1. CIR v.

DLSU The Factual Antecedents

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU

[G.R. No. 196596. November 9, 2016.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. DE
LA SALLE UNIVERSITY, INC., respondent.
[G.R. No. 198841. November 9, 2016.]
DE LA SALLE UNIVERSITY,
INC., petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, respondent.
[G.R. No. 198941. November 9, 2016.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. DE
LA SALLE UNIVERSITY, INC., respondent.
DECISION
BRION, J p:
Before the Court are consolidated petitions for review on certiorari: 1
1. G.R. No. 196596 filed by the Commissioner of Internal
Revenue (Commissioner) to assail the December 10, 2010
decision and March 29, 2011 resolution of the Court of Tax
Appeals (CTA) in En Banc Case No. 622; 2
2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail
the June 8, 2011 decision and October 4, 2011 resolution in
CTA En Banc Case No. 671; 3 and
3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011
decision and October 4, 2011 resolution in CTA En Banc Case
No. 671. 4
G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special
First Division (CTA Division) Case No. 7303. G.R. No. 196596 stemmed
from CTA En Banc Case No. 622 filed by the Commissioner to challenge CTA
Case No. 7303. G.R. Nos. 198841 and 198941 both stemmed from CTA En
Banc Case No. 671 filed by DLSU to also challenge CTA Case No. 7303. CAIHTE
Letter of Authority (LOA) No. 2794 authorizing its revenue officers to examine the
latter's books of accounts and other accounting records for all internal revenue
taxes for the period Fiscal Year Ending 2003 and Unverified Prior Years. 5
On May 19, 2004, BIR issued a Preliminary Assessment Notice to
DLSU. 6
Subsequently on August 18, 2004, the BIR through a Formal Letter of
Demand assessed DLSU the following deficiency taxes: (1) income tax on rental
earnings from restaurants/canteens and bookstores operating within the campus;
(2) value-added tax (VAT) on business income; and (3) documentary stamp tax
(DST) on loans and lease contracts. The BIR demanded the payment
of P17,303,001.12, inclusive of surcharge, interest and penalty for taxable years
2001, 2002 and 2003. 7
DLSU protested the assessment. The Commissioner failed to act on the
protest; thus, DLSU filed on August 3, 2005 a petition for review with the CTA
Division. 8
DLSU, a non-stock, non-profit educational institution, principally
anchored its petition on Article XIV, Section 4 (3) of the Constitution, which reads:
(3) All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and
duties. . . . .
On January 5, 2010, the CTA Division partially granted DLSU's petition
for review. The dispositive portion of the decision reads:
WHEREFORE, the Petition for Review is PARTIALLY
GRANTED. The DST assessment on the loan transactions of
[DLSU] in the amount of P1,1681,774.00 n is
hereby CANCELLED. However, [DLSU] is ORDERED TO
PAY deficiency income tax, VAT and DST on its lease contracts,
plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in
the total amount of P18,421,363.53. . . . .
In addition, [DLSU] is hereby held liable to pay 20%
delinquency interest on the total amount due computed from
September 30, 2004 until full payment thereof pursuant to
Section 249(C)(3) of the [National Internal Revenue Code].
Further, the compromise penalties imposed by [the
Commissioner] were excluded, there being no compromise
agreement between the parties.
SO ORDERED. 9
Both the Commissioner and DLSU moved for the reconsideration of the
January 5, 2010 decision. 10 On April 6, 2010, the CTA Division denied the
Commissioner's motion for reconsideration while it held in abeyance the resolution
on DLSU's motion for reconsideration. 11
 On May 13, 2010, the Commissioner appealed to the CTA En
Banc (CTA En Banc Case No. 622) arguing that DLSU's use of its revenues and
assets for non-educational or commercial purposes removed these items from the
exemption coverage under the Constitution. 12
On May 18, 2010, DLSU formally offered to the CTA Division
supplemental pieces of documentary evidence to prove that its rental income was
used actually, directly and exclusively for educational purposes. 13 The
Commissioner did not promptly object to the formal offer of supplemental evidence
despite notice. 14
On July 29, 2010, the CTA Division, in view of the supplemental evidence
submitted, reduced the amount of DLSU's tax deficiencies. The dispositive portion
of the amended decision reads:
WHEREFORE, [DLSU]'s Motion for Partial
Reconsideration is hereby PARTIALLY GRANTED. [DLSU] is
hereby ORDERED TO PAY for deficiency income tax, VAT and
DST plus 25% surcharge for the fiscal years 2001, 2002 and
2003 in the total adjusted amount of P5,506,456.71. . . . .
In addition, [DLSU] is hereby held liable to pay 20% per
annum deficiency interest on the . . . basic deficiency taxes . . .
until full payment thereof pursuant to Section 249(B) of the
[National Internal Revenue Code]. . . . .
Further, [DLSU] is hereby held liable to pay 20% per
annum delinquency interest on the deficiency taxes, surcharge
and deficiency interest which have accrued . . . from September
30, 2004 until fully paid. 15
Consequently, the Commissioner supplemented its petition with the
CTA En Banc and argued that the CTA Division erred in admitting DLSU's
additional evidence. 16
Dissatisfied with the partial reduction of its tax liabilities, DLSU filed
a separate petition for review with the CTA En Banc (CTA En Banc Case No. 671)
on the following grounds: (1) the entire assessment should have been cancelled
because it was based on an invalid LOA; (2) assuming the LOA was valid, the CTA
Division should still have cancelled the entire assessment because DLSU
submitted evidence similar to those submitted by Ateneo De Manila
University (Ateneo) in a separate case where the CTA cancelled Ateneo's tax
assessment; 17 and (3) the CTA Division erred in finding that a portion of DLSU's
rental income was not proved to have been used actually, directly and exclusively
for educational purposes. 18
The CTA En Banc Rulings
CTA En Banc Case No. 622
The CTA En Banc dismissed the Commissioner's petition for review and
sustained the findings of the CTA Division. 19 DETACa
Tax on rental income
Relying on the findings of the court-commissioned Independent Certified
Public Accountant (Independent CPA), the CTA En Banc found that DLSU was
able to prove that a portion of the assessed rental income was used actually,
directly and exclusively for educational purposes; hence, exempt from tax. 20 The
CTA En Banc was satisfied with DLSU's supporting evidence confirming that part
of its rental income had indeed been used to pay the loan it obtained to build the
university's Physical Education — Sports Complex. 21
Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the
part of its income that was not shown by supporting documents to have been
actually, directly and exclusively used for educational purposes, must be subjected
to income tax and VAT. 22
DST on loan and mortgage transactions
Contrary to the Commissioner's contention, DLSU proved its remittance
of the DST due on its loan and mortgage documents. 23 The CTA En Banc found
that DLSU's DST payments had been remitted to the BIR, evidenced by the stamp
on the documents made by a DST imprinting machine, which is allowed under
Section 200 (D) of the National Internal Revenue Code (Tax Code) 24 and Section
2 of Revenue Regulations (RR) No. 15-2001. 25
Admissibility of DLSU s supplemental evidence
The CTA En Banc held that the supplemental pieces of documentary
evidence were admissible even if DLSU formally offered them only when it moved
for reconsideration of the CTA Division's original decision. Notably, the law creating
the CTA provides that proceedings before it shall not be governed strictly by the
technical rules of evidence. 26
The Commissioner moved but failed to obtain a reconsideration of the
CTA En Banc's December 10, 2010 decision. 27 Thus, she came to this court for
relief through a petition for review on certiorari (G.R. No. 196596).
CTA En Banc Case No. 671
The CTA En Banc partially granted DLSU's petition for review and further
reduced its tax liabilities to P2,554,825.47 inclusive of surcharge. 28
On the validity of the Letter of Authority
The issue of the LOA's validity was raised during trial; 29 hence, the issue
was deemed properly submitted for decision and reviewable on appeal.
Citing jurisprudence, the CTA En Banc held that a LOA should cover only
one taxable period and that the practice of issuing a LOA covering audit
of unverified prior years is prohibited. 30 The prohibition is consistent
with Revenue Memorandum Order (RMO) No. 43-90, which provides that if the
audit includes more than one taxable period, the other periods or years shall be
specifically indicated in the LOA. 31
In the present case, the LOA issued to DLSU is for Fiscal Year Ending
2003 and Unverified Prior Years. Hence, the assessments for deficiency income
tax, VAT and DST for taxable years 2001 and 2002 are void, but the assessment
for taxable year 2003 is valid. 32
On the applicability of the Ateneo case
The CTA En Banc held that the Ateneo case is not a valid precedent
because it involved different parties, factual settings, bases of assessments, sets
of evidence, and defenses. 33
On the CTA Division's appreciation of the evidence
The CTA En Banc affirmed the CTA Division's appreciation of DLSU's
evidence. It held that while DLSU successfully proved that a portion of its rental
income was transmitted and used to pay the loan obtained to fund the construction
of the Sports Complex, the rental income from othersources were not shown to
have been actually, directly and exclusively used for educational purposes. 34
Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841)
and the Commissioner (G.R. No. 198941) came to this Court for relief.
The Consolidated Petitions
G.R. No. 196596
The Commissioner submits the following arguments:
First, DLSU's rental income is taxable regardless of how such income is
derived, used or disposed of. 35 DLSU's operations of canteens and bookstores
within its campus even though exclusively serving the university community do not
negate income tax liability. 36
The Commissioner contends that Article XIV, Section 4 (3) of the
Constitution must be harmonized with Section 30 (H) of the Tax Code, which states
among others, that the income of whatever kind and character of [a non-stock and
non-profit educational institution] from any of [its] properties, real or personal, or
from any of [its] activities conducted for profit regardless of the disposition made of
such income, shall be subject to tax imposed by this Code. 37
The Commissioner argues that the CTA En Banc misread and misapplied
the case of Commissioner of Internal Revenue v. YMCA 38 to support its
conclusion that revenues however generated are covered by the constitutional
exemption, provided that, the revenues will be used for educational purposes or
will be held in reserve for such purposes. 39
On the contrary, the Commissioner posits that a tax-exempt organization
like DLSU is exempt only from property tax but not from income tax on the rentals
earned from property. 40 Thus, DLSU's income from the leases of its real
properties is not exempt from taxation even if the income would be used for
educational purposes. 41 aDSIHc
Second, the Commissioner insists that DLSU did not prove the fact of
DST payment 42 and that it is not qualified to use the On-Line Electronic DST
Imprinting Machine, which is available only to certain classes of taxpayers
under RR No. 9-2000. 43
Finally, the Commissioner objects to the admission of DLSU's
supplemental offer of evidence. The belated submission of supplemental evidence
reopened the case for trial, and worse, DLSU offered the supplemental evidence
only after it received the unfavorable CTA Division's original decision. 44 In any
case, DLSU's submission of supplemental documentary evidence was
unnecessary since its rental income was taxable regardless of its disposition. 45
G.R. No. 198841
DLSU argues as that:
First, RMO No. 43-90 prohibits the practice of issuing a LOA with any
indication of unverified prior years. A LOA issued contrary to RMO No. 43-90 is
void, thus, an assessment issued based on such defective LOA must also be
void. 46
DLSU points out that the LOA issued to it covered the Fiscal Year Ending
2003 and Unverified Prior Years. On the basis of this defective LOA, the
Commissioner assessed DLSU for deficiency income tax, VAT and DST for taxable
years 2001, 2002 and 2003. 47 DLSU objects to the CTA En Banc's conclusion
that the LOA is valid for taxable year 2003. According to DLSU, when RMO No.
43-90 provides that:
The practice of issuing [LOAs] covering audit
of 'unverified prior years' is hereby prohibited.
it refers to the LOA which has the format "Base Year + Unverified Prior
Years." Since the LOA issued to DLSU follows this format, then any assessment
arising from it must be entirely voided.n 48
Second, DLSU invokes the principle of uniformity in taxation, which
mandates that for similarly situated parties, the same set of evidenceshould be
appreciated and weighed in the same manner. 49 The CTA En Banc erred when
it did not similarly appreciate DLSU's evidence as it did to the pieces of evidence
submitted by Ateneo, also a non-stock, non-profit educational institution. 50
G.R. No. 198941
The issues and arguments raised by the Commissioner in G.R. No.
198941 petition are exactly the same as those she raised in her: (1) petition
docketed as G.R. No. 196596 and (2) comment on DLSU's petition docketed as
G.R. No. 198841. 51
Counter-arguments
DLSU's Comment on G.R. No. 196596
First, DLSU questions the defective verification attached to the
petition. 52
Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution
is clear that all assets and revenues of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational purposes are
exempt from taxes and duties. 53
On this point, DLSU explains that: (1) the tax exemption of non-stock,
non-profit educational institutions is novel to the 1987 Constitution and that
Section 30 (H) of the 1997 Tax Code cannot amend the 1987 Constitution; 54 (2)
Section 30 of the 1997 Tax Code is almost an exact replica of Section 26 of
the 1977 Tax Code — with the addition of non-stock, non-profit educational
institutions to the list of tax-exempt entities; and (3) that the 1977 Tax Code was
promulgated when the 1973 Constitution was still in place.
DLSU elaborates that the tax exemption granted to a private educational
institution under the 1973 Constitution was only for real property tax.Back then, the
special tax treatment on income of private educational institutions only emanates
from statute, i.e., the 1977 Tax Code. Only under the 1987 Constitution that
exemption from tax of all the assets and revenues of non-stock, non-profit
educational institutions used actually, directly and exclusively for educational
purposes, was expressly and categorically enshrined. 55
DLSU thus invokes the doctrine of constitutional supremacy, which
renders any subsequent law that is contrary to the Constitution void and without
any force and effect. 56 Section 30 (H) of the 1997 Tax Code insofar as it subjects
to tax the income of whatever kind and character of a non-stock and non-profit
educational institution from any of its properties, real or personal, or from any of its
activities conducted for profit regardless of the disposition made of such income,
should be declared without force and effect in view of the constitutionally granted
tax exemption on "all revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational purposes." 57
DLSU further submits that it complies with the requirements enunciated
in the YMCA case, that for an exemption to be granted under Article XIV, Section
4 (3) of the Constitution, the taxpayer must prove that: (1) it falls under the
classification non-stock, non-profit educational institution; and (2) the income it
seeks to be exempted from taxation is used actually, directly and exclusively for
educational purposes. 58 Unlike YMCA, which is not an educational institution,
DLSU is undisputedly a non-stock, non-profit educational institution. It had also
submitted evidence to prove that it actually, directly and exclusively used its
income for educational purposes. 59 ETHIDa
DLSU also cites the deliberations of the 1986 Constitutional Commission
where they recognized that the tax exemption was granted "to incentivize private
educational institutions to share with the State the responsibility of educating the
youth." 60
Third, DLSU highlights that both the CTA En Banc and Division found that
the bank that handled DLSU's loan and mortgage transactions had remitted to the
BIR the DST through an imprinting machine, a method allowed under RR No. 15-
2001. 61 In any case, DLSU argues that it cannot be held liable for DST owing to
the exemption granted under the Constitution. 62
Finally, DLSU underscores that the Commissioner, despite notice, did not
oppose the formal offer of supplemental evidence. Because of the Commissioner's
failure to timely object, she became bound by the results of the submission of such
supplemental evidence. 63
The CIR's Comment on G.R. No. 198841
The Commissioner submits that DLSU is estopped from questioning the
LOA's validity because it failed to raise this issue in both the administrative and
judicial proceedings. 64 That it was asked on cross-examination during the trial
does not make it an issue that the CTA could resolve. 65 The Commissioner also
maintains that DLSU's rental income is not tax-exempt because an educational
institution is only exempt from property tax but not from tax on the income earned
from the property. 66
DLSU's Comment on G.R. No. 198941
DLSU puts forward the same counter-arguments discussed above. 67 In
addition, DLSU prays that the Court award attorney's fees in its favor because it
was constrained to unnecessarily retain the services of counsel in this separate
petition. 68
Issues
Although the parties raised a number of issues, the Court shall decide
only the pivotal issues, which we summarize as follows:
I. Whether DLSU's income and revenues proved to have been used
actually, directly and exclusively for educational purposes are
exempt from duties and taxes;
II. Whether the entire assessment should be voided because of the
defective LOA;
III. Whether the CTA correctly admitted DLSU's supplemental pieces of
evidence; and
IV. Whether the CTA's appreciation of the sufficiency of DLSU's evidence
may be disturbed by the Court.
Our Ruling
As we explain in full below, we rule that:
I. The income, revenues and assets of non-stock, non-profit educational
institutions proved to have been used actually, directly and
exclusively for educational purposes are exempt from duties and
taxes.
II. The LOA issued to DLSU is not entirely void. The assessment for
taxable year 2003 is valid.
III. The CTA correctly admitted DLSU's formal offer of supplemental
evidence; and
IV. The CTA's appreciation of evidence is conclusive unless the CTA is
shown to have manifestly overlooked certain relevant facts not
disputed by the parties and which, if properly considered, would
justify a different conclusion.
 The parties failed to convince the Court that the CTA overlooked or failed educational institutions, these exemptions may be subject to limitations imposed
to consider relevant facts. We thus sustain the CTA En Banc's by Congress.
findings that:
As we explain below, the marked distinction between a non-stock, non-
a. DLSU proved that a portion of its rental income was used profit and a proprietary educational institution is crucial in determining the nature
actually, directly and exclusively for educational and extent of the tax exemption granted to non-stock, non-profit educational
purposes; and institutions.
b. DLSU proved the payment of the DST through its bank's on- The Commissioner opposes DLSU's claim for tax exemption on the basis
line imprinting machine. of Section 30 (H) of the Tax Code. The relevant text reads:
I. The revenues and assets of non-stock, The following organizations shall not be taxed under this
non-profit educational institutions Title [Tax on Income] in respect to income received by them as
proved to have been used actually, such:
directly, and exclusively for educational
purposes are exempt from duties and xxx xxx xxx
taxes. (H) A non-stock and non-profit educational institution
DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, xxx xxx xxx
which reads:
Notwithstanding the provisions in the preceding paragraphs,
(3) All revenues and assets of non-stock, non-profit the income of whatever kind and character of the foregoing
educational institutions used actually, directly, and organizations from any of their properties, real or personal,
exclusively for educational purposes shall be exempt or from any of their activities conducted for
from taxes and duties. Upon the dissolution or profit regardless of the disposition made of such
cessation of the corporate existence of such institutions, income shall be subject to tax imposed under this
their assets shall be disposed of in the manner provided Code. [underscoring and emphasis supplied]
by law.
The Commissioner posits that the 1997 Tax Code qualified the tax
Proprietary educational institutions, including those exemption granted to non-stock, non-profit educational institutions such that the
cooperatively owned, may likewise be entitled to such revenues and income they derived from their assets, or from any of their activities
exemptions subject to the limitations provided by conducted for profit, are taxable even if these revenues and income are used for
law including restrictions on dividends and provisions for educational purposes.
reinvestment. [underscoring and emphasis
supplied] cSEDTC Did the 1997 Tax Code qualify the tax exemption constitutionally-
granted to non-stock, non-profit educational institutions?
Before fully discussing the merits of the case, we observe that:
We answer in the negative.
First, the constitutional provision refers to two kinds of educational
institutions: (1) non-stock, non-profit educational institutions and (2) proprietary While the present petition appears to be a case of first impression, 71 the
educational institutions. 69 Court in the YMCA case had in fact already analyzed and explained the meaning
of Article XIV, Section 4 (3) of the Constitution. The Court in that case made
Second, DLSU falls under the first category. Even the Commissioner doctrinal pronouncements that are relevant to the present case.
admits the status of DLSU as a non-stock, non-profit educational institution. 70
The issue in YMCA was whether the income derived from rentals of real
Third, while DLSU's claim for tax exemption arises from and is based on property owned by the YMCA, established as a "welfare, educational and
the Constitution, the Constitution, in the same provision, also imposes certain charitable non-profit corporation," was subject to income tax under the Tax Code
conditions to avail of the exemption. We discuss below the import of the and the Constitution. 72
constitutional text vis-à-vis the Commissioner's counter-arguments.
The Court denied YMCA's claim for exemption on the ground that as
Fourth, there is a marked distinction between the treatment of non-stock, a charitable institution falling under Article VI, Section 28 (3) of the
non-profit educational institutions and proprietary educational institutions. The tax Constitution, 73 the YMCA is not tax-exempt per se; " what is exempted is not the
exemption granted to non-stock, non-profit educational institutions is conditioned institution itself . . . those exempted from real estate taxes are lands, buildings and
only on the actual, direct and exclusive use of their revenues and assets for improvements actually, directly and exclusively used for religious, charitable or
educational purposes. While tax exemptions may also be granted to proprietary educational purposes." 74
 The Court held that the exemption claimed by the YMCA is expressly The addition and express use of the word revenues in Article XIV, Section
disallowed by the last paragraph of then Section 27 (now Section 30) of the Tax 4 (3) of the Constitution is not without significance.
Code, which mandates that the income of exempt organizations from any of their
properties, real or personal, are subject to the same tax imposed by the Tax We find that the text demonstrates the policy of the 1987 Constitution,
Code, regardless of how that income is used. The Court ruled that the last discernible from the records of the 1986 Constitutional Commission 79to provide
paragraph of Section 27 unequivocally subjects to tax the rent income of the YMCA broader tax privilege to non-stock, non-profit educational institutions as recognition
from its property. 75 of their role in assisting the State provide a public good. The tax exemption was
seen as beneficial to students who may otherwise be charged unreasonable tuition
In short, the YMCA is exempt only from property tax but not from income fees if not for the tax exemption extended to all revenues and assets of non-
tax. stock, non-profit educational institutions. 80
As a last ditch effort to avoid paying the taxes on its rental income, the Further, a plain reading of the Constitution would show that Article XIV,
YMCA invoked the tax privilege granted under Article XIV, Section 4 (3) of the Section 4 (3) does not require that the revenues and income must have also been
Constitution. sourced from educational activities or activities related to the purposes of an
educational institution. The phrase all revenues is unqualified by any reference to
The Court denied YMCA's claim that it falls under Article XIV, Section 4
the source of revenues. Thus, so long as the revenues and income are used
(3) of the Constitution holding that the term educational institution, when used in actually, directly and exclusively for educational purposes, then said revenues and
laws granting tax exemptions, refers to the school system (synonymous with formal income shall be exempt from taxes and duties. 81
education); it includes a college or an educational establishment; it refers to the
hierarchically structured and chronologically graded learnings organized and We find it helpful to discuss at this point the taxation of revenues versus
provided by the formal school system. 76 the taxation of assets.
The Court then significantly laid down the requisites for availing the tax Revenues consist of the amounts earned by a person or entity from the
exemption under Article XIV, Section 4 (3), namely: (1) the taxpayer falls under the conduct of business operations. 82 It may refer to the sale of goods, rendition of
classification non-stock, non-profit educational institution; and (2) services, or the return of an investment. Revenue is a component of the tax base
the income it seeks to be exempted from taxation is used actually, directly and in income tax, 83 VAT, 84 and local business tax (LBT). 85
exclusively for educational purposes. 77 SDAaTC
Assets, on the other hand, are the tangible and intangible properties
We now adopt YMCA as precedent and hold that: owned by a person or entity. 86 It may refer to real estate, cash deposit in a bank,
investment in the stocks of a corporation, inventory of goods, or any property from
1. The last paragraph of Section 30 of the Tax Code is without force and which the person or entity may derive income or use to generate the same. In
effect with respect to non-stock, non-profit educational Philippine taxation, the fair market value of real property is a component of the tax
institutions, provided, that the non-stock, non-profit educational base in real property tax (RPT). 87 Also, the landed cost of imported goods is a
institutions prove that its assets and revenues are used actually, component of the tax base in VAT on importation 88 and tariff duties. 89
directly and exclusively for educational purposes.
