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1. CIR v ALGUE

DIGEST1

CIR vs. Algue Inc.
Commissioner of Internal Revenue vs. Algue Inc.
GR No. L-28896 | Feb. 17, 1988

Facts:

Algue Inc. is a domestic corp engaged in engineering, construction and other
allied activities
On Jan. 14, 1965, the corp received a letter from the CIR regarding its
delinquency income taxes from 1958-1959, amtg to P83,183.85
A letter of protest or reconsideration was filed by Algue Inc on Jan 18
On March 12, a warrant of distraint and levy was presented to Algue Inc. thru its
counsel, Atty. Guevara, who refused to receive it on the ground of the pending
protest
Since the protest was not found on the records, a file copy from the corp was
produced and given to BIR Agent Reyes, who deferred service of the warrant
On April 7, Atty. Guevara was informed that the BIR was not taking any action on
the protest and it was only then that he accepted the warrant of distraint and levy
earlier sought to be served
On April 23, Algue filed a petition for review of the decision of the CIR with the
Court of Tax Appeals
CIR contentions:
- the claimed deduction of P75,000.00 was properly disallowed because it was
not an ordinary reasonable or necessary business expense
- payments are fictitious because most of the payees are members of the same
family in control of Algue and that there is not enough substantiation of such
payments
CTA: 75K had been legitimately paid by Algue Inc. for actual services rendered
in the form of promotional fees. These were collected by the Payees for their work
in the creation of the Vegetable Oil Investment Corporation of the Philippines and
its subsequent purchase of the properties of the Philippine Sugar Estate
Development Company.

Issue:
W/N the Collector of Internal Revenue correctly disallowed the P75,000.00
deduction claimed by Algue as legitimate business expenses in its income tax
returns

Ruling:

Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance, made in accordance with law.
RA 1125: the appeal may be made within thirty days after receipt of the decision
or ruling challenged
During the intervening period, the warrant was premature and could therefore
not be served.
Originally, CIR claimed that the 75K promotional fees to be personal holding
company income, but later on conformed to the decision of CTA
There is no dispute that the payees duly reported their respective shares of the
fees in their income tax returns and paid the corresponding taxes thereon. CTA
also found, after examining the evidence, that no distribution of dividends was
involved
CIR suggests a tax dodge, an attempt to evade a legitimate assessment by
involving an imaginary deduction
Algue Inc. was a family corporation where strict business procedures were not
applied and immediate issuance of receipts was not required. at the end of the
year, when the books were to be closed, each payee made an accounting of all
of the fees received by him or her, to make up the total of P75,000.00. This
arrangement was understandable in view of the close relationship among the
persons in the family corporation
The amount of the promotional fees was not excessive. The total commission
paid by the Philippine Sugar Estate Development Co. to Algue Inc. was P125K.
After deducting the said fees, Algue still had a balance of P50,000.00 as clear
profit from the transaction. The amount of P75,000.00 was 60% of the total
commission. This was a reasonable proportion, considering that it was the payees
who did practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar Estate
properties.
Sec. 30 of the Tax Code: allowed deductions in the net income Expenses - All
the ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including a reasonable allowance for salaries or
other compensation for personal services actually rendered xxx
the burden is on the taxpayer to prove the validity of the claimed deduction
In this case, Algue Inc. has proved that the payment of the fees was necessary
and reasonable in the light of the efforts exerted by the payees in inducing
investors and prominent businessmen to venture in an experimental enterprise and
involve themselves in a new business requiring millions of pesos.
2

Taxes are what we pay for civilization society. Without taxes, the government
would be paralyzed for lack of the motive power to activate and operate it.
Hence, despite the natural reluctance to surrender part of one's hard earned
income to the taxing authorities, every person who is able to must contribute his
share in the running of the government. The government for its part, is expected to
respond in the form of tangible and intangible benefits intended to improve the
lives of the people and enhance their moral and material values
Taxation must be exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and the courts will
then come to his succor

Algue Inc.s appeal from the decision of the CIR was filed on time with the CTA in
accordance with Rep. Act No. 1125. And we also find that the claimed deduction
by Algue Inc. was permitted under the Internal Revenue Code and should
therefore not have been disallowed by the CIR

DIGEST2

COMMISSIONER v. ALGUE, INC.
GR No. L-28896, February 17, 1988
158 SCRA 9

FACTS:
Private respondent corporation Algue Inc. filed its income tax returns for 1958 and
1959showing deductions, for promotional fees paid, from their gross income, thus
lowering their taxable income. The BIR assessed Algue based on such deductions
contending that the claimed deduction is disallowed because it was not an
ordinary, reasonable and necessary expense.

ISSUE:
Should an uncommon business expense be disallowed as a proper deduction in
computation of income taxes, corollary to the doctrine that taxes are the
lifeblood of the government?

HELD:
No. Private respondent has proved that the payment of the fees was necessary
and reasonable in the light of the efforts exerted by the payees in inducing
investors and prominent businessmen to venture in an xperimental enterprise and
involve themselves in a new business requiring millions of pesos. This was no mean
feat and should be, as it was, sufficiently recompensed.
It is well-settled that taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance On the other hand, such collection
should be made in accordance with law as any arbitrariness will negate the very
reason for government itself. It is therefore necessary to reconcile the apparently
conflicting interests of the authorities and the taxpayers so that the real purpose of
taxation, which is the promotion of the common good, may be achieved.
But even as we concede the inevitability and indispensability of taxation, it is a
requirement in all democratic regimes that it be exercised reasonably and in
accordance with the prescribed procedure. If it is not, then the taxpayer has a
right to complain and the courts will then come to his succor. For all the awesome
power of the tax collector, he may still be stopped in his tracks if the taxpayer can
demonstrate, as it has here, that the law has not been observed.

DIGEST3

G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

FACTS:
The Philippine Sugar Estate Development Company had earlier appointed Algue
as its agent, authorizing it to sell its land, factories and oil manufacturing process.
Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel
Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the
Vegetable Oil Investment Corporation, inducing other persons to invest in it.
Ultimately, after its incorporation largely through the promotion of the said
persons, this new corporation purchased the PSEDC properties. For this sale, Algue
received as agent a commission of P126, 000.00, and it was from this commission
that the P75, 000.00 promotional fees were paid to the a forenamed individuals.

The petitioner contends that the claimed deduction of P75, 000.00 was properly
disallowed because it was not an ordinary reasonable or necessary business
expense. The Court of Tax Appeals had seen it differently. Agreeing with Algue, it
held that the said amount had been legitimately paid by the private respondent
for actual services rendered. The payment was in the form of promotional fees.

ISSUE:

Whether or not the Collector of Internal Revenue correctly disallowed the P75,
000.00 deduction claimed by private respondent Algue as legitimate business
expenses in its income tax returns.
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RULING:

The Supreme Court agrees with the respondent court that the amount of the
promotional fees was not excessive. The amount of P75,000.00 was 60% of the
total commission. This was a reasonable proportion, considering that it was the
payees who did practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar Estate
properties.

It is said that taxes are what we pay for civilization society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and
operate it. Hence, despite the natural reluctance to surrender part of one's hard
earned income to the taxing authorities, every person who is able to must
contribute his share in the running of the government.

DIGEST4

Commissioner vs. AlgueGRL-28890, 17 February 1988First Division, Cruz (J); 4 concur

Facts:

The Philippine Sugar Estate Development Company (PSEDC) appointed Algue
Inc. as its agent,authorizing it to sell its land, factories, and oil manufacturing
process. The Vegetable Oil InvestmentCorporation (VOICP) purchased PSEDC
properties. For the sale, Algue received a commission of P125,000 and it was from
this commission that it paid Guevara, et. al. organizers of the VOICP, P75,000in
promotional fees. In 1965, Algue received an assessment from the Commissioner
of Internal Revenuein the amount of P83,183.85 as delinquency income tax for
years 1958 amd 1959. Algue filed a protestor request for reconsideration which
was not acted upon by the Bureau of Internal Revenue (BIR). Thecounsel for Algue
had to accept the warrant of distrant and levy. Algue, however, filed a petition
forreview with the Coourt of Tax Appeals.

Issue:

Whether the assessment was reasonable.




Held:

Taxes are the lifeblood of the government and so should be collected without
unnecessaryhindrance. Every person who is able to pay must contribute his share
in the running of the government.The Government, for his part, is expected to
respond in the form of tangible and intangible benefitsintended to improve the
lives of the people and enhance their moral and material values. This
symbioticrelationship is the rationale of taxation and should dispel the erroneous
notion that is an arbitrarymethod of exaction by those in the seat of power. Tax
collection, however, should be made inaccordance with law as any arbitrariness
will negate the very reason for government itself. For all theawesome power of the
tax collector, he may still be stopped in his tracks if the taxpayer candemonstrate
that the law has not been observed. Herein, the claimed deduction (pursuant to
Section 30[a] [1] of the Tax Code and Section 70 [1] of Revenue Regulation 2: as
to compensation for personalservices) had been legitimately by Algue Inc. It has
further proven that the payment of fees wasreasonable and necessary in light of
the efforts exerted by the payees in inducing investors (in VOICP) toinvolve
themselves in an experimental enterprise or a business requiring millions of pesos.
Theassessment was not reasonable.
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2.
PEPSICOLA V. MUN. OF TANAUAN

DIGEST 1

69 SCRA 460 Taxation Delegation to Local Governments Double Taxation

Pepsi Cola has a bottling plant in the Municipality of Tanauan, Leyte. In
September 1962, the Municipality approved Ordinance No. 23 which levies and
collects from soft drinks producers and manufacturers a tai of one-sixteenth
(1/16) of a centavo for every bottle of soft drink corked.
In December 1962, the Municipality also approved Ordinance No. 27 which levies
and collects on soft drinks produced or manufactured within the territorial
jurisdiction of this municipality a tax of one centavo P0.01) on each gallon of
volume capacity.
Pepsi Cola assailed the validity of the ordinances as it alleged that they constitute
double taxation in two instances: a) double taxation because Ordinance No. 27
covers the same subject matter and impose practically the same tax rate as with
Ordinance No. 23, b) double taxation because the two ordinances impose
percentage or specific taxes.
Pepsi Cola also questions the constitutionality of Republic Act 2264 which allows
for the delegation of taxing powers to local government units; that allowing local
governments to tax companies like Pepsi Cola is confiscatory and oppressive.
The Municipality assailed the arguments presented by Pepsi Cola. It argued,
among others, that only Ordinance No. 27 is being enforced and that the latter
law is an amendment of Ordinance No. 23, hence there is no double taxation.

ISSUE: Whether or not there is undue delegation of taxing powers. Whether or not
there is double taxation.

HELD: No. There is no undue delegation. The Constitution even allows such
delegation. Legislative powers may be delegated to local governments in respect
of matters of local concern. By necessary implication, the legislative power to
create political corporations for purposes of local self-government carries with it
the power to confer on such local governmental agencies the power to tax.
Under the New Constitution, local governments are granted the autonomous
authority to create their own sources of revenue and to levy taxes. Section 5,
Article XI provides: Each local government unit shall have the power to create its
sources of revenue and to levy taxes, subject to such limitations as may be
provided by law. Withal, it cannot be said that Section 2 of Republic Act No. 2264
emanated from beyond the sphere of the legislative power to enact and vest in
local governments the power of local taxation.
There is no double taxation. The argument of the Municipality is well taken. Further,
Pepsi Colas assertion that the delegation of taxing power in itself constitutes
double taxation cannot be merited. It must be observed that the delegating
authority specifies the limitations and enumerates the taxes over which local
taxation may not be exercised. The reason is that the State has exclusively
reserved the same for its own prerogative. Moreover, double taxation, in general,
is not forbidden by our fundamental law unlike in other jurisdictions. Double
taxation becomes obnoxious only where the taxpayer is taxed twice for the
benefit of the same governmental entity or by the same jurisdiction for the same
purpose, but not in a case where one tax is imposed by the State and the other
by the city or municipality.

DIGEST2

PEPSI-COLA BOTTLING CO. OF THE PHILS., INC. vs. MUNICIPALITY OF TANAUAN
69 SCRA 460
GR No. L-31156, February 27, 1976

"Legislative power to create political corporations for purposes of local self-
government carries with it the power to confer on such local governmental
agencies the power to tax.

FACTS: Plaintiff-appellant Pepsi-Cola commenced a complaint with preliminary
injunction to declare Section 2 of Republic Act No. 2264, otherwise known as the
Local Autonomy Act, unconstitutional as an undue delegation of taxing authority
as well as to declare Ordinances Nos. 23 and 27 denominated as "municipal
production tax" of the Municipality of Tanauan, Leyte, null and void. Ordinance 23
levies and collects from soft drinks producers and manufacturers a tax of one-
sixteenth (1/16) of a centavo for every bottle of soft drink corked, and Ordinance
27 levies and collects on soft drinks produced or manufactured within the territorial
jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on each gallon (128
fluid ounces, U.S.) of volume capacity. Aside from the undue delegation of
authority, appellant contends that it allows double taxation, and that the subject
ordinances are void for they impose percentage or specific tax.

ISSUE: Are the contentions of the appellant tenable?

HELD: No. On the issue of undue delegation of taxing power, it is settled that the
power of taxation is an essential and inherent attribute of sovereignty, belonging
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as a matter of right to every independent government, without being expressly
conferred by the people. It is a power that is purely legislative and which the
central legislative body cannot delegate either to the executive or judicial
department of the government without infringing upon the theory of separation of
powers. The exception, however, lies in the case of municipal corporations, to
which, said theory does not apply. Legislative powers may be delegated to local
governments in respect of matters of local concern. By necessary implication, the
legislative power to create political corporations for purposes of local self-
government carries with it the power to confer on such local governmental
agencies the power to tax.
Also, there is no validity to the assertion that the delegated authority can be
declared unconstitutional on the theory of double taxation. It must be observed
that the delegating authority specifies the limitations and enumerates the taxes
over which local taxation may not be exercised. The reason is that the State has
exclusively reserved the same for its own prerogative. Moreover, double taxation,
in general, is not forbidden by our fundamental law, so that double taxation
becomes obnoxious only where the taxpayer is taxed twice for the benefit of the
same governmental entity or by the same jurisdiction for the same purpose, but
not in a case where one tax is imposed by the State and the other by the city or
municipality.
On the last issue raised, the ordinances do not partake of the nature of a
percentage tax on sales, or other taxes in any form based thereon. The tax is
levied on the produce (whether sold or not) and not on the sales. The volume
capacity of the taxpayer's production of soft drinks is considered solely for
purposes of determining the tax rate on the products, but there is not set ratio
between the volume of sales and the amount of the tax.

DIGEST3

The legislative power to create political corporations for purposes of locals el f -
gov er nmen t cou r t s wi t h i t t he power t o conf er on s u ch
l ocal government agencies the power to tax.

Pepsi commenced a compl ai nt wi th prel i mi nary i nj uncti onbefore the
CFI of Leyte for that court to declare Section 2 ofR.A. 2264 (Local Autonomy Act)
unconstitutional as an unduedel egati on of taxi ng authori ty as wel l as
decl are Muni ci pal Ordi nance Nos. 23 & 27 seri es of 1962 of
Muni ci pal i ty of Tanauan, Leyte null and void. Municipal Ordinance 23 leviesand
collects from softdrinks producers and manufacturers atai of 1/16
th
of a centavo
for every bottle of softdrink corked.On t he ot he r hand, Muni ci pal
Or di nance 2 7 l ev i es and col l ects on softdri nks produced or
manufactured wi thi n theterritorial jurisdiction of the municipality a tax of 1
centavoon each gallon of volume capacity. Both are denominated asmunicipal
production tax.Issues: a) WoN section 2 of R.A. 2264 is an undue delegationof
power b) WoN Ordi nances 23 & 27 consti tute doubl etaxati on and
i mpose percentage or speci fi c t ax c) WoNOrdinances 23 and 27 are
unjust and unfairHel d: a) No, i t i s t r ue t hat power of t ax at i on i s
pu r el y l egi sl ati ve and whi ch the central l egi sl ati ve body
cannotdel egate ei ther to the executi ve or j udi ci al department of t he
gov er nmen t wi t hou t i nf r i ngi ng upon t he t heor y of separati on
of powers but the excepti on l i es i n the case ofmuni ci pal corporati ons
to whi ch the sai d theory does not appl y . L egi s l at i ve conce r ns
may be del egat ed t o l ocal governments i n respect of matters of
l ocal concerns. Byne ces s ar y i mpl i cat i on, t he l egi s l at i v e power
t o cr eat e political corporations for purposes of local self-governmentcourts with
it the power to confer on such local governmentagenci es the power to tax.
The consti tuti on grants l ocal government the autonomous authori ty to
create thei r ownsources of revenue and to levy taxes.b) No, the difference
between the two ordinances clearly liesin the tax rate of the soft drinks produced:
in Ordinance No.2 3 , i t was 1 / 1 6 of a cen t av o f or ev e r y bot t l e
cor k ed; i n Ordi nance No. 27, i t i s one centavo (P0.01) on each
gal l on(128 fluid ounces, U.S.) of volume capacity. The intention of
the Municipal Council of Tanauan in enacting Ordinance No.27 is thus clear: it
was intended as a plain substitute for thepr i or Or di nance No. 2 3 , and
ope r at es as a r epeal of t he latter, even without words to that effect.
Plaintiff-appellanti n i ts bri ef admi tted that defendants -appel l ees are
onl ys eek i ng t o enf or ce Or di nance No. 2 7 , s er i es of
1 9 6 2 . Undoubt e dl y , t he t ax i ng au t hor i t y con f er r ed on
l ocal governments under Section 2, Republic Act No. 2264, is broadenough as
to extend to al most " everythi ng, accepti ng thosewhi ch ar e
men t i oned t her ei n. "

T he l i mi t at i on appl i es , parti cul arl y to the prohi bi ti on agai nst
muni ci pal i ti es andmuni ci pal di stri cts to i mpose " any percentage tax
or other taxes in any form based thereon nor impose taxes on articlessubject to
specific tax except gasoline, under the provisionsof the National Internal Revenue
Code." For purposes of thisparticular limitation, a municipal ordinance which
prescribesa set ratio between the amount of the tax and the volume ofsale of the
taxpayer imposes a sales tax and is null and voidf o r b e i n g o u t s i d e t h e
p o w e r o f t h e mu n i c i p a l i t y t o enact. But, the i mposi ti on of " a
tax of one centavo (P0.01) o n e a c h g a l l o n o f v o l u me
c a p a c i t y " o n a l l s o f t d r i n k s produced or manufactured under
6

Ordinance No. 27 does notpartake of the nature of a percentage tax on sales, or
othertaxes i n any form based thereon. The tax i s l evi ed on
theproduce (whether sol d or not) and not on the sal es. Thevolume
capacity of the taxpayer's production of soft drinks isconsidered solely for
purposes of determining the tax rate onthe products, but there is not set ratio
between the volumeof sales and the amount of the tax.

Nor can the tax levied be treated as a specific tax. Specific taxes are those
imposed on specified articles, such as distilled spirits, wines, fermented liquors,
products of tobacco other than cigars and cigarettes, matches fi recrackers,
manufactured oi l s and other fuel s, coal, bunker fuel oil, diesel fuel oil,
cinematographic films, pl ayi ng cards, sacchari ne, opi um and other
habi t-formi ng drugs. Soft drink is not one of those specified. c) The tax of one
(P0.01) on each gal l on (128 fl ui d ounces, U. S . ) of v ol ume
capaci t y on al l s of t dr i nk s , pr odu ced or ma n u f a c t u r e d , o r
a n e q u i v a l e n t o f 1 - c e n t a v o s p e r case, cannot be
considered unjust and unfair. An increasei n the tax al one woul d not support
the cl ai m that the tax i s oppressive, unjust and confiscatory. Municipal
corporations are al l owed much di screti on i n determi ni ng the rates of
imposable taxes. This is in line with the constitutional policy o f a c c o r d i n g
t h e w i d e s t p o s s i b l e a u t o n o m y t o l o c a l governments i n
matters of l ocal taxati on, an aspect that i s gi ven expressi on i n the
Local Tax Code (PD No. 231, Jul y 1, 1973). Unless the amount is so excessive
as to be prohibitive, c o u r t s w i l l g o s l o w i n w r i t i n g o f f
a n o r d i n a n c e a s unreasonable. Reluctance should not deter
compliance with an ordinance such as Ordinance No. 27 if the purpose of the
l aw t o f u r t he r s t r engt hen l ocal au t onomy wer e t o be realized.

DIGEST4

PEPSI-COLA BOTTLING CO. OF THE PHILS., INC. vs. MUNICIPALITY OF TANAUAN
69 SCRA 460
GR No. L-31156, February 27, 1976

"Legislative power to create political corporations for purposes of local self-
government carries with it the power to confer on such local governmental
agencies the power to tax.

FACTS: Plaintiff-appellant Pepsi-Cola commenced a complaint with preliminary
injunction to declare Section 2 of Republic Act No. 2264, otherwise known as the
Local Autonomy Act, unconstitutional as an undue delegation of taxing authority
as well as to declare Ordinances Nos. 23 and 27 denominated as "municipal
production tax" of the Municipality of Tanauan, Leyte, null and void. Ordinance 23
levies and collects from soft drinks producers and manufacturers a tax of one-
sixteenth (1/16) of a centavo for every bottle of soft drink corked, and Ordinance
27 levies and collects on soft drinks produced or manufactured within the territorial
jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on each gallon (128
fluid ounces, U.S.) of volume capacity. Aside from the undue delegation of
authority, appellant contends that it allows double taxation, and that the subject
ordinances are void for they impose percentage or specific tax.

