digests tax 1

7/28/2019 Digests Tax 1

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1. Chamber of Real Estate and BuildersAssociations, Inc., v. The Hon. ExecutiveSecretary Alberto Romulo, et alG.R. No. 160756. March 9, 2010

Facts: Petitioner Chamber of Real Estate and BuildersAssociations, Inc. (CREBA), an association of real estatedevelopers and builders in the Philippines, questioned thevalidity of Section 27(E) of the Tax Code which imposes theminimum corporate income tax (MCIT) on corporations.

Under the Tax Code, a corporation can become subject to theMCIT at the rate of 2% of gross income, beginning on the 4thtaxable year immediately following the year in which itcommenced its business operations, when such MCIT isgreater than the normal corporate income tax. If the regular

income tax is higher than the MCIT, the corporation does notpay the MCIT.

CREBA argued, among others, that the use of gross income asMCIT base amounts to a confiscation of capital because grossincome, unlike net income, is not realized gain.

CREBA also sought to invalidate the provisions of RR No. 2-98, as amended, otherwise known as the ConsolidatedWithholding Tax Regulations, which prescribe the rules andprocedures for the collection of CWT on sales of real properties

classified as ordinary assets, on the grounds that theseregulations:

Use gross selling price (GSP) or fair market value(FMV) as basis for determining

the income tax on the sale of real estate classified as ordinaryassets, instead of the entitys net taxable income as providedfor under the Tax Code;

Mandate the collection of income tax on a pertransaction basis, contrary to the Tax Code provision

which imposes income tax on net income at the end ofthe taxable period;

Go against the due process clause because thegovernment collects income tax even when the netincome has not yet been determined; gain is neverassured by mere receipt of the selling price; and

Contravene the equal protection clause because theCWT is being charged upon real estate enterprises, butnot on other business enterprises, more particularly,those in the manufacturing sector, which do businesssimilar to that of a real estate enterprise.

Issues: (1) Is the imposition of MCIT constitutional? (2) Is theimposition of CWT on income from sales of real propertiesclassified as ordinary assets constitutional?

Held: (1) Yes. The imposition of the MCIT is constitutional.An income tax is arbitrary and confiscatory if it taxes capital,because it is income, and not capital, which is subject toincome tax. However, MCIT is imposed on gross income whichis computed by deducting from gross sales the capital spent bya corporation in the sale of its goods, i.e., the cost of goods and

other direct expenses from gross sales. Clearly, the capital isnot being taxed.

Various safeguards were incorporated into the law imposingMCIT.


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Firstly, recognizing the birth pangs of businesses and thereality of the need to recoup initial major capital expenditures,the MCIT is imposed only on the 4th taxable year immediatelyfollowing the year in which the corporation commenced itsoperations.

Secondly, the law allows the carry-forward of any excess of theMCIT paid over the normal income tax which shall be creditedagainst the normal income tax for the three immediatelysucceeding years.

Thirdly, since certain businesses may be incurring genuinerepeated losses, the law authorizes the Secretary of Finance tosuspend the imposition of MCIT if a corporation suffers lossesdue to prolonged labor dispute, force majeure and legitimatebusiness reverses.

(2) Yes. Despite the imposition of CWT on GSP or FMV, theincome tax base for sales of real property classified as ordinaryassets remains as the entitys net taxable income as provided inthe Tax Code, i.e., gross income less allowable costs anddeductions. The seller shall file its income tax return and creditthe taxes withheld by the withholding agent-buyer against itstax due. If the tax due is greater than the tax withheld, then thetaxpayer shall pay the difference. If, on the other hand, the taxdue is less than the tax withheld, the taxpayer will be entitledto a refund or tax credit.

The use of the GSP or FMV as basis to determine the CWT isfor purposes of practicality and convenience. The knowledge ofthe withholding agent-buyer is limited to the particulartransaction in which he is a party. Hence, his basis can only bethe GSP or FMV which figures are reasonably known to him.

Also, the collection of income tax via the CWT on a pertransaction basis, i.e., upon consummation of the sale, is notcontrary to the Tax Code which calls for the payment of the netincome at the end of the taxable period. The taxes withheld arein the nature of advance tax payments by a taxpayer in order to

cancel its possible future tax obligation. They are installmentson the annual tax which may be due at the end of the taxableyear. The withholding agent-buyers act of collecting the tax atthe time of the transaction, by withholding the tax due fromthe income payable, is the very essence of the withholding taxmethod of tax collection.

On the alleged violation of the equal protection clause, thetaxing power has the authority to make reasonableclassifications for purposes of taxation. Inequalities whichresult from singling out a particular class for taxation, or

exemption, infringe no constitutional limitation. The realestate industry is, by itself, a class and can be validly treateddifferently from other business enterprises.

What distinguishes the real estate business from othermanufacturing enterprises, for purposes of the imposition ofthe CWT, is not their production processes but the prices oftheir goods sold and the number of transactions involved. Theincome from the sale of a real property is bigger and itsfrequency of transaction limited, making it less cumbersomefor the parties to comply with the withholding tax scheme. On

the other hand, each manufacturing enterprise may have tensof thousands of transactions with several thousand customersevery month involving both minimal and substantial amounts.

2. COMMISSIONER OF INTERNAL REVENUE,petitioner, vs. CEBU PORTLAND CEMENT


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COMPANY and COURT OF TAX APPEALS,respondents.G.R. No. L-29059 December 15, 1987

FACTS: By virtue of a decision of the CTA, as modified on

appeal by the Supreme Court, the CIR was ordered to refund toCebu Portland Cement Company the amount of P 359,408.98,representing overpayments of ad valorem taxes on cementproduced and sold by it. When respondent moved for a writ ofexecution, petitioner opposed on the ground that the privaterespondent had an outstanding sales tax liability to which thejudgment debt had already been credited. In fact, it wasstressed, there was still a balance owing on the sales taxes inthe amount of P 4,789,279.85 plus 28% surcharge. The CTAgranted the CIRs motion.

The CIR claims that the refund should be charged against thetax deficiency of the private respondent on the sales of cementunder Section 186 of the Tax Code. His position is that cementis a manufactured and not a mineral product and therefore notexempt from sales taxes. The petitioner also denies that thesales tax assessments have already prescribed because theprescriptive period should be counted from the filing of thesales tax returns, which had not yet been done by the privaterespondent.

Meanwhile, the private respondent disclaims liability for the

sales taxes, on the ground that cement is not a manufacturedproduct but a mineral product. As such, it was exempted fromsales taxes. Also, the alleged sales tax deficiency could not asyet be enforced against it because the tax assessment was notyet final, the same being still under protest and still to bedefinitely resolved on the merits. Besides, the assessment had

already prescribed, not having been made within thereglementary five-year period from the filing of the tax returns.

ISSUE: Whether or not sales tax was properly imposed uponprivate respondent.

HELD: Yes, because cement has always been considered amanufactured product and not a mineral product. This matterwas extensively discussed and categorically resolved inCommissioner of Internal Revenue v. Republic CementCorporation, decided on August 10, 1983, stating that cementqua cement was never considered as a mineral product withinthe meaning of Section 246 of the Tax Code, notwithstandingthat at least 80% of its components are minerals, for thesimple reason that cement is the product of a manufacturingprocess and is no longer the mineral product contemplated in

the Tax Code (i.e.; minerals subjected to simple treatments)for the purpose of imposing the ad valorem tax.

The argument that the assessment cannot as yet be enforcedbecause it is still being contested loses sight of the urgency ofthe need to collect taxes as "the lifeblood of the government."If the payment of taxes could be postponed by simplyquestioning their validity, the machinery of the state wouldgrind to a halt and all government functions would beparalyzed.

3. Municipality of Makati v. Court of AppealsGR # 89898-9 10/01/90

Facts:An expropriation proceeding for a piece of land filed bythe Municipality of Makati against Admiral Financial andCredit Corp resulted with the Municipality having to pay P5,291,666.00 less initial payments by the municipality. After


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that, private respondent filed a writ for execution for thebalance. Regional Trial Court granted the motion and directedthe bank to deliver the said balance. Subsequent motions forreconsideration and appeal to the respondent Court of Appealsby the municipality in order to stop the garnishment.

Issues: Whether or not the court can validly subjectgovernment accounts/property to garnishment. Whether ornot the the court erred with the decision of assessing thehigher amount as to how much the municipality is willing topay.

Held: The court ruled that the Municipality of Makati'saccounts or property cannot be held for garnishment asgovernment's fund, held for public use, can not be held forgarnishment. However, the court still held the Municipality

liable for the assessed value of the land and improvementsbecause the private respondent should be entitled to justcompensation.

4. CIR v Algue, Inc., & CTAG.R. No. L-28896 February 17, 1988

FACTS: Algue, Inc., a domestic corporation engaged inengineering, construction and other allied activities. PhilippineSugar Estate Development Company had earlier appointedAlgue as its agent, authorizing it to sell its land, factories and

oil manufacturing process. [There was a sale for which] Alguereceived as agent a commission of P126,000.00, and it wasfrom this commission that the P75,000.00 promotional feeswere paid to the aforenamed individuals. The payees dulyreported their respective shares of the fees in their income taxreturns and paid the corresponding taxes thereon, and therewas no distribution of dividends was involved.

[Algue claimed the 75,000 to be deductible from their tax, towhich the CIR disallowed.]

ISSUE: Whether or not the Collector of Internal Revenue

correctly disallowed the P75,000.00 deduction claimed byprivate respondent Algue as legitimate business expenses in itsincome tax returns.

