G.R. No.

195909

September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.
x-----------------------x
G.R. No. 195960

On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax
assessments. The BIR did not act on the protest within the 180-day period under Section 228 of the NIRC.
Thus, St. Luke's appealed to the CTA.
The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential tax rate on
the income of proprietary non-profit hospitals, should be applicable to St. Luke's. According to the BIR, Section
27(B), introduced in 1997, "is a new provision intended to amend the exemption on non-profit hospitals that
were previously categorized as non-stock, non-profit corporations under Section 26 of the 1997 Tax Code x x
5
x." It is a specific provision which prevails over the general exemption on income tax granted under Section
30(E) and (G) for non-stock, non-profit charitable institutions and civic organizations promoting social welfare.
6

ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its revenues
came from charitable purposes. Moreover, the hospital's board of trustees, officers and employees directly
benefit from its profits and assets. St. Luke's had total revenues of P1,730,367,965 or approximately P1.73
7
billion from patient services in 1998.

CARPIO, J.:
The Case

St. Luke's contended that the BIR should not consider its total revenues, because its free services to patients
was P218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less operating expenses) of
8
P334,642,615. St. Luke's also claimed that its income does not inure to the benefit of any individual.

These are consolidated petitions for review on certiorari under Rule 45 of the Rules of Court assailing the
2
Decision of 19 November 2010 of the Court of Tax Appeals (CTA) En Banc and its Resolution of 1 March
2011 in CTA Case No. 6746. This Court resolves this case on a pure question of law, which involves the
interpretation of Section 27(B) vis--vis Section 30(E) and (G) of the National Internal Revenue Code of the
Philippines (NIRC), on the income tax treatment of proprietary non-profit hospitals.
The Facts
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit corporation.
Under its articles of incorporation, among its corporate purposes are:

St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare purposes
under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not destroy its income
tax exemption.
The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA that
Section 27(B) applies to St. Luke's. The petition raises the sole issue of whether the enactment of Section
27(B) takes proprietary non-profit hospitals out of the income tax exemption under Section 30 of the NIRC and
instead, imposes a preferential rate of 10% on their taxable income. The BIR prays that St. Luke's be ordered
to pay P57,659,981.19 as deficiency income and expanded withholding tax for 1998 with surcharges and
interest for late payment.

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent,
charitable and scientific hospital which shall give curative, rehabilitative and spiritual care to the
sick, diseased and disabled persons; provided that purely medical and surgical services shall be
performed by duly licensed physicians and surgeons who may be freely and individually contracted
by patients;

The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding of a part
of its income, 9 as well as the payment of surcharge and delinquency interest. There is no ground for this
Court to undertake such a factual review. Under the Constitution 10 and the Rules of Court, 11 this Court's
review power is generally limited to "cases in which only an error or question of law is involved." 12 This Court
cannot depart from this limitation if a party fails to invoke a recognized exception.

(b) To provide a career of health science education and provide medical services to the community
through organized clinics in such specialties as the facilities and resources of the corporation make
possible;

The Ruling of the Court of Tax Appeals

The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision dated 23
February 2009 which held:

(c) To carry on educational activities related to the maintenance and promotion of health as well as
provide facilities for scientific and medical researches which, in the opinion of the Board of
Trustees, may be justified by the facilities, personnel, funds, or other requirements that are
available;
(d) To cooperate with organized medical societies, agencies of both government and private
sector; establish rules and regulations consistent with the highest professional ethics;

WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED.
Accordingly, the 1998 deficiency VAT assessment issued by respondent against petitioner in the amount of
P110,000.00 is hereby CANCELLED and WITHDRAWN. However, petitioner is hereby ORDERED to PAY
deficiency income tax and deficiency expanded withholding tax for the taxable year 1998 in the respective
amounts of P5,496,963.54 and P778,406.84 or in the sum of P6,275,370.38, x x x.
xxxx

xxxx3
On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes amounting
to P76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax, withholding tax on
compensation and expanded withholding tax. The BIR reduced the amount to P63,935,351.57 during trial in
the First Division of the CTA. 4

In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the total
amount of P6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to Section
249(C)(3) of the NIRC of 1997.
SO ORDERED. 13
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TAXATION LAW REVIEW

The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc to be paid, arose from the failure of
St. Luke's to prove that part of its income in 1998 (declared as "Other Income-Net") 14 came from charitable
activities. The CTA cancelled the remainder of the P63,113,952.79 deficiency assessed by the BIR based on
the 10% tax rate under Section 27(B) of the NIRC, which the CTA En Banc held was not applicable to St.
15
Luke's.
The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section 30(E) and
(G) of the NIRC. This ruling would exempt all income derived by St. Luke's from services to its patients,
whether paying or non-paying. The CTA reiterated its earlier decision in St. Luke's Medical Center, Inc. v.
Commissioner of Internal Revenue, 16 which examined the primary purposes of St. Luke's under its articles of
17
incorporation and various documents identifying St. Luke's as a charitable institution.
18

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, which states that "a
charitable institution does not lose its charitable character and its consequent exemption from taxation merely
because recipients of its benefits who are able to pay are required to do so, where funds derived in this
19
manner are devoted to the charitable purposes of the institution x x x." The generation of income from
paying patients does not per se destroy the charitable nature of St. Luke's.

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25% surcharge under
Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within the time prescribed for its
30
payment in the notice of assessment[.]" St. Luke's is also liable to pay 20% delinquency interest under
Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the amount of P6,275,370.38 in the
dispositive portion of the CTA First Division Decision includes only deficiency interest under Section 249(A)
32
and (B) of the NIRC and not delinquency interest.
The Main Issue
The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section 27(B) in
the NIRC of 1997 vis--vis Section 30(E) and (G) on the income tax exemption of charitable and social welfare
institutions. The 10% income tax rate under Section 27(B) specifically pertains to proprietary educational
institutions and proprietary non-profit hospitals. The BIR argues that Congress intended to remove the
exemption that non-profit hospitals previously enjoyed under Section 27(E) of the NIRC of 1977, which is now
33
substantially reproduced in Section 30(E) of the NIRC of 1997. Section 27(B) of the present NIRC provides:
SEC. 27. Rates of Income Tax on Domestic Corporations. -

20

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, which ruled that
the old NIRC (Commonwealth Act No. 466, as amended) 21 "positively exempts from taxation those
corporations or associations which, otherwise, would be subject thereto, because of the existence of x x x net
22
income." The NIRC of 1997 substantially reproduces the provision on charitable institutions of the old NIRC.
Thus, in rejecting the argument that tax exemption is lost whenever there is net income, the Court in Jesus
Sacred Heart College declared: "[E]very responsible organization must be run to at least insure its existence,
by operating within the limits of its own resources, especially its regular income. In other words, it should
always strive, whenever possible, to have a surplus." 23
The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The CTA explained that
to apply the 10% preferential rate, Section 27(B) requires a hospital to be "non-profit." On the other hand,
Congress specifically used the word "non-stock" to qualify a charitable "corporation or association" in Section
30(E) of the NIRC. According to the CTA, this is unique in the present tax code, indicating an intent to exempt
this type of charitable organization from income tax. Section 27(B) does not require that the hospital be "nonstock." The CTA stated, "it is clear that non-stock, non-profit hospitals operated exclusively for charitable
purpose are exempt from income tax on income received by them as such, applying the provision of Section
30(E) of the NIRC of 1997, as amended." 25
The Issue
The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of the
NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit hospitals.

xxxx
(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals
which are non-profit shall pay a tax of ten percent (10%) on their taxable income except those covered by
Subsection (D) hereof: Provided, That if the gross income from unrelated trade, business or other activity
exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from
all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For
purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or
other activity, the conduct of which is not substantially related to the exercise or performance by such
educational institution or hospital of its primary purpose or function. A 'proprietary educational institution' is any
private school maintained and administered by private individuals or groups with an issued permit to operate
from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in
accordance with existing laws and regulations. (Emphasis supplied)
St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a charitable
institution and an organization promoting social welfare. The arguments of St. Luke's focus on the wording of
Section 30(E) exempting from income tax non-stock, non-profit charitable institutions. 34 St. Luke's asserts that
the legislative intent of introducing Section 27(B) was only to remove the exemption for "proprietary non-profit"
hospitals. 35 The relevant provisions of Section 30 state:
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this
Title in respect to income received by them as such:

The Ruling of the Court

xxxx
St. Luke's Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the petition
raises factual issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall raise only questions
of law which must be distinctly set forth." St. Luke's cites Martinez v. Court of Appeals 26 which permits factual
review "when the Court of Appeals [in this case, the CTA] manifestly overlooked certain relevant facts not
disputed by the parties and which, if properly considered, would justify a different conclusion." 27
This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA
"disregarded the testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to show the nature of
the 'Other Income-Net' x x x." 28 This is not a case of overlooking or failing to consider relevant evidence. The
CTA obviously considered the evidence and concluded that it is self-serving. The CTA declared that it has
"gone through the records of this case and found no other evidence aside from the self-serving affidavit
executed by [the] witnesses [of St. Luke's] x x x." 29

(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall
belong to or inure to the benefit of any member, organizer, officer or any specific person;
xxxx
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social
welfare;
xxxx