ISSUE: Are the contentions of the appellant tenable?

HELD: No. On the issue of undue delegation of taxing power, it is settled that the
power of taxation is an essential and inherent attribute of sovereignty, belonging
as a matter of right to every independent government, without being expressly
conferred by the people. It is a power that is purely legislative and which the
central legislative body cannot delegate either to the executive or judicial
department of the government without infringing upon the theory of separation of
powers. The exception, however, lies in the case of municipal corporations, to
which, said theory does not apply. Legislative powers may be delegated to local
governments in respect of matters of local concern. By necessary implication, the
legislative power to create political corporations for purposes of local self-
government carries with it the power to confer on such local governmental
agencies the power to tax.
Also, there is no validity to the assertion that the delegated authority can be
declared unconstitutional on the theory of double taxation. It must be observed
that the delegating authority specifies the limitations and enumerates the taxes
over which local taxation may not be exercised. The reason is that the State has
exclusively reserved the same for its own prerogative. Moreover, double taxation,
in general, is not forbidden by our fundamental law, so that double taxation
becomes obnoxious only where the taxpayer is taxed twice for the benefit of the
same governmental entity or by the same jurisdiction for the same purpose, but
not in a case where one tax is imposed by the State and the other by the city or
municipality.
On the last issue raised, the ordinances do not partake of the nature of a
percentage tax on sales, or other taxes in any form based thereon. The tax is
levied on the produce (whether sold or not) and not on the sales. The volume
capacity of the taxpayer's production of soft drinks is considered solely for
purposes of determining the tax rate on the products, but there is not set ratio
between the volume of sales and the amount of the tax.
7

3.
CIR v Estate of Toda

DIGEST1

CIR v. Estate of Benigno Toda

(Tax evasion)

Facts:
CIC authorized Benigno P. Toda, Jr., President andowner of 99.991% of its issued
and outstanding capital stock,to sell the Cibeles Building and the two parcels of
land onwhich the building stands for an amount of not less than P90million.30
August 1989, Toda purportedly sold the property for P100million to Altonaga, who,
in turn, sold the same property on thesame day to Royal Match Inc. (RMI) for P200
million. Thesetwo transactions were evidenced by Deeds of Absolute
Salenotarized on the same day by the same notary public.For the sale of the
property to RMI, Altonaga paid capital gainstax in the amount of P10 million.On 16
April 1990, CIC filed its corporate annual income taxreturn for the year 1989,
declaring, among other things, its gainfrom the sale of real property in the amount
of P75,728.021.After crediting withholding taxes of P254,497.00, it paidP26,341,207
for its net taxable income of P75,987,725.On 12 July 1990, Toda sold his entire
shares of stocks in CICto Le Hun T. Choa for P12.5 million, as evidenced by a
Deedof Sale of Shares of Stocks.

Issue:
WON this is a case of tax evasion or tax avoidance.

Held/Ratio:
Tax avoidance and tax evasion are the two mostcommon ways used by
taxpayers in escaping from taxation.

Tax avoidance is the tax saving device within the meanssanctioned by law. It
should be used by the taxpayer in goodfaith and at arms length

. Tax evasion is a scheme usedoutside of those lawful means and when availed of,
it usuallysubjects the taxpayer to further or additional civil or criminalliabilities.
Tax evasion connotes the integration of three factors :



(1)
the end to be achieved, i.e., the payment of less than thatknown by the taxpayer
to be legally due, or the non-payment of tax when it is shown that a tax is due;

(2)
an accompanying state of mind which is described as being"evil," in "bad faith,"
"willfull," or "deliberate and not accidental";

(3)
a course of action or failure of action which is unlawful.
All these factors are present in the instant case.
That Altonaga was a mere conduit finds support in theadmission of respondent
.Estate that the sale to him was partof the tax planning scheme of CIC.The
scheme resorted to by CIC in making it appear that there were two sales of the
subject properties, i.e., fromCIC to Altonaga, and then from Altonaga to RMI
cannot beconsidered a legitimate tax planning. It is tainted with fraud.Here, it is
obvious that the objective of the sale toAltonaga was to reduce the amount of
tax to be paid. Thetransfer from him to RMI would result to 5% individual
capitalgains tax, instead of 35% corporate income tax. Altonagassole purpose of
acquiring and transferring title of the propertieson the same day was to create a
tax shelter. Altonaga never controlled the property and did not enjoy the normal
benefitsand burdens of ownership. The sale to him was merely a taxploy, a sham,
and without business purpose and economicsubstance. Doubtless, the execution
of the two sales wascalculated to mislead the BIR with the end in view of
reducingthe consequent income tax liability.In a nutshell, the intermediary
transaction, i.e., thesale of Altonaga, which was prompted more on the
mitigationof tax liabilities than for legitimate business purposesconstitutes tax
evasion.

DIGEST2

G.R. No. 147188. September 14, 2004

Facts:
Cebiles Insurance Corporation authorized Benigno P. Toda, Jr., President and
owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles
Building and the two parcels of land on which the building stands for an amount
of not less than P90 million.

Toda purportedly sold the property for P100 million to Rafael A. Altonaga.
However, Altonaga in turn, sold the same property on the same day to Royal
8

Match Inc. for P200 million. These two transactions were evidenced by Deeds of
Absolute Sale notarized on the same day by the same notary public.

For the sale of the property to Royal Dutch, Altonaga paid capital gains tax [6%]
in the amount of P10 million.
Issue:
Whether or not the scheme employed by Cibelis Insurance Company
constitutes tax evasion.

Ruling:
Yes! The scheme, explained the Court, resorted to by CIC in making it appear
that there were two sales of the subject properties, i.e., from CIC to Altonaga, and
then from Altonaga to RMI cannot be considered a legitimate tax planning. Such
scheme is tainted with fraud.

Fraud in its general sense, is deemed to comprise anything calculated to
deceive, including all acts, omissions, and concealment involving a breach of
legal or equitable duty, trust or confidence justly reposed, resulting in the damage
to another, or by which an undue and unconscionable advantage is taken of
another.

It is obvious that the objective of the sale to Altonaga was to reduce the
amount of tax to be paid especially that the transfer from him to RMI would then
subject the income to only 5% individual capital gains tax, and not the 35%
corporate income tax. Altonagas sole purpose of acquiring and transferring title
of the subject properties on the same day was to create a tax shelter. Altonaga
never controlled the property and did not enjoy the normal benefits and burdens
of ownership. The sale to him was merely a tax ploy, a sham, and without business
purpose and economic substance. Doubtless, the execution of the two sales was
calculated to mislead the BIR with the end in view of reducing the consequent
income tax liability.

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was
prompted more on the mitigation of tax liabilities than for legitimate business
purposes constitutes one of tax evasion.

Generally, a sale or exchange of assets will have an income tax incidence only
when it is consummated. The incidence of taxation depends upon the substance
of a transaction. The tax consequences arising from gains from a sale of property
are not finally to be determined solely by the means employed to transfer legal
title. Rather, the transaction must be viewed as a whole, and each step from the
commencement of negotiations to the consummation of the sale is relevant. A
sale by one person cannot be transformed for tax purposes into a sale by another
by using the latter as a conduit through which to pass title. To permit the true
nature of the transaction to be disguised by mere formalisms, which exist solely to
alter tax liabilities, would seriously impair the effective administration of the tax
policies of Congress.

To allow a taxpayer to deny tax liability on the ground that the sale was made
through another and distinct entity when it is proved that the latter was merely a
conduit is to sanction a circumvention of our tax laws. Hence, the sale to
Altonaga should be disregarded for income tax purposes. The two sale
transactions should be treated as a single direct sale by CIC to RMI.


9

4.
TOLENTINO v Sec of Finance

DIGEST1

Political Law Origination of Revenue Bills EVAT Amendment by Substitution

Tolentino et al is questioning the constitutionality of RA 7716 otherwise known as
the Expanded Value Added Tax (EVAT) Law. Tolentino averred that this revenue
bill did not exclusively originate from the House of Representatives as required by
Section 24, Article 6 of the Constitution. Even though RA 7716 originated as HB
11197 and that it passed the 3 readings in the HoR, the same did not complete the
3 readings in Senate for after the 1
st
reading it was referred to the Senate Ways &
Means Committee thereafter Senate passed its own version known as Senate Bill
1630. Tolentino averred that what Senate could have done is amend HB 11197 by
striking out its text and substituting it w/ the text of SB 1630 in that way the bill
remains a House Bill and the Senate version just becomes the text (only the text) of
the HB. Tolentino and co-petitioner Roco [however] even signed the said Senate
Bill.

ISSUE: Whether or not EVAT originated in the HoR.

HELD: By a 9-6 vote, the SC rejected the challenge, holding that such
consolidation was consistent with the power of the Senate to propose or concur
with amendments to the version originated in the HoR. What the Constitution
simply means, according to the 9 justices, is that the initiative must come from the
HoR. Note also that there were several instances before where Senate passed its
own version rather than having the HoR version as far as revenue and other such
bills are concerned. This practice of amendment by substitution has always been
accepted. The proposition of Tolentino concerns a mere matter of form. There is
no showing that it would make a significant difference if Senate were to adopt his
over what has been done.

DIGEST2

Tolentino vs. Secretary of Finance G.R. No. 115455, August 25, 1994
Facts: The value-added tax (VAT) is levied on the sale, barter or exchange of
goods and properties as well as on the sale or exchange of services. RA 7716
seeks to widen the tax base of the existing VAT system and enhance its
administration by amending the National Internal Revenue Code. There are
various suits challenging the constitutionality of RA 7716 on various grounds.

One contention is that RA 7716 did not originate exclusively in the House of
Representatives as required by Art. VI, Sec. 24 of the Constitution, because it is in
fact the result of the consolidation of 2 distinct bills, H. No. 11197 and S. No. 1630.
There is also a contention that S. No. 1630 did not pass 3 readings as required by
the Constitution.

Issue: Whether or not RA 7716 violates Art. VI, Secs. 24 and 26(2) of the Constitution

Held: The argument that RA 7716 did not originate exclusively in the House of
Representatives as required by Art. VI, Sec. 24 of the Constitution will not bear
analysis. To begin with, it is not the law but the revenue bill which is required by the
Constitution to originate exclusively in the House of Representatives. To insist that a
revenue statute and not only the bill which initiated the legislative process
culminating in the enactment of the law must substantially be the same as the
House bill would be to deny the Senates power not only to concur with
amendments but also to propose amendments. Indeed, what the Constitution
simply means is that the initiative for filing revenue, tariff or tax bills, bills authorizing
an increase of the public debt, private bills and bills of local application must
come from the House of Representatives on the theory that, elected as they are
from the districts, the members of the House can be expected to be more
sensitive to the local needs and problems. Nor does the Constitution prohibit the
filing in the Senate of a substitute bill in anticipation of its receipt of the bill from the
House, so long as action by the Senate as a body is withheld pending receipt of
the House bill.

The next argument of the petitioners was that S. No. 1630 did not pass 3 readings
on separate days as required by the Constitution because the second and third
readings were done on the same day. But this was because the President had
certified S. No. 1630 as urgent. The presidential certification dispensed with the
requirement not only of printing but also that of reading the bill on separate days.
That upon the certification of a bill by the President the requirement of 3 readings
on separate days and of printing and distribution can be dispensed with is
supported by the weight of legislative practice.

DIGEST3

Tolentino vs. Secretary of Finance,
(235 SCRA 630, 249 SCRA 628)

August 25, 1994; October 30, 1995
10

Facts:
There are various suits challenging the constitutionality of RA 7716 on
variousgrounds.The value-added tax (VAT) is levied on the sale, barter or
exchange of goodsand properties as well as on the sale or exchange of services.
It is equivalent to 10% of the gross selling price or gross value in money of goods or
properties sold, bartered or exchanged or of the gross receipts from the sale or
exchange of services. Republic ActNo. 7716 seeks to widen the tax base of the
existing VAT system and enhance itsadministration by amending the National
Internal Revenue Code. Among the Petitioners was the Philippine Press Institute
which claim that R.A.7716 violates their press freedom and religious liberty, having
removed them from theexemption to pay Value Added Tax. It is contended by
the PPI that by removing theexemption of the press from the VAT while
maintaining those granted to others, the lawdiscriminates against the press. At any
rate, it is averred, "even nondiscriminatorytaxation of constitutionally guaranteed
freedom is unconstitutional." PPI argued that theVAT is in the nature of a license
tax.

Issue:
Whether or not the purpose of the VAT is the same as that of a license tax.

Ruling:
A license tax, which, unlike an ordinary tax, is mainly for regulation. Its
impositionon the press is unconstitutional because it lays a prior restraint on the
exercise of itsright. Hence, although its application to others, such those selling
goods, is valid, itsapplication to t
he press or to religious groups, such as the Jehovahs Witnesses, inconnection with the latters sale of
religious books and pamphlets, is unconstitutional. As the U.S. Supreme Court put it, it is one
thing to impose a tax on income or property of a preacher. It is quite another thing to
exact a tax on him for delivering a sermon.
The VAT is, however, different.
It is not a license tax.
It is not a tax on theexercise of a privilege, much less a constitutional right. It is
imposed on the sale, barter,lease or exchange of goods or properties or the sale
or exchange of services and thelease of properties purely for revenue purposes.
To subject the press to its payment isnot to burden the exercise of its right any
more than to make the press pay income taxor subject it to general regulation is
not to violate its freedom under the Constitution.




DIGEST4

Tolentino vs. Secretary of Finance
Facts: These are motions seeking reconsideration of our decision dismissing the
petitions filed inthese cases for the declaration of unconstitutionality of R.A. No.
7716, otherwise known as theExpanded Value-Added Tax Law. Now it is
contended by the PPI that by removing the exemption of the press from the VAT
while maintaining those granted to others, the law discriminates against the press.
At any rate, it is averred, "even nondiscriminatory taxation of constitutionally
guaranteedfreedom is unconstitutional."Issue: Does sales tax on bible sales
violative of religious freedom?Held: No. The Court was speaking in that case of a
license tax, which, unlike an ordinary tax, is mainly for regulation. Its imposition on
the press is unconstitutional because it lays a prior restraint on the exercise of its
right. Hence, although its application to others, such those selling goods, is valid, its
application to the press or to religious groups, such as the Jehovah's Witnesses, in
connection with the latter's sale of religious books and pamphlets, is
unconstitutional. As the U.S. Supreme Court put it, "it is one thing to impose a tax
on income or property of a preacher. It is quiteanother thing to exact a tax on him
for delivering a sermon."The VAT is, however, different. It is not a license tax. It is not
a tax on the exercise of a privilege,much less a constitutional right. It is imposed on
the sale, barter, lease or exchange of goods or properties or the sale or exchange
of services and the lease of properties purely for revenuepurposes. To subject the
press to its payment is not to burden the exercise of its right any more than to
make the press pay income tax or subject it to general regulation is not to violate
its freedomunder the Constitution

DIGEST5
FACTS
RA 7716, otherwise known as the Expanded Value-Added Tax Law, is an act that
seeks to widen the tax base of the existing VAT system and enhance its
administration by amending the National Internal Revenue Code. There are
various suits questioning and challenging the constitutionality of RA 7716 on
various grounds.
Tolentino contends that RA 7716 did not originate exclusively from the House of
Representatives but is a mere consolidation of HB. No. 11197 and SB. No. 1630 and
it did not pass three readings on separate days on the Senate thus violating Article
VI, Sections 24 and 26(2) of the Constitution, respectively.
11

Art. VI, Section 24: All appropriation, revenue or tariff bills, bills authorizing increase
of the public debt, bills of local application, and private bills shall originate
exclusively in the House of Representatives, but the Senate may propose or
concur with amendments.
Art. VI, Section 26(2): No bill passed by either House shall become a law unless it
has passed three readings on separate days, and printed copies thereof in its final
form have been distributed to its Members three days before its passage, except
when the President certifies to the necessity of its immediate enactment to meet a
public calamity or emergency. Upon the last reading of a bill, no amendment
thereto shall be allowed, and the vote thereon shall be taken immediately
thereafter, and the yeas and nays entered in the Journal.
ISSUE
Whether or not RA 7716 violated Art. VI, Section 24 and Art. VI, Section 26(2) of the
Constitution.
HELD
No. The phrase originate exclusively refers to the revenue bill and not to the
revenue law. It is sufficient that the House of Representatives initiated the passage
of the bill which may undergo extensive changes in the Senate.
SB. No. 1630, having been certified as urgent by the President need not meet the
requirement not only of printing but also of reading the bill on separate days.

12

5
Abakada Guro Party List, et al vs Exec. Sec. Ermita
DIGEST1
Facts: On May 24, 2005, the President signed into law Republic Act 9337 or the VAT
Reform Act. Before the law took effect on July 1, 2005, the Court issued a TRO
enjoining government from implementing the law in response to a slew of petitions
for certiorari and prohibition questioning the constitutionality of the new law.

The challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and
6: That the President, upon the recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate of value-added tax to 12%, after any
of the following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP)
of the previous year exceeds two and four-fifth percent (2 4/5%);

or (ii) National government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1%)

Petitioners allege that the grant of stand-by authority to the President to increase
the VAT rate is an abdication by Congress of its exclusive power to tax because
such delegation is not covered by Section 28 (2), Article VI Consti. They argue that
VAT is a tax levied on the sale or exchange of goods and services which cant be
included within the purview of tariffs under the exemption delegation since this
refers to customs duties, tolls or tribute payable upon merchandise to the
government and usually imposed on imported/exported goods. They also said
that the President has powers to cause, influence or create the conditions
provided by law to bring about the conditions precedent. Moreover, they allege
that no guiding standards are made by law as to how the Secretary of Finance
will make the recommendation.

Issue: Whether or not the RA 9337's stand-by authority to the Executive to increase
the VAT rate, especially on account of the recommendatory power granted to
the Secretary of Finance, constitutes undue delegation of legislative power? NO

Held: The powers which Congress is prohibited from delegating are those which
are strictly, or inherently and exclusively, legislative. Purely legislative power which
can never be delegated is the authority to make a complete law- complete as to
the time when it shall take effect and as to whom it shall be applicable, and to
determine the expediency of its enactment. It is the nature of the power and not
the liability of its use or the manner of its exercise which determines the validity of
its delegation.

The exceptions are:

(a) delegation of tariff powers to President under Constitution

(b) delegation of emergency powers to President under Constitution

(c) delegation to the people at large

(d) delegation to local governments

(e) delegation to administrative bodies

For the delegation to be valid, it must be complete and it must fix a standard. A
sufficient standard is one which defines legislative policy, marks its limits, maps out
its boundaries and specifies the public agency to apply it.

In this case, it is not a delegation of legislative power BUT a delegation of
ascertainment of facts upon which enforcement and administration of the
increased rate under the law is contingent. The legislature has made the
operation of the 12% rate effective January 1, 2006, contingent upon a specified
fact or condition. It leaves the entire operation or non-operation of the 12% rate
upon factual matters outside of the control of the executive. No discretion would
be exercised by the President. Highlighting the absence of discretion is the fact
that the word SHALL is used in the common proviso. The use of the word SHALL
connotes a mandatory order. Its use in a statute denotes an imperative obligation
and is inconsistent with the idea of discretion.

Thus, it is the ministerial duty of the President to immediately impose the 12% rate
upon the existence of any of the conditions specified by Congress. This is a duty,
which cannot be evaded by the President. It is a clear directive to impose the 12%
VAT rate when the specified conditions are present.

Congress just granted the Secretary of Finance the authority to ascertain the
existence of a fact--- whether by December 31, 2005, the VAT collection as a
percentage of GDP of the previous year exceeds 2 4/5 % or the national
13

government deficit as a percentage of GDP of the previous year exceeds one
and 1%. If either of these two instances has occurred, the Secretary of Finance,
by legislative mandate, must submit such information to the President.

In making his recommendation to the President on the existence of either of the
two conditions, the Secretary of Finance is not acting as the alter ego of the
President or even her subordinate. He is acting as the agent of the legislative
department, to determine and declare the event upon which its expressed will is
to take effect. The Secretary of Finance becomes the means or tool by which
legislative policy is determined and implemented, considering that he possesses
all the facilities to gather data and information and has a much broader
perspective to properly evaluate them. His function is to gather and collate
statistical data and other pertinent information and verify if any of the two
conditions laid out by Congress is present.

Congress does not abdicate its functions or unduly delegate power when it
describes what job must be done, who must do it, and what is the scope of his
authority; in our complex economy that is frequently the only way in which the
legislative process can go forward.

There is no undue delegation of legislative power but only of the discretion as to
the execution of a law. This is constitutionally permissible. Congress did not
delegate the power to tax but the mere implementation of the law.
DIGEST2
ABAKADA Guro Party List vs. Ermita

G.R. No. 168056 September 1, 2005

FACTS:
Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed
a petition for prohibition on May 27, 2005 questioning the constitutionality of
Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a
10% VAT on sale of goods and properties, Section 5 imposes a 10% VAT on
importation of goods, and Section 6 imposes a 10% VAT on sale of services and
use or lease of properties. These questioned provisions contain a uniformp ro v is o
authorizing the President, upon recommendation of the Secretary of Finance, to
raise the VAT rate to 12%, effective January 1, 2006, after specified conditions
have been satisfied. Petitioners argue that the law is unconstitutional.

