therefore, to accord precipitate credulity to the CIR's bare
assertion that FDC had deducted substantial interest expense from its gross
income, there would still be no factual basis for the imputation of theoretical
interests on the subject advances and assess deficiency income taxes thereon. More
so, when it is borne in mind that, pursuant to Article 1956 of the Civil Code of the
Philippines, no interest shall be due unless it has been expressly stipulated in
writing. Considering that taxes, being burdens, are not to be presumed beyond
what the applicable statute expressly and clearly declares, [48] the rule is likewise
settled that tax statutes must be construed strictly against the government and
liberally in favor of the taxpayer.[49] Accordingly, the general rule of requiring
adherence to the letter in construing statutes applies with peculiar strictness to tax
laws and the provisions of a taxing act are not to be extended by implication.
[50]
While it is true that taxes are the lifeblood of the government, it has been held
that their assessment and collection should be in accordance with law as any
arbitrariness will negate the very reason for government itself.[51]
In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence on
the imposition of deficiency income taxes on the transfer FDC and FAI effected in
exchange for the shares of stock of FLI. With respect to the Deed of Exchange
executed between FDC, FAI and FLI, Section 34 (c) (2) of the 1993 NIRC
pertinently provides as follows:
Sec. 34. Determination of amount of and recognition of gain or
loss.xxxx
(c) Exception x x x x
No gain or loss shall also be recognized if property is transferred to a
corporation by a person in exchange for shares of stock in such
corporation of which as a result of such exchange said person, alone or
together with others, not exceeding four persons, gains control of said
corporation;Provided, That stocks issued for services shall not be
considered as issued in return of property.

As even admitted in the 14 February 2001 Stipulation of Facts submitted by the

parties,[52] the requisites for the non-recognition of gain or loss under the foregoing
provision are as follows: (a) the transferee is a corporation; (b) the transferee

exchanges its shares of stock for property/ies of the transferor; (c) the transfer is
made by a person, acting alone or together with others, not exceeding four persons;
and, (d) as a result of the exchange the transferor, alone or together with others, not
exceeding four, gains control of the transferee. [53] Acting on the 13 January 1997
request filed by FLI, the BIR had, in fact, acknowledged the concurrence of the
foregoing requisites in the Deed of Exchange the former executed with FDC and
FAI by issuing BIR Ruling No. S-34-046-97.[54] With the BIR's reiteration of said
ruling upon the request for clarification filed by FLI, [55] there is also no dispute that
said transferee and transferors subsequently complied with the requirements
provided for the non-recognition of gain or loss from the exchange of property for
tax, as provided under Section 34 (c) (2) of the 1993 NIRC.[56]
Then as now, the CIR argues that taxable gain should be recognized for the
exchange considering that FDC's controlling interest in FLI was actually decreased
as a result thereof. For said purpose, the CIR calls attention to the fact that, prior to
the exchange, FDC owned 2,537,358,000 or 67.42% of FLI's 3,763,535,000
outstanding capital stock. Upon the issuance of 443,094,000 additional FLI shares
as a consequence of the exchange and with only 42,217,000 thereof accruing in
favor of FDC for a total of 2,579,575,000 shares, said corporations controlling
interest was supposedly reduced to 61%.03 when reckoned from the transferee's
aggregate 4,226,629,000 outstanding shares. Without owning a share from FLI's
initial 3,763,535,000 outstanding shares, on the other hand, FAI's acquisition of
420,877,000 FLI shares as a result of the exchange purportedly resulted in its
control of only 9.96% of said transferee corporation's 4,226,629,000 outstanding
shares. On the principle that the transaction did not qualify as a tax-free exchange
under Section 34 (c) (2) of the 1993 NIRC, the CIR asseverates that taxable gain in
the sum of P263,386,921.00 should be recognized on the part of FDC and in the
sum of P3,088,711,367.00 on the part of FAI.[57]
The paucity of merit in the CIR's position is, however, evident from the categorical
language of Section 34 (c) (2) of the 1993 NIRC which provides that gain or loss
will not be recognized in case the exchange of property for stocks results in the
control of the transferee by the transferor, alone or with other transferors not
exceeding four persons. Rather than isolating the same as proposed by the CIR,
FDC's 2,579,575,000 shares or 61.03% control of FLI's 4,226,629,000 outstanding
shares should, therefore, be appreciated in combination with the 420,877,000 new
shares issued to FAI which represents 9.96% control of said transferee
corporation. Together FDC's 2,579,575,000 shares (61.03%) and FAI's
420,877,000 shares (9.96%) clearly add up to 3,000,452,000 shares or 70.99% of
FLI's 4,226,629,000 shares. Since the term "control" is clearly defined as
"ownership of stocks in a corporation possessing at least fifty-one percent of the
total voting power of classes of stocks entitled to one vote" under Section 34 (c)
(6) [c] of the 1993 NIRC, the exchange of property for stocks between FDC FAI

and FLI clearly qualify as a tax-free transaction under paragraph 34 (c) (2) of the
same provision.
Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the CIR cites then
Supreme Court Justice Jose Vitug and CTA Justice Ernesto D. Acosta who, in their
book Tax Law and Jurisprudence, opined that said provision could be inapplicable
if control is already vested in the exchangor prior to exchange. [58] Aside from the
fact that that the 10 September 2002 Decision in CTA Case No. 6182 upholding the
tax-exempt status of the exchange between FDC, FAI and FLI was penned by no
less than Justice Acosta himself,[59] FDC and FAI significantly point out that said
authors have acknowledged that the position taken by the BIR is to the effect that
"the law would apply even when the exchangor already has control of the
corporation at the time of the exchange." [60] This was confirmed when, apprised in
FLI's request for clarification about the change of percentage of ownership of its
outstanding capital stock, the BIR opined as follows:
Please be informed that regardless of the foregoing, the
transferors, Filinvest Development Corp. and Filinvest Alabang, Inc. still
gained control of Filinvest Land, Inc. The term 'control' shall mean
ownership of stocks in a corporation by possessing at least 51% of the
total voting power of all classes of stocks entitled to vote. Control is
determined by the amount of stocks received, i.e., total subscribed,
whether for property or for services by the transferor or transferors. In
determining the 51% stock ownership, only those persons who
transferred property for stocks in the same transaction may be counted
up to the maximum of five (BIR Ruling No. 547-93 dated December 29,
1993.[61]

At any rate, it also appears that the supposed reduction of FDC's shares in FLI
posited by the CIR is more apparent than real. As the uncontested owner of 80% of
the outstanding shares of FAI, it cannot be gainsaid that FDC ideally controls the
same percentage of the 420,877,000 shares issued to its said co-transferor which,
by itself, represents 7.968% of the outstanding shares of FLI.Considered alongside
FDC's 61.03% control of FLI as a consequence of the 29 November 1996 Deed of
Transfer, said 7.968% add up to an aggregate of 68.998% of said transferee
corporation's outstanding shares of stock which is evidently still greater than the
67.42% FDC initially held prior to the exchange. This much was admitted by the
parties in the 14 February 2001 Stipulation of Facts, Documents and Issues they
submitted to the CTA.[62] Inasmuch as the combined ownership of FDC and FAI of
FLI's outstanding capital stock adds up to a total of 70.99%, it stands to reason that
neither of said transferors can be held liable for deficiency income taxes the CIR
assessed on the supposed gain which resulted from the subject transfer.
On the other hand, insofar as documentary stamp taxes on loan agreements and
promissory notes are concerned, Section 180 of the NIRC provides follows:

Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of
exchange, drafts, instruments and securities issued by the
government or any of its instrumentalities, certificates of deposit
bearing interest and others not payable on sight or demand. On all
loan agreements signed abroad wherein the object of the contract is
located or used in the Philippines; bill of exchange (between points
within the Philippines), drafts, instruments and securities issued by the
Government or any of its instrumentalities or certificates of deposits
drawing interest, or orders for the payment of any sum of money
otherwise than at sight or on demand, or on all promissory notes,
whether negotiable or non-negotiable, except bank notes issued for
circulation, and on each renewal of any such note, there shall be
collected a documentary stamp tax of Thirty centavos (P0.30) on each
two hundred pesos, or fractional part thereof, of the face value of any
such agreement, bill of exchange, draft, certificate of deposit or
note: Provided, That only one documentary stamp tax shall be imposed
on either loan agreement, or promissory notes issued to secure such
loan, whichever will yield a higher tax: Provided however, That loan
agreements or promissory notes the aggregate of which does not exceed
Two hundred fifty thousand pesos (P250,000.00) executed by an
individual for his purchase on installment for his personal use or that of
his family and not for business, resale, barter or hire of a house, lot,
motor vehicle, appliance or furniture shall be exempt from the payment
of documentary stamp tax provided under this Section.

When read in conjunction with Section 173 of the 1993 NIRC,[63] the foregoing
provision concededly applies to "(a)ll loan agreements, whether made or signed in
the Philippines, or abroad when the obligation or right arises from Philippine
sources or the property or object of the contract is located or used in the
Philippines." Correlatively, Section 3 (b) and Section 6 of Revenue Regulations
No. 9-94 provide as follows:
Section 3. Definition of Terms. For purposes of these Regulations, the
following term shall mean:
(b) 'Loan agreement' refers to a contract in writing where one of the
parties delivers to another money or other consumable thing, upon the
condition that the same amount of the same kind and quality shall be
paid. The term shall include credit facilities, which may be evidenced by
credit memo, advice or drawings.
The terms 'Loan Agreement" under Section 180 and "Mortgage' under
Section 195, both of the Tax Code, as amended, generally refer to
distinct and separate instruments. A loan agreement shall be taxed under
Section 180, while a deed of mortgage shall be taxed under Section
195."

"Section 6. Stamp on all Loan Agreements. All loan agreements whether

made or signed in the Philippines, or abroad when the obligation or right
arises from Philippine sources or the property or object of the contract is
located in the Philippines shall be subject to the documentary stamp tax
of thirty centavos (P0.30) on each two hundred pesos, or fractional part
thereof, of the face value of any such agreements, pursuant to Section
180 in relation to Section 173 of the Tax Code.
In cases where no formal agreements or promissory notes have
been executed to cover credit facilities, the documentary stamp tax shall
be based on the amount of drawings or availment of the facilities, which
may be evidenced by credit/debit memo, advice or drawings by any form
of check or withdrawal slip, under Section 180 of the Tax Code.