HELD: NO CIR is not correct. The burden is on thetaxpayer to prove the validity of the claimed deduction. In thepresent case, however, we find that the onus has beendischarged satisfactorily. The private respondent has provedthat the payment of the fees was necessary and reasonable inthe light of the efforts exerted by the payees in inducinginvestors and prominent businessmen to venture in an

experimental enterprise and involve themselves in a newbusiness requiring millions of pesos. This was no mean featand should be, as it was, sufficiently recompensed.

Taxes are the lifeblood of the government and so should becollected without unnecessary hindrance. On the other hand,such collection should be made in accordance with law as anyarbitrariness will negate the very reason for government itself.It is therefore necessary to reconcile the apparently conflictinginterests of the authorities and the taxpayers so that the realpurpose of taxation, which is the promotion of the common

good, may be achieved.

It is said that taxes are what we pay for civilization society.Without taxes, the government would be paralyzed for lack ofthe motive power to activate and operate it. Hence, despite thenatural reluctance to surrender part of one's hard earnedincome to the taxing authorities, every person who is able to


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must contribute his share in the running of the government.The government for its part, is expected to respond in the formof tangible and intangible benefits intended to improve thelives of the people and enhance their moral and materialvalues. This symbiotic relationship is the rationale of taxation

and should dispel the erroneous notion that it is an arbitrarymethod of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability oftaxation, it is a requirement in all democratic regimes that it beexercised reasonably and in accordance with the prescribedprocedure. If it is not, then the taxpayer has a right tocomplain and the courts will then come to his succor. For allthe awesome power of the tax collector, he may still be stoppedin his tracks if the taxpayer can demonstrate, as it has here,that the law has not been observed.

5. BPI Family Savings Bank v. CA, et al.GR No. 122480; April 12, 2000

Facts: Petitioner BPI Family Savings Bank had an excesswithholding taxes for the year 1989 amounting to P112,491.90.It indicated in its 1989 Income Tax Return that it would applythe said amount as a tax credit for the succeeding taxable year,1990. However because of business losses, petitioner informedthe Bureau of Internal Revenue (BIR) that it would claim theamount as a tax refund, instead of applying it as a tax credit.

When no action from the BIR was forthcoming, petitioner filedits claim with the Court of Tax Appeals.

The CTA and the CA, however, denied the claim for tax refund.Since petitioner declared in its 1989 Income Tax Return that itwould apply the excess withholding tax as a tax credit for thefollowing year, the Tax Court held that petitioner was

presumed to have done so. The CTA and the CA ruled thatpetitioner failed to overcome this presumption because it didnot present its 1990 Return, which would have shown that theamount in dispute was not applied as a tax credit. Hence, theCA concluded that petitioner was not entitled to a tax refund.

Issue: Whether or not petitioner is entitled to the refund ofP112,491.90, representing excess creditable withholding taxpaid for the taxable year 1989.

Held: It is undisputed that petitioner had excess withholdingtaxes for the year 1989 and was thus entitled to a refundamounting to P112,491. Pursuant to Section 69 of the 1986 TaxCode which states that a corporation entitled to a refund mayopt either (1) to obtain such refund or (2) to credit said amountfor the succeeding taxable year.

Petitioner presented evidence to prove its claim that it did notapply the amount as a tax credit.

A copy of the Final Adjustment Return for 1990 was attachedto petitioner's Motion for Reconsideration filed before theCTA. A final adjustment return shows whether a corporationincurred a loss or gained a profit during the taxable year. Inthis case, that Return clearly showed that petitioner incurredP52,480,173 as net loss in 1990. Clearly, it could not haveapplied the amount in dispute as a tax credit.

The BIR did not controvert the veracity of the said return. Itdid not even file an opposition to petitioner's Motion and the1990 Final Adjustment Return attached thereto.

Petitioner also calls the attention of this Court, as it had donebefore the CTA, to a Decision rendered by the Tax Court in


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CTA Case No. 4897, involving its claim for refund for the year1990. In that case, the Tax Court held that "petitioner suffereda net loss for the taxable year 1990 . . . ." Respondent, however,urges this Court not to take judicial notice of the said case.

Respondents' reasoning underscores the weakness of theircase. For if they had really believed that petitioner is notentitled to a tax refund, they could have easily proved that itdid not suffer any loss in 1990. Indeed, it is noteworthy thatrespondents opted not to assail the fact appearing therein that petitioner suffered a net loss in 1990 in the same waythat it refused to controvert the same fact established bypetitioner's other documentary exhibits

Technicalities and legalisms, however exalted, should not bemisused by the government to keep money not belonging to it

and thereby enrich itself at the expense of its law-abidingcitizens. If the State expects its taxpayers to observe fairnessand honesty in paying their taxes, so must it apply the samestandard against itself in refunding excess payments of suchtaxes. Indeed, the State must lead by its own example of honor,dignity and uprightness.

6. COMMISSIONER OF INTERNAL REVENUEvs.TOKYO SHIPPING CO. LTD., represented bySORIAMONT STEAMSHIP AGENCIES INC., andCOURT OF TAX APPEALS

244 SCRA 342; May 26, 1995

Facts: Tokyo Shipping a foreign corporation represented inthe Philippines by Soriamont Steamship Agencies and ownsand operates M/V Gardenia. NASUTRA2 chartered M/VGardenia to load 16,500 metric tons of raw sugar in thePhilippines. Soriamont Agency, 4 paid the required income and

common carrier's taxes P59,523.75 and P47,619.00,respectively (Total P107,142.75). Upon arriving, however, atGuimaras Port of Iloilo, the vessel found no sugar for loading.NASUTRA and Soriamont mutually agreed to have the vesselsail for Japan without any cargo. Claiming the pre-payment of

income and common carrier's taxes as erroneous since noreceipt was realized from the charter agreement, Tokyoinstituted a claim for tax credit or refund of the sumP107,142.75 from CIR. Petitioner failed to act promptly on theclaim , hence Tokyo filed a petition for review6 before Court ofTax Appeals. CTA decided for Tokyo and denied MR of CIR.

Issue: WON Tokyo Shipping Co. Ltd., is entitled to a refund ortax credit whether it was able to prove that it derived noreceipts from its charter agreement, and hence is entitled to arefund of the taxes it pre-paid to the government.

Ruling: Yes. Pursuant to Section 24 (b) (2) of the NationalInternal Revenue Code which at that time, a resident foreigncorporation engaged in the transport of cargo is liable for taxesdepending on the amount of income it derives from sourceswithin the Philippines. Thus, before such a tax liability can beenforced the taxpayer must be shown to have earned incomesourced from the Philippines.

Indeed, a claim for refund is in the nature of a claim forexemption 8 and should be construed in strictissimi

juris against the taxpayer. And Tokyo has the burden of proofto establish the factual basis of its claim for tax refund.

But sufficient evidence has already been adduced by Tokyoproving that it derived no receipt from its charter agreementwith NASUTRA - M/V "Gardenia" arrived in Iloilo on January


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10, 1981 but found no raw sugar to load and returned to Japanwithout any cargo laden on board.

7. COMMISSIONER OF INTERNAL REVENUE V.MISTUBISHI METAL CORPORATION (181SCRA 214)

Facts: Atlas Consolidated Mining andDevelopmentCorporation, a domestic corporation, entered into a Loan andSales Contract with Mitsubishi Metal Corporation, a Japanesecorporation licensed to engage in business in the Philippines. Tobe able to extend the loan to Atlas, Mitsubishi entered intoanother loan agreement with Export-Import Bank (Eximbank),a financing institution owned, controlled, and financed by theJapanese government. After making interest payments toMitsubishi, with the corresponding 15% tax thereon remitted to

the Government of the Philippines, Altas claimed for tax creditwith the Commissioner of Internal Revenue based on Section29(b)(7) (A) of the National Internal Revenue Code, stating thatsince Eximbank, and not Mitsubishi, is where the money for theloan originated from Eximbank, then it should be exempt frompaying taxes on its loan thereon.

Issue : WON the interest income from the loans extended toAtlas by Mitsubishi is excludible from gross income taxation.

NO. Mitsubishi secured the loan from Eximbank in its ownindependent capacity as a private entity and not as a conduit of

Eximbank. Therefore, what the subject of the 15% withholding

tax is not the interest income paid by Mitsubishi to Eximbank,

but the interest income earned by Mitsubishi from the loan to

Atlas. Thus, it does not come within the ambit of Section 29(b)

(7)(A), and it is not exempt from the payment of taxes.

Notes: Findings of fact of the Court of Tax Appeals are entitled

to the highest respect and can only be disturbed on appeal ifthey are not supported by substantial evidence or if there is ashowing of gross error or abuse on the part of the tax court.Laws granting exemption from tax are construed strictissimijuris against the taxpayer and liberally in favor of the taxingpower. Taxation is the rule and exemption is the exception.

8. Phil Bank of Communications vs. CIR, et. al.302 SCRA 241 January 28, 1999

Facts: Petitioner, Philippine Bank of Communications(PBCom), a commercial banking corporation duly organizedunder Philippine laws, filed its quarterly income tax returnsfor the first and second quarters of 1985, reported profits, andpaid the total income tax of P5,016,954.00. The taxes due weresettled by applying PBCom's tax credit memos.

