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in his capacity as Commissioner of Internal Revenue,
G.R. No. L-29987
October 22, 1975

CTA: MERALCO is not exempt from paying the compensating tax
provided for in Section 190 of the National Internal Revenue Code, the
purpose of which is to "place casual importers, who are not merchants
on equal putting with established merchants who pay sales tax on
articles imported by them." The court further stated that MERALCO's
claim for exemption from the payment of the compensating tax is not
clear or expressed, contrary to the cardinal rule in taxation that
"exemptions from taxation are highly disfavored in law, and he who
claims exemption must be able to justify his claim by the clearest grant
of organic or statute law.

MERALCO FRANCHISE: The grantee shall be liable to pay the same
taxes upon its real estate, buildings, plant (not including poles, wires,
transformers, and insulators), machinery, and personal property as
other persons are or may be hereafter by law to pay

ISSUE: Is Manila Electric Company (MERALCO for short) exempt from
payment of a compensating tax on poles, wires, transformers, and
insulators imported by it for use in the operation of its electric light,
heat, and power system? MERALCO answers the query in the
affirmative while the Commissioner of Internal Revenue asserts the


One who claims to be exempt from the payment of a particular tax
must do so under clear and unmistakable terms found in the statute.
Tax exemptions are strictly construed against the taxpayer, they being
highly disfavored and may almost be said "to be odious to the law." He
who claims an exemption must be able to print to some positive
provision of law creating the right; it cannot be allowed to exist upon a
mere vague implication or inference.

We do not see in paragraph 9 of its petitioner's franchise, on the
assumption that it does exist as worded, what may be considered as
"plain and unambiguous terms" declaring petitioner MERALCO exempt
from paying a compensating tax on its imports of poles, wires,
transformers, and insulators. What MERALCO really wants Us to do,
but which We cannot under the principles enumerated earlier, is to
infer and imply that there is such an exemption from the following
phrase: "... the grantee shall pay to the City of Manila five per centum
of the gross earnings received from its business ... and shall be in lieu
of all taxes and assessments of whatsoever nature, and by whatsoever
authority upon the privileges, earnings, income, franchise, and poles,
wires, transformers, and insulators of the grantee, from which taxes
and assessments the grantee is hereby expressly exempted."
Note that what the above provision exempts petitioner from, is the
payment of property, tax on its poles, wires, transformers, and
insulators; it does not exempt it from payment of taxes like the one in
question which, by mere necessity or consequence alone, fall upon

It is a well-settled rule or principle in taxation that a compensating tax
is not a property tax but is an excise tax.
Generally stated, an excise
tax is one that is imposed on the performance of an act, the engaging
in an occupation, or the enjoyment of a privilege. A tax upon property
because of its ownership its a direct tax, whereas one levied upon
property because of its use is an excise duty.

If it had been the legislative intent to exempt MERALCO from paying a
tax on the use of imported equipment, the legislative body could have
easily done so by expanding the provision of paragraph 9 and adding
to the exemption such words as "compensating tax" or "purchases
from abroad for use in its business," and the like. We cannot ignore
the principle that express mention in a statute of one exemption
precludes reading others into it.

The broad statement that the tax upon the gross earning of telephone
companies shall be "in lieu of all other taxation" upon them is not
necessarily to be given a literal meaning. "In construing the act it is
our duty to seek the real intent of the legislature, even though by so
doing we may limit the literal meaning of the broad language used."

The rationale of Republic Act 901 is "to encourage the establishment
or exploitation of new and necessary industries to promote the
economic growth of the country," and because "an entrepreneur
engaging in a new and necessary industry faces uncertainty and
assumes a risk bigger than one engaging in a venture already known
and developed ... the law grants him tax exemption to lighten
onerous financial burdens and reduce losses."


CORPORATION, plaintiff-appellant, vs. THE MUNICIPALITY OF
JAGNA, PROVINCE OF BOHOL, defendant-appellee.
G.R. No. L-24265
December 28, 1979
Plaintiff is engaged in the manufacture of soap, edible oil, margarine
and other similar products, and for this purpose maintains a "bodega"
in defendant Municipality where it stores copra purchased in the
municipality and therefrom ships the same for its manufacturing and
other operations.
ORDINANCE: Any person, firm or corporation having a deposit of
exportable copra in the bodega, within the jurisdiction of the
Municipality of Jagna Bohol, shall pay to the Municipal Treasury a
storage fee of TEN (P0.10) CENTAVOS FOR EVERY HUNDRED (100)
For a period of six years, from 1958 to 1963, plaintiff paid defendant
Municipality, allegedly under protest, storage fees in the total sum of
Plaintiff filed this suit in the Court of First Instance 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 being beyond the
power of the Municipality to enact; and
2) that defendant Municipality be ordered to refund to it the amount of
P42,265.13 which it had paid under protest
ISSUE: Whether defendant Municipality was authorized to impose and
collect the storage fee provided for in the challenged Ordinance under
the laws then prevailing.
HELD: The validity of the Ordinance must be upheld pursuant to the
broad authority conferred upon municipalities by Commonwealth Act
No. 472, approved on June 16, 1939, which was the prevailing law
when 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-useful occupations or enterprises;
and (3) license for revenue.