Applying the aforesaid provisions to the case at bench, we find that the
instructional letters as well as the journal and cash vouchers evidencing the
advances FDC extended to its affiliates in 1996 and 1997 qualified as loan
agreements upon which documentary stamp taxes may be imposed. In keeping
with the caveat attendant to every BIR Ruling to the effect that it is valid only if
the facts claimed by the taxpayer are correct, we find that the CA reversibly erred
in utilizing BIR Ruling No. 116-98, dated 30 July 1998 which, strictly speaking,
could be invoked only by ASB Development Corporation, the taxpayer who sought
the same. In said ruling, the CIR opined that documents like those evidencing the
advances FDC extended to its affiliates are not subject to documentary stamp tax,
to wit:
On the matter of whether or not the inter-office memo covering the
advances granted by an affiliate company is subject to documentary
stamp tax, it is informed that nothing in Regulations No. 26
(Documentary Stamp Tax Regulations) and Revenue Regulations No. 994 states that the same is subject to documentary stamp tax. Such being
the case, said inter-office memo evidencing the lendings or borrowings
which is neither a form of promissory note nor a certificate of
indebtedness issued by the corporation-affiliate or a certificate of
obligation, which are, more or less, categorized as 'securities', is not
subject to documentary stamp tax imposed under Section 180, 174 and
175 of the Tax Code of 1997, respectively. Rather, the inter-office memo
is being prepared for accounting purposes only in order to avoid the comingling of funds of the corporate affiliates.

In its appeal before the CA, the CIR argued that the foregoing ruling was later
modified in BIR Ruling No. 108-99 dated 15 July 1999, which opined that interoffice memos evidencing lendings or borrowings extended by a corporation to its
affiliates are akin to promissory notes, hence, subject to documentary stamp taxes.
[64]
In brushing aside the foregoing argument, however, the CA applied Section 246
of the 1993 NIRC[65] from which proceeds the settled principle that rulings,

circulars, rules and regulations promulgated by the BIR have no retroactive

application if to so apply them would be prejudicial to the taxpayers.
[66]
Admittedly, this rule does not apply: (a) where the taxpayer deliberately
misstates or omits material facts from his return or in any document required of
him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered
by the Bureau of Internal Revenue are materially different from the facts on which
the ruling is based; or (c) where the taxpayer acted in bad faith. [67] Not being the
taxpayer who, in the first instance, sought a ruling from the CIR, however, FDC
cannot invoke the foregoing principle on non-retroactivity of BIR rulings.
Viewed in the light of the foregoing considerations, we find that both the CTA and
the CA erred in invalidating the assessments issued by the CIR for the deficiency
documentary stamp taxes due on the instructional letters as well as the journal and
cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and
1997. In Assessment Notice No. SP-DST-96-00020-2000, the CIR correctly
assessed the sum of P6,400,693.62 for documentary stamp tax, P3,999,793.44 in
interests
and P25,000.00
as
compromise
penalty,
for
a
total
of P10,425,487.06. Alongside the sum ofP4,050,599.62 for documentary stamp
tax, the CIR similarly assessed P1,721,099.78 in interests andP25,000.00 as
compromise penalty in Assessment Notice No. SP-DST-97-00021-2000 or a total
ofP5,796,699.40. The imposition of deficiency interest is justified under Sec. 249
(a) and (b) of the NIRC which authorizes the assessment of the same at the rate of
twenty percent (20%), or such higher rate as may be prescribed by regulations,
from the date prescribed for the payment of the unpaid amount of tax until full
payment.[68] The imposition of the compromise penalty is, in turn, warranted under
Sec. 250[69] of the NIRC which prescribes the imposition thereof in case of each
failure to file an information or return, statement or list, or keep any record or
supply any information required on the date prescribed therefor.
To our mind, no reversible error can, finally, be imputed against both the CTA and
the CA for invalidating the Assessment Notice issued by the CIR for the deficiency
income taxes FDC is supposed to have incurred as a consequence of the dilution of
its shares in FAC. Anent FDCs Shareholders Agreement with RHPL, the record
shows that the parties were in agreement about the following factual antecedents
narrated in the 14 February 2001 Stipulation of Facts, Documents and Issues they
submitted before the CTA,[70] viz.:
1.11. On November 15, 1996, FDC entered into a Shareholders
Agreement (SA) with Reco Herrera Pte. Ltd. (RHPL) for the formation
of a joint venture company named Filinvest Asia Corporation (FAC)
which is based in Singapore (pars. 1.01 and 6.11, Petition, pars. 1 and 7,
Answer).
1.12. FAC, the joint venture company formed by FDC and RHPL, is
tasked to develop and manage the 50% ownership interest of FDC in its

PBCom Office Tower Project (Project) with the Philippine Bank of

Communications (par. 6.12, Petition; par. 7, Answer).
1.13. Pursuant to the SA between FDC and RHPL, the equity
participation of FDC and RHPL in FAC was 60% and 40% respectively.
1.14. In accordance with the terms of the SA, FDC subscribed to P500.7
million worth of shares of stock representing a 60% equity participation
in FAC. In turn, RHPL subscribed to P433.8 million worth of shares of
stock of FAC representing a 40% equity participation in FAC.
1.15. In payment of its subscription in FAC, FDC executed a Deed
of Assignment transferring to FAC a portion of FDCs right and interests
in the Project to the extent of P500.7 million.
1.16. FDC reported a net loss of P190,695,061.00 in its Annual
Income Tax Return for the taxable year 1996. [71]

Alongside the principle that tax revenues are not intended to be liberally
construed,[72] the rule is settled that the findings and conclusions of the CTA are
accorded great respect and are generally upheld by this Court, unless there is a
clear showing of a reversible error or an improvident exercise of authority.
[73]
Absent showing of such error here, we find no strong and cogent reasons to
depart from said rule with respect to the CTA's finding that no deficiency income
tax can be assessed on the gain on the supposed dilution and/or increase in the
value of FDC's shareholdings in FAC which the CIR, at any rate, failed to
establish. Bearing in mind the meaning of "gross income" as above discussed, it
cannot be gainsaid, even then, that a mere increase or appreciation in the value of
said shares cannot be considered income for taxation purposes. Since a mere
advance in the value of the property of a person or corporation in no sense
constitute the income specified in the revenue law, it has been held in the early
case of Fisher vs. Trinidad,[74] that it constitutes and can be treated merely as an
increase of capital. Hence, the CIR has no factual and legal basis in assessing
income tax on the increase in the value of FDC's shareholdings in FAC until the
same is actually sold at a profit.
WHEREFORE, premises considered, the CIR's petition for review
on certiorari in G.R. No. 163653 is DENIED for lack of merit and the CAs 16
December 2003 Decision in G.R. No. 72992 isAFFIRMED in toto. The CIRs
petition in G.R. No. 167689 is PARTIALLY GRANTED and the CAs 26 January
2005 Decision in CA-G.R. SP No. 74510 is MODIFIED.
Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SPDST-97-00021-2000 issued for deficiency documentary stamp taxes due on the

instructional letters as well as journal and cash vouchers evidencing the advances
FDC extended to its affiliates are declared valid.
The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SPINC-97-00019-2000 and SP-INC-97-0027-2000 issued for deficiency income
assessed on (a) the arms-length interest from said advances; (b) the gain from
FDCs Deed of Exchange with FAI and FLI; and (c) income from the dilution
resulting from FDCs Shareholders Agreement with RHPL is, however, upheld.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-43082

June 18, 1937

PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-appellant,

vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.
Pablo Lorenzo and Delfin Joven for plaintiff-appellant.
Office of the Solicitor-General Hilado for defendant-appellant.
LAUREL, J.:
On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate of Thomas
Hanley, deceased, brought this action in the Court of First Instance of Zamboanga against the
defendant, Juan Posadas, Jr., then the Collector of Internal Revenue, for the refund of the amount of
P2,052.74, paid by the plaintiff as inheritance tax on the estate of the deceased, and for the
collection of interst thereon at the rate of 6 per cent per annum, computed from September 15, 1932,
the date when the aforesaid tax was [paid under protest. The defendant set up a counterclaim for
P1,191.27 alleged to be interest due on the tax in question and which was not included in the
original assessment. From the decision of the Court of First Instance of Zamboanga dismissing both
the plaintiff's complaint and the defendant's counterclaim, both parties appealed to this court.
It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving a
will (Exhibit 5) and considerable amount of real and personal properties. On june 14, 1922,
proceedings for the probate of his will and the settlement and distribution of his estate were begun in
the Court of First Instance of Zamboanga. The will was admitted to probate. Said will provides,
among other things, as follows:
4. I direct that any money left by me be given to my nephew Matthew Hanley.
5. I direct that all real estate owned by me at the time of my death be not sold or otherwise
disposed of for a period of ten (10) years after my death, and that the same be handled and
managed by the executors, and proceeds thereof to be given to my nephew, Matthew
Hanley, at Castlemore, Ballaghaderine, County of Rosecommon, Ireland, and that he be
directed that the same be used only for the education of my brother's children and their
descendants.

6. I direct that ten (10) years after my death my property be given to the above mentioned
Matthew Hanley to be disposed of in the way he thinks most advantageous.
xxx

xxx

xxx

8. I state at this time I have one brother living, named Malachi Hanley, and that my nephew,
Matthew Hanley, is a son of my said brother, Malachi Hanley.
The Court of First Instance of Zamboanga considered it proper for the best interests of ther estate to
appoint a trustee to administer the real properties which, under the will, were to pass to Matthew
Hanley ten years after the two executors named in the will, was, on March 8, 1924, appointed
trustee. Moore took his oath of office and gave bond on March 10, 1924. He acted as trustee until
February 29, 1932, when he resigned and the plaintiff herein was appointed in his stead.
During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue,
alleging that the estate left by the deceased at the time of his death consisted of realty valued at
P27,920 and personalty valued at P1,465, and allowing a deduction of P480.81, assessed against
the estate an inheritance tax in the amount of P1,434.24 which, together with the penalties for
deliquency in payment consisting of a 1 per cent monthly interest from July 1, 1931 to the date of
payment and a surcharge of 25 per cent on the tax, amounted to P2,052.74. On March 15, 1932, the
defendant filed a motion in the testamentary proceedings pending before the Court of First Instance
of Zamboanga (Special proceedings No. 302) praying that the trustee, plaintiff herein, be ordered to
pay to the Government the said sum of P2,052.74. The motion was granted. On September 15,
1932, the plaintiff paid said amount under protest, notifying the defendant at the same time that
unless the amount was promptly refunded suit would be brought for its recovery. The defendant
overruled the plaintiff's protest and refused to refund the said amount hausted, plaintiff went to court
with the result herein above indicated.
In his appeal, plaintiff contends that the lower court erred:
I. In holding that the real property of Thomas Hanley, deceased, passed to his instituted heir,
Matthew Hanley, from the moment of the death of the former, and that from the time, the
latter became the owner thereof.
II. In holding, in effect, that there was deliquency in the payment of inheritance tax due on the
estate of said deceased.
III. In holding that the inheritance tax in question be based upon the value of the estate upon
the death of the testator, and not, as it should have been held, upon the value thereof at the
expiration of the period of ten years after which, according to the testator's will, the property
could be and was to be delivered to the instituted heir.
IV. In not allowing as lawful deductions, in the determination of the net amount of the estate
subject to said tax, the amounts allowed by the court as compensation to the "trustees" and
paid to them from the decedent's estate.
V. In not rendering judgment in favor of the plaintiff and in denying his motion for new trial.
The defendant-appellant contradicts the theories of the plaintiff and assigns the following error
besides:
The lower court erred in not ordering the plaintiff to pay to the defendant the sum of
P1,191.27, representing part of the interest at the rate of 1 per cent per month from April 10,
1924, to June 30, 1931, which the plaintiff had failed to pay on the inheritance tax assessed
by the defendant against the estate of Thomas Hanley.