Thus, when a non-stock, non-profit educational institution proves that it
2. The tax-exemption constitutionally-granted to non-stock, non-profit uses its revenues actually, directly, and exclusively for educational purposes, it
educational institutions, is not subject to limitations imposed by shall be exempted from income tax, VAT, and LBT. On the other hand, when it
law. also shows that it uses its assets in the form of real property for educational
The tax exemption granted by the purposes, it shall be exempted from RPT.
Constitution to non-stock, non-profit To be clear, proving the actual use of the taxable item will result in an
educational institutions is conditioned exemption, but the specific tax from which the entity shall be exempted from shall
only on the actual, direct and exclusive depend on whether the item is an item of revenue or asset.
use of their assets, revenues and income 78
for educational purposes. To illustrate, if a university leases a portion of its school building to a
bookstore or cafeteria, the leased portion is not actually, directly and
We find that unlike Article VI, Section 28 (3) of the Constitution exclusively used for educational purposes, even if the bookstore or canteen caters
(pertaining to charitable institutions, churches, parsonages or convents, mosques, only to university students, faculty and staff.
and non-profit cemeteries), which exempts from tax only the assets, i.e.,
"all lands, buildings, and improvements, actually, directly, and exclusively used The leased portion of the building may be subject to real property tax,
for religious, charitable, or educational purposes . . .," Article XIV, Section 4 as held in Abra Valley College, Inc. v. Aquino. 90 We ruled in that case that the
(3) categorically states that "[a]ll revenues and assets . . . used actually, directly, test of exemption from taxation is the use of the property for purposes mentioned
and exclusively for educational purposes shall be exempt from taxes and duties." in the Constitution. We also held that the exemption extends to facilities which are
incidental to and reasonably necessary for the accomplishment of the main To be specific, Section 30 provides that exempt organizations like non-
purposes. stock, non-profit educational institutions shall not be taxed on income received by
them as such.
In concrete terms, the lease of a portion of a school building for
commercial purposes, removes such asset from the property tax exemption Section 27 (B), on the other hand, states that "[p]roprietary educational
granted under the Constitution. 91 There is no exemption because the asset institutions . . . which are nonprofit shall pay a tax of ten percent (10%) on their
is not used actually, directly and exclusively for educational purposes.The taxable income . . . Provided, that if the gross income from unrelated trade,
commercial use of the property is also not incidental to and reasonably necessary business or other activity exceeds fifty percent (50%) of the total gross income
for the accomplishment of the main purpose of a university, which is to educate its derived by such educational institutions . . . [the regular corporate income tax of
students. 30%] shall be imposed on the entire taxable income . . . " 92
However, if the university actually, directly and exclusively uses for By the Tax Code's clear terms, a proprietary educational institution is
educational purposes the revenues earned from the lease of its school building, entitled only to the reduced rate of 10% corporate income tax. The reduced rate is
such revenues shall be exempt from taxes and duties. The tax exemption no longer applicable only if: (1) the proprietary educational institution is non-profit and (2) its
hinges on the use of the asset from which the revenues were earned, but on the gross income from unrelated trade, business or activity does not exceed 50% of
actual, direct and exclusive use of the revenues for educational its total gross income.
purposes. acEHCD
Consistent with Article XIV, Section 4 (3) of the Constitution, these
Parenthetically, income and revenues of non-stock, non-profit limitations do not apply to non-stock, non-profit educational institutions.
educational institution not used actually, directly and exclusively for educational
purposes are not exempt from duties and taxes. To avail of the exemption, the Thus, we declare the last paragraph of Section 30 of the Tax Code without
taxpayer must factually prove that it used actually, directly and exclusively for force and effect for being contrary to the Constitution insofar as it subjects to tax
educational purposes the revenues or income sought to be exempted. the income and revenues of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purpose. We make this declaration
The crucial point of inquiry then is on the use of the assets or on the use in the exercise of and consistent with our duty 93 to uphold the primacy of the
of the revenues. These are two things that must be viewed and treated Constitution. 94
separately. But so long as the assets or revenues are used actually, directly and
exclusively for educational purposes, they are exempt from duties and taxes. Finally, we stress that our holding here pertains only to non-stock, non-
profit educational institutions and does not cover the other exempt organizations
The tax exemption granted by the under Section 30 of the Tax Code.
Constitution to non-stock, non-profit
educational institutions, unlike the For all these reasons, we hold that the income and revenues of
exemption that may be availed of by DLSU proven to have been used actually, directly and exclusively for educational
proprietary educational institutions, purposes are exempt from duties and taxes.
is not subject to limitations imposed II. The LOA issued to DLSU is
by law. not entirely void. The
That the Constitution treats non-stock, non-profit educational institutions assessment for taxable year
differently from proprietary educational institutions cannot be doubted. As 2003 is valid.
discussed, the privilege granted to the former is conditioned only on the actual, DLSU objects to the CTA En Banc's conclusion that the LOA is valid for
direct and exclusive use of their revenues and assets for educational purposes. In taxable year 2003 and insists that the entire LOA should be voided for being
clear contrast, the tax privilege granted to the latter may be subject to limitations contrary to RMO No. 43-90, which provides that if tax audit includes more than one
imposed by law. taxable period, the other periods or years shall be specifically indicated in the LOA.
We spell out below the difference in treatment if only to highlight the A LOA is the authority given to the appropriate revenue officer to examine
privileged status of non-stock, non-profit educational institutions compared with the books of account and other accounting records of the taxpayer in order to
their proprietary counterparts. determine the taxpayer's correct internal revenue liabilities 95 and for the purpose
While a non-stock, non-profit educational institution is classified as a tax- of collecting the correct amount of tax, 96 in accordance with Section 5 of the Tax
exempt entity under Section 30 (Exemptions from Tax on Corporations) of the Tax Code, which gives the CIR the power to obtain information, to summon/examine,
Code, a proprietary educational institution is covered by Section 27 (Rates of and take testimony of persons. The LOA commences the audit process 97 and
Income Tax on Domestic Corporations). informs the taxpayer that it is under audit for possible deficiency tax assessment.
Given the purposes of a LOA, is there basis to completely nullify the LOA
issued to DLSU, and consequently, disregard the BIR and the CTA's findings of
tax deficiency for taxable year 2003?
 We answer in the negative.
The relevant provision is Section C of RMO No. 43-90, the pertinent
portion of which reads: SDHTEC
3. A Letter of Authority [LOA] should cover a taxable period not
exceeding one taxable year. The practice of issuing
[LOAs] covering audit of unverified prior years is hereby
prohibited. If the audit of a taxpayer shall include more
than one taxable period, the other periods or years shall
be specifically indicated in the [LOA]. 98
What this provision clearly prohibits is the practice of issuing LOAs
covering audit of unverified prior years. RMO 43-90 does not say that a LOA which
contains unverified prior years is void. It merely prescribes that if the audit includes
more than one taxable period, the other periods or years must be specified. The
provision read as a whole requires that if a taxpayer is audited for more than one
taxable year, the BIR must specify each taxable year or taxable period on separate
LOAs.
Read in this light, the requirement to specify the taxable period covered
by the LOA is simply to inform the taxpayer of the extent of the audit and the scope
of the revenue officer's authority. Without this rule, a revenue officer can unduly
burden the taxpayer by demanding random accounting records from
random unverified years, which may include documents from as far back as ten
years in cases of fraud audit. 99
In the present case, the LOA issued to DLSU is for Fiscal Year Ending
2003 and Unverified Prior Years. The LOA does not strictly comply with RMO 43-
90 because it includes unverified prior years. This does not mean, however, that
the entire LOA is void.
As the CTA correctly held, the assessment for taxable year 2003 is valid
because this taxable period is specified in the LOA. DLSU was fully apprised that
it was being audited for taxable year 2003. Corollarily, the assessments for taxable
years 2001 and 2002 are void for having been unspecified on separate LOAs as
required under RMO No. 43-90.
Lastly, the Commissioner's claim that DLSU failed to raise the issue of
the LOA's validity at the CTA Division, and thus, should not have been entertained
on appeal, is not accurate.
On the contrary, the CTA En Banc found that the issue of the LOA's
validity came up during the trial. 100 DLSU then raised the issue in
its memorandum and motion for partial reconsideration with the CTA Division.
DLSU raised it again on appeal to the CTA En Banc. Thus, the CTA En Banccould,
as it did, pass upon the validity of the LOA. 101 Besides, the Commissioner had
the opportunity to argue for the validity of the LOA at the CTA En Banc but she
chose not to file her comment and memorandum despite notice. 102
III. The CTA correctly admitted
the supplemental evidence
formally offered by DLSU.
The Commissioner objects to the CTA Division's admission of DLSU's
supplemental pieces of documentary evidence.
To recall, DLSU formally offered its supplemental evidence upon filing its
motion for reconsideration with the CTA Division. 103 The CTA Division admitted
the supplemental evidence, which proved that a portion of DLSU's rental income
was used actually, directly and exclusively for educational purposes.
Consequently, the CTA Division reduced DLSU's tax liabilities.
We uphold the CTA Division's admission of the supplemental evidence
on distinct but mutually reinforcing grounds, to wit: (1) the Commissioner failed to
timely object to the formal offer of supplemental evidence; and (2) the CTA is not
governed strictly by the technical rules of evidence.
First, the failure to object to the offered evidence renders it admissible,
and the court cannot, on its own, disregard such evidence. 104
The Court has held that if a party desires the court to reject the evidence
offered, it must so state in the form of a timely objection and it cannot raise the
objection to the evidence for the first time on appeal. 105 Because of a party's
failure to timely object, the evidence offered becomes part of the evidence in the
case. As a consequence, all the parties are considered bound by any outcome
arising from the offer of evidence properly presented. 106
As disclosed by DLSU, the Commissioner did not oppose the
supplemental formal offer of evidence despite notice. 107 The Commissioner
objected to the admission of the supplemental evidence only when the case was
on appeal to the CTA En Banc. By the time the Commissioner raised her objection,
it was too late; the formal offer, admission and evaluation of the supplemental
evidence were all fait accompli.
We clarify that while the Commissioner's failure to promptly object had no
bearing on the materiality or sufficiency of the supplemental evidence admitted,
she was bound by the outcome of the CTA Division's assessment of the
evidence. 108
Second, the CTA is not governed strictly by the technical rules of
evidence. The CTA Division's admission of the formal offer of supplemental
evidence, without prompt objection from the Commissioner, was thus justified.
Notably, this Court had in the past admitted and considered evidence
attached to the taxpayers' motion for reconsideration.
In the case of BPI-Family Savings Bank v. Court of Appeals, 109 the tax
refund claimant attached to its motion for reconsideration with the CTA its Final
Adjustment Return. The Commissioner, as in the present case, did not oppose the
taxpayer's motion for reconsideration and the admission of the Final Adjustment
Return. 110 We thus admitted and gave weight to the Final Adjustment
Return although it was only submitted upon motion for reconsideration. AScHCD
We held that while it is true that strict procedural rules generally frown
upon the submission of documents after the trial, the law creating the CTA
specifically provides that proceedings before it shall not be governed strictly by the
technical rules of evidence 111 and that the paramount consideration remains the
ascertainment of truth. We ruled that procedural rules should not bar courts from
considering undisputed facts to arrive at a just determination of a controversy. 112
We applied the same reasoning in the subsequent cases of Filinvest
Development Corporation v. Commissioner of Internal
Revenue 113 and Commissioner of Internal Revenue v. PERF Realty
Corporation, 114 where the taxpayers also submitted the supplemental supporting
document only upon filing their motions for reconsideration.
Although the cited cases involved claims for tax refunds, we also
dispense with the strict application of the technical rules of evidence in the
present tax assessment case. If anything, the liberal application of the rules
assumes greater force and significance in the case of a taxpayer who claims a
constitutionally granted tax exemption. While the taxpayers in the cited cases
claimed refund of excess tax payments based on the Tax Code, 115 DLSU is
claiming tax exemption based on the Constitution. If liberality is afforded to
taxpayers who paid more than they should have under a statute, then with more
reason that we should allow a taxpayer to prove its exemption from tax based on
the Constitution.
Hence, we sustain the CTA's admission of DLSU's supplemental offer of
evidence not only because the Commissioner failed to promptly object, but more
so because the strict application of the technical rules of evidence may defeat the
intent of the Constitution.
IV. The CTA's appreciation of
evidence is generally binding
on the Court unless compelling
reasons justify otherwise.
It is doctrinal that the Court will not lightly set aside the conclusions
reached by the CTA which, by the very nature of its function of being dedicated
exclusively to the resolution of tax problems, has developed an expertise on the
subject, unless there has been an abuse or improvident exercise of
authority. 116 We thus accord the findings of fact by the CTA with the highest
respect. These findings of facts can only be disturbed on appeal if they are not
supported by substantial evidence or there is a showing of gross error or abuse on
the part of the CTA. In the absence of any clear and convincing proof to the
contrary, this Court must presume that the CTA rendered a decision which is valid
in every respect. 117
We sustain the factual findings of the CTA.
The parties failed to raise credible basis for us to disturb the CTA's
findings that DLSU had used actually, directly and exclusively for educational
purposes a portion of its assessed income and that it had remitted the DST
payments though an online imprinting machine.
a. DLSU used actually, directly, and exclusively for educational purposes
a portion of its assessed income.
To see how the CTA arrived at its factual findings, we review the process
undertaken, from which it deduced that DLSU successfully proved that it used
actually, directly and exclusively for educational purposes a portion of its rental
income.
The CTA reduced DLSU's deficiency income tax and VAT liabilities in
view of the submission of the supplemental evidence, which consisted
of statement of receipts, statement of disbursement and fund balance and
statement of fund changes. 118
These documents showed that DLSU borrowed P93.86
Million, 119 which was used to build the university's Sports Complex. Based on
these pieces of evidence, the CTA found that DLSU's rental income from its
concessionaires were indeed transmitted and used for the payment of this loan.
The CTA held that the degree of preponderance of evidence was sufficiently met
to prove actual, direct and exclusive use for educational purposes.
The CTA also found that DLSU's rental income
from other concessionaires, which were allegedly deposited to a fund (CF-CPA
Account), 120intended for the university's capital projects, was not proved to
have been used actually, directly and exclusively for educational
purposes. The CTA observed that "[DLSU] . . . failed to fully account for and
substantiate all the disbursements from the [fund]." Thus, the CTA "cannot
ascertain whether rental income from the [other] concessionaires was indeed used
for educational purposes." 121
To stress, the CTA's factual findings were based on and supported by the
report of the Independent CPA who reviewed, audited and examined the
voluminous documents submitted by DLSU.
Under the CTA Revised Rules, an Independent CPA's functions include:
(a) examination and verification of receipts, invoices, vouchers and other long
accounts; (b) reproduction of, and comparison of such reproduction with, and
certification that the same are faithful copies of original documents, and pre-
marking of documentary exhibits consisting of voluminous documents; (c)
preparation of schedules or summaries containing a chronological listing of the
numbers, dates and amounts covered by receipts or invoices or other relevant
documents and the amount(s) of taxes paid; (d) making findings as to
compliance with substantiation requirements under pertinent tax laws,
regulations and jurisprudence; (e) submission of a formal report with
certification of authenticity and veracity of findings and conclusions in the
performance of the audit; (f) testifying on such formal report; and (g) performing
such other functions as the CTA may direct. 122
Based on the Independent CPA's report and on its own appreciation of
the evidence, the CTA held that only the portion of the rental income pertaining to
the substantiated disbursements (i.e., proved by receipts, vouchers, etc.) from the
CF-CPA Account was considered as used actually, directly and exclusively for
educational purposes. Consequently, the unaccounted and unsubstantiated
disbursements must be subjected to income tax and VAT. 123 AcICHD
The CTA then further reduced DLSU's tax liabilities by cancelling the
assessments for taxable years 2001 and 2002 due to the defective LOA. 124
The Court finds that the above fact-finding process undertaken by the
CTA shows that it based its ruling on the evidence on record, which we reiterate,
were examined and verified by the Independent CPA. Thus, we see no persuasive
reason to deviate from these factual findings.
However, while we generally respect the factual findings of the CTA, it
does not mean that we are bound by its conclusions. In the present case, we do
not agree with the method used by the CTA to arrive at DLSU's unsubstantiated
rental income (i.e., income not proved to have been actually, directly and
exclusively used for educational purposes).
 To recall, the CTA found that DLSU earned a rental
income of P10,610,379.00 in taxable year 2003. 125 DLSU earned this income
from leasing a portion of its premises to: 1) MTO-Sports Complex, 2) La Casita, 3)
Alarey, Inc., 4) Zaide Food Corp., 5) Capri International, and 6) MTO
Bookstore. 126
To prove that its rental income was used for educational purposes, DLSU
identified the transactions where the rental income was expended, viz.:
1) P4,007,724.00 127 used to pay the loan obtained by DLSU to build the Sports
Complex; and 2) P6,602,655.00 transferred to the CF-CPA Account. 128
DLSU also submitted documents to the Independent CPA to prove that
the P6,602,655.00 transferred to the CF-CPA Account was used actually, directly
and exclusively for educational purposes. According to the Independent CPA'
findings, DLSU was able to substantiate disbursements from the CF-CPA Account
amounting to P6,259,078.30.
Contradicting the findings of the Independent CPA, the CTA concluded
that out of the P10,610,379.00 rental
income, P4,841,066.65 was unsubstantiated, and thus, subject to income tax and
VAT. 129
The CTA then concluded that the ratio of substantiated disbursements to
the total disbursements from the CF-CPA Account for taxable year 2003 is only
26.68%. 130 The CTA held as follows:
However, as regards petitioner's rental income from Alarey, Inc.,
Zaide Food Corp., Capri International and MTO Bookstore,
which were transmitted to the CF-CPA Account, petitioner again
failed to fully account for and substantiate all the disbursements
from the CF-CPA Account; thus failing to prove that the rental
income derived therein were actually, directly and exclusively
used for educational purposes. Likewise, the findings of the
Court-Commissioned Independent CPA show that the
disbursements from the CF-CPA Account for fiscal year 2003
amounts to P6,259,078.30 only. Hence, this portion of the rental
income, being the substantiated disbursements of the CF-CPA
Account, was considered by the Special First Division as used
actually, directly and exclusively for educational purposes. Since
for fiscal year 2003, the total disbursements per voucher is
P6,259,078.3 (Exhibit "LL-25-C"), and the total disbursements
per subsidiary ledger amounts to P23,463,543.02 (Exhibit "LL-
29-C"), the ratio of substantiated disbursements for fiscal year
2003 is 26.68% (P6,259,078.30/P23,463,543.02). Thus, the
substantiated portion of CF-CPA Disbursements for fiscal year
2003, arrived at by multiplying the ratio of 26.68% with the total
rent income added to and used in the CF-CPA Account in the
amount of P6,602,655.00 is P1,761,588.35. 131 (emphasis
supplied)
For better understanding, we summarize the CTA's computation as
follows:
1. The CTA subtracted the rent income used in the construction of the
Sports Complex (P4,007,724.00) from the rental income
(P10,610,379.00) earned from the abovementioned
concessionaries. The difference (P6,602,655.00) was the
portion claimed to have been deposited to the CF-CPA
Account.
2. The CTA then subtracted the supposed substantiated portion of CF-
CPA disbursements (P1,761,308.37) from the P6,602,655.00 to
arrive at the supposed unsubstantiated portion of the rental
income (P4,841,066.65). 132
3. The substantiated portion of CF-CPA disbursements
(P1,761,308.37) 133 was derived by multiplying the rental
income claimed to have been added to the CF-CPA Account
(P6,602,655.00) by 26.68% or the ratio
of substantiated disbursements to total
disbursements(P23,463,543.02).
4. The 26.68% ratio 134 was the result of dividing the substantiated
disbursements from the CF-CPA Account as found by the
Independent CPA (P6,259,078.30) by the total disbursements
(P23,463,543.02) from the same account.
We find that this system of calculation is incorrect and does not truly give
effect to the constitutional grant of tax exemption to non-stock, non-profit
educational institutions. The CTA's reasoning is flawed because it required DLSU
to substantiate an amount that is greater than the rental income deposited in the
CF-CPA Account in 2003. TAIaHE
To reiterate, to be exempt from tax, DLSU has the burden of proving that
the proceeds of its rental income (which amounted to a total of P10.61
million) 135 were used for educational purposes. This amount was divided into two
parts: (a) the P4.01 million, which was used to pay the loan obtained for the
construction of the Sports Complex; and (b) the P6.60 million, 136 which was
transferred to the CF-CPA account.
For year 2003, the total disbursement from the CF-CPA account
amounted to P23.46 million. 137 These figures, read in light of the constitutional
exemption, raises the question: does DLSU claim that the whole total CF-CPA
disbursement of P23.46 million is tax-exempt so that it is required to prove
that all these disbursements had been made for educational purposes?
We answer in the negative.
The records show that DLSU never claimed that the total CF-CPA
disbursements of P23.46 million had been for educational purposes and should
thus be tax-exempt; DLSU only claimed P10.61 million for tax-exemption and
should thus be required to prove that this amount had been used as claimed.
Of this amount, P4.01 had been proven to have been used for educational
purposes, as confirmed by the Independent CPA. The amount in issue is therefore
the balance of P6.60 million which was transferred to the CF-CPA which in turn
made disbursements of P23.46 million for various general purposes, among them
the P6.60 million transferred by DLSU.
Significantly, the Independent CPA confirmed that the CF-CPA made
disbursements for educational purposes in year 2003 in the amount P6.26 million.
 Based on these given figures, the CTA concluded that the expenses for
Rental income deposited to the CF-CPA Account
educational purposes that had been coursed through the CF-CPA should be
prorated so that only the portion that P6.26 million bears to the total CF-CPA
Less: Substantiated portion of CF-CPA disbursements
disbursements should be credited to DLSU for tax exemption.
This approach, in our view, is flawed given the constitutional requirement
that revenues actually and directly used for educational purposes should be tax-
exempt. As already mentioned above, DLSU is not claiming that the whole TaxP23.46
base for deficiency income tax and VAT
million CF-CPA disbursement had been used for educational purposes; it only
claims that P6.60 million transferred to CF-CPA had been used for educational
purposes. This was what DLSU needed to prove to have actually and directly used
for educational purposes.
That this fund had been first deposited into a separate fund (the CF-CPA
established to fund capital projects) lends peculiarity to the facts of this case, but
does not detract from the fact that the deposited funds were DLSU revenue funds
that had been confirmed and proven to have been actually and directly used for
educational purposes via the CF-CPA. That the CF-CPA might have had other
sources of funding is irrelevant because the assessment in the present case
pertains only to the rental income which DLSU indisputably earned as revenue in
2003. That the proven CF-CPA funds used for educational purposes should not be
prorated as part of its total CF-CPA disbursements for purposes of crediting to
DLSU is also logical because no claim whatsoever had been made that the totality
of the CF-CPA disbursements had been for educational purposes. No prorating is
necessary; to state the obvious, exemption is based on actual and direct use and
this DLSU has indisputably proven.