The storage fee imposed under the question Ordinance is actually a
municipal license tax or fee on persons, firms and corporations, like
plaintiff, exercising the privilege of storing copra in a bodega within the
Municipality's territorial jurisdiction.

For it has been held that a warehouse used for keeping or storing
copra is an establishment likely to endanger the public safety or likely
to give rise to conflagration because the oil content of the copra when
ignited is difficult to put under control by water and the use of
chemicals is necessary to put out the fire.

And as the Ordinance itself
states, all exportable copra deposited within the municipality is "part of
the surveillance and lookout of municipal authorities.
The question of whether appellant is engaged in that business or not is
irrelevant because the storage fee, as previously mentioned, is an
imposition on the privilege of storing copra in a bodega within
defendant municipality by persons, firms or corporations. Section 1 of
the Ordinance in question does not state that said persons, firms or
corporations should be engaged in the business or occupation of
buying or selling copra. Moreover, by plaintiff's own admission that it is
a consolidated corporation with its trading company, it will be hard to
segregate the copra it uses for trading from that it utilizes for

Thus, it can be said that plaintiff's payment of storage fees imposed by
the Ordinance in question does not amount to double taxation. For
double taxation to exist, the same property must be taxed twice, when
it should be taxed but once. Double taxation has also been defined as
taxing the same person twice by the same jurisdiction for the same
Surely, a tax on plaintiff's products is different from a tax on the
privilege of storing copra in a bodega situated within the territorial
boundary of defendant municipality.
G.R. No. 78780
July 23, 1987
Petitioners, the duly appointed and qualified Judges presiding over
Branches 52, 19 and 53, respectively, of the Regional Trial Court,
National Capital Judicial Region, all with stations in Manila, seek to
prohibit and/or perpetually enjoin respondents, the Commissioner of
Internal Revenue and the Financial Officer of the Supreme Court, from
making any deduction of withholding taxes from their salaries
SUBMIT: Any tax withheld from their emoluments or compensation as
judicial officers constitutes a decrease or diminution of their salaries,
contrary to the provision of Section 10, Article VIII of the 1987
Constitution mandating that "during their continuance in office, their
salary shall not be decreased," even as it is anathema to the Ideal of
an independent judiciary envisioned in and by said Constitution."
It was further expressly made clear, specially with regard to
Commissioner Joaquin F. Bernas' accepted amendment to the
amendment of Commissioner Rigos, that the salaries of members of
the Judiciary would be subject to the general income tax applied to all
The 1987 Constitution does not contain a provision similar to Section
6, Article XV of the 1973 Constitution, for which reason, petitioners
claim that the intent of the framers is to revert to the original concept
of "non-diminution "of salaries of judicial officers.
And I know right now, for instance, there are many people who have
accepted employment in the government involving a reduction of
income and yet are still subject to income tax. So, they are not the
only citizens whose income is reduced by accepting service in
It is plain that the Constitution authorizes Congress to pass a law fixing
another rate of compensation of Justices and Judges but such rate
must be higher than that which they are receiving at the time of
enactment, or if lower, it would be applicable only to those appointed
after its approval. It would be a strained construction to read into the
provision an exemption from taxation in the light of the discussion in
the Constitutional Commission.
Stated otherwise, we accord due respect to the intent of the people,
through the discussions and deliberations of their representatives, in
the spirit that all citizens should bear their aliquot part of the cost of
maintaining the government and should share the burden of general
income taxation equitably.
and the COURT OF TAX APPEALS, respondents.