The following are the principal questions to be decided by this court in this appeal: (a) When does
the inheritance tax accrue and when must it be satisfied? (b) Should the inheritance tax be
computed on the basis of the value of the estate at the time of the testator's death, or on its value ten
years later? (c) In determining the net value of the estate subject to tax, is it proper to deduct the
compensation due to trustees? (d) What law governs the case at bar? Should the provisions of Act
No. 3606 favorable to the tax-payer be given retroactive effect? (e) Has there been deliquency in the
payment of the inheritance tax? If so, should the additional interest claimed by the defendant in his
appeal be paid by the estate? Other points of incidental importance, raised by the parties in their
briefs, will be touched upon in the course of this opinion.
(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as
amended, of the Administrative Code, imposes the tax upon "every transmission by virtue of
inheritance, devise, bequest, giftmortis causa, or advance in anticipation of inheritance,devise, or
bequest." The tax therefore is upon transmission or the transfer or devolution of property of a
decedent, made effective by his death. (61 C. J., p. 1592.) It is in reality an excise or privilege tax
imposed on the right to succeed to, receive, or take property by or under a will or the intestacy law,
or deed, grant, or gift to become operative at or after death. Acording to article 657 of the Civil Code,
"the rights to the succession of a person are transmitted from the moment of his death." "In other
words", said Arellano, C. J., ". . . the heirs succeed immediately to all of the property of the deceased
ancestor. The property belongs to the heirs at the moment of the death of the ancestor as completely
as if the ancestor had executed and delivered to them a deed for the same before his death."
(Bondad vs. Bondad, 34 Phil., 232. See also, Mijares vs. Nery, 3 Phil., 195; Suilong & Co., vs. ChioTaysan, 12 Phil., 13; Lubrico vs. Arbado, 12 Phil., 391; Innocencio vs. Gat-Pandan, 14 Phil., 491;
Aliasas vs.Alcantara, 16 Phil., 489; Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio,
19 Phil., 434; Bowa vs. Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti Steamship Co., 41 Phil.,
531; Fule vs. Fule, 46 Phil., 317; Dais vs. Court of First Instance of Capiz, 51 Phil., 396; Baun vs.
Heirs of Baun, 53 Phil., 654.) Plaintiff, however, asserts that while article 657 of the Civil Code is
applicable to testate as well as intestate succession, it operates only in so far as forced heirs are
concerned. But the language of article 657 of the Civil Code is broad and makes no distinction
between different classes of heirs. That article does not speak of forced heirs; it does not even use
the word "heir". It speaks of the rights of succession and the transmission thereof from the moment
of death. The provision of section 625 of the Code of Civil Procedure regarding the authentication
and probate of a will as a necessary condition to effect transmission of property does not affect the
general rule laid down in article 657 of the Civil Code. The authentication of a will implies its due
execution but once probated and allowed the transmission is effective as of the death of the testator
in accordance with article 657 of the Civil Code. Whatever may be the time when actual transmission
of the inheritance takes place, succession takes place in any event at the moment of the decedent's
death. The time when the heirs legally succeed to the inheritance may differ from the time when the
heirs actually receive such inheritance. "Poco importa", says Manresa commenting on article 657 of
the Civil Code, "que desde el falleimiento del causante, hasta que el heredero o legatario entre en
posesion de los bienes de la herencia o del legado, transcurra mucho o poco tiempo, pues la
adquisicion ha de retrotraerse al momento de la muerte, y asi lo ordena el articulo 989, que debe
considerarse como complemento del presente." (5 Manresa, 305; see also, art. 440, par. 1, Civil
Code.) Thomas Hanley having died on May 27, 1922, the inheritance tax accrued as of the date.
From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the
obligation to pay the tax arose as of the date. The time for the payment on inheritance tax is clearly
fixed by section 1544 of the Revised Administrative Code as amended by Act No. 3031, in relation to
section 1543 of the same Code. The two sections follow:
SEC. 1543. Exemption of certain acquisitions and transmissions. The following shall not
be taxed:
(a) The merger of the usufruct in the owner of the naked title.
(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or
legatee to the trustees.

(c) The transmission from the first heir, legatee, or donee in favor of another
beneficiary, in accordance with the desire of the predecessor.
In the last two cases, if the scale of taxation appropriate to the new beneficiary is greater
than that paid by the first, the former must pay the difference.
SEC. 1544. When tax to be paid. The tax fixed in this article shall be paid:
(a) In the second and third cases of the next preceding section, before entrance into
possession of the property.
(b) In other cases, within the six months subsequent to the death of the predecessor;
but if judicial testamentary or intestate proceedings shall be instituted prior to the
expiration of said period, the payment shall be made by the executor or administrator
before delivering to each beneficiary his share.
If the tax is not paid within the time hereinbefore prescribed, interest at the rate of twelve per
centum per annum shall be added as part of the tax; and to the tax and interest due and
unpaid within ten days after the date of notice and demand thereof by the collector, there
shall be further added a surcharge of twenty-five per centum.
A certified of all letters testamentary or of admisitration shall be furnished the Collector of
Internal Revenue by the Clerk of Court within thirty days after their issuance.
It should be observed in passing that the word "trustee", appearing in subsection (b) of section 1543,
should read "fideicommissary" or "cestui que trust". There was an obvious mistake in translation
from the Spanish to the English version.
The instant case does fall under subsection (a), but under subsection (b), of section 1544 abovequoted, as there is here no fiduciary heirs, first heirs, legatee or donee. Under the subsection, the
tax should have been paid before the delivery of the properties in question to P. J. M. Moore as
trustee on March 10, 1924.
(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties are
concerned, did not and could not legally pass to the instituted heir, Matthew Hanley, until after the
expiration of ten years from the death of the testator on May 27, 1922 and, that the inheritance tax
should be based on the value of the estate in 1932, or ten years after the testator's death. The
plaintiff introduced evidence tending to show that in 1932 the real properties in question had a
reasonable value of only P5,787. This amount added to the value of the personal property left by the
deceased, which the plaintiff admits is P1,465, would generate an inheritance tax which, excluding
deductions, interest and surcharge, would amount only to about P169.52.
If death is the generating source from which the power of the estate to impose inheritance taxes
takes its being and if, upon the death of the decedent, succession takes place and the right of the
estate to tax vests instantly, the tax should be measured by the vlaue of the estate as it stood at the
time of the decedent's death, regardless of any subsequent contingency value of any subsequent
increase or decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L., p. 232; Blakemore and
Bancroft, Inheritance Taxes, p. 137. See also Knowlton vs. Moore, 178 U.S., 41; 20 Sup. Ct. Rep.,
747; 44 Law. ed., 969.) "The right of the state to an inheritance tax accrues at the moment of death,
and hence is ordinarily measured as to any beneficiary by the value at that time of such property as
passes to him. Subsequent appreciation or depriciation is immaterial." (Ross, Inheritance Taxation,
p. 72.)
Our attention is directed to the statement of the rule in Cyclopedia of Law of and Procedure (vol. 37,
pp. 1574, 1575) that, in the case of contingent remainders, taxation is postponed until the estate
vests in possession or the contingency is settled. This rule was formerly followed in New York and
has been adopted in Illinois, Minnesota, Massachusetts, Ohio, Pennsylvania and Wisconsin. This

rule, horever, is by no means entirely satisfactory either to the estate or to those interested in the
property (26 R. C. L., p. 231.). Realizing, perhaps, the defects of its anterior system, we find upon
examination of cases and authorities that New York has varied and now requires the immediate
appraisal of the postponed estate at its clear market value and the payment forthwith of the tax on its
out of the corpus of the estate transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Huber,
86 N. Y. App. Div., 458; 83 N. Y. Supp., 769; Estate of Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate of
Brez, 172 N. Y., 609; 64 N. E., 958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide
also, Saltoun vs. Lord Advocate, 1 Peter. Sc. App., 970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas., 888.)
California adheres to this new rule (Stats. 1905, sec. 5, p. 343).
But whatever may be the rule in other jurisdictions, we hold that a transmission by inheritance is
taxable at the time of the predecessor's death, notwithstanding the postponement of the actual
possession or enjoyment of the estate by the beneficiary, and the tax measured by the value of the
property transmitted at that time regardless of its appreciation or depreciation.
(c) Certain items are required by law to be deducted from the appraised gross in arriving at the net
value of the estate on which the inheritance tax is to be computed (sec. 1539, Revised
Administrative Code). In the case at bar, the defendant and the trial court allowed a deduction of only
P480.81. This sum represents the expenses and disbursements of the executors until March 10,
1924, among which were their fees and the proven debts of the deceased. The plaintiff contends that
the compensation and fees of the trustees, which aggregate P1,187.28 (Exhibits C, AA, EE, PP, HH,
JJ, LL, NN, OO), should also be deducted under section 1539 of the Revised Administrative Code
which provides, in part, as follows: "In order to determine the net sum which must bear the tax, when
an inheritance is concerned, there shall be deducted, in case of a resident, . . . the judicial expenses
of the testamentary or intestate proceedings, . . . ."
A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs. Saunders,
16 How., 535; 14 Law. ed., 1047). But from this it does not follow that the compensation due him
may lawfully be deducted in arriving at the net value of the estate subject to tax. There is no statute
in the Philippines which requires trustees' commissions to be deducted in determining the net value
of the estate subject to inheritance tax (61 C. J., p. 1705). Furthermore, though a testamentary trust
has been created, it does not appear that the testator intended that the duties of his executors and
trustees should be separated. (Ibid.; In re Vanneck's Estate, 161 N. Y. Supp., 893; 175 App. Div.,
363; In re Collard's Estate, 161 N. Y. Supp., 455.) On the contrary, in paragraph 5 of his will, the
testator expressed the desire that his real estate be handled and managed by his executors until the
expiration of the period of ten years therein provided. Judicial expenses are expenses of
administration (61 C. J., p. 1705) but, in State vs. Hennepin County Probate Court (112 N. W., 878;
101 Minn., 485), it was said: ". . . The compensation of a trustee, earned, not in the administration of
the estate, but in the management thereof for the benefit of the legatees or devises, does not come
properly within the class or reason for exempting administration expenses. . . . Service rendered in
that behalf have no reference to closing the estate for the purpose of a distribution thereof to those
entitled to it, and are not required or essential to the perfection of the rights of the heirs or legatees. .
. . Trusts . . . of the character of that here before the court, are created for the the benefit of those to
whom the property ultimately passes, are of voluntary creation, and intended for the preservation of
the estate. No sound reason is given to support the contention that such expenses should be taken
into consideration in fixing the value of the estate for the purpose of this tax."
(d) The defendant levied and assessed the inheritance tax due from the estate of Thomas Hanley
under the provisions of section 1544 of the Revised Administrative Code, as amended by section 3
of Act No. 3606. But Act No. 3606 went into effect on January 1, 1930. It, therefore, was not the law
in force when the testator died on May 27, 1922. The law at the time was section 1544 abovementioned, as amended by Act No. 3031, which took effect on March 9, 1922.
It is well-settled that inheritance taxation is governed by the statute in force at the time of the death
of the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The taxpayer can not
foresee and ought not to be required to guess the outcome of pending measures. Of course, a tax
statute may be made retroactive in its operation. Liability for taxes under retroactive legislation has