Based on these considerations, DLSU should therefore be liable only for
the difference between what it claimed and what it has proven. In more concrete
terms, DLSU only had to prove that its rental income for taxable year 2003
(P10,610,379.00) was used for educational purposes. Hence, while the total
disbursements from the CF-CPA Account amounted to P23,463,543.02, DLSU
only had to substantiate its P10.6 million rental income, part of which was the
P6,602,655.00 transferred to the CF-CPA account. Of this latter amount, P6.259
million was substantiated to have been used for educational purposes.
To summarize, we thus revise the tax base for deficiency income tax and
VAT for taxable year 2003 as follows:
6,602,655.00 6,602,655.00
1,761,588.35 6,259,078.30
–––––––––––– ––––––––––––
4,841,066.65 343,576.70
========
On DLSU's argument that the CTA should have appreciated its evidence
in the same way as it did with the evidence submitted by Ateneo in another
separate case, the CTA explained that the issue in the Ateneo case was not the
same as the issue in the present case.
The issue in the Ateneo case was whether or not Ateneo could be held
liable to pay income taxes and VAT under certain BIR and Department of Finance
issuances 139 that required the educational institution to own and operate the
canteens, or other commercial enterprises within its campus, as condition for tax
exemption. The CTA held that the Constitution does not require the educational
institution to own or operate these commercial establishments to avail of the
exemption. 140
Given the lack of complete identity of the issues involved, the CTA held
that it had to evaluate the separate sets of evidence differently. The CTA likewise
stressed that DLSU and Ateneo gave distinct defenses and that its wisdom "cannot
be equated on its decision on two different cases with two different
issues." 141 cDHAES
DLSU disagrees with the CTA and argues that the entire assessment
must be cancelled because it submitted similar, if not stronger sets of evidence, as
Ateneo. We reject DLSU's argument for being non sequitur. Its reliance on the
concept of uniformity of taxation is also incorrect.
First, even granting that Ateneo and DLSU submitted similar evidence,
the sufficiency and materiality of the evidence supporting their respective claims
for tax exemption would necessarily differ because their attendant issues and facts
differ.

CTA To state the obvious, the amount of income received by DLSU and by
Ateneo during the taxable years they were assessed varied. The amount of tax
Decision 138 Revised assessment also varied. The amount of income proven to have been used for
educational purposes also varied because the amount substantiated
varied. 142 Thus, the amount of tax assessment cancelled by the CTA varied.
On the one hand, the BIR assessed DLSU a total tax deficiency
me 10,610,379.00 10,610,379.00
of P17,303,001.12 for taxable years 2001, 2002 and 2003. On the other hand, the
ncome used in construction of the Sports BIR assessed Ateneo a total deficiency tax of P8,864,042.35 for the same period.
Notably, DLSU was assessed deficiency DST, while Ateneo was not. 143
4,007,724.00 4,007,724.00 Thus, although both Ateneo and DLSU claimed that they used their rental
income actually, directly and exclusively for educational purposes by submitting
–––––––––––– –––––––––––– similar evidence, e.g., the testimony of their employees on the use of university
revenues, the report of the Independent CPA, their income summaries, financial
statements, vouchers, etc., the fact remains that DLSU failed to prove that a
portion of its income and revenues had indeed been used for educational
purposes.
The CTA significantly found that some documents that could have fully
supported DLSU's claim were not produced in court. Indeed, the Independent CPA
testified that some disbursements had not been proven to have been used actually,
directly and exclusively for educational purposes. 144
The final nail on the question of evidence is DLSU's own admission that
the original of these documents had not in fact been produced before the
CTA although it claimed that there was no bad faith on its part. 145 To our mind,
this admission is a good indicator of how the Ateneo and the DLSU cases varied,
resulting in DLSU's failure to substantiate a portion of its claimed exemption.
Further, DLSU's invocation of Section 5, Rule 130 of the Revised Rules
on Evidence, that the contents of the missing supporting documents were proven
by its recital in some other authentic documents on record, 146 can no longer be
entertained at this late stage of the proceeding. The CTA did not rule on this
particular claim. The CTA also made no finding on DLSU's assertion of lack of bad
faith. Besides, it is not our duty to go over these documents to test the truthfulness
of their contents, this Court not being a trier of facts.
Second, DLSU misunderstands the concept of uniformity of taxation.
Equality and uniformity of taxation means that all taxable articles or kinds
of property of the same class shall be taxed at the same rate. 147 A tax is uniform
when it operates with the same force and effect in every place where the subject
of it is found. 148 The concept requires that all subjects of taxation similarly
situated should be treated alike and placed in equal footing. 149
In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA
treated them alike because their income proved to have been used actually,
directly and exclusively for educational purposes were exempted from taxes. The
CTA equally applied the requirements in the YMCA case to test if they indeed used
their revenues for educational purposes.
DLSU can only assert that the CTA violated the rule on uniformity if it can
show that, despite proving that it used actually, directly and exclusively for
educational purposes its income and revenues, the CTA still affirmed the
imposition of taxes. That the DLSU secured a different result happened because it
failed to fully prove that it used actually, directly and exclusively for educational
purposes its revenues and income.
On this point, we remind DLSU that the rule on uniformity of taxation
does not mean that subjects of taxation similarly situated are treated in literally the
same way in all and every occasion. The fact that the Ateneo and DLSU are both
non-stock, non-profit educational institutions, does not mean that the CTA or this
Court would similarly decide every case for (or against) both universities. Success
in tax litigation, like in any other litigation, depends to a large extent on the
sufficiency of evidence. DLSU's evidence was wanting, thus, the CTA was correct
in not fully cancelling its tax liabilities.
b. DLSU proved its payment of the DST
The CTA affirmed DLSU's claim that the DST due on its mortgage and
loan transactions were paid and remitted through its bank's On-Line Electronic
DST Imprinting Machine. The Commissioner argues that DLSU is not allowed to
use this method of payment because an educational institution is excluded from
the class of taxpayers who can use the On-Line Electronic DST Imprinting
Machine.
We sustain the findings of the CTA. The Commissioner's argument lacks
basis in both the Tax Code and the relevant revenue regulations.
DST on documents, loan agreements, and papers shall be levied,
collected and paid for by the person making, signing, issuing, accepting, or
transferring the same. 150 The Tax Code provides that whenever one party to the
document enjoys exemption from DST, the other party not exempt from DST shall
be directly liable for the tax. Thus, it is clear that DST shall be payable by any party
to the document, such that the payment and compliance by one shall mean the full
settlement of the DST due on the document. ASEcHI
In the present case, DLSU entered into mortgage and loan agreements
with banks. These agreements are subject to DST. 151 For the purpose of showing
that the DST on the loan agreement has been paid, DLSU presented its
agreements bearing the imprint showing that DST on the document has been paid
by the bank, its counterparty. The imprint should be sufficient proof that DST has
been paid. Thus, DLSU cannot be further assessed for deficiency DST on the said
documents.
Finally, it is true that educational institutions are not included in the class
of taxpayers who can pay and remit DST through the On-Line Electronic DST
Imprinting Machine under RR No. 9-2000. As correctly held by the CTA, this is
irrelevant because it was not DLSU who used the On-Line Electronic DST
Imprinting Machine but the bank that handled its mortgage and loan
transactions. RR No. 9-2000 expressly includes banks in the class of taxpayers
that can use the On-Line Electronic DST Imprinting Machine.
Thus, the Court sustains the finding of the CTA that DLSU proved the
payment of the assessed DST deficiency, except for the unpaid balance
of P13,265.48. 152
WHEREFORE, premises considered, we DENY the petition of the
Commissioner of Internal Revenue in G.R. No. 196596 and AFFIRM the
December 10, 2010 decision and March 29, 2011 resolution of the Court of Tax
Appeals En Banc in CTA En Banc Case No. 622, except for the total amount of
deficiency tax liabilities of De La Salle University, Inc., which had been reduced.
We also DENY both the petition of De La Salle University, Inc. in G.R.
No. 198841 and the petition of the Commissioner of Internal Revenue in G.R. No.
198941 and thus AFFIRM the June 8, 2011 decision and October 4, 2011
resolution of the Court of Tax Appeals En Banc in CTA En Banc Case No. 671,
with the MODIFICATION that the base for the deficiency income tax and VAT for
taxable year 2003 is P343,576.70.
SO ORDERED.
 2. CIR v. ADMU Inc.
3. PLDT v. Davao City
[G.R. No. 143867. August 22, 2001.]
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY,
INC., petitioner, vs. CITY OF DAVAO and ADELAIDA B.
BARCELONA, in her capacity as the City Treasurer of
Davao, respondents.
Estelito P. Mendoza for petitioner.
Office of the City Legal Officer for respondent.
SYNOPSIS
In January 1999, petitioner Philippine Long Distance Telephone Co., Inc.
(PLDT) applied for a Mayor's Permit to operate its Davao Metro Exchange. The
application was withheld by the respondent City of Davao pending payment of its local
franchise tax in the amount of P3,681,985.72 for the first to the fourth quarter of 1999.
Petitioner protested the assessment and requested a refund paid by it for the year 1997
and the first to the third quarter of 1998. Petitioner contended that it was exempt from
the payment of the franchise tax based on an opinion of the Bureau of Local
Government Finance (BLGF), that PLDT shall be exempted from the payment of
franchise and business taxes imposable by Local Government Units upon the effectivity
of Republic Act No. 7925 on March 16, 1995, but it shall be liable to pay the franchise
and business taxes on its gross receipts realized from January 1, 1992 to March 15,
1995 since at that time, it was not enjoying yet the "most favored clause" proviso of RA
7925. The City Treasurer of Davao denied the protest and claim for tax refund of
petitioner. Petitioner then filed a petition in the Regional Trial Court of Davao seeking a
reversal of respondent City Treasurer's denial of petitioner's protest and the refund of
the franchise tax paid by it for the year 1998 in the amount of P2,580,829.23. The trial
court denied petitioner's appeal and affirmed the City Treasurer's decision. It ruled
that the Local Government Code (LGC)withdrew all tax exemptions previously enjoyed
by all persons and authorized local government units to impose a tax on business
enjoying a franchise notwithstanding the grant of tax exemption to them. It also denied
petitioner's claim for exemption under RA 7925 for reasons, among others, that it is
clear from the wording of Section 193 of the LGC that Congress did not intend to
exempt any franchise holder from the payment of local franchise and business taxes.
Hence, this petition.
The Court ruled that it does not appear that, in approving Section 23 of R.A.
No. 7925, Congress intended it to operate as a blanket tax exemption to all
telecommunications entities. Applying the rule of strict construction of laws granting tax
exemptions and the rule that doubts should be resolved in favor of municipal
corporations in interpreting statutory provisions on municipal taxing powers, the Court
held that Section 23 of R.A. No. 7925cannot be considered as having amended
petitioner's franchise so as to entitle it to exemption from the imposition of local
franchise taxes. Consequently, the Court held that petitioner is liable to pay local
franchise taxes in the amount of P3,681,985.72 for the period covering the first to the
fourth quarter of 1999 and that it is not entitled to a refund of taxes paid by it for the
period covering the first to the third quarter of 1998. SIcEHD
SYLLABUS
1. TAXATION; TAX CODE PROVISION WITHDRAWING THE TAX
EXEMPTION, NOT CONSTRUED AS PROHIBITING FUTURE GRANTS OF
EXEMPTIONS FROM ALL TAXES. — In Philippine Airlines, Inc. v. Edu, where a
provision of the Tax Code enacted on June 27, 1968 (R.A. 5431) withdrew the
exemption enjoyed by PAL, it was held that a subsequent amendment of PAL's
franchise, exempting it from all other taxes except that imposed by its franchise, again
entitled PAL to exemption from the date of the enactment of such amendment. The Tax
Code provision withdrawing the tax exemption was not construed as prohibiting future
grants of exemptions from all taxes.
2. ID.; IN INTERPRETING STATUTORY PROVISIONS ON MUNICIPAL
TAXING POWERS, DOUBTS MUST BE RESOLVED IN FAVOR OF MUNICIPAL
CORPORATIONS. — [T]he grant of taxing powers to local government units under the
Constitution and the LGC does not affect the power of Congress to grant exemptions
to certain persons, pursuant to a declared national policy. The legal effect of the
constitutional grant to local governments simply means that in interpreting statutory
provisions on municipal taxing powers, doubts must be resolved in favor of municipal
corporations.
3. ID.; TAX EXEMPTIONS; HIGHLY DISFAVORED; REASON. — To begin
with, tax exemptions are highly disfavored. The reason for this was explained by this
Court in Asiatic Petroleum Co. v. Llanes, in which it was held: . . . Exemptions from
taxation are highly disfavored, so much so that they may almost be said to be odious
to the law. He who claims an exemption must be able to point to some positive provision
of law creating the right. . . . As was said by the Supreme Court of Tennessee
in Memphis vs. U. & P Bank (91 Tenn., 546, 550), "The right of taxation is inherent in
the State. It is a prerogative essential to the perpetuity of the government; and he who
claims an exemption from the common burden must justify his claim by the clearest
grant of organic or statute law." Other utterances equally or more emphatic come
readily to hand from the highest authority. In Ohio Life Ins. and Trust Co. vs. Debolt (16
Howard, 416), it was said by Chief Justice Taney, that the right of taxation will not be
held to have been surrendered, "unless the intention to surrender is manifested by
words too plain to be mistaken." In the case of the Delaware Railroad Tax (18 Wallace,
206, 226), the Supreme Court of the United States said that the surrender, when
claimed, must be shown by clear, unambiguous language, which will admit of no
reasonable construction consistent with the reservation of the power. If a doubt arises
as to the intent of the legislature, that doubt must be solved in favor of the State. In Erie
Railway Company vs. Commonwealth of Pennsylvania (21 Wallace, 492, 499), Mr.
Justice Hunt, speaking of exemptions, observed that a State cannot strip itself of the
most essential power of taxation by doubtful words. "It cannot, by ambiguous language,
be deprived of this highest attribute of sovereignty." In Tennessee vs. Whitworth (117
U. S., 129, 136), it was said: "In all cases of this kind the question is as to the intent of
the legislature, the presumption always being against any surrender of the taxing
power." In Farrington vs. Tennessee and County of Shelby (95 U. S., 679, 686), Mr.
Justice Swayne said: ". . . When exemption is claimed, it must be shown indubitably to
exist. At the outset, every presumption is against it. A well-founded doubt is fatal to the
claim. It is only when the terms of the concession are too explicit to admit fairly of any
other construction that the proposition can be supported."
4. ID.; ID.; MUST BE INTERPRETED IN STRICTISSIMI JURIS AGAINST
THE TAXPAYER. — The tax exemption must be expressed in the statute in clear
language that leaves no doubt of the intention of the legislature to grant such
exemption. And, even if it is granted, the exemption must be interpreted in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority.
5. ID.; ID.; ID.; EXEMPTION FROM THE PAYMENT OF THE FRANCHISE
TAX GRANTED TO SMART AND GLOBE WILL NOT IPSO FACTO BE EXTENDED
TO PHILIPPINE LONG DISTANCE TELEPHONE COMPANY. — Petitioner then
claims that Smart and Globe enjoy exemption from the payment of the franchise tax by
virtue of their legislative franchises per opinion of the Bureau of Local Government
Finance of the Department of Finance. Finally, it argues that because Smart and Globe
are exempt from the franchise tax, it follows that it must likewise be exempt from the
tax being collected by the City of Davao because the grant of tax exemption to Smart
and Globe ipso facto extended the same exemption to it. The acceptance of petitioner's
theory would result in absurd consequences. To illustrate: In its franchise, Globe is
required to pay a franchise tax of only one and one-half percentum (1 1/2%) of all gross
receipts from its transactions while Smart is required to pay a tax of three percent (3%)
on all gross receipts from business transacted. Petitioner's theory would require that,
to level the playing field, any "advantage, favor, privilege, exemption, or immunity"
granted to Globe must be extended to all telecommunications companies, including
Smart. If, later, Congress again grants a franchise to another telecommunications
company imposing, say, one percent (1%) franchise tax, then all other
telecommunications franchises will have to be adjusted to "level the playing field" so to
speak. This could not have been the intent of Congress in enacting §23 of Rep. Act
7925. Petitioner's theory will leave the Government with the burden of having to keep
track of all granted telecommunications franchises, lest some companies be treated
unequally. It is different if Congress enacts a law specifically granting uniform
advantages, favor, privilege, exemption, or immunity to all telecommunications entities.
6. STATUTORY CONSTRUCTION; LEGISLATIVE INTENT MUST BE
ASCERTAINED FROM A CONSIDERATION OF THE STATUTE AS A WHOLE AND
NOT MERELY OF A PARTICULAR PROVISION. — A cardinal rule in statutory
construction is that legislative intent must be ascertained from a consideration of the
statute as a whole and not merely of a particular provision. For, taken in the abstract, a
word or phrase might easily convey a meaning which is different from the one actually
intended. A general provision may actually have a limited application if read together
with other provisions. Hence, a consideration of the law itself in its entirety and the
proceedings of both Houses of Congress is in order.
7. ID.; REPUBLIC ACT NO. 7925 (PUBLIC TELECOMMUNICATIONS
POLICY ACT OF THE PHILIPPINES); PURPOSE. — R.A. No. 7925 is thus a
legislative enactment designed to set the national policy on telecommunications and
provide the structures to implement it to keep up with the technological advances in the
industry and the needs of the public. The thrust of the law is to promote gradually the
deregulation of the entry, pricing, and operations of all public telecommunications
entities and thus promote a level playing field in the telecommunications industry. There
is nothing in the language of § 23 nor in the proceedings of both the House of
Representatives and the Senate in enacting R.A. No. 7925 which shows that it
contemplates the grant of tax exemptions to all telecommunications entities, including
those whose exemptions had been withdrawn by the LGC.
8. ID.; TAX EXEMPTIONS; ASIATIC PETROLEUM CO. vs. LLANES, 49
PHIL. 466, 471-472 (1926); APPLICABLE IN CASE AT BAR. — What this Court said
in Asiatic Petroleum Co. v. Llanes applies mutatis mutandis to this case: "When
exemption is claimed, it must be shown indubitably to exist. At the outset, every
presumption is against it. A well-founded doubt is fatal to the claim. It is only when the
terms of the concession are too explicit to admit fairly of any other construction that the
proposition can be supported." In this case, the word "exemption" in § 23 of R.A. No.
7925 could contemplate exemption from certain regulatory or reporting requirements,
bearing in mind the policy of the law. It is noteworthy that, in holding Smart and Globe
exempt from local taxes, the BLGF did not base its opinion on § 23 but on the fact that
the franchises granted to them after the effectivity of the LGCexempted them from the
payment of local franchise and business taxes.
9. REMEDIAL LAW; EVIDENCE; FINDINGS OF FACT OF BUREAU OF
LOCAL GOVERNMENT FINANCE ARE NOT GIVEN WEIGHT AND DEFERENCE IN
COURTS. — To be sure, the BLGF is not an administrative agency whose findings on
questions of fact are given weight and deference in the courts. The authorities cited by
petitioner pertain to the Court of Tax Appeals, a highly specialized court which performs
judicial functions as it was created for the review of tax cases. In contrast, the BLGF
was created merely to provide consultative services and technical assistance to local
governments and the general public on local taxation, real property assessment, and
other related matters, among others. The question raised by petitioner is a legal
question, to wit, the interpretation of §23 of R.A. No. 7925. There is, therefore, no basis
for claiming expertise for the BLGF that administrative agencies are said to possess in
their respective fields.
10. TAXATION; REPUBLIC ACT NO. 7925; SECTION 23; NOT INTENDED
TO OPERATE AS A BLANKET TAX EXEMPTION TO ALL TELECOMMUNICATIONS
ENTITIES. — [I]t does not appear that, in approving §23 of R.A. No. 7925, Congress
intended it to operate as a blanket tax exemption to all telecommunications entities.
Applying the rule of strict construction of laws granting tax exemptions and the rule that
doubts should be resolved in favor of municipal corporations in interpreting statutory
provisions on municipal taxing powers, we hold that §23 of R.A. No. 7925 cannot be
considered as having amended petitioner's franchise so as to entitle it to exemption
from the imposition of local franchise taxes.
DECISION
MENDOZA, J p:
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of
Civil Procedure of the resolution, 1 dated June 23, 2000, of the Regional Trial Court,
Branch 13, Davao City, affirming the tax assessment of petitioner and the denial of its
claim for tax refund by the City Treasurer of Davao.
The facts are as follows:
On January 1999, petitioner Philippine Long Distance Telephone Co., Inc.
(PLDT) applied for a Mayor's Permit to operate its Davao Metro Exchange. Respondent
City of Davao withheld action on the application pending payment by petitioner of the
local franchise tax in the amount of P3,681,985.72 for the first to the fourth quarter of
1999. 2 In a letter dated May 31, 1999, 3 petitioner protested the assessment of the
local franchise tax and requested a refund of the franchise tax paid by it for the year
1997 and the first to the third quarters of 1998. Petitioner contended that it was exempt
from the payment of franchise tax based on an opinion of the Bureau of Local
Government Finance (BLGF), dated June 2, 1998, which reads as follows:
PLDT:
Section 12 of RA 7082 provides as follows:
"SECTION 12. The grantee, its successors or
assigns shall be liable to pay the same taxes on their real
estate, buildings, and personal property, exclusive of this
franchise, as other persons or corporations are now or
hereafter may be required by law to pay. In addition
thereto, the grantee, its successors or assigns shall pay
a franchise tax equivalent to three percent (3%) of all
gross receipts of the telephone or other
telecommunications businesses transacted under this
franchise by the grantee, its successors or assigns, and
the said percentage shall be in lieu of all taxes on this
franchise or earnings thereof . . ."
It appears that RA 7082 further amending Act No.
3436 which granted to PLDT a franchise to install, operate and
maintain a telephone system throughout the Philippine Islands was
approved on August 3, 1991. Section 12 of said franchise,
likewise, contains the "in lieu of all taxes" proviso.
In this connection, Section 23 of RA 7925, quoted
hereunder, which was approved on March 1, 1995, provides for
the equality of treatment in the telecommunications industry:
"SECTION 23. Equality of Treatment in the
Telecommunications Industry. — Any advantage, favor,
privilege, exemption, or immunity granted under existing
franchises, or may hereafter be granted, shall ipso
facto become part of previously granted
telecommunications franchise and shall be accorded
immediately and unconditionally to the grantees of such
franchises: Provided, however, That the foregoing shall
neither apply to nor affect provisions of
telecommunications franchises concerning territory
covered by the franchise, the life span of the franchise, or
the type of service authorized by the franchise."
(Underscoring supplied.)
On the basis of the aforequoted Section 23 of RA 7925,
PLDT as a telecommunications franchise holder becomes
automatically covered by the tax exemption provisions of RA 7925,
which took effect on March 16, 1995. TAIaHE
Accordingly, PLDT shall be exempt from the payment of
franchise and business taxes imposable by LGUs under Sections
137 and 143 (sic), respectively, of the LGC,upon the effectivity
of RA 7925 on March 16, 1995. However, PLDT shall be liable to
pay the franchise and business taxes on its gross receipts realized
from January 1, 1992 up to March 15, 1995, during which period
PLDT was not enjoying the "most favored clause" proviso of RA
7025 (sic). 4
In a letter dated September 27, 1999, respondent Adelaida B. Barcelona, City
Treasurer of Davao, denied the protest and claim for tax refund of petitioner, 5 citing
the legal opinion of the City Legal Officer of Davao and Art. 10, §1 of Ordinance No.