Subsequently, however, PBCom suffered losses so that when itfiled its Annual Income Tax Returns for the year-endedDecember 31, 1986, the petitioner likewise reported a net lossof P14,129,602.00, and thus declared no tax payable for theyear.

But during these two years, PBCom earned rental income fromleased properties. The lessees withheld and remitted to theBIR withholding creditable taxes of P282,795.50 in 1985 andP234,077.69 in 1986.


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Subsequently, Petitioner requested the Commissioner ofInternal Revenue, among others, for a tax credit ofP5,016,954.00 representing the overpayment of taxes in thefirst and second quarters of 1985.

Thereafter, on July 25, 1988, petitioner filed a claim for refundof creditable taxes withheld by their lessees from propertyrentals in 1985 for P282,795.50 and in 1986 for P234,077.69.

Pending the investigation of the respondent Commissioner ofInternal Revenue, petitioner instituted a Petition for Reviewon November 18, 1988 before the Court of Tax Appeals (CTA).

The CTA rendered a decision which, as stated on the outset,denied the request of petitioner for a tax refund or credit in thesum amount of P5,299,749.95, on the ground that it was filed

beyond the two-year reglementary period provided for by law.The petitioner's claim for refund in 1986 amounting toP234,077.69 was likewise denied on the assumption that it wasautomatically credited by PBCom against its tax payment inthe succeeding year.

ISSUE: Whether the Court of Appeals erred in denying theplea for tax refund or tax credits on the ground of prescription

HELD: No. Basic is the principle that "taxes are the lifebloodof the nation." The primary purpose is to generate funds for

the State to finance the needs of the citizenry and to advancethe common weal. 13 Due process of law under theConstitution does not require judicial proceedings in tax cases.This must necessarily be so because it is upon taxation that thegovernment chiefly relies to obtain the means to carry on itsoperations and it is of utmost importance that the modes

adopted to enforce the collection of taxes levied should besummary and interfered with as little as possible.

From the same perspective, claims for refund or tax creditshould be exercised within the time fixed by law because the

BIR being an administrative body enforced to collect taxes, itsfunctions should not be unduly delayed or hampered byincidental matters.

Sec. 230 of the National Internal Revenue Code (NIRC) of 1977(now Sec. 229, NIRC of 1997) provides for the prescriptiveperiod for filing a court proceeding for the recovery of taxerroneously or illegally collected.

The rule states that the taxpayer may file a claim for refund orcredit with the Commissioner of Internal Revenue, within two

(2) years after payment of tax, before any suit in CTA iscommenced. The two-year prescriptive period provided,should be computed from the time of filing the AdjustmentReturn and final payment of the tax for the year.

9. Sison v. AnchetaGR No. L-59431; 25 July 1984

F A C T S : Batas Pambansa 135 was enacted. Sison, astaxpayer, alleged that its provision (Section 1) unduly

discriminated against him by the imposition of higher ratesupon his income as a professional, that it amounts to classlegislation, and that it transgresses against the equalprotection and due process clauses of the Constitution as wellas the rule requiring uniformity in taxation.


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I S S U E: Whether or not BP 135 violates the due processand equal protection clauses, and the rule on uniformity intaxation.

H E L D: There is a need for proof of such persuasive

character as would lead to a conclusion that there was aviolation of the due process and equal protection clauses.Absent such showing, the presumption of validity must prevail.Equality and uniformity in taxation means that all taxablearticles or kinds of property of the same class shall be taxed atthe same rate. The taxing power has the authority to makereasonable and natural classifications for purposes of taxation.Where the differentiation conforms to the practical dictates ofjustice and equity, similar to the standards of equal protection,it is not discriminatory within the meaning of the clause and istherefore uniform. Taxpayers may be classified into different

categories, such as recipients of compensation income asagainst professionals. Recipients of compensation income arenot entitled to make deductions for income tax purposes asthere is no practically overhead expense, while professionalsand businessmen have no uniform costs or expenses necessaryto produce their income. There is ample justification to adoptthe gross system of income taxation to compensation income,while continuing the system of net income taxation as regardsprofessional and business income.

10.Reyes vs. Almanzor196 SCRA 322; April 26, 1991

FACTS: Petitioners J.B.L. Reyes, Edmundo and MilagrosReyes are owners of parcels of land situated in Tondo and Sta.Cruz Districts, City of Manila, which are leased and entirelyoccupied as dwelling sites by tenants. Said tenants were paying

monthly rentals not exceeding three hundred pesos (P300.00)in July, 1971.

On July 14, 1971, the National Legislature enacted RepublicAct No. 6359 prohibiting for one year from its effectivity, an

increase in monthly rentals of dwelling units or of lands onwhich another's dwelling is located, where such rentals do notexceed three hundred pesos (P300.00) a month but allowingan increase in rent by not more than 10% thereafter.

On October 12, 1972, Presidential Decree No. 20 amended R.A.No. 6359 by making absolute the prohibition to increasemonthly rentals below P300.00 and by indefinitely suspendingthe aforementioned provision of the Civil Code, exceptingleases with a definite period. Consequently, the Reyeses wereprecluded from raising the rentals and from ejecting the

tenants thereof.

The City Assessor of Manila assessed the value of the Reyesesproperty on the schedule of market values duly reviewed by theSecretary of Finance. The revision entailed an increase to thetax rates and the petitioners averred that the reassessmentimposed upon them greatly exceeded the annual incomederived from their properties.

ISSUE: WON income approach is the method to be used inthe tax assessment and not the comparable sales approach.

HELD: The income approach and not the comparable salesapproach must be used.

By no strength of the imagination can the market value ofproperties covered by P.D. No. 20 be equated with the market


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value of properties not so covered. The former has naturally amuch lesser market value in view of the rental restrictions.

In the case at bar, not even the factors determinant of theassessed value of subject properties under the "comparable

sales approach" were presented by the public respondents,namely: (1) that the sale must represent a bonafide arm'slength transaction between a willing seller and a willing buyerand (2) the property must be comparable property. Nothingcan justify or support their view as it is of judicial notice thatfor properties covered by P.D. 20 especially during the time inquestion, there were hardly any willing buyers. As a generalrule, there were no takers so that there can be no reasonablebasis for the conclusion that these properties were comparablewith other residential properties not burdened by P.D. 20.

11. PAL v. Sec of FinanceGR No. 115852; 30 October 1995

F A C T S: The Value-Added Tax [VAT] is levied on the sale,barter or exchange of goods and properties as well as on thesale or exchange of services. It is equivalent to 10% of the grossselling price or gross value in money of goods or propertiessold, bartered or exchanged or of the gross receipts from thesale or exchange of services. Republic Act No. 7716 seeks towiden the tax base of the existing VAT system and enhance its

administration by amending the National Internal RevenueCode.

These are various suits for certiorari and prohibitionchallenging the constitutionality of RA 7716:

In the case at bar, PAL attacks the formal validity of RepublicAct No. 7716. PAL contends that it violates Art. VI, Section26[1] which provides that "Every bill passed by Congress shallembrace only one subject which shall be expressed in the titlethereof." It is contended that neither H. No. 11197 nor S. No.

1630 provided for removal of exemption of PAL transactionsfrom the payment of the VAT and that this was made only inthe Conference Committee bill which became Republic Act No.7716 without reflecting this fact in its title.

The title of Republic Act No. 7716 is:

AN ACT RESTRUCTURING THE VALUE-ADDEDTAX [VAT] SYSTEM, WIDENING ITS TAX BASE ANDENHANCING ITS ADMINISTRATION, AND FORTHESE PURPOSES AMENDING AND REPEALING

THE RELEVANT PROVISIONS OF THE NATIONALINTERNAL REVENUE CODE, AS AMENDED, ANDFOR OTHER PURPOSES.

Furthermore, section 103 of RA 7716 states the following:

Section 103. Exempt Transactions.- The following shall beexempt from the value-added tax:

[q] Transactions which are exempt under special laws, exceptthose granted under Presidential Decree Nos. 66, 529, 972,

1491, 1590.

The effect of the amendment is to remove the exemptiongranted to PAL, as far as the VAT is concerned.

Philippine Airlines [PAL] claims that its franchise under P.D.No. 1590 which makes it liable for a franchise tax of only 2% of


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gross revenues "in lieu of all the other fees and charges of anykind, nature or description, imposed, levied, established,assessed or collected by any municipal, city, provincial, ornational authority or government agency, now or in thefuture," cannot be amended by Rep. Act No. 7716 as to make it

[PAL] liable for a 10% value-added tax on revenues, becauseSec. 24 of P.D. No. 1590 provides that PAL's franchise can onlybe amended, modified or repealed by a special law specificallyfor that purpose.

I S S U E: Whether or not this amendment of Section 103 ofthe NIRC is fairly embraced in the title of Republic Act No.7716, although no mention is made therein of P. D. No. 1590

H E L D: The court ruled in in the affirmative. The title statesthat the purpose of the statute is to expand the VAT system,

and one way of doing this is to widen its base by withdrawingsome of the exemptions granted before. To insist that P. D. No.1590 be mentioned in the title of the law, in addition to Section103 of the NIRC, in which it is specifically referred to, would beto insist that the title of a bill should be a complete index of itscontent.

The constitutional requirement that every bill passed byCongress shall embrace only one subject which shall beexpressed in its title is intended to prevent surprise upon themembers of Congress and to inform the people of pending

legislation so that, if they wish to, they can be heard regardingit. If, in the case at bar, petitioner did not know before that itsexemption had been withdrawn, it is not because of any defectin the title but perhaps for the same reason other statutes,although published, pass unnoticed until some event somehowcalls attention to their existence.