G.R. No. L-54908
January 22, 1990
Atlas Consolidated Mining and Development Corporation (hereinafter,
Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal
Corporation (Mitsubishi, for brevity), a Japanese corporation licensed
to engage in business in the Philippines, for purposes of the projected
expansion of the productive capacity of the former's mines in Toledo,
Cebu. Under said contract, Mitsubishi agreed to extend a loan to Atlas
'in the amount of $20,000,000.00, United States currency, for the
installation of a new concentrator for copper production. Atlas, in turn
undertook to sell to Mitsubishi all the copper concentrates produced
from said machine for a period of fifteen (15) years. It was
contemplated that $9,000,000.00 of said loan was to be used for the
purchase of the concentrator machinery from Japan.
Pursuant to the contract between Atlas and Mitsubishi, interest
payments were made by the former to the latter totalling
P13,143,966.79 for the years 1974 and 1975. The corresponding 15%
tax thereon in the amount of P1,971,595.01 was withheld pursuant to
Section 24 (b) (1) and Section 53 (b) (2) of the National Internal
Revenue Code, as amended by Presidential Decree No. 131, and duly
remitted to the Government
ISSUE: Whether or not the interest income from the loans extended
to Atlas by Mitsubishi is excludible from gross income taxation
pursuant to Section 29 b) (7) (A) of the tax code and, therefore,
exempt from withholding tax. Apropos thereto, the focal question is
whether or not Mitsubishi is a mere conduit of Eximbank which will
then be considered as the creditor whose investments in the
Philippines on loans are exempt from taxes under the code.
The nature of the above contract shows that the same is not just a
simple contract of loan. It is not a mere creditor-debtor relationship. It
is more of a reciprocal obligation between ATLAS and MITSUBISHI
where the latter shall provide the funds in the installation of a new
concentrator at the former's Toledo mines in Cebu, while ATLAS in
consideration of which, shall sell to MITSUBISHI, for a term of 15
years, the entire copper concentrate that will be produced by the
installed concentrator.
It is too settled a rule in this jurisdiction, as to dispense with the need
for citations, 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
burden of proof rests upon the party claiming exemption to prove that
it is in fact covered by the exemption so claimed, which onus
petitioners have failed to discharge. Significantly, private respondents
are not even among the entities which, under Section 29 (b) (7) (A) of
the tax code, are entitled to exemption and which should indispensably
be the party in interest in this case.
Definitely, the taxability of a party cannot be blandly glossed over on
the basis of a supposed "broad, pragmatic analysis" alone without
substantial supportive evidence, lest governmental operations suffer
due to diminution of much needed funds. Nor can we close this
discussion without taking cognizance of petitioner's warning, of
pervasive relevance at this time, that while international comity is
invoked in this case on the nebulous representation that the funds
involved in the loans are those of a foreign government, scrupulous
care must be taken to avoid opening the floodgates to the violation of
our tax laws. Otherwise, the mere expedient of having a Philippine
corporation enter into a contract for loans or other domestic securities
with private foreign entities, which in turn will negotiate independently
with their governments, could be availed of to take advantage of the
tax exemption law under discussion.
G.R. Nos. 62554-55
September 2, 1992
Commissioner assessed petitioner the amount of P1,060,615.06, plus
25% surcharge in the amount of P265,153.76, or a total of
P1,325,768.82, as 1% monthly bank reserve deficiency tax for taxable
year 1969
Petitioner contends that Section 249 of the Tax Code is no longer
enforceable, because Section 126 of Act 1459, which was allegedly the
basis for the imposition of the 1% reserve deficiency tax, was repealed
by Section 90 of Republic Act 337, the General Banking Act, and by
Sections 100 and 101 of Republic Act 265
Both petitioner and public respondent agree that:

The requirement on the maintenance of bank reserves, previously
found in Section 126 of Act 1459 (The Corporation Law), remained
prescribed, after its repeal, in

a. Sec. 26, RA 337 4 subjecting the deposit liabilities of commercial
banks including the Philippine National Bank to the reserve
requirements and other conditions prescribed by the Monetary Board
in accordance with the authority granted to 1t under the Central Bank

b. Sec. 100, RA 265 5 requiring banks to maintain reserves against
their deposit liabilities;

c. Sec. 101, RA 265 6 authorizing the Monetary Board to prescribe
and to modify the minimum reserved ratios applicable to each class of
peso deposits;

d. Sec. 106, RA 265 7 imposing a penalty of 1/10 of 1% for violation
of the Banking Law."

Petitioner Republic argues then that in case of a reserve deficiency, the
violating bank would be liable at the same time for a tax of 1% a
month (Second paragraph, Section 249, NIRC) payable to the Bureau
of Internal Revenue as well as a penalty of 1/10 of 1% a day (Section
106, Central Bank Act) payable to the Central Bank


Dura lex sed lex!

While petitioner might have a point, the wisdom of this legislation is
not the province of the Court. 11 It is clear from the statutes then in
force that there was no double taxation involved one was a penalty
and the other was a tax. At any rate, We have upheld the validity of
double taxation. 12 The payment of 1/10 of 1% for incurring reserve
deficiencies (Section 106, Central Bank Act) is a penalty as the primary
purpose involved is regulation, 13 while the payment of 1% for the
same violation (Second Paragraph, Section 249, NIRC) is a tax for the
generation of revenue which is the primary purpose in this instance. 14
Petitioner should not complain that it is being asked to pay twice for
incurring reserve deficiencies. It can always avoid this predicament by
not having reserve deficiencies. Petitioners case is covered by two
special laws one a banking law and the other, a tax law. These two
laws should receive such construction as to make them harmonize with
each other and with the other body of pre-existing laws.

The wisdom of this is not the province of the Court. It is clear from the
statutes then in force that there was no double taxation involved
one was a penalty and the other was a tax. At any rate, We have
upheld the validity of double taxation. (Double taxation: when the
same person is taxed by the same jurisdiction for the same purpose.
[San Miguel Brewery, Inc. v. City of Cebu 43 SCRA 275, 280]) The
payment of 1/10 of 1% for incurring reserve deficiencies (Section 106,
Central Bank Act) is a penalty as the primary purpose involved is
regulation, while the payment of 1% for the same violation (Second
Paragraph, Section 249, NIRC) is a tax for the generation of revenue
which is the primary purpose in this instance. Petitioner should not
complain that it is being asked to pay twice for incurring reserve
deficiencies. It can always avoid this predicament by not having
reserve deficiencies. Petitioners case is covered by two special laws
one a banking law and the other, a tax law. These two laws should
receive such construction as to make them harmonize with each other
and with the other body of pre-existing laws.