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Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.
(Emphasis supplied)
The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of the
NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and
(G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together
without the removal of such tax exemption. The effect of the introduction of Section 27(B) is to subject the
taxable income of two specific institutions, namely, proprietary non-profit educational institutions 36 and
proprietary non-profit hospitals, among the institutions covered by Section 30, to the 10% preferential rate
under Section 27(B) instead of the ordinary 30% corporate rate under the last paragraph of Section 30 in
relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-profit
educational institutions and (2) proprietary non-profit hospitals. The only qualifications for hospitals are that
they must be proprietary and non-profit. "Proprietary" means private, following the definition of a "proprietary
educational institution" as "any private school maintained and administered by private individuals or groups"
with a government permit. "Non-profit" means no net income or asset accrues to or benefits any member or
specific person, with all the net income or asset devoted to the institution's purposes and all its activities
conducted not for profit.
"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino Inc. de
37
Cebu, this Court considered as non-profit a sports club organized for recreation and entertainment of its
stockholders and members. The club was primarily funded by membership fees and dues. If it had profits, they
were used for overhead expenses and improving its golf course. 38 The club was non-profit because of its
purpose and there was no evidence that it was engaged in a profit-making enterprise. 39
The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court defined
"charity" in Lung Center of the Philippines v. Quezon City 40 as "a gift, to be applied consistently with existing
laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts under the
influence of education or religion, by assisting them to establish themselves in life or [by] otherwise lessening
the burden of government." 41 A non-profit club for the benefit of its members fails this test. An organization
may be considered as non-profit if it does not distribute any part of its income to stockholders or members.
However, despite its being a tax exempt institution, any income such institution earns from activities
conducted for profit is taxable, as expressly provided in the last paragraph of Section 30.
To be a charitable institution, however, an organization must meet the substantive test of charity in Lung
Center. The issue in Lung Center concerns exemption from real property tax and not income tax. However, it
provides for the test of charity in our jurisdiction. Charity is essentially a gift to an indefinite number of persons
which lessens the burden of government. In other words, charitable institutions provide for free goods and
services to the public which would otherwise fall on the shoulders of government. Thus, as a matter of
efficiency, the government forgoes taxes which should have been spent to address public needs, because
certain private entities already assume a part of the burden. This is the rationale for the tax exemption of
charitable institutions. The loss of taxes by the government is compensated by its relief from doing public
works which would have been funded by appropriations from the Treasury. 42
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a tax
exemption are specified by the law granting it. The power of Congress to tax implies the power to exempt from
tax. Congress can create tax exemptions, subject to the constitutional provision that "[n]o law granting any tax
exemption shall be passed without the concurrence of a majority of all the Members of Congress." 43 The
requirements for a tax exemption are strictly construed against the taxpayer 44 because an exemption restricts
the collection of taxes necessary for the existence of the government.
The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution for the
purpose of exemption from real property taxes. This ruling uses the same premise as Hospital de San Juan 45
and Jesus Sacred Heart College 46 which says that receiving income from paying patients does not destroy
the charitable nature of a hospital.

As a general principle, a charitable institution does not lose its character as such and its exemption from taxes
simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or
receives subsidies from the government, so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money inures to the private benefit of the persons
47
managing or operating the institution.
For real property taxes, the incidental generation of income is permissible because the test of exemption is the
use of the property. The Constitution provides that "[c]haritable institutions, churches and personages or
convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements,
actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from
48
taxation." The test of exemption is not strictly a requirement on the intrinsic nature or character of the
institution. The test requires that the institution use the property in a certain way, i.e. for a charitable purpose.
Thus, the Court held that the Lung Center of the Philippines did not lose its charitable character when it used a
portion of its lot for commercial purposes. The effect of failing to meet the use requirement is simply to remove
from the tax exemption that portion of the property not devoted to charity.
The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress decided
to extend the exemption to income taxes. However, the way Congress crafted Section 30(E) of the NIRC is
materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the
corporation or association that is exempt from income tax. On the other hand, Section 28(3), Article VI of the
Constitution does not define a charitable institution, but requires that the institution "actually, directly and
exclusively" use the property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution must be devoted "exclusively" for
charitable purposes. The organization of the institution refers to its corporate form, as shown by its articles of
incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC specifically requires that
the corporation or association be non-stock, which is defined by the Corporation Code as "one where no part
of its income is distributable as dividends to its members, trustees, or officers" 49 and that any profit "obtain[ed]
as an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the
purpose or purposes for which the corporation was organized." 50 However, under Lung Center, any profit by a
charitable institution must not only be plowed back "whenever necessary or proper," but must be "devoted or
used altogether to the charitable object which it is intended to achieve." 51
The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the NIRC
requires that these operations be exclusive to charity. There is also a specific requirement that "no part of [the]
net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific
person." The use of lands, buildings and improvements of the institution is but a part of its operations.
There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution. However,
this does not automatically exempt St. Luke's from paying taxes. This only refers to the organization of St.
Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not ipso facto tax exempt. To be
exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a charitable
institution use the property "actually, directly and exclusively" for charitable purposes. To be exempt from
income taxes, Section 30(E) of the NIRC requires that a charitable institution must be "organized and operated
exclusively" for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the NIRC
requires that the institution be "operated exclusively" for social welfare.
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TAXATION LAW REVIEW

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated
exclusively" by providing that:
In Lung Center, this Court declared:
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.
(Emphasis supplied)
In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts "any"
activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax exempt. This
paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation or association [must
be] organized and operated exclusively for x x x charitable x x x purposes x x x." It likewise qualifies the
requirement in Section 30(G) that the civic organization must be "operated exclusively" for the promotion of
social welfare.
Thus, even if the charitable institution must be "organized and operated exclusively" for charitable purposes, it
is nevertheless allowed to engage in "activities conducted for profit" without losing its tax exempt status for its
not-for-profit activities. The only consequence is that the "income of whatever kind and character" of a
charitable institution "from any of its activities conducted for profit, regardless of the disposition made of such
income, shall be subject to tax." Prior to the introduction of Section 27(B), the tax rate on such income from
for-profit activities was the ordinary corporate rate under Section 27(A). With the introduction of Section 27(B),
the tax rate is now 10%.
In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients. It cannot be
disputed that a hospital which receives approximately P1.73 billion from paying patients is not an institution
"operated exclusively" for charitable purposes. Clearly, revenues from paying patients are income received
from "activities conducted for profit." 52 Indeed, St. Luke's admits that it derived profits from its paying patients.
St. Luke's declared P1,730,367,965 as "Revenues from Services to Patients" in contrast to its "Free Services"
expenditure of P218,187,498. In its Comment in G.R. No. 195909, St. Luke's showed the following
"calculation" to support its claim that 65.20% of its "income after expenses was allocated to free or charitable
services" in 1998. 53

REVENUES FROM SERVICES TO PATIENTS

Administrative

287,319,334.00

Household and Property

91,797,622.00

St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating income in 1998.
However, if a part of the remaining 34.80% of the operating income is reinvested in property, equipment or
facilities used for services to paying and non-paying patients, then it cannot be said that the income is
"devoted or used altogether to the charitable object which it is intended to achieve." 56 The income is plowed
back to the corporation not entirely for charitable purposes, but for profit as well. In any case, the last
paragraph of Section 30 of the NIRC expressly qualifies that income from activities for profit is taxable
"regardless of the disposition made of such income."
Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase "any
activity conducted for profit." However, it quoted a deposition of Senator Mariano Jesus Cuenco, who was a
member of the Committee of Conference for the Senate, which introduced the phrase "or from any activity
conducted for profit."
P. Cuando ha hablado de la Universidad de Santo Toms que tiene un hospital, no cree Vd. que es una
actividad esencial dicho hospital para el funcionamiento del colegio de medicina de dicha universidad?

R. Si el hospital se limita a recibir enformos pobres, mi contestacin seria afirmativa; pero considerando que
el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de buena posicin social
econmica, lo que se paga por estos enfermos debe estar sujeto a 'income tax', y es una de las razones que
hemos tenido para insertar las palabras o frase 'or from any activity conducted for profit.' 57

OPERATING EXPENSES
P1,016,608,394.00

The Court cannot expand the meaning of the words "operated exclusively" without violating the NIRC.
Services to paying patients are activities conducted for profit. They cannot be considered any other way.
55
There is a "purpose to make profit over and above the cost" of services. The P1.73 billion total revenues
from paying patients is not even incidental to St. Luke's charity expenditure of P218,187,498 for non-paying
patients.

xxxx

P1,730,367,965.00

Professional care of patients

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or
enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." x x x The
words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing
violence to the Constitution and the law. Solely is synonymous with exclusively. 54

The question was whether having a hospital is essential to an educational institution like the College of
Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has paid rooms
generally occupied by people of good economic standing, then it should be subject to income tax. He said that
this was one of the reasons Congress inserted the phrase "or any activity conducted for profit."

P1,395,725,350.00

INCOME FROM OPERATIONS

P334,642,615.00

100%

Free Services

-218,187,498.00

-65.20%

INCOME FROM OPERATIONS, Net of FREE SERVICES

P116,455,117.00

34.80%

OTHER INCOME

17,482,304.00

EXCESS OF REVENUES OVER EXPENSES

P133,937,421.00

The question in Jesus Sacred Heart College involves an educational institution. 58 However, it is applicable to
charitable institutions because Senator Cuenco's response shows an intent to focus on the activities of
charitable institutions. Activities for profit should not escape the reach of taxation. Being a non-stock and nonprofit corporation does not, by this reason alone, completely exempt an institution from tax. An institution
cannot use its corporate form to prevent its profitable activities from being taxed.
The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or social welfare
purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict
interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and
(G). Section 30(E) and (G) of the NIRC requires that an institution be "operated exclusively" for charitable or
social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G)
does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit
activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary
corporate rate but now at the preferential 10% rate pursuant to Section 27(B).
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TAXATION LAW REVIEW

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared
from sharing in the expenses of government and yet benefits from them. Tax exemptions for charitable
institutions should therefore be limited to institutions beneficial to the public and those which improve social
welfare. A profit-making entity should not be allowed to exploit this subsidy to the detriment of the government
and other taxpayers.1wphi1

G.R. No. 168461

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1, Rule 45
of the Rules of Court.

ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by its President, ROSARIO ANTONIO;
PETRON DEALERS ASSOCIATION represented by its President, RUTH E. BARBIBI; ASSOCIATION OF
CALTEX DEALERS OF THE PHILIPPINES represented by its President, MERCEDITAS A. GARCIA;
ROSARIO ANTONIO doing business under the name and style of "ANB NORTH SHELL SERVICE
STATION"; LOURDES MARTINEZ doing business under the name and style of "SHELL GATE N.
DOMINGO"; BETHZAIDA TAN doing business under the name and style of "ADVANCE SHELL STATION";
REYNALDO P. MONTOYA doing business under the name and style of "NEW LAMUAN SHELL SERVICE
STATION"; EFREN SOTTO doing business under the name and style of "RED FIELD SHELL SERVICE
STATION"; DONICA CORPORATION represented by its President, DESI TOMACRUZ; RUTH E. MARBIBI
doing business under the name and style of "R&R PETRON STATION"; PETER M. UNGSON doing business
under the name and style of "CLASSIC STAR GASOLINE SERVICE STATION"; MARIAN SHEILA A. LEE
doing business under the name and style of "NTE GASOLINE & SERVICE STATION"; JULIAN CESAR P.
POSADAS doing business under the name and style of "STARCARGA ENTERPRISES"; ADORACION
MAEBO doing business under the name and style of "CMA MOTORISTS CENTER"; SUSAN M. ENTRATA
doing business under the name and style of "LEONAS GASOLINE STATION and SERVICE CENTER";
CARMELITA BALDONADO doing business under the name and style of "FIRST CHOICE SERVICE
CENTER"; MERCEDITAS A. GARCIA doing business under the name and style of "LORPED SERVICE
CENTER"; RHEAMAR A. RAMOS doing business under the name and style of "RJRAM PTT GAS STATION";
MA. ISABEL VIOLAGO doing business under the name and style of "VIOLAGO-PTT SERVICE CENTER";
MOTORISTS HEART CORPORATION represented by its Vice-President for Operations, JOSELITO F.
FLORDELIZA; MOTORISTS HARVARD CORPORATION represented by its Vice-President for Operations,
JOSELITO F. FLORDELIZA; MOTORISTS HERITAGE CORPORATION represented by its Vice-President for
Operations, JOSELITO F. FLORDELIZA; PHILIPPINE STANDARD OIL CORPORATION represented by its
Vice-President for Operations, JOSELITO F. FLORDELIZA; ROMEO MANUEL doing business under the
name and style of "ROMMAN GASOLINE STATION"; ANTHONY ALBERT CRUZ III doing business under the
name and style of "TRUE SERVICE STATION", Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of the Department of Finance and GUILLERMO L.
PARAYNO, JR., in his capacity as Commissioner of Internal Revenue, Respondent.

SO ORDERED.

x-------------------------x

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax
exempt from all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of the
NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant
to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate
of 10% on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However, St.
Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St. Luke's is "a
corporation for purely charitable and social welfare purposes"59 and thus exempt from income tax. 60 In
61
Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that "good faith and honest
belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to
62
implement the tax law, are sufficient justification to delete the imposition of surcharges and interest."
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY
GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its Resolution
dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO
PAY the deficiency income tax in 1998 based on the 10% preferential income tax rate under Section 27(B) of
the National Internal Revenue Code. However, it is not liable for surcharges and interest on such deficiency
income tax under Sections 248 and 249 of the National Internal Revenue Code. All other parts of the Decision
and Resolution of the Court of Tax Appeals are AFFIRMED.

G.R. No. 168463

ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED
VINCENT S. ALBANO, Petitioners,
vs.
THE HONORABLE EXECUTIVE SECRETARY EDUARDO ERMITA; HONORABLE SECRETARY OF THE
DEPARTMENT OF FINANCE CESAR PURISIMA; and HONORABLE COMMISSIONER OF INTERNAL
REVENUE GUILLERMO PARAYNO, JR., Respondent.

FRANCIS JOSEPH G. ESCUDERO, VINCENT CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA,

RODOLFO G. PLAZA, DARLENE ANTONINO-CUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C.
AGARAO, JR. JUAN EDGARDO M. ANGARA, JUSTIN MARC SB. CHIPECO, FLORENCIO G. NOEL, MUJIV
S. HATAMAN, RENATO B. MAGTUBO, JOSEPH A. SANTIAGO, TEOFISTO DL. GUINGONA III, RUY ELIAS
C. LOPEZ, RODOLFO Q. AGBAYANI and TEODORO A. CASIO, Petitioners,
vs.
CESAR V. PURISIMA, in his capacity as Secretary of Finance, GUILLERMO L. PARAYNO, JR., in his
capacity as Commissioner of Internal Revenue, and EDUARDO R. ERMITA, in his capacity as
Executive Secretary, Respondent.

x-------------------------x

x-------------------------x

G.R. No. 168207

G.R. No. 168730

AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO-ESTRADA, JINGGOY E. ESTRADA, PANFILO M.

LACSON, ALFREDO S. LIM, JAMBY A.S. MADRIGAL, AND SERGIO R. OSMEA III, Petitioners,
vs.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, CESAR V. PURISIMA, SECRETARY OF FINANCE,
GUILLERMO L. PARAYNO, JR., COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE,
Respondent.

BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. Petitioner,

vs.
HON. EDUARDO R. ERMITA, in his capacity as the Executive Secretary; HON. MARGARITO TEVES, in his
capacity as Secretary of Finance; HON. JOSE MARIO BUNAG, in his capacity as the OIC Commissioner of
the Bureau of Internal Revenue; and HON. ALEXANDER AREVALO, in his capacity as the OIC Commissioner
of the Bureau of Customs, Respondent.

G.R. No. 168056 September 1, 2005

x-------------------------x

DECISION
5

TAXATION LAW REVIEW

AUSTRIA-MARTINEZ, J.:
The expenses of government, having for their object the interest of all, should be borne by everyone, and the
more man enjoys the advantages of society, the more he ought to hold himself honored in contributing to
those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased emoluments
for health workers, and wider coverage for full value-added tax benefits these are the reasons why
Republic Act No. 9337 (R.A. No. 9337)1 was enacted. Reasons, the wisdom of which, the Court even with its
extensive constitutional power of review, cannot probe. The petitioners in these cases, however, question not
only the wisdom of the law, but also perceived constitutional infirmities in its passage.
Every law enjoys in its favor the presumption of constitutionality. Their arguments notwithstanding, petitioners
failed to justify their call for the invalidity of the law. Hence, R.A. No. 9337 is not unconstitutional.

July 1, 2005 is the effectivity date of R.A. No. 9337. When said date came, the Court issued a temporary
restraining order, effective immediately and continuing until further orders, enjoining respondents from
enforcing and implementing the law.
Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court speaking through Mr.
Justice Artemio V. Panganiban, voiced the rationale for its issuance of the temporary restraining order on July
1, 2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a little
background. You know when the law took effect on July 1, 2005, the Court issued a TRO at about 5 oclock in
the afternoon. But before that, there was a lot of complaints aired on television and on radio. Some people in a
gas station were complaining that the gas prices went up by 10%. Some people were complaining that their
electric bill will go up by 10%. Other times people riding in domestic air carrier were complaining that the
prices that theyll have to pay would have to go up by 10%. While all that was being aired, per your
presentation and per our own understanding of the law, thats not true. Its not true that the e-vat law
necessarily increased prices by 10% uniformly isnt it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?

LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705, and Senate
Bill No. 1950.

ATTY. BANIQUED : Its not, because, Your Honor, there is an Executive Order that granted the Petroleum
companies some subsidy . . . interrupted
J. PANGANIBAN : Thats correct . . .

House Bill No. 35552 was introduced on first reading on January 7, 2005. The House Committee on Ways
and Means approved the bill, in substitution of House Bill No. 1468, which Representative (Rep.) Eric D.
Singson introduced on August 8, 2004. The President certified the bill on January 7, 2005 for immediate
enactment. On January 27, 2005, the House of Representatives approved the bill on second and third
reading.
House Bill No. 37053 on the other hand, substituted House Bill No. 3105 introduced by Rep. Salacnib F.
Baterina, and House Bill No. 3381 introduced by Rep. Jacinto V. Paras. Its "mother bill" is House Bill No.
3555. The House Committee on Ways and Means approved the bill on February 2, 2005. The President also
certified it as urgent on February 8, 2005. The House of Representatives approved the bill on second and third
reading on February 28, 2005.
Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 19504 on March 7, 2005,
"in substitution of Senate Bill Nos. 1337, 1838 and 1873, taking into consideration House Bill Nos. 3555 and
3705." Senator Ralph G. Recto sponsored Senate Bill No. 1337, while Senate Bill Nos. 1838 and 1873 were
both sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The President certified
the bill on March 11, 2005, and was approved by the Senate on second and third reading on April 13, 2005.
On the same date, April 13, 2005, the Senate agreed to the request of the House of Representatives for a
committee conference on the disagreeing provisions of the proposed bills.
Before long, the Conference Committee on the Disagreeing Provisions of House Bill No. 3555, House Bill No.
3705, and Senate Bill No. 1950, "after having met and discussed in full free and conference," recommended
the approval of its report, which the Senate did on May 10, 2005, and with the House of Representatives
agreeing thereto the next day, May 11, 2005.
On May 23, 2005, the enrolled copy of the consolidated House and Senate version was transmitted to the
President, who signed the same into law on May 24, 2005. Thus, came R.A. No. 9337.

ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted
J. PANGANIBAN : . . . mitigating measures . . .
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination of the Excise
Tax and the import duties. That is why, it is not correct to say that the VAT as to petroleum dealers increased
prices by 10%.
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to cover the EVat tax. If you consider the excise tax and the import duties, the Net Tax would probably be in the
neighborhood of 7%? We are not going into exact figures I am just trying to deliver a point that different
industries, different products, different services are hit differently. So its not correct to say that all prices must
go up by 10%.
ATTY. BANIQUED : Youre right, Your Honor.
J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present imposed a
Sales Tax of 3%. When this E-Vat law took effect the Sales Tax was also removed as a mitigating measure.
So, therefore, there is no justification to increase the fares by 10% at best 7%, correct?
ATTY. BANIQUED : I guess so, Your Honor, yes.
J. PANGANIBAN : There are other products that the people were complaining on that first day, were being
increased arbitrarily by 10%. And thats one reason among many others this Court had to issue TRO because
6

TAXATION LAW REVIEW

of the confusion in the implementation. Thats why we added as an issue in this case, even if its tangentially
taken up by the pleadings of the parties, the confusion in the implementation of the E-vat. Our people were
subjected to the mercy of that confusion of an across the board increase of 10%, which you yourself now
admit and I think even the Government will admit is incorrect. In some cases, it should be 3% only, in some
cases it should be 6% depending on these mitigating measures and the location and situation of each product,
of each service, of each company, isnt it?