230, Series of 1991, as amended by Ordinance No. 519, Series of 1992, which
provides:
Notwithstanding any exemption granted by any law or
other special law, there is hereby imposed a tax on businesses
enjoying a franchise, at a rate of Seventy-five percent (75%) of one
percent (1%) of the gross annual receipts for the preceding
calendar year based on the income or receipts realized within the
territorial jurisdiction of Davao City. 6
Petitioner received respondent City Treasurer's order of denial on October 1,
1999. On November 3, 1999, it filed a petition in the Regional Trial Court of Davao
seeking a reversal of respondent City Treasurer's denial of petitioner's protest and the
refund of the franchise tax paid by it for the year 1998 in the amount of
P2,580,829.23. The petition was filed pursuant to §§195 and 196 of the Local
Government Code (R.A. No. 7160). No claim for refund of franchise taxes paid in 1997
was made as the same had already prescribed under §196 of the LGC,which provides
that claims for the refund of taxes paid under it must be made within two (2) years from
the date of payment of such taxes. 7
The trial court denied petitioner's appeal and affirmed the City Treasurer's
decision. It ruled that the LGC withdrew all tax exemptions previously enjoyed by all
persons and authorized local government units to impose a tax on businesses enjoying
a franchise notwithstanding the grant of tax exemption to them. The trial court likewise
denied petitioner's claim for exemption under R.A. No. 7925 for the following reasons:
(1) it is clear from the wording of §193 of the Local Government Code that Congress
did not intend to exempt any franchise holder from the payment of local franchise and
business taxes; (2) the opinion of the Executive Director of the Bureau of Local
Government Finance to the contrary is not binding on respondents; and (3) petitioner
failed to present any proof that Globe and Smart were enjoying local franchise and
business tax exemptions.
Hence, this petition for review based on the following grounds:
 I. THE LOWER COURT ERRED IN APPLYING SECTION 137
OF THE LOCAL GOVERNMENT CODE, WHICH
ALLOWS A CITY TO IMPOSE A FRANCHISE TAX, AND
SECTION 193 THEREOF, WHICH PROVIDES FOR
WITHDRAWAL OF TAX EXEMPTION PRIVILEGES.
II. THE LOWER COURT ERRED IN NOT HOLDING THAT
UNDER PETITIONER'S FRANCHISE, AS IMPLICITLY
AMENDED AND EXPANDED BY SECTION 23
OF REPUBLIC ACT NO. 7925 (PUBLIC
TELECOMMUNICATIONS POLICY ACT), TAKING
INTO ACCOUNT THE FRANCHISES OF GLOBE
TELECOM, INC. AND SMART COMMUNICATIONS,
INC., WHICH WERE ENACTED SUBSEQUENT
TO THE LOCAL GOVERNMENT CODE, NO
FRANCHISE AND BUSINESS TAXES MAY BE
IMPOSED ON PETITIONER BY RESPONDENT CITY.
III. THE LOWER COURT ERRED IN NOT GIVING WEIGHT TO
THE RULING OF THE BUREAU OF LOCAL
GOVERNMENT FINANCE THAT PETITIONER IS
EXEMPT FROM THE PAYMENT OF FRANCHISE AND
BUSINESS TAXES, AMONG OTHERS, IMPOSABLE BY
LOCAL GOVERNMENT UNITS UNDER THE LOCAL
GOVERNMENT CODE.
First. The LGC,which took effect on January 1, 1992, provides:
SECTION 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. 8
SECTION 193. Withdrawal of Tax Exemption Privileges.
— Unless otherwise provided in this Code, tax exemptions or
incentives granted to, or presently enjoyed by all persons, whether
natural or juridical, including government-owned or -controlled
corporations, except local water districts, cooperatives duly
registered under R.A. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity
of this Code.
The trial court held that, under these provisions, all exemptions granted to all
persons, whether natural and juridical, including those which in the future might be
granted, are withdrawn unless the law granting the exemption expressly states that the
exemption also applies to local taxes. We disagree. Sec. 137 does not state that it
covers future exemptions. In Philippine Airlines, Inc. v. Edu, 9 where a provision of
the Tax Code enacted on June 27, 1968 (R.A. 5431) withdrew the exemption enjoyed
by PAL, it was held that a subsequent amendment of PAL's franchise, exempting it from
all other taxes except that imposed by its franchise, again entitled PAL to exemption
from the date of the enactment of such amendment. The Tax Code provision
withdrawing the tax exemption was not construed as prohibiting future grants of
exemptions from all taxes.
Indeed, the grant of taxing powers to local government units under the
Constitution and the LGC does not affect the power of Congress to grant exemptions
to certain persons, pursuant to a declared national policy. The legal effect of the
constitutional grant to local governments simply means that in interpreting statutory
provisions on municipal taxing powers, doubts must be resolved in favor of municipal
corporations. 10
The question, therefore, is whether, after the withdrawal of its exemption by
virtue of §137 of the LGC,petitioner has again become entitled to exemption from local
franchise tax. Petitioner answers in the affirmative and points to §23 of R.A. No. 7925,
in relation to the franchises of Globe Telecom (Globe) and Smart Communications, Inc.
(Smart), which allegedly grant the latter exemption from local franchise taxes.
To begin with, tax exemptions are highly disfavored. The reason for this was
explained by this Court in Asiatic Petroleum Co. v. Llanes, 11 in which it was held:
. . . Exemptions from taxation are highly disfavored, so
much so that they may almost be said to be odious to the law. He
who claims an exemption must be able to point to some positive
provision of law creating the right. . . . As was said by the Supreme
Court of Tennessee in Memphis vs. U. & P. Bank (91 Tenn., 546,
550), "The right of taxation is inherent in the State. It is a
prerogative essential to the perpetuity of the government; and he
who claims an exemption from the common burden must justify his
claim by the clearest grant of organic or statute law." Other
utterances equally or more emphatic come readily to hand from
the highest authority. In Ohio Life Ins. and Trust Co. vs. Debolt (16
Howard, 416), it was said by Chief Justice Taney, that the right of
taxation will not be held to have been surrendered, "unless the
intention to surrender is manifested by words too plain to be
mistaken." In the case of the Delaware Railroad Tax (18 Wallace,
206, 226), the Supreme Court of the United States said that the
surrender, when claimed, must be shown by clear, unambiguous
language, which will admit of no reasonable construction
consistent with the reservation of the power. If a doubt arises as to
the intent of the legislature, that doubt must be solved in favor of
the State. In Erie Railway Company vs. Commonwealth of
Pennsylvania (21 Wallace, 492, 499), Mr. Justice Hunt, speaking
of exemptions, observed that a State cannot strip itself of the most
essential power of taxation by doubtful words. "It cannot, by
ambiguous language, be deprived of this highest attribute of
sovereignty." In Tennessee vs. Whitworth (117 U. S., 129, 136), it
was said: "In all cases of this kind the question is as to the intent
of the legislature, the presumption always being against any
 surrender of the taxing power." In Farrington vs. Tennessee and
County of Shelby (95 U. S., 679, 686), Mr. Justice Swayne said: ".
. . When exemption is claimed, it must be shown indubitably to
exist. At the outset, every presumption is against it. A well-founded
doubt is fatal to the claim. It is only when the terms of the
concession are too explicit to admit fairly of any other construction
that the proposition can be supported."
The tax exemption must be expressed in the statute in clear language that
leaves no doubt of the intention of the legislature to grant such exemption. And, even if
it is granted, the exemption must be interpreted in strictissimi juris against the taxpayer
and liberally in favor of the taxing authority. 12
In the present case, petitioner justifies its claim of tax exemption by strained
inferences. First, it cites R.A. No. 7925, otherwise known as the Public
Telecommunications Policy Act of the Philippines, §23 of which reads:
SECTION 23. Equality of Treatment in the
Telecommunications Industry. — Any advantage, favor, privilege,
exemption, or immunity granted under existing franchises, or may
hereafter be granted, shall ipso facto become part of previously
granted telecommunications franchises and shall be accorded
immediately and unconditionally to the grantees of such
franchises: Provided, however, That the foregoing shall neither
apply to nor affect provisions of telecommunications franchises
concerning territory covered by the franchise, the life span of the
franchise, or the type of service authorized by the franchise.
Petitioner then claims that Smart and Globe enjoy exemption from the
payment of the franchise tax by virtue of their legislative franchises per opinion of the
Bureau of Local Government Finance of the Department of Finance. Finally, it argues
that because Smart and Globe are exempt from the franchise tax, it follows that it must
likewise be exempt from the tax being collected by the City of Davao because the grant
of tax exemption to Smart and Globe ipso facto extended the same exemption to it.
The acceptance of petitioner's theory would result in absurd consequences.
To illustrate: In its franchise, Globe is required to pay a franchise tax of only one and
one-half percentum (1 1/2%) of all gross receipts from its transactions while Smart is
required to pay a tax of three percent (3%) on all gross receipts from business
transacted. Petitioner's theory would require that, to level the playing field, any
"advantage, favor, privilege, exemption, or immunity" granted to Globe must be
extended to all telecommunications companies, including Smart. If, later, Congress
again grants a franchise to another telecommunications company imposing, say, one
percent (1%) franchise tax, then all other telecommunications franchises will have to
be adjusted to "level the playing field" so to speak. This could not have been the intent
of Congress in enacting §23 of Rep. Act 7925. Petitioner's theory will leave the
Government with the burden of having to keep track of all granted telecommunications
franchises, lest some companies be treated unequally. It is different if Congress enacts
a law specifically granting uniform advantages, favor, privilege, exemption, or immunity
to all telecommunications entities.
The fact is that the term "exemption" in §23 is too general. A cardinal rule in
statutory construction is that legislative intent must be ascertained from a consideration
of the statute as a whole and not merely of a particular provision. For, taken in the
abstract, a word or phrase might easily convey a meaning which is different from the
one actually intended. A general provision may actually have a limited application if
read together with other provisions. 13 Hence, a consideration of the law itself in its
entirety and the proceedings of both Houses of Congress is in order. 14
Art. I of Rep. Act No. 7925 contains the general provisions, stating that the Act
shall be known as the Public Telecommunications Policy Act of the Philippines, and a
definition of terms. 15 Art. II provides for its policies and objectives, which is to foster
the improvement and expansion of telecommunications services in the country through:
(1) the construction of telecommunications infrastructure and interconnection facilities,
having in mind the efficient use of the radio frequency spectrum and extension of basic
services to areas not yet served; (2) fair, just, and reasonable rates and tariff charges;
(3) stable, transparent, and fair administrative processes; (4) reliance on private
enterprise for direct provision of telecommunications services; (5) dispersal of
ownership of telecommunications entities in compliance with the constitutional mandate
to democratize the ownership of public utilities; (6) encouragement of the establishment
of interconnection with other countries to provide access to international
communications highways and development of a competitive export-oriented domestic
telecommunications manufacturing industry; and (7) development of human resources
skills and capabilities to sustain the growth and development of telecommunications. 16
Art. III provides for its administration. The operational and administrative
functions are delegated to the National Telecommunications Commission (NTC), while
policy-making, research, and negotiations in international telecommunications matters
are left with the Department of Transportation and Communications. 17
Art. IV classifies the categories of telecommunications entities as: Local
Exchange Operator, Inter-Exchange Carrier, International Carrier, Value-Added
Service Provider, Mobile Radio Services, and Radio Paging Services. 18 Art. V
provides for the use of other services and facilities, such as customer premises
equipment, which may be used within the premises of telecommunications subscribers
subject only to the requirement that it is type-approved by the NTC, and radio frequency
spectrum, the assignment of which shall be subject to periodic review. 19
Art. VI, entitled Franchise, Rates and Revenue Determination, provides for the
requirement to obtain a franchise from Congress and a Certificate of Public
Convenience and Necessity from the NTC before a telecommunications entity can
begin its operations. It also provides for the NTC's residual power to regulate the rates
or tariffs when ruinous competition results or when a monopoly or a cartel or
combination in restraint of free competition exists and the rates or tariffs are distorted
or unable to function freely and the public is adversely affected. There is also a
provision relating to revenue sharing arrangements between inter-connecting
carriers. 20
Art. VII provides for the rights of telecommunications users. 21
Art. VIII, entitled Telecommunications Development, where §23 is found,
provides for public ownership of telecommunications entities, privatization of existing
facilities, and the equality of treatment provision. 22
Art. IX contains the Final Provisions. 23
 R.A. No. 7925 is thus a legislative enactment designed to set the national liable to pay local franchise taxes in the amount of P3,681,985.72 for the period
policy on telecommunications and provide the structures to implement it to keep up with covering the first to the fourth quarter of 1999 and that it is not entitled to a refund of
the technological advances in the industry and the needs of the public. The thrust of taxes paid by it for the period covering the first to the third quarter of 1998.
the law is to promote gradually the deregulation of the entry, pricing, and operations of
all public telecommunications entities and thus promote a level playing field in the WHEREFORE, the petition for review on certiorari is DENIED and the
telecommunications industry. 24There is nothing in the language of §23 nor in the decision of the Regional Trial Court, Branch 13, Davao City is AFFIRMED.
proceedings of both the House of Representatives and the Senate in enacting R.A. No.
SO ORDERED. DSAacC
7925 which shows that it contemplates the grant of tax exemptions to all
telecommunications entities, including those whose exemptions had been withdrawn ||| (PDLT v. City of Davao, G.R. No. 143867, [August 22, 2001], 415 PHIL 764-780)
by the LGC. ACIDTE
What this Court said in Asiatic Petroleum Co. v. Llanes 25 applies mutatis
mutandis to this case: "When exemption is claimed, it must be shown indubitably to
exist. At the outset, every presumption is against it. A well-founded doubt is fatal to the
claim. It is only when the terms of the concession are too explicit to admit fairly of any
other construction that the proposition can be supported." In this case, the word
"exemption" in §23 of R.A. No. 7925 could contemplate exemption from certain
regulatory or reporting requirements, bearing in mind the policy of the law. It is
noteworthy that, in holding Smart and Globe exempt from local taxes, the BLGF did not
base its opinion on §23 but on the fact that the franchises granted to them after the
effectivity of the LGC exempted them from the payment of local franchise and business
taxes.
Second. In the case of petitioner, the BLGF opined that §23 of R.A. No.
7925 amended the franchise of petitioner and in effect restored its exemptions from
local taxes. Petitioner contends that courts should not set aside conclusions reached
by the BLGF because its function is precisely the study of local tax problems and it has
necessarily developed an expertise on the subject.
To be sure, the BLGF is not an administrative agency whose findings on
questions of fact are given weight and deference in the courts. The authorities cited by
petitioner pertain to the Court of Tax Appeals, 26 a highly specialized court which
performs judicial functions as it was created for the review of tax cases. 27 In contrast,
the BLGF was created merely to provide consultative services and technical assistance
to local governments and the general public on local taxation, real property
assessment, and other related matters, among others. 28 The question raised by
petitioner is a legal question, to wit, the interpretation of §23 of R.A. No. 7925. There
is, therefore, no basis for claiming expertise for the BLGF that administrative agencies
are said to possess in their respective fields.
Petitioner likewise argues that the BLGF enjoys the presumption of regularity
in the performance of its duty. It does enjoy this presumption, but this has nothing to do
with the question in this case. This case does not concern the regularity of performance
of the BLGF in the exercise of its duties, but the correctness of its interpretation of a
provision of law.
In sum, it does not appear that, in approving §23 of R.A. No. 7925, Congress
intended it to operate as a blanket tax exemption to all telecommunications entities.
Applying the rule of strict construction of laws granting tax exemptions and the rule that
doubts should be resolved in favor of municipal corporations in interpreting statutory
provisions on municipal taxing powers, we hold that §23 of R.A. No. 7925 cannot be
considered as having amended petitioner's franchise so as to entitle it to exemption
from the imposition of local franchise taxes. Consequently, we hold that petitioner is
 4. Soriano v. Sec. of Finance SERENO, C.J p:

Before us are consolidated Petitions for Certiorari, Prohibition

and Mandamus, under Rule 65 of the 1997 Revised Rules of Court. These
[G.R. No. 184450. January 24, 2017.] Petitions seek to nullify certain provisions of Revenue Regulations No. (RR) 10-
2008. The RR was issued by the Bureau of Internal Revenue (BIR) on 24
September 2008 to implement the provisions of Republic Act No. (R.A.) 9504. The
JAIME N. SORIANO, MICHAEL VERNON M. GUERRERO, law granted, among others, income tax exemption for minimum wage earners
MARY ANN L. REYES, MARAH SHARYN M. DE CASTRO and (MWEs), as well as an increase in personal and additional exemptions for
CRIS P. TENORIO, petitioners, vs. SECRETARY OF FINANCE individual taxpayers.
and the COMMISSIONER OF INTERNAL
REVENUE, respondents. Petitioners assail the subject RR as an unauthorized departure from the
legislative intent of R.A. 9504. The regulation allegedly restricts the implementation
of the MWEs' income tax exemption only to the period starting from 6 July 2008,
instead of applying the exemption to the entire year 2008. They further challenge
[G.R. No. 184508. January 24, 2017.] the BIR's adoption of the prorated application of the new set of personal and
additional exemptions for taxable year 2008. They also contest the validity of the
SENATOR MANUEL A. ROXAS, petitioner, vs. MARGARITO B. RR's alleged imposition of a condition for the availment by MWEs of the exemption
TEVES, in his capacity as Secretary of the Department of provided by R.A. 9504. Supposedly, in the event they receive other benefits in
Finance and LILIAN B. HEFTI, in her capacity as excess of P30,000, they can no longer avail themselves of that exemption.
Commissioner of the Bureau of Internal Petitioners contend that the law provides for the unconditional exemption of MWEs
Revenue, respondents. from income tax and, thus, pray that the RR be nullified.
ANTECEDENT FACTS
R.A. 9504
[G.R. No. 184538. January 24, 2017.]
On 19 May 2008, the Senate filed its Senate Committee Report No. 53
on Senate Bill No. (S.B.) 2293. On 21 May 2008, former President Gloria M. Arroyo
TRADE UNION CONGRESS OF THE PHILIPPINES (TUCP), certified the passage of the bill as urgent through a letter addressed to then Senate
represented by its President, DEMOCRITO T. President Manuel Villar. On the same day, the bill was passed on second reading
MENDOZA, petitioner, vs.MARGARITO B. TEVES, in his IN the Senate and, on 27 May 2008, on third reading. The following day, 28 May
capacity as Secretary of the Department of Finance and 2008, the Senate sent S.B. 2293 to the House of Representatives for the latter's
LILIAN B. HEFTI, in her capacity as Commissioner of the concurrence.
Bureau of Internal Revenue, respondents.
On 04 June 2008, S.B. 2293 was adopted by the House of
Representatives as an amendment to House Bill No. (H.B.) 3971.
[G.R. No. 185234. January 24, 2017.] On 17 June 2008, R.A. 9504 entitled "An Act Amending Sections 22, 24,
34, 35, 51, and 79 of Republic Act No. 8424, as Amended, Otherwise Known as
the National Internal Revenue Code of 1997," was approved and signed into law
SENATOR FRANCIS JOSEPH G. ESCUDERO, TAX by President Arroyo. The following are the salient features of the new law:
MANAGEMENT ASSOCIATION OF THE PHILIPPINES, INC.
and ERNESTO G. EBRO, petitioners, vs. MARGARITO B. 1. It increased the basic personal exemption from P20,000 for a single
TEVES, in his capacity as Secretary of the Department of individual, P25,000 for the head of the family, and P32,000 for a
Finance and SIXTO S. ESQUIVIAS IV, in his capacity as married individual to P50,000 for each individual. CAIHTE
Commissioner of the Bureau of Internal
Revenue, respondents. 2. It increased the additional exemption for each dependent not
exceeding four from P8,000 to P25,000.
3. It raised the Optional Standard Deduction (OSD) for individual
taxpayers from 10% of gross income to 40% of the gross
DECISION receipts or gross sales.
4. It introduced the OSD to corporate taxpayers at no more than 40% of
their gross income.
 5. It granted MWEs exemption from payment of income tax on their
minimum wage, holiday pay, overtime pay, night shift differential
pay and hazard pay.1
Section 9 of the law provides that it shall take effect 15 days following its
publication in the Official Gazette or in at least two newspapers of general
circulation. Accordingly, R.A. 9504 was published in the Manila
Bulletin and Malaya on 21 June 2008. On 6 July 2008, the end of the 15-day
period, the law took effect.
RR 10-2008
On 24 September 2008, the BIR issued RR 10-2008, dated 08 July 2008,
implementing the provisions of R.A. 9504. The relevant portions of the said RR
read as follows:
SECTION 1. Section 2.78.1 of RR 2-98, as amended,
is hereby further amended to read as follows:
Sec. 2.78.1. Withholding of Income Tax on
Compensation Income. —
xxx xxx xxx
The amount of 'de minimis' benefits conforming to the
ceiling herein prescribed shall not be considered in determining
the P30,000.00 ceiling of 'other benefits' excluded from gross
income under Section 32 (b) (7) (e) of the Code. Provided that,
the excess of the 'de minimis'benefits over their respective
ceilings prescribed by these regulations shall be considered as
part of 'other benefits' and the employee receiving it will be
subject to tax only on the excess over the P30,000.00
ceiling. Provided, further, that MWEs receiving 'other
benefits' exceeding the P30,000.00 limit shall be taxable on
the excess benefits, as well as on his salaries, wages and
allowances, just like an employee receiving compensation
income beyond the SMW.
xxx xxx xxx
(B) Exemptions from Withholding Tax on
Compensation. — The following income payments are
exempted from the requirements of withholding tax on
compensation:
xxx xxx xxx
(13) Compensation income of MWEs who work in the
private sector and being paid the Statutory Minimum Wage
(SMW), as fixed by Regional Tripartite Wage and Productivity
Board (RTWPB)/National Wages and Productivity Commission
(NWPC), applicable to the place where he/she is assigned.
The aforesaid income shall likewise be exempted from
income tax.
'Statutory Minimum Wage' (SMW) shall refer to the rate
fixed by the Regional Tripartite Wage and Productivity Board
(RTWPB), as defined by the Bureau of Labor and Employment
Statistics (BLES) of the Department of Labor and Employment
(DOLE). The RTWPB of each region shall determine the wage
rates in the different regions based on established criteria and
shall be the basis of exemption from income tax for this purpose.
Holiday pay, overtime pay, night shift differential pay
and hazard pay earned by the aforementioned MWE shall
likewise be covered by the above exemption. Provided,
however, that an employee who receives/earns additional
compensation such as commissions, honoraria, fringe
benefits, benefits in excess of the allowable statutory
amount of P30,000.00, taxable allowances and other taxable
income other than the SMW, holiday pay, overtime pay,
hazard pay and night shift differential pay shall not enjoy
the privilege of being a MWE and, therefore, his/her entire
earnings are not exempt from income tax, and
consequently, from withholding tax.