Republic Act No. 7716 expressly amends PAL's franchise [P. D.No. 1590] by specifically excepting from the grant ofexemptions from the VAT PAL's exemption under P. D. No.1590. This is within the power of Congress to do under Art.XII, Section 11 of the Constitution, which provides that the

grant of a franchise for the operation of a public utility issubject to amendment, alteration or repeal by Congress whenthe common good so requires.

12. ARTURO M. TOLENTINO, petitioner, vs. THESECRETARY OF FINANCE and THECOMMISSIONER OF INTERNAL REVENUE,respondents. G.R. No. 115455 August 25, 1994

FACTS: Herein various petitioners seek to declare RA 7166 as

unconstitutional as it seeks to widen the tax base of theexisting VAT system and enhance its administration byamending the National Internal Revenue Code. The value-added tax (VAT) is levied on the sale, barter or exchange ofgoods and properties as well as on the sale or exchange ofservices. It is equivalent to 10% of the gross selling price orgross value in money of goods or properties sold, bartered orexchanged or of the gross receipts from the sale or exchange ofservices.

CREBA asserts that R.A. No. 7716 (1) impairs the obligations of

contracts, (2) classifies transactions as covered or exemptwithout reasonable basis and (3) violates the rule that taxesshould be uniform and equitable and that Congress shall"evolve a progressive system of taxation."

With respect to the first contention, it is claimed that theapplication of the tax to existing contracts of the sale of real


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property by installment or on deferred payment basis wouldresult in substantial increases in the monthly amortizations tobe paid because of the 10% VAT. The additional amount, it ispointed out, is something that the buyer did not anticipate atthe time he entered into the contract.

It is next pointed out that while Section 4 of R.A. No. 7716exempts such transactions as the sale of agricultural products,food items, petroleum, and medical and veterinary services, itgrants no exemption on the sale of real property which isequally essential. The sale of real property for socialized andlow-cost housing is exempted from the tax, but CREBA claimsthat real estate transactions of "the less poor," i.e., the middleclass, who are equally homeless, should likewise be exempted.Finally, it is contended, for the reasons already noted, thatR.A. No. 7716 also violates Art. VI, Section 28(1) which

provides that "The rule of taxation shall be uniform andequitable. The Congress shall evolve a progressive system oftaxation."

ISSUE: Whether or not RA 7166 violates the principle ofprogressive system of taxation.

HELD: No, there is no justification for passing upon theclaims that the law also violates the rule that taxation must beprogressive and that it denies petitioners' right to due processand that equal protection of the laws. The reason for this

different treatment has been cogently stated by an eminentauthority on constitutional law thus: "When freedom of themind is imperiled by law, it is freedom that commands amomentum of respect; when property is imperiled it is thelawmakers' judgment that commands respect. This dualstandard may not precisely reverse the presumption of

constitutionality in civil liberties cases, but obviously it doesset up a hierarchy of values within the due process clause."

Petitioners contend that as a result of the uniform 10% VAT,the tax on consumption goods of those who are in the higher-

income bracket, which before were taxed at a rate higher than10%, has been reduced, while basic commodities, which beforewere taxed at rates ranging from 3% to 5%, are now taxed at ahigher rate.

Just as vigorously as it is asserted that the law is regressive, theopposite claim is pressed by respondents that in fact itdistributes the tax burden to as many goods and services aspossible particularly to those which are within the reach ofhigher-income groups, even as the law exempts basic goodsand services. It is thus equitable. The goods and properties

subject to the VAT are those used or consumed by higher-income groups. These include real properties held primarilyfor sale to customers or held for lease in the ordinary course ofbusiness, the right or privilege to use industrial, commercial orscientific equipment, hotels, restaurants and similar places,tourist buses, and the like. On the other hand, small businessestablishments, with annual gross sales of less than P500,000,are exempted. This, according to respondents, removes fromthe coverage of the law some 30,000 business establishments.On the other hand, an occasional paper of the Center forResearch and Communication cities a NEDA study that the

VAT has minimal impact on inflation and income distributionand that while additional expenditure for the lowest incomeclass is only P301 or 1.49% a year, that for a family earningP500,000 a year or more is P8,340 or 2.2%.

Lacking empirical data on which to base any conclusionregarding these arguments, any discussion whether the VAT is


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regressive in the sense that it will hit the "poor" and middle-income group in society harder than it will the "rich," is largelyan academic exercise. On the other hand, the CUP's contentionthat Congress' withdrawal of exemption of producerscooperatives, marketing cooperatives, and service

cooperatives, while maintaining that granted to electriccooperatives, not only goes against the constitutional policy topromote cooperatives as instruments of social justice (Art. XII, 15) but also denies such cooperatives the equal protection ofthe law is actually a policy argument. The legislature is notrequired to adhere to a policy of "all or none" in choosing thesubject of taxation. 44

Nor is the contention of the Chamber of Real Estate andBuilders Association (CREBA), petitioner in G.R. 115754, thatthe VAT will reduce the mark up of its members by as much as

85% to 90% any more concrete. It is a mere allegation. On theother hand, the claim of the Philippine Press Institute,petitioner in G.R. No. 115544, that the VAT will drive some ofits members out of circulation because their profits fromadvertisements will not be enough to pay for their tax liability,while purporting to be based on the financial statements of thenewspapers in question, still falls short of the establishment offacts by evidence so necessary for adjudicating the questionwhether the tax is oppressive and confiscatory.

Indeed, regressivity is not a negative standard for courts to

enforce. What Congress is required by the Constitution to do isto "evolve a progressive system of taxation." This is a directiveto Congress, just like the directive to it to give priority to theenactment of laws for the enhancement of human dignity andthe reduction of social, economic and political inequalities(Art. XIII, 1), or for the promotion of the right to "qualityeducation" (Art. XIV, 1). These provisions are put in the

Constitution as moral incentives to legislation, not as judiciallyenforceable rights.

13. ABAKADA v. Ermita (Delegation to thePresident)469 SCRA 1: September 1, 2005

Facts: RA 9337: VAT Reform Act enacted on May 24, 2005.Sec. 4 (sales of goods and properties), Sec. 5 (importation ofgoods) and Sec. 6 (services and lease of property) of RA 9337,in collective, granted the Secretary of Finance the authority toascertain: (a) whether by 12/31/05, the VAT collection as apercentage of the 2004 GDP exceeds 2.8% or (b)the nationalgovernment deficit as a percentage of the 2004 GDP exceeds

1.5%. If either condition is met, the Sec of Finance must informthe President who, in turn, must impose the 12% VAT rate(from 10%) effective January 1, 2006.

ABAKADA maintained that Congress abandoned its exclusiveauthority to fix taxes and that RA 9337 contained a uniformproviso authorizing the President upon recommendation bythe DOF Secretary to rasie VAT to 12%.

Sen Pimentel maintained that RA 9337 constituted unduedelegation of legislative powers and a violation of due process

since the law was ambiguous and arbitrary. Same with Rep.Escudero.

Pilipinas Shell dealers argued that the VAT reform wasarbitrary, oppressive and confiscatory.


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Respondents countered that the law was complete, that it leftno discretion to the President, and that it merely charged thePresident with carrying out the rate increase once any of thetwo conditions arise.

Issue:WON there was undue delegation.

Held: No delegation but mere implementation of the law.Constitution allows as under exempted delegation thedelegation of tariffs, customs duties, and other tolls, levies ongoods imported and exported. VAT is tax levied on sales ofgoods and services which could not fall under this exemption.Hence, its delegation if unqualified is unconstitutional.

Legislative power is authority to make a complete law. Thus, tobe valid, a law must be complete in itself, setting forth therein

the policy and it must fix a standard, limits of which aresufficiently determinate and determinable.

No undue delegation when congress describes what job mustbe done who must do it and the scope of the authority given.(Edu v Ericta)

Sec of Finance was merely tasked to ascertain the existence offacts. All else was laid out. Mainly ministerial for the Secretaryto ascertain the facts and for the president to carry out theimplementation for the VAT. They were agents of the

legislative dept

14.CIR and Commissioner of Customs vs. BotelhoShipping Corp. & General Shipping Co., Inc.G.R. Nos. L-21633-34 June 29, 1967

FACTS: Reparations Commission of the Philippines sold toBotelho the vessel "M/S Maria Rosello" for the amount ofP6,798,888.88. The former likewise sold to General Shippingthe vessel "M/S General Lim" at the price of P6,951,666.66.Upon arrival at the port of Manila, the Bureau of Customs

placed the same under custody and refused to give due course[to applications for registration], unless the aforementionedsums of P483,433 and P494,824 be paid as compensating tax.The buyers subsequently filed with the CTA their respectivepetitions for review. Pending the case, Republic Act No. 3079amended Republic Act No. 1789 the Original ReparationsAct, under which the aforementioned contracts with theBuyers had been executed by exempting buyers ofreparations goods acquired from the Commission, fromliability for the compensating tax.

Invoking [section 20 of the RA 3079], the Buyers applied, forthe renovation of their utilizations contracts with theCommission, which granted the application, and, then, filedwith the Tax Court, their supplemental petitions for review.The CTA ruled in favor of the buyers.