Petitioners further claim that the inclusion of a stand-by authority granted to the President by the Bicameral
Conference Committee is a violation of the "no-amendment rule" upon last reading of a bill laid down in Article
VI, Section 26(2) of the Constitution.
G.R. No. 168461
Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas Shell Dealers,
Inc., et al., assailing the following provisions of R.A. No. 9337:

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : Alright. So thats one reason why we had to issue a TRO pending the clarification of all
these and we wish the government will take time to clarify all these by means of a more detailed implementing
6
rules, in case the law is upheld by this Court. . . .
The Court also directed the parties to file their respective Memoranda.

1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable goods shall
be amortized over a 60-month period, if the acquisition, excluding the VAT components, exceeds One Million
Pesos (P1, 000,000.00);
2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input tax to be
credited against the output tax; and

G.R. No. 168056

Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for prohibition
on May 27, 2005. They question the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a
10% VAT on sale of goods and properties, Section 5 imposes a 10% VAT on importation of goods, and
Section 6 imposes a 10% VAT on sale of services and use or lease of properties. These questioned
provisions contain a uniform proviso authorizing the President, upon recommendation of the Secretary of
Finance, to raise the VAT rate to 12%, effective January 1, 2006, after any of the following conditions have
been satisfied, to wit:
. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been
satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds
two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 %).
Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its exclusive
authority to fix the rate of taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution.
G.R. No. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise assailing the
constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.
Aside from questioning the so-called stand-by authority of the President to increase the VAT rate to 12%, on
the ground that it amounts to an undue delegation of legislative power, petitioners also contend that the
increase in the VAT rate to 12% contingent on any of the two conditions being satisfied violates the due
process clause embodied in Article III, Section 1 of the Constitution, as it imposes an unfair and additional tax
burden on the people, in that: (1) the 12% increase is ambiguous because it does not state if the rate would be
returned to the original 10% if the conditions are no longer satisfied; (2) the rate is unfair and unreasonable, as
the people are unsure of the applicable VAT rate from year to year; and (3) the increase in the VAT rate,
which is supposed to be an incentive to the President to raise the VAT collection to at least 2 4/5 of the GDP of
the previous year, should only be based on fiscal adequacy.

3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its political
subdivisions, instrumentalities or agencies, including GOCCs, to deduct a 5% final withholding tax on gross
payments of goods and services, which are subject to 10% VAT under Sections 106 (sale of goods and
properties) and 108 (sale of services and use or lease of properties) of the NIRC.
Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive, excessive, and
confiscatory.
Petitioners argument is premised on the constitutional right of non-deprivation of life, liberty or property
without due process of law under Article III, Section 1 of the Constitution. According to petitioners, the
contested sections impose limitations on the amount of input tax that may be claimed. Petitioners also argue
that the input tax partakes the nature of a property that may not be confiscated, appropriated, or limited
without due process of law. Petitioners further contend that like any other property or property right, the input
tax credit may be transferred or disposed of, and that by limiting the same, the government gets to tax a profit
or value-added even if there is no profit or value-added.
Petitioners also believe that these provisions violate the constitutional guarantee of equal protection of the law
under Article III, Section 1 of the Constitution, as the limitation on the creditable input tax if: (1) the entity has a
high ratio of input tax; or (2) invests in capital equipment; or (3) has several transactions with the government,
is not based on real and substantial differences to meet a valid classification.
Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI, Section 28(1)
of the Constitution, and that it is the smaller businesses with higher input tax to output tax ratio that will suffer
the consequences thereof for it wipes out whatever meager margins the petitioners make.
G.R. No. 168463
Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed this petition
for certiorari on June 30, 2005. They question the constitutionality of R.A. No. 9337 on the following grounds:
1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in violation of
Article VI, Section 28(2) of the Constitution;
2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass on provisions
present in Senate Bill No. 1950 and House Bill No. 3705; and
3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, 121, 125,7 148,
151, 236, 237 and 288, which were present in Senate Bill No. 1950, violates Article VI, Section 24(1) of the
7

TAXATION LAW REVIEW

Constitution, which provides that all appropriation, revenue or tariff bills shall originate exclusively in the House
of Representatives
G.R. No. 168730
On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and prohibition on July 20,
2005, alleging unconstitutionality of the law on the ground that the limitation on the creditable input tax in effect
allows VAT-registered establishments to retain a portion of the taxes they collect, thus violating the principle
that tax collection and revenue should be solely allocated for public purposes and expenditures. Petitioner
Garcia further claims that allowing these establishments to pass on the tax to the consumers is inequitable, in
violation of Article VI, Section 28(1) of the Constitution.
RESPONDENTS COMMENT
The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily, respondents
contend that R.A. No. 9337 enjoys the presumption of constitutionality and petitioners failed to cast doubt on
its validity.
Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA
630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the bicameral
proceedings, exclusive origination of revenue measures and the power of the Senate concomitant thereto,
have already been settled. With regard to the issue of undue delegation of legislative power to the President,
respondents contend that the law is complete and leaves no discretion to the President but to increase the
rate to 12% once any of the two conditions provided therein arise.
Respondents also refute petitioners argument that the increase to 12%, as well as the 70% limitation on the
creditable input tax, the 60-month amortization on the purchase or importation of capital goods exceeding
P1,000,000.00, and the 5% final withholding tax by government agencies, is arbitrary, oppressive, and
confiscatory, and that it violates the constitutional principle on progressive taxation, among others.
Finally, respondents manifest that R.A. No. 9337 is the anchor of the governments fiscal reform agenda. A
reform in the value-added system of taxation is the core revenue measure that will tilt the balance towards a
sustainable macroeconomic environment necessary for economic growth.
ISSUES
The Court defined the issues, as follows:

b. Article VI, Section 28(2)

2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12
of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
RULING OF THE COURT
As a prelude, the Court deems it apt to restate the general principles and concepts of value-added tax (VAT),
as the confusion and inevitably, litigation, breeds from a fallacious notion of its nature.
The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or
8
properties and services. Being an indirect tax on expenditure, the seller of goods or services may pass on the
amount of tax paid to the buyer,9 with the seller acting merely as a tax collector.10 The burden of VAT is
intended to fall on the immediate buyers and ultimately, the end-consumers.
In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages
11
in, without transferring the burden to someone else. Examples are individual and corporate income taxes,
transfer taxes, and residence taxes.12
In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a different
mode. Prior to 1978, the system was a single-stage tax computed under the "cost deduction method" and was
payable only by the original sellers. The single-stage system was subsequently modified, and a mixture of the
"cost deduction method" and "tax credit method" was used to determine the value-added tax payable.13 Under
the "tax credit method," an entity can credit against or subtract from the VAT charged on its sales or outputs
14
the VAT paid on its purchases, inputs and imports.
It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT system
was rationalized by imposing a multi-stage tax rate of 0% or 10% on all sales using the "tax credit method."15
E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law,16 R.A. No. 8241 or the Improved VAT
Law,17 R.A. No. 8424 or the Tax Reform Act of 1997,18 and finally, the presently beleaguered R.A. No. 9337,
also referred to by respondents as the VAT Reform Act.
The Court will now discuss the issues in logical sequence.

PROCEDURAL ISSUE

PROCEDURAL ISSUE

Whether R.A. No. 9337 violates the following provisions of the Constitution:
a. Article VI, Section 24, and

I.
Whether R.A. No. 9337 violates the following provisions of the Constitution:

b. Article VI, Section 26(2)

a. Article VI, Section 24, and

SUBSTANTIVE ISSUES

1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate
the following provisions of the Constitution:

b. Article VI, Section 26(2)

A. The Bicameral Conference Committee

a. Article VI, Section 28(1), and

8
TAXATION LAW REVIEW

Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference Committee exceeded
its authority by:

A comparative presentation of the conflicting House and Senate provisions and a reconciled version thereof
with the explanatory statement of the conference committee shall be attached to the report.

1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No. 9337;

...

2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;

The creation of such conference committee was apparently in response to a problem, not addressed by any
constitutional provision, where the two houses of Congress find themselves in disagreement over changes or
amendments introduced by the other house in a legislative bill. Given that one of the most basic powers of the
legislative branch is to formulate and implement its own rules of proceedings and to discipline its members,
may the Court then delve into the details of how Congress complies with its internal rules or how it conducts its
business of passing legislation? Note that in the present petitions, the issue is not whether provisions of the
rules of both houses creating the bicameral conference committee are unconstitutional, but whether the
bicameral conference committee has strictly complied with the rules of both houses, thereby
remaining within the jurisdiction conferred upon it by Congress.

3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against the output tax;
and
4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in
addition to the value-added tax.
Petitioners now beseech the Court to define the powers of the Bicameral Conference Committee.
It should be borne in mind that the power of internal regulation and discipline are intrinsic in any legislative
body for, as unerringly elucidated by Justice Story, "[i]f the power did not exist, it would be utterly
impracticable to transact the business of the nation, either at all, or at least with decency, deliberation,
19
and order." Thus, Article VI, Section 16 (3) of the Constitution provides that "each House may determine the
rules of its proceedings." Pursuant to this inherent constitutional power to promulgate and implement its own
rules of procedure, the respective rules of each house of Congress provided for the creation of a Bicameral
Conference Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows:
Sec. 88. Conference Committee. In the event that the House does not agree with the Senate on the
amendment to any bill or joint resolution, the differences may be settled by the conference committees of both
chambers.
In resolving the differences with the Senate, the House panel shall, as much as possible, adhere to and
support the House Bill. If the differences with the Senate are so substantial that they materially impair the
House Bill, the panel shall report such fact to the House for the latters appropriate action.
Sec. 89. Conference Committee Reports. . . . Each report shall contain a detailed, sufficiently explicit
statement of the changes in or amendments to the subject measure.
...
The Chairman of the House panel may be interpellated on the Conference Committee Report prior to the
voting thereon. The House shall vote on the Conference Committee Report in the same manner and
procedure as it votes on a bill on third and final reading.
Rule XII, Section 35 of the Rules of the Senate states:
Sec. 35. In the event that the Senate does not agree with the House of Representatives on the provision of
any bill or joint resolution, the differences shall be settled by a conference committee of both Houses which
shall meet within ten (10) days after their composition. The President shall designate the members of the
Senate Panel in the conference committee with the approval of the Senate.
Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the changes
in, or amendments to the subject measure, and shall be signed by a majority of the members of each House
panel, voting separately.