ISSUES:

1. Whether or not there is a violation of Article VI, Section 24 of the Constitution.

2. Whether or not there is undue delegation of legislative power in violation of
Article VI Sec 28(2) of the Constitution.

3. Whether or not there is a violation of the due process and equal protection
under Article III Sec. 1 of the Constitution.

RULING:

1. Since there is no question that the revenue bill exclusively originated in the
House of Representatives, the Senate was acting within its constitutional power to
introduce amendments to the House bill when it included provisions in Senate Bill
No. 1950 amending corporate income taxes, percentage, and excise and
franchise taxes.

2. There is no undue delegation of legislative power but only of the discretion as to
the execution of a law. This is constitutionally permissible. Congress does not
abdicate its functions or unduly delegate power when it describes what job must
be done, who must do it, and what is the scope of his authority; in our complex
economy that is frequently the only way in which the legislative process can go
forward.

3. The power of the State to make reasonable and natural classifications for the
purposes of taxation has long been established. Whether it relates to the subject
of taxation, the kind of property, the rates to be levied, or the amounts to be
raised, the methods of assessment, valuation and collection, the States power is
entitled to presumption of validity. As a rule, the judiciary will not interfere with
such power absent a clear showing of unreasonableness, discrimination, or
arbitrariness.
DIGEST3
Facts:

Motions for Reconsideration filed by petitioners, ABAKADA Guro party List Officer
and et al., insist that the bicameral conference committee should not even have
acted on the no pass-on provisions since there is no disagreement between House
14

Bill Nos. 3705 and 3555 on the one hand, and Senate Bill No. 1950 on the other,
with regard to the no pass-on provision for the sale of service for power generation
because both the Senate and the House were in agreement that the VAT burden
for the sale of such service shall not be passed on to the end-consumer. As to the
no pass-on provision for sale of petroleum products, petitioners argue that the fact
that the presence of such a no pass-on provision in the House version and the
absence thereof in the Senate Bill means there is no conflict because a House
provision cannot be in conflict with something that does not exist.

Escudero, et. al., also contend that Republic Act No. 9337 grossly violates the
constitutional imperative on exclusive origination of revenue bills under Section 24
of Article VI of the Constitution when the Senate introduced amendments not
connected with VAT.

Petitioners Escudero, et al., also reiterate that R.A. No. 9337s stand- by authority to
the Executive to increase the VAT rate, especially on account of the
recommendatory power granted to the Secretary of Finance, constitutes undue
delegation of legislative power. They submit that the recommendatory power
given to the Secretary of Finance in regard to the occurrence of either of two
events using the Gross Domestic Product (GDP) as a benchmark necessarily and
inherently required extended analysis and evaluation, as well as policy making.

Petitioners also reiterate their argument that the input tax is a property or a
property right. Petitioners also contend that even if the right to credit the input VAT
is merely a statutory privilege, it has already evolved into a vested right that the
State cannot remove.

Issue:

Whether or not the R.A. No. 9337 or the Vat Reform Act is constitutional?

Held:

The Court is not persuaded. Article VI, Section 24 of the Constitution provides that
All appropriation, revenue or tariff bills, bills authorizing increase of the public debt,
bills of local application, and private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with amendments.

The Court reiterates that in making his recommendation to the President on the
existence of either of the two conditions, the Secretary of Finance is not acting as
the alter ego of the President or even her subordinate. He is acting as the agent of
the legislative department, to determine and declare the event upon which its
expressed will is to take effect. The Secretary of Finance becomes the means or
tool by which legislative policy is determined and implemented, considering that
he possesses all the facilities to gather data and information and has a much
broader perspective to properly evaluate them. His function is to gather and
collate statistical data and other pertinent information and verify if any of the two
conditions laid out by Congress is present.

In the same breath, the Court reiterates its finding that it is not a property or a
property right, and a VAT-registered persons entitlement to the creditable input
tax is a mere statutory privilege. As the Court stated in its Decision, the right to
credit the input tax is a mere creation of law. More importantly, the assailed
provisions of R.A. No. 9337 already involve legislative policy and wisdom. So long
as there is a public end for which R.A. No. 9337 was passed, the means through
which such end shall be accomplished is for the legislature to choose so long as it
is within constitutional bounds.

The Motions for Reconsideration are hereby DENIED WITH FINALITY. The temporary
restraining order issued by the Court is LIFTED.
DIGEST4
ABAKADA GURO PARTY LIST V. ERMITA

September 1, 2005
AUSTRIA-MARTINEZ, J

>>>THE VAT REFORM LAW (RA 9337) IS ENTIRELY CONSTITUTIONAL

NATURE OF VAT

The VAT is a tax on spending or consumption. It is levied on the sale, barter,
exchange or lease of goods or properties and services. Being an indirect tax on
expenditure, the seller of goods or services may pass on the amount of tax paid to
the buyer, with the seller acting merely as a tax collector. The burden of VAT is
intended to fall on the immediate buyers and ultimately, the end-consumers.

HISTORICAL PERSPECTIVE

In the Philippines, the value-added system of sales taxation has long been in
existence, albeit in a different mode. Prior to 1978, the system was a single-stage
15

tax computed under the "cost deduction method" and was payable only by the
original sellers. The single-stage system was subsequently modified, and a mixture
of the "cost deduction method" and "tax credit method" was used to determine
the value-added tax payable. Under the "tax credit method," an entity can credit
against or subtract from the VAT charged on its sales or outputs the VAT paid on its
purchases, inputs and imports.

It was only in 1987, when President Corazon C. Aquino issued Executive Order No.
273, that the VAT system was rationalized by imposing a multi-stage tax rate of 0%
or 10% on all sales using the "tax credit method."

E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law, R.A. No.
8241 or the Improved VAT Law, R.A. No. 8424 or the Tax Reform Act of 1997, and
finally, the presently beleaguered R.A. No. 9337, also referred to by respondents as
the VAT Reform Act.

ENROLLED BILL DOCTRINE

Under the "enrolled bill doctrine," the signing of a bill by the Speaker of the House
and the Senate President and the certification of the Secretaries of both Houses of
Congress that it was passed are conclusive of its due enactment.

COURTS GENERALLY DENIED THE POWER TO INQUIRE INTO CONGRESS FAILURE TO
COMPLY WITH ITS OWN RULES

The cases, both here and abroad, in varying forms of expression, all deny to the
courts the power to inquire into allegations that, in enacting a law, a House of
Congress failed to comply with its own rules, in the absence of showing that there
was a violation of a constitutional provision or the rights of private individuals. In
Osmea v. Pendatun, it was held: "At any rate, courts have declared that 'the
rules adopted by deliberative bodies are subject to revocation, modification or
waiver at the pleasure of the body adopting them.' And it has been said that
"Parliamentary rules are merely procedural, and with their observance, the courts
have no concern. They may be waived or disregarded by the legislative body."

The foregoing declaration is exactly in point with the present cases, where
petitioners allege irregularities committed by the conference committee in
introducing changes or deleting provisions in the House and Senate bills. One of
the most basic and inherent power of the legislature is the power to formulate
rules for its proceedings and the discipline of its members. Congress is the best
judge of how it should conduct its own business expeditiously and in the most
orderly manner. It is also the sole concern of Congress to instill discipline among
the members of its conference committee if it believes that said members violated
any of its rules of proceedings. Even the expanded jurisdiction of the Supreme
Court cannot apply to questions regarding only the internal operation of
Congress.

BICAMERAL CONFERENCE COMMITTEE (BCC)

All the changes or modifications made by the Bicameral Conference Committee
were germane to subjects of the provisions referred to it for reconciliation. Such
being the case, the Court does not see any grave abuse of discretion amounting
to lack or excess of jurisdiction committed by the Bicameral Conference
Committee. The Court recognized the long-standing legislative practice of giving
said conference committee ample latitude for compromising differences
between the Senate and the House. Thus, in the Tolentino case, it was held that:

. . . it is within the power of a conference committee to include in its report an
entirely new provision that is not found either in the House bill or in the Senate bill. If
the committee can propose an amendment consisting of one or two provisions,
there is no reason why it cannot propose several provisions, collectively
considered as an "amendment in the nature of a substitute," so long as such
amendment is germane to the subject of the bills before the committee. After all,
its report was not final but needed the approval of both houses of Congress to
become valid as an act of the legislative department. The charge that in this case
the Conference Committee acted as a third legislative chamber is thus without
any basis.

NO AMENDEMENT RULE NOT VIOLATED BY BCC

Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall become a law unless it has passed three
readings on separate days, and printed copies thereof in its final form have been
distributed to its Members three days before its passage, except when the
President certifies to the necessity of its immediate enactment to meet a public
calamity or emergency. Upon the last reading of a bill, no amendment thereto
shall be allowed, and the vote thereon shall be taken immediately thereafter, and
the yeas and nays entered in the Journal.

There is no reason for requiring that the Committee's Report in these cases must
have undergone three readings in each of the two houses. If that be the case,
there would be no end to negotiation since each house may seek modification of
16

the compromise bill. . . .

EXTENT OF NO AMENDMENT RULE

The No Amendment Rule must be construed as referring only to bills introduced
for the first time in either house of Congress, not to the conference committee
report.


BILLS WHICH MUST EXCLUSIVELY ORIGINATE IN THE HOUSE

All appropriation, revenue or tariff bills, bills authorizing increase of the public debt,
bills of local application, and private bills shall originate exclusively in the House of
Representatives but the Senate may propose or concur with amendments.

In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and
3705 that initiated the move for amending provisions of the NIRC dealing mainly
with the value-added tax. Upon transmittal of said House bills to the Senate, the
Senate came out with Senate Bill No. 1950 proposing amendments not only to
NIRC provisions on the value-added tax but also amendments to NIRC provisions
on other kinds of taxes. Is the introduction by the Senate of provisions not dealing
directly with the value-added tax, which is the only kind of tax being amended in
the House bills, still within the purview of the constitutional provision authorizing the
Senate to propose or concur with amendments to a revenue bill that originated
from the House?

YES. In the Tolentino case:
. . . To begin with, it is not the law but the revenue bill which is required by
the Constitution to "originate exclusively" in the House of Representatives. It is
important to emphasize this, because a bill originating in the House may undergo
such extensive changes in the Senate that the result may be a rewriting of the
whole. . . . At this point, what is important to note is that, as a result of the Senate
action, a distinct bill may be produced. To insist that a revenue statute and not
only the bill which initiated the legislative process culminating in the enactment of
the law must substantially be the same as the House bill would be to deny the
Senate's power not only to "concur with amendments" but also to "propose
amendments." It would be to violate the coequality of legislative power of the two
houses of Congress and in fact make the House superior to the Senate.

Indeed, what the Constitution simply means is that the initiative for filing revenue,
tariff or tax bills, bills authorizing an increase of the public debt, private bills and
bills of local application must come from the House of Representatives on the
theory that, elected as they are from the districts, the members of the House can
be expected to be more sensitive to the local needs and problems. On the other
hand, the senators, who are elected at large, are expected to approach the
same problems from the national perspective. Both views are thereby made to
bear on the enactment of such laws.

NON-DELEGATION OF LEGISLATIVE POWER

The principle of separation of powers ordains that each of the three great
branches of government has exclusive cognizance of and is supreme in matters
falling within its own constitutionally allocated sphere. A logical corollary to the
doctrine of separation of powers is the principle of non-delegation of powers, as
expressed in the Latin maxim: potestas delegata non delegari potest which
means "what has been delegated, cannot be delegated." This doctrine is based
on the ethical principle that such as delegated power constitutes not only a right
but a duty to be performed by the delegate through the instrumentality of his own
judgment and not through the intervening mind of another.

The powers which Congress is prohibited from delegating are those which are
strictly, or inherently and exclusively, legislative. Purely legislative power, which can
never be delegated, has been described as the authority to make a complete
law complete as to the time when it shall take effect and as to whom it shall be
applicable and to determine the expediency of its enactment. Thus, the rule is
that in order that a court may be justified in holding a statute unconstitutional as a
delegation of legislative power, it must appear that the power involved is purely
legislative in nature that is, one appertaining exclusively to the legislative
department. It is the nature of the power, and not the liability of its use or the
manner of its exercise, which determines the validity of its delegation.

EXCEPTIONS:

(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of
the Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2) of
Article VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.

In every case of permissible delegation, there must be a showing that the
17

delegation itself is valid. It is valid only if the law (a) is complete in itself, setting
forth therein the policy to be executed, carried out, or implemented by the
delegate; and (b) fixes a standard the limits of which are sufficiently
determinate and determinable to which the delegate must conform in the
performance of his functions. A sufficient standard is one which defines legislative
policy, marks its limits, maps out its boundaries and specifies the public agency to
apply it.

NO DELEGATION OF LEGISLATIVE POWER TO THE PRESIDENT IN THIS CASE

In the present case, the challenged section of R.A. No. 9337 is the common
proviso in Sections 4, 5 and 6 which reads as follows:

That the President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve percent
(12%), after any of the following conditions has been satisfied: xxx


The case is not a delegation of legislative power. It is simply a delegation of
ascertainment of facts upon which enforcement and administration of the
increase rate under the law is contingent. The legislature has made the operation
of the 12% rate effective January 1, 2006, contingent upon a specified fact or
condition. It leaves the entire operation or non-operation of the 12% rate upon
factual matters outside of the control of the executive. No discretion would be
exercised by the President. Highlighting the absence of discretion is the fact that
the word shall is used in the common proviso. The use of the word shall connotes a
mandatory order. Its use in a statute denotes an imperative obligation and is
inconsistent with the idea of discretion.

SECRETARY OF FINANCE AS AGENT OF LEGISLATURE; PRESIDENTS POWER OF
CONTROL NOT APPLICABLE

In the present case, in making his recommendation to the President on the
existence of either of the two conditions, the Secretary of Finance is not acting as
the alter ego of the President or even her subordinate. In such instance, he is not
subject to the power of control and direction of the President. He is acting as the
agent of the legislative department, to determine and declare the event upon
which its expressed will is to take effect. The Secretary of Finance becomes the
means or tool by which legislative policy is determined and implemented,
considering that he possesses all the facilities to gather data and information and
has a much broader perspective to properly evaluate them. His function is to
gather and collate statistical data and other pertinent information and verify if
any of the two conditions laid out by Congress is present. His personality in such
instance is in reality but a projection of that of Congress. Thus, being the agent of
Congress and not of the President, the President cannot alter or modify or nullify,
or set aside the findings of the Secretary of Finance and to substitute the judgment
of the former for that of the latter.

NO VIOLATION OF PRINCIPLE OF REPUBLICANISM

As to the argument of petitioners that delegating to the President the legislative
power to tax is contrary to the principle of republicanism, the same deserves scant
consideration. Congress did not delegate the power to tax but the mere
implementation of the law. The intent and will to increase the VAT rate to 12%
came from Congress and the task of the President is to simply execute the
legislative policy. That Congress chose to do so in such a manner is not within the
province of the Court to inquire into, its task being to interpret the law.

NEW TAX NOT OPPRESSIVE

The principle of fiscal adequacy as a characteristic of a sound tax system was
originally stated by Adam Smith in his Canons of Taxation (1776). It simply means
that sources of revenues must be adequate to meet government expenditures
and their variations. The dire need for revenue cannot be ignored. Our country is
in a quagmire of financial woe. During the Bicameral Conference Committee
hearing, then Finance Secretary Purisima bluntly depicted the country's gloomy
state of economic affairs.

. . . policy matters are not the concern of the Court. Government policy is within
the exclusive dominion of the political branches of the government. It is not for this
Court to look into the wisdom or propriety of legislative determination. Indeed,
whether an enactment is wise or unwise, whether it is based on sound economic
theory, whether it is the best means to achieve the desired results, whether, in
short, the legislative discretion within its prescribed limits should be exercised in a
particular manner are matters for the judgment of the legislature, and the serious
conflict of opinions does not suffice to bring them within the range of judicial
cognizance.

NO DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS

Petitioners argue that the input tax partakes the nature of a property that may not
be confiscated, appropriated, or limited without due process of law.
18


The input tax is not a property or a property right within the constitutional purview
of the due process clause. A VAT-registered person's entitlement to the creditable
input tax is a mere statutory privilege. The distinction between statutory privileges
and vested rights must be borne in mind for persons have no vested rights in
statutory privileges. The state may change or take away rights, which were
created by the law of the state, although it may not take away property, which
was vested by virtue of such rights.

EQUAL PROTECTION CLAUSE

The equal protection clause under the Constitution means that "no person or class
of persons shall be deprived of the same protection of laws which is enjoyed by
other persons or other classes in the same place and in like circumstances.

The power of the State to make reasonable and natural classifications for the
purposes of taxation has long been established. Whether it relates to the subject
of taxation, the kind of property, the rates to be levied, or the amounts to be
raised, the methods of assessment, valuation and collection, the State's power is
entitled to presumption of validity. As a rule, the judiciary will not interfere with
such power absent a clear showing of unreasonableness, discrimination, or
arbitrariness.

The equal protection clause does not require the universal application of the laws
on all persons or things without distinction. This might in fact sometimes result in
unequal protection. What the clause requires is equality among equals as
determined according to a valid classification. By classification is meant the
grouping of persons or things similar to each other in certain particulars and
different from all others in these same particulars.

UNIFORMITY AND EQUITABILITY OF TAXATION

The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation. Uniformity in taxation means that all taxable
articles or kinds of property of the same class shall be taxed at the same rate.
Different articles may be taxed at different amounts provided that the rate is
uniform on the same class everywhere with all people at all times.

In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or
12%) on all goods and services. Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108, respectively, of the NIRC, provide for a rate of 10% (or
12%) on sale of goods and properties, importation of goods, and sale of services
and use or lease of properties. These same sections also provide for a 0% rate on
certain sales and transaction.

Neither does the law make any distinction as to the type of industry or trade that
will bear the 70% limitation on the creditable input tax, 5-year amortization of input
tax paid on purchase of capital goods or the 5% final withholding tax by the
government. It must be stressed that the rule of uniform taxation does not deprive
Congress of the power to classify subjects of taxation, and only demands
uniformity within the particular class.

R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The
VAT rate of 0% or 10% (or 12%) does not apply to sales of goods or services with
gross annual sales or receipts not exceeding P1,500,000.00. Also, basic marine and
agricultural food products in their original state are still not subject to the tax, thus
ensuring that prices at the grassroots level will remain accessible.

R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly
favors those with high profit margins. Congress was not oblivious to this. Thus, to
equalize the weighty burden the law entails, the law imposed a 3% percentage
tax on VAT-exempt persons under Section 109(v), i.e., transactions with gross
annual sales and/or receipts not exceeding P1.5 Million. This acts as a equalizer
because in effect, bigger businesses that qualify for VAT coverage and VAT-
exempt taxpayers stand on equal-footing.

Moreover, Congress provided mitigating measures to cushion the impact of the
imposition of the tax on those previously exempt. Excise taxes on petroleum
products and natural gas were reduced. Percentage tax on domestic carriers was
removed. Power producers are now exempt from paying franchise tax.

Aside from these, Congress also increased the income tax rates of corporations, in
order to distribute the burden of taxation. Domestic, foreign, and non-resident
corporations are now subject to a 35% income tax rate, from a previous 32%.
Intercorporate dividends of non-resident foreign corporations are still subject to
15% final withholding tax but the tax credit allowed on the corporation's domicile
was increased to 20%. The Philippine Amusement and Gaming Corporation
(PAGCOR) is not exempt from income taxes anymore. Even the sale by an artist of
his works or services performed for the production of such works was not spared.

All these were designed to ease, as well as spread out, the burden of taxation,
which would otherwise rest largely on the consumers.
19


PROGRESSIVITY OF TAXATION

Progressive taxation is built on the principle of the taxpayer's ability to pay.
Taxation is progressive when its rate goes up depending on the resources of the
person affected. The VAT is an antithesis of progressive taxation. By its very nature,
it is regressive. The principle of progressive taxation has no relation with the VAT
system inasmuch as the VAT paid by the consumer or business for every goods
bought or services enjoyed is the same regardless of income. In other words, the
VAT paid eats the same portion of an income, whether big or small. The disparity
lies in the income earned by a person or profit margin marked by a business, such
that the higher the income or profit margin, the smaller the portion of the income
or profit that is eaten by VAT. A converso, the lower the income or profit margin,
the bigger the part that the VAT eats away. At the end of the day, it is really the
lower income group or businesses with low-profit margins that is always hardest hit.

Nevertheless, the Constitution does not really prohibit the imposition of indirect
taxes, like the VAT. What it simply provides is that Congress shall "evolve a
progressive system of taxation."

Resort to indirect taxes should be minimized but not avoided entirely because it is
difficult, if not impossible, to avoid them by imposing such taxes according to the
taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive
effects of this imposition by providing for zero rating of certain transactions (R.A.
No. 7716, 3, amending 102 (b) of the NIRC), while granting exemptions to other
transactions. (R.A. No. 7716, 4 amending 103 of the NIRC).

DIGEST5

ABAKADA GURO v. EXECUTIVE SECRETARY
G.R. No. 168056, 168207, 168461, 168463 and 168730,
1 September 2005, En Banc (Austria-Martinez, J)

The equal protection clause does not require the universal application of the laws
on all persons or things without distinction. This might in fact sometimes result in
unequal protection. What the clause requires is equality among equals as
determined according to a valid classification. .. Taxes are the lifeblood of the
government. It is just an enema, a first-aid measure to resuscitate an economy in
distress. The Court is neither blind nor is it turning a deaf ear on the plight of the
masses. But it does not have the panacea for the malady that the law seeks to
remedy. The Court cannot strike down a law as unconstitutional simply because of
its yokes.
Mounting budget deficit, revenue generation, inadequate fiscal allocation for
education, increased emoluments for health workers, and wider coverage for full
value-added tax benefits these are the reasons why Republic Act No. 9337
(R.A. No. 9337) was enacted. Reasons, the wisdom of which, the Court even with
its extensive constitutional power of review, cannot probe. The petitioners in these
cases, however, question not only the wisdom of the law, but also perceived
constitutional infirmities in its passage.