been "one of the incidents of social life." (Seattle vs. Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup.
Ct. Rep., 44.) But legislative intent that a tax statute should operate retroactively should be perfectly
clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491; Smietanka vs. First Trust & Savings Bank, 257 U. S.,
602; Stockdale vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 247 U. S., 221.) "A statute should
be considered as prospective in its operation, whether it enacts, amends, or repeals an inheritance
tax, unless the language of the statute clearly demands or expresses that it shall have a retroactive
effect, . . . ." (61 C. J., P. 1602.) Though the last paragraph of section 5 of Regulations No. 65 of the
Department of Finance makes section 3 of Act No. 3606, amending section 1544 of the Revised
Administrative Code, applicable to all estates the inheritance taxes due from which have not been
paid, Act No. 3606 itself contains no provisions indicating legislative intent to give it retroactive effect.
No such effect can begiven the statute by this court.
The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act No.
3606 are more favorable to the taxpayer than those of Act No. 3031, that said provisions are penal in
nature and, therefore, should operate retroactively in conformity with the provisions of article 22 of
the Revised Penal Code. This is the reason why he applied Act No. 3606 instead of Act No. 3031.
Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is based on the tax only, instead of on
both the tax and the interest, as provided for in Act No. 3031, and (2) the taxpayer is allowed twenty
days from notice and demand by rthe Collector of Internal Revenue within which to pay the tax,
instead of ten days only as required by the old law.
Properly speaking, a statute is penal when it imposes punishment for an offense committed against
the state which, under the Constitution, the Executive has the power to pardon. In common use,
however, this sense has been enlarged to include within the term "penal statutes" all status which
command or prohibit certain acts, and establish penalties for their violation, and even those which,
without expressly prohibiting certain acts, impose a penalty upon their commission (59 C. J., p.
1110). Revenue laws, generally, which impose taxes collected by the means ordinarily resorted to for
the collection of taxes are not classed as penal laws, although there are authorities to the contrary.
(See Sutherland, Statutory Construction, 361; Twine Co. vs. Worthington, 141 U. S., 468; 12 Sup.
Ct., 55; Rice vs. U. S., 4 C. C. A., 104; 53 Fed., 910; Com. vs. Standard Oil Co., 101 Pa. St., 150;
State vs. Wheeler, 44 P., 430; 25 Nev. 143.) Article 22 of the Revised Penal Code is not applicable to
the case at bar, and in the absence of clear legislative intent, we cannot give Act No. 3606 a
retroactive effect.
(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and the tax
may be paid within another given time. As stated by this court, "the mere failure to pay one's tax
does not render one delinqent until and unless the entire period has eplased within which the
taxpayer is authorized by law to make such payment without being subjected to the payment of
penalties for fasilure to pay his taxes within the prescribed period." (U. S. vs. Labadan, 26 Phil.,
239.)
The defendant maintains that it was the duty of the executor to pay the inheritance tax before the
delivery of the decedent's property to the trustee. Stated otherwise, the defendant contends that
delivery to the trustee was delivery to the cestui que trust, the beneficiery in this case, within the
meaning of the first paragraph of subsection (b) of section 1544 of the Revised Administrative Code.
This contention is well taken and is sustained. The appointment of P. J. M. Moore as trustee was
made by the trial court in conformity with the wishes of the testator as expressed in his will. It is true
that the word "trust" is not mentioned or used in the will but the intention to create one is clear. No
particular or technical words are required to create a testamentary trust (69 C. J., p. 711). The words
"trust" and "trustee", though apt for the purpose, are not necessary. In fact, the use of these two
words is not conclusive on the question that a trust is created (69 C. J., p. 714). "To create a trust by
will the testator must indicate in the will his intention so to do by using language sufficient to
separate the legal from the equitable estate, and with sufficient certainty designate the beneficiaries,
their interest in the ttrust, the purpose or object of the trust, and the property or subject matter
thereof. Stated otherwise, to constitute a valid testamentary trust there must be a concurrence of
three circumstances: (1) Sufficient words to raise a trust; (2) a definite subject; (3) a certain or
ascertain object; statutes in some jurisdictions expressly or in effect so providing." (69 C. J., pp.

705,706.) There is no doubt that the testator intended to create a trust. He ordered in his will that
certain of his properties be kept together undisposed during a fixed period, for a stated purpose. The
probate court certainly exercised sound judgment in appointment a trustee to carry into effect the
provisions of the will (see sec. 582, Code of Civil Procedure).
P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him (sec. 582
in relation to sec. 590, Code of Civil Procedure). The mere fact that the estate of the deceased was
placed in trust did not remove it from the operation of our inheritance tax laws or exempt it from the
payment of the inheritance tax. The corresponding inheritance tax should have been paid on or
before March 10, 1924, to escape the penalties of the laws. This is so for the reason already stated
that the delivery of the estate to the trustee was in esse delivery of the same estate to the cestui que
trust, the beneficiary in this case. A trustee is but an instrument or agent for the cestui que
trust (Shelton vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When Moore
accepted the trust and took possesson of the trust estate he thereby admitted that the estate
belonged not to him but to his cestui que trust (Tolentino vs. Vitug, 39 Phil.,126, cited in 65 C. J., p.
692, n. 63). He did not acquire any beneficial interest in the estate. He took such legal estate only as
the proper execution of the trust required (65 C. J., p. 528) and, his estate ceased upon the
fulfillment of the testator's wishes. The estate then vested absolutely in the beneficiary (65 C. J., p.
542).
The highest considerations of public policy also justify the conclusion we have reached. Were we to
hold that the payment of the tax could be postponed or delayed by the creation of a trust of the type
at hand, the result would be plainly disastrous. Testators may provide, as Thomas Hanley has
provided, that their estates be not delivered to their beneficiaries until after the lapse of a certain
period of time. In the case at bar, the period is ten years. In other cases, the trust may last for fifty
years, or for a longer period which does not offend the rule against petuities. The collection of the tax
would then be left to the will of a private individual. The mere suggestion of this result is a sufficient
warning against the accpetance of the essential to the very exeistence of government. (Dobbins vs.
Erie Country, 16 Pet., 435; 10 Law. ed., 1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed.,
558; Lane County vs. Oregon, 7 Wall., 71; 19 Law. ed., 101; Union Refrigerator Transit Co. vs.
Kentucky, 199 U. S., 194; 26 Sup. Ct. Rep., 36; 50 Law. ed., 150; Charles River Bridge vs. Warren
Bridge, 11 Pet., 420; 9 Law. ed., 773.) The obligation to pay taxes rests not upon the privileges
enjoyed by, or the protection afforded to, a citizen by the government but upon the necessity of
money for the support of the state (Dobbins vs. Erie Country, supra). For this reason, no one is
allowed to object to or resist the payment of taxes solely because no personal benefit to him can be
pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct. Rep., 340; 43 Law. ed., 740.) While courts
will not enlarge, by construction, the government's power of taxation (Bromley vs. McCaughn, 280 U.
S., 124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46) they also will not place upon tax laws so loose a
construction as to permit evasions on merely fanciful and insubstantial distictions. (U. S. vs. Watts, 1
Bond., 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story, 369; Fed. Cas. No. 16,690,
followed in Froelich & Kuttner vs. Collector of Customs, 18 Phil., 461, 481; Castle Bros., Wolf & Sons
vs. McCoy, 21 Phil., 300; Muoz & Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking
Corporation vs. Rafferty, 39 Phil., 145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When
proper, a tax statute should be construed to avoid the possibilities of tax evasion. Construed this
way, the statute, without resulting in injustice to the taxpayer, becomes fair to the government.
That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus, no court
is allowed to grant injunction to restrain the collection of any internal revenue tax ( sec. 1578,
Revised Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In the case of Lim Co Chui vs.
Posadas (47 Phil., 461), this court had occassion to demonstrate trenchment adherence to this
policy of the law. It held that "the fact that on account of riots directed against the Chinese on
October 18, 19, and 20, 1924, they were prevented from praying their internal revenue taxes on time
and by mutual agreement closed their homes and stores and remained therein, does not authorize
the Collector of Internal Revenue to extend the time prescribed for the payment of the taxes or to
accept them without the additional penalty of twenty five per cent." (Syllabus, No. 3.)

". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that the
modes adopted to enforce the taxes levied should be interfered with as little as possible. Any delay
in the proceedings of the officers, upon whom the duty is developed of collecting the taxes, may
derange the operations of government, and thereby, cause serious detriment to the public." (Dows
vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs. Rafferty, 32 Phil., 580.)
It results that the estate which plaintiff represents has been delinquent in the payment of inheritance
tax and, therefore, liable for the payment of interest and surcharge provided by law in such cases.
The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee.
The interest due should be computed from that date and it is error on the part of the defendant to
compute it one month later. The provisions cases is mandatory (see and cf. Lim Co Chui vs.
Posadas, supra), and neither the Collector of Internal Revenuen or this court may remit or decrease
such interest, no matter how heavily it may burden the taxpayer.
To the tax and interest due and unpaid within ten days after the date of notice and demand thereof
by the Collector of Internal Revenue, a surcharge of twenty-five per centum should be added (sec.
1544, subsec. (b), par. 2, Revised Administrative Code). Demand was made by the Deputy Collector
of Internal Revenue upon Moore in a communiction dated October 16, 1931 (Exhibit 29). The date
fixed for the payment of the tax and interest was November 30, 1931. November 30 being an official
holiday, the tenth day fell on December 1, 1931. As the tax and interest due were not paid on that
date, the estate became liable for the payment of the surcharge.
In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by the
plaintiff in his brief.
We shall now compute the tax, together with the interest and surcharge due from the estate of
Thomas Hanley inaccordance with the conclusions we have reached.
At the time of his death, the deceased left real properties valued at P27,920 and personal properties
worth P1,465, or a total of P29,385. Deducting from this amount the sum of P480.81, representing
allowable deductions under secftion 1539 of the Revised Administrative Code, we have P28,904.19
as the net value of the estate subject to inheritance tax.
The primary tax, according to section 1536, subsection (c), of the Revised Administrative Code,
should be imposed at the rate of one per centum upon the first ten thousand pesos and two per
centum upon the amount by which the share exceed thirty thousand pesos, plus an additional two
hundred per centum. One per centum of ten thousand pesos is P100. Two per centum of
P18,904.19 is P378.08. Adding to these two sums an additional two hundred per centum, or
P965.16, we have as primary tax, correctly computed by the defendant, the sum of P1,434.24.
To the primary tax thus computed should be added the sums collectible under section 1544 of the
Revised Administrative Code. First should be added P1,465.31 which stands for interest at the rate
of twelve per centum per annum from March 10, 1924, the date of delinquency, to September 15,
1932, the date of payment under protest, a period covering 8 years, 6 months and 5 days. To the tax
and interest thus computed should be added the sum of P724.88, representing a surhcarge of 25
per cent on both the tax and interest, and also P10, the compromise sum fixed by the defendant
(Exh. 29), giving a grand total of P3,634.43.
As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 is legally due
from the estate. This last sum is P390.42 more than the amount demanded by the defendant in his
counterclaim. But, as we cannot give the defendant more than what he claims, we must hold that the
plaintiff is liable only in the sum of P1,191.27 the amount stated in the counterclaim.
The judgment of the lower court is accordingly modified, with costs against the plaintiff in both
instances. So ordered.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 149110