MWEs receiving other income, such as income from
the conduct of trade, business, or practice of profession, except
income subject to final tax, in addition to compensation income
are not exempted from income tax on their entire income earned
during the taxable year. This rule, notwithstanding, the SMW,
holiday pay, overtime pay, night shift differential pay and
hazard pay shall still be exempt from withholding tax.
For purposes of these regulations, hazard pay shall
mean the amount paid by the employer to MWEs who were
actually assigned to danger or strife-torn areas, disease-infested
places, or in distressed or isolated stations and camps, which
expose them to great danger of contagion or peril to life. Any
hazard pay paid to MWEs which does not satisfy the above
criteria is deemed subject to income tax and consequently, to
withholding tax.
xxx xxx xxx
SECTION 3. Section 2.79 of RR 2-98, as amended, is
hereby further amended to read as follows:
Sec. 2.79. Income Tax Collected at Source on
Compensation Income. —
(A) Requirement of Withholding. — Every employer
must withhold from compensation paid an amount computed in
accordance with these Regulations. Provided, that no
withholding of tax shall be required on the SMW, including
holiday pay, overtime pay, night shift differential and hazard pay
of MWEs in the private/public sectors as defined in these
Regulations. Provided, further, that an employee who
receives additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the
 allowable statutory amount of P30,000.00, taxable
allowances and other taxable income other than the SMW,
holiday pay, overtime pay, hazard pay and night shift
differential pay shall not enjoy the privilege of being a MWE
and, therefore, his/her entire earnings are not exempt from
income tax and, consequently, shall be subject to
withholding tax.
xxx xxx xxx
For the year 2008, however, being the initial year of
implementation of R.A. 9504, there shall be a transitory
withholding tax table for the period from July 6 to December 31,
2008 (Annex "D") determined by prorating the annual personal
and additional exemptions under R.A. 9504over a period of six
months. Thus, for individuals, regardless of personal status, the
prorated personal exemption is P25,000, and for each qualified
dependent child (QDC), P12,500.
xxx xxx xxx
SECTION 9. Effectivity. —
These Regulations shall take effect beginning July 6,
2008.
(Emphases supplied)
The issuance and effectivity of RR 10-2008 implementing R.A.
9504 spawned the present Petitions. DETACa
G.R. No. 184450
Petitioners Jaime N. Soriano et al. primarily assail Section 3 of RR 10-
2008 providing for the prorated application of the personal and additional
exemptions for taxable year 2008 to begin only effective 6 July 2008 for being
contrary to Section 4 of Republic Act No. 9504. 2
Petitioners argue that the prorated application of the personal and
additional exemptions under RR 10-2008 is not "the legislative intendment in this
jurisdiction." 3 They stress that Congress has always maintained a policy of "full
taxable year treatment" 4 as regards the application of tax exemption laws. They
allege further that R.A. 9504 did not provide for a prorated application of the new
set of personal and additional exemptions. 5
G.R. No. 184508
Then Senator Manuel Roxas, as principal author of R.A. 9504, also
argues for a full taxable year treatment of the income tax benefits of the new law.
He relies on what he says is clear legislative intent. In his "Explanatory Note of
Senate Bill No. 103," he stresses "the very spirit of enacting the subject tax
exemption law" 6 as follows:
With the poor, every little bit counts, and by lifting their burden
of paying income tax, we give them opportunities to put their
money to daily essentials as well as savings. Minimum wage
earners can no longer afford to be taxed and to be placed
in the cumbersome income tax process in the same manner
as higher-earning employees. It is our obligation to ease their
burdens in any way we can. 7 (Emphasis Supplied)
Apart from raising the issue of legislative intent, Senator Roxas brings up
the following legal points to support his case for the full-year application of R.A.
9504's income tax benefits. He says that the pro rata application of the assailed
RR deprives MWEs of the financial relief extended to them by the law; 8 that Umali
v. Estanislao 9 serves as jurisprudential basis for his position that R.A.
9504 should be applied on a full-year basis to taxable year 2008; 10 and that the
social justice provisions of the 1987 Constitution, particularly Articles II and XIII,
mandate a full application of the law according to the spirit of R.A. 9504. 11
On the scope of exemption of MWEs under R.A. 9504, Senator Roxas
argues that the exemption of MWEs is absolute, regardless of the amount of the
other benefits they receive. Thus, he posits that the Department of Finance (DOF)
and the BIR committed grave abuse of discretion amounting to lack and/or excess
of jurisdiction. They supposedly did so when they provided in Section 1 of RR 10-
2008 the condition that an MWE who receives "other benefits" exceeding the
P30,000 limit would lose the tax exemption. 12 He further contends that the real
intent of the law is to grant income tax exemption to the MWE without any limitation
or qualification, and that while it would be reasonable to tax the benefits in excess
of P30,000, it is unreasonable and unlawful to tax both the excess benefits and the
salaries, wages and allowances. 13
G.R. No. 184538
Petitioner Trade Union Congress of the Philippine contends that the
provisions of R.A. 9504 provide for the application of the tax exemption for the full
calendar year 2008. It also espouses the interpretation that R.A. 9504 provides for
the unqualified tax exemption of the income of MWEs regardless of the other
benefits they receive. 14 In conclusion, it says that RR 10-2008, which is only an
implementing rule, amends the original intent of R.A. 9504, which is the
substantive law, and is thus null and void.
G.R. No. 185234
Petitioners Senator Francis Joseph Escudero, the Tax Management
Association of the Philippines, Inc., and Ernesto Ebro allege that R.A.
9504unconditionally grants MWEs exemption from income tax on their taxable
income, as well as increased personal and additional exemptions for other
individual taxpayers, for the whole year 2008. They note that the assailed RR 10-
2008 restricts the start of the exemptions to 6 July 2008 and provides that those
MWEs who received "other benefits" in excess of P30,000 are not exempt from
income taxation. Petitioners believe this RR is a "patent nullity" 15 and therefore
void.
Comment of the OSG
The Office of the Solicitor General (OSG) filed a Consolidated
Comment 16 and took the position that the application of R.A. 9504 was intended
to be prospective, and not retroactive. This was supposedly the general rule under
the rules of statutory construction: law will only be applied retroactively if it clearly
provides for retroactivity, which is not provided in this instance. 17
 The OSG contends that Umali v. Estanislao is not applicable to the
present case. It explains that R.A. 7167, the subject of that case, was intended to
adjust the personal exemption levels to the poverty threshold prevailing in 1991.
Hence, the Court in that case held that R.A. 7167 had been given a retroactive
effect. The OSG believes that the grant of personal exemptions no longer took into
account the poverty threshold level under R.A. 9504, because the amounts of
personal exemption far exceeded the poverty threshold levels. 18
The OSG further argues that the legislative intent of non-retroactivity was
effectively confirmed by the "Conforme" of Senator Escudero, Chairperson of the
Senate Committee on Ways and Means, on the draft revenue regulation that
became RR 10-2008.
ISSUES
Assailing the validity of RR 10-2008, all four Petitions raise common
issues, which may be distilled into three major ones:
First, whether the increased personal and additional exemptions
provided by R.A. 9504 should be applied to the entire taxable year 2008 or
prorated, considering that R.A. 9504 took effect only on 6 July 2008.
Second, whether an MWE is exempt for the entire taxable year 2008 or
from 6 July 2008 only.
Third, whether Sections 1 and 3 of RR 10-2008 are consistent with the
law in providing that an MWE who receives other benefits in excess of the statutory
limit of P30,000 19 is no longer entitled to the exemption provided by R.A. 9504.
THE COURT'S RULING
I.
Whether the increased personal and additional exemptions provided by R.A.
9504 should be applied to the entire taxable year 2008 or prorated,
considering that the law took effect only on 6 July 2008
The personal and additional exemptions established by R.A. 9504 should
be applied to the entire taxable year 2008. aDSIHc
Umali is applicable.
Umali v. Estanislao 20 supports this Court's stance that R.A. 9504 should
be applied on a full-year basis for the entire taxable year 2008. 21 In Umali,
Congress enacted R.A. 7167 amending the 1977 National Internal Revenue Code
(NIRC). The amounts of basic personal and additional exemptions given to
individual income taxpayers were adjusted to the poverty threshold level. R.A.
7167 came into law on 30 January 1992. Controversy arose when the Commission
of Internal Revenue (CIR) promulgated RR 1-92 stating that the regulation shall
take effect on compensation income earned beginning 1 January 1992. The issue
posed was whether the increased personal and additional exemptions could be
applied to compensation income earned or received during calendar year 1991,
given that R.A. 7167 came into law only on 30 January 1992, when taxable year
1991 had already closed.
This Court ruled in the affirmative, considering that the increased
exemptions were already available on or before 15 April 1992, the date for the filing
of individual income tax returns. Further, the law itself provided that the new set of
personal and additional exemptions would be immediately available upon its
effectivity. While R.A. 7167 had not yet become effective during calendar year
1991, the Court found that it was a piece of social legislation that was in part
intended to alleviate the economic plight of the lower-income taxpayers. For that
purpose, the new law provided for adjustments "to the poverty threshold level"
prevailing at the time of the enactment of the law. The relevant discussion is quoted
below:
[T]he Court is of the considered view that Rep. Act
7167 should cover or extend to compensation income earned or
received during calendar year 1991.
Sec. 29, par. (L), Item No. 4 of the National Internal
Revenue Code, as amended, provides:
Upon the recommendation of the
Secretary of Finance, the President shall
automatically adjust not more often than once
every three years, the personal and additional
exemptions taking into account, among
others, the movement in consumer price
indices, levels of minimum wages, and bare
subsistence levels.
As the personal and additional exemptions of individual
taxpayers were last adjusted in 1986, the President, upon the
recommendation of the Secretary of Finance, could have
adjusted the personal and additional exemptions in 1989 by
increasing the same even without any legislation providing for
such adjustment. But the President did not.
However, House Bill 28970, which was subsequently
enacted by Congress as Rep. Act 7167, was introduced in the
House of Representatives in 1989 although its passage was
delayed and it did not become effective law until 30 January
1992. A perusal, however, of the sponsorship remarks of
Congressman Hernando B. Perez. Chairman of the House
Committee on Ways and Means, on House Bill 28970, provides
an indication of the intent of Congress in enacting Rep. Act
7167. The pertinent legislative journal contains the following:
At the outset, Mr. Perez explained
that the Bill Provides for increased personal
additional exemptions to individuals in view of
the higher standard of living.
The Bill, he stated, limits the amount
of income of individuals subject to income tax
to enable them to spend for basic necessities
and have more disposable income.
xxx xxx xxx
 Mr. Perez added that inflation has
raised the basic necessities and that it had
been three years since the last exemption
adjustment in 1986.
xxx xxx xxx
Subsequently, Mr. Perez stressed
the necessity of passing the measure to
mitigate the effects of the current inflation and
of the implementation of the salary
standardization law. Stating that it is
imperative for the government to take
measures to ease the burden of the individual
income tax filers, Mr. Perez then cited specific
examples of how the measure can help
assuage the burden to the taxpayers.
He then reiterated that the increase
in the prices of commodities has eroded the
purchasing power of the peso despite the
recent salary increases and emphasized that
the Bill will serve to compensate the adverse
effects of inflation on the taxpayers. x x x
(Journal of the House of Representatives,
May 23, 1990, pp. 32-33).
It will also be observed that Rep. Act 7167 speaks of
the adjustments that it provides for, as adjustments "to the
poverty threshold level." Certainly, "the poverty threshold level"
is the poverty threshold level at the time Rep. Act 7167 was
enacted by Congress, not poverty threshold levels in futuro, at
which time there may be need of further adjustments in personal
exemptions. Moreover, the Court can not lose sight of the
fact that these personal and additional exemptions are fixed
amounts to which an individual taxpayer is entitled, as a
means to cushion the devastating effects of high prices and
a depreciated purchasing power of the currency. In the end,
it is the lower-income and the middle-income groups of
taxpayers (not the high-income taxpayers) who stand to
benefit most from the increase of personal and additional
exemptions provided for by Rep. Act 7167. To that extent,
the act is a social legislation intended to alleviate in part the
present economic plight of the lower income taxpayers. It
is intended to remedy the inadequacy of the heretofore
existing personal and additional exemptions for individual
taxpayers. ETHIDa
And then, Rep. Act 7167 says that the increased
personal exemptions that it provides for shall be available
thenceforth, that is, after Rep. Act 7167 shall have become
effective. In other words, these exemptions are available
upon the filing of personal income tax returns which is,
under the National Internal Revenue Code, done not later
than the 15th day of April after the end of a calendar year.
Thus, under Rep. Act 7167, which became effective, as
aforestated, on 30 January 1992, the increased exemptions
are literally available on or before 15 April 1992 (though not
before 30 January 1992). But these increased exemptions can
be available on 15 April 1992 only in respect of compensation
income earned or received during the calendar year 1991.
The personal exemptions as increased by Rep. Act
7167 cannot be regarded as available in respect of
compensation income received during the 1990 calendar year;
the tax due in respect of said income had already accrued, and
been presumably paid, by 15 April 1991 and by 15 July 1991, at
which time Rep. Act 7167 had not been enacted. To make Rep.
Act 7167 refer back to income received during 1990 would
require language explicitly retroactive in purport and effect,
language that would have to authorize the payment of refunds
of taxes paid on 15 April 1991 and 15 July 1991: such language
is simply not found in Rep. Act 7167.
The personal exemptions as increased by Rep. Act
7167 cannot be regarded as available only in respect of
compensation income received during 1992, as the
implementing Revenue Regulations No. 1-92 purport to
provide. Revenue Regulations No. 1-92 would in effect
postpone the availability of the increased exemptions to 1
January-15 April 1993, and thus literally defer the effectivity
of Rep. Act 7167 to 1 January 1993. Thus, the implementing
regulations collide frontally with Section 3 of Rep. Act
7167 which states that the statute "shall take effect upon its
approval." The objective of the Secretary of Finance and the
Commissioner of Internal Revenue in postponing through
Revenue Regulations No. 1-92 the legal effectivity of Rep. Act
7167 is, of course, entirely understandable — to defer to 1993
the reduction of governmental tax revenues which irresistibly
follows from the application of Rep. Act 7167. But the law-
making authority has spoken and the Court can not refuse to
apply the law-maker's words. Whether or not the government
can afford the drop in tax revenues resulting from such
increased exemptions was for Congress (not this Court) to
decide. 22 (Emphases supplied)
In this case, Senator Francis Escudero's sponsorship speech for Senate
Bill No. 2293 reveals two important points about R.A. 9504: (1) it is a piece of social
legislation; and (2) its intent is to make the proposed law immediately applicable,
that is, to taxable year 2008:
Mr. President, distinguished colleagues, Senate Bill
No. 2293 seeks, among others, to exempt minimum wage
earners from the payment of income and/or withholding tax. It is
an attempt to help our people cope with the rising costs of
commodities that seem to be going up unhampered these
past few months.
 Mr. President, a few days ago, the Regional Tripartite
and Wages Productivity Board granted an increase of P20 per
day as far as minimum wage earners are concerned. By way of
impact, Senate Bill No. 2293 would grant our workers an
additional salary or take-home pay of approximately P34 per
day, given the exemption that will be granted to all minimum
wage earners. It might he also worthy of note that on the part of
the public sector, the Senate Committee on Ways and Means
included, as amongst those who will be exempted from the
payment of income tax and/or withholding tax, government
workers receiving Salary Grade V. We did not make any
distinction so as to include Steps 1 to 8 of Salary Grade V as
long as one is employed in the public sector or in government.
In contradistinction with House Bill No. 3971 approved
by the House of Representatives pertaining to a similar subject
matter, the House of Representatives, very much like the
Senate, adopted the same levels of exemptions which are:
From an allowable personal
exemption for a single individual of P20,000,
to a head of family of P25,000, to a married
individual of P32,000, both the House and the
Senate versions contain a higher personal
exemption of P50,000.
Also, by way of personal additional exemption as far as
dependents are concerned, up to four, the House, very much
like the Senate, recommended a higher ceiling of P25,000 for
each dependent not exceeding four, thereby increasing the
maximum additional exemptions and personal additional
exemptions to as high as P200,000, depending on one's status
in life.
The House also, very much like the Senate,
recommended by way of trying to address the revenue loss on
the part of the government, an optional standard deduction
(OSD) on gross sales, and/or gross receipts as far as individual
taxpayers are concerned. However, the House, unlike the
Senate, recommended a Simplified Net Income Tax Scheme
(SNITS) in order to address the remaining balance of the
revenue loss.
By way of contrast, the Senate Committee on Ways
and Means recommended, in lieu of SNITS, an optional
standard deduction of 40% for corporations as far as their gross
income is concerned.
Mr. President, if we total the revenue loss as well as
the gain brought about by the 40% OSD on individuals on gross
sales and receipts and 40% on gross income as far as
corporations are concerned, with a conservative availment rate
as computed by the Department of Finance, the government
what would subsequently become R.A. 9504. He was candid enough to admit that
would still enjoy a gain of P.78 billion or P780 million if we use
the high side of the computation however improbable it may be.
For the record, we would like to state that if the
availment rate is computed at 15% for individuals and 10% for
corporations, the potential high side of a revenue gain would
amount to approximately P18.08 billion.
Mr. President, we have received many suggestions
increasing the rate of personal exemptions and personal
additional exemptions. We have likewise received various
suggestions pertaining to the expansion of the coverage of the
tax exemption granted to minimum wage earners to encompass
as well other income brackets.
However, the only suggestion other than or outside the
provisions contained in House Bill No. 3971 that the Senate
Committee on Ways and Means adopted, was an expansion of
the exemption to cover overtime, holiday, nightshift differential,
and hazard pay also being enjoyed by minimum wage earners.
It entailed an additional revenue loss of P1 billion approximately
on the part of the government. However, Mr. President, that was
taken into account when I stated earlier that there will still be a
revenue gain on the conservative side on the part of government
of P780 million.
Mr. President, [my distinguished colleagues in the
Senate, we wish to provide a higher exemption for our
countrymen because of the incessant and constant
increase in the price of goods. Nonetheless, not only Our
Committee, but also the Senate and Congress, must act
responsibly in recognizing that much as we would like to give all
forms of help that we can and must provide to our people, we
also need to recognize the need of the government to defray its
expenses in providing services to the public. This is the most
that we can give at this time because the government operates
on a tight budget and is short on funds when it comes to the
discharge of its main expenses.] 23
Mr. President, time will perhaps come and we can
improve on this version, but at present, this is the best, I
believe, that we can give our people. But by way of
comparison, it is still P10 higher than what the wage boards were
able to give minimum wage earners. Given that, we were able
to increase their take-home pay by the amount equivalent
to the tax exemption we have granted.
We urge our colleagues, Mr. President, to pass this
bill in earnest so that we can immediately grant relief to our
people.
Thank you, Mr. President. (Emphases Supplied) 24
Clearly, Senator Escudero expressed a sense of urgency for passing
the bill needed improvement, but because time was of the essence, he urged the
Senate to pass the bill immediately. The idea was immediate tax relief to the
individual taxpayers, particularly low-compensation earners, and an increase in
their take-home pay. 25 cSEDTC
Senator Miriam Defensor-Santiago also remarked during the
deliberations that "the increase in personal exemption from P20,000 to P50,000 is
timely and appropriate given the increased cost of living. Also, the increase in the
additional exemption for dependent children is necessary and timely." 26
Finally, we consider the President's certification of the necessity of the
immediate enactment of Senate Bill No. 2293. That certification became the basis
for the Senate to dispense with the three-day rule 27 for passing a bill. It evinced
the intent of the President to afford wage earners immediate tax relief from the
impact of a worldwide increase in the prices of commodities. Specifically, the
certification stated that the purpose was to "address the urgent need to cushion
the adverse impact of the global escalation of commodity prices upon the most
vulnerable within the low income group by providing expanded income tax
relief." 28
In sum, R.A. 9504, like R.A. 7167 in Umali, was a piece of social
legislation clearly intended to afford immediate tax relief to individual taxpayers,
particularly low-income compensation earners. Indeed, if R.A. 9504 was to take
effect beginning taxable year 2009 or half of the year 2008 only, then the intent of
Congress to address the increase in the cost of living in 2008 would have been
negated.
Therefore, following Umali, the test is whether the new set of personal
and additional exemptions was available at the time of the filing of the income tax
return. In other words, while the status of the individual taxpayers is determined at
the close of the taxable year, 29 their personal and additional exemptions — and
consequently the computation of their taxable income — are reckoned when the
tax becomes due, and not while the income is being earned or received.
The NIRC is clear on these matters. The taxable income of an individual
taxpayer shall be computed on the basis of the calendar year. 30 The taxpayer is
required to file an income tax return on the 15th of April of each year covering
income of the preceding taxable year. 31 The tax due thereon shall be paid at the
time the return is filed. 32
It stands to reason that the new set of personal and additional
exemptions, adjusted as a form of social legislation to address the prevailing
poverty threshold, should be given effect at the most opportune time as the Court
ruled in Umali.
The test provided by Umali is consistent with Ingalls v. Trinidad, 33 in
which the Court dealt with the matter of a married person's reduced exemption. As
early as 1923, the Court already provided the reference point for determining the
taxable income:
[T]hese statutes dealing with the manner of collecting
the income tax and with the deductions to be made in favor of
the taxpayer have reference to the time when the return is filed
and the tax assessed. If Act No. 2926 took, as it did take, effect
on January 1, 1921, its provisions must be applied to income tax
returns filed, and assessments made from that date. This is the
reason why Act No. 2833, and Act No. 2926, in their respective
first sections, refer to income received during the preceding civil
year. (Italics in the original)
There, the exemption was reduced, not increased, and the Court
effectively ruled that income tax due from the individual taxpayer is properly
determined upon the filing of the return. This is done after the end of the taxable
year, when all the incomes for the immediately preceding taxable year and the
corresponding personal exemptions and/or deductions therefor have been
considered. Therefore, the taxpayer was made to pay a higher tax for his income
earned during 1920, even if the reduced exemption took effect on 1 January 1921.
In the present case, the increased exemptions were already available
much earlier than the required time of filing of the return on 15 April 2009. R.A.
9504 came into law on 6 July 2008, more than nine months before the deadline for
the filing of the income tax return for taxable year 2008. Hence, individual
taxpayers were entitled to claim the increased amounts for the entire year 2008.
This was true despite the fact that incomes were already earned or received prior
to the law's effectivity on 6 July 2008.
Even more compelling is the fact that R.A. 9504 became effective during
the taxable year in question. In Umali, the Court ruled that the application of the
law was prospective, even if the amending law took effect after the close of the
taxable year in question, but before the deadline for the filing of the return and
payment of the taxes due for that year. Here, not only did R.A. 9504 take effect
before the deadline for the filing of the return and payment for the taxes due for
taxable year 2008, it took effect way before the close of that taxable year.
Therefore, the operation of the new set of personal and additional exemption in the
present case was all the more prospective.
Additionally, as will be discussed later, the rule of full taxable year
treatment for the availment of personal and additional exemptions was established,
not by the amendments introduced by R.A. 9504, but by the provisions of the
1997 Tax Code itself. The new law merely introduced a change in the amounts of
the basic and additional personal exemptions. Hence, the fact that R.A. 9504 took
effect only on 6 July 2008 is irrelevant.
The present case is substantially
identical with Umali and not with
Pansacola.