R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555
and 3705, and Senate Bill No. 1950. Because of the conflicting provisions of the
proposed bills the Senate agreed to the request of the House of Representatives
for a committee conference.
The Conference Committee on the Disagreeing Provisions of House Bill
recommended the approval of its report, which the Senate and the House of the
Representatives did.
On May 24, 2005, the President signed into law the consolidated House and
Senate versions as Republic Act 9337. Before the law was to take effect on July 1,
2005, the Court issued a temporary restraining order enjoining government from
implementing the law in response to a slew of petitions for certiorari and
prohibition questioning the constitutionality of the new law.

ISSUES:

PROCEDURAL ISSUE
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and
108 of the NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)

2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and
110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending Section
114(C) of the NIRC, violate Article VI, Section 28(1), and Article III, Section
1 of the Constitution:

20

HELD:
Petitions DISMISSED.
There being no constitutional impediment to the full enforcement and
implementation of R.A. No. 9337, the temporary restraining order issued by the
Court on July 1, 2005 is LIFTED upon finality of herein decision.
Procedural Issues
A. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the
Constitution on Exclusive Origination of Revenue Bills

In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and
3705 that initiated the move for amending provisions of the NIRC dealing mainly
with the valueadded tax. Upon transmittal of said House bills to the Senate, the
Senate came out with Senate Bill No. 1950 proposing amendments not only to
NIRC provisions on the value-added tax but also amendments to NIRC provisions
on other kinds of taxes. Is the introduction by the Senate of provisions not dealing
directly with the value- added tax, which is the only kind of tax being amended in
the House bills, still within the purview of the constitutional provision authorizing the
Senate to propose or concur with amendments to a revenue bill that originated
from the House?
Since there is no question that the revenue bill exclusively originated in the House
of Representatives, the Senate was acting within its constitutional power to
introduce amendments to the House bill when it included provisions in Senate Bill
No. 1950 amending corporate income taxes, percentage, excise and franchise
taxes. Verily, Article VI, Section 24 of the Constitution does not contain any
prohibition or limitation on the extent of the amendments that may be introduced
by the Senate to the House revenue bill.

Notably therefore, the main purpose of the bills emanating from the House of
Representatives is to bring in sizeable revenues for the government to supplement
our countrys serious financial problems, and improve tax administration and
control of the leakages in revenues from income taxes and value-added taxes. As
these house bills were transmitted to the Senate, the latter, approaching the
measures from the point of national perspective, can introduce amendments
within the purposes of those bills.
The Senate can propose amendments and in fact, the amendments made on
provisions in the tax on income of corporations are germane to the purpose of the
house bills which is to raise revenues for the government. The sections introduced
by the Senate are germane to the subject matter and purposes of the house bills,
which is to supplement our countrys fiscal deficit, among others. Thus, the Senate
acted within its power to propose those amendments.
B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the
No-Amendment Rule
The no-amendment rule refers only to the procedure to be followed by each
house of Congress with regard to bills initiated in each of said respective houses,
before said bill is transmitted to the other house for its concurrence or
amendment. Verily, to construe said provision in a way as to proscribe any further
changes to a bill after one house has voted on it would lead to absurdity as this
would mean that the other house of Congress would be deprived of its
constitutional power to amend or introduce changes to said bill. Thus, Art. VI, Sec.
26 (2) of the Constitution cannot be taken to mean that the introduction by the
Bicameral Conference Committee of amendments and modifications to
disagreeing provisions in bills that have been acted upon by both houses of
Congress is prohibited.
Petitioners allege that the Bicameral Conference Committee exceeded its
authority by:
(1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6
of R.A. No. 9337; (2) Deleting entirely the no pass-on provisions found in both the
House and Senate bills; (3)
Inserting the provision imposing a 70% limit on the amount of input tax to be
credited against the output tax; and (4) Including the amendments introduced
only by Senate Bill No. 1950 regarding other kinds of taxes in addition to the value-
added tax.
It should be borne in mind that the power of internal regulation and discipline are
intrinsic in any legislative body. Thus, Article VI, Section 16 (3) of the Constitution
provides that each House may determine the rules of its proceedings. Pursuant
to this inherent constitutional power to promulgate and implement its own rules of
procedure, the respective rules of each house, the Rule XIV, sec 88 & 889 of the
House of the Representatives and Rule XII sec 35 of the Rules of the Senate,
provided for the creation of a Bicameral Conference Committee.
The creation of such conference committee was apparently in response to a
problem, not addressed by any constitutional provision, where the two houses of
Congress find themselves in disagreement over changes or amendments
introduced by the other house in a legislative bill. In the present petitions, the issue
is not whether provisions of the rules of both houses creating the bicameral
conference committee are unconstitutional, but whether the bicameral
conference committee has strictly complied with the rules of both houses, thereby
remaining within the jurisdiction conferred upon it by Congress.

In the case of Farias vs. The Executive Secretary, the Court En Banc, unanimously
reiterated and emphasized its adherence to the enrolled bill doctrine, thus,
declining therein petitioners plea for the Court to go behind the enrolled copy of
21

the bill. Akin to the Farias case, the present petitions also raise an issue regarding
the actions taken by the conference committee on matters regarding Congress
compliance with its own internal rules. One of the most basic and inherent power
of the legislature is the power to formulate rules for its proceedings and the
discipline of its members. Congress is the best judge of how it should conduct its
own business expeditiously and in the most orderly manner. It is also the sole
concern of Congress to instill discipline among the members of its conference
committee if it believes that said members violated any of its rules of proceedings.
Even the expanded jurisdiction of this Court cannot apply to questions regarding
only the internal operation of Congress, thus, the Court is wont to deny a review of
the internal proceedings of a co-equal branch of government.
Moreover, in the case of Tolentino vs. Secretary of Finance, the Court already
made the pronouncement that if a change is desired in the practice of the
Bicameral Conference Committee it must be sought in Congress since this
question is not covered by any constitutional provision but is only an internal rule
of each house. To date, Congress has not seen it fit to make such changes
adverted to by the Court. It seems, therefore, that Congress finds the practices of
the bicameral conference committee to be very useful for purposes of prompt
and efficient legislative action.
In the present case, the changes introduced by the Bicameral Conference
Committee on disagreeing provisions were meant only to reconcile and
harmonize the disagreeing provisions for it did not inject any idea or intent that is
wholly foreign to the subject embraced by the original provisions. The so-called
stand-by authority in favor of the President, whereby the rate of 10% VAT wanted
by the Senate is retained until such time that certain conditions arise when the
12% VAT wanted by the House shall be imposed, appears to be a compromise to
try to bridge the difference in the rate of VAT proposed by the two houses of
Congress. Nevertheless, such compromise is still totally within the subject of what
rate of VAT should be imposed on taxpayers.
The no pass-on provision was deleted altogether. The reason for deleting the no
pass-on provision was just to keep the VAT law or the VAT bill simple and that no
sector should be a beneficiary of legislative grace, neither should any sector be
discriminated on.
With regard to the amount of input tax to be credited against output tax, the
Bicameral Conference Committee came to a compromise on the percentage
rate of the limitation or cap on such input tax credit, but again, the change
introduced by the Bicameral Conference Committee was totally within the intent
of both houses to put a cap on input tax that may be credited against the output
tax.
As to the amendments to NIRC provisions on taxes other than the value-added
tax proposed in Senate Bill No. 1950, since said provisions were among those
referred to it, the conference committee had to act on the same and it basically
adopted the version of the Senate.
Thus, all the changes or modifications made by the Bicameral Conference
Committee were germane to subjects of the provisions referred to it for
reconciliation. Such being the case, the Court does not see any grave abuse of
discretion amounting to lack or excess of jurisdiction committed by the Bicameral
Conference Committee.
Substantial Issues
I. A. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads: The rule of taxation shall be
uniform and equitable. The Congress shall evolve a progressive system of
taxation.
Uniformity in taxation means that all taxable articles or kinds of property of the
same class shall be taxed at the same rate. Different articles may be taxed at
different amounts provided that the rate is uniform on the same class everywhere
with all people at all times. The tax law is uniform as it provides a standard rate of
0% or 10% (or 12%) on all goods and services.
It must be stressed that the rule of uniform taxation does not deprive Congress of
the power to classify subjects of taxation, and only demands uniformity within the
particular class.
R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The
VAT rate of 0% or 10% (or 12%) does not apply to sales of goods or services with
gross annual sales or receipts not exceeding P1, 500, 000.00. Also, basic marine
and agricultural food products in their original state are still not subject to tax, thus
ensuring the prices at the grassroots level remain accessible.
Lastly, petitioners contend that the limitation on the creditable input tax is
anything but regressive. It is the smaller business with higher input tax-output tax
ratio that will suffer the consequences. Progressive taxation is built on the principle
of the taxpayers ability to pay.
Taxation is progressive when its rate goes up depending on the resources of the
person affected.
The VAT is an antithesis of progressive taxation. By its very nature, it is regressive.
The principle of progressive taxation has no relation with the VAT system inasmuch
as the VAT paid by the consumer or business for every goods bought or services
enjoyed is the same regardless of income. In other words, the VAT paid eats the
same portion of an income, whether big or small.
Nevertheless, the Constitution does not really prohibit the imposition of indirect
taxes, like the VAT. What it simply provides is that Congress shall "evolve a
progressive system of taxation." The constitutional provision has been interpreted
to mean simply that direct taxes are . . . to be preferred [and] as much as
22

possible, indirect taxes should be minimized. Indeed, the mandate to Congress is
not to prescribe, but to evolve, a progressive tax system.
I. B. No Undue Delegation of Legislative Power
The principle of separation of powers ordains that each of the three great
branches of government has exclusive cognizance of and is supreme in matters
falling within its own constitutionally allocated sphere. A logical corollary to the
doctrine of separation of powers is the principle of non-delegation of powers,
potestas delegata non delegari potest.
In the present case, the challenged section of R.A. No. 9337 is the common
proviso in Sections 4, 5 and 6 which reads as follows: That the President, upon the
recommendation of the Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP)
of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National
government deficit as a percentage of GDP of the previous year exceeds one
and one-half percent (1 %).
The case before the Court is not a delegation of legislative power. It is simply a
delegation of ascertainment of facts upon which enforcement and administration
of the increase rate under the law is contingent. The legislature has made the
operation of the 12% rate effective January 1, 2006, contingent upon a specified
fact or condition. It leaves the entire operation or non-operation of the 12% rate
upon factual matters outside of the control of the executive.
No discretion would be exercised by the President. Highlighting the absence of
discretion is the fact that the word shall is used in the common proviso. The use of
the word shall connote a mandatory order. Its use in a statute denotes an
imperative obligation and is inconsistent with the idea of discretion. Where the law
is clear and unambiguous, it must be taken to mean exactly what it says, and
courts have no choice but to see to it that the mandate is obeyed.

Thus, it is the ministerial duty of the President to immediately impose the 12% rate
upon the existence of any of the conditions specified by Congress. This is a duty,
which cannot be evaded by the President. Inasmuch as the law specifically uses
the word shall, the exercise of discretion by the President does not come into play.
It is a clear directive to impose the 12% VAT rate when the specified conditions are
present. The time of taking into effect of the 12% VAT rate is based on the
happening of a certain specified contingency, or upon the ascertainment of
certain facts or conditions by a person or body other than the legislature itself.
When one speaks of the Secretary of Finance as the alter ego of the President, it
simply means that as head of the Department of Finance he is the assistant and
agent of the Chief Executive. In the present case, the Secretary of Finance, in
making his recommendation to the President on the existence of either of the two
conditions, the Secretary of Finance is not acting as the alter ego of the President
or even her subordinate. In such instance, he is not subject to the power of control
and direction of the President. He is acting as the agent of the legislative
department, to determine and declare the event upon which its expressed will is
to take effect.
The Secretary of Finance becomes the means or tool by which legislative policy is
determined and implemented, considering that he possesses all the facilities to
gather data and information and has a much broader perspective to properly
evaluate them. His function is to gather and collate statistical data and other
pertinent information and verify if any of the two conditions laid out by Congress is
present. His personality in such instance is in reality but a projection of that of
Congress. Thus, being the agent of Congress and not of the President, the
President cannot alter or modify or nullify, or set aside the findings of the Secretary
of Finance and to substitute the judgment of the former for that of the latter.
Congress simply granted the Secretary of Finance the authority to ascertain the
existence of a fact, namely, whether by December 31, 2005, the value-added tax
collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent
(24/5%) or the national government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1%). If either of these two
instances has occurred, the Secretary of
Finance, by legislative mandate, must submit such information to the President.
Then the 12%
VAT rate must be imposed by the President effective January 1, 2006. There is no
undue delegation of legislative power but only of the discretion as to the
execution of a law. This is constitutionally permissible. Congress does not abdicate
its functions or unduly delegate power when it describes what job must be done,
who must do it, and what is the scope of his authority; in our complex economy
that is frequently the only way in which the legislative process can go forward.

II.A. Due Process and Equal Protection Clauses
The doctrine is that where the due process and equal protection clauses are
invoked, considering that they are not fixed rules but rather broad standards,
there is a need for proof of such persuasive character as would lead to such a
conclusion. Absent such a showing, the presumption of validity must prevail.
Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a
limitation on the amount of input tax that may be credited against the output tax.
It states, in part:
23

[P]rovided, that the input tax inclusive of the input VAT carried over from the
previous quarter that may be credited in every quarter shall not exceed seventy
percent (70%) of the output VAT:

Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-
added tax due from or paid by a VAT-registered person on the importation of
goods or local purchase of good and services, including lease or use of property,
in the course of trade or business, from a
VAT-registered person, and Output Tax is the value-added tax due on the sale or
lease of taxable goods or properties or services by any person registered or
required to register under the law.
Petitioners claim that the contested sections impose limitations on the amount of
input tax that may be claimed. In effect, a portion of the input tax that has
already been paid cannot now be credited against the output tax. This argument
is not absolute. It assumes that the input tax exceeds 70% of the output tax, and
therefore, the input tax in excess of 70% remains uncredited. However, to the
extent that the input tax is less than 70% of the output tax, then 100% of such input
tax is still creditable.
The non-application of the unutilized input tax in a given quarter is not ad
infinitum, as petitioners exaggeratedly contend. Their analysis of the effect of the
70 per cent limitation is incomplete and one-sided. It ends at the net effect that
there will be unapplied/unutilized inputs
VAT for a given quarter. It does not proceed further to the fact that such
unapplied/unutilized input tax may be credited in the subsequent periods as
allowed by the carry-over provision of Section 110(B) or that it may later on be
refunded through a tax credit certificate under Section 112(B).
Therefore, petitioners argument must be rejected. The equal protection clause
under the Constitution means that no person or class of persons shall be deprived
of the same protection of laws which is enjoyed by other persons or other classes
in the same place and in like circumstances.
The power of the State to make reasonable and natural classifications for the
purposes of taxation has long been established. Whether it relates to the subject
of taxation, the kind of property, the rates to be levied, or the amounts to be
raised, the methods of assessment, valuation and collection, the States power is
entitled to presumption of validity. As a rule, the judiciary will not interfere with
such power absent a clear showing of unreasonableness, discrimination, or
arbitrariness.
The equal protection clause does not require the universal application of the laws
on all persons or things without distinction. This might in fact sometimes result in
unequal protection.
What the clause requires is equality among equals as determined according to a
valid classification. By classification is meant the grouping of persons or things
similar to each other in certain particulars and different from all others in these
same particulars.
It has been said that taxes are the lifeblood of the government. In this case, it is
just an enema, a first-aid measure to resuscitate an economy in distress. The Court
is neither blind nor is it turning a deaf ear on the plight of the masses. But it does
not have the panacea for the malady that the law seeks to remedy. As in other
cases, the Court cannot strike down a law as unconstitutional simply because of
its yokes.
24

6
DIAZ V SEC OF FINANCE
DIGEST1
Diaz vs. Secretary of Finance (2011)

Facts:
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition
for declaratory rel i ef assai l i ng the val i di ty of the i mpendi ng i mposi ti on
of val ue-added tax (VAT) by the Bureau of I nternal Revenue ( BI R) on
the col l ecti ons of tol l way operators. Cour t treated the case as one
of prohibition.Petitioners hold the view that Congress did not, when it enacted the
NIRC, intend to include toll fees within the meaning of "sale of services" that are
subject to VAT; that a toll fee is a "user's tax," not asal e of servi ces; that to
i mpose VAT on tol l fees woul d amount to a tax on publ i c servi ce; and
that, since VAT was never factored into the formula for computing toll fees, its
imposition would violate thenon-impairment clause of the constitution.The government
avers that the NI RC i mposes VAT on al l ki nds of servi ces of franchi se
grantees, including tollway operations; that the Court should seek the meaning
and intent of the law from the words used in the statute; and that the imposition of
VAT on tollway operations has been the subjectas early as 2003 of several BIR
rulings and circulars.The government also argues that petitioners have no right to
invoke the non-impairment of contractscl ause si nce they cl earl y have no
personal i nterest i n exi sti ng tol l operati ng agreements (TOAs) between
the government and tollway operators. At any rate, the non-impairment clause
cannot limitthe State's sovereign taxing power which is generally read into contracts.

Issue:
May toll fees collected by tollway operators be subjected to VAT (Are tollway
operations a franchiseand/or a service that is subject to VAT)?

Ruling:
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the
latter's use of thetollway facilities over which the operator enjoys private
proprietary rights that its contract and the law recognize. In this sense, the tollway
operator is no different from the service providers under Section108 who allow
others to use their properties or facilities for a fee.Tollway operators are franchise
grantees and they do not belong to exceptions that Section 119 sparesfrom the
payment of VAT. The word "franchise" broadly covers government grants of a
special rightto do an act or series of acts of public concern. Tollway operators are,
owing to the nature and objectof their business, "franchise grantees." The
construction, operation, and maintenance of toll facilitieson public improvements
are activities of public consequence that necessarily require a special grant
of authority from the state. A tax i s i mposed under the taxi ng power of
the government pri nci pal l y for the purpose of rai si ngrevenues to
fund publ i c expendi tures. Tol l fees, on the other hand, are col l ected
by pri vate tol l way operators as reimbursement for the costs and expenses
incurred in the construction, maintenance andoperation of the tollways, as well as
to assure them a reasonable margin of income. Although toll feesare charged for
the use of public facilities, therefore, they are not government exactions that can
bepr oper l y t r eat ed as a t ax . T ax es may be i mpos ed onl y by
t he gov er nmen t under i t s s ov e r ei gn authority, toll fees may be
demanded by either the government or private individuals or entities, as
anattribute of ownership.


DIGEST2
R E N A T O V . D I A Z A N D A U R O R A M A . F .
T I M B O L , V S . T H E S E C R E T A R Y O F
F I N A N C E A N D C I R
G . R . N O . 1 9 3 0 0 7 J U L Y 1 9 , 2 0 1 1
May toll fees collected by tollway operators be subjected to value- added tax?


F A C T S :
Renato V. Diaz and Aurora Ma. F. Timbol filed a petition for declaratory relief1
assailing thevalidity of the impending imposition of VAT by BIR on the collections of
tollway operators.

Petitioners claim that, since the VAT would result in increased toll fees, they have
an interest asregular users of tollways in stopping the BIR action
.
Diaz claims that he sponsored the approval of Republic Act 7716 (EVAT Law)and Republic Act
8424 (the1997 NIRC) at the House of Representatives.

Timbolclaims that she served as Assistant Secretary of DTI and consultant of the TRB in the
pastadministration.

25

Gloria Macapagal- Arroyo to impose VAT on toll fees.

But the imposition was deferred in view of the consistentopposition of Diaz and
other sectors to such move
.
But, upon President Benigno C. Aquino IIIs assumption of office in 2010, the BIR
revived the idea and would impose the challenged tax on toll fees beginning
August 16, 2010 unless judiciallyenjoined
.
Petitioners hold the view that:

Congress did not, when it enacted the NIRC, intend to include toll fees within
themeaning of "sale of services" that are subject to VAT;

s a "users tax," not a sale of services;

to impose VAT on toll fees would amount to a tax on public service;

since VAT was never factored into the formula for computing toll fees, its
impositionwould violate the non-impairment clause of the constitution.

Court issued a TRO enjoining the implementation of the VAT.

The Court required the government, represented by respondents Cesar V. Purisima, SOF, and Kim
S.Jacinto-Henares, CIR, to comment on the petition within 10 days from notice.

Later, the Court issued another resolution treating the petition as one for
prohibition
.
Office of the Solicitor General filed the governments comment.

The government (SOLGEN) avers that:

1.NIRC imposes VAT on all kinds of services of franchise grantees, including
tollwayoperations, except where the law provides otherwise
; that the Court should seek the meaningand intent of the law from the words used in the statute; and
that the imposition of VAT on tollwayoperations has been the subject as early as 2003 of several BIR
rulings and circulars.

And not only do tollway operators come under the broad term "all kinds of
services," they alsocome under the specific class described in Section 108 as "all
other franchise grantees" whoare subject to VAT, "except those under Section 119
of this Code."