G.R. No. 96700
November 19, 1996


Petitioner National Power Corporation is the owner of certain real
properties situated in Saguiaran, Lanao del Sur

Said properties comprised petitioner's Agus II Hydroelectric Power
Plant Complex. Petitioner was assessed real estate taxes on said
properties in the amount of one hundred fifty four million one hundred
fourteen thousand eight hundred fifty four pesos and eighty two
centavos (P154,114,854.82) covering the period from June 14, 1984 to
December 31, 1989, allegedly because petitioners exemption from
realty taxes had been withdrawn.
Anent the tax exempt status of petitioner for the period up to
December 31, 1989, the following are the relevant laws and
(1) Commonwealth Act No. 120, which became
effective on November 3, 1936, created the
petitioner as a non-profit public corporation
wholly owned by the government of the Republic
of the Philippines tasked to undertake the
development of hydraulic power and the
production of power from other sources. Section
13 thereof exempted it from the payment of all
forms of taxes, duties, fees, imposts as well as
costs and service fees including filing fees,
appeal bonds, supersedes bonds, in any court or
administrative proceedings to enable the
Corporation to pay its indebtedness and
(2) Section 2 of Republic Act No. 358, which took
effect on June 4, 1949, exempted petitioner
from all taxes, duties, fees, imposts, charges
and restrictions of the Republic of the Philippines,
its provinces, cities and municipalities in order to
facilitate payment of its indebtedness.
(3) Republic Act No. 6395, which took effect on September
10, 1971, revised the charter of the petitioner
ISSUE: Is petitioner National Power Corporation liable for real
property taxes for the period June 14, 1984 to December 31, 1989
amounting to more than P154 million? To compel payment of
petitioners alleged delinquency in its realty taxes, did respondents act
correctly in selling at public auction petitioners real properties on
which is situated its hydroelectric power plant complex?

Pivotal issue: whether or not petitioner has ceased to enjoy its tax and
duty exemption privileges, including its exemption from payment of
real property taxes.
Petitioners position, simply put, is that it has never been effectively
deprived of its tax and duty exemption privileges granted under CA
120, as amended, and RA 6395, as amended, and which, although
temporarily withdrawn, were just as quickly restored, such that at no
time did it lose its tax-exempt status. Hence, never did it become
liable for realty taxes, and therefore, the subject properties were
wrongfully levied upon and sold at auction.
On the other hand, respondents position is that the petitioners
exemption from payment of realty taxes had been withdrawn or
revoke by virtue of PD 1931, and had never been validly restored by
the FIRB Resolutions aforementioned, nor by the memorandum of
Exec. Sec. Macaraig, Jr., thereby rendering petitioner liable for realty
taxes for the period June 14, 1984 up to December 31, 1989

By virtue of FIRB Resolution No. 1-86, Hon. Virata fully restored the
tax exemption as of July 1, 1985, to continue for an indefinite
period. He also signed the same in his dual capacities as Minister of
Finance and as Chairman of the FIRB. The resolution specifically
provided that:
2. The NPC as a government corporation is exempt from the real
property tax on land and improvements owned by it x x x pursuant to
the provisions of Section 40 (a) of the Real Property Tax Code, as
While EO 93 again withdrew the tax exemption of petitioner, through
its Section 1, as follows:
Section 1. The provisions of any general or special law to the
contrary notwithstanding, all tax and duty incentives granted to
government and private entities are hereby withdrawn, except:
x x x x x x x x x
f) those approved by the President upon the recommendation of the
Fiscal Incentives Review Board.
Nevertheless. It also stated:
Section 2. The Fiscal Incentives Review Board created under PD 776,
as amended, is hereby authorized to:
(a) restore tax and/or duty exemptions withdrawn hereunder in whole
or in part;
Pursuant thereto, FIRB Resolution No. 17-87 restored the tax
exemption privileges of the petitioner effective March 10, 1987. Again,
the resolution was signed by De Roda, Jr. in his dual capacities as
Acting Secretary of Finance and as Chairman, FIRB. This resolution
was confirmed and approved by then Acting Executive Secretary
Macaraig, by the authority of the President.
Considering the entire chain of events, it is clear that petitioners tax
exemptions for the period in question (1984-1989) had effectively
been preserved intact by virtue of their restoration through FIRB
To repeat, as FIRB Resolutions Nos. 10-85 and 1-86 were duly
approved by the Minister of Finance, hence they are valid and
effective. To this extent, this decision modifies or supersedes the
Courts earlier decision in Albay afore-referred to.

The latest in our jurisprudence indicates that delegation of legislative
power has become the rule and its non-delegation the exception. The
reason is the increasing complexity of modern life and many technical
fields of governmental functions as in matters pertaining to tax
exemptions. This is coupled by the growing inability of the legislature
to cope directly with the many problems demanding its attention. The
growth of society has ramified its activities and created peculiar and
sophisticated problems that the legislature cannot be expected
reasonably to comprehend. Specialization even in legislation has
become necessary. To many of the problems attendant upon present
day undertakings, the legislature may not have the competence, let
alone the interest and the time, to provide the required direct and
efficacious, not to say specific solutions.
The inescapable conclusion is that the tax exemption privileges of
petitioner had been validly restored and preserved by said FIRB