Respondents argue that Umali is not applicable to the present case. They
contend that the increase in personal and additional exemptions were necessary
in that case to conform to the 1991 poverty threshold level; but that in the present
case, the amounts under R.A. 9504 far exceed the poverty threshold level. To
support their case, respondents cite figures allegedly coming from the National
Statistical Coordination Board. According to those figures, in 2007, or one year
before the effectivity of R.A. 9504, the poverty threshold per capita was P14,866
or P89,196 for a family of six. 34
We are not persuaded.
The variance raised by respondents borders on the superficial. The
message of Umali is that there must be an event recognized by Congress that
occasions the immediate application of the increased amounts of personal and
additional exemptions. In Umali, that event was the failure to adjust the personal
and additional exemptions to the prevailing poverty threshold level. In this case,
the legislators specified the increase in the price of commodities as the basis for
the immediate availability of the new amounts of personal and additional
exemptions.
We find the facts of this case to be substantially identical to those
of Umali.
First, both cases involve an amendment to the prevailing tax code. The
present petitions call for the interpretation of the effective date of the increase in
personal and additional exemptions. Otherwise stated, the present case deals with
an amendment (R.A. 9504) to the prevailing tax code(R.A. 8424 or the 1997 Tax
Code). Like the present case, Umali involved an amendment to the then
prevailing tax code — it interpreted the effective date of R.A. 7167, an amendment
to the 1977 NIRC, which also increased personal and additional exemptions.
Second, the amending law in both cases reflects an intent to make the
new set of personal and additional exemptions immediately available after the
effectivity of the law. As already pointed out, in Umali, R.A. 7167 involved social
legislation intended to adjust personal and additional exemptions. The adjustment
was made in keeping with the poverty threshold level prevailing at the time.
Third, both cases involve social legislation intended to cure a social evil
— R.A. 7167 was meant to adjust personal and additional exemptions in relation
to the poverty threshold level, while R.A. 9504 was geared towards addressing the
impact of the global increase in the price of goods.
Fourth, in both cases, it was clear that the intent of the legislature was to
hasten the enactment of the law to make its beneficial relief immediately available.
Pansacola is not applicable.
In lieu of Umali, the OSG relies on our ruling in Pansacola v.
Commissioner of Internal Revenue. 35 In that case, the 1997 Tax Code (R.A.
8424) took effect on 1 January 1998, and the petitioner therein pleaded for the
application of the new set of personal and additional exemptions provided
thereunder to taxable year 1997. R.A. 8424 explicitly provided for its effectivity on
1 January 1998, but it did not provide for any retroactive application.
We ruled against the application of the new set of personal and additional
exemptions to the previous taxable year 1997, in which the filing and payment of
the income tax was due on 15 April 1998, even if the NIRC had already taken effect
on 1 January 1998. This court explained that the NIRC could not be given
retroactive application, given the specific mandate of the law that it shall take effect
on 1 January 1998; and given the absence of any reference to the application of
personal and additional exemptions to income earned prior to 1 January 1998. We
further stated that what the law considers for the purpose of determining the
income tax due is the status at the close of the taxable year, as opposed to
the time of filing of the return and payment of the corresponding tax. SDAaTC
The facts of this case are not identical with those of Pansacola.
First, Pansacola interpreted the effectivity of an entirely new tax code —
R.A. 8424, the Tax Reform Act of 1997. The present case, like Umali,involves a
mere amendment of some specific provisions of the prevailing tax code: R.A.
7167 amending then P.D. 1158 (the 1977 NIRC) in Umali and R.A.
9504 amending R.A. 8424 herein.
Second, in Pansacola, the new tax code specifically provided for an
effective date — the beginning of the following year — that was to apply to all its
provisions, including new tax rates, new taxes, new requirements, as well as new
exemptions. The tax code did not make any exception to the effectivity of the
subject exemptions, even if transitory provisions 36 specifically provided for
different effectivity dates for certain provisions.
Hence, the Court did not find any legislative intent to make the new rates
of personal and additional exemptions available to the income earned in the year
previous to R.A. 8424's effectivity. In the present case, as previously discussed,
there was a clear intent on the part of Congress to make the new amounts of
personal and additional exemptions immediately available for the entire taxable
year 2008. R.A. 9504 does not even need a provision providing for retroactive
application because, as mentioned above, it is actually prospective — the new law
took effect during the taxable year in question.
Third, in Pansacola, the retroactive application of the new rates of
personal and additional exemptions would result in an absurdity — new tax rates
under the new law would not apply, but a new set of personal and additional
exemptions could be availed of. This situation does not obtain in this case,
however, precisely because the new law does not involve an entirely new tax code.
The new law is merely an amendment to the rates of personal and additional
exemptions.
Nonetheless, R.A. 9504 can still be made applicable to taxable year
2008, even if we apply the Pansacola test. We stress that Pansacolaconsiders the
close of the taxable year as the reckoning date for the effectivity of the new
exemptions. In that case, the Court refused the application of the new set of
personal exemptions, since they were not yet available at the close of the taxable
year. In this case, however, at the close of the taxable year, the new set of
exemptions was already available. In fact, it was already available during the
taxable year — as early as 6 July 2008 — when the new law took effect.
There may appear to be some dissonance between the Court's
declarations in Umali and those in Pansacola, which held:
Clearly from the abovequoted provisions, what the law
should consider for the purpose of determining the tax due from
an individual taxpayer is his status and qualified dependents at
the close of the taxable year and not at the time the return is filed
and the tax due thereon is paid. Now comes Section 35(C) of
the NIRC which provides,
xxx xxx xxx
Emphasis must be made that Section 35(C) of the
NIRC allows a taxpayer to still claim the corresponding full
amount of exemption for a taxable year, e.g., if he marries; have
additional dependents; he, his spouse, or any of his deendents
die; and if any of his dependents marry, turn 21 years old; or
 become gainfully employed. It is as if the changes in his or his
dependents status took place at the close of the taxable year.
Consequently, his correct taxable income and his
corresponding allowable deductions e.g., personal and
additional deductions, if any, had already been determined
as of the end of the calendar year.
x x x. Since the NIRC took effect on January 1, 1998,
the increased amounts of personal and additional exemptions
under Section 35, can only be allowed as deductions from the
individual taxpayers gross or net income, as the case maybe, for
the taxable year 1998 to be filed in 1999. The NIRC made no
reference that the personal and additional exemptions shall
apply on income earned before January 1, 1998. 37
It must be remembered, however, that the Court therein emphasized
that Umali was interpreting a social legislation:
In Umali, we noted that despite being given authority
by Section 29(1)(4) of the National Internal Revenue Code of
1977 to adjust these exemptions, no adjustments were made to
cover 1989. Note that Rep. Act No. 7167 is entitled "An Act
Adjusting the Basic Personal and Additional Exemptions
Allowable to Individuals for Income Tax Purposes to the Poverty
Threshold Level, Amending for the Purpose Section 29,
Paragraph (L), Items (1) and (2) (A), of the National Internal
Revenue Code, As Amended, and For Other Purposes." Thus,
we said in Umali, that the adjustment provided by Rep. Act No.
7167 effective 1992, should consider the poverty threshold level
in 1991, the time it was enacted. And we observed therein that
since the exemptions would especially benefit lower and middle-
income taxpayers, the exemption should be made to cover the
past year 1991. To such an extent, Rep. Act No. 7167 was a
social legislation intended to remedy the non-adjustment in
1989. And as cited in Umali, this legislative intent is also clear in
the records of the House of Representatives' Journal.
This is not so in the case at bar. There is nothing in the
NIRC that expresses any such intent. The policy declarations
in its enactment do not indicate it was a social legislation
that adjusted personal and additional exemptions
according to the poverty threshold level nor is there any
indication that its application should retroact. x x
x. 38 (Emphasis Supplied)
Therefore, the seemingly inconsistent pronouncements
in Umali and Pansacola are more apparent than real. The circumstances of the
cases and the laws interpreted, as well as the legislative intents thereof, were
different.
The policy in this jurisdiction is full
taxable year treatment.
We have perused R.A. 9504, and we see nothing that expressly provides
or even suggests a prorated application of the exemptions for taxable year 2008.
On the other hand, the policy of full taxable year treatment, especially of the
personal and additional exemptions, is clear under Section 35, particularly
paragraph C of R.A. 8424 or the 1997 Tax Code:
SEC. 35. Allowance of Personal Exemption for Individual
Taxpayer. —
(A) In General. — For purposes of determining the tax
provided in Section 24(A) of this Title, there shall be allowed a
basic personal exemption as follows:
xxx xxx xxx
(B) Additional Exemption for Dependents. — There
shall be allowed an additional exemption of . . . for each
dependent not exceeding four (4).
xxx xxx xxx
(C) Change of Status. — If the taxpayer marries or
should have additional dependent(s) as defined above during
the taxable year, the taxpayer may claim the corresponding
additional exemption, as the case may be, in full for such year.
If the taxpayer dies during the taxable year, his estate
may still claim the personal and additional exemptions for
himself and his dependent(s) as if he died at the close of such
year.
If the spouse or any of the dependents dies or if any of
such dependents marries, becomes twenty-one (21) years old
or becomes gainfully employed during the taxable year,
the taxpayer may still claim the same exemptions as if the
spouse or any of the dependents died, or as if such dependents
married, became twenty-one (21) years old or became gainfully
employed at the close of such year. (Emphases supplied)
Note that paragraph C does not allow the prorating of the personal and
additional exemptions provided in paragraphs A and B, even in case a status-
changing event occurs during the taxable year. Rather, it allows the fullest benefit
to the individual taxpayer. This manner of reckoning the taxpayer's status for
purposes of the personal and additional exemptions clearly demonstrates the
legislative intention; that is, for the state to give the taxpayer the maximum
exemptions that can be availed, notwithstanding the fact that the latter's actual
status would qualify only for a lower exemption if prorating were
employed. acEHCD
We therefore see no reason why we should make any distinction between
the income earned prior to the effectivity of the amendment (from 1 January 2008
to 5 July 2008) and that earned thereafter (from 6 July 2008 to 31 December 2008)
as none is indicated in the law. The principle that the courts should not distinguish
when the law itself does not distinguish squarely applies to this case. 39
 We note that the prorating of personal and additional exemptions was
employed in the 1939 Tax Code. Section 23 (d) of that law states:
Change of status. — If the status of the taxpayer
insofar as it affects the personal and additional exemptions for
himself or his dependents, changes during the taxable year, the
amount of the personal and additional exemptions shall be
apportioned, under rules and regulations prescribed by the
Secretary of Finance, in accordance with the number of
months before and after such change. For the purpose of
such apportionment a fractional part of a month shall be
disregarded unless it amounts to more than half a month, in
which case it shall be considered as a month. 40 (Emphasis
supplied)
On 22 September 1950, R.A. 590 amended Section 23 (d) of the
1939 Tax Code by restricting the operation of the prorating of personal
exemptions. As amended, Section 23 (d) reads:
(d) Change of status. — If the status of the taxpayer
insofar as it affects the personal and additional exemption for
himself or his dependents, changes during the taxable year by
reason of his death, the amount of the personal and additional
exemptions shall be apportioned, under rules and regulations
prescribed by the Secretary of Finance, in accordance with the
number of months before and after such change. For the
purpose of such apportionment a fractional part of a month shall
be disregarded unless it amounts to more than half a month, in
which case it shall be considered as a month. 41 (Emphasis
supplied)
Nevertheless, in 1969, R.A. 6110 ended the operation of the prorating
scheme in our jurisdiction when it amended Section 23 (d) of the 1939 Tax
Code and adopted a full taxable year treatment of the personal and additional
exemptions. Section 23 (d), as amended, reads:
(d) Change of status. —
If the taxpayer married or should have additional
dependents as defined in subsection (c) above during the
taxable year the taxpayer may claim the corresponding personal
exemptions in full for such year.
If the taxpayer should die during the taxable year, his
estate may still claim the personal and additional deductions for
himself and his dependents as if he died at the close of such
year.
If the spouse or any of the dependents should die
during the year, the taxpayer may still claim the same
deductions as if they died at the close of such year.
P.D. 69 followed in 1972, and it retained the full taxable year scheme.
Section 23 (d) thereof reads as follows:
(d) Change of status. — If the taxpayer marries or
should have additional dependents as defined in subsection (c)
above during the taxable year the taxpayer may claim the
corresponding personal exemptions in full for such year.
If the taxpayer should die during the taxable year, his
estate may still claim the personal and additional deductions for
himself and his dependents as if he died at the close of such
year.
If the spouse or any of the dependents should die or
become twenty-one years old during the taxable year, the
taxpayer may still claim the same exemptions as if they died, or
as if such dependents became twenty-one years old at the close
of such year.
The 1977 Tax Code continued the policy of full taxable year treatment.
Section 23 (d) thereof states:
(d) Change of status. — If the taxpayer married or
should have additional dependents as defined in subsection (c)
above during the taxable year, the taxpayer may claim the
corresponding personal exemption in full for such year.
If the taxpayer should die during the taxable year, his
estate may still claim the personal and additional exemptions for
himself and his dependents as if he died at the close of such
year.
If the spouse or any of the dependents should die or
become twenty-one years old during the taxable year, the
taxpayer may still claim the same exemptions as if they died, or
as if such dependents became twenty-one years old at the close
of such year.
While Section 23 of the 1977 Tax Code underwent changes, the provision
on full taxable year treatment in case of the taxpayer's change of status was left
untouched. 42 Executive Order No. 37, issued on 31 July 1986, retained
the change of status provision verbatim. The provision appeared under Section 30
(1) (3) of the NIRC, as amended:
(3) Change of status. — If the taxpayer married or should have
additional dependents as defined above during the taxable year,
the taxpayer may claim the corresponding personal and
additional exemptions, as the case may be, in full for such year.
If the taxpayer should die during the taxable year, his
estate may still claim the personal and additional exemptions for
himself and his dependents as if he died at the close of such
year.
If the spouse or any of the dependents should die or if
any of such dependents becomes twenty-one years old during
the taxable year, the taxpayer may still claim the same
exemptions as if they died, or if such dependents become
twenty-one years old at the close of such year.
 Therefore, the legislative policy of full taxable year treatment of the
personal and additional exemptions has been in our jurisdiction continuously since
1969. The prorating approach has long since been abandoned. Had Congress
intended to revert to that scheme, then it should have so stated in clear and
unmistakeable terms. There is nothing, however, in R.A. 9504 that provides for the
reinstatement of the prorating scheme. On the contrary, the change-of-status
provision utilizing the full-year scheme in the 1997 Tax Code was left untouched
by R.A. 9504.
We now arrive at this important point: the policy of full taxable year
treatment is established, not by the amendments introduced by R.A. 9504, but by
the provisions of the 1997 Tax Code, which adopted the policy from as early as
1969.
There is, of course, nothing to prevent Congress from again adopting a
policy that prorates the effectivity of basic personal and additional exemptions. This
policy, however, must be explicitly provided for by law — to amend the prevailing
law, which provides for full-year treatment. As already pointed out, R.A. 9504 is
totally silent on the matter. This silence cannot be presumed by the BIR as
providing for a half-year application of the new exemption levels. Such
presumption is unjust, as incomes do not remain the same from month to month,
especially for the MWEs.
Therefore, there is no legal basis for the BIR to reintroduce the prorating
of the new personal and additional exemptions. In so doing, respondents
overstepped the bounds of their rule-making power. It is an established rule that
administrative regulations are valid only when these are consistent with the
law. 43 Respondents cannot amend, by mere regulation, the laws they
administer. 44 To do so would violate the principle of non-delegability of legislative
powers. 45
The prorated application of the new set of personal and additional
exemptions for the year 2008, which was introduced by respondents, cannot even
be justified under the exception to the canon of non-delegability; that is, when
Congress makes a delegation to the executive branch. 46The delegation would fail
the two accepted tests for a valid delegation of legislative power; the completeness
test and the sufficient standard test. 47The first test requires the law to be complete
in all its terms and conditions, such that the only thing the delegate will have to do
is to enforce it. 48The sufficient standard test requires adequate guidelines or
limitations in the law that map out the boundaries of the delegate's authority and
canalize the delegation. 49
In this case, respondents went beyond enforcement of the law, given the
absence of a provision in R.A. 9504 mandating the prorated application of the new
amounts of personal and additional exemptions for 2008. Further, even assuming
that the law intended a prorated application, there are no parameters set forth
in R.A. 9504 that would delimit the legislative power surrendered by Congress to
the delegate. In contrast, Section 23 (d) of the 1939 Tax Code authorized not only
the prorating of the exemptions in case of change of status of the taxpayer, but
also authorized the Secretary of Finance to prescribe the corresponding rules and
regulations.
II.
Whether an MWE is exempt for the entire taxable
year 2008 or from 6 July 2008 only
The MWE is exempt for the entire taxable year 2008.
As in the case of the adjusted personal and additional exemptions, the
MWE exemption should apply to the entire taxable year 2008, and not only from 6
July 2008 onwards.
We see no reason why Umali cannot be made applicable to the MWE
exemption, which is undoubtedly a piece of social legislation. It was intended to
alleviate the plight of the working class, especially the low-income earners. In
concrete terms, the exemption translates to a P34 per day benefit, as pointed out
by Senator Escudero in his sponsorship speech. 50
As it stands, the calendar year 2008 remained as one taxable year for an
individual taxpayer. Therefore, RR 10-2008 cannot declare the income earned by
a minimum wage earner from 1 January 2008 to 5 July 2008 to be taxable and
those earned by him for the rest of that year to be tax-exempt. To do so would be
to contradict the NIRC and jurisprudence, as taxable income would then cease to
be determined on a yearly basis.
Respondents point to the letter of former Commissioner of Internal
Revenue Lilia B. Hefti dated 5 July 2008 and petitioner Sen. Escudero's signature
on the Conforme portion thereof. This letter and the conforme supposedly
establish the legislative intent not to make the benefits of R.A. 9504 effective as of
1 January 2008.
We are not convinced. The conforme is irrelevant in the determination of
legislative intent. SDHTEC
We quote below the relevant portion of former Commissioner Hefti's
letter:
Attached herewith are salient features of the proposed
regulations to implement RA 9504 x x x. We have tabulated
critical issues raised during the public hearing and comments
received from the public which we need immediate written
resolution based on the inten[t]ion of the law more particularly
the effectivity clause. Due to the expediency and clamor of the
public for its immediate implementation, may we request your
confirmation on the proposed recommendation within five (5)
days from receipt hereof. Otherwise, we shall construe your
affirmation. 51
We observe that a Matrix of Salient Features of Proposed Revenue
Regulations per R.A. 9504 was attached to the letter. 52 The Matrix had a column
entitled "Remarks" opposite the Recommended Resolution. In that column, noted
was a suggestion coming from petitioner TMAP:
TMAP suggested that it should be retroactive
considering that it was [for] the benefit of the majority and to
alleviate the plight of workers.Exemption should be applied for
the whole taxable year as provided in the NIRC. x x x Umali v.
Estanislao [ruled] that the increase[d] exemption in 1992 [was
applicable] [to] 1991.
 Majority issues raised during the public hearing last
July 1, 2008 and emails received suggested [a] retroactive
implementation. 53 (Italics in the original)
The above remarks belie the claim that the conforme is evidence of the
legislative intent to make the benefits available only from 6 July 2008 onwards.
There would have been no need to make the remarks if the BIR had merely wanted
to confirm was the availability of the law's benefits to income earned starting 6 July
2008. Rather, the implication is that the BIR was requesting the conformity of
petitioner Senator Escudero to the proposed implementing rules, subject to the
remarks contained in the Matrix. Certainly, it cannot be said that Senator
Escudero's conforme is evidence of legislative intent to the effect that the benefits
of the law would not apply to income earned from 1 January 2008 to 5 July 2008.
Senator Escudero himself states in G.R. No. 185234:
In his bid to ensure that the BIR would observe the
effectivity dates of the grant of tax exemptions and increased
basic personal and additional exemptions under Republic Act
No. 9504, Petitioner Escudero, as Co-Chairperson of the
Congressional Oversight Committee on Comprehensive Tax
Reform Program, and his counterpart in the House of
Representatives, Hon. Exequiel B. Javier, conveyed through a
letter, dated 16 September 2008, to Respondent Teves the
legislative intent that "Republic Act (RA) No. 9504 must be made
applicable to the entire taxable year 2008" considering that it
was "a social legislation intended to somehow alleviate the plight
of minimum wage earners or low income taxpayers." They also
jointly expressed their "fervent hope that the corresponding
Revenue Regulations that will be issued reflect the true
legislative intent and rightful statutory interpretation of R.A. No.
9504." 54
Senator Escudero repeats in his Memorandum:
On 16 September 2008, the Chairpersons (one of them
being herein Petitioner Sen. Escudero) of the Congressional
Oversight Committee on Comprehensive Tax Reform Program
of both House of Congress wrote Respondent DOF Sec.
Margarito Teves, and requested that the revenue regulations
(then yet still to be issued) 55 to implement Republic Act No.
9504 reflect the true intent and rightful statutory interpretation
thereof, specifically that the grant of tax exemption and
increased basic personal and additional exemptions be made
available for the entire taxable year 2008. Yet, the DOF
promulgated Rev. Reg. No. 10-2008 in contravention of such
legislative intent. x x x. 56
We have gone through the records and we do not see anything that would
to suggest that respondents deny the senator's assertion.
Clearly, Senator Escudero's assertion is that the legislative intent is to
make the MWE's tax exemption and the increased basic personal and additional
exemptions available for the entire year 2008. In the face of his assertions,
respondents' claim that his conforme to Commissioner Hefti's letter was evidence
of legislative intent becomes baseless and specious. The remarks described
above and the subsequent letter sent to DOF Secretary Teves, by no less than the
Chairpersons of the Bi-cameral Congressional Oversight Committee on
Comprehensive Tax Reform Program, should have settled for respondents the
matter of what the legislature intended for R.A. 9504's exemptions.
Accordingly, we agree with petitioners that RR 10-2008, insofar as it
allows the availment of the MWE's tax exemption and the increased personal and
additional exemptions beginning only on 6 July 2008 is in contravention of the law
it purports to implement.
A clarification is proper at this point. Our ruling that the MWE exemption
is available for the entire taxable year 2008 is premised on the fact of one's status
as an MWE; that is, whether the employee during the entire year of 2008 was an
MWE as defined by R.A. 9504. When the wages received exceed the minimum
wage anytime during the taxable year, the employee necessarily loses the MWE
qualification. Therefore, wages become taxable as the employee ceased to be an
MWE. But the exemption of the employee from tax on the income previously
earned as an MWE remains.
This rule reflects the understanding of the Senate as gleaned from the
exchange between Senator Miriam Defensor-Santiago and Senator Escudero:
Asked by Senator Defensor-Santiago on how a person
would be taxed if, during the year, he is promoted from Salary
Grade 5 to Salary Grade 6 in July and ceases to be a minimum
wage employee, Senator Escudero said that the tax
computation would be based starting on the new salary in
July. 57
As the exemption is based on the employee's status as an MWE, the
operative phrase is "when the employee ceases to be an MWE". Even beyond
2008, it is therefore possible for one employee to be exempt early in the year for
being an MWE for that period, and subsequently become taxable in the middle of
the same year with respect to the compensation income, as when the pay is
increased higher than the minimum wage. The improvement of one's lot, however,
cannot justly operate to make the employee liable for tax on the income earned as
an MWE.