[On appeal, the CIR and COC maintain that such provisoshould not be applied retroactively], upon the ground that atax exemption must be clear and explicit; that there is noexpress provision for the retroactivity of the exemption,established by Republic Act No. 3079, from the compensating

tax; that the favorable provisions, which are referred to insection 20 thereof, cannot include the exemption fromcompensating tax; and, that Congress could not have intendedany retroactive exemption, considering that the result thereofwould be prejudicial to the Government.


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ISSUE: Whether or not the tax exemption can be appliedretroactively

HELD: YES. The inherent weakness of the last groundbecomes manifest when we consider that, if true, there could

be no tax exemption of any kind whatsoever, even if Congressshould wish to create one, because every such exemptionimplies a waiver of the right to collect what otherwise would bedue to the Government, and, in this sense, is prejudicialthereto. It may not be amiss to add that no tax exemption like any other legal exemption or exception is given withoutany reason therefor. In much the same way as other statutorycommands, its avowed purpose is some public benefit orinterest, which the law-making body considers sufficient tooffset the monetary loss entitled in the grant of the exemption.Indeed, section 20 of Republic Act No. 3079 exacts a valuable

consideration for the retroactivity of its favorable provisions,namely, the voluntary assumption, by the end-user whobought reparations goods prior to June 17, 1961 of "all the newobligations provided for in" said Act.

Furthermore, Section 14 of the Law on Reparations, asamended, exempts from the compensating tax, not particularpersons, but persons belonging to a particular class. Indeed,appellants do not assail the constitutionality of said section 14,insofar as it grants exemptions to end-users who, after theapproval of Republic Act No. 3079, on June 17, 1961,

purchased reparations goods procured by the Commission.From the viewpoint of Constitutional Law, especially the equalprotection clause, there is no difference between the grant ofexemption to said end-users, and the extension of the grant tothose whose contracts of purchase and sale mere made beforesaid date, under Republic Act No. 1789.

15. Tan v. Del RosarioG.R. No. 109289. October 3, 1994

Facts: Petitioners assail RA 7496, also commonly known asthe Simplified Net Income Taxation Scheme ("SNIT"),

amending certain provisions of the National Internal RevenueCode, as violative of the constitutional requirement thattaxation shall be "shall be uniform and equitable." The lawwould now attempt to tax single proprietorships andprofessionals differently from the manner it imposes the tax oncorporations and partnerships.

Petitioner gives a fairly extensive discussion on the merits ofthe law, illustrating, in the process, what he believes to be animbalance between the tax liabilities of those covered by theamendatory law and those who are not.

Issue: Whether or not RA 7496 is violative of theconstitutional requirement that taxation shall be uniform andequitable.

Held: Petition denied. Uniformity of taxation means that (1)the standards that are used therefore are substantial and notarbitrary, (2) the categorization is germane to achievelegislative purpose, (3) the law applies, all things being equal,to both present and future conditions and (4) the classificationapplies equally well to all those belonging to the same class.

With the legislature primarily lies the discretion to determinethe nature (kind), object (purpose), extent (rate), coverage(subjects) and situs (place) of taxation. This court cannot freelydelve into those matters which, by constitutional fiat, rightlyrest on legislative judgment. Of course, where a tax measurebecomes so unconscionable and unjust as to amount to


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confiscation of property, courts will not hesitate to strike itdown, for, despite all its plenitude, the power to tax cannotoverride constitutional proscriptions. This stage, however, hasnot been demonstrated to have been reached within anyappreciable distance in this controversy before us.

16. MACEDA vs. MACARAIG, JR223 SCRA 217 June 8, 1993

Topic: Classification of Taxes Accordingto Burden or Incidence (Direct orIndirect)

Facts: This matter of indirect tax exemption of the privaterespondent National Power Corporation (NPC) is brought tothis Court a second time. Unfazed by the Decision Wepromulgated on May 31, 1991petitioner Ernesto Maceda asks

this Court to reconsider said Decision.

A Chronological review of the relevant NPC laws, specially withrespect to its tax exemption provisions.

1. On November 3, 1936, Commonwealth Act No. 120:creating the National Power Corporation. The mainsource of funds for the NPC was the flotation of bondsin the capital markets 4and these bonds...issued underthe authority of this Act shall be exempt from thepayment of all taxes by the Commonwealth of thePhilippines

2. On June 24, 1938, C.A. No. 344, the provision on taxexemption in relation to the issuance of the NPC bondswas neither amended nor deleted.

3. On September 30, 1939, C.A. No. 495, the provision ontax exemption in relation to the issuance of the NPCbonds was neither amended nor deleted.

4. On June 4, 1949, Republic Act No. 357, any such loanor loans shall be exempt from taxes, duties, fees,imposts, charges, contributions and restrictions of theRepublic of the Philippines

5. On the same date, R.A. No. 358, to facilitate payment of

its indebtedness, the National Power Corporation shallbe exempt from all taxes.

6. On July 10, 1952, R.A. No. 813 amended R.A. No. 357.The tax provision as stated in R.A. No. 357, was notamended.

7. On June 2, 1954, R.A. No. 987 was enacted specificallyto withdraw NPC's tax exemption for real estate taxes.

8. On September 8, 1955, R.A. No. 1397, the taxexemption provision related to the payment of thistotal indebtedness was not amended nor deleted.

9. On June 13, 1958, R.A. No. 2055, the tax provision

related to the repayment of loans was not amended nordeleted.

10. On June 18, 1960, R.A. No 2641 converted the NPCfrom a public corporation into a stock corporation. Notax exemption was incorporated in said Act.

11. On June 17, 1961, R.A. No. 3043. No tax provision wasincorporated in said Act.

12. On June 17, 1967, R.A. No 4897. No tax provision wasincorporated in said Act.

13. On September 10, 1971, R.A. No. 6395 was enactedrevising the charter of the NPC. The bonds issued shall

be exempt from the payment of all taxes. As to theforeign loans the NPC was authorized to contract, shallalso be exempt from all taxes,

14. On January 22, 1974, P.D. No. 380shall alsobe exempt from all direct and indirect taxes,

15. On February 26, 1970, P.D. No. 395, no tax exemptionprovision was amended, deleted or added.


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P.D. No. 938 amended into exempt from the payment ofALLFORMS OFtaxes

President Marcos must have considered all the NPC statutes

from C.A. No. 120 up to P.D. No. 938.

One common theme in all these laws is that the NPC must beenable to pay its indebtedness 56which, as of P.D. No. 938, wasP12 Billion in total domestic indebtedness, at any one time,and U$4 Billion in total foreign loans at any one time. TheNPC must be and has to be exempt from all forms of taxes ifthis goal is to be achieved.

The tax exemption stood as is with the express mention of"direct and indirect" tax exemptions. Lawmakers wanted the

NPC to be exempt from ALL FORMS of taxes direct andindirect.

Therefore, that NPC had been granted tax exemptionprivileges for both direct and indirect taxes under P.D. No.938.

The Court rules and declares that the oil companies whichsupply bunker fuel oil to NPC have to pay the taxes imposedupon said bunker fuel oil sold to NPC. By the very nature ofindirect taxation, the economic burden of such taxation is

expected to be passed on through the channels of commerce tothe user or consumer of the goods sold. Because, however, theNPC has been exempted from both direct and indirecttaxation, the NPC must be held exempted from absorbing theeconomic burden of indirect taxation

17. ESSO STANDARD EASTERN, INC vs.COMMISSIONER OF INTERNAL REVENUEG.R. Nos. L-28508-9, July 7, 1989

FACTS: In CTA Case No. 1251, Esso Standard Eastern Inc.

(Esso) deducted from its gross income for 1959, as part ofi t s o r d i n a r y a n d n e c e s s a r y b u s i n e s s e x p e n s e s , t h ea m o u n t i t h a d s p e n t f o r d r i l l i n g a n d e x p l o r a t i o nof i ts p et r ol e um concessions. This claim was disallowed bythe Commissioner of Internal Revenue (CIR) on the groundthat the expensesshould be capitalized and might be writtenoff as a loss only when a "dry hole" should result. Esso thenfiled an amendedreturn where it asked for the refund ofP323,279.00 by reason of its abandonment as dry holes ofseveral of its oil wells.Also claimed as ordinary andnecessary expenses in the same return was the amount

of P340,822.04, representingmargin fees it had paid to theCentral Bank on its profit remittances to its New York headoffice.On August 5, 1964, the CIR granted a tax credit ofP221,033.00 only, disallowing the claimed deduction forthemargin fees paid on the ground that the margin fees paid tothe Central Bank could not be considered taxes or allowedasdeductible business expenses.Esso appealed to the Court ofTax Appeals (CTA) for the refund of the margin fees it hadearlier paid contendingthat the margin fees weredeductible from gross income either as a tax or as anordin ary and nece ssary busin essexpense. However, Essos

appeal was denied.

ISSUE: (1) Whether or not the margin fees are taxes.(2)Whether or not the margin fees are necessary and ordinarybusiness expenses.


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RULING: (1) No. A tax is levied to provide revenue forgovernment operations, while the proceeds of the margin feeareapplied to strengthen our country's international reserves.The margin fee was imposed by the State in the exercise ofitspolice power and not the power of taxation.(2) No.

Ordinarily, an expense will be considered 'necessary' where theexpenditure is appropriate and helpful inthe development ofthe taxpayer's business. It is 'ordinary' when it connotes apayment which is normal in relation to thebusi nes s of thetaxpayer and the surrounding circumstances. Since themargin fees in ques tion we re inc urred f or theremittanceof funds to Esso's Head Office in New York, which is a separateand distinct income taxpayer from the branchin thePhilippines, for its disposal abroad, it can never be saidtherefore that the margin fees were appropriate and helpfulinthe development of Esso's business in the Philippines

exclusively or were incurred for purposes proper to theconductof the affairs of Esso's branch in the Philippinesexclusively or for the purpose of realizing a profit or ofminimizing a loss inthe Philippines exclusively.