Petitioners of course contend that tollway operators cannot be considered "franchise grantees"
under Section 108 since they do not hold legislative franchises.
But nothing in Section 108 indicates thatthe "franchise grantees" it speaks of are
those who hold legislative franchises
.
The term "franchise" has been broadly construed as referring, not only to authorizations that
Congressdirectly issues in the form of a special law, but also to those granted by administrative
agencies towhich the power to grant franchises has been delegated by Congress
.
, OWING TO THE NATURE AND OBJECT OF
THEIRBUSINESS, "FRANCHISE GRANTEES."

Petitioners argue that a toll fee is a "users tax" and to impose VAT on toll fees is tantamount to taxing
atax.

The operation by the government of a tollway does not change the character of the road as one
for public use
.
do not go tothe general coffers of the government.

Fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. Atax
isimposed under the taxing power of the government principally for the purpose of raising revenues
tofund public expenditures. Toll fees, on the other hand, are collected by private tollway operators
asreimbursement for the costs and expenses incurred in the construction, maintenance and
operation of the tollways, as well as to assure them a reasonable margin of income.

tollway operator
.Under Section 105 of the Code, VAT is imposed on any person who, in the course of trade or
business,sells or renders services for a fee. In other words, the seller of services, who in this case is the
tollwayoperator, is the person liable for VAT. The latter merely shifts the burden of VAT to the tollway user
aspart of the toll fees.

as a "users tax
26

." VAT is assessed a gainst the tollway operators gross receipts and not necessarily on the toll fees.
Although the tollway operator may shift the VAT burden to the tollway user, it will
not make the latter directly liable for the VAT. The shifted VAT burden simply becomes part of the
toll fees that one has topay in order to use the tollways.32

Timbol has no personality to invoke the non-impairment of contract clause on behalf of private
investorsin the tollway projects. She will neither be prejudiced by nor be affected by the alleged
diminution inreturn of investments that may result from the VAT imposition. She has no interest at all in
the profits tobe earned under the TOAs. The interest in and right to recover investments solely belongs
to theprivate tollway investors.

According to petitioners, VAT on tollway operations is not administratively
feasible. Administrativefeasibility is one of the canons of a sound tax system. It simply means that
the tax system should becapable of being effectively administered and enforced with the least
inconvenience to the taxpayer.Non-observance of the canon, however, will not render a tax
imposition invalid "except to the extentthat specific constitutional or statutory limitations are impaired."
Thus, even if the imposition of VAT ontollway operations may seem burdensome to implement, it is not
necessarily invalid unless someaspect of it is shown to violate any law or the Constitution.

For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-
2010 whichdirects toll companies to record an accumulated input VAT of zero balance in their
books as of August16, 2010, the date when the VAT imposition was supposed to take effect. The
issuance allegedlyviolates Section 111(A)36 of the Code which grants first time VAT payers a
transitional input VAT of 2%on beginning inventory.

In this connection, the BIR explained that BIR RMC 63-2010 is actually the product
of negotiations with tollway operators who have been assessed VAT as early as
2005, but failedto charge VAT-inclusive toll fees which by now can no longer be
collected.
The tollway operatorsagreed to waive the 2% transitional input VAT, in exchange for cancellation of
their past due VATliabilities. Notably, the right to claim the 2% transitional input VAT belongs to the
tollway operators who have not questioned the circulars validity. They are thus the ones who have a
right to challenge the circular in a direct and proper action brought for the purpose.

ive prerogative or expand the V AT laws coverage
when she sought to impose VAT on tollway operations. Section 108(A) of the Code
clearly states that services of all other franchise grantees are subject to VAT,
except as may be provided under Section 119of the Code. Tollway operators are
not among the franchise grantees subject to franchise tax under the latter
provision. Neither are their services among the VAT-exempt transactionsunder
Section 109 of the Code.
the grant of tax exemption is a matter of legislative policy that is within the
exclusive prerogative of Congress. The Courts role is to merely uphold this
legislative policy , as reflectedfirst and foremost in the language of the tax statute. Thus, any
unwarranted burden that may beperceived to result from enforcing such policy must be properly
referred to Congress. The Court has nodiscretion on the matter but simply applies the law.

R.A. 7716 or the ExpandedValue-Added Tax law was passed. It is only now,
however, that the executive has earnestly pursued the VATimposition against
tollway operators. The executive exercises exclusive discretion in matters
pertaining to theimplementation and execution of tax laws. Consequently, the
executive is more properly suited to deal with theimmediate and practical
consequences of the VAT imposition.

DIGEST3
DIAZ VS. SECRETARY OF FINANCE- Value Added Tax (VAT)
May toll fees collected by tollway operators be subject to VAT?
YES.
(1) VAT is imposed on all kinds of services and tollway operators who are
engaged in constructing, maintaining, and operating expressways are no
different from lessors of property, transportation contractors, etc.
(2) Not only do they fall under the broad term under (1) but also come under
those described as all other franchise grantees which is not confined only to
legislative franchise grantees since the law does not distinguish. They are also not
a franchise grantee under Section 119 which would have made them subject to
percentage tax and not VAT.
(3) Neither are the services part of the enumeration under Section 109 on VAT-
exempt transactions.
(4) The toll fee is not a users tax and thus it is permissible to impose a VAT on the
said fee. The MIAA case does not apply and the Court emphasized that toll fees
are not taxes since they are not assessed by the BIR and do not go the general
coffers of the government. Toll fees are collected by private operators as
reimbursement for their costs and expenses with a view to a profit while taxes are
imposed by the government as an attribute of its sovereignty. Even if the toll fees
27

were treated as users tax, the VAT can not be deemed as a tax on tax since the
VAT is imposed on the tollway operator and the fact that it might pass-on the
same to the tollway user, it will not make the latter directly liable for VAT since the
shifted VAT simply becomes part of the cost to use the tollways.
(5) The assertion that the VAT imposed is not administratively feasible given the
manner by which the BIR intends to implement the VAT (i.e., rounding off the toll
rates and putting any excess collection in an escrow account) is not enough to
invalidate the law. Non-observance of the canon of administrative feasibility will
not render a tax imposition invalid except to the extent that specific
constitutional or statutory limitations are impaired.

28

7.
PAGCOR v BIR

DIGEST1

PAGCOR vs. BIR:

ISSUE : W/N PAGCOR IS EXEMPTED FROM VAT. YES.

Facts: With the passage of Republic Act No. (RA) 9337, the PhilippineAmusement
and Gaming Corporation (PAGCOR) has beenexcluded from the list of
government-owned and -controlledcorporations (GOCCs) that are exempt from
tax under Section27(c) of the Tax Code;PAGCOR is now subject to corporate
income tax.The Supreme Court (SC) held that the omission of PAGCOR from the
list of tax-exempt GOCCs by RA 9337 does not violatethe right to equal protection
of the laws under Section 1, ArticleIII of the Constitution, because PAGCORs
exemption from payment of corporate income tax was not based on
classificationshowing substantial distinctions; rather, it was granted upon
thecorporations own request to be exempted from corporateincome tax.
Legislative records likewise reveal that the legislativeintention is to require
PAGCOR to pay corporateincome tax.With regard to the issue that the removal of
PAGCOR from theexempted list violates the non-impairment clause contained
inSection 10, Article III of the Constitution which provides thatno law impairing
the obligation of contracts shall be passed theSC explained that following its
previous ruling in the case of Manila Electric Company v. Province of Laguna 366
Phil. 428(1999), this does not apply.Franchises such as that granted to PAGCOR
partake of the natureof a grant, and is thus beyond the purview of the non-
impairmentclause of the Constitution.As regards the liability of PAGCOR to VAT,
the SC findsSection 4.108-3 of Revenue Regulations No. (RR) 16-2005,which
subjects PAGCOR and its licensees and franchisees toVAT, null and void for being
contrary to the National InternalRevenue Code (NIRC), as amended by RA 9337.
According tothe SC, RA 9337 does not contain any provision that subjectsPAGCOR
to VAT. Instead, the

SC finds support to the VATexemption of PAGCOR under Section 109(k) of theTax
Code, which provides that transactions exempt under international agreements
to which the Philippines is a signatory or under special laws [except Presidential
Decree No. (PD) 529] areexempt from VAT. Considering that PAGCORs charter,
i.e., PD1869 which grants PAGCOR exemption from taxes is aspecial law, it is
exempt from payment of VAT.Accordingly, the SC held that the BIR exceeded its
authority insubjecting PAGCOR to VAT, and thus declared RR 16-05 nulland void
insofar as it subjects PAGCOR to VAT for beingcontrary to the NIRC, as amended by RA
9337.
PAGCOR is subject to income tax but remains exempt fromthe imposition of value-added tax.
With the amendment by R.A. No. 9337 of Section 27 (c) of the National Internal
Revenue Code of 1997 by omitting PAGCOR from the list of government
corporations exempt for income tax,the legislative intent is to require PAGCOR to
pay corporateincome tax. However, nowhere in R.A. No. 9337 is it providedthat
PAGCOR can be subjected to VAT. Thus, the provision of RR No. 16-2005, which
the respondent BIR issued to implementthe VAT law, subjecting PAGCOR to 10%
VAT is invalid for being contrary to R.A. No. 9337. ( Philippine Amusement and Gaming
Corporation vs. BIR,
G.R. No. 172087, March 15, 2011)

With the passage of Republic Act No. (RA) 9337, the PhilippineAmu s emen t
and Gami ng Cor por at i on ( P AGCOR ) has been excl uded from
the l i st of government -owned and control l edcorporati ons (GOCCs)
that are exempt from tax under Secti on27(c) of the T ax Code;
PAGCOR i s now subj ect to corporatei ncome tax. The Supreme Court
(SC) hel d that the omi ssi on of PAGCOR from the list of tax-exempt GOCCs
by RA 9337 doesnot violate the right to equal protection of the laws under
Section1, Article III of the Constitution, because PAGCORs exemptionf r o m
p a y me n t o f c o r p o r a t e i n c o me t a x w a s n o t b a s e d
o n cl assi fi cati on showi ng substanti al di sti ncti ons; rather, i t was granted
upon the corporations own request to be exempted fromcorporate income tax.
Legislative records likewise reveal that thel egi sl ati ve i ntenti on i s to requi re
PAGCOR to pay corporateincome tax.With regard to the issue that the removal
of PAGCOR from theexempted l i st vi ol ates the non-i mpai rment cl ause
contai ned i nSection 10, Article III of the Constitution which provides thatno
law impairing the obligation of contractsshal l be passed the SC
expl ai ned that fol l owi ng i ts previ ous ruling in the case of Mani l a El ectri c
Company v. Provi nce of Laguna 366 Phi l . 428(1999), thi s does not
appl y. Franchi ses such as that granted toPAGCOR partake of the nature
of a grant, and is thus beyond the purvi ew of the non-i mpai rment cl ause
of the Consti tuti on. As regards the liability of PAGCOR to VAT, the SC finds
Section4 . 1 0 8 - 3 of R e v enue R egul at i ons No. ( R R) 1 6 - 2 0 0 5 ,
whi ch subjects PAGCOR and its licensees and franchisees to VAT, nulland voi d
for bei ng contrary to the Nati onal I nternal RevenueCode (NIRC), as
amended by RA 9337.Accordi ng to the SC, RA 9337 does not contai n
any provi si onthat subjects PAGCOR to VAT. Instead, the SC finds support tothe
VAT exemption of PAGCOR under Section 109(k) of the TaxC o d e , w h i c h
p r o v i d e s t h a t t r a n s a c t i o n s e x e m p t
u n d e r international agreements to which the Philippines is a signatory
or under special laws [except Presidential Decree No. (PD) 529] areexempt from
VAT. Considering that PAGCORs charter, i.e., PD1869 whi ch grants
PAGCOR exempti on from taxes i s aspecial law, it is exempt from
payment of VAT. Accordingly, theS C h e l d t h a t t h e B I R e x c e e d e d
i t s a u t h o r i t y i n s u b j e c t i n g PAGCOR to VAT, and thus declared RR
16-05 null and void insofar as it subjects PAGCOR to VAT for being contrary
tothe NIRC, as amended by RA 9337. [Philippine Amusement andGami ng
Cor por at i on ( P AGCOR ) v . t he Bu r eau of I nt er nal Revenue (BIR),
et. al., GR 172087, March 15, 2011.

29

DIGEST2

P A G C O R V . B I R G R N O . 1 7 2 0 8 7 M A R C H 1 5 ,
2 0 1 1

F A C T S :
-A2
on January 1, 1977.

-B3 was issued exempting PAGCOR
from the paymentof any type of tax, except a franchise tax of 5% of the gross
revenue
.

.
No. 18696

Sec. 13. Exemptions.

x x x
(1) Customs Duties, taxes and other imposts on importations
.(2)
Income and other taxes
.


(a) Franchise Holder
:
tax of any kind or form, income or otherwise, as well as fees, charges, or levies of whatever nature
tax or charge attach in any way to the earnings of the Corporation,
Except a Franchise Tax of 5%of the gross revenue or earnings derived by the Corporation from its
operation under thisFranchise.(b)
Others
:
earnings derived from the operations conducted under the franchise
charges, fees or levies, shall inure to the benefit of and extend to corporation(s),
association(s),agency(ies), or individual(s) with whom the Corporation or operator has any
contractualrelationship in connection with the operations of the casino(s
)

The fee or remuneration of foreign entertainers contracted by the Corporation or operator
inpursuance of this provision
(3) Dividend Income
.
provided that such dividend income shall be totally exempted from income or other form of taxes
if invested within 6 months from the date the dividend income is received in the following:

o

operation of the casino(s) or investments in any affiliate activity that will ultimately redound tothe
benefit of the Corporation; or any other corporation with whom the Corporation has anyexisting
arrangements in connection with or related to the operations of the casino(s);(b) Government bonds,
securities, treasury notes, or government debentures; or (c) BOI-registered or export-oriented
corporation(s).7

oved through P.D. No. 1931, but it was later
restored by Letter of Instruction No. 1430

shall paycorporate income tax, except petitioner PAGCOR, GSIS, SSS, PHIC, and
PCSO

With the enactment of R.A. No.
certain sections of the NIRC were amended.
The particular amendmentthat is at issue in this case is Section 1 of R.A. No. 9337, which amended
Section 27 (c) of NIRC byexcluding PAGCOR from the enumeration of GOCCs
that are exempt from payment of corporateincome tax

assailing the validityand constitutionality of R.A. No. 9337, in particular:

1.
Section 4, which imposes a 10 % Value Added Tax (VAT ) on sale of goods and
properties;Section 5, which imposes a 10% VAT on importation of goods; andSection 6, which imposes
a 10% VAT on sale of services and use or lease of properties, all containa uniform proviso authorizing
the President, upon the recommendation of the Secretary of Finance,to raise the VAT rate to 12%.
The said provisions were alleged to be violative of Section 28 (2), Article VI of
theConstitution, which section vests in Congress the exclusive authority to fix the
rate of taxes, and of Section 1, Article III of the Constitution on due process , as well as of Section
26 (2), ArticleVI of the Constitution, which section provides for the " no amendment rule" upon
the last readingof a bill;

2.
Sections 8 and 12 were alleged to be violative of Section 1, Article III of the Constitution, or the
guarantee of equal protection of the laws , and Section 28 (1), Article VI of the Constitution;
and3.

other technical aspects of the passage of the law, questioning the manner it was passed.
smissed all the petitions and upheld the constitutionality of R.A. No.
9337.12

30

- -2005,13 specifically identifying PAGCOR as one of the
franchisees subject to 10% VAT imposed under Section 108 of the National Internal
Revenue Code of 1997, asamended by R.A. No. 9337.

I S S U E
whether or not PAGCOR is still exempt from corporate income tax and VAT with
theenactment of R.A. No. 9337.

R U L I N G
petition is PARTLY GRANTED.

Section 1 of Republic Act No. 9337, amending Section 27 (c) of the National Internal Revenue
Code of 1997, by excluding petitioner PAGCOR from the enumeration of government-owned and
controlledcorporations exempted from corporate income tax is valid and constitutional,

while RR No. 16-2005 insofar as it subjects PAGCOR to 10% VAT is null and void for being contrary to
theNIRC, as amended by Republic Act No. 9337.

Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the NIRC of 1977, petitioner is no
longer exempt from corporate income tax as it has been effectively omitted from the list of GOCCs
that areexempt from it. PAGCOR argues that such omission is unconstitutional, as it is violative of its right
to equalprotection of the laws under Section 1, Article III of the Constitution:

Legislative bodies are allowed to classify the subjects of legislation. If the classification is reasonable,
thelaw may operate only on some and not all of the people without violating the equal protection
clause. Theclassification must, as an indispensable requisite, not be arbitrary. To be valid, it must
conform to thefollowing requirements:1.

It must be based on substantial distinctions.2.

It must be germane to the purposes of the law.3.

It must not be limited to existing conditions only.4.

It must apply equally to all members of the class.18

one of the fiveGOCCs exempted from payment of corporate income tax as
shown in R.A. No. 8424, Section 27(c) of which, reads:

under R.A. No. 8424, the exemption of PAGCOR from paying corporate income tax was not based
on aclassification showing substantial distinctions which make for real differences, but the exemption
wasgranted upon the request of PAGCOR that it be exempt from the payment of corporate
income tax.

With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424, PAGCOR has been
excludedfrom the enumeration of GOCCs that are exempt from paying corporate income tax. The
records of theBicameral Conference Meeting dated April 18, 2005, of the Committee on the
Disagreeing Provisions of Senate Bill No. 1950 and House Bill No. 3555, show that it is the legislative intent
that PAGCOR be subjectto the payment of corporate income tax.

om the payment of corporate
income tax,considering that Section 1 of R.A. No. 9337 amended Section 27 (c) of
the National InternalRevenue Code of 1997 by omitting PAGCOR from the
exemption.

The legislative intent, as shown by the discussions in the Bicameral Conference Meeting, is to
requirePAGCOR to pay corporate income tax; hence, the omission or removal of PAGCOR from
exemption fromthe payment of corporate income tax.

income tax excludes allothers. Not being excepted, petitioner PAGCOR must be
regarded as coming within the purviewof the general rule that GOCCs shall pay
corporate income tax, expressed in the maxim: exceptiofirmat regulam in casibus
non exceptis.28

Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio for violating the
non-

As regards franchises, Section 11, Article XII of the Constitution31 provides that
no franchise or right shall be granted except under the condition that it shall be
subject to amendment, alteration,or repeal by the Congress when the common
good so requires.

gambling casinos, clubsand other recreation or amusement places, sports,
gaming pools, i.e., basketball, football,lotteries, etc
.

Under Section 11, Article XII of the Constitution, PAGCORs franchise is subject to amendment,
alteration or repeal by Congress such as the amendment under Section 1 of R.A. No. 9377. Hence,
the provision inSection 1 of R.A. No. 9337, amending Section 27 (c) of R.A. No. 8424
by withdrawing the exemption of PAGCOR from corporate income tax, which
may affect any benefits to PAGCORs transactions with private parties, is not
violative of the non-impairment clause of the Constitution.

Anent the validity of RR No. 16-2005, the Court holds that the provision
subjecting PAGCOR to10% VAT is invalid for being contrary to R.A. No. 9337.
Nowhere in R.A. No. 9337 is it providedthat petitioner can be subjected to VAT.
R.A. No. 9337 is clear only as to the removal of petitioner's exemption from the
payment of corporate income tax, which was already addressedabove by this
Court.

31

Petitioner contends that the tax exemption under NIRC refers only to PAGCOR's direct tax liability
and notto indirect taxes, like the VAT. SC disagree.

no distinction on whether the taxes are direct or indirect; PAGCOR is also exempt from indirect taxes,
likeVAT, as follows:

The manner of charging VAT does not make PAGCOR liable to said tax.

regulation issuedto implement said law, the basic law prevails, because the said
rule or regulation cannot gobeyond the terms and provisions of the basic law
.
o. 16-2005, therefore, cannot go beyond the provisions of R.A. No. 9337.
Since PAGCOR isexempt from VAT under R.A. No. 9337, the BIR exceeded its
authority in subjecting PAGCOR to10% VAT under RR No. 16-2005; hence, the said
regulatory provision is hereby nullified
.