Additionally, on the question of whether one who ceases to be an MWE
may still be entitled to the personal and additional exemptions, the answer must
necessarily be yes. The MWE exemption is separate and distinct from the personal
and additional exemptions. One's status as an MWE does not preclude enjoyment
of the personal and additional exemptions. Thus, when one is an MWE during a
part of the year and later earns higher than the minimum wage and becomes a
non-MWE, only earnings for that period when one is a non-MWE is subject to tax.
It also necessarily follows that such an employee is entitled to the personal and
additional exemptions that any individual taxpayer with taxable gross income is
entitled.
A different interpretation will actually render the MWE exemption a totally
oppressive legislation. It would be a total absurdity to disqualify an MWE from
enjoying as much as P150,000 58 in personal and additional exemptions just
because sometime in the year, he or she ceases to be an MWE by earning a little
more in wages. Laws cannot be interpreted with such absurd and unjust outcome.
It is axiomatic that the legislature is assumed to intend right and equity in the laws (a) Monetized unused vacation
it passes. 59 leave credits of employees not
exceeding ten (10) days during the
Critical, therefore, is how an employee ceases to become an MWE and year and the monetized value of
thus ceases to be entitled to an MWE's exemption. leave credits paid to government
III. officials and employees;
Whether Sections 1 and 3 of RR 10-2008 are consistent with the law in (b) Medical cash allowance to
declaring that an MWE who receives other benefits in excess of the dependents of employees not
statutory limit of P30,000 is no longer entitled to the exemption provided exceeding P750.00 per employee
by R.A. 9504, is consistent with the law. per semester or P125 per month;

Sections 1 and 3 of RR 10-2008 add a requirement not found in the law (c) Rice subsidy of P1,500.00 or one
by effectively declaring that an MWE who receives other benefits in excess of the (1) sack of 50-kg. rice per month
statutory limit of P30,000 is no longer entitled to the exemption provided by R.A. amounting to not more than
9504. P1,500.00;
(d) Uniforms and clothing allowance
The BIR added a requirement not
not exceeding P4,000.00 per
found in the law.
annum;
The assailed Sections 1 and 3 of RR 10-2008 are reproduced hereunder
(e) Actual yearly medical benefits
for easier reference.
not exceeding P10,000.00 per
SECTION 1. Section 2.78.1 of RR 2-98, as amended, annum;
is hereby further amended to read as follows: (f) Laundry allowance not exceeding
Sec. 2.78.1. Withholding of Income Tax on P300.00 per month;
Compensation Income. — (g) Employees achievement
(A) Compensation Income Defined. — x x x awards, e.g., for length of service or
safety achievement, which must be
xxx xxx xxx in the form of a tangible personal
property other than cash or gift
(3) Facilities and privileges of
certificate, with an annual monetary
relatively small value. — Ordinarily, facilities,
value not exceeding P10,000.00
and privileges (such as entertainment,
received by the employee under an
medical services, or so-called "courtesy"
established written plan which does
discounts on purchases), otherwise known as
not discriminate in favor of highly
"de minimis benefits," furnished or offered by
paid employees;
an employer to his employees, are not
considered as compensation subject to (h) Gifts given during Christmas and
income tax and consequently to withholding major anniversary celebrations not
tax, if such facilities or privileges are of exceeding P5,000.00 per employee
relatively small value and are offered or per annum;
furnished by the employer merely as means
(i) Flowers, fruits, books, or similar
of promoting the health, goodwill,
items given to employees under
contentment, or efficiency of his
special circumstances, e.g., on
employees. AScHCD
account of illness, marriage, birth of
The following shall be considered a baby, etc.; and
as "de minimis" benefits not subject to income (j) Daily meal allowance for overtime
tax, hence, not subject to withholding tax on work not exceeding twenty-five
compensation income of both managerial and percent (25%) of the basic minimum
rank and file employees: wage. 60
 The amount of 'de minimis' benefits
conforming to the ceiling herein prescribed
shall not be considered in determining the
P30,000.00 ceiling of 'other benefits' excluded
from gross income under Section 32(b)(7)(e)
of the Code. Provided that, the excess of
the 'de minimis' benefits over their respective
ceilings prescribed by these regulations shall
be considered as part of 'other benefits' and
the employee receiving it will be subject to tax
only on the excess over the P30,000.00
ceiling. Provided, further, that MWEs
receiving 'other benefits' exceeding the
P30,000.00 limit shall be taxable on the
excess benefits, as well as on his salaries,
wages and allowances, just like an
employee receiving compensation income
beyond the SMW.
Any amount given by the employer
as benefits to its employees, whether
classified as 'de minimis' benefits or fringe
benefits, shall constitute [a] deductible
expense upon such employer.
Where compensation is paid in
property other than money, the employer shall
make necessary arrangements to ensure that
the amount of the tax required to be withheld
is available for payment to the Bureau of
Internal Revenue.
xxx xxx xxx
(B) Exemptions from Withholding Tax on
Compensation. — The following income payments are
exempted from the requirements of withholding tax on
compensation:
xxx xxx xxx
(13) Compensation income of
MWEs who work in the private sector and
being paid the Statutory Minimum Wage
(SMW), as fixed by Regional Tripartite Wage
and Productivity Board (RTWPB)/National
Wages and Productivity Commission
(NWPC), applicable to the place where
he/she is assigned.
The aforesaid income shall likewise
he exempted from income tax.
"Statutory Minimum Wage" (SMW)
shall refer to the rate fixed by the Regional
Tripartite Wage and Productivity Board
(RTWPB), as defined by the Bureau of Labor
and Employment Statistics (BLES) of the
Department of Labor and Employment
(DOLE). The RTWPB of each region shall
determine the wage rates in the different
regions based on established criteria and
shall be the basis of exemption from income
tax for this purpose.
Holiday pay, overtime pay, night shift
differential pay and hazard pay earned by the
aforementioned MWE shall likewise be
covered by the above exemption. Provided,
however, that an employee who
receives/earns additional compensation
such as commissions, honoraria, fringe
benefits, benefits in excess of the
allowable statutory amount of P30,000.00,
taxable allowances and other taxable
income other than the SMW, holiday pay,
overtime pay, hazard pay and night shift
differential pay shall not enjoy the
privilege of being a MWE and, therefore,
his/her entire earnings are not exempt
form income tax, and consequently, from
withholding tax.
MWEs receiving other
income, such as income from the conduct
of trade, business, or practice of
profession, except income subject to final
tax, in addition to compensation income are
not exempted from income tax on their entire
income earned during the taxable year. This
rule, notwithstanding, the [statutory
minimum wage], [h]oliday pay, overtime
pay, night shift differential pay and hazard
pay shall still be exempt from withholding
tax.
For purposes of these regulations,
hazard pay shall mean x x x.
In case of hazardous employment, x
xx
The NWPC shall officially submit a
Matrix of Wage Order by region x x x
Any reduction or diminution of
wages for purposes of exemption from
income tax shall constitute misrepresentation
and therefore, shall result to the automatic
disallowance of expense, i.e., compensation
and benefits account, on the part of the
employer. The offenders may be criminally
prosecuted under existing laws.
(14) Compensation income of
employees in the public sector with
compensation income of not more than the
SMW in the non-agricultural sector, as fixed
by RTWPB/NWPC, applicable to the place
where he/she is assigned.
The aforesaid income shall likewise
be exempted from income tax.
The basic salary of MWEs in the
public sector shall be equated to the SMW in
the non-agricultural sector applicable to the
place where he/she is assigned. The
determination of the SMW in the public sector
shall likewise adopt the same procedures and
consideration as those of the private sector.
Holiday pay, overtime pay, night shift
differential pay and hazard pay earned by the
aforementioned MWE in the public sector
shall likewise be covered by the above
exemption. Provided, however, that a
public sector employee who receives
additional compensation such as
commissions, honoraria, fringe benefits,
benefits in excess of the allowable
statutory amount of P30,000.00, taxable
allowances and other taxable income other
than the SMW, holiday pay, overtime pay,
night shift differential pay and hazard
pay shall not enjoy the privilege of being a
MWE and, therefore, his/her entire
earnings are not exempt from income
tax and, consequently, from withholding tax.
MWEs receiving other income,
such as income from the conduct of trade,
business, or practice of profession, except
income subject to final tax, in addition to
compensation income are not exempted from
income tax on their entire income earned
during the taxable year. This rule,
notwithstanding, the SMW, Holiday pay,
overtime pay, night shift differential pay
and hazard pay shall still be exempt from
withholding tax.
For purposes of these regulations,
hazard pay shall mean xxx
In case of hazardous employment, x
xx
xxx xxx xxx
SECTION 3. Section 2.79 of RR 2-98, as amended, is
hereby further amended to read as follows:
Sec. 2.79. Income Tax Collected at Source on Compensation
Income. —
(A) Requirement of Withholding. —
Every employer must withhold from
compensation paid an amount computed in
accordance with these Regulations. Provided,
that no withholding of tax shall be required on
the SMW, including holiday pay, overtime
pay, night shift differential and hazard pay of
MWEs in the private/public sectors as defined
in these Regulations. Provided, further, that
an employee who receives additional
compensation such as commissions,
honoraria, fringe benefits, benefits in
excess of the allowable statutory amount
of P30,000.00, taxable allowances and
other taxable income other than the SMW,
holiday pay, overtime pay, hazard pay and
night shift differential pay shall not enjoy
the privilege of being a MWE and,
therefore, his/her entire earnings are not
exempt from income tax and,
consequently, shall be subject to
withholding tax. AcICHD
xxx xxx xxx
For the year 2008, however, being
the initial year of implementation of R.A.
9504, there shall be a transitory withholding
tax table for the period from July 6 to
December 31, 2008 (Annex "D") determined
by prorating the annual personal and
additional exemptions under R.A. 9504 over a
period of six months. Thus, for individuals,
regardless of personal status, the prorated
personal exemption is P25,000, and for each
qualified dependent child (QDC), P12,500.
On the other hand, the pertinent provisions of law, which are supposed to
be implemented by the above-quoted sections of RR 10-2008, read as follows:
 SECTION 1. Section 22 of Republic Act No. 8424, as
amended, otherwise known as the National Internal Revenue
Code of 1997, is hereby further amended by adding the
following definitions after Subsection (FF) to read as follows:
Section 22. Definitions. — When used in this Title: 61
(A) x x x
(FF) x x x
(GG) The term 'statutory minimum wage'
shall refer to the rate fixed by the Regional
Tripartite Wage and Productivity Board, as
defined by the Bureau of Labor and
Employment Statistics (BLES) of the
Department of Labor and Employment
(DOLE).
(HH) The term 'minimum wage earner'
shall refer to a worker in the private sector
paid the statutory minimum wage, or to an
employee in the public sector with
compensation income of not more than
the statutory minimum wage in the non-
agricultural sector where he/she is assigned.
SECTION 2. Section 24(A) of Republic Act No. 8424,
as amended, otherwise known as the National Internal Revenue
Code of 1997, is hereby further amended to read as follows:
SEC. 24. Income Tax Rates. —
(A) Rates of Income Tax on
Individual Citizen and Individual Resident
Alien of the Philippines. —
(1) x x x
x x x x; and
(c) On the taxable income defined in
Section 31 of this Code, other than income
subject to tax under Subsections (B), (C) and
(D) of this Section, derived for each taxable
year from all sources within the Philippines by
an individual alien who is a resident of the
Philippines.
(2) Rates of Tax on Taxable Income
of Individuals. — The tax shall be computed
in accordance with and at the rates
established in the following schedule:
xxx xxx xxx
For married individuals, the husband
and wife, subject to the provision of Section
51(D) hereof, shall compute separately their
individual income tax based on their
respective total taxable income: Provided,
That if any income cannot be definitely
attributed to or identified as income
exclusively earned or realized by either of the
spouses, the same shall be divided equally
between the spouses for the purpose of
determining their respective taxable income.
Provided, That minimum wage
earners as defined in Section 22(HH) of
this Code shall be exempt from the
payment of income tax on their taxable
income: Provided, further, That the
holiday pay, overtime pay, night shift
differential pay and hazard pay received
by such minimum wage earners shall
likewise be exempt from income tax.
xxx xxx xxx
SECTION 5. Section 51(A)(2) of Republic Act No.
8424, as amended, otherwise known as the National Internal
Revenue Code of 1997, is hereby further amended to read as
follows:
SEC. 51. Individual Return. —
(A) Requirements. —
(1) Except as provided in paragraph
(2) of this Subsection, the following
individuals are required to file an income tax
return:
(a) x x x
xxx xxx xxx
(2) The following individuals shall
not be required to file an income tax
return:
(a) x x x
(b) An individual with respect to pure
compensation income, as defined in Section
32(A)(1), derived from sources within the
Philippines, the income tax on which has been
correctly withheld under the provisions of
Section 79 of this Code:
Provided, That an individual deriving
compensation concurrently from two or more
employers at any time during the taxable year
shall file an income tax return;
 (c) x x x; and
(d) A minimum wage earner as
defined in Section 22(HH) of this Code or an
individual who is exempt from income tax
pursuant to the provisions of this Code and
other laws, general or special.
xxx xxx xxx
SECTION 6. Section 79(A) of Republic Act No. 8424,
as amended, otherwise known as the National Internal Revenue
Code of 1997, is hereby further amended to read as follows:
SEC. 79. Income Tax Collected at Source. —
(A) Requirement of
Withholding. — Except in the case of a
minimum wage earner as defined in
Section 22(HH) of this Code, every
employer making payment of wages shall
deduct and withhold upon such wages a tax
determined in accordance with the rules and
regulations to be prescribed by the Secretary
of Finance, upon recommendation of the
Commissioner. (Emphases supplied)
Nowhere in the above provisions of R.A. 9504 would one find the
qualifications prescribed by the assailed provisions of RR 10-2008. The provisions
of the law are clear and precise; they leave no room for interpretation — they do
not provide or require any other qualification as to who are MWEs.
To be exempt, one must be an MWE, a term that is clearly defined.
Section 22(HH) says he/she must be one who is paid the statutory minimum wage
if he/she works in the private sector, or not more than the statutory minimum wage
in the non-agricultural sector where he/she is assigned, if he/she is a government
employee. Thus, one is either an MWE or he/she is not. Simply put, MWE is the
status acquired upon passing the litmus test — whether one receives wages not
exceeding the prescribed minimum wage.
The minimum wage referred to in the definition has itself a clear and
definite meaning. The law explicitly refers to the rate fixed by the Regional Tripartite
Wage and Productivity Board, which is a creation of the Labor Code. 62 The Labor
Code clearly describes wages and Minimum Wage under Title II of the Labor
Code. Specifically, Article 97 defines "wage" as follows:
(f) "Wage" paid to any employee shall mean the
remuneration or earnings, however designated, capable of
being expressed in terms of money, whether fixed or
ascertained on a time, task, piece, or commission basis, or other
method of calculating the same, which is payable by an
employer to an employee under a written or unwritten contract
of employment for work done or to be done, or for services
rendered or to be rendered and includes the fair and reasonable
value, as determined by the Secretary of Labor and
Employment, of board, lodging, or other facilities customarily
furnished by the employer to the employee. "Fair and
reasonable value" shall not include any profit to the employer, or
to any person affiliated with the employer.
While the Labor Code's definition of "wage" appears to encompass any
payments of any designation that an employer pays his or her employees, the
concept of minimum wage is distinct. 63 "Minimum wage" is wage mandated; one
that employers may not freely choose on their own to designate in any which way.
In Article 99, minimum wage rates are to be prescribed by the Regional
Tripartite Wages and Productivity Boards. In Articles 102 to 105, specific
instructions are given in relation to the payment of wages. They must be paid in
legal tender at least once every two weeks, or twice a month, at intervals not
exceeding 16 days, directly to the worker, except in case of force majeure or death
of the worker. TAIaHE
These are the wages for which a minimum is prescribed. Thus, the
minimum wage exempted by R.A. 9504 is that which is referred to in the Labor
Code. It is distinct and different from other payments including allowances,
honoraria, commissions, allowances or benefits that an employer may pay or
provide an employee.
Likewise, the other compensation incomes an MWE receives that are
also exempted by R.A. 9504 are all mandated by law and are based on this
minimum wage.
Additional compensation in the form of overtime pay is mandated for work
beyond the normal hours based on the employee's regular wage. 64Those working
between ten o'clock in the evening and six o'clock in the morning are required to
be paid a night shift differential based on their regular wage. 65 Holiday/premium
pay is mandated whether one works on regular holidays or on one's scheduled rest
days and special holidays. In all of these cases, additional compensation is
mandated, and computed based on the employee's regular wage. 66
R.A. 9504 is explicit as to the coverage of the exemption: the wages that
are not in excess of the minimum wage as determined by the wage boards,
including the corresponding holiday, overtime, night differential and hazard pays.
In other words, the law exempts from income taxation the most basic
compensation an employee receives — the amount afforded to the lowest paid
employees by the mandate of law. In a way, the legislature grants to these lowest
paid employees additional income by no longer demanding from them a
contribution for the operations of government. This is the essence of R.A. 9504 as
a social legislation. The government, by way of the tax exemption, affords
increased purchasing power to this sector of the working class.
This intent is reflected in the Explanatory Note to Senate Bill No. 103 of
Senator Roxas:
This bill seeks to exempt minimum wage earners in the
private sector and government workers in Salary Grades 1 to 3,
amending certain provisions of Republic Act 8424, otherwise
known as the National Internal Revenue Code of 1997, as
amended.
 As per estimates by the National Wages and (e) 13th Month Pay and
Productivity Board, there are 7 million workers earning the Other Benefits. — Gross benefits
minimum wage and even below. While these workers are in received by officials and employees
the verge of poverty, it is unfair and unjust that the of public and private entities:
Government, under the law, is taking away a portion of their Provided, however, That the total
already subsistence-level income. exclusion under this subparagraph
shall not exceed Thirty thousand
Despite this narrow margin from poverty, the pesos (P30,000) which shall cover:
Government would still be mandated to take a slice away
from that family's meager resources. Even if the (i) Benefits
Government has recently exempted minimum wage earners received by officials and
from withholding taxes, they are still liable to pay income employees of the national
taxes at the end of the year. The law must be amended to and local government
correct this injustice. (Emphases supplied) pursuant to Republic Act
No. 6686; 70
The increased purchasing power is estimated at about P9,500 a
year. 67 RR 10-2008, however, takes this away. In declaring that once an MWE (ii) Benefits
receives other forms of taxable income like commissions, honoraria, and fringe received by employees
benefits in excess of the non-taxable statutory amount of P30,000, RR 10- pursuant to Presidential
2008 declared that the MWE immediately becomes ineligible for tax exemption; Decree No. 851, 71 as
and otherwise non-taxable minimum wage, along with the other taxable incomes amended by Memorandum
of the MWE, becomes taxable again. Order No. 28, dated August
13, 1986;
Respondents acknowledge that R.A. 9504 is a social legislation meant
for social justice, 68 but they insist that it is too generous, and that consideration (iii) Benefits
must be given to the fiscal position and financial capability of the received by officials and
government. 69 While they acknowledge that the intent of the income tax employees not covered
exemption of MWEs is to free low-income earners from the burden of taxation, by Presidential decree No.
respondents, in the guise of clarification, proceed to redefine which incomes may 851, as amended
or may not be granted exemption. These respondents cannot do without by Memorandum Order No.
encroaching on purely legislative prerogatives. 28, dated August 13, 1986;
and
By way of review, this P30,000 statutory ceiling on benefits has its
beginning in 1994 under R.A. 7833, which amended then Section 28 (b) (8) of (iv) Other benefits
the 1977 NIRC. It is substantially carried over as Section 32 (B) (Exclusion from such as productivity
Gross Income) of Chapter VI (Computation of Gross Income) of Title II (Tax on incentives and Christmas
Income) in the 1997 NIRC (R.A. 8424). R.A. 9504 does not amend that provision bonus: Provided, further,
of R.A. 8424, which reads: That the ceiling of Thirty
thousand pesos (P30,000)
SEC. 32. Gross Income. — may be increased through
rules and regulations
(A) General Definition. — x x x
issued by the Secretary of
(B) Exclusions from Gross Income. — The Finance, upon
following items shall not be included in gross recommendation of the
income and shall be exempt from taxation Commissioner, after
under this title: considering among others,
the effect on the same of
(1) x x x the inflation rate at the end
xxx xxx xxx of the taxable year.
(7) Miscellaneous Items. — (f) x x x
(a) x x x The exemption granted to MWEs by R.A. 9504 reads:
xxx xxx xxx
 Provided, That minimum wage earners as defined in
Section 22(HH) of this Code shall be exempt from the
payment of income tax on their taxable income: Provided,
further, That the holiday pay, overtime pay, night shift differential
pay and hazard pay received by such minimum wage earners
shall likewise be exempt from income tax.
"Taxable income" is defined as follows:
SEC. 31. Taxable Income Defined. — The term
taxable income means the pertinent items of gross
income specified in this Code, less the deductions and/or
personal and additional exemptions, if any, authorized for such
types of income by this Code or other special laws.
A careful reading of these provisions will show at least two distinct groups
of items of compensation. On one hand are those that are further exempted from
tax by R.A. 9504; on the other hand are items of compensation that R.A.
9504 does not amend and are thus unchanged and in no need to be disturbed.
First are the different items of compensation subject to tax prior to R.A.
9504. These are included in the pertinent items of gross income in Section 31.
"Gross income" in Section 32 includes, among many other items, "compensation
for services in whatever form paid, including, but not limited to salaries, wages,
commissions, and similar items." R.A. 9504 particularly exempts the minimum
wage and its incidents; it does not provide exemption for the many other forms of
compensation. cDHAES
Second are the other items of income that, prior to R.A. 9504, were
excluded from gross income and were therefore not subject to tax. Among these
are other payments that employees may receive from employers pursuant to their
employer-employee relationship, such as bonuses and other benefits. These are
either mandated by law (such as the 13th month pay) or granted upon the
employer's prerogative or are pursuant to collective bargaining agreements (as
productivity incentives). These items were not changed by R.A. 9504.
It becomes evident that the exemption on benefits granted by law in 1994
are now extended to wages of the least paid workers under R.A. 9504. Benefits
not beyond P30,000 were exempted; wages not beyond the SMW are now
exempted as well. Conversely, benefits in excess of P30,000 are subject to tax
and now, wages in excess of the SMW are still subject to tax.
What the legislature is exempting is the MWE's minimum wage and other
forms of statutory compensation like holiday pay, overtime pay, night shift
differential pay, and hazard pay. These are not bonuses or other benefits; these
are wages. Respondents seek to frustrate this exemption granted by the
legislature.
In respondents' view, anyone receiving 13th month pay and other benefits
in excess of P30,000 cannot be an MWE. They seek to impose their own definition
of "MWE" by arguing thus:
It should be noted that the intent of the income tax
exemption of MWEs is to free the low-income earner from the
burden of tax. R.A. No. 9504 and R.R. No. 10-2008 define who
are the low-income earners. Someone who earns beyond the
incomes and benefits above-enumerated is definitely not a low-
income earner. 72
We do not agree.
As stated before, nothing to this effect can be read from R.A. 9504. The
amendment is silent on whether compensation-related benefits exceeding the
P30,000 threshold would make an MWE lose exemption. R.A. 9504 has given
definite criteria for what constitutes an MWE, and R.R. 10-2008 cannot change
this.