The exemption is not only legally defensible, but also logically
unassailable. The properties in question comprise the site of the entire
Agus II Hydroelectric Power Plant Complex, which generates and
supplies relatively cheap electricity to the island of Mindanao. These
are government properties, wholly owned by petitioner and devoted
directly and solely for public service and utilized in the implementation
of the state policy of bringing about the total electrification of the
country at the least cost to the public, through the development of
power from all sources to meet the needs of industrial development
and rural electrification. It can be noted, from RA 6395, PD 380 and
PD 938, that petitioners non-profit character has been maintained
throughout its existence, and that petitioner is mandated to devote all
its returns from capital investment and excess revenues from
operations to its expansion

At this juncture, we hasten to point out that the foregoing ruling is
solely with respect to the purported realty tax liabilities of petitioner for
the period from June 14, 1984 to December 31, 1989. We shall not, in
this Decision, rule upon the effect (if any) of Republic Act No. 7160,
otherwise known as the Local Government Code of 1991, upon
petitioners tax-exempt status; we merely make mention of the fact
that the exemption claimed by petitioner is partly based on PD 464
which, though repealed by the Local Government Code in its
paragraph (c), Section 534, Title Four of Book IV, was still good law
during the period the exemption was being claimed in the instant case.

A denial of the tax-exempt status of NPC, as sought by respondents,
would not only be legally untenable and subversive of doctrinal
stability but would also lead to disastrous practical consequences. It
should be noted that in this case, respondent province has already
auctioned off, purchased and caused to be registered in its name the
subject real properties of petitioner on which the Agus II Hydroelectric
Power Plant Complex is built. Thus, should the FIRB resolutions be
deemed void, then the ownership of the auctioned properties including
the hydro-electric plant would be legally vested in respondent
province. Additionally, other local government entities might even be
induced to covet and grab other properties of the NPC in the guise of
collecting local taxes. The far-reaching consequence of such
eventuality would not be difficult to imagine. Definitely, it would
seriously impair the capacity of the National Power Corporation to fulfill
its statutory mandate to carry out the total electrification of the
Philippines through the development of power from all sources to meet
the needs of industrial development and rural electrification.
In the end, the Supreme Court has the constitutional duty not only of
interpreting and applying the law in accordance with prior doctrines
but also of protecting society from the improvidence and wantonness
wrought by needless upheavals in such interpretations and
applications. Interest rei publicae ut finis sit litium


G.R. No. 127105
June 25, 1999
Respondent, a domestic corporation organized and operating under
the Philippine laws, entered into a license agreement with SC Johnson
and Son, United States of America (USA), a non-resident foreign
corporation based in the U.S.A. pursuant to which the [respondent]
was granted the right to use the trademark, patents and technology
owned by the latter including the right to manufacture, package and
distribute the products covered by the Agreement and secure
assistance in management, marketing and production from SC Johnson
and Son, U. S. A.
On October 29, 1993, [respondent] filed with the International Tax
Affairs Division (ITAD) of the BIR a claim for refund of overpaid
withholding tax on royalties arguing that, "the antecedent facts
attending [respondent's] case fall squarely within the same
circumstances under which said MacGeorge and Gillete rulings were
issued. Since the agreement was approved by the Technology Transfer
Board, the preferential tax rate of 10% should apply to the
[respondent]. We therefore submit that royalties paid by the
[respondent] to SC Johnson and Son, USA is only subject to 10%
withholding tax pursuant to the most-favored nation clause of the RP-
US Tax Treaty
[Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West Germany
Tax Treaty [Article 12 (2) (b)]
The Commissioner did not act on said claim for refund. Private
respondent S.C. Johnson & Son, Inc. (S.C. Johnson) then filed a
petition for review before the Court of Tax Appeals (CTA)

Court of Tax Appeals rendered its decision in favor of S.C. Johnson and
ordered the Commissioner of Internal Revenue to issue a tax credit
certificate in the amount of P963,266.00 representing overpaid
withholding tax on royalty payments

HELD: The petition is meritorious.
We accordingly agree with petitioner that since the RP-US Tax Treaty
does not give a matching tax credit of 20 percent for the taxes paid to
the Philippines on royalties as allowed under the RP-West Germany
Tax Treaty, private respondent cannot be deemed entitled to the 10
percent rate granted under the latter treaty for the reason that there is
no payment of taxes on royalties under similar circumstances.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax
Treaty, which is known as the "most favored nation" clause, the lowest
rate of the Philippine tax at 10% may be imposed on royalties derived
by a resident of the United States from sources within the Philippines
only if the circumstances of the resident of the United States are
similar to those of the resident of West Germany. Since the RP-US Tax
Treaty contains no "matching credit" provision as that provided under
Article 24 of the RP-West Germany Tax Treaty, the tax on royalties
under the RP-US Tax Treaty is not paid under similar circumstances as
those obtaining in the RP-West Germany Tax Treaty

Private respondent S.C. Johnson avers that the instant petition should
be denied (1) because it contains a defective certification against
forum shopping as required under SC Circular No. 28-91, that is, the
certification was not executed by the petitioner herself but by her
counsel; and (2) that the "most favored nation" clause under the RP-
US Tax Treaty refers to royalties paid under similar circumstances as
those royalties subject to tax in other treaties; that the phrase "paid
under similar circumstances" does not refer to payment of the tax but
to the subject matter of the tax, that is, royalties, because the "most
favored nation" clause is intended to allow the taxpayer in one state to
avail of more liberal provisions contained in another tax treaty wherein
the country of residence of such taxpayer is also a party thereto,
subject to the basic condition that the subject matter of taxation in
that other tax treaty is the same as that in the original tax treaty under
which the taxpayer is liable; thus, the RP-US Tax Treaty speaks of
"royalties of the same kind paid under similar circumstances"