18. PROCTER & GAMBLE PHILIPPINEMANUFACTURING CORPORATION

vs. THE MUNICIPALITY OF JAGNA, PROVINCEOF BOHOL

G.R. No. L-24265 December 28, 1979

TOPIC: Nature and amount of license

FACTS: Plaintiff-appellant is a domestic corporation withprincipal offices in Manila. lt is a consolidated corporation ofProcter & Gamble Trading Company and PhilippineManufacturing Company, which later became Procter &Gamble Trading Company, Philippines. It is engaged in the

manufacture of soap, edible oil, margarine and other similarproducts, and for this purpose maintains a "bodega" indefendant Municipality where it stores copra purchased in themunicipality and therefrom ships the same for itsmanufacturing and other operations.

On December 13, 1957, the Municipal Council of Jagna enactedMunicipal Ordinance No. 4, Series of 1957 or An Ordinanceimposing storage fees of all exportable copra deposited in thebodega within the jurisdlcti0n of the municipality of jagnabohol. For a period of six years, from 1958 to 1963, plaintiffpaid defendant Municipality, allegedly under protest, storagefees in the total sum of P42,265.13.

On March 3, 1964, plaintiff filed this suit in the Court of FirstInstance of Manila, Branch VI, wherein it prayed that 1)

Ordinance No. 4 be declared inapplicable to it, or in the alter.native, that it be pronounced ultra-vires and void for beingbeyond the power of the Municipality to enact; and 2) thatdefendant Municipality be ordered to refund to it the amountof P42,265.13 which it had paid under protest; and costs.

The trial Court upheld its jurisdiction as well as defendantMunicipality's power to enact the Ordinance in question undersection 2238 of the Revised Administrative Code, otherwiseknown as the general welfare clause.

ISSUES: Whether defendant Municipality was authorized toimpose and collect the storage fee provided for in thechallenged Ordinance under the laws then prevailing.

Whether the imposition of P0.10 per 100 kilos of copra storedin a bodega within the municipality ofJagnas' territory isbeyond the cost of regulation and surveillance


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HELD: The validity of the Ordinance must be upheldpursuant to the broad authority conferred upon municipalitiesby Commonwealth Act No. 472, which was the prevailing lawwhen the Ordinance was enacted.

A municipality is authorized to impose three kinds of licenses:(1) a license for regulation of useful occupation or enterprises;(2) license for restriction or regulation of non-usefuloccupations or enterprises; and (3) license for revenue. 4 It isthus unnecessary, as plaintiff would have us do, to determinewhether the subject storage fee is a tax for revenue purposes ora license fee to reimburse defendant Municipality for service ofsupervision because defendant Municipality is authorized notonly to impose a license fee but also to tax for revenuepurposes.

The storage fee imposed under the question Ordinance isactually a municipal license tax or fee on persons, firms andcorporations, like plaintiff, exercising the privilege of storingcopra in a bodega within the Municipality's territorialjurisdiction. For the term "license tax" has not acquired a fixedmeaning. It is often used indiseriminately to designateimpositions exacted for the exercise of various privileges. Inmany instances, it refers to revenue-raising exactions onprivileges or activities.

(2) Municipal corporations are allowed wide discretion indetermining the rates of imposable license fees even in cases ofpurely police power measures. In the absence of proof as tomunicipal conditions and the nature of the business beingtaxed as well as other factors relevant to the issue ofarbitrariness or unreasonableness of the questioned rates,Courts will go slow in writing off an Ordinance. In the case at

bar, appellant has not sufficiently shown that the rate imposedby the questioned Ordinance is oppressive, excessive andprohibitive.

19. Golden Ribbon Lumber Co., Inc. v. City of

ButuanGR No. L-18534 24 December 1964

F A C T S: Golden Ribbon Lumber Co., Inc., a duly organizeddomestic corporation, operated a lumber mill and lumber yardin Butuan City. Pursuant to Ordinance No. 5, as amended byOrdinance Nos. 9, 10, 47, and 49 of the said city, it paid thetaxes provided therein. Claiming that said ordinance, asamended, was void, it later brought the present action to haveit so declared; to recover the amount paid, and to haveappellants permanently enjoined from enforcing said

ordinance as amended.

I S S U E: Whether or not Ordinance No. 5 falls within theCharter of the City of Butuan.

H E L D: No. The tax imposed is and was really intended to beon lumber sold and not a tax on, or, license fee for the privilegeof operating a lumber mill and/or a lumber yard. It violates RA2264 as municipal corporations are prohibited from imposingcharges of taxes of such nature.

Appellants claim that the questioned tax is one on business ora privilege tax for the operation of a lumber mill or a lumberyard is without merit. The character or nature of a tax isdetermined by its operation, practical results and incidents.Neither the original ordinance in question nor the amendatoryones provide that payment thereof is a condition precedent to


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the enjoyment of such privilege or that its non-payment wouldresult in the cancellation of any previous license granted.

Lastly, the rule is well-settled that municipal corporations areclothed with no power of taxation; that its charter or a statute

must clearly show an intent to confer that power or themunicipal corporation cannot assume and exercise it, and thatany such power granted must be construed strictly, any doubtor ambiguity arising out from the terms of the grant to beresolved against the municipality.

20. VICTORIAS MILLING CO. V PPA153 SCRA 317; August 27, 1987

FACTS: This is a petition for review on certiorari of theJuly 27, 1984 Decision of the Office of the Presidential

Assistant For Legal Affairs dismissing the appeal from theadverse ruling of the Philippine Ports Authority on the soleground that the same was filed beyond the reglementaryperiod.

On April 28, 1981, the Iloilo Port Manager of respondentPhilippine Ports Authority (PPA for short) wrote petitionerVictorias Milling Co., requiring it to have its tugboats andbarges undergo harbor formalities and pay entrance/clearancefees as well as berthing fees effective May 1, 1981. PPA,likewise, requiring petitioner to secure a permit for cargo

handling operations at its Da-an Banua wharf and remit 10%of its gross income for said operations as the government'sshare.

Victorias Milling Co. maintained that it is except from payingPPA any fee or charge because: 1. The wharf and its facilitiesare built and installed on its own land; 2. Repairs and

maintenance are solely paid by it; 3. Maintenance anddredging of the channel are done by the Company personnel;4. At not time has the government paid any centavo for suchactivities.

ISSUE: WON the Victorias Milling Co. claim of exception forPPA fees is meritorious.

HELD: No, the petitioners claim that there is no basis for thePPA to assess and impose the dues and charge is devoid ofmerit.

As correctly stated by the Solicitor General, the fees andcharges PPA collects are not for the use of the wharf thatpetitioner owns but for the privilege of navigating in publicwaters, of entering and leaving public harbours and berthing

on public streams or waters.

As to the requirement to remit 10% of the handling charges,Section 6B-(ix) of the Presidential Decree No. 857 authorizedthe PPA "To levy dues, rates, or charges for the use of thepremises, works, appliances, facilities, or for services providedby or belonging to the Authority, or any organizationconcerned with port operations." This 10% government shareof earnings of arrastre and stevedoring operators is in thenature of contractual compensation to which a person desiringto operate arrastre service must agree as a condition to the

grant of the permit to operate.

21. CIR v. CA, CTA, AdMUGR No.115349; 18 April 1997


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F A C T S: Private respondent, Ateneo de Manila University,is a non-stock, non-profit educational institution with auxiliaryunits and branches all over the country. The Institute ofPhilippine Culture (IPC) is an auxiliary unit with no legalpersonality separate and distinct from private respondent. The

IPC is a Philippine unit engaged in social science studies ofPhilippine society and culture. Occasionally, it acceptssponsorships for its research activities from internationalorganizations, private foundations and government agencies.

On 8 July 1983, private respondent received from CIR ademand letter dated 3 June 1983, assessing private respondentthe sum of P174,043.97 for alleged deficiency contractors tax,and an assessment dated 27 June 1983 in the sum ofP1,141,837 for alleged deficiency income tax, both for the fiscalyear ended 31 March 1978. Denying said tax liabilities, private

respondent sent petitioner a letter-protest and subsequentlyfiled with the latter a memorandum contesting the validity ofthe assessments.

After some time petitioner issued a final decision dated 3August 1988 reducing the assessment for deficiencycontractors tax from P193,475.55 to P46,516.41, exclusive ofsurcharge and interest.

The lower courts ruled in favor of respondent. Hence thispetition.

Petitioner Commissioner of Internal Revenue contends thatPrivate Respondent Ateneo de Manila University "falls withinthe definition" of an independent contractor and "is not one ofthose mentioned as excepted"; hence, it is properly a subject ofthe three percent contractor's tax levied by the foregoingprovision of law. Petitioner states that the "term 'independent

contractor' is not specifically defined so as to delimit the scopethereof, so much so that any person who . . . renders physicaland mental service for a fee, is now indubitably considered anindependent contractor liable to 3% contractor's tax."

I S S U E: Whether or not private respondent falls under thepurview of independent contractor pursuant to Section 205 ofthe Tax Code and is subject to a 3% contractors tax.

H E LD: The petition is unmeritorious.