April 9, 2003

NATIONAL POWER CORPORATION, petitioner,

vs.
CITY OF CABANATUAN, respondent.
PUNO, J.:
This is a petition for review1 of the Decision2 and the Resolution3 of the Court of Appeals dated March
12, 2001 and July 10, 2001, respectively, finding petitioner National Power Corporation (NPC) liable
to pay franchise tax to respondent City of Cabanatuan.
Petitioner is a government-owned and controlled corporation created under Commonwealth Act No.
120, as amended.4 It is tasked to undertake the "development of hydroelectric generations of power
and the production of electricity from nuclear, geothermal and other sources, as well as, the
transmission of electric power on a nationwide basis."5 Concomitant to its mandated duty, petitioner
has, among others, the power to construct, operate and maintain power plants, auxiliary plants,
power stations and substations for the purpose of developing hydraulic power and supplying such
power to the inhabitants.6
For many years now, petitioner sells electric power to the residents of Cabanatuan City, posting a
gross income of P107,814,187.96 in 1992.7 Pursuant to section 37 of Ordinance No. 165-92,8 the
respondent assessed the petitioner a franchise tax amounting to P808,606.41, representing 75% of
1% of the latter's gross receipts for the preceding year.9
Petitioner, whose capital stock was subscribed and paid wholly by the Philippine
Government,10 refused to pay the tax assessment. It argued that the respondent has no authority to
impose tax on government entities. Petitioner also contended that as a non-profit organization, it is
exempted from the payment of all forms of taxes, charges, duties or fees 11 in accordance with sec.
13 of Rep. Act No. 6395, as amended, viz:
"Sec.13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees,
Imposts and Other Charges by Government and Governmental Instrumentalities.- The
Corporation shall be non-profit and shall devote all its return from its capital investment, as
well as excess revenues from its operation, for expansion. To enable the Corporation to pay
its indebtedness and obligations and in furtherance and effective implementation of the
policy enunciated in Section one of this Act, the Corporation is hereby exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in
any court or administrative proceedings in which it may be a party, restrictions and duties to
the Republic of the Philippines, its provinces, cities, municipalities and other government
agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the National
Government, its provinces, cities, municipalities and other government agencies and
instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees
on import of foreign goods required for its operations and projects; and

(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of
the Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities, on all petroleum products used by the Corporation in the generation,
transmission, utilization, and sale of electric power."12
The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City, demanding that
petitioner pay the assessed tax due, plus a surcharge equivalent to 25% of the amount of tax, and
2% monthly interest.13Respondent alleged that petitioner's exemption from local taxes has been
repealed by section 193 of Rep. Act No. 7160,14 which reads as follows:
"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. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon the effectivity of this
Code."
On January 25, 1996, the trial court issued an Order15 dismissing the case. It ruled that the tax
exemption privileges granted to petitioner subsist despite the passage of Rep. Act No. 7160 for the
following reasons: (1) Rep. Act No. 6395 is a particular law and it may not be repealed by Rep. Act
No. 7160 which is a general law; (2) section 193 of Rep. Act No. 7160 is in the nature of an implied
repeal which is not favored; and (3) local governments have no power to tax instrumentalities of the
national government. Pertinent portion of the Order reads:
"The question of whether a particular law has been repealed or not by a subsequent law is a
matter of legislative intent. The lawmakers may expressly repeal a law by incorporating
therein repealing provisions which expressly and specifically cite(s) the particular law or
laws, and portions thereof, that are intended to be repealed. A declaration in a statute,
usually in its repealing clause, that a particular and specific law, identified by its number or
title is repealed is an express repeal; all others are implied repeal. Sec. 193 of R.A. No. 7160
is an implied repealing clause because it fails to identify the act or acts that are intended to
be repealed. It is a well-settled rule of statutory construction that repeals of statutes by
implication are not favored. The presumption is against inconsistency and repugnancy for the
legislative is presumed to know the existing laws on the subject and not to have enacted
inconsistent or conflicting statutes. It is also a well-settled rule that, generally, general law
does not repeal a special law unless it clearly appears that the legislative has intended by
the latter general act to modify or repeal the earlier special law. Thus, despite the passage of
R.A. No. 7160 from which the questioned Ordinance No. 165-92 was based, the tax
exemption privileges of defendant NPC remain.
Another point going against plaintiff in this case is the ruling of the Supreme Court in the
case of Basco vs. Philippine Amusement and Gaming Corporation, 197 SCRA 52, where it
was held that:
'Local governments have no power to tax instrumentalities of the National
Government. PAGCOR is a government owned or controlled corporation with an
original charter, PD 1869. All of its shares of stocks are owned by the National
Government. xxx 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 mere local government.'
Like PAGCOR, NPC, being a government owned and controlled corporation with an original
charter and its shares of stocks owned by the National Government, is beyond the taxing
power of the Local Government. Corollary to this, it should be noted here that in the NPC
Charter's declaration of Policy, Congress declared that: 'xxx (2) the total electrification of the
Philippines through the development of power from all services to meet the needs of
industrial development and dispersal and needs of rural electrification are primary objectives

of the nations which shall be pursued coordinately and supported by all instrumentalities and
agencies of the government, including its financial institutions.' (underscoring supplied). To
allow plaintiff to subject defendant to its tax-ordinance would be to impede the avowed goal
of this government instrumentality.
Unlike the State, a city or municipality has no inherent power of taxation. Its taxing power is
limited to that which is provided for in its charter or other statute. Any grant of taxing power is
to be construed strictly, with doubts resolved against its existence.
From the existing law and the rulings of the Supreme Court itself, it is very clear that the
plaintiff could not impose the subject tax on the defendant."16
On appeal, the Court of Appeals reversed the trial court's Order17 on the ground that section 193, in
relation to sections 137 and 151 of the LGC, expressly withdrew the exemptions granted to the
petitioner.18 It ordered the petitioner to pay the respondent city government the following: (a) the sum
of P808,606.41 representing the franchise tax due based on gross receipts for the year 1992, (b) the
tax due every year thereafter based in the gross receipts earned by NPC, (c) in all cases, to pay a
surcharge of 25% of the tax due and unpaid, and (d) the sum of P 10,000.00 as litigation expense. 19
On April 4, 2001, the petitioner filed a Motion for Reconsideration on the Court of Appeal's Decision.
This was denied by the appellate court, viz:
"The Court finds no merit in NPC's motion for reconsideration. Its arguments reiterated
therein that the taxing power of the province under Art. 137 (sic) of the Local Government
Code refers merely to private persons or corporations in which category it (NPC) does not
belong, and that the LGC (RA 7160) which is a general law may not impliedly repeal the
NPC Charter which is a special lawfinds the answer in Section 193 of the LGC to the effect
that '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 xxx are hereby withdrawn.' The repeal is direct and unequivocal, not implied.
IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED.
SO ORDERED."20
In this petition for review, petitioner raises the following issues:
"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A PUBLIC
NON-PROFIT CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO
CONSIDER THAT SECTION 137 OF THE LOCAL GOVERNMENT CODE IN RELATION TO
SECTION 131 APPLIES ONLY TO PRIVATE PERSONS OR CORPORATIONS ENJOYING
A FRANCHISE.
B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S EXEMPTION
FROM ALL FORMS OF TAXES HAS BEEN REPEALED BY THE PROVISION OF THE
LOCAL GOVERNMENT CODE AS THE ENACTMENT OF A LATER LEGISLATION, WHICH
IS A GENERAL LAW, CANNOT BE CONSTRUED TO HAVE REPEALED A SPECIAL LAW.
C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN
EXERCISE OF POLICE POWER THROUGH TAX EXEMPTION SHOULD PREVAIL OVER
THE LOCAL GOVERNMENT CODE."21
It is beyond dispute that the respondent city government has the authority to issue Ordinance No.
165-92 and impose an annual tax on "businesses enjoying a franchise," pursuant to section 151 in
relation to section 137 of the LGC, viz:

"Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other
special law, the province may impose a tax on businesses enjoying a franchise, at a rate not
exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized, within its territorial
jurisdiction.
In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one
percent (1%) of the capital investment. In the succeeding calendar year, regardless of when
the business started to operate, the tax shall be based on the gross receipts for the
preceding calendar year, or any fraction thereof, as provided herein." (emphasis supplied)
x

Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code, the city, may
levy the taxes, fees, and charges which the province or municipality may impose: Provided,
however, That the taxes, fees and charges levied and collected by highly urbanized and
independent component cities shall accrue to them and distributed in accordance with the
provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the
province or municipality by not more than fifty percent (50%) except the rates of professional
and amusement taxes."
Petitioner, however, submits that it is not liable to pay an annual franchise tax to the respondent city
government. It contends that sections 137 and 151 of the LGC in relation to section 131, limit the
taxing power of the respondent city government to private entities that are engaged in trade or
occupation for profit.22
Section 131 (m) of the LGC defines a "franchise" as "a right or privilege, affected with public interest
which is conferred upon private persons or corporations, under such terms and conditions as the
government and its political subdivisions may impose in the interest of the public welfare, security
and safety." From the phraseology of this provision, the petitioner claims that the word "private"
modifies the terms "persons" and "corporations." Hence, when the LGC uses the term "franchise,"
petitioner submits that it should refer specifically to franchises granted to private natural persons and
to private corporations.23 Ergo, its charter should not be considered a "franchise" for the purpose of
imposing the franchise tax in question.
On the other hand, section 131 (d) of the LGC defines "business" as "trade or commercial activity
regularly engaged in as means of livelihood or with a view to profit." Petitioner claims that it is not
engaged in an activity for profit, in as much as its charter specifically provides that it is a "non-profit
organization." In any case, petitioner argues that the accumulation of profit is merely incidental to its
operation; all these profits are required by law to be channeled for expansion and improvement of its
facilities and services.24
Petitioner also alleges that it is an instrumentality of the National Government, 25 and as such, may
not be taxed by the respondent city government. It cites the doctrine in Basco vs. Philippine
Amusement and Gaming Corporation26where this Court held that local governments have no power
to tax instrumentalities of the National Government, viz:
"Local governments have no power to tax instrumentalities of the National Government.
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role 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. (MC Culloch v.
Maryland, 4 Wheat 316, 4 L Ed. 579)'
This doctrine emanates from the 'supremacy' of the National Government over local
governments.
'Justice Holmes, speaking for the Supreme Court, made reference 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 seriously burden it from accomplishment of them.'
(Antieau, Modern Constitutional Law, Vol. 2, p. 140, italics supplied)
Otherwise, mere creatures 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 tool regulation' (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the 'power to destroy' (Mc Culloch
v. Maryland,supra) cannot be allowed to defeat an instrumentality or creation of the very
entity which has the inherent power to wield it."27
Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the tax privileges of
government-owned or controlled corporations, is in the nature of an implied repeal. A special law, its
charter cannot be amended or modified impliedly by the local government code which is a general
law. Consequently, petitioner claims that its exemption from all taxes, fees or charges under its
charter subsists despite the passage of the LGC, viz:
"It is a well-settled rule of statutory construction that repeals of statutes by implication are not
favored and as much as possible, effect must be given to all enactments of the legislature.
Moreover, it has to be conceded that the charter of the NPC constitutes a special law.
Republic Act No. 7160, is a general law. It is a basic rule in statutory construction that the
enactment of a later legislation which is a general law cannot be construed to have repealed
a special law. Where there is a conflict between a general law and a special statute, the
special statute should prevail since it evinces the legislative intent more clearly than the
general statute."28
Finally, petitioner submits that the charter of the NPC, being a valid exercise of police power, should
prevail over the LGC. It alleges that the power of the local government to impose franchise tax is
subordinate to petitioner's exemption from taxation; "police power being the most pervasive, the
least limitable and most demanding of all powers, including the power of taxation." 29
The petition is without merit.
Taxes are the lifeblood of the government,30 for without taxes, the government can neither exist nor
endure. A principal attribute of sovereignty,31 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;32 without taxes, government cannot fulfill its mandate of promoting the general welfare and
well-being of the people.
In recent years, the increasing social challenges of the times expanded the scope of state activity,
and taxation has become a tool to realize social justice and the equitable distribution of wealth,
economic progress and the protection of local industries as well as public welfare and similar
objectives.33 Taxation assumes even greater significance with the ratification of the 1987

Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local
legislative bodies are now given direct authority to levy taxes, fees and other charges 34 pursuant to
Article X, section 5 of the 1987 Constitution, viz:
"Section 5.- Each Local Government unit shall have the power to create its own sources of
revenue, 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. Such taxes, fees
and charges shall accrue exclusively to the Local Governments."
This paradigm shift results from the realization that genuine development can be achieved only by
strengthening local autonomy and promoting decentralization of governance. For a long time, the
country's highly centralized government structure has bred a culture of dependence among local
government leaders upon the national leadership. It has also "dampened the spirit of initiative,
innovation and imaginative resilience in matters of local development on the part of local government
leaders."35 The only way to shatter this culture of dependence is to give the LGUs a wider role in the
delivery of basic services, and confer them sufficient powers to generate their own sources for the
purpose. To achieve this goal, section 3 of Article X of the 1987 Constitution mandates Congress to
enact a local government code that will, consistent with the basic policy of local autonomy, set the
guidelines and limitations to this grant of taxing powers, viz:
"Section 3. The Congress shall enact a local government code which shall provide for a
more responsive and accountable local government structure instituted through a system of
decentralization with effective mechanisms of recall, initiative, and referendum, allocate
among the different local government units their powers, responsibilities, and resources, and
provide for the qualifications, election, appointment and removal, term, salaries, powers and
functions and duties of local officials, and all other matters relating to the organization and
operation of the local units."
To recall, prior to the enactment of the Rep. Act No. 7160, 36 also known as the Local Government
Code of 1991 (LGC), various measures have been enacted to promote local autonomy. These
include the Barrio Charter of 1959,37 the Local Autonomy Act of 1959,38 the Decentralization Act of
196739 and the Local Government Code of 1983.40 Despite these initiatives, however, the shackles of
dependence on the national government remained. Local government units were faced with the
same problems that hamper their capabilities to participate effectively in the national development
efforts, among which are: (a) inadequate tax base, (b) lack of fiscal control over external sources of
income, (c) limited authority to prioritize and approve development projects, (d) heavy dependence
on external sources of income, and (e) limited supervisory control over personnel of national line
agencies.41
Considered as the most revolutionary piece of legislation on local autonomy,42 the LGC effectively
deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes
which were prohibited by previous laws such as the imposition of taxes on forest products, forest
concessionaires, mineral products, mining operations, and the like. The LGC likewise provides
enough flexibility to impose tax rates in accordance with their needs and capabilities. It does not
prescribe graduated fixed rates but merely specifies the minimum and maximum tax rates and
leaves the determination of the actual rates to the respective sanggunian.43
One of the most significant provisions of the LGC is the removal of the blanket exclusion of
instrumentalities and agencies of the national government from the coverage of local taxation.
Although as a general rule, LGUs cannot impose taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, this rule now admits an exception, i.e., when
specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the
aforementioned entities, viz:
"Section 133. Common Limitations on the Taxing Powers of the 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:

(o) Taxes, fees, or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units." (emphasis supplied)
In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. Philippine Amusement
and Gaming Corporation44 relied upon by the petitioner to support its claim no longer applies. To
emphasize, the Basco case was decided prior to the effectivity of the LGC, when no law empowering
the local government units to tax instrumentalities of the National Government was in effect.
However, as this Court ruled in the case of Mactan Cebu International Airport Authority (MCIAA) vs.
Marcos,45 nothing prevents Congress from decreeing that even instrumentalities or agencies of the
government performing governmental functions may be subject to tax.46 In enacting the LGC,
Congress exercised its prerogative to tax instrumentalities and agencies of government as it sees fit.
Thus, after reviewing the specific provisions of the LGC, this Court held that MCIAA, although an
instrumentality of the national government, was subject to real property tax, viz:
"Thus, reading together sections 133, 232, and 234 of the LGC, we conclude that as a
general rule, as laid down in section 133, the taxing power of local governments cannot
extend to the levy of inter alia, 'taxes, fees and charges of any kind on the national
government, its agencies and instrumentalities, and local government units'; however,
pursuant to section 232, provinces, cities and 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 use thereof
has been granted for consideration or otherwise, to a taxable person as provided in the item
(a) of the first paragraph of section 12.'"47
In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the
respondent city government to impose on the petitioner the franchise tax in question.
In its general signification, a franchise is a privilege conferred by government authority, which does
not belong to citizens of the country generally as a matter of common right. 48 In its specific sense, a
franchise may refer to a general or primary franchise, or to a special or secondary franchise. The
former relates to the right to exist as a corporation, by virtue of duly approved articles of
incorporation, or a charter pursuant to a special law creating the corporation. 49 The right under a
primary or general franchise is vested in the individuals who compose the corporation and not in the
corporation itself.50 On the other hand, the latter refers to the right or privileges conferred upon an
existing corporation such as the right to use the streets of a municipality to lay pipes of tracks, erect
poles or string wires.51 The rights under a secondary or special franchise are vested in the
corporation and may ordinarily be conveyed or mortgaged under a general power granted to a
corporation to dispose of its property, except such special or secondary franchises as are charged
with a public use.52
In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a
secondary or special franchise. This is to avoid any confusion when the word franchise is used in the
context of taxation. As commonly used, a franchise tax is "a tax on the privilege of transacting
business in the state and exercising corporate franchises granted by the state." 53 It is not levied on
the corporation simply for existing as a corporation, upon its property54 or its income,55 but on its
exercise of the rights or privileges granted to it by the government. Hence, a corporation need not
pay franchise tax from the time it ceased to do business and exercise its franchise. 56 It is within this
context that the phrase "tax on businesses enjoying a franchise" in section 137 of the LGC should be
interpreted and understood. Verily, to determine whether the petitioner is covered by the franchise
tax in question, the following requisites should concur: (1) that petitioner has a "franchise" in the
sense of a secondary or special franchise; and (2) that it is exercising its rights or privileges under
this franchise within the territory of the respondent city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act No. 7395,
constitutes petitioner's primary and secondary franchises. It serves as the petitioner's charter,

defining its composition, capitalization, the appointment and the specific duties of its corporate
officers, and its corporate life span.57 As its secondary franchise, Commonwealth Act No. 120, as
amended, vests the petitioner the following powers which are not available to ordinary
corporations, viz:
"x x x
(e) To conduct investigations and surveys for the development of water power in any part of
the Philippines;
(f) To take water from any public stream, river, creek, lake, spring or waterfall in the
Philippines, for the purposes specified in this Act; to intercept and divert the flow of waters
from lands of riparian owners and from persons owning or interested in waters which are or
may be necessary for said purposes, upon payment of just compensation therefor; to alter,
straighten, obstruct or increase the flow of water in streams or water channels intersecting or
connecting therewith or contiguous to its works or any part thereof: Provided, That just
compensation shall be paid to any person or persons whose property is, directly or indirectly,
adversely affected or damaged thereby;
(g) To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs, pipes,
mains, transmission lines, power stations and substations, and other works for the purpose
of developing hydraulic power from any river, creek, lake, spring and waterfall in the
Philippines and supplying such power to the inhabitants thereof; to acquire, construct, install,
maintain, operate, and improve gas, oil, or steam engines, and/or other prime movers,
generators and machinery in plants and/or auxiliary plants for the production of electric
power; to establish, develop, operate, maintain and administer power and lighting systems
for the transmission and utilization of its power generation; to sell electric power in bulk to (1)
industrial enterprises, (2) city, municipal or provincial systems and other government
institutions, (3) electric cooperatives, (4) franchise holders, and (5) real estate subdivisions x
x x;
(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber and otherwise
dispose of property incident to, or necessary, convenient or proper to carry out the purposes
for which the Corporation was created: Provided, That in case a right of way is necessary for
its transmission lines, easement of right of way shall only be sought: Provided, however, That
in case the property itself shall be acquired by purchase, the cost thereof shall be the fair
market value at the time of the taking of such property;
(i) To construct works across, or otherwise, any stream, watercourse, canal, ditch, flume,
street, avenue, highway or railway of private and public ownership, as the location of said
works may require xxx;
(j) To exercise the right of eminent domain for the purpose of this Act in the manner provided
by law for instituting condemnation proceedings by the national, provincial and municipal
governments;
x