The main point of contention in this appeal is the interpretation of
Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax
to be imposed by the Philippines upon royalties received by a non-
resident foreign corporation. The provision states insofar as
pertinent that
1) Royalties derived by a resident of one of the Contracting States
from sources within the other Contracting State may be taxed by both
Contracting States.
2) However, the tax imposed by that Contracting State shall not
a) In the case of the United States, 15 percent of the gross amount of
the royalties, and
b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the royalties;
(ii) 15 percent of the gross amount of the royalties, where the royalties
are paid by a corporation registered with the Philippine Board of
Investments and engaged in preferred areas of activities; and
(iii) the lowest rate of Philippine tax that may be imposed on royalties
of the same kind paid under similar circumstances to a resident of a
third State.
For as long as the transfer of technology, under Philippine law, is
subject to approval, the limitation of the tax rate mentioned under b)
shall, in the case of royalties arising in the Republic of the Philippines,
only apply if the contract giving rise to such royalties has been
approved by the Philippine competent authorities.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax
credit of 20 percent of the gross amount of such royalties against
German income and corporation tax for the taxes payable in the
Philippines on such royalties where the tax rate is reduced to 10 or 15
percent under such treaty.

The RP-US Tax Treaty is just one of a number of bilateral treaties
which the Philippines has entered into for the avoidance of double
The purpose of these international agreements is to
reconcile the national fiscal legislations of the contracting parties in
order to help the taxpayer avoid simultaneous taxation in two different
More precisely, the tax conventions are drafted with a
view towards the elimination of international juridical double taxation,
which is defined as the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject matter and
for identical periods.
The apparent rationale for doing away with
double taxation is of encourage the free flow of goods and services
and the movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and dynamic
Foreign investments will only thrive in a fairly predictable
and reasonable international investment climate and the protection
against double taxation is crucial in creating such a climate.

Double taxation usually takes place when a person is resident of a
contracting state and derives income from, or owns capital in, the
other contracting state and both states impose tax on that income or
capital. In order to eliminate double taxation, a tax treaty resorts to
several methods. First, it sets out the respective rights to tax of the
state of source or situs and of the state of residence with regard to
certain classes of income or capital. In some cases, an exclusive right
to tax is conferred on one 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 of
source is limited.

The second method for the elimination of double taxation applies
whenever the state of source is given a full or limited right to tax
together with the state of residence. In this case, the treaties make it
incumbent upon the state of residence to allow relief in order to avoid
double taxation. There are two methods of relief the exemption
method and the credit method. In the exemption method, the income
or capital which is taxable in the state of source or situs is exempted in
the state of residence, although in some instances it may be taken into
account in determining the rate of tax applicable to the taxpayer's
remaining income or capital. On the other hand, in the credit method,
although the income or capital which is taxed in the state of source is
still taxable in the state of residence, the tax paid in the former is
credited against the tax levied in the latter. The basic difference
between the two methods is that in the exemption method, the focus
is on the income or capital itself, whereas the credit method focuses
upon the tax.

In negotiating tax treaties, the underlying rationale for reducing the
tax rate is that the Philippines will give up a part of the tax in the
expectation that the tax given up for this particular investment is not
taxed by the other country.
Thus the petitioner correctly opined that
the phrase "royalties paid under similar circumstances" in the most
favored nation clause of the US-RP Tax Treaty necessarily
contemplated "circumstances that are tax-related".
In the case at bar, the state of source is the Philippines because the
royalties are paid for the right to use property or rights, i.e.
trademarks, patents and technology, located within the Philippines.

The United States is the state of residence since the taxpayer, S. C.
Johnson and Son, U. S. A., is based there. Under the RP-US Tax
Treaty, the state of residence and the state of source are both
permitted to tax the royalties, with a restraint on the tax that may be
collected by the state of source.
Furthermore, the method employed
to give relief from double taxation is the allowance of a tax credit to
citizens or residents of the United States (in an appropriate amount
based upon the taxes paid or accrued to the Philippines) against the
United States tax, but such amount shall not exceed the limitations
provided by United States law for the taxable year.
Under Article 13
thereof, the Philippines may impose one of three rates 25 percent of
the gross amount of the royalties; 15 percent when the royalties are
paid by a corporation registered with the Philippine Board of
Investments and engaged in preferred areas of activities; or the lowest
rate of Philippine tax that may be imposed on royalties of the same
kind paid under similar circumstances to a resident of a third state.
Given the purpose underlying tax treaties and the rationale for the
most favored nation clause, the concessional tax rate of 10 percent
provided for in the RP-Germany Tax Treaty should apply only if the
taxes imposed upon 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 the RP-US Tax Treaty
grants similar tax reliefs to residents of the United States in respect of
the taxes imposable upon royalties earned 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 not contain
similar provisions on tax crediting. Article 24 of the RP-Germany Tax
Treaty, supra, expressly allows crediting against German income and
corporation tax of 20% of the gross amount of royalties paid under the
law of the Philippines. On the other hand, Article 23 of the RP-US Tax
Treaty, which is the counterpart provision with respect to relief for
double taxation, does not provide for similar crediting of 20% of the
gross amount of royalties paid