20

In the recent case of Farias vs. The Executive Secretary, the Court En Banc, unanimously reiterated and
emphasized its adherence to the "enrolled bill doctrine," thus, declining therein petitioners plea for the Court to
go behind the enrolled copy of the bill. Assailed in said case was Congresss creation of two sets of bicameral
conference committees, the lack of records of said committees proceedings, the alleged violation of said
committees of the rules of both houses, and the disappearance or deletion of one of the provisions in the
compromise bill submitted by the bicameral conference committee. It was argued that such irregularities in the
passage of the law nullified R.A. No. 9006, or the Fair Election Act.
Striking down such argument, the Court held thus:
Under the "enrolled bill doctrine," the signing of a bill by the Speaker of the House and the Senate President
and the certification of the Secretaries of both Houses of Congress that it was passed are conclusive of its due
enactment. A review of cases reveals the Courts consistent adherence to the rule. The Court finds no
reason to deviate from the salutary rule in this case where the irregularities alleged by the petitioners
mostly involved the internal rules of Congress, e.g., creation of the 2nd or 3rd Bicameral Conference
Committee by the House. This Court is not the proper forum for the enforcement of these internal
rules of Congress, whether House or Senate. Parliamentary rules are merely procedural and with their
observance the courts have no concern. Whatever doubts there may be as to the formal validity of
Rep. Act No. 9006 must be resolved in its favor. The Court reiterates its ruling in Arroyo vs. De Venecia,
viz.:
But the cases, both here and abroad, in varying forms of expression, all deny to the courts the power
to inquire into allegations that, in enacting a law, a House of Congress failed to comply with its own
rules, in the absence of showing that there was a violation of a constitutional provision or the rights of
private individuals. In Osmea v. Pendatun, it was held: "At any rate, courts have declared that the rules
adopted by deliberative bodies are subject to revocation, modification or waiver at the pleasure of the body
adopting them. And it has been said that "Parliamentary rules are merely procedural, and with their
observance, the courts have no concern. They may be waived or disregarded by the legislative body."
Consequently, "mere failure to conform to parliamentary usage will not invalidate the action (taken by
a deliberative body) when the requisite number of members have agreed to a particular measure."21
(Emphasis supplied)
The foregoing declaration is exactly in point with the present cases, where petitioners allege irregularities
committed by the conference committee in introducing changes or deleting provisions in the House and
Senate bills. Akin to the Farias case,22 the present petitions also raise an issue regarding the actions taken
by the conference committee on matters regarding Congress compliance with its own internal rules. As stated
earlier, one of the most basic and inherent power of the legislature is the power to formulate rules for its
proceedings and the discipline of its members. Congress is the best judge of how it should conduct its own
business expeditiously and in the most orderly manner. It is also the sole
concern of Congress to instill discipline among the members of its conference committee if it believes that said
members violated any of its rules of proceedings. Even the expanded jurisdiction of this Court cannot apply to
questions regarding only the internal operation of Congress, thus, the Court is wont to deny a review of the
internal proceedings of a co-equal branch of government.
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23

Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of Finance,
the Court already made the pronouncement that "[i]f a change is desired in the practice [of the Bicameral
Conference Committee] it must be sought in Congress since this question is not covered by any
24
constitutional provision but is only an internal rule of each house." To date, Congress has not seen it
fit to make such changes adverted to by the Court. It seems, therefore, that Congress finds the practices of
the bicameral conference committee to be very useful for purposes of prompt and efficient legislative action.

Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of the bicameral
conference committees, the Court deems it necessary to dwell on the issue. The Court observes that there
was a necessity for a conference committee because a comparison of the provisions of House Bill Nos. 3555
and 3705 on one hand, and Senate Bill No. 1950 on the other, reveals that there were indeed disagreements.
As pointed out in the petitions, said disagreements were as follows:
House Bill No. 3555

House Bill No.3705

Senate Bill No. 1950
With regard to "Stand-By Authority" in favor of President
Provides for 12% VAT on every sale
Provides for 12% VAT in general on sales
Provides for a single rate of 10% VAT
of goods or properties (amending
of goods or properties and reduced rates
on sale of goods or properties
Sec. 106 of NIRC); 12% VAT on
for sale of certain locally manufactured
(amending Sec. 106 of NIRC), 10%
importation of goods (amending Sec.
goods and petroleum products and raw
VAT on sale of services including sale
107 of NIRC); and 12% VAT on sale
materials to be used in the manufacture
of electricity by generation
of services and use or lease of
thereof (amending Sec. 106 of NIRC);
companies, transmission and
properties (amending Sec. 108 of
12% VAT on importation of goods and
distribution companies, and use or
NIRC)
reduced rates for certain imported
lease of properties (amending Sec.
products including petroleum products
108 of NIRC)
(amending Sec. 107 of NIRC); and 12%
VAT on sale of services and use or lease
of properties and a reduced rate for
certain services including power
generation (amending Sec. 108 of NIRC)
With regard to the "no pass-on" provision
No similar provision
Provides that the VAT imposed on power
Provides that the VAT imposed on
generation and on the sale of petroleum
sales of electricity by generation
products shall be absorbed by generation
companies and services of
companies or sellers, respectively, and
transmission companies and
shall not be passed on to consumers
distribution companies, as well as
those of franchise grantees of electric
utilities shall not apply to residential

end-users. VAT shall be absorbed by

generation, transmission, and
distribution companies.
Provides that the input tax credit for
capital goods on which a VAT has
been paid shall be equally
distributed over 5 years or the
depreciable life of such capital
goods; the input tax credit for goods
and services other than capital
goods shall not exceed 5% of the
total amount of such goods and
services; and for persons engaged
in retail trading of goods, the
allowable input tax credit shall not
exceed 11% of the total amount of
goods purchased.
No similar provision

With regard to 70% limit on input tax credit

No similar provision

Provides that the input tax credit for

capital goods on which a VAT has
been paid shall be equally distributed
over 5 years or the depreciable life of
such capital goods; the input tax
credit for goods and services other
than capital goods shall not exceed
90% of the output VAT.

input tax credits should be limited; (4) and whether the NIRC provisions on corporate income taxes,
percentage, franchise and excise taxes should be amended.
There being differences and/or disagreements on the foregoing provisions of the House and Senate bills, the
Bicameral Conference Committee was mandated by the rules of both houses of Congress to act on the same
by settling said differences and/or disagreements. The Bicameral Conference Committee acted on the
disagreeing provisions by making the following changes:
1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the Conference
Committee Report that the Bicameral Conference Committee tried to bridge the gap in the difference between
the 10% VAT rate proposed by the Senate, and the various rates with 12% as the highest VAT rate proposed
by the House, by striking a compromise whereby the present 10% VAT rate would be retained until certain
conditions arise, i.e., the value-added tax collection as a percentage of gross domestic product (GDP) of the
previous year exceeds 2 4/5%, or National Government deficit as a percentage of GDP of the previous year
exceeds 1%, when the President, upon recommendation of the Secretary of Finance shall raise the rate of
VAT to 12% effective January 1, 2006.
2. With regard to the disagreement on whether only the VAT imposed on electricity generation, transmission
and distribution companies should not be passed on to consumers or whether both the VAT imposed on
electricity generation, transmission and distribution companies and the VAT imposed on sale of petroleum
products may be passed on to consumers, the Bicameral Conference Committee chose to settle such
disagreement by altogether deleting from its Report any no pass-on provision.
3. With regard to the disagreement on whether input tax credits should be limited or not, the Bicameral
Conference Committee decided to adopt the position of the House by putting a limitation on the amount of
input tax that may be credited against the output tax, although it crafted its own language as to the amount of
the limitation on input tax credits and the manner of computing the same by providing thus:
(A) Creditable Input Tax. . . .
...
Provided, The input tax on goods purchased or imported in a calendar month for use in trade or business for
which deduction for depreciation is allowed under this Code, shall be spread evenly over the month of
acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods,
excluding the VAT component thereof, exceeds one million Pesos (P1,000,000.00): PROVIDED, however,
that if the estimated useful life of the capital good is less than five (5) years, as used for depreciation
purposes, then the input VAT shall be spread over such shorter period: . . .
(B) Excess Output or Input Tax. If at the end of any taxable quarter the output tax exceeds the input tax, the
excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be
carried over to the succeeding quarter or quarters: PROVIDED that the input tax inclusive of input VAT carried
over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%)
of the output VAT: PROVIDED, HOWEVER, THAT any input tax attributable to zero-rated sales by a VATregistered person may at his option be refunded or credited against other internal revenue taxes, . . .
4. With regard to the amendments to other provisions of the NIRC on corporate income tax, franchise,

With regard to amendments to be made to NIRC provisions regarding income and excise taxes
percentage and excise taxes, the conference committee decided to include such amendments and basically
No similar provision
Provided for amendments
to several
NIRC
adopted
the provisions
found in Senate Bill No. 1950, with some changes as to the rate of the tax to be
provisions regarding
corporate income, percentage,
imposed.
franchise and excise taxes

The disagreements between the provisions in the House bills and the Senate bill were with regard to (1) what
rate of VAT is to be imposed; (2) whether only the VAT imposed on electricity generation, transmission and
distribution companies should not be passed on to consumers, as proposed in the Senate bill, or both the VAT
imposed on electricity generation, transmission and distribution companies and the VAT imposed on sale of
petroleum products should not be passed on to consumers, as proposed in the House bill; (3) in what manner

Under the provisions of both the Rules of the House of Representatives and Senate Rules, the Bicameral
Conference Committee is mandated to settle the differences between the disagreeing provisions in the House
bill and the Senate bill. The term "settle" is synonymous to "reconcile" and "harmonize."25 To reconcile or
harmonize disagreeing provisions, the Bicameral Conference Committee may then (a) adopt the specific
provisions of either the House bill or Senate bill, (b) decide that neither provisions in the House bill or the
provisions in the Senate bill would
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TAXATION LAW REVIEW

31

be carried into the final form of the bill, and/or (c) try to arrive at a compromise between the disagreeing
provisions.