DIGEST3

645 SCRA 338 Taxation Law Income Taxation Corporate Taxpayers PAGCOR
is not exempt from income taxation
Political Law Equal Protection Clause
The Philippine Amusement and Gaming Corporation (PAGCOR) was created by
P.D. No. 1067-A in 1977. Obviously, it is a government owned and controlled
corporation (GOCC).
In 1998, R.A. 8424 or the National Internal Revenue Code of 1997 (NIRC) became
effective. Section 27 thereof provides that GOCCs are NOT EXEMPT from paying
income taxation but it exempted the following GOCCs:
1. GSIS
2. SSS
3. PHILHEALTH
4. PCSO
5. PAGCOR
But in May 2005, R.A. 9337, a law amending certain provisions of R.A. 8424, was
passed. Section 1 thereof excluded PAGCOR from the exempt GOCCs hence
PAGCOR was subjected to pay income taxation. In September 2005, the Bureau
of Internal Revenue issued the implementing rules and regulations (IRR) for R.A.
9337. In the said IRR, it identified PAGCOR as subject to a 10% value added tax
(VAT) upon items covered by Section 108 of the NIRC (Sale of Services and Use or
Lease of Properties).
PAGCOR questions the constitutionality of Section 1 of R.A. 9337 as well as the IRR.
PAGCOR avers that the said provision violates the equal protection clause.
PAGCOR argues that it is similarly situated with SSS, GSIS, PCSO, and PHILHEALTH,
hence it should not be excluded from the exemption.
ISSUE: Whether or not PAGCOR should be subjected to income taxation.
HELD: Yes. Section 1 of R.A. 9337 is constitutional. It was the express intent of
Congress to exclude PAGCOR from the exempt GOCCs hence PAGCOR is now
subject to income taxation.
PAGCORs contention that the law violated the constitution is not tenable. The
equal protection clause provides that all persons or things similarly situated should
be treated alike, both as to rights conferred and responsibilities imposed.
The general rule is, ALL GOCCs are subject to income taxation. However, certain
classes of GOCCs may be exempt from income taxation based on the following
requisites for a valid classification under the principle of equal protection:
1) It must be based on substantial distinctions.
2) It must be germane to the purposes of the law.
3) It must not be limited to existing conditions only.
4) It must apply equally to all members of the class.
When the Supreme Court looked into the records of the deliberations of the
lawmakers when R.A. 8424 was being drafted, the SC found out that PAGCORs
exemption was not really based on substantial distinctions. In fact, the lawmakers
merely exempted PAGCOR from income taxation upon the request of PAGCOR
itself. This was changed however when R.A. 9337 was passed and now PAGCOR is
already subject to income taxation.
32

Anent the issue of the imposition of the 10% VAT against PAGCOR, the BIR had
overstepped its authority. Nowhere in R.A. 9337 does it state that PAGCOR is
subject to VAT. Therefore, that portion of the IRR issued by the BIR is void. In fact,
Section 109 of R.A. 9337 expressly exempts PAGCOR from VAT. Further, PAGCORs
charter exempts it from VAT.
To recapitulate, PAGCOR is subject to income taxation but not to VAT.

33

8.

VILLEGAS V HIU CHONG

DIGEST1

Villegas vs Hiu Chiong Tsai Pao Ho (1978)Facts: The Municipal Board of Manila
enacted Ordinance 6537 requiring aliens (except those employed in the
diplomatic and consular missions of foreign countries, in technical assistance
programs of the government and another country, and members of religious
orders or congregations) to procure the requisite mayor

s permit so as to be employed or engage in trade in the City of Manila. The permit
fee is P50, and the penalty for the violation of the ordinance is 3 to 6 months
imprisonment or a fine of P100 to P200, or both.Issue: Whether the ordinance
imposes a regulatory fee or a tax.Held: The ordinance

s purpose is clearly to raise money under the guise of regulation by exacting P50
from aliens who have been cleared for employment. The amount is unreasonable
and excessive because it fails to consider difference in situation among aliens
required to pay it, i.e. being casual, permanent, part-time, rank-and-file or
executive.[ The Ordinance was declared invalid as it is arbitrary, oppressive and
unreasonable, being applied only to aliens who are thus deprived of their rights to
life, liberty and property and therefore violates the due process and equal
protection clauses of the Constitution. Further, the ordinance does not lay down
any criterion or standard to guide the Mayor in the exercise of his discretion, thus
conferring upon the mayor arbitrary and unrestricted powers. ]

DIGEST2
Political Law Delegation of Powers Administrative Bodies
Pao Ho is a Chinese national employed in the City of Manila. On 27 March 1968,
then Manila mayor Antonio Villegas signed Ordinance No. 6537. The said
ordinance prohibits foreign nationals to be employed within the City of Manila
without first securing a permit from the Mayor of Manila. The permit will cost them
P50.00. Pao Ho, on 04 May 1968 filed a petition for prohibition against the said
Ordinance alleging that as a police power measure, it makes no distinction
between useful and non-useful occupations, imposing a fixed P50.00 employment
permit, which is out of proportion to the cost of registration and that it fails to
prescribe any standard to guide and/or limit the action of the Mayor, thus,
violating the fundamental principle on illegal delegation of legislative powers.
Judge Arca of Manila CFI ruled in favor of Pao Ho and he declared the
Ordinance as being null and void.
ISSUE: Whether or not there is undue delegation to the Mayor of Manila.
HELD: The decision of Judge Arca is affirmed. Ordinance No. 6537 does not lay
down any criterion or standard to guide the Mayor in the exercise of his discretion.
It has been held that where an ordinance of a municipality fails to state any policy
or to set up any standard to guide or limit the mayors action, expresses no
purpose to be attained by requiring a permit, enumerates no conditions for its
grant or refusal, and entirely lacks standard, thus conferring upon the Mayor
arbitrary and unrestricted power to grant or deny the issuance of building permits,
such ordinance is invalid, being an undefined and unlimited delegation of power
to allow or prevent an activity per se lawful. Ordinance No. 6537 is void because it
does not contain or suggest any standard or criterion to guide the mayor in the
exercise of the power which has been granted to him by the ordinance. The
ordinance in question violates the due process of law and equal protection rule of
the Constitution.
DIGEST3

Villegas v. Hiu Chiung Tsai Pao Ho 86 SCRA 270 (1978)
F: An ordinance of the City of Manila prohibited the employment of aliens in any
occupation or business unless they first secured a permit from the Mayor of Manila
and paid a fee of P500. Respondent, an alien, employed in Manila, brought suit
and obtained judgment from the CFI declaring the ordinance null and void.
HELD: The ordinance is a tax measure. In imposing a flat rate of P500, it failed to
consider substantial differences in situations among aliens and for that reason
violates the rule on uniformity of taxation. It also lays down no guide for
granting/denying the permit and therefore permits the arbitrary exercise of
discretion by the Mayor. Finally, the ordinance denies aliens due process and the
equal protection of the laws
DIGEST4

FACTS:
On February 22, 1968, the Municipal Board of Manila passed City
Ordinance No. 6537. The said city ordinance was also signed by then Manila
Mayor Antonio J. Villegas (Villegas).
Section 1 of the said city ordinance prohibits aliens from being employed
or to engage or participate in any position or occupation or business enumerated
therein, whether permanent, temporary or casual, without first securing an
employment permit from the Mayor of Manila and paying the permit fee of P50.00
except persons employed in the diplomatic or consular missions of foreign
countries, or in the technical assistance programs of both the Philippine
Government and any foreign government, and those working in their respective
households, and members of religious orders or congregations, sect or
denomination, who are not paid monetarily or in kind.
34

Hiu Chiong Tsai Pao Ho (Tsai Pao Ho) who was employed in Manila, filed
a petition with the CFI of Manila to declare City Ordinance No. 6537 as null and
void for being discriminatory and violative of the rule of the uniformity in taxation.
The trial court declared City Ordinance No. 6537 null and void. Villegas
filed the present petition.

ISSUE:
Whether or not City Ordinance No. 6537 is a tax or revenue measure.

RULING:
Yes. The contention that City Ordinance No. 6537 is not a purely tax or
revenue measure because its principal purpose is regulatory in nature has no
merit. While it is true that the first part which requires that the alien shall secure an
employment permit from the Mayor involves the exercise of discretion and
judgment in the processing and approval or disapproval of applications for
employment permits and therefore is regulatory in character the second part
which requires the payment of P50.00 as employee's fee is not regulatory but a
revenue measure. There is no logic or justification in exacting P50.00 from aliens
who have been cleared for employment. It is obvious that the purpose of the
ordinance is to raise money under the guise of regulation.

DIGEST5

"A tax law should be declared invalid if it fails to lay down standards to guide or
limit the actions of the taxing authority."

FACTS: The Municipal Board of Manila enacted Ordinance No. 6537 which
prohibits aliens from being employed or to engage or participate in any position
or occupation or business, without first securing an employment permit from the
Mayor of Manila and paying the permit fee of P50.00. The respondent challenged
the validity of the ordinance upon the contention that it does not qualify as a
valid exercise of the power to tax for, as a revenue measure imposed on aliens
employed in the City of Manila, the ordinance is discriminatory and violative of the
rule of the uniformity in taxation, and as a police power measure, it makes no
distinction between useful and non-useful occupations, imposing a fixed P50.00
employment permit, which is out of proportion to the cost of registration and that
it fails to prescribe any standard to guide and/or limit the action of the Mayor,
thus, violating the fundamental principle on delegation of legislative powers:

ISSUE: Is there a valid exercise of the taxing power of the local government?

HELD: None. First, the ordinance is not a regulatory or police power measure; it is
but a revenue measure guised in a police power measure. Second, the P50.00 fee
is unreasonable not only because it is excessive but because it fails to consider
valid substantial differences in situation among individual aliens who are required
to pay it. Although the equal protection clause of the Constitution does not forbid
classification, it is imperative that the classification should be based on real and
substantial differences having a reasonable relation to the subject of the
particular legislation. The same amount of P50.00 is being collected from every
employed alien whether he is casual or permanent, part time or full time or
whether he is a lowly employee or a highly paid executive.
On the illegal delegation part of the argument, Ordinance No. 6537 is void for it
does not lay down any criterion or standard to guide the Mayor in the exercise of
his discretion. It has been held that where an ordinance of a municipality fails to
state any policy or to set up any standard to guide or limit the mayor's action,
expresses no purpose to be attained by requiring a permit, enumerates no
conditions for its grant or refusal, and entirely lacks standard, thus conferring upon
the Mayor arbitrary and unrestricted power to grant or deny the issuance of
permits, such ordinance is invalid, being an undefined and unlimited delegation
of power to allow or prevent an activity per se lawful.

35

9.

REYES V ALMANZOR

DIGEST1

REYES v. ALMANZOR
GR Nos. L-49839-46, April 26, 1991
196 SCRA 322

FACTS: Petitioners JBL Reyes et al. owned a parcel of land in Tondo which are
leased and occupied as dwelling units by tenants who were paying monthly
rentals of not exceeding P300. Sometimes in 1971 the Rental
Freezing Law was passed prohibiting for one year from its effectivity, an increase in
monthly rentals of dwelling units where rentals do not exceed three hundred
pesos (P300.00), so that the Reyeses were precluded from raising the rents and
from ejecting the tenants. In 1973, respondent City Assessor of Manila re-classified
and reassessed the value of the subject properties based on the schedule of
market values, which entailed an increase in the corresponding tax rates
prompting petitioners to file a Memorandum of Disagreement averring that the
reassessments made were "excessive, unwarranted, inequitable, confiscatory and
unconstitutional" considering that the taxes imposed upon them greatly
exceeded the annual income derived from their properties. They argued that the
income approach should have been used in determining the land values instead
of the comparable sales approach which the City Assessor adopted.

ISSUE: Is the approach on tax assessment used by the City Assessor reasonable?

HELD: No. The taxing power has the authority to make a reasonable and natural
classification for purposes of taxation but the government's act must not be
prompted by a spirit of hostility, or at the very least discrimination that finds no
support in reason. It suffices then that the laws operate equally and uniformly on
all persons under similar circumstances or that all persons must be treated in the
same manner, the conditions not being different both in the privileges conferred
and the liabilities imposed.
Consequently, it stands to reason that petitioners who are burdened by the
government by its Rental Freezing
Laws (then R.A. No. 6359 and P.D. 20) under the principle of social justice should
not now be penalized by the same government by the imposition of excessive
taxes petitioners can ill afford and eventually result in the forfeiture of their
properties.






DIGEST2

FACTS:
Petitioners (J.B.L. Reyes and Edmundo Reyes) are owners of parcels of land leased
to tenants.RA 6359 was enacted prohibiting for one year an increase in monthly
rentals of dwelling unitsand sai d Act al so di sal l owed ej ectment of l essees
upon the expi rati on of the usual peri od of l ease. Ci ty assessor of
Mani l a (one of the respondents) assess ed the val ue of
peti ti onersproperty based on the schedule of market values duly reviewed by
the Secretary of Finance.The revision entailed an increase to the tax rates and
petitioners averred that the reassessmentimposed upon them greatly exceeded
the annual income derived from their properties.

ISSUE:
Whether or not income approach is the method to be used in the tax assessment
and not thecomparable sales approach.

RULING:
Petition Granted.B y no s t r e t ch of t he i magi nat i on can t he mar k e t
v al ue of pr ope r t i es cov e r ed by P D 2 0 be equated with the market
value of properties not so covered. In the case at bar, not even
factorsdeterminant of the assessed value of subject properties under the
comparable sales approachwere presented by respondent namely:1.That the
sale must represent a bonafide arms length transaction between a willing
seller and a willing buyer 2.The property must be comparabl e property. As
a general rule, there were no takers so that there can be no reasonable basis for
theconclusion that these properties are comparable.Taxes are lifeblood of
government, however,such collection should be made in accordance with the
law and therefore necessary to reconcileconfl i cti ng i nterests of the
authori ti es so that the real purpose of taxati on, promoti on of
thewelfare of common good can be achieved.

DIGEST3

Facts: JBL, Edmundo and Milagros Reyes are owners of parcels of land in Manila
which are leased and occupied as dwelling sites by tenants. In 1971, RA 6359 was
passed prohibiting an increase of monthly rentals of dwelling units or of land on
which another dwelling is located for one year after effectivity for rentals not
exceeding P300 but allowing an increase of rent thereafter by not more than 10%.
The Act also suspended the operation of Article 1673 of the Civil Code (ejectment
of lessess). PD 20 amended RA 6359 by absolutely prohibiting the increase and
indefinitely suspending Article 1673. The Reyeses, thus, were precluded from raising
the rentals and from ejecting the tenants. In 1973, the City Assessor of Manila
reclassified and reassessed the value of the properties based on the schedule of
market values duly reviewed by the Secretary of Finance. As it entailed an
increase of the corresponding tax rates, the Reyeses filed a memorandum of
disagreement with the Board of Tax Assessment Appeals and averring therein that
36

the reassessments were excessive, unwarranted, unequitable, confiscatory and
unconstitutional inasmuch as the taxes imposed exceeded the annual income
derived from their properties; and that the income approach should have been
used in determining land values instead of the comparative sales approach which
the assessor adopted.

Issue: Whether the reassessment is unequitable.

Held: Taxation is equitable when its burden falls on those better able to pay.
Taxation is progressive when its rate goes up depenfing on the resources of the
person affected. Taxes are uniform when all taxable articles or kinds of property of
the same class are taxed at the same rate. The taxing power has the authority to
make reasonable and natural classification for purposes of taxation. Laws should
operate equally and uniformly, however, on all persons under similar
circumstances or that all persons mus t be treated in the same manner, the
conditiions not being different both in the privileges conferred and liabilities
imposed. Finally, under the Real Property Tax Code (PD 464), property must be
appraised at its cuurent and fair market value. The market value of the properties
covered by PD 20, thus cannot be equated with the market value of properties
not so covered. Shcu property covered by PD 20 has naturally a much lesser
market value in view of the rental restrictions. Although taxes are the lifeblood of
the government and should be collected without unnecessary hindrance, such
collection should be made in accordance with law as any arbitrariness will negate
the very reason for government itself. As teh Reyeses are burdened by the Rent
Freeze Laws (RA 6359 and PD 20), they should not be penalized by the same
government by the imposition of excessive taxes they cancan ill afford and would
eventually result in the forfeiture of their properties, under the principle of social
justice.

DIGEST4

FACTS:
Petitioner are owners of parcels of land leased to tenants. RA 6359 was enacted
prohibiting for one year an increase in monthly rentals of dwelling units and said
Act also disallowed ejectment of lessees upon the expiration of the usual period of
lease. City assessor of Manila assessed the value of petitioners property based on
the schedule of market values duly reviewed by the Secretary of Finance. The
revision entailed an increase to the tax rates and petitioners averred that the
reassessment imposed upon them greatly exceeded the annual income derived
from their properties.
ISSUE:
Whether or not income approach is the method to be used in the tax assessment
and not the comparable sales approach.
RULING:
By no stretch of the imagination can the market value of properties covered by
PD 20 be equated with the market value of properties not so covered. In the case
at bar, not even factors determinant of the assessed value of subject properties
under the comparable sales approach were presented by respondent namely:
1. That the sale must represent a bonafide arms length transaction between a
willing seller and a willing buyer
2. The property must be comparable property.
As a general rule, there were no takers so that there can be no reasonable basis
for the conclusion that these properties are comparable.
Taxes are lifeblood of government, however, such collection should be made in
accordance with the law and therefore necessary to reconcile conflicting
interests of the authorities so that the real purpose of taxation, promotion of the
welfare of common good can be achieved.

37

10.
LUNG CENTER V QUEZON CITY

DIGEST1

Lung Center of the Philippines vs. Quezon City [GR No. 144104 June 29, 2004]
Facts: Lung Center of the Philippines is a non-stock and non-profit entity
established by virtue of PD No. 1823. It is the registered owner of the land on which
the Lung Center of the Philippines Hospital is erected. A big space in the ground
floor of the hospital is being leased to private parties, for canteen and small store
spaces, and to medical or professional practitioners who use the same as their
private clinics. Also, a big portion on the right side of the hospital is being leased
for commercial purposes to a private enterprise known as the Elliptical Orchids
and Garden Center.

When the City Assessor of Quezon City assessed both its land and hospital building
for real property taxes, the Lung Center of the Philippines filed a claim for
exemption on its averment that it is a charitable institution with a minimum of 60%
of its hospital beds exclusively used for charity patients and that the major thrust of
its hospital operation is to serve charity patients. The claim for exemption was
denied, prompting a petition for the reversal of the resolution of the City Assessor
with the Local Board of Assessment Appeals of Quezon City, which denied the
same. On appeal, the Central Board of Assessment Appeals of Quezon City
affirmed the local boards decision, finding that Lung Center of the Philippines is
not a charitable institution and that its properties were not actually, directly and
exclusively used for charitable purposes. Hence, the present petition for review
with averments that the Lung Center of the Philippines is a charitable institution
under Section 28(3), Article VI of the Constitution, notwithstanding that it accepts
paying patients and rents out portions of the hospital building to private individuals
and enterprises.

Issue: Is the Lung Center of the Philippines a charitable institution within the
context of the Constitution, and therefore, exempt from real property tax?

Held: The Lung Center of the Philippines is a charitable institution. To determine
whether an enterprise is a charitable institution or not, the elements which should
be considered include the statute creating the enterprise, its corporate purposes,
its constitution and by-laws, the methods of administration, the nature of the
actual work performed, that character of the services rendered, the indefiniteness
of the beneficiaries and the use and occupation of the properties.

However, under the Constitution, in order to be entitled to exemption from real
property tax, there must be clear and unequivocal proof that (1) it is a charitable
institution and (2)its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used
for charitable purposes. While portions of the hospital are used for treatment of
patients and the dispensation of medical services to them, whether paying or
non-paying, other portions thereof are being leased to private individuals and
enterprises.

Exclusive is defined as possessed and enjoyed to the exclusion of others, debarred
from participation or enjoyment. If real property is used for one or more
commercial purposes, it is not exclusively used for the exempted purposes but is
subject to taxation.

DIGEST2

To determine whether an enterprise is a charitable institution/entity or not, the
elements which should be considered include the statute creating the enterprise,
its corporate purposes, its constitution and by-laws, the methods of administration,
the nature of the actual work performed, the character of the services rendered,
the indefiniteness of the beneficiaries, and the use and occupation of the
properties. What is meant by actual, direct and exclusive use of the property for
charitable purposes is the direct and immediate and actual application of the
property itself to the purposes for which the charitable institution is organized. It is
not the use of the income from the real property that is determinative of whether
the property is used for taxexempt purposes.
Lung Center of the Philippines, herein petitioner, is a non-stock and non-profit
entity organized under PD # 1823. It owned a lot located in Quezon Avenue
corner Elliptical Road erected therein is a hospital. The space at the ground floor
of the said hospital is being leased to private parties, for canteen and small store
spaces and to medical or professional practitioners who use their clinics for their
patients. A big portion of the said lot is being occupied by a private enterprise
known as Elliptical Orchids and Garden Center. Petitioner accepts both paying
and non-paying patients. It also receives annual subsidies from the government.
On June 7, 1993, the City Assessor of Quezon City assessed real property taxes
amounting to P4,554,860 on the land and the hospital building of the petitioner.
The latter filed a Claim for Exemption from real property taxes with the City
Assessor claiming that it is a charitable institution. Its claim was denied. Petitioner
then filed for a reversal of the City Assessors resolution to the Local Board of
Assessment Appeals of Quezon City, also known as QC-LBAA. Petitioner claimed
that under Section 28 paragraph 3 of the 1987 Constitution the property is
exempted form real property taxes. It contended that
60% of its hospital beds are exclusively used for charity patients and that the
hospitals operation is for charity patients. QC-LBAA dismissed the petition and
held the petitioner liable for real property taxes.
The Central Board of Assessment Appeals of Quezon City (CBAA) affirmed the said
decision. The petitioner appealed to the Court of Appeals which also affirmed the
same. Hence, this petition with the Supreme Court.



38

ISSUES:
1. Whether or not Lung Center is a charitable institution within the context of
Presidential
Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of
Republic Act
No. 7160
2. Whether or not the real properties of the petitioner are exempt from real
property taxes

HELD:
First Issue:
It is a charitable institution within the context of the 1973 and 1987 Constitution
The petitioner is a charitable institution within the context of the 1973 and 1987
Constitutions.
To determine whether an enterprise is a charitable institution/entity or not, the
elements which should be considered include the statute creating the enterprise,
its corporate purposes, its constitution and bylaws, the methods of administration,
the nature of the actual work performed, the character of the services rendered,
the indefiniteness of the beneficiaries, and the use and occupation of the
properties.
Under PD # 1823, herein petitioner is a non-profit and non-stock corporation which
is administered by the Office of the President of the Philippines with the Ministry of
Health and the Ministry of Human Settlements. The Lung Center is organized for
the welfare and benefit of the Filipino people to combat the high incidence of
lung and pulmonary diseases in the Philippines. The services offered by the
petitioner are for the general public in any and walks of life including those who
are poor and the needy without discrimination.
As a general principle, a charitable institution does not lose its character as such
and its exemption for taxes simply because it derives income from paying patients,
whether out-patient, or confined in the hospitals, or receives subsidies from the
government, so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money inures to the
private benefit of the persons managing or operating the institution.
Petitioner is also entitled to receive donations. Even so, it does not lose its
character as a charitable institution simply because the gift or donation is in the
form of subsidies granted by the government.