The term "independent contractors" include persons(juridical or natural) not enumerated above (but not includingindividuals subject to the occupation tax under Section 12 ofthe Local Tax Code) whose activity consists essentially of thesale of all kinds of services for a fee regardless of whether or

not the performance of the service calls for the exercise or useof the physical or mental faculties of such contractors or theiremployees.

Petitioner Commissioner of Internal Revenue erred inapplying the principles of tax exemption without first applyingthe well-settled doctrine of strict interpretation in theimposition of taxes. It is obviously both illogical andimpractical to determine who are exempted without firstdetermining who are covered by the aforesaid provision. TheCommissioner should have determined first if private

respondent was covered by Section 205, applying the rule ofstrict interpretation of laws imposing taxes and other burdenson the populace, before asking Ateneo to prove its exemptiontherefrom.

Interpretation of Tax Laws. The doctrine in theinterpretation of tax laws is that (a) statute will not be


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construed as imposing a tax unless it does so clearly, expressly,and unambiguously. . . . (A) tax cannot be imposed withoutclear and express words for that purpose. Accordingly, thegeneral rule of requiring adherence to the letter in construingstatutes applies with peculiar strictness to tax laws and the

provisions of a taxing act are not to be extended byimplication. In case of doubt, such statutes are to beconstrued most strongly against the government and in favorof the subjects or citizens because burdens are not to beimposed nor presumed to be imposed beyond what statutesexpressly and clearly import.

Ateneos Institute of Philippine Culture never sold its servicesfor a fee to anyone or was ever engaged in a business apartfrom and independently of the academic purposes of theuniversity. Funds received by the Ateneo de Manila University

are technically not a fee. They may however fall as gifts ordonations which are tax-exempt as shown by privaterespondents compliance with the requirement of Section 123of the National Internal Revenue Code providing for theexemption of such gifts to an educational institution.

Transaction of IPC not a contract of sale nor acontract for a piece of work. The transactions of AteneosInstitute of Philippine Culture cannot be deemed either as acontract of sale or a contract for a piece of work. By thecontract of sale, one of the contracting parties obligateshimself to transfer the ownership of and to deliver a

determinate thing, and the other to pay therefor a price certainin money or its equivalent. In the case of a contract for a pieceof work, the contractor binds himself to execute a piece ofwork for the employer, in consideration of a certain price orcompensation. . . . If the contractor agrees to produce the workfrom materials furnished by him, he shall deliver the thingproduced to the employer and transfer dominion over the

thing. . . . In the case at bench, it is clear from the evidence onrecord that there was no sale either of objects or servicesbecause, as adverted to earlier, there was no transfer ofownership over the research data obtained or the results ofresearch projects undertaken by the Institute of Philippine

Culture.

22. COMMISSIONER OF INTERNAL REVENUE,petitioner, vs. THE HON. COURT OF APPEALS,R.O.H. AUTO PRODUCTS PHILIPPINES, INC.and THE HON. COURT OF TAX APPEALS,respondents. G.R. No. 108358 January 20, 1995

Facts: On 22 August 1986, Executive Order No. 41 waspromulgated declaring a one-time tax amnesty on unpaid

income taxes, later amended to include estate and donor'staxes and taxes on business, for the taxable years 1981 to 1985.Respondent R.O.H. Auto Products Philippines, Inc., availing ofthe amnesty, filed in October 1986 and November 1986, its TaxAmnesty Return and Supplemental Tax Amnesty Return No.and paid the corresponding amnesty taxes due.

Prior to this availment, petitioner Commissioner of InternalRevenue, in a communication received by private respondenton August 13, 1986, assessed the latter deficiency income andbusiness taxes for its fiscal years 1981 and 1982 in an aggregate

amount of P1,410,157.71. Meanwhile, respondent averred thatsince it had been able to avail itself of the tax amnesty, thedeficiency tax notice should forthwith be cancelled andwithdrawn. This was denied by the CIR RevenueMemorandum Order No. 4-87, implementing Executive OrderNo. 41, had construed the amnesty coverage to include onlyassessments issued by the Bureau of Internal Revenue after


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the promulgation of the executive order on August 22 1986and not to assessments theretofore made.

On appeal, The Court of Tax appeal upheld for the respondent,which was further upheld by the Court of Appeals.

ISSUE: Whether or not the the deficiency assessments wereextinguished by reason of respondents availment of the taxamnesty.

HELD: Yes, as the scope of the amnesty covers the unpaidincome taxes for the years 1981 to 1985. If, as theCommissioner argues, Executive Order No. 41 had not beenintended to include 1981-1985 tax liabilities already assessed(administratively) prior to August 22, 1986, the law could havesimply so provided in its exclusionary clauses. It did not. The

conclusion is unavoidable, and it is that the executive orderhas been designed to be in the nature of a general grant of taxamnesty subject only to the cases specifically excepted by it.

Further, the law provides that, upon full compliance with theconditions of the tax amnesty and the rules and regulationsissued pursuant to this Executive order, the taxpayer shall berelieved of any income tax liability on any untaxed incomefrom January 1, 1981 to December 31, 1985, includingincrements thereto and penalties on account of the non-payment of the said tax. Civil, criminal or administrative

liability arising from the non-payment of the said tax, whichare actionable under the National Internal Revenue Code, asamended, are likewise deemed extinguished.

23.HYDRO RESOURCES V. COURT OF TAXAPPEALS ET AL.GR 80276; December 21, 1990

FACTS Hydro Resources Contractors Corporation entered

into a contract of sale with the National Irrigation Authority(NIA) for the construction of Magat River MultipurposeProject in Isabella in August 1978. The contract provided thatHydro will import parts, construction equipment and tools andtaxes and duties to be paid by NIA. Tools and equipmentarrived during 1978 and 1979. NIA reneged on the contract.Therefore causing the transfer its sale to Hydro in seperatedates in December 6, 1982 and March 24, 1983. ExecutiveOrder 860 took effect during December 21, 1982 provided for3% ad valorem tax on importations and it specifically providedthat it should have no retroactive effect. During the contract of

sale execution, Hydro was assessed and paid the said 3% advalorem tax worth P 281,591 under protest. The Hydro whenfiling for refund with Customs Commissioner who indorsedthe approval of the refund but was denied by the Secretary ofFinance and motion was denied by the Court of Tax Appeals.

ISSUE Whether or not should the Executive Order 860should have a retroactive effect.

HELD The Court of Tax Appeals erred in applying aretroactive effect for the Executive Order therefore should not

have been subject to the additional 3% ad valorem tax. Ingeneral tax laws are not retroactive in nature. Not only thatExecutive Order 860 specifically provides that it is notretroactive in nature, but also when the conditional contract ofsale was executed, its had a suspensive condition contemplatedin the Civil Code (Article 1187) where it returned ownership tothe seller Hydro because NIA was not able to comply with its


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part of the contract, it was deemed executed as if during theconstitution of the obligation which was in 1978 and not in1982.

24.Central Azucarera Don Pedro v CIR and CTAG.R. Nos. L-23236 and L-23254 May 31,

1967

FACTS:Central Azucarera Don Pedro, a domestic corporationwith office at Nasugbu, Batangas, had been filing its incometax returns on the "fiscal year" basis ending August 31, of everyyear.

[It had been assessed deficiency tax plus interest. It paid thedeficiency tax but protested on the imposition of the interest],

claiming that the imposition of % monthly interest on itsdeficiency tax for the fiscal year 1954 to 1958, Pursuant toSection 51 (d) of the Revenue Code, as amended by RepublicAct No. 2343, is illegal, because the imposition of interest onefficiency income tax earned prior to the effectivity of theamendatory law (Rep. Act 2343) [on 1959] will be tantamountto giving it (Rep. Act No. 2343) retroactive application. [Itfurther contends that] the application of the amendedprovision (now Sec. 51-d of the Tax Code) to the cases at barwould run counter to the constitutional restriction against theenactment of ex post facto laws.

ISSUE: Whether or not the imposition of the interest, isunconstitutional

HELD:NO [the interest was correctly imposed]. It is to benoted that the collection of interest in these cases is not penalin nature, thus

the imposition of . . . interest is but a justcompensation to the state for the delay inpaying the tax, and for the concomitant use bythe taxpayer of funds that rightfully should be

in the government's hands (U.S. vs. Goldstein,189 F [2d] 752; Ross vs. U.S., 148 Fed. Supp.330; U.S. vs. Joffray, 97 Fed. [2d] 488). Thefact that the interest charged is madeproportionate to the period of delay constitutesthe best evidence that such interest is not penalbut compensatory. (Castro vs. Collector ofInternal Revenue, G.R. No. L-12174, Resolutionon Motion for Reconsideration, December 28,1962)

and we had already held that

The doctrine of unconstitutionality raised byappellant is based on the prohibition against expost facto laws. But this prohibition appliesonly to criminal or penal matters, and not tolaws which concern civil matters orproceedings generally, or which affect orregulate civil or private rights (Ex parteGarland, 18 Law Ed., 366; 16 C.J.S., 889-891).(Republic vs. Oasan Vda. de Fernandez, 99

Phil. 934, 937).

Finally, section 13 of the amendatory Republic Act No. 2343refers only to the basic tax rates, which are made applicable toincome received in 1959 onward, but does not affect theinterest due on deficiencies, which are left to be governed bysection 51 (d).