Conference Committee acted as a third legislative chamber is thus without any basis.
supplied)

In the present case, the changes introduced by the Bicameral Conference Committee on disagreeing
provisions were meant only to reconcile and harmonize the disagreeing provisions for it did not inject any idea
or intent that is wholly foreign to the subject embraced by the original provisions.

B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the "No-Amendment Rule"

The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT wanted by the Senate
is retained until such time that certain conditions arise when the 12% VAT wanted by the House shall be
imposed, appears to be a compromise to try to bridge the difference in the rate of VAT proposed by the two
houses of Congress. Nevertheless, such compromise is still totally within the subject of what rate of VAT
should be imposed on taxpayers.
The no pass-on provision was deleted altogether. In the transcripts of the proceedings of the Bicameral
Conference Committee held on May 10, 2005, Sen. Ralph Recto, Chairman of the Senate Panel, explained
the reason for deleting the no pass-on provision in this wise:
. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking that no sector
should be a beneficiary of legislative grace, neither should any sector be discriminated on. The VAT is an
indirect tax. It is a pass on-tax. And lets keep it plain and simple. Lets not confuse the bill and put a no passon provision. Two-thirds of the world have a VAT system and in this two-thirds of the globe, I have yet to see a
VAT with a no pass-though provision. So, the thinking of the Senate is basically simple, lets keep the VAT
simple.26 (Emphasis supplied)
Rep. Teodoro Locsin further made the manifestation that the no pass-on provision "never really enjoyed the
support of either House."27
With regard to the amount of input tax to be credited against output tax, the Bicameral Conference Committee
came to a compromise on the percentage rate of the limitation or cap on such input tax credit, but again, the
change introduced by the Bicameral Conference Committee was totally within the intent of both houses to put
a cap on input tax that may be
credited against the output tax. From the inception of the subject revenue bill in the House of Representatives,
one of the major objectives was to "plug a glaring loophole in the tax policy and administration by creating vital
restrictions on the claiming of input VAT tax credits . . ." and "[b]y introducing limitations on the claiming of tax
credit, we are capping a major leakage that has placed our collection efforts at an apparent disadvantage."28
As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in Senate Bill
No. 1950, since said provisions were among those referred to it, the conference committee had to act on the
same and it basically adopted the version of the Senate.
Thus, all the changes or modifications made by the Bicameral Conference Committee were germane toSection 27
subjects of the provisions referred
28(A)(1)
28(B)(1)
34(B)(1)
to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion amounting
116
to lack or excess of jurisdiction committed by the Bicameral Conference Committee. In the earlier cases
of
Philippine Judges Association vs. Prado29 and Tolentino vs. Secretary of Finance,30 the Court recognized
117the
long-standing legislative practice of giving said conference committee ample latitude for compromising 119
differences between the Senate and the House. Thus, in the Tolentino case, it was held that:
121
148
. . . it is within the power of a conference committee to include in its report an entirely new provision that
is not
151
found either in the House bill or in the Senate bill. If the committee can propose an amendment consisting
236 of
one or two provisions, there is no reason why it cannot propose several provisions, collectively considered
237 as
an "amendment in the nature of a substitute," so long as such amendment is germane to the subject of the
bills before the committee. After all, its report was not final but needed the approval of both houses of 288
Congress to become valid as an act of the legislative department. The charge that in this case the

(Emphasis

Article VI, Sec. 26 (2) of the Constitution, states:

No bill passed by either House shall become a law unless it has passed three readings on separate days, and
printed copies thereof in its final form have been distributed to its Members three days before its passage,
except when the President certifies to the necessity of its immediate enactment to meet a public calamity or
emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall
be taken immediately thereafter, and the yeas and nays entered in the Journal.
Petitioners argument that the practice where a bicameral conference committee is allowed to add or delete
provisions in the House bill and the Senate bill after these had passed three readings is in effect a
circumvention of the "no amendment rule" (Sec. 26 (2), Art. VI of the 1987 Constitution), fails to convince the
Court to deviate from its ruling in the Tolentino case that:
Nor is there any reason for requiring that the Committees Report in these cases must have undergone three
readings in each of the two houses. If that be the case, there would be no end to negotiation since each house
may seek modification of the compromise bill. . . .
Art. VI. 26 (2) must, therefore, be construed as referring only to bills introduced for the first time in
either house of Congress, not to the conference committee report.32 (Emphasis supplied)
The Court reiterates here that the "no-amendment rule" refers only to the procedure to be followed by
each house of Congress with regard to bills initiated in each of said respective houses, before said bill
is transmitted to the other house for its concurrence or amendment. Verily, to construe said provision in
a way as to proscribe any further changes to a bill after one house has voted on it would lead to absurdity as
this would mean that the other house of Congress would be deprived of its constitutional power to amend or
introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of the Constitution cannot be taken to mean that the
introduction by the Bicameral Conference Committee of amendments and modifications to disagreeing
provisions in bills that have been acted upon by both houses of Congress is prohibited.
C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive Origination of
Revenue Bills
Coming to the issue of the validity of the amendments made regarding the NIRC provisions on corporate
income taxes and percentage, excise taxes. Petitioners refer to the following provisions, to wit:
Rates of Income Tax on Domestic Corporation
Tax on Resident Foreign Corporation
Inter-corporate Dividends
Inter-corporate Dividends
Tax on Persons Exempt from VAT
Percentage Tax on domestic carriers and keepers of Garage
Tax on franchises
Tax on banks and Non-Bank Financial Intermediaries
Excise Tax on manufactured oils and other fuels
Excise Tax on mineral products
Registration requirements
Issuance of receipts or sales or commercial invoices
Disposition of Incremental Revenue

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Petitioners claim that the amendments to these provisions of the NIRC did not at all originate from the House.
They aver that House Bill No. 3555 proposed amendments only regarding Sections 106, 107, 108, 110 and
114 of the NIRC, while House Bill No. 3705 proposed amendments only to Sections 106, 107,108, 109, 110
and 111 of the NIRC; thus, the other sections of the NIRC which the Senate amended but which amendments
were not found in the House bills are not intended to be amended by the House of Representatives. Hence,
they argue that since the proposed amendments did not originate from the House, such amendments are a
violation of Article VI, Section 24 of the Constitution.
The argument does not hold water.
Article VI, Section 24 of the Constitution reads:
Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the House of Representatives but the Senate may
propose or concur with amendments.
In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that initiated the
move for amending provisions of the NIRC dealing mainly with the value-added tax. Upon transmittal of said
House bills to the Senate, the Senate came out with Senate Bill No. 1950 proposing amendments not only to
NIRC provisions on the value-added tax but also amendments to NIRC provisions on other kinds of taxes. Is
the introduction by the Senate of provisions not dealing directly with the value- added tax, which is the only
kind of tax being amended in the House bills, still within the purview of the constitutional provision authorizing
the Senate to propose or concur with amendments to a revenue bill that originated from the House?
The foregoing question had been squarely answered in the Tolentino case, wherein the Court held, thus:
. . . To begin with, it is not the law but the revenue bill which is required by the Constitution to "originate
exclusively" in the House of Representatives. It is important to emphasize this, because a bill originating in the
House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. . . .
At this point, what is important to note is that, as a result of the Senate action, a distinct bill may be produced.
To insist that a revenue statute and not only the bill which initiated the legislative process
culminating in the enactment of the law must substantially be the same as the House bill would be to
deny the Senates power not only to "concur with amendments" but also to "propose amendments." It
would be to violate the coequality of legislative power of the two houses of Congress and in fact make the
House superior to the Senate.

Given, then, the power of the Senate to propose amendments, the Senate can propose its own
version even with respect to bills which are required by the Constitution to originate in the House.

of the Constitution does not contain any prohibition or limitation on the extent of the amendments that may be
introduced by the Senate to the House revenue bill.
Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been touched in
the House bills are still in furtherance of the intent of the House in initiating the subject revenue bills. The
Explanatory Note of House Bill No. 1468, the very first House bill introduced on the floor, which was later
substituted by House Bill No. 3555, stated:
One of the challenges faced by the present administration is the urgent and daunting task of solving the
countrys serious financial problems. To do this, government expenditures must be strictly monitored and
controlled and revenues must be significantly increased. This may be easier said than done, but our fiscal
authorities are still optimistic the government will be operating on a balanced budget by the year 2009. In fact,
several measures that will result to significant expenditure savings have been identified by the administration.
It is supported with a credible package of revenue measures that include measures to improve tax
administration and control the leakages in revenues from income taxes and the value-added tax (VAT).
(Emphasis supplied)
Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:
In the budget message of our President in the year 2005, she reiterated that we all acknowledged that on top
of our agenda must be the restoration of the health of our fiscal system.
In order to considerably lower the consolidated public sector deficit and eventually achieve a balanced budget
by the year 2009, we need to seize windows of opportunities which might seem poignant in the
beginning, but in the long run prove effective and beneficial to the overall status of our economy. One
such opportunity is a review of existing tax rates, evaluating the relevance given our present
conditions.34 (Emphasis supplied)
Notably therefore, the main purpose of the bills emanating from the House of Representatives is to bring in
sizeable revenues for the government
to supplement our countrys serious financial problems, and improve tax administration and control of the
leakages in revenues from income taxes and value-added taxes. As these house bills were transmitted to the
Senate, the latter, approaching the measures from the point of national perspective, can introduce
amendments within the purposes of those bills. It can provide for ways that would soften the impact of the VAT
measure on the consumer, i.e., by distributing the burden across all sectors instead of putting it entirely on the
shoulders of the consumers. The sponsorship speech of Sen. Ralph Recto on why the provisions on income
tax on corporation were included is worth quoting:
All in all, the proposal of the Senate Committee on Ways and Means will raise P64.3 billion in additional
revenues annually even while by mitigating prices of power, services and petroleum products.