Second issue:
Real Property That Are Leased To Private Entities Are Not Exempt From Real
Property
Taxes
Those portions of the petitioners real property that are leased to private entities
are not exempt from real property taxes as these are not actually, directly and
exclusively used for charitable purposes.
Section 28(3), Article VI of the 1987 Philippine Constitution provides that:
(3) Charitable institutions, churches and parsonages or convents appurtenant
thereto, mosques, nonprofit cemeteries, and all lands, buildings, and
improvements, actually, directly and exclusively used for religious, charitable or
educational purposes shall be exempt from taxation.
In this provision, what is exempted is the property taxes only. Those exempted from
real estate taxes are land, buildings, and improvements actually, directly and
exclusively used for religious, charitable or educational purposes.
This constitutional provision is implemented by section 234(B) of RA 7160 (Local
Government Code of 1991). Under which it provides that: SECTION 234.
Exemptions from Real Property Tax. The following are exempted from payment of
the real property tax:
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, nonprofit or religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusively used for religious, charitable or
educational purposes.
It is clear from the abovementioned provisions that in order to be entitled to the
exemption, the petitioner is burdened to prove, by clear and unequivocal proof,
that (a) it is a charitable institution; and (b) its real properties are ACTUALLY,
DIRECTLY and EXCLUSIVELY used for charitable purposes. What is meant by actual,
direct and exclusive use of the property for charitable purposes is the direct and
immediate and actual application of the property itself to the purposes for which
the charitable institution is organized.
It is not the use of the income from the real property that is determinative of
whether the property is used for tax-exempt purposes.
Unfortunately, the Lung Center of the Philippines failed to prove that the entirety
of its real property is actually, directly and exclusively used for charitable purposes.
A part of the hospital is being used for the treatment of patients, but a relative
portion is being leased to private individuals for their clinics and canteen and by
the Elliptical Orchids and Garden Center.
Accordingly, we hold that the portions of the land leased to private entities as well
as those parts of the hospital leased to private individuals are not exempt from
such taxes. On the other hand, the portions of the land occupied by the hospital
and portions of the hospital used for its patients, whether paying or nonpaying, are
exempt from real property taxes.

DIGEST2

LUNG CENTER v. QUEZON CITY

NATURE: Petition for review on certiorariFACTS: The petitioner Lung Center of the
Philippines is a non-stock and non-profit entityestablished by virtue of Presidential
Decree No. 1823. It owns a piece of land, in the middle of which is ahospital
stands. A big space at the ground floor is being leased to private parties for
canteen and smallstores and to medical and to professional practitioners. A big
portion of the lot is being leased forcommercial purposes to a private enterprise. In
1993, both land and the hospital building were assessedfor real property taxes in
the amount of about Php 4.5 Million. The petitioner avers that it is a
charitableinstitution within the context of Section 28(3), Article VI of the 1987
Constitution. It asserts that itscharacter as a charitable institution is not altered by
39

the fact that it admits paying patients and rendersmedical services to them,
leases portions of the land to private parties, and rents out portions of thehospital
to private medical practitioners from which it derives income to be used for
operationalexpenses.ISSUE: Whether or not the property is tax exempt under the
1987 Constitution.HELD: Only the hospital is exempt from property tax.RATIONALE:
The test whether an enterprise is charitable or not is whether it exists to carry out
apurpose reorganized in law as charitable or whether it is maintained for gain,
profit, or privateadvantage. As a general principle, a charitable institution does
not lose its character as such and itsexemption from taxes simply because it
derives income from paying patients, whether out-patient, orconfined in the
hospital, or receives subsidies from the government, so long as the money
received isdevoted or used altogether to the charitable object which it is
intended to achieve; and no money inuresto the private benefit of the persons
managing or operating the institution. However, under the 1973and 1987
Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the
petitioner isburdened to prove, by clear and unequivocal proof, that (a) it is a
charitable institution; and (b) its realproperties are
ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. Accordingly,
onlythose portions of the hospital used for patients whether paying or non-paying
are exempt from realproperty taxes. Those portions of its real property that are
leased to private entities are not exemptfrom real property taxes as these are not
actually, directly and exclusively used for charitable purposes.


DIGEST3

FACTS:
Petitioner is a non-stock, non-profit entity established by virtue of PD No. 1823,
seeks exemption from real property taxes when the City Assessor issued Tax
Declarations for the land and the hospital building. Petitioner predicted on its
claim that it is a charitable institution. The request was denied, and a petition
hereafter filed before the Local Board of Assessment Appeals of Quezon City (QC-
LBAA) for reversal of the resolution of the City Assessor. Petitioner alleged that as a
charitable institution, is exempted from real property taxes under Sec 28(3) Art VI
of the Constitution. QC-LBAA dismissed the petition and the decision was likewise
affirmed on appeal by the Central Board of Assessment Appeals of Quezon City.
The Court of Appeals affirmed the judgment of the CBAA.

ISSUE:
1. Whether or not petitioner is a charitable institution within the context of PD 1823
and the 1973 and 1987 Constitution and Section 234(b) of RA 7160.

2. Whether or not petitioner is exempted from real property taxes.

RULING:
1. Yes. The Court hold that the petitioner is a charitable institution within the
context of the 1973 and 1987 Constitution. Under PD 1823, the petitioner is a non-
profit and non-stock corporation which, subject to the provisions of the decree, is
to be administered by the Office of the President with the Ministry of Health and
the Ministry of Human Settlements. The purpose for which it was created was to
render medical services to the public in general including those who are poor and
also the rich, and become a subject of charity. Under PD 1823, petitioner is
entitled to receive donations, even if the gift or donation is in the form of subsidies
granted by the government.

2. Partly No. Under PD 1823, the lung center does not enjoy any property tax
exemption privileges for its real properties as well as the building constructed
thereon.
The property tax exemption under Sec. 28(3), Art. VI of the Constitution of the
property taxes only. This provision was implanted by Sec.243 (b) of RA 7160.which
provides that in order to be entitled to the exemption, the lung center must be
able to prove that: it is a charitable institution and; its real properties are actually,
directly and exclusively used for charitable purpose. Accordingly, the portions
occupied by the hospital used for its patients are exempt from real property taxes
while those leased to private entities are not exempt from such taxes.

DIGEST4

FACTS:

The Petitioner is a non-stock, non-profit entity which owns a parcel of land in
Quezon City. Erected in the middle of the aforesaid lot is a hospital known as the
Lung Center of the Philippines. The ground floor is being leased to a canteen,
medical professionals whom use the same as their private clinics, as well as to
other private parties. The right portion of the lot is being leased for commercial
purposes to the Elliptical Orchids and Garden Center. The petitioner accepts
paying and non-paying patients. It also renders medical services to out-patients,
both paying and non-paying. Aside from its income from paying patients, the
petitioner receives annual subsidies from the government.

Petitioner filed a Claim for Exemption from realty taxes amounting to about Php4.5
million, predicating its claim as a charitable institution. The city assessor denied the
Claim. When appealed to the QC-Local Board of Assessment, the same was
dismissed. The decision of the QC-LBAA was affirmed by the Central Board of
Assessment Appeals, despite the Petitioners claim that 60% of its hospital beds are
used exclusively for charity.

ISSUE:
Whether or not the Petitioner is entitled to exemption from realty taxes
notwithstanding the fact that it admits paying clients and leases out a portion of
its property for commercial purposes.



40

HELD:

The Court held that the petitioner is indeed a charitable institution based on its
charter and articles of incorporation. As a general principle, a charitable
institution does not lose its character as such and its exemption from taxes simply
because it derives income from paying patients, whether out-patient or confined
in the hospital, or receives subsidies from the government, so long as the money
received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the persons
managing or operating the institution.

Despite this, the Court held that the portions of real property that are leased to
private entities are not exempt from real property taxes as these are not actually,
directly and exclusively used for charitable purposes. (strictissimi juris) Moreover,
P.D. No. 1823 only speaks of tax exemptions as regards to:
income and gift taxes for all donations, contributions, endowments
and equipment and supplies to be imported by authorized entities or
persons and by the Board of Trustees of the Lung Center of the
Philippines for the actual use and benefit of the Lung Center; and
taxes, charges and fees imposed by the Government or any
political subdivision or instrumentality thereof with respect to equipment
purchases (expression unius est exclusion alterius/expressium facit
cessare tacitum).

DIGEST5

Issues:
1. Whether Lung Center is a charitable institution within the context of PD
1823 ans the 1973 and 1987 Constitutions ans Section 234(b) of RA 7160;
2. Whether the real properties of the Lung Center are exempt from real
property taxes.
Petition is partially granted.
On the first issue, petitioner Lung Center is a charitable institution within the context
of the 1973 and 1987 Constitutions. To determine whether an enterprise id a
charitable institution/entity or not, the elements which should be considered
include the statute creating the enterprise, its corporate purposes, its constitution
and by-laws, the method of administration, the nature of the actual work
performed , character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties.
Under Pd 1823, the petitioner is a non-profit and non-stock corporation which,
subject to the provisions of the decree, is to be administered by the Office of the
President with the Ministry of Health and the Ministry of Human Settlements. It was
organized for the welfare and benefit of the Filipino people principally to help
combat the high incidence of lung and pulmonary diseases in the Philippines.
Hence, the medical services of the petitioner are to be rendered to the public in
general in any and all walks of life including those who are poor and the needy
without discrimination.
As a general principle, a charitable institution does not lose its character as such
and its exemption from taxes simply because it derives income from paying
patients, whether out-patient, or confined in the hospital, or receives subsidies
from the government so long as the money received is devoted or used
altogether to the charitable object which it is intended to achieve, and no money
inures to the private benefit of the persons managing or operating the institution.
The money received by the petitioners becomes part of the trust fund and must
be devoted to public trust purposes and cannot be diverted to private profit or
benefit. Under PD 1823, the petitioner is entitled to receive donations. The
petitioner does not lose its character as a charitable institution simply because the
gift or donations is in the form of subsidies granted by the government.
Therefore, the fact that subsidization is by the government rather than private
charitable contributions does not dictate the denial of a charitable exemption if
the facts otherwise support such an exemption, as they do here.
Even if we find that petitioner Lung Center is a charitable institution, we hold,
anent the second issue, that those portions of its real property that are leased to
private entities are not exempt from real property taxes as these are not actually,
directly, and exclusively used for charitable purposes.
The settled rule in this jurisdiction is that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing
power. Taxation is the rule and exemption is the exception. The effect of an
exemption is equivalent to an appropriation. Hence, a claim for exemption from
payment of taxes must be clearly shown and based on language in the law too
plain to be mistaken.
It is plain as day that under the decree, petitioner Lung Center does not enjoy any
property tax exemption privileges for its real properties as well as the building
constructed thereon. If the intentions were otherwise, the same should have been
among the enumeration of tax exempt privileges under Section 2 of the decree.
41

Section 28(3) Article VI of the 1987 Constitution provides:
(3) charitable institutions, churches, and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes shall be exempt from taxation.
The tax exemption under this constitutional provision covers property taxes only.
what is exempted is not the institution itself... those exempted from real estate
taxes are lands, buildings, and improvements actually, directly, and exclusively
used for religious, charitable, or educational purposes.
What is meant by actual, direct, and exclusive use of the property for charitable
purposes is the direct and immediate and actual application of the property itself
to the purposes for which the charitable institution is organized. It is not the use of
the income from the real property that is determinative of whether the property is
used for tax-exempt purposes.
Petitioner Lung Center failed to discharge its burden to prove that the entirety of
its real property is actually, directly, and exclusively used for charitable purposes.
While portions of the hospital are used for the treatment of patients, other portions
thereof are being leased to individuals for their clinics, canteen, and for business
enterprise named Elliptical Orchids and Garden Center.
Accordingly, we hold that the portions of the land leased to private entities as well
as those parts of the hospital leased to private individuals are not exempt from
such taxes. On the other hand, the portions of the land occupied by the hospital
and portions used for its patients, paying or non-paying, are exempt from real
property taxes.

DIGEST6

Facts:
The lung center is a charitable institution within the context of 1973 and 1987
constitutions. The elements considered in determining a charitable institution are:
the statue creating the enterprise; its corporate purposes; constitution and by-
laws, methods of administration, nature of actual work performed, character of
the services rendered, indefiniteness of the beneficiaries, and the use occupation
of properties. As a gen. principle, a charitable institution doe not lose its character
as such and its exemption form taxes simply because it derives income from
paying patients, or receives subsidies from government; and no money insures to
the private benefit of the persons managing or operating the institution.

Issue:
Whether or not the real properties of the lung center are exempt from real
property taxes.

Ruling.
Partly No. Those portions of its real property that are leased to private entities are
not exempt from actually, direct and exclusively used for charitable purpose.
Under PD 1823, the lung center does not enjoy any property tax exemption
privileges for its real properties as well as the building constructed thereon.
The property tax exemption under Sec. 28(3), Art. Vi of the property taxes only. This
provision was implanted by Sec.243 (b) of RA 7160.which provides that in order to
be entitled to the exemption, the lung center must be able to prove that: it is a
charitable institution and; its real properties are actually, directly and exclusively
used for charitable purpose. Accordingly, the portions occupied by the hospital
used for its patients are exempt from real property taxes while those leased to
private entities are not exempt from such taxes.

42

11.
CIR V CENTRAL LUZON

[G.R. NO. 159647 April 15, 2005]
COMMISSIONER OF INTERNAL REVENUE, Petitioners, v. CENTRAL LUZON DRUG
CORPORATION, Respondent.
D E C I S I O N
PANGANIBAN, J.:
The 20 percent discount required by the law to be given to senior citizens is a tax
credit, not merely a tax deduction from the gross income or gross sale of the
establishment concerned. A tax credit is used by a private establishment only
after the tax has been computed; a tax deduction, before the tax is computed.
RA 7432 unconditionally grants a tax credit to all covered entities. Thus, the
provisions of the revenue regulation that withdraw or modify such grant are void.
Basic is the rule that administrative regulations cannot amend or revoke the law.
The Case
Before us is a Petition for Review
1
under Rule 45 of the Rules of Court, seeking to set
aside the August 29, 2002 Decision
2
and the August 11, 2003 Resolution
3
of the
Court of Appeals (CA) in CA-GR SP No. 67439. The assailed Decision reads as
follows:
"WHEREFORE, premises considered, the Resolution appealed from is AFFIRMED in
toto. No costs."
4

The assailed Resolution denied petitioner's Motion for Reconsideration.
The Facts
The CA narrated the antecedent facts as follows:
"Respondent is a domestic corporation primarily engaged in retailing of medicines
and other pharmaceutical products. In 1996, it operated six (6) drugstores under
the business name and style 'Mercury Drug.'
"From January to December 1996, respondent granted twenty (20%) percent sales
discount to qualified senior citizens on their purchases of medicines pursuant to
Republic Act No. [R.A.] 7432 and its Implementing Rules and Regulations. For the
said period, the amount allegedly representing the 20% sales discount granted by
respondent to qualified senior citizens totaled P904,769.00.
"On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year
1996 declaring therein that it incurred net losses from its operations.
"On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit
in the amount of P904,769.00 allegedly arising from the 20% sales discount granted
by respondent to qualified senior citizens in compliance with [R.A.] 7432. Unable to
obtain affirmative response from petitioner, respondent elevated its claim to the
Court of Tax Appeals [(CTA or Tax Court)] via a Petition for Review.
"On February 12, 2001, the Tax Court rendered a Decision
5
dismissing respondent's
Petition for lack of merit. In said decision, the [CTA] justified its ruling with the
following ratiocination:
'x x x, if no tax has been paid to the government, erroneously or illegally, or if no
amount is due and collectible from the taxpayer, tax refund or tax credit is
unavailing. Moreover, whether the recovery of the tax is made by means of a
claim for refund or tax credit, before recovery is allowed[,] it must be first
established that there was an actual collection and receipt by the government of
the tax sought to be recovered. x x x.
'x x x x x x x x x
'Prescinding from the above, it could logically be deduced that tax credit is
premised on the existence of tax liability on the part of taxpayer. In other words, if
there is no tax liability, tax credit is not available.'
"Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed
resolution,
6
granted respondent's motion for reconsideration and ordered herein
petitioner to issue a Tax Credit Certificate in favor of respondent citing the
decision of the then Special Fourth Division of [the CA] in CA G.R. SP No. 60057
entitled 'Central [Luzon] Drug Corporation v. Commissioner of Internal Revenue'
promulgated on May 31, 2001, to wit:
'However, Sec. 229 clearly does not apply in the instant case because the tax
sought to be refunded or credited by petitioner was not erroneously paid or
illegally collected. We take exception to the CTA's sweeping but unfounded
statement that 'both tax refund and tax credit are modes of recovering taxes
which are either erroneously or illegally paid to the government. 'Tax refunds or
43

credits do not exclusively pertain to illegally collected or erroneously paid taxes as
they may be other circumstances where a refund is warranted. The tax refund
provided under Section 229 deals exclusively with illegally collected or erroneously
paid taxes but there are other possible situations, such as the refund of excess
estimated corporate quarterly income tax paid, or that of excess input tax paid by
a VAT-registered person, or that of excise tax paid on goods locally produced or
manufactured but actually exported. The standards and mechanics for the grant
of a refund or credit under these situations are different from that under Sec. 229.
Sec. 4[.a)] of R.A. 7432, is yet another instance of a tax credit and it does not in
any way refer to illegally collected or erroneously paid taxes, x x x. '"
7

Ruling of the Court of Appeals
The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering
petitioner to issue a tax credit certificate in favor of respondent in the reduced
amount of P903,038.39. It reasoned that Republic Act No. (RA) 7432 required
neither a tax liability nor a payment of taxes by private establishments prior to the
availment of a tax credit. Moreover, such credit is not tantamount to an
unintended benefit from the law, but rather a just compensation for the taking of
private property for public use.
Hence this Petition.
8

The Issues
Petitioner raises the following issues for our consideration:
"Whether the Court of Appeals erred in holding that respondent may claim the
20% sales discount as a tax credit instead of as a deduction from gross income or
gross sales.
"Whether the Court of Appeals erred in holding that respondent is entitled to a
refund."
9

These two issues may be summed up in only one: whether respondent, despite
incurring a net loss, may still claim the 20 percent sales discount as a tax credit.
The Court's Ruling
The Petition is not meritorious.
Sole Issue:
Claim of 20 Percent Sales Discount as Tax Credit Despite Net Loss
Section 4a) of RA 7432
10
grants to senior citizens the privilege of obtaining a 20
percent discount on their purchase of medicine from any private establishment in
the country.
11
The latter may then claim the cost of the discount as a tax credit.
12

But can such credit be claimed, even though an establishment operates at a
loss?chanroblesvirtualawlibrary
We answer in the affirmative.
Tax Credit versus Tax Deduction
Although the term is not specifically defined in our Tax Code,
13
tax credit generally
refers to an amount that is "subtracted directly from one's total tax liability."
14
It is
an "allowance against the tax itself"
15
or "a deduction from what is owed"
16
by a
taxpayer to the government. Examples of tax credits are withheld taxes, payments
of estimated tax, and investment tax credits.
17

Tax credit should be understood in relation to other tax concepts. One of these is
tax deduction - - defined as a subtraction "from income for tax purposes,"
18
or an
amount that is "allowed by law to reduce income prior to [the] application of the
tax rate to compute the amount of tax which is due."
19
An example of a tax
deduction is any of the allowable deductions enumerated in Section 34
20
of the
Tax Code.
A tax credit differs from a tax deduction. On the one hand, a tax credit reduces
the tax due, including - - whenever applicable - - the income tax that is
determined after applying the corresponding tax rates to taxable income.
21
A tax
deduction, on the other, reduces the income that is subject to tax
22
in order to
arrive at taxable income.
23
To think of the former as the latter is to avoid, if not
entirely confuse, the issue. A tax credit is used only after the tax has been
computed; a tax deduction, before.
Tax Liability Required for Tax Credit
Since a tax credit is used to reduce directly the tax that is due, there ought to be a
tax liability before the tax credit can be applied. Without that liability, any tax
credit application will be useless. There will be no reason for deducting the latter
when there is, to begin with, no existing obligation to the government. However,
as will be presented shortly, the existence of a tax credit or its grant by law is not
the same as the availment or use of such credit. While the grant is mandatory, the
availment or use is not.
44