(m) To cooperate with, and to coordinate its operations with those of the National
Electrification Administration and public service entities;
(n) To exercise complete jurisdiction and control over watersheds surrounding the reservoirs
of plants and/or projects constructed or proposed to be constructed by the Corporation.
Upon determination by the Corporation of the areas required for watersheds for a specific
project, the Bureau of Forestry, the Reforestation Administration and the Bureau of Lands
shall, upon written advice by the Corporation, forthwith surrender jurisdiction to the

Corporation of all areas embraced within the watersheds, subject to existing private rights,
the needs of waterworks systems, and the requirements of domestic water supply;
(o) In the prosecution and maintenance of its projects, the Corporation shall adopt measures
to prevent environmental pollution and promote the conservation, development and
maximum utilization of natural resources xxx "58
With these powers, petitioner eventually had the monopoly in the generation and distribution of
electricity. This monopoly was strengthened with the issuance of Pres. Decree No. 40, 59 nationalizing
the electric power industry. Although Exec. Order No. 21560 thereafter allowed private sector
participation in the generation of electricity, the transmission of electricity remains the monopoly of
the petitioner.
Petitioner also fulfills the second requisite. It is operating within the respondent city government's
territorial jurisdiction pursuant to the powers granted to it by Commonwealth Act No. 120, as
amended. From its operations in the City of Cabanatuan, petitioner realized a gross income of
P107,814,187.96 in 1992. Fulfilling both requisites, petitioner is, and ought to be, subject of the
franchise tax in question.
Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply because
its stocks are wholly owned by the National Government, and its charter characterized it as a "nonprofit" organization.
These contentions must necessarily fail.
To stress, a franchise tax is imposed based not on the ownership but on the exercise by the
corporation of a privilege to do business. The taxable entity is the corporation which exercises the
franchise, and not the individual stockholders. By virtue of its charter, petitioner was created as a
separate and distinct entity from the National Government. It can sue and be sued under its own
name,61 and can exercise all the powers of a corporation under the Corporation Code. 62
To be sure, the ownership by the National Government of its entire capital stock does not necessarily
imply that petitioner is not engaged in business. Section 2 of Pres. Decree No. 2029 63 classifies
government-owned or controlled corporations (GOCCs) into those performing governmental
functions and those performing proprietary functions, viz:
"A government-owned or controlled corporation is a stock or a non-stock
corporation, whether performing governmental or proprietary functions, which is directly
chartered by special law or if organized under the general corporation law is owned or
controlled by the government directly, or indirectly through a parent corporation or subsidiary
corporation, to the extent of at least a majority of its outstanding voting capital stock x x x."
(emphases supplied)
Governmental functions are those pertaining to the administration of government, and as such, are
treated as absolute obligation on the part of the state to perform while proprietary functions are those
that are undertaken only by way of advancing the general interest of society, and are merely optional
on the government.64 Included in the class of GOCCs performing proprietary functions are "businesslike" entities such as the National Steel Corporation (NSC), the National Development Corporation
(NDC), the Social Security System (SSS), the Government Service Insurance System (GSIS), and
the National Water Sewerage Authority (NAWASA),65 among others.
Petitioner was created to "undertake the development of hydroelectric generation of power and the
production of electricity from nuclear, geothermal and other sources, as well as the transmission of
electric power on a nationwide basis."66 Pursuant to this mandate, petitioner generates power and
sells electricity in bulk. Certainly, these activities do not partake of the sovereign functions of the
government. They are purely private and commercial undertakings, albeit imbued with public
interest. The public interest involved in its activities, however, does not distract from the true nature

of the petitioner as a commercial enterprise, in the same league with similar public utilities like
telephone and telegraph companies, railroad companies, water supply and irrigation companies,
gas, coal or light companies, power plants, ice plant among others; all of which are declared by this
Court as ministrant or proprietary functions of government aimed at advancing the general interest of
society.67
A closer reading of its charter reveals that even the legislature treats the character of the petitioner's
enterprise as a "business," although it limits petitioner's profits to twelve percent (12%), viz:68
"(n) When essential to the proper administration of its corporate affairs or necessary for the
proper transaction of its business or to carry out the purposes for which it was organized, to
contract indebtedness and issue bonds subject to approval of the President upon
recommendation of the Secretary of Finance;
(o) To exercise such powers and do such things as may be reasonably necessary to carry
out the business and purposes for which it was organized, or which, from time to time, may
be declared by the Board to be necessary, useful, incidental or auxiliary to accomplish the
said purpose xxx."(emphases supplied)
It is worthy to note that all other private franchise holders receiving at least sixty percent (60%) of its
electricity requirement from the petitioner are likewise imposed the cap of twelve percent (12%) on
profits.69 The main difference is that the petitioner is mandated to devote "all its returns from its
capital investment, as well as excess revenues from its operation, for expansion" 70 while other
franchise holders have the option to distribute their profits to its stockholders by declaring dividends.
We do not see why this fact can be a source of difference in tax treatment. In both instances, the
taxable entity is the corporation, which exercises the franchise, and not the individual stockholders.
We also do not find merit in the petitioner's contention that its tax exemptions under its charter
subsist despite the passage of the LGC.
As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown to
exist clearly and categorically, and supported by clear legal provisions. 71 In the case at bar, the
petitioner's sole refuge is section 13 of Rep. Act No. 6395 exempting from, among others, "all
income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces,
cities, municipalities and other government agencies and instrumentalities." However, section 193 of
the LGC withdrew, subject to limited exceptions, the sweeping tax privileges previously enjoyed by
private and public corporations. Contrary to the contention of petitioner, section 193 of the LGC is an
express, albeit general, repeal of all statutes granting tax exemptions from local taxes. 72 It reads:
"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. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon the effectivity of this
Code." (emphases supplied)
It is a basic precept of statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio
alterius.73 Not being a local water district, a cooperative registered under R.A. No. 6938, or a nonstock and non-profit hospital or educational institution, petitioner clearly does not belong to the
exception. It is therefore incumbent upon the petitioner to point to some provisions of the LGC that
expressly grant it exemption from local taxes.
But this would be an exercise in futility. Section 137 of the LGC clearly states that the LGUs can
impose franchise tax "notwithstanding any exemption granted by any law or other special law." This
particular provision of the LGC does not admit any exception. In City Government of San Pablo,
Laguna v. Reyes,74 MERALCO's exemption from the payment of franchise taxes was brought as an

issue before this Court. The same issue was involved in the subsequent case of Manila Electric
Company v. Province of Laguna.75 Ruling in favor of the local government in both instances, we ruled
that the franchise tax in question is imposable despite any exemption enjoyed by MERALCO under
special laws, viz:
"It is our view that petitioners correctly rely on provisions of Sections 137 and 193 of the LGC
to support their position that MERALCO's tax exemption has been withdrawn. The explicit
language of section 137 which authorizes the province to impose franchise tax
'notwithstanding any exemption granted by any law or other special law' is all-encompassing
and clear. The franchise tax is imposable despite any exemption enjoyed under special laws.
Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that
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 (1) local water districts, (2) cooperatives duly registered under
R.A. 6938, (3) non-stock and non-profit hospitals and educational institutions, are withdrawn
upon the effectivity of this code, the obvious import is to limit the exemptions to the three
enumerated entities. It is a basic precept of statutory construction that the express mention
of one person, thing, act, or consequence excludes all others as expressed in the familiar
maxim expressio unius est exclusio alterius. In the absence of any provision of the Code to
the contrary, and we find no other provision in point, any existing tax exemption or incentive
enjoyed by MERALCO under existing law was clearly intended to be withdrawn.
Reading together sections 137 and 193 of the LGC, we conclude that under the LGC the
local government unit may now impose a local tax at a rate not exceeding 50% of 1% of the
gross annual receipts for the preceding calendar based on the incoming receipts realized
within its territorial jurisdiction. The legislative purpose to withdraw tax privileges enjoyed
under existing law or charter is clearly manifested by the language used on (sic) Sections
137 and 193 categorically withdrawing such exemption subject only to the exceptions
enumerated. Since it would be not only tedious and impractical to attempt to enumerate all
the existing statutes providing for special tax exemptions or privileges, the LGC provided for
an express, albeit general, withdrawal of such exemptions or privileges. No more
unequivocal language could have been used."76(emphases supplied).
It is worth mentioning that section 192 of the LGC empowers the LGUs, through ordinances duly
approved, to grant tax exemptions, initiatives or reliefs. 77 But in enacting section 37 of Ordinance No.
165-92 which imposes an annual franchise tax "notwithstanding any exemption granted by law or
other special law," the respondent city government clearly did not intend to exempt the petitioner
from the coverage thereof.
Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and
support myriad activities of the 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. As this Court observed in theMactan case, "the original reasons for the withdrawal of tax
exemption privileges granted to government-owned or 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."78 With the added burden of devolution, it is even more
imperative for government entities to share in the requirements of development, fiscal or otherwise,
by paying taxes or other charges due from them.
IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and Resolution of the
Court of Appeals dated March 12, 2001 and July 10, 2001, respectively, are hereby AFFIRMED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-22734

September 15, 1967

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO PINEDA, respondent.
Office of the Solicitor General for petitioner.
Manuel B. Pineda for and in his own behalf as respondent.

BENGZON, J.P., J.:

On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children, the
eldest of whom is Manuel B. Pineda, a lawyer. Estate proceedings were had in the Court of First
Instance of Manila (Case No. 71129) wherein the surviving widow was appointed administratrix. The
estate was divided among and awarded to the heirs and the proceedings terminated on June 8,
1948. Manuel B. Pineda's share amounted to about P2,500.00.
After the estate proceedings were closed, the Bureau of Internal Revenue investigated the income
tax liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that the corresponding
income tax returns were not filed. Thereupon, the representative of the Collector of Internal Revenue
filed said returns for the estate on the basis of information and data obtained from the aforesaid
estate proceedings and issued an assessment for the following:
1. Deficiency income tax
1945
P135.83
1946
436.95
1947
1,206.91
Add: 5% surcharge
1% monthly interest
from November 30,
1953 to April 15, 1957
Compromise for late
filing
Compromise for late
payment
Total amount due

P1,779.69
88.98
720.77
80.00
40.00
P2,707.44
===========
P14.50
===========

Additional residence tax for

1945
3. Real Estate dealer's tax for
the fourth quarter of 1946 and
P207.50
the whole year of 1947
===========
2.

Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he appealed
to the Court of Tax Appeals alleging that he was appealing "only that proportionate part or portion
pertaining to him as one of the heirs."
After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision of the
Commissioner on the ground that his right to assess and collect the tax has prescribed. The
Commissioner appealed and this Court affirmed the findings of the Tax Court in respect to the
assessment for income tax for the year 1947 but held that the right to assess and collect the taxes
for 1945 and 1946 has not prescribed. For 1945 and 1946 the returns were filed on August 24, 1953;
assessments for both taxable years were made within five years therefrom or on October 19, 1953;

and the action to collect the tax was filed within five years from the latter date, on August 7, 1957.
For taxable year 1947, however, the return was filed on March 1, 1948; the assessment was made
on October 19, 1953, more than five years from the date the return was filed; hence, the right to
assess income tax for 1947 had prescribed. Accordingly, We remanded the case to the Tax Court for
further appropriate proceedings.1
In the Tax Court, the parties submitted the case for decision without additional evidence.
On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B. Pineda liable
for the payment corresponding to his share of the following taxes:
Deficiency income tax
1945
1946
Real estate dealer's
fixed tax 4th quarter
of 1946 and whole
year of 1947

P135.83
436.95

P187.50

The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel B.
Pineda liable for the payment of all the taxes found by the Tax Court to be due from the estate in the
total amount of P760.28 instead of only for the amount of taxes corresponding to his share in the
estate.
1awphl.nt

Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid
income tax due the estate only up to the extent of and in proportion to any share he received. He
relies on Government of the Philippine Islands v. Pamintuan2 where We held that "after the partition
of an estate, heirs and distributees are liable individually for the payment of all lawful outstanding
claims against the estate in proportion to the amount or value of the property they have respectively
received from the estate."
We hold that the Government can require Manuel B. Pineda to pay the full amount of the taxes
assessed.
Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging to
the estate/taxpayer. As an heir he is individually answerable for the part of the tax proportionate to
the share he received from the inheritance.3 His liability, however, cannot exceed the amount of his
share.4
As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of the
property in his possession. The reason is that the Government has a lien on the P2,500.00 received
by him from the estate as his share in the inheritance, for unpaid income taxes 4a for which said
estate is liable, pursuant to the last paragraph of Section 315 of the Tax Code, which we quote
hereunder:
If any person, corporation, partnership, joint-account (cuenta en participacion), association,
or insurance company liable to pay the income tax, neglects or refuses to pay the same after
demand, the amount shall be a lien in favor of the Government of the Philippines from the
time when the assessment was made by the Commissioner of Internal Revenue until paid
with interest, penalties, and costs that may accrue in addition thereto upon all property and
rights to property belonging to the taxpayer: . . .
By virtue of such lien, the Government has the right to subject the property in Pineda's possession,
i.e., the P2,500.00, to satisfy the income tax assessment in the sum of P760.28. After such payment,
Pineda will have a right of contribution from his co-heirs,5 to achieve an adjustment of the proper
share of each heir in the distributable estate.
All told, the Government has two ways of collecting the tax in question. One, by going after all the
heirs and collecting from each one of them the amount of the tax proportionate to the inheritance
received. This remedy was adopted in Government of the Philippine Islands v. Pamintuan, supra. In
said case, the Government filed an action against all the heirs for the collection of the tax. This
action rests on the concept that hereditary property consists only of that part which remains after the

settlement of all lawful claims against the estate, for the settlement of which the entire estate is first
liable.6 The reason why in case suit is filed against all the heirs the tax due from the estate is levied
proportionately against them is to achieve thereby two results: first, payment of the tax; and second,
adjustment of the shares of each heir in the distributed estate as lessened by the tax.
Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and
rights to property belonging to the taxpayer for unpaid income tax, is by subjecting said property of
the estate which is in the hands of an heir or transferee to the payment of the tax due, the estate.
This second remedy is the very avenue the Government took in this case to collect the tax. The
Bureau of Internal Revenue should be given, in instances like the case at bar, the necessary
discretion to avail itself of the most expeditious way to collect the tax as may be envisioned in the
particular provision of the Tax Code above quoted, because taxes are the lifeblood of government
and their prompt and certain availability is an imperious need.7 And as afore-stated in this case the
suit seeks to achieve only one objective: payment of the tax. The adjustment of the respective
shares due to the heirs from the inheritance, as lessened by the tax, is left to await the suit for
contribution by the heir from whom the Government recovered said tax.
WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered to pay
to the Commissioner of Internal Revenue the sum of P760.28 as deficiency income tax for 1945 and
1946, and real estate dealer's fixed tax for the fourth quarter of 1946 and for the whole year 1947,
without prejudice to his right of contribution for his co-heirs. No costs. So ordered.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-31156 February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and Assistant
Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for appellees.

MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294,
which was certified to Us by the Court of Appeals on October 6, 1969, as involving only pure
questions of law, challenging the power of taxation delegated to municipalities under the Local
Autonomy Act (Republic Act No. 2264, as amended, June 19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc.,
commenced a complaint with preliminary injunction before the Court of First Instance of Leyte for
that court to declare Section 2 of Republic Act No. 2264. 1 otherwise known as the Local Autonomy Act,
unconstitutional as an undue delegation of taxing authority as well as to declare Ordinances Nos. 23 and
27, series of 1962, of the municipality of Tanauan, Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which state
that, first, both Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the
production tax rates imposed therein are practically the same, and second, that on January 17,
1963, the acting Municipal Treasurer of Tanauan, Leyte, as per his letter addressed to the Manager
of the Pepsi-Cola Bottling Plant in said municipality, sought to enforce compliance by the latter of the
provisions of said Ordinance No. 27, series of 1962.

Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies
and collects "from soft drinks producers and manufacturers a tai of one-sixteenth (1/16) of a centavo
for every bottle of soft drink corked." 2 For the purpose of computing the taxes due, the person, firm,
company or corporation producing soft drinks shall submit to the Municipal Treasurer a monthly report, of
the total number of bottles produced and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies
and collects "on soft drinks produced or manufactured within the territorial jurisdiction of this
municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity." 4 For the purpose of computing the taxes due, the person, fun company, partnership,
corporation or plant producing soft drinks shall submit to the Municipal Treasurer a monthly report of the
total number of gallons produced or manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the
complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring
Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay the taxes due under
the oft the said Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals,
which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as
amended.
There are three capital questions raised in this appeal:
1. Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory
and oppressive?
2. Do Ordinances Nos. 23 and 27 constitute double taxation and impose
percentage or specific taxes?
3. Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter
of right to every independent government, without being expressly conferred by the people. 6 It is a
power that is purely legislative and which the central legislative body cannot delegate either to the
executive or judicial department of the government without infringing upon the theory of separation of
powers. The exception, however, lies in the case of municipal corporations, to which, said theory does not
apply. Legislative powers may be delegated to local governments in respect of matters of local
concern. 7 This is sanctioned by immemorial practice. 8 By necessary implication, the legislative power to
create political corporations for purposes of local self-government carries with it the power to confer on
such local governmental agencies the power to tax. 9 Under the New Constitution, local governments are
granted the autonomous authority to create their own sources of revenue and to levy taxes. Section 5,
Article XI provides: "Each local government unit shall have the power to create its sources of revenue and
to levy taxes, subject to such limitations as may be provided by law." Withal, it cannot be said that Section
2 of Republic Act No. 2264 emanated from beyond the sphere of the legislative power to enact and vest in
local governments the power of local taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense,
would not suffice to invalidate the said law as confiscatory and oppressive. In delegating the
authority, the State is not limited 6 the exact measure of that which is exercised by itself. When it is
said that the taxing power may be delegated to municipalities and the like, it is meant that there may
be delegated such measure of power to impose and collect taxes as the legislature may deem
expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public policy
the State has not deemed wise to tax for more general purposes. 10 This is not to say though that the
constitutional injunction against deprivation of property without due process of law may be passed over
under the guise of the taxing power, except when the taking of the property is in the lawful exercise of the
taxing power, as when (1) the tax is for a public purpose; (2) the rule on uniformity of taxation is observed;
(3) either the person or property taxed is within the jurisdiction of the government levying the tax; and (4)
in the assessment and collection of certain kinds of taxes notice and opportunity for hearing are
provided. 11 Due process is usually violated where the tax imposed is for a private as distinguished from a
public purpose; a tax is imposed on property outside the State, i.e., extraterritorial taxation; and arbitrary
or oppressive methods are used in assessing and collecting taxes. But, a tax does not violate the due
process clause, as applied to a particular taxpayer, although the purpose of the tax will result in an injury

rather than a benefit to such taxpayer. Due process does not require that the property subject to the tax or
the amount of tax to be raised should be determined by judicial inquiry, and a notice and hearing as to the
amount of the tax and the manner in which it shall be apportioned are generally not necessary to due
process of law. 12

There is no validity to the assertion that the delegated authority can be declared unconstitutional on
the theory of double taxation. It must be observed that the delegating authority specifies the
limitations and enumerates the taxes over which local taxation may not be exercised. 13 The reason is
that the State has exclusively reserved the same for its own prerogative. Moreover, double taxation, in
general, is not forbidden by our fundamental law, since We have not adopted as part thereof the
injunction against double taxation found in the Constitution of the United States and some states of the
Union. 14 Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the
same governmental entity 15 or by the same jurisdiction for the same purpose, 16 but not in a case where
one tax is imposed by the State and the other by the city or municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation, because
these two ordinances cover the same subject matter and impose practically the same tax rate. The
thesis proceeds from its assumption that both ordinances are valid and legally enforceable. This is
not so. As earlier quoted, Ordinance No. 23, which was approved on September 25, 1962, levies or
collects from soft drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo for
.every bottle corked, irrespective of the volume contents of the bottle used. When it was discovered
that the producer or manufacturer could increase the volume contents of the bottle and still pay the
same tax rate, the Municipality of Tanauan enacted Ordinance No. 27, approved on October 28,
1962, imposing a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity. The difference between the two ordinances clearly lies in the tax rate of the soft drinks
produced: in Ordinance No. 23, it was 1/16 of a centavo for every bottle corked; in Ordinance No.
27, it is one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The
intention of the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus clear: it was
intended as a plain substitute for the prior Ordinance No. 23, and operates as a repeal of the latter,
even without words to that effect. 18 Plaintiff-appellant in its brief admitted that defendants-appellees are
only seeking to enforce Ordinance No. 27, series of 1962. Even the stipulation of facts confirms the fact
that the Acting Municipal Treasurer of Tanauan, Leyte sought t6 compel compliance by the plaintiffappellant 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 taxexcept 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- 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, Muoz 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.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 90776

June 3, 1991

PHILIPPINE PETROLEUM CORPORATION, petitioner,

vs.
MUNICIPALITY OF PILILLA, RIZAL, Represented by MAYOR NICOMEDES F.
PATENIA, respondent.
Quiason, Makalintal, Barot, Torres & Ibarra for petitioner.

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. To
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:
1wphi1

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.