An administrative agency may not enlarge, alter or restrict a provision of
law. It cannot add to the requirements provided by law. To do so constitutes
lawmaking, which is generally reserved for Congress. 73 In CIR v. Fortune
Tobacco, 74 we applied the plain meaning rule when the Commissioner of Internal
Revenue ventured into unauthorized administrative lawmaking:
[A]n administrative agency issuing regulations may not
enlarge, alter or restrict the provisions of the law it administers,
and it cannot engraft additional requirements not contemplated
by the legislature. The Court emphasized that tax
administrators are not allowed to expand or contract the
legislative mandate and that the "plain meaning rule"
or verba legis in statutory construction should be applied
such that where the words of a statute are clear, plain and
free from ambiguity, it must be given its literal meaning and
applied without attempted interpretation.
As we have previously declared, rule-making power
must be confined to details for regulating the mode or
proceedings in order to carry into effect the law as it has been
enacted, and it cannot be extended to amend or expand the
statutory requirements or to embrace matters not covered
by the statute. Administrative regulations must always be in
harmony with the provisions of the law because any resulting
discrepancy between the two will always be resolved in favor of
the basic law. 75 (Emphases supplied)
We are not persuaded that RR 10-2008 merely clarifies the law. The
CIR's clarification is not warranted when the language of the law is plain and
clear. 76
The deliberations of the Senate reflect its understanding of the outworking
of this MWE exemption in relation to the treatment of benefits, both those for the
P30,000 threshold and the de minimis benefits:
Senator Defensor Santiago. Thank you. Next
question: How about employees who are only receiving a
minimum wage as base pay, but are earning significant amounts
of income from sales, commissions which may be even higher
than their base pay? Is their entire income from commissions
also tax-free? Because strictly speaking, they are minimum
wage earners. For purposes of ascertaining entitlement to tax
exemption, is the basis only the base pay or should it be the
 aggregate compensation that is being received, that is, inclusive
of commissions, for example?
Senator Escudero. Mr. President, what is included
would be only the base pay and, if any, the hazard pay, holiday
pay, overtime pay and night shift differential received by a
minimum wage earner. As far as commissions are
concerned, only to the extent of P30,000 would be
exempted. Anything in excess of P30,000 would already be
taxable if it is being received by way of commissions. Add
to that de minimisbenefits being received by an employee, such
as rice subsidy or clothing allowance or transportation allowance
would also be exempted; but they are exempted already under
the existing law.
Senator Defensor Santiago. I would like to thank the
sponsor. That makes it clear. 77 (Emphases supplied)
Given the foregoing, the treatment of bonuses and other benefits that an
employee receives from the employer in excess of the P30,000 ceiling cannot but
be the same as the prevailing treatment prior to R.A. 9504 — anything in excess
of P30,000 is taxable; no more, no less.
The treatment of this excess cannot operate to disenfranchise the MWE
from enjoying the exemption explicitly granted by R.A. 9504.
The government's argument that the
RR avoids a tax distortion has no
merit.
The government further contends that the "clarification" avoids a situation
akin to wage distortion and discourages tax evasion. They claim that MWE must
be treated equally as other individual compensation income earners "when their
compensation does not warrant exemption under R.A. No. 9504. Otherwise, there
would be gross inequity between and among individual income taxpayers." 78 For
illustrative purposes, respondents present three scenarios:
37.1. In the first scenario, a minimum wage earner in
the National Capital Region receiving P382.00 per day has an
annual salary of P119,566.00, while a non-minimum wage
earner with a basic pay of P385.00 per day has an annual salary
of P120,505.00. The difference in their annual salaries amounts
to only P939.00, but the non-minimum wage earner is liable for
a tax of P8,601.00, while the minimum wage earner is tax-
exempt?
37.2. In the second scenario, the minimum wage
earner's "other benefits" exceed the threshold of P30,000.00 by
P20,000.00. The non-minimum wage earner is liable for
P8,601.00, while the minimum wage earner is still tax-exempt.
37.3. In the third scenario, both workers earn "other
benefits" at P50,000.00 more than the P30,000 threshold. The
non-minimum wage earner is liable for the tax of P18,601.00,
while the minimum wage earner is still tax-
exempt. 79 (Underscoring in the original)
Again, respondents are venturing into policy-making, a function that
properly belongs to Congress. In British American Tobacco v. Camacho, we
explained: 80
We do not sit in judgment as a supra-legislature to
decide, after a law is passed by Congress, which state interest
is superior over another, or which method is better suited to
achieve one, some or all of the state's interests, or what these
interests should be in the first place. This policy-determining
power, by constitutional fiat, belongs to Congress as it is its
function to determine and balance these interests or choose
which ones to pursue. Time and again we have ruled that the
judiciary does not settle policy issues. The Court can only
declare what the law is and not what the law should be. Under
our system of government, policy issues are within the domain
of the political branches of government and of the people
themselves as the repository of all state power. Thus, the
legislative classification under the classification freeze
provision, after having been shown to be rationally related to
achieve certain legitimate state interests and done in good faith,
must, perforce, end our inquiry.
Concededly, the finding that the assailed law seems to
derogate, to a limited extent, one of its avowed objectives (i.e.,
promoting fair competition among the players in the industry)
would suggest that, by Congress's own standards, the current
excise tax system on sin products is imperfect. But, certainly, we
cannot declare a statute unconstitutional merely because it can
be improved or that it does not tend to achieve all of its stated
objectives. This is especially true for tax legislation which
simultaneously addresses and impacts multiple state interests.
Absent a clear showing of breach of constitutional limitations,
Congress, owing to its vast experience and expertise in the field
of taxation, must be given sufficient leeway to formulate and
experiment with different tax systems to address the complex
issues and problems related to tax administration. Whatever
imperfections that may occur, the same should be
addressed to the democratic process to refine and evolve a
taxation system which ideally will achieve most, if not all, of
the state's objectives.
In fine, petitioner may have valid reasons to
disagree with the policy decision of Congress and the
method by which the latter sought to achieve the same. But
its remedy is with Congress and not this Court. (Emphases
supplied and citations deleted)
Respondents cannot interfere with the wisdom of R.A. 9504. They must
respect and implement it as enacted.
 Besides, the supposed undesirable "income distortion" has been
addressed in the Senate deliberations. The following exchange between Senators
Santiago and Escudero reveals the view that the distortion impacts only a few —
taxpayers who are single and have no dependents:
Senator Santiago . . . . It seems to me awkward that a
person is earning just P1 above the minimum wage is already
taxable to the full extent simply because he is earning P1 more
each day, or o more than P30 a month, or P350 per annum.
Thus, a single individual earning P362 daily in Metro Manila
pays no tax but the same individual if he earns P363 a day will
be subject to tax, under the proposed amended provisions, in
the amount of P4,875 — I no longer took into account the
deductions of SSS, et cetera — although that worker is just P360
higher than the minimum wage.
xxx xxx xxx
I repeat, I am raising respectfully the point that a person
who is earning just P1 above the minimum wage is already
taxable to the full extent just for a mere P1. May I please have
the Sponsor's comment. ASEcHI
Senator Escudero...I fully subscribe and accept the
analysis and computation of the distinguished Senator, Mr.
President, because this was the very concern of this
representation when we were discussing the bill. It will create
wage distortions up to the extent wherein a person is paying or
rather receiving a salary which is only higher by P6,000
approximately from that of a minimum wage earner. So
anywhere between P1 to approximately P6,000 higher, there will
be a wage distortion, although distortions disappears as the
salary goes up.
However, Mr. President, as computed by the
distinguished Senator, the distortion is only made apparent if
the taxpayer is single or is not married and has no
dependents. Because at two dependents, the distortion
would already disappear; at three dependents, it would not
make a difference anymore because the exemption would
already cover approximately the wage distortion that would
be created as far as individual or single taxpayers are
concerned. 81 (Emphases in the original)
Indeed, there is a distortion, one that RR 10-2008 actually engenders.
While respondents insist that MWEs who are earning purely compensation income
will lose their MWE exemption the moment they receive benefits in excess of
P30,000, RR 10-2008 does not withdraw the MWE exemption from those who are
earning other income outside of their employer-employee relationship. Consider
the following provisions of RR 10-2008:
Section 2.78.1(B):
(B) Exemptions from Withholding Tax on
Compensation. — The following income payments are
exempted from the requirements of withholding tax on
compensation:
xxx xxx xxx
(13) Compensation income of MWEs who work in
the private sector and being paid the Statutory Minimum
Wage (SMW), as fixed by Regional Tripartite Wage and
Productivity Board (RTWPB)/National Wages and Productivity
Commission (NWPC), applicable to the place where he/she is
assigned.
xxx xxx xxx
Holiday pay, overtime pay, night shift differential pay
and hazard pay earned by the aforementioned MWE shall
likewise be covered by the above exemption. Provided,
however, that an employee who receives/earns additional
compensation such as commissions, honoraria, fringe benefits,
benefits in excess of the allowable statutory amount of
P30,000.00, taxable allowances and other taxable income other
than the SMW, holiday pay, overtime pay, hazard pay and night
shift differential pay shall not enjoy the privilege of being a MWE
and, therefore, his/her entire earnings are not exempt from
income tax, and consequently, from withholding tax.
MWEs receiving other income, such as income from
the conduct of trade, business, or practice of
profession, except income subject to final tax, in addition to
compensation income are not exempted from income tax on
their entire income earned during the taxable year. This rule,
notwithstanding, the SMW, Holiday pay, overtime pay, night
shift differential pay and hazard pay shall still be exempt
from withholding tax.
xxx xxx xxx
(14) Compensation income of employees in the
public sector with compensation income of not more than the
SMW in the non-agricultural sector, as fixed by RTWPB/NWPC,
applicable to the place where he/she is assigned.
xxx xxx xxx
Holiday pay, overtime pay, night shift differential pay
and hazard pay earned by the aforementioned MWE in the
public sector shall likewise be covered by the above exemption.
Provided, however, that a public sector employee who receives
additional compensation such as commissions, honoraria, fringe
benefits, benefits in excess of the allowable statutory amount of
P30,000.00, taxable allowances and other taxable income other
than the SMW, holiday pay, overtime pay, night shift differential
pay and hazard pay shall not enjoy the privilege of being a MWE
and, therefore, his/her entire earnings are not exempt from
income tax and, consequently, from withholding tax.
 MWEs receiving other income, such as income In this case, there is a clear legislative intent to exempt the minimum wage
from the conduct of trade, business, or practice of received by an MWE who earns additional income on top of the minimum wage.
profession, except income subject to final tax, in addition to As previously discussed, this intent can be seen from both the law and the
compensation income are not exempted from income tax on deliberations.
their entire income earned during the taxable year. This rule,
notwithstanding, the SMW, Holiday pay, overtime pay, night Accordingly, we see no reason why we should not liberally interpret R.A.
shift differential pay and hazard pay shall still be exempt 9504 in favor of the taxpayers.
from withholding tax. R.A. 9504 is a grant of tax relief long overdue.
These provisions of RR 10-2008 reveal a bias against those who are We do not lose sight of the fact that R.A. 9504 is a tax relief that is long
purely compensation earners. In their consolidated comment, respondents reason: overdue.
Verily, the interpretation as to who is a minimum Table 1 below shows the tax burden of an MWE over the years. We use
wage earner as petitioners advance will open the as example one who is a married individual without dependents and is working in
opportunity for tax evasion by the mere expedient of pegging the National Capital Region (NCR). For illustration purposes, R.A. 9504 is applied
the salary or wage of a worker at the minimum and reflecting a as if the worker being paid the statutory minimum wage is not tax exempt:
worker's other incomes as some other benefits. This situation
will not only encourage tax evasion, it will likewise Table 1 — Tax Burden of MWE over the years
discourage able employers from paying salaries or wages Taxable Tax
higher than the statutory minimum. This should never be Law Effective NCR Minimum Daily Wage 85
Income 86
Tax Due (Annual)
Burd
countenanced. 82
Again, respondents are delving into policy-making they presume bad RAfaith 7167 88 WO 3 (1993 Dec) P135.00 P24,255 P1,343.05 3.2%
RA 7496 89 1992
on the part of the employers, and then shift the burden of this presumption and lay WO 5 (1997 May) P185.00 P39,905 P3,064.55 5.3%
it on the backs of the lowest paid workers. This presumption of bad faith does not
even reflect pragmatic reality. It must be remembered that a worker's holiday, RA 8424 90 WO 6 (1998 Feb) P198.00 P29,974 P2,497.40 4.0%
overtime and night differential pays are all based on the worker's regular(1997 wage.NIRC)
Thus, there will always be pressure from the workers to increase, not decrease, 1998 WO 13 (2007 Aug) P362.00 P81,306 P10,761.20 9.5%
their basic pay.
WO 14 (2008 June) P382.00 P87,566 P12,013.20 10.0
What is not acceptable is the blatant inequity between the treatment
that RR 10-2008 gives to those who earn purely compensation income and RA that
9504 91 WO 14 (2008 Aug) P382.00 P69,566 P8,434.90 7.1%
given to those who have other sources of income. Respondents want to tax the 2008
MWEs who serve their employer well and thus receive higher bonuses or WO 20 (2016 June) P491.00 P103,683 P15,236.60 9.9%
performance incentives; but exempts the MWEs who serve, in addition to their
employer, their other business or professional interests. As shown on Table 1, we note that in 1992, the tax burden upon an MWE
We cannot sustain respondents' position. was just about 3.2%, when Congress passed R.A. 7167, which increased the
personal exemptions for a married individual without dependents from P12,000 to
In sum, the proper interpretation of R.A. 9504 is that it imposes taxes only P18,000; and R.A. 7496, which revised the table of graduated tax rates (tax table).
on the taxable income received in excess of the minimum wage, but the MWEs will
not lose their exemption as such. Workers who receive the statutory minimum Over the years, as the minimum wage increased, the tax burden of the
wage their basic pay remain MWEs. The receipt of any other income during the MWE likewise increased. In 1997, the MWE's tax burden was about 5.3%. When
year does not disqualify them as MWEs. They remain MWEs, entitled to exemption R.A. 8424 became effective in 1998, some relief in the MWE's tax burden was
as such, but the taxable income they receive other than as MWEs may be seen as it was reduced to 4.0%. This was mostly due to the increase in personal
subjected to appropriate taxes. exemptions, which were increased from P18,000 to P32,000 for a married
individual without dependents. It may be noted that while the tax table was revised,
R.A. 9504 must be liberally construed. a closer scrutiny of Table 3 below would show that the rates actually increased for
those who were earning less.
We are mindful of the strict construction rule when it comes to the
interpretation of tax exemption laws. 83 The canon, however, is tempered by As the minimum wage continued to increase, the MWE's tax burden
several exceptions, one of which is when the taxpayer falls within the purview of likewise did — by August 2007, it was 9.5%. This means that in 2007, of the P362
the exemption by clear legislative intent. In this situation, the rule of liberal minimum wage, the MWE's take-home pay was only P327.62, after a tax of
interpretation applies in favor of the grantee and against the government. 84 P34.38.
 This scenario does not augur well for the wage earners. Over the years,
even with the occasional increase in the basic personal and additional exemptions,
the contribution the government exacts from its MWEs continues to increase as a
portion of their income. This is a serious social issue, which R.A. 9504 partly
addresses. With the P20 increase in minimum wage from P362 to P382 in 2008,
the tax due thereon would be about P30. As seen in their deliberations, the
lawmakers wanted all of this amount to become additional take-home pay for the
MWEs in 2008. 92 ITAaHc
The foregoing demonstrates the effect of inflation. When tax tables do not
get adjusted, inflation has a profound impact in terms of tax burden. "Bracket
creep," "the process by which inflation pushes individuals into higher tax
brackets," 93 occurs, and its deleterious results may be explained as follows:
[A]n individual whose dollar income increases from one
year to the next might be obliged to pay tax at a higher marginal
rate (say 25% instead of 15%) on the increase, this being a
natural consequence of rate progression. If, however, due to
inflation the benefit of the increase is wiped out by a
corresponding increase in the cost of living, the effect would be
a heavier tax burden with no real improvement in the
taxpayer's economic position. Wage and salary-earners are
especially vulnerable. Even if a worker gets a raise in wages
this year, the raise will be illusory if the prices of consumer
goods rise in the same proportion. If her marginal tax rate
also increased, the result would actually be a decrease in
the taxpayer's real disposable income. 94
Table 2 shows how MWEs get pushed to higher tax brackets with higher
tax rates due only to the periodic increases in the minimum wage. This unfortunate
development illustrates how "bracket creep" comes about and how inflation alone
increases their tax burden:
Table 2
Highest
Applicable Tax
Tax
Effective NCR Minimum Daily Wage 95 Rate
(Annual)
(Bracket
Creep)
The overall effect is the diminution, if not elimination, of the progressivity
of the rate structure under the present Tax Code. We emphasize that the
graduated tax rate schedule for individual taxpayers, which takes into account the
ability to pay, is intended to breathe life into the constitutional requirement of
equity. 101
R.A. 9504 provides relief by declaring that an MWE, one who is paid the
statutory minimum wage (SMW), is exempt from tax on that income, as well as on
the associated statutory payments for hazardous, holiday, overtime and night
work.
R.R. 10-2008, however, unjustly removes this tax relief. While R.A.
9504 grants MWEs zero tax rights from the beginning or for the whole year
2008, RR 10-2008 declares that certain workers — even if they are being paid the
SMW, "shall not enjoy the privilege."
Following RR10-2008's "disqualification" injunction, the MWE will
continue to be pushed towards the higher tax brackets and higher rates. As Table
2 shows, as of June 2016, an MWE would already belong to the 4th highest tax
bracket of 20% (see also Table 3), resulting in a tax burden of 9.9%. This means
that for every P100 the MWE earns, the government takes back P9.90.
Further, a comparative view of the tax tables over the years (Table 3)
shows that while the highest tax rate was reduced from as high as 70% under
the 1977 NIRC, to 35% in 1992, and 32% presently, the lower income group
actually gets charged higher taxes. Before R.A. 8424, one who had taxable income
of less than P2,500 did not have to pay any income tax, under R.A. 8424, he paid
5% thereof. The MWEs now pay 20% or even more, depending on the other
benefits they receive including overtime, holiday, night shift, and hazard pays.
Table 3 — Tax Tables: Comparison of Tax Brackets and Rates
Rates Rates under Rates
Taxable Income Bracket under R.A. R.A. 8424 under R.A.
7496(1992) (1998) 9504 (2008)
Not Over P2,500 0%
Due Tax
Over96
P2,500 but not over P5,000 1% 5% 5%
Burden
Over P5,000 but not over P10,000 3%

7167 97 1992 WO 3 (1993 Dec) P135.00 11% P1,343.05 Over P10,000 but not over P20,000
3.2% 7%
98 10% 10%
WO 5 (1997 May) P185.00 11% P3,064.55 Over P20,000 but not over P30,000
5.3%
11%
8424 99 1998 WO 6 (1998 Feb) P198.00 10% P2,497.40 Over P30,000 but not over P40,000
4.0%
RC)
WO 13 (2007 Aug) P362.00 20% P10,761.20 Over P40,000 but not over P60,000
9.5% 15% 15% 15%

WO 14 (2008 June) P382.00 20% P12,013.20 Over P60,000 but not over P70,000
10.0%
19%
100 2008 WO 14 (2008 Aug) P382.00 15% P8,434.90 Over P70,000 but not over P100,000
7.1%
20% 20%
WO 20 (2016 June) P491.00 20% P15,236.60 Over P100,000 but not over P140,000 24%
9.9%
Over P140,000 but not over P250,000 25% 25% xxx xxx xxx

Over P250,000 but not over P500,000 29% 30% 30% (4) De minimis benefits as defined in the rules and
regulations to be promulgated by the Secretary of Finance, upon
Over P500,000 35% 34% 32% recommendation of the Commissioner.
WHEREFORE, the Court resolves to:
The relief afforded by R.A. 9504 is thus long overdue. The law must be
now given full effect for the entire taxable year 2008, and without the qualification (a) GRANT the Petitions for Certiorari, Prohibition, and Mandamus; and
introduced by RR 10-2008. The latter cannot disqualify MWEs from exemption (b) DECLARE NULL and VOID the following provisions of Revenue
from taxes on SMW and on their on his SMW, holiday, overtime, night shift Regulations No. 10-2008:
differential, and hazard pay.
(i) Sections 1 and 3, insofar as they disqualify MWEs who earn purely
CONCLUSION compensation income from the privilege of the MWE exemption
The foregoing considered, we find that respondents committed grave in case they receive bonuses and other compensation-related
abuse of discretion in promulgating Sections 1 and 3 of RR 10-2008, insofar as benefits exceeding the statutory ceiling of P30,000;
they provide for (a) the prorated application of the personal and additional (ii) Section 3 insofar as it provides for the prorated application of the
exemptions for taxable year 2008 and for the period of applicability of the MWE personal and additional exemptions under R.A. 9504 for taxable
exemption for taxable year 2008 to begin only on 6 July 2008; and (b) the year 2008, and for the period of applicability of the MWE
disqualification of MWEs who earn purely compensation income, whether in the exemption to begin only on 6 July 2008.
private or public sector, from the privilege of availing themselves of the MWE
exemption in case they receive compensation-related benefits exceeding the (c) DIRECT respondents Secretary of Finance and Commissioner of
statutory ceiling of P30,000. Internal Revenue to grant a refund, or allow the application of the refund by way of
withholding tax adjustments, or allow a claim for tax credits by (i) all individual
As an aside, we stress that the progressivity of the rate structure under taxpayers whose incomes for taxable year 2008 were the subject of the prorated
the present Tax Code has lost its strength. In the main, it has not been updated increase in personal and additional tax exemption; and (ii) all MWEs whose
since its revision in 1997, or for a period of almost 20 years. The phenomenon of minimum wage incomes were subjected to tax for their receipt of the 13th month
"bracket creep" could be prevented through the inclusion of an indexation pay and other bonuses and benefits exceeding the threshold amount under
provision, in which the graduated tax rates are adjusted periodically without need Section 32 (B) (7) (e) of the 1997 Tax Code. CHTAIc
of amending the tax law. The 1997 Tax Code, however, has no such indexation
provision. It should be emphasized that indexation to inflation is now a standard SO ORDERED.
feature of a modern tax code. 102 ||| (Soriano v. Secretary of Finance, G.R. Nos. 184450, 184508, 184538 & 185234,
We note, however, that R.A. 8424 imposes upon respondent Secretary [January 24, 2017])
of Finance and Commissioner of Internal Revenue the positive duty to periodically
review the other benefits, in consideration of the effect of inflation thereon, as
provided under Section 32 (B) (7) (e) entitled "13th Month Pay and Other Benefits":
(iv) Other benefits such as productivity incentives and
Christmas bonus: Provided, further, That the ceiling of Thirty
thousand pesos (P30,000) may be increased through rules and
regulations issued by the Secretary of Finance, upon
recommendation of the Commissioner, after considering among
others, the effect on the same of the inflation rate at the end of
the taxable year.
This same positive duty, which is also imposed upon the same officials
regarding the de minimis benefits provided under Section 33 (C) (4), is a duty that
has been exercised several times. The provision reads:
(C) Fringe Benefits Not Taxable. — The following
fringe benefits are not taxable under this Section:
(1) x x x