If a net loss is reported by, and no other taxes are currently due from, a business
establishment, there will obviously be no tax liability against which any tax credit
can be applied.
24
For the establishment to choose the immediate availment of a
tax credit will be premature and impracticable. Nevertheless, the irrefutable fact
remains that, under RA 7432, Congress has granted without conditions a tax credit
benefit to all covered establishments.
Although this tax credit benefit is available, it need not be used by losing ventures,
since there is no tax liability that calls for its application. Neither can it be reduced
to nil by the quick yet callow stroke of an administrative pen, simply because no
reduction of taxes can instantly be effected. By its nature, the tax credit may still
be deducted from a future, not a present, tax liability, without which it does not
have any use. In the meantime, it need not move. But it breathes.
Prior Tax Payments Not Required for Tax Credit
While a tax liability is essential to the availment or use of any tax credit, prior tax
payments are not. On the contrary, for the existence or grant solely of such credit,
neither a tax liability nor a prior tax payment is needed. The Tax Code is in fact
replete with provisions granting or allowing tax credits, even though no taxes have
been previously paid.
For example, in computing the estate tax due, Section 86(E) allows a tax credit - -
subject to certain limitations - - for estate taxes paid to a foreign country. Also
found in Section 101(C) is a similar provision for donor's taxes - - again when paid
to a foreign country - - in computing for the donor's tax due. The tax credits in both
instances allude to the prior payment of taxes, even if not made to our
government.
Under Section 110, a VAT (Value-Added Tax) - registered person engaging in
transactions - - whether or not subject to the VAT - - is also allowed a tax credit
that includes a ratable portion of any input tax not directly attributable to either
activity. This input tax may either be the VAT on the purchase or importation of
goods or services that is merely due from - - not necessarily paid by - - such VAT-
registered person in the course of trade or business; or the transitional input tax
determined in accordance with Section 111(A). The latter type may in fact be an
amount equivalent to only eight percent of the value of a VAT-registered person's
beginning inventory of goods, materials and supplies, when such amount - - as
computed - - is higher than the actual VAT paid on the said items.
25
Clearly from
this provision, the tax credit refers to an input tax that is either due only or given a
value by mere comparison with the VAT actually paid - - then later prorated. No
tax is actually paid prior to the availment of such credit.
In Section 111(B), a one and a half percent input tax credit that is merely
presumptive is allowed. For the purchase of primary agricultural products used as
inputs - - either in the processing of sardines, mackerel and milk, or in the
manufacture of refined sugar and cooking oil - - and for the contract price of
public work contracts entered into with the government, again, no prior tax
payments are needed for the use of the tax credit.
More important, a VAT-registered person whose sales are zero-rated or effectively
zero-rated may, under Section 112(A), apply for the issuance of a tax credit
certificate for the amount of creditable input taxes merely due - - again not
necessarily paid to - - the government and attributable to such sales, to the extent
that the input taxes have not been applied against output taxes.
26
Where a
taxpayer
is engaged in zero-rated or effectively zero-rated sales and also in taxable or
exempt sales, the amount of creditable input taxes due that are not directly and
entirely attributable to any one of these transactions shall be proportionately
allocated on the basis of the volume of sales. Indeed, in availing of such tax credit
for VAT purposes, this provision - - as well as the one earlier mentioned - - shows
that the prior payment of taxes is not a requisite.
It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of
a tax credit allowed, even though no prior tax payments are not required.
Specifically, in this provision, the imposition of a final withholding tax rate on cash
and/or property dividends received by a nonresident foreign corporation from a
domestic corporation is subjected to the condition that a foreign tax credit will be
given by the domiciliary country in an amount equivalent to taxes that are merely
deemed paid.
27
Although true, this provision actually refers to the tax credit as a
condition only for the imposition of a lower tax rate, not as a deduction from the
corresponding tax liability. Besides, it is not our government but the domiciliary
country that credits against the income tax payable to the latter by the foreign
corporation, the tax to be foregone or spared.
28

In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows
as credits, against the income tax imposable under Title II, the amount of income
taxes merely incurred - - not necessarily paid - - by a domestic corporation during
a taxable year in any foreign country. Moreover, Section 34(C)(5) provides that for
such taxes incurred but not paid, a tax credit may be allowed, subject to the
condition precedent that the taxpayer shall simply give a bond with sureties
satisfactory to and approved by petitioner, in such sum as may be required; and
further conditioned upon payment by the taxpayer of any tax found due, upon
petitioner's redetermination of it.
In addition to the above-cited provisions in the Tax Code, there are also tax
treaties and special laws that grant or allow tax credits, even though no prior tax
payments have been made.
45

Under the treaties in which the tax credit method is used as a relief to avoid
double taxation, income that is taxed in the state of source is also taxable in the
state of residence, but the tax paid in the former is merely allowed as a credit
against the tax levied in the latter.
29
Apparently, payment is made to the state of
source, not the state of residence. No tax, therefore, has been previously paid to
the latter.
Under special laws that particularly affect businesses, there can also be tax credit
incentives. To illustrate, the incentives provided for in Article 48 of Presidential
Decree No. (PD) 1789, as amended by Batas Pambansa Blg. (BP) 391, include tax
credits equivalent to either five percent of the net value earned, or five or ten
percent of the net local content of exports.
30
In order to avail of such credits under
the said law and still achieve its objectives, no prior tax payments are necessary.
From all the foregoing instances, it is evident that prior tax payments are not
indispensable to the availment of a tax credit. Thus, the CA correctly held that the
availment under RA 7432 did not require prior tax payments by private
establishments concerned.
31
However, we do not agree with its finding
32
that the
carry-over of tax credits under the said special law to succeeding taxable periods,
and even their application against internal revenue taxes, did not necessitate the
existence of a tax liability.
The examples above show that a tax liability is certainly important in the availment
or use, not the existence or grant, of a tax credit. Regarding this matter, a private
establishment reporting a net loss in its financial statements is no different from
another that presents a net income. Both are entitled to the tax credit provided
for under RA 7432, since the law itself accords that unconditional benefit.
However, for the losing establishment to immediately apply such credit, where no
tax is due, will be an improvident usance.
Sections 2.i and 4 of Revenue Regulations No. 2-94 Erroneous
RA 7432 specifically allows private establishments to claim as tax credit the
amount of discounts they grant.
33
In turn, the Implementing Rules and Regulations,
issued pursuant thereto, provide the procedures for its availment.
34
To deny such
credit, despite the plain mandate of the law and the regulations carrying out that
mandate, is indefensible.
First, the definition given by petitioner is erroneous. It refers to tax credit as the
amount representing the 20 percent discount that "shall be deducted by the said
establishments from their gross income for income tax purposes and from their
gross sales for value-added tax or other percentage tax purposes."
35
In ordinary
business language, the tax credit represents the amount of such discount.
However, the manner by which the discount shall be credited against taxes has
not been clarified by the revenue regulations.
By ordinary acceptation, a discount is an "abatement or reduction made from the
gross amount or value of anything."
36
To be more precise, it is in business parlance
"a deduction or lowering of an amount of money;"
37
or "a reduction from the full
amount or value of something, especially a price."
38
In business there are many
kinds of discount, the most common of which is that affecting the income
statement
39
or financial report upon which the income tax is based.
Business Discounts Deducted from Gross Sales
A cash discount, for example, is one granted by business establishments to credit
customers for their prompt payment.
40
It is a "reduction in price offered to the
purchaser if payment is made within a shorter period of time than the maximum
time specified."
41
Also referred to as a sales discount on the part of the seller and a
purchase discount on the part of the buyer, it may be expressed in such
terms as "5/10, n/30."
42

A quantity discount, however, is a "reduction in price allowed for purchases made
in large quantities, justified by savings in packaging, shipping, and handling."
43
It is
also called a volume or bulk discount.
44

A "percentage reduction from the list price x x x allowed by manufacturers to
wholesalers and by wholesalers to retailers"
45
is known as a trade discount. No
entry for it need be made in the manual or computerized books of accounts,
since the purchase or sale is already valued at the net price actually charged the
buyer.
46
The purpose for the discount is to encourage trading or increase sales,
and the prices at which the purchased goods may be resold are also suggested.
47

Even a chain discount - - a series of discounts from one list price - - is recorded at
net.
48

Finally, akin to a trade discount is a functional discount. It is "a supplier's price
discount given to a purchaser based on the [latter's] role in the [former's]
distribution system."
49
This role usually involves warehousing or advertising.
Based on this discussion, we find that the nature of a sales discount is peculiar.
Applying generally accepted accounting principles (GAAP) in the country, this
type of discount is reflected in the income statement
50
as a line item deducted - -
along with returns, allowances, rebates and other similar expenses - - from gross
sales to arrive at net sales.
51
This type of presentation is resorted to, because the
accounts receivable and sales figures that arise from sales discounts, - - as well as
from quantity, volume or bulk discounts - - are recorded in the manual and
computerized books of accounts and reflected in the financial statements at the
gross amounts of the invoices.
52
This manner of recording credit sales - - known as
the gross method - - is most widely used, because it is simple, more convenient to
apply than the net method, and produces no material errors over time.
53

46

However, under the net method used in recording trade, chain or functional
discounts, only the net amounts of the invoices - - after the discounts have been
deducted - - are recorded in the books of accounts
54
and reflected in the
financial statements. A separate line item cannot be shown,
55
because the
transactions themselves involving both accounts receivable and sales have
already been entered into, net of the said discounts.
The term sales discounts is not expressly defined in the Tax Code, but one provision
adverts to amounts whose sum - - along with sales returns, allowances and cost of
goods sold
56
- - is deducted from gross sales to come up with the gross income,
profit or margin
57
derived from business.
58
In another provision therein, sales
discounts that are granted and indicated in the invoices at the time of sale - - and
that do not depend upon the happening of any future event - - may be excluded
from the gross sales within the same quarter they were given.
59
While
determinative only of the VAT, the latter provision also appears as a suitable
reference point for income tax purposes already embraced in the former. After all,
these two provisions affirm that sales discounts are amounts that are always
deductible from gross sales.
Reason for the Senior Citizen Discount:
The Law, Not Prompt Payment
A distinguishing feature of the implementing rules of RA 7432 is the private
establishment's outright deduction of the discount from the invoice price of the
medicine sold to the senior citizen.
60
It is, therefore, expected that for each retail
sale made under this law, the discount period lasts no more than a day, because
such discount is given - - and the net amount thereof collected - - immediately
upon perfection of the sale.
61
Although prompt payment is made for an arm's-
length transaction by the senior citizen, the real and compelling reason for the
private establishment giving the discount is that the law itself makes it mandatory.
What RA 7432 grants the senior citizen is a mere discount privilege, not a sales
discount or any of the above discounts in particular. Prompt payment is not the
reason for (although a necessary consequence of) such grant. To be sure, the
privilege enjoyed by the senior citizen must be equivalent to the tax credit benefit
enjoyed by the private establishment granting the discount. Yet, under the
revenue regulations promulgated by our tax authorities, this benefit has been
erroneously likened and confined to a sales discount.
To a senior citizen, the monetary effect of the privilege may be the same as that
resulting from a sales discount. However, to a private establishment, the effect is
different from a simple reduction in price that results from such discount. In other
words, the tax credit benefit is not the same as a sales discount. To repeat from
our earlier discourse, this benefit cannot and should not be treated as a tax
deduction.
To stress, the effect of a sales discount on the income statement and income tax
return of an establishment covered by RA 7432 is different from that resulting from
the availment or use of its tax credit benefit. While the former is a deduction
before, the latter is a deduction after, the income tax is computed. As mentioned
earlier, a discount is not necessarily a sales discount, and a tax credit for a simple
discount privilege should not be automatically treated like a sales discount. Ubi lex
non distinguit, nec nos distinguere debemus. Where the law does not distinguish,
we ought not to distinguish.
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20
percent discount deductible from gross income for income tax purposes, or from
gross sales for VAT or other percentage tax purposes. In effect, the tax credit
benefit under RA 7432 is related to a sales discount. This contrived definition is
improper, considering that the latter has to be deducted from gross sales in order
to compute the gross income in the income statement and cannot be deducted
again, even for purposes of computing the income tax.
When the law says that the cost of the discount may be claimed as a tax credit, it
means that the amount - - when claimed - - shall be treated as a reduction from
any tax liability, plain and simple. The option to avail of the tax credit benefit
depends upon the existence of a tax liability, but to limit the benefit to a sales
discount - - which is not even identical to the discount privilege that is granted by
law - - does not define it at all and serves no useful purpose. The definition must,
therefore, be stricken down.
Laws Not Amended by Regulations
Second, the law cannot be amended by a mere regulation. In fact, a regulation
that "operates to create a rule out of harmony with
the statute is a mere nullity";
62
it cannot prevail.
It is a cardinal rule that courts "will and should respect the contemporaneous
construction placed upon a statute by the executive officers whose duty it is to
enforce it x x x."
63
In the scheme of judicial tax administration, the need for
certainty and predictability in the implementation of tax laws is crucial.
64
Our tax
authorities fill in the details that "Congress may not have the opportunity or
competence to provide."
65
The regulations these authorities issue are relied upon
by taxpayers, who are certain that these will be followed by the courts.
66
Courts,
however, will not uphold these authorities' interpretations when clearly absurd,
erroneous or improper.
47

In the present case, the tax authorities have given the term tax credit in Sections
2.i and 4 of RR 2-94 a meaning utterly in contrast to what RA 7432 provides. Their
interpretation has muddled up the intent of Congress in granting a mere discount
privilege, not a sales discount. The administrative agency issuing these regulations
may not enlarge, alter or restrict the provisions of the law it administers; it cannot
engraft additional requirements not contemplated by the legislature.
67

In case of conflict, the law must prevail.
68
A "regulation adopted pursuant to law is
law."
69
Conversely, a regulation or any portion thereof not adopted pursuant to
law is no law and has neither the force nor the effect of law.
70

Availment of Tax Credit Voluntary

Third, the word may in the text of the statute
71
implies that the
availability of the tax credit benefit is neither unrestricted nor mandatory.
72
There is
no absolute right conferred upon respondent, or any similar taxpayer, to avail itself
of the tax credit remedy whenever it chooses; "neither does it impose a duty on
the part of the government to sit back and allow an important facet of tax
collection to be at the sole control and discretion of the taxpayer."
73
For the tax
authorities to compel respondent to deduct the 20 percent discount from either its
gross income or its gross sales
74
is, therefore, not only to make an imposition
without basis in law, but also to blatantly contravene the law itself.
What Section 4.a of RA 7432 means is that the tax credit benefit is merely
permissive, not imperative. Respondent is given two options - - either to claim or
not to claim the cost of the discounts as a tax credit. In fact, it may even ignore
the credit and simply consider the gesture as an act of beneficence, an
expression of its social conscience.
Granting that there is a tax liability and respondent claims such cost as a tax
credit, then the tax credit can easily be applied. If there is none, the credit cannot
be used and will just have to be carried over and revalidated
75
accordingly. If,
however, the business continues to operate at a loss and no other taxes are due,
thus compelling it to close shop, the credit can never be applied and will be lost
altogether.
In other words, it is the existence or the lack of a tax liability that determines
whether the cost of the discounts can be used as a tax credit. RA 7432 does not
give respondent the unfettered right to avail itself of the credit whenever it
pleases. Neither does it allow our tax administrators to expand or contract the
legislative mandate. "The 'plain meaning rule' or verba legis in statutory
construction is thus applicable x x x. 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."
76

Tax Credit Benefit Deemed Just Compensation
Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power of
eminent domain. Be it stressed that the privilege enjoyed by senior citizens does
not come directly from the State, but rather from the private establishments
concerned. Accordingly, the tax credit benefit granted to these establishments
can be deemed as their just compensation for private property taken by the State
for public use.
77

The concept of public use is no longer confined to the traditional notion of use by
the public, but held synonymous with public interest, public benefit, public
welfare, and public convenience.
78
The discount privilege to which our senior
citizens are entitled is actually a benefit enjoyed by the general public to which
these citizens belong. The discounts given would have entered the coffers and
formed part of the gross sales of the private establishments concerned, were it not
for RA 7432. The permanent reduction in their total revenues is a forced subsidy
corresponding to the taking of private property for public use or benefit.
As a result of the 20 percent discount imposed by RA 7432, respondent becomes
entitled to a just compensation. This term refers not only to the issuance of a tax
credit certificate indicating the correct amount of the discounts given, but also to
the promptness in its release. Equivalent to the payment of property taken by the
State, such issuance - - when not done within a reasonable time from the grant of
the discounts - - cannot be considered as just compensation. In effect,
respondent is made to suffer the consequences of being immediately deprived of
its revenues while awaiting actual receipt, through the certificate, of the
equivalent amount it needs to cope with the reduction in its revenues.
79

Besides, the taxation power can also be used as an implement for the exercise of
the power of eminent domain.
80
Tax measures are but "enforced contributions
exacted on pain of penal sanctions"
81
and "clearly imposed for a public
purpose."
82
In recent years, the power to tax has indeed become a most effective
tool to realize social justice, public welfare, and the equitable distribution of
wealth.
83

While it is a declared commitment under Section 1 of RA 7432, social justice
"cannot be invoked to trample on the rights of property owners who under our
Constitution and laws are also entitled to protection. The social justice
consecrated in our [C]onstitution [is] not intended to take away rights from a
person and give them to another who is not entitled thereto."
84
For this reason, a
just compensation for income that is taken away from respondent becomes
necessary. It is in the tax credit that our legislators find support to realize social
justice, and no administrative body can alter that fact.
48

To put it differently, a private establishment that merely breaks even
85
- - without
the discounts yet - - will surely start to incur losses because of such discounts. The
same effect is expected if its mark-up is less than 20 percent, and if all its sales
come from retail purchases by senior citizens. Aside from the observation we have
already raised earlier, it will also be grossly unfair to an establishment if the
discounts will be treated merely as deductions from either its gross income or its
gross sales. Operating at a loss through no fault of its own, it will realize that the tax
credit limitation under RR 2-94 is inutile, if not improper. Worse, profit-generating
businesses will be put in a better position if they avail themselves of tax credits
denied those that are losing, because no taxes are due from the latter.
Grant of Tax Credit Intended by the Legislature
Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by
the community as a whole and to establish a program beneficial to them.
86
These
objectives are consonant with the constitutional policy of making "health x x x
services available to all the people at affordable cost"
87
and of giving "priority for
the needs of the x x x elderly."
88
Sections 2.i and 4 of RR 2-94, however, contradict
these constitutional policies and statutory objectives.
Furthermore, Congress has allowed all private establishments a simple tax credit,
not a deduction. In fact, no cash outlay is required from the government for the
availment or use of such credit. The deliberations on February 5, 1992 of the
Bicameral Conference Committee Meeting on Social Justice, which finalized RA
7432, disclose the true intent of our legislators to treat the sales discounts as a tax
credit, rather than as a deduction from gross income. We quote from those
deliberations as follows:
"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions from
taxable income. I think we incorporated there a provision na - on the responsibility
of the private hospitals and drugstores, hindi ba?chanroblesvirtualawlibrary
SEN. ANGARA. Oo.
THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision here
about the deductions from taxable income of that private hospitals, di ba ganon
'yan?chanroblesvirtualawlibrary
MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting government
and public institutions, so, puwede na po nating hindi isama yung mga less
deductions ng taxable income.
THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals. Yung
isiningit natin?chanroblesvirtualawlibrary
MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the
microphone).
SEN. ANGARA. Hindi pa, hindi pa.
THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama
natin?chanroblesvirtualawlibrary
SEN. ANGARA. Oo. You want to insert that?chanroblesvirtualawlibrary
THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e.
SEN. ANGARA. In the case of private hospitals they got the grant of 15% discount,
provided that, the private hospitals can claim the expense as a tax credit.
REP. AQUINO. Yah could be allowed as deductions in the perpetrations of
(inaudible) income.
SEN. ANGARA. I-tax credit na lang natin para walang cash-out
ano?chanroblesvirtualawlibrary
REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng establishments
na covered.
THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang.
REP. AQUINO. Ano ba yung establishments na
covered?chanroblesvirtualawlibrary
SEN. ANGARA. Restaurant lodging houses, recreation centers.
REP. AQUINO. All establishments covered siguro?chanroblesvirtualawlibrary
SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung ganon.
Can we go back to Section 4 ha?chanroblesvirtualawlibrary
REP. AQUINO. Oho.
SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20%
discount from all establishments et cetera, et cetera, provided that said
49

establishments - provided that private establishments may claim the cost as a tax
credit. Ganon ba 'yon?chanroblesvirtualawlibrary
REP. AQUINO. Yah.
SEN. ANGARA. Dahil kung government, they don't need to claim it.
THE CHAIRMAN. (Rep. Unico). Tax credit.
SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay.
REP. AQUINO Okay.
SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A".
89

Special Law Over General Law
Sixth and last, RA 7432 is a special law that should prevail over the Tax Code - - a
general law. "x x x [T]he rule is that on a specific matter the special law shall
prevail over the general law, which shall
be resorted to only to supply deficiencies in the former."
90
In addition, "[w]here
there are two statutes, the earlier special and the later general - - the terms of the
general broad enough to include the matter provided for in the special - - the
fact that one is special and the other is general creates a presumption that the
special is to be considered as remaining an exception to the general,
91
one as a
general law of the land, the other as the law of a particular case."
92
"It is a canon
of statutory construction that a later statute, general in its terms and not expressly
repealing a prior special statute, will ordinarily not affect the special provisions of
such earlier statute."
93

RA 7432 is an earlier law not expressly repealed by, and therefore remains an
exception to, the Tax Code - - a later law. When the former states that a tax credit
may be claimed, then the requirement of prior tax payments under certain
provisions of the latter, as discussed above, cannot be made to apply. Neither
can the instances of or references to a tax deduction under the Tax Code
94
be
made to restrict RA 7432. No provision of any revenue regulation can supplant or
modify the acts of Congress.
WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of
the Court of Appeals AFFIRMED. No pronouncement as to costs.
SO ORDERED.