The goal of double taxation conventions would be thwarted if such
treaties did not provide for effective measures to minimize, if not
completely eliminate, the tax burden laid upon the income or capital of
the investor. Thus, if the rates of tax are lowered by the state of
source, in this case, by the Philippines, there should be a concomitant
commitment on the part of the state of residence to grant some form
of tax relief, whether this be in the form of a tax credit or exemption.
Otherwise, the tax which could have been collected by the Philippine
government will simply be collected by another state, defeating the
object of the tax treaty since the tax burden imposed upon the
investor would remain unrelieved. If the state of residence does not
grant some form of tax relief to the investor, no benefit would redound
to the Philippines, i.e., increased investment resulting from a favorable
tax regime, should it impose a lower tax rate on the royalty earnings of
the investor, and it would be better to impose the regular rate rather
than lose much-needed revenues to another country.
At the same time, the intention behind the adoption of the provision on
"relief from double taxation" in the two tax treaties in question should
be considered in light of the purpose behind the most favored nation
The most favored nation clause is intended to establish the principle of
equality of international treatment by providing that the citizens or
subjects of the contracting nations may enjoy the privileges accorded
by either party to those of the most favored nation.
The essence of
the principle is to allow the taxpayer in one state to avail of more
liberal provisions granted in another tax treaty to which the country of
residence of such taxpayer is also a party provided that the subject
matter of taxation, in this case royalty income, is the same as that in
the tax treaty under which the taxpayer is liable.


TALON, respondents.
G.R. No. 102967
February 10, 2000
On February 20, 1976, petitioner, Bibiano V. Baas Jr. sold to Ayala
Investment Corporation (AYALA), 128,265 square meters of land
located at Bayanan, Muntinlupa, for two million, three hundred eight
thousand, seven hundred seventy (P2,308,770.00) pesos. The Deed of
Sale provided that upon the signing of the contract AYALA shall pay
four hundred sixty-one thousand, seven hundred fifty-four
(P461,754.00) pesos. The balance of one million, eight hundred forty-
seven thousand and sixteen (P1,847,016.00) pesos was to be paid in
four equal consecutive annual installments, with twelve (12%) percent
interest per annum on the outstanding balance. AYALA issued one
promissory note covering four equal annual installments. Each periodic
payment of P461,754.00 pesos shall be payable starting on February
20, 1977, and every year thereafter, or until February 20, 1980.
In his 1976 Income Tax Return, petitioner reported the P461,754 initial
payment as income from disposition of capital asset.
In the succeeding years, until 1979, petitioner reported a uniform
income of two hundred thirty thousand, eight hundred seventy-seven
(P230,877.00) pesos
as gain from sale of capital asset. In his 1980
income tax amnesty return, petitioner also reported the same amount
of P230,877.00 as the realized gain on disposition of capital asset for
the year.
Revenue Director Mauro Calaguio authorized tax examiners, Rodolfo
Tuazon and Procopio Talon to examine the books and records of
petitioner for the year 1976. They discovered that petitioner had no
outstanding receivable from the 1976 land sale to AYALA and
concluded that the sale was cash and the entire profit should have
been taxable in 1976 since the income was wholly derived in 1976.
Tuazon and Talon filed their audit report and declared a discrepancy of
two million, ninety-five thousand, nine hundred fifteen (P2,095,915.00)
pesos in petitioner's 1976 net income. They recommended deficiency
tax assessment for two million, four hundred seventy-three thousand,
six hundred seventy-three (P2,473,673.00) pesos.
On July 2, 1981, petitioner filed an Amnesty Tax Return under P.D.
1740 and paid the amount of forty-one thousand, seven hundred
twenty-nine pesos and eighty-one centavos (P41,729.81). On
November 2, 1981, petitioner again filed an Amnesty Tax Return under
P.D. 1840 and paid an additional amount of one thousand, five
hundred twenty-five pesos and sixty-two centavos (P1,525.62). In
both, petitioner did not recognize that his sale of land to AYALA was on
cash basis.
ISSUE: whether P.D. Nos. 1740 and 1840 which granted tax
amnesties also granted immunity from criminal prosecution against tax
offenses, the pertinent sections of these laws state:
The pertinent sections of these laws state:
x x x x x x x x x
Sec. 1. Voluntary Disclosure of Correct Taxable Income. Any
individual who, for any or all of the taxable years 1974 to 1979, had
failed to file a return is hereby, allowed to file a return for each of the
aforesaid taxable years and accurately declare therein the true and
correct income, deductions and exemptions and pay the income tax
due per return. Likewise, any individual who filed a false or fraudulent
return for any taxable year in the period mentioned above may amend
his return and pay the correct amount of tax due after deducting the
taxes already paid, if any, in the original declaration. (emphasis ours)
x x x x x x x x x
Sec. 5. Immunity from Penalties. Any individual who voluntarily files
a return under this Decree and pays the income tax due thereon shall
be immune from the penalties, civil or criminal, under the National
Internal Revenue Code arising from failure to pay the correct income
tax with respect to the taxable years from which an amended return
was filed or for which an original return was filed in cases where no
return has been filed for any of the taxable years 1974 to 1979:
Provided, however, That these immunities shall not apply in cases
where the amount of net taxable income declared under this Decree is
understated to the extent of 25% or more of the correct net taxable
income. (emphasis ours)
Sec. 1. Coverage. In case of voluntary disclosure of previously
untaxed income and/or wealth such as earnings, receipts, gifts,
bequests or any other acquisition from any source whatsoever, realized
here or abroad, by any individual taxpayer, which are taxable under
the National Internal Revenue Code, as amended, the assessment and
collection of all internal revenue taxes, including the increments or
penalties on account of non-payment, as well as all civil, criminal or
administrative liabilities arising from or incident thereto under the
National Internal Revenue Code, are hereby condoned provided that
the individual taxpayer shall pay. (emphasis ours) . . .
Sec. 2. Conditions for Immunity. The immunity granted under
Section one of this Decree shall apply only under the following
a) Such previously untaxed income and/or wealth must have been
earned or realized in any of the years 1974 to 1980;
b) The taxpayer must file an amnesty return on or before November
30, 1981, and fully pay the tax due thereon;
c) The amnesty tax paid by the taxpayer under this Decree shall not be
less than P1,000.00 per taxable year; and
d) The taxpayer must file a statement of assets, liabilities and net
worth as of December 31, 1980, as required under Section 6 hereof.
It will be recalled that petitioner entered into a deed of sale
purportedly on installment. On the same day, he discounted the
promissory note covering the future installments. The discounting
seems questionable because ordinarily, when a bill is discounted, the
lender (e.g. banks, financial institution) charges or deducts a certain
percentage from the principal value as its compensation. Here, the
discounting was done by the buyer. On July 2, 1981, two weeks after
the filing of the tax evasion complaint against him by respondent Larin
on June 17, 1981, petitioner availed of the tax amnesty under P.D. No.
1740. His amended tax return for the years 1974 - 1979 was filed with
the BIR office of Valenzuela, Bulacan, instead of Manila where the
petitioner's principal office was located. He again availed of the tax
amnesty under P.D. No. 1840. His disclosure, however, did not include
the income from his sale of land to AYALA on cash basis. Instead he
insisted that such sale was on installment. He did not amend his
income tax return. He did not pay the tax which was considerably
increased by the income derived from the discounting. He did not meet
the twin requirements of P.D. 1740 and 1840, declaration of his
untaxed income and full payment of tax due thereon. Clearly, the
petitioner is not entitled to the benefits of P.D. Nos. 1740 and 1840.
The mere filing of tax amnesty return under P.D. 1740 and 1840 does
not ipso facto shield him from immunity against prosecution. Tax
amnesty is a general pardon to taxpayers who want to start a clean
tax slate. It also gives the government a chance to collect uncollected
tax from tax evaders without having to go through the tedious process
of a tax case. To avail of a tax amnesty granted by the government,
and to be immune from suit on its delinquencies, the tax payer must
have voluntarily disclosed his previously untaxed income and must
have paid the corresponding tax on such previously untaxed income.