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25.Pepsi-Cola Bottling Company of thePhilippines, Inc. v. Municipality of TanauanG.R. No. L-31156; February 27, 1976

Facts: In February 1963, plaintiff commenced a complaintseeking to declare Section 2 of R.A. 2264 (Local AutonomyAct) unconstitutional as an undue delegation of taxing powerand to declare Ordinance Nos. 23 and 27 issued by theMunicipality of Tanauan, Leyte as null and void.

Municipal Ordinance No. 23 levies and collects from softdrinks producers and manufacturers one-sixteenth (1/16) of acentavo for every bottle of soft drink corked. On the otherhand, Municipal Ordinance No. 27 levies and collects on soft

drinks produced or manufactured within the territorialjurisdiction of the municipality a tax of one centavo (P0.01) oneach gallon of volume capacity. The tax imposed in bothOrdinances Nos. 23 and 27 is denominated as "municipalproduction tax.

Issues: (1) Is Section 2 of R.A. 2264 an undue delegation ofthe power of taxation? (2) Do Ordinance Nos. 23 and 24constitute double taxation and impose percentage or specifictaxes?

Held: (1) NO. The power of taxation is purely legislative andcannot be delegated to the executive or judicial department ofthe government without infringing upon the theory ofseparation of powers. But as an exception, the theory does notapply to municipal corporations. Legislative powers may bedelegated to local governments in respect of matters of localconcern. (2) NO. The Municipality of Tanauan discovered that

manufacturers could increase the volume contents of eachbottle and still pay the same tax rate since tax is imposed onevery bottle corked. To combat this scheme, MunicipalOrdinance No. 27 was enacted. As such, it was a repeal ofMunicipal Ordinance No. 23. In the stipulation of facts, the

parties admitted that the Municipal Treasurer was enforcingMunicipal Ordinance No. 27 only. Hence, there was no case ofdouble taxation.

26. COMMISSIONER OF INTERNAL REVENUE vs.S.C. JOHNSON AND SON, INC., and COURT OF

APPEALS309 SCRA 87 ; June 25, 1999

Topic: Double Taxation

Facts: SC. JOHNSON AND SON, INC., a domesticcorporation organized and operating under the Philippinelaws, entered into a license agreement with SC Johnson andSon, United States of America (USA), a non-resident foreigncorporation was granted the right to use the trademark,patents and technology owned by the latter including the rightto manufacture, package and distribute the products. LicenseAgreement was duly registered with the Technology TransferBoard of the Bureau of Patents, Trade Marks and TechnologyTransfer under Certificate of Registration No. 8064. SC.JOHNSON AND SON, INC was obliged to pay SC Johnson and

Son, USA royalties based on a percentage of net sales andsubjected the same to 25% withholding tax on royaltypayments which [respondent] paid from July 1992 to May1993. Respondent filed with the International Tax AffairsDivision (ITAD) of the BIR a claim for refund of overpaidwithholding tax on royalties arguing that Since the agreementwas approved by the Technology Transfer Board, the


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preferential tax rate of 10% should apply hence royalties paidby the [respondent] to SC Johnson and Son, USA is onlysubject to 10% withholding tax pursuant to the most-favorednation clause of the RP-US Tax Treaty.

The Commissioner did not act on said claim for refund.Respondent filed a petition for review before the CTA to claima refund of the overpaid withholding tax on royalty payments.CTA decided for Respondent and ordered CIR to issue a taxcredit certificate in the amount of P963,266.00 representingoverpaid withholding tax on royalty payments, beginning July,1992 to May, 1993. CIR filed a petition for review with CA. CAupheld CTA.

CIR contends that under RP-US Tax Treaty, which is known asthe "most favored nation" clause, the lowest rate of the

Philippine tax at 10% may be imposed on royalties derived by aresident of the United States from sources within thePhilippines only if the circumstances of the resident of theUnited States are similar to those of the resident of WestGermany. Since the RP-US Tax Treaty contains no "matchingcredit" provision as that provided in RP-West Germany TaxTreaty, the tax on royalties under the RP-US Tax Treaty is notpaid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Also petitioner argues that sinceS.C. Johnson's invocation of the "most favored nation" clauseis in the nature of a claim for exemption from the application

of the regular tax rate of 25% for royalties, the provisions ofthe treaty must be construed strictly against it.

Respondent countered that the "most favored nation" clauseunder the RP-US Tax Treaty refers to royalties paid undersimilar circumstances as those royalties subject to tax in othertreaties; that the phrase "paid under similar circumstances"

does not refer to payment of the tax but to the subject matterof the tax, that is, royalties, because the "most favored nation"clause is intended to allow the taxpayer in one state to avail ofmore liberal provisions contained in another tax treatywherein the country of residence of such taxpayer is also a

party thereto, subject to the basic condition that the subjectmatter of taxation in that other tax treaty is the same as that inthe original tax treaty under which the taxpayer is liable; thus,the RP-US Tax Treaty speaks of "royalties of the same kindpaid under similar circumstances".

Issue: WON SC Johnson can refund.

Ruling: NO. The tax rates on royalties and the circumstancesof payment thereof are the same for all the recipients of suchroyalties and there is no disparity based on nationality in the

circumstances of such payment.6

On the other hand, a cursoryreading of the various tax treaties will show that there is nosimilarity in the provisions on relief from or avoidance ofdouble taxation 7 as this is a matter of negotiation between thecontracting parties. This dissimilarity is true particularly in thetreaties between the Philippines and the United States andbetween the Philippines and West Germany.

The RP-US Tax Treaty is just one of a number of bilateraltreaties which the Philippines has entered into for theavoidance of double taxation. 9The purpose of these

international agreements is to reconcile the national fiscallegislations of the contracting parties in order to help thetaxpayer avoid simultaneous taxation in two differentjurisdictions. 10 More precisely, the tax conventions are draftedwith a view towards the elimination of international juridicaldouble taxation, which is defined as the imposition ofcomparable taxes in two or more states on the same taxpayer


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in respect of the same subject matter and for identicalperiods. 11 The apparent rationale for doing away with doubletaxation is of encourage the free flow of goods and services andthe movement of capital, technology and persons betweencountries, conditions deemed vital in creating robust and

dynamic economies.

Double taxation usually takes place when a person is residentof a contracting state and derives income from, or owns capitalin, the other contracting state and both states impose tax onthat income or capital. In order to eliminate double taxation, atax treaty resorts to several methods. First, it sets out therespective rights to tax of the state of source or situs and of thestate of residence with regard to certain classes of income orcapital. In some cases, an exclusive right to tax is conferred onone of the contracting states; however, for other items of

income or capital, both states are given the right to tax,although the amount of tax that may be imposed by the state ofsource is limited.

Double taxation usually takes place when a person is residentof a contracting state and derives income from, or owns capitalin, the other contracting state and both states impose tax onthat income or capital. In order to eliminate double taxation, atax treaty resorts to several methods. First, it sets out therespective rights to tax of the state of source or situs and of thestate of residence with regard to certain classes of income or

capital. In some cases, an exclusive right to tax is conferred onone of the contracting states; however, for other items ofincome or capital, both states are given the right to tax,although the amount of tax that may be imposed by the state ofsource is limited. On the other hand, in the credit method,although the income or capital which is taxed in the state ofsource is still taxable in the state of residence, the tax paid in

the former is credited against the tax levied in the latter. Thebasic difference between the two methods is that in theexemption method, the focus is on the income or capital itself,whereas the credit method focuses upon the tax. 15

The phrase "royalties paid under similar circumstances" in themost favored nation clause of the US-RP Tax Treatynecessarily contemplated "circumstances that are tax-related".

In the case at bar, the state of source is the Philippines becausethe royalties are paid for the right to use property or rights, i.e.trademarks, patents and technology, located within thePhilippines. 17The United States is the state of residence sincethe taxpayer, S. C. Johnson and Son, U. S. A., is based there.Under the RP-US Tax Treaty, the state of residence and thestate of source are both permitted to tax the royalties, with a

restraint on the tax that may be collected by the state ofsource.

the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the taxes imposedupon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances.This would mean that private respondent must prove that theRP-US Tax Treaty grants similar tax reliefs to residents of theUnited States in respect of the taxes imposable upon royaltiesearned from sources within the Philippines as those allowed to

their German counterparts under the RP-Germany Tax Treaty.The RP-US and the RP-West Germany Tax Treaties do notcontain similar provisions on tax crediting.

If the rates of tax are lowered by the state of source, in thiscase, by the Philippines, there should be a concomitantcommitment on the part of the state of residence to grant some


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form of tax relief, whether this be in the form of a tax credit orexemption. 24 Otherwise, the tax which could have beencollected by the Philippine government will simply be collectedby another state, defeating the object of the tax treaty since thetax burden imposed upon the investor would remain

unrelieved. If the state of residence does not grant some formof tax relief to the investor, no benefit would redound to thePhilippines, i.e., increased investment resulting from afavorable tax regime, should it impose a lower tax rate on theroyalty earnings of the investor, and it would be better toimpose the regular rate rather than lose much-neededrevenues to another country.

The entitlement of the 10% rate by U.S. firms despite theabsence of a matching credit (20% for royalties) wouldderogate from the design behind the most grant equality of

international treatment since the tax burden laid upon theincome of the investor is not the same in the two countries.The similarity in the circumstances of payment of taxes is acondition for the enjoyment of most favored nation treatmentprecisely to underscore the need for equality of treatment.

Respondent cannot be deemed entitled to the 10 percent rategranted under the RP-West Germany Tax Treaty for the reasonthat there is no payment of taxes on royalties und

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