It also bears noting that a tax amnesty, much like a tax exemption, is
never favored nor presumed in law and if granted by statute, the
terms of the amnesty like that of a tax exemption must be construed
strictly against the taxpayer and liberally in favor of the taxing
Hence, on this matter, it is our view that petitioner's claim
of immunity from prosecution under the shield of availing tax amnesty
is untenable.
We appreciate petitioner's claim that he filed his 1976 return in good
faith and that he had honestly believed that the law allowed him to
declare the sale of the land, in installment. We can further grant that
the pertinent tax laws needed construction, as we have earlier done.
That petitioner was offended by the headlines alluding to him as tax
evader is also fully understandable. All these, however, do not justify
what amounted to a baseless prosecution of respondent Larin.
Petitioner presented no evidence to prove Larin extorted money from
him. He even admitted that he never met nor talked to respondent
Larin. When the tax investigation against the petitioner started, Larin
was not yet the Regional Director of BIR Region IV-A, Manila. On
respondent Larin's instruction, petitioner's tax assessment was
considered one involving a sale of capital asset, the income from which
was subjected to only fifty percent (50%) assessment, thus reducing
the original tax assessment by half. These circumstances may be taken
to show that Larin's involvement in extortion was not indubitable. Yet,
petitioner went on to file the extortion cases against Larin in different
fora. This is where actual malice could attach on petitioner's part.
Significantly, the trial court did not err in dismissing petitioner's
complaints, a ruling affirmed by the Court of Appeals.
Keeping all these in mind, we are constrained to agree that there is
sufficient basis for the award of moral and exemplary damages in favor
of respondent Larin. The appellate court believed respondent Larin
when he said he suffered anxiety and humiliation because of the
unfounded charges against him. Petitioner's actions against Larin were
found "unwarranted and baseless," and the criminal charges filed
against him in the Tanodbayan and City Fiscal's Office were all
Hence, there is adequate support for respondent court's
conclusion that moral damages have been proved.