...
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills
authorizing an increase of the public debt, private bills and bills of local application must come from the House
of Representatives on the theory that, elected as they are from the districts, the members of the House can
be expected to be more sensitive to the local needs and problems. On the other hand, the senators,
who are elected at large, are expected to approach the same problems from the national perspective.
Both views are thereby made to bear on the enactment of such laws.33 (Emphasis supplied)
Since there is no question that the revenue bill exclusively originated in the House of Representatives, the
Senate was acting within its
constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No.
1950 amending corporate income taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24

However, not all of this will be wrung out of VAT. In fact, only P48.7 billion amount is from the VAT on twelve
goods and services. The rest of the tab P10.5 billion- will be picked by corporations.
What we therefore prescribe is a burden sharing between corporate Philippines and the consumer. Why
should the latter bear all the pain? Why should the fiscal salvation be only on the burden of the consumer?
The corporate worlds equity is in form of the increase in the corporate income tax from 32 to 35 percent, but
up to 2008 only. This will raise P10.5 billion a year. After that, the rate will slide back, not to its old rate of 32
percent, but two notches lower, to 30 percent.
Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency provision that
will be in effect for 1,200 days, while we put our fiscal house in order. This fiscal medicine will have an expiry
date.

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For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their sacrifice
brief. We would like to assure them that not because there is a light at the end of the tunnel, this government
will keep on making the tunnel long.
The responsibility will not rest solely on the weary shoulders of the small man. Big business will be there to
35
share the burden.
As the Court has said, the Senate can propose amendments and in fact, the amendments made on provisions
in the tax on income of corporations are germane to the purpose of the house bills which is to raise revenues
for the government.
Likewise, the Court finds the sections referring to other percentage and excise taxes germane to the reforms
to the VAT system, as these sections would cushion the effects of VAT on consumers. Considering that
certain goods and services which were subject to percentage tax and excise tax would no longer be VATexempt, the consumer would be burdened more as they would be paying the VAT in addition to these taxes.
Thus, there is a need to amend these sections to soften the impact of VAT. Again, in his sponsorship speech,
Sen. Recto said:
However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker fuel, to
lessen the effect of a VAT on this product.
For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT.

Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et al. contend in common
that Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC
giving the President the stand-by authority to raise the VAT rate from 10% to 12% when a certain condition is
met, constitutes undue delegation of the legislative power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:
SEC. 106. Value-Added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange
of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross
value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or
transferor: provided, that the President, upon the recommendation of the Secretary of Finance, shall,
effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied.
(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 %).

And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the VAT chain,
we will however bring down the excise tax on socially sensitive products such as diesel, bunker, fuel and
kerosene.

SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:

...

SEC. 107. Value-Added Tax on Importation of Goods.

What do all these exercises point to? These are not contortions of giving to the left hand what was taken from
the right. Rather, these sprang from our concern of softening the impact of VAT, so that the people can
cushion the blow of higher prices they will have to pay as a result of VAT.36

(A) In General. There shall be levied, assessed and collected on every importation of goods a value-added
tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining
tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such tax to be paid by
the importer prior to the release of such goods from customs custody: Provided, That where the customs
duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based
on the landed cost plus excise taxes, if any: provided, further, that the President, upon the
recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of valueadded tax to twelve percent (12%) after any of the following conditions has been satisfied.

The other sections amended by the Senate pertained to matters of tax administration which are necessary for
the implementation of the changes in the VAT system.
To reiterate, the sections introduced by the Senate are germane to the subject matter and purposes of the
house bills, which is to supplement our countrys fiscal deficit, among others. Thus, the Senate acted within its
power to propose those amendments.
SUBSTANTIVE ISSUES

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 %).

I.
SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the
following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to
ten percent (10%) of gross receipts derived from the sale or exchange of services: provided, that the
President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise
the rate of value-added tax to twelve percent (12%), after any of the following conditions has been
satisfied.

A. No Undue Delegation of Legislative Power

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(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year
exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 %). (Emphasis supplied)
Petitioners allege that the grant of the stand-by authority to the President to increase the VAT rate is a virtual
abdication by Congress of its exclusive power to tax because such delegation is not within the purview of
Section 28 (2), Article VI of the Constitution, which provides:

legislative power, it must appear that the power involved is purely legislative in nature that is, one
appertaining exclusively to the legislative department. It is the nature of the power, and not the liability of its
use or the manner of its exercise, which determines the validity of its delegation.
Nonetheless, the general rule barring delegation of legislative powers is subject to the following recognized
limitations or exceptions:
(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution;

The Congress may, by law, authorize the President to fix within specified limits, and may impose, tariff rates,
import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of
the national development program of the government.
They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as well as on
the sale or exchange of services, which cannot be included within the purview of tariffs under the exempted
delegation as the latter refers to customs duties, tolls or tribute payable upon merchandise to the government
and usually imposed on goods or merchandise imported or exported.
Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President the legislative
power to tax is contrary to republicanism. They insist that accountability, responsibility and transparency
should dictate the actions of Congress and they should not pass to the President the decision to impose taxes.
They also argue that the law also effectively nullified the Presidents power of control, which includes the
authority to set aside and nullify the acts of her subordinates like the Secretary of Finance, by mandating the
fixing of the tax rate by the President upon the recommendation of the Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or create the
conditions provided by the law to bring about either or both the conditions precedent.
On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the imposition of the
12% rate would be subject to the whim of the Secretary of Finance, an unelected bureaucrat, contrary to the
principle of no taxation without representation. They submit that the Secretary of Finance is not mandated to
give a favorable recommendation and he may not even give his recommendation. Moreover, they allege that
no guiding standards are provided in the law on what basis and as to how he will make his recommendation.
They claim, nonetheless, that any recommendation of the Secretary of Finance can easily be brushed aside
by the President since the former is a mere alter ego of the latter, such that, ultimately, it is the President who
decides whether to impose the increased tax rate or not.
A brief discourse on the principle of non-delegation of powers is instructive.
The principle of separation of powers ordains that each of the three great branches of government has
exclusive cognizance of and is supreme in matters falling within its own constitutionally allocated sphere.37 A
logical
corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in
the Latin maxim: potestas delegata non delegari potest which means "what has been delegated, cannot be
delegated."38 This doctrine is based on the ethical principle that such as delegated power constitutes not only
a right but a duty to be performed by the delegate through the instrumentality of his own judgment and not
through the intervening mind of another.39
With respect to the Legislature, Section 1 of Article VI of the Constitution provides that "the Legislative power
shall be vested in the Congress of the Philippines which shall consist of a Senate and a House of
Representatives." The powers which Congress is prohibited from delegating are those which are strictly, or
inherently and exclusively, legislative. Purely legislative power, which can never be delegated, has been
described as the authority to make a complete law complete as to the time when it shall take effect
and as to whom it shall be applicable and to determine the expediency of its enactment.40 Thus, the
rule is that in order that a court may be justified in holding a statute unconstitutional as a delegation of
TAXATION LAW REVIEW

(3) Delegation to the people at large;

(4) Delegation to local governments; and
(5) Delegation to administrative bodies.
In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid
only if the law (a) is complete in itself, setting forth therein the policy to be executed, carried out, or
41
implemented by the delegate; and (b) fixes a standard the limits of which are sufficiently determinate and
42
determinable to which the delegate must conform in the performance of his functions. A sufficient
standard is one which defines legislative policy, marks its limits, maps out its boundaries and specifies the
public agency to apply it. It indicates the circumstances under which the legislative command is to be
effected.43 Both tests are intended to prevent a total transference of legislative authority to the delegate, who is
not allowed to step into the shoes of the legislature and exercise a power essentially legislative.44
In People vs. Vera,45 the Court, through eminent Justice Jose P. Laurel, expounded on the concept and extent
of delegation of power in this wise:
In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual to inquire
whether the statute was complete in all its terms and provisions when it left the hands of the legislature so that
nothing was left to the judgment of any other appointee or delegate of the legislature.
...
The true distinction, says Judge Ranney, is between the delegation of power to make the law, which
necessarily involves a discretion as to what it shall be, and conferring an authority or discretion as to
its execution, to be exercised under and in pursuance of the law. The first cannot be done; to the latter
no valid objection can be made.
...
It is contended, however, that a legislative act may be made to the effect as law after it leaves the hands of the
legislature. It is true that laws may be made effective on certain contingencies, as by proclamation of the
executive or the adoption by the people of a particular community. In Wayman vs. Southard, the Supreme
Court of the United States ruled that the legislature may delegate a power not legislative which it may itself
rightfully exercise. The power to ascertain facts is such a power which may be delegated. There is
nothing essentially legislative in ascertaining the existence of facts or conditions as the basis of the
taking into effect of a law. That is a mental process common to all branches of the government.
Notwithstanding the apparent tendency, however, to relax the rule prohibiting delegation of legislative authority
on account of the complexity arising from social and economic forces at work in this modern industrial age, the
orthodox pronouncement of Judge Cooley in his work on Constitutional Limitations finds restatement in Prof.
Willoughby's treatise on the Constitution of the United States in the following language speaking of
declaration of legislative power to administrative agencies: The principle which permits the legislature to
provide that the administrative agent may determine when the circumstances are such as require the
application of a law is defended upon the ground that at the time this authority is granted, the rule of
14

public policy, which is the essence of the legislative act, is determined by the legislature. In other
words, the legislature, as it is its duty to do, determines that, under given circumstances, certain
executive or administrative action is to be taken, and that, under other circumstances, different or no
action at all is to be taken. What is thus left to the administrative official is not the legislative
determination of what public policy demands, but simply the ascertainment of what the facts of the
case require to be done according to the terms of the law by which he is governed. The efficiency of
an Act as a declaration of legislative will must, of course, come from Congress, but the ascertainment
of the contingency upon which the Act shall take effect may be left to such agencies as it may
designate. The legislature, then, may provide that a law shall take effect upon the happening of future
specified contingencies leaving to some other person or body the power to determine when the
46
specified contingency has arisen. (Emphasis supplied).
47

In Edu vs. Ericta,

the Court reiterated:

What cannot be delegated is the authority under the Constitution to make laws and to alter and repeal them;
the test is the completeness of the statute in all its terms and provisions when it leaves the hands of the
legislature. To determine whether or not there is an undue delegation of legislative power, the inquiry must be
directed to the scope and definiteness of the measure enacted. The legislative does not abdicate its
functions when it describes what job must be done, who is to do it, and what is the scope of his
authority. For a complex economy, that may be the only way in which the legislative process can go forward.
A distinction has rightfully been made between delegation of power to make the laws which
necessarily involves a discretion as to what it shall be, which constitutionally may not be done, and
delegation of authority or discretion as to its execution to be exercised under and in pursuance of the
law, to which no valid objection can be made. The Constitution is thus not to be regarded as denying the
legislature the necessary resources of flexibility and practicability. (Emphasis supplied).48
Clearly, the legislature may delegate to executive officers or bodies the power to determine certain facts or
conditions, or the happening of contingencies, on which the operation of a statute is, by its terms, made to
depend, but the legislature must prescribe sufficient standards, policies or limitations on their authority.49 While
the power to tax cannot be delegated to executive agencies, details as to the enforcement and administration
of an exercise of such power may be left to them, including the power to determine the existence of facts on
which its operation depends.50
The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of legislation is
not of itself a legislative function, but is simply ancillary to legislation. Thus, the duty of correlating information
and making recommendations is the kind of subsidiary activity which the legislature may perform through its
members, or which it may delegate to others to perform. Intelligent legislation on the complicated problems of
modern society is impossible in the absence of accurate information on the part of the legislators, and any
reasonable method of securing such information is proper.51 The Constitution as a continuously operative
charter of government does not require that Congress find for itself
every fact upon which it desires to base legislative action or that it make for itself detailed determinations
which it has declared to be prerequisite to application of legislative policy to particular facts and circumstances
impossible for Congress itself properly to investigate.52
In the present case, the challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6
which reads as follows:
That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been
satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds
two and four-fifth percent (2 4/5%); or
(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1 %).

The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of
facts upon which enforcement and administration of the increase rate under the law is contingent. The
legislature has made the operation of the 12% rate effective January 1, 2006, contingent upon a specified fact
or condition. It leaves the entire operation or non-operation of the 12% rate upon factual matters outside of the
control of the executive.
No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the
word shall is used in the common proviso. The use of the word shall connotes a mandatory order. Its use in a
53
statute denotes an imperative obligation and is inconsistent with the idea of discretion. Where the law is clear
and unambiguous, it must be taken to mean exactly what it says, and courts have no choice but to see to it
54
that the mandate is obeyed.
Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any
of the conditions specified by Congress. This is a duty which cannot be evaded by the President. Inasmuch as
the law specifically uses the word shall, the exercise of discretion by the President does not come into play. It
is a clear directive to impose the 12% VAT rate when the specified conditions are present. The time of taking
into effect of the 12% VAT rate is based on the happening of a certain specified contingency, or upon the
ascertainment of certain facts or conditions by a person or body other than the legislature itself.
The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the law
effectively nullified the Presidents power of control over the Secretary of Finance by mandating the fixing of
the tax rate by the President upon the recommendation of the Secretary of Finance. The Court cannot also
subscribe to the position of petitioners
Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase "upon the
recommendation of the Secretary of Finance." Neither does the Court find persuasive the submission of
petitioners Escudero, et al. that any recommendation by the Secretary of Finance can easily be brushed aside
by the President since the former is a mere alter ego of the latter.
When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that as head
of the Department of Finance he is the assistant and agent of the Chief Executive. The multifarious executive
and administrative functions of the Chief Executive are performed by and through the executive departments,
and the acts of the secretaries of such departments, such as the Department of Finance, performed and
promulgated in the regular course of business, are, unless disapproved or reprobated by the Chief Executive,
presumptively the acts of the Chief Executive. The Secretary of Finance, as such, occupies a political position
and holds office in an advisory capacity, and, in the language of Thomas Jefferson, "should be of the
President's bosom confidence" and, in the language of Attorney-General Cushing, is "subject to the direction
of the President."55
In the present case, in making his recommendation to the President on the existence of either of the two
conditions, the Secretary of Finance is not acting as the alter ego of the President or even her subordinate. In
such instance, he is not subject to the power of control and direction of the President. He is acting as the
agent of the legislative department, to determine and declare the event upon which its expressed will is to take
effect.56 The Secretary of Finance becomes the means or tool by which legislative policy is determined and
implemented, considering that he possesses all the facilities to gather data and information and has a much
broader perspective to properly evaluate them. His function is to gather and collate statistical data and other
pertinent information and verify if any of the two conditions laid out by Congress is present. His personality in
such instance is in reality but a projection of that of Congress. Thus, being the agent of Congress and not of
the President, the President cannot alter or modify or nullify, or set aside the findings of the Secretary of
Finance and to substitute the judgment of the former for that of the latter.
Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact, namely,
whether by December 31, 2005, the value-added tax collection as a percentage of Gross Domestic Product
(GDP) of the previous year exceeds two and four-fifth percent (24/5%) or the national government deficit as a
percentage of GDP of the previous year exceeds one and one-half percent (1%). If either of these two
instances has occurred, the Secretary of Finance, by legislative mandate, must submit such information to the
President. Then the 12% VAT rate must be imposed by the President effective January 1, 2006. There is no
undue delegation of legislative power but only of the discretion as to the execution of a law. This is
constitutionally permissible.57 Congress does not abdicate its functions or unduly delegate power when it
15

TAXATION LAW REVIEW

describes what job must be done, who must do it, and what is the scope of his authority; in our complex
58
economy that is frequently the only way in which the legislative process can go forward.
As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the President the
legislative power to tax is contrary to the principle of republicanism, the same deserves scant consideration.
Congress did not delegate the power to tax but the mere implementation of the law. The intent and will to
increase the VAT rate to 12% came from Congress and the task of the President is to simply execute the
legislative policy. That Congress chose to do so in such a manner is not within the province of the Court to
inquire into, its task being to interpret the law.59
The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause, influence or
create the conditions to bring about either or both the conditions precedent does not deserve any merit as this
argument is highly speculative. The Court does not rule on allegations which are manifestly conjectural, as
these may not exist at all. The Court deals with facts, not fancies; on realities, not appearances. When the
Court acts on appearances instead of realities, justice and law will be short-lived.
B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax Burden
Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and additional tax
burden on the people. Petitioners also argue that the 12% increase, dependent on any of the 2 conditions set
forth in the contested provisions, is ambiguous because it does not state if the VAT rate would be returned to
the original 10% if the rates are no longer satisfied. Petitioners also argue that such rate is unfair and
unreasonable, as the people are unsure of the applicable VAT rate from year to year.
Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions set forth
therein are satisfied, the President shall increase the VAT rate to 12%. The provisions of the law are clear. It
does not provide for a return to the 10% rate nor does it empower the President to so revert if, after the rate is
increased to 12%, the VAT collection goes below the 24/5 of the GDP of the previous year or that the national
government deficit as a percentage of GDP of the previous year does not exceed 1%.
Therefore, no statutory construction or interpretation is needed. Neither can conditions or limitations be
introduced where none is provided for. Rewriting the law is a forbidden ground that only Congress may tread
upon.60
Thus, in the absence of any provision providing for a return to the 10% rate, which in this case the Court finds
none, petitioners argument is, at best, purely speculative. There is no basis for petitioners fear of a fluctuating
VAT rate because the law itself does not provide that the rate should go back to 10% if the conditions provided
in Sections 4, 5 and 6 are no longer present. The rule is that where the provision of the law is clear and
unambiguous, so that there is no occasion for the court's seeking the legislative intent, the law must be taken
as it is, devoid of judicial addition or subtraction.61
Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the President to
raise the VAT collection to at least 2 4/5 of the GDP of the previous year, should be based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is another
condition, i.e., the national government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 %).
Respondents explained the philosophy behind these alternative conditions:
1. VAT/GDP Ratio > 2.8%
The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is less than
2.8%, it means that government has weak or no capability of implementing the VAT or that VAT is not
effective in the function of the tax collection. Therefore, there is no value to increase it to 12% because such
action will also be ineffectual.

2. Natl Govt Deficit/GDP >1.5%

The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of
government has reached a relatively sound position or is towards the direction of a balanced budget position.
Therefore, there is no need to increase the VAT rate since the fiscal house is in a relatively healthy position.
62
Otherwise stated, if the ratio is more than 1.5%, there is indeed a need to increase the VAT rate.
That the first condition amounts to an incentive to the President to increase the VAT collection does not render
it unconstitutional so long as there is a public purpose for which the law was passed, which in this case, is
mainly to raise revenue. In fact, fiscal adequacy dictated the need for a raise in revenue.
The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by Adam Smith
in his Canons of Taxation (1776), as:
IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little
63
as possible over and above what it brings into the public treasury of the state.
It simply means that sources of revenues must be adequate to meet government expenditures and their
64
variations.
The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe. During the
Bicameral Conference Committee hearing, then Finance Secretary Purisima bluntly depicted the countrys
gloomy state of economic affairs, thus:
First, let me explain the position that the Philippines finds itself in right now. We are in a position where 90
percent of our revenue is used for debt service. So, for every peso of revenue that we currently raise, 90 goes
to debt service. Thats interest plus amortization of our debt. So clearly, this is not a sustainable situation.
Thats the first fact.
The second fact is that our debt to GDP level is way out of line compared to other peer countries that borrow
money from that international financial markets. Our debt to GDP is approximately equal to our GDP. Again,
that shows you that this is not a sustainable situation.
The third thing that Id like to point out is the environment that we are presently operating in is not as benign as
what it used to be the past five years.
What do I mean by that?
In the past five years, weve been lucky because we were operating in a period of basically global growth and
low interest rates. The past few months, we have seen an inching up, in fact, a rapid increase in the interest
rates in the leading economies of the world. And, therefore, our ability to borrow at reasonable prices is going
to be challenged. In fact, ultimately, the question is our ability to access the financial markets.
When the President made her speech in July last year, the environment was not as bad as it is now, at least
based on the forecast of most financial institutions. So, we were assuming that raising 80 billion would put us
in a position where we can then convince them to improve our ability to borrow at lower rates. But conditions
have changed on us because the interest rates have gone up. In fact, just within this room, we tried to access
the market for a billion dollars because for this year alone, the Philippines will have to borrow 4 billion dollars.
Of that amount, we have borrowed 1.5 billion. We issued last January a 25-year bond at 9.7 percent cost. We
were trying to access last week and the market was not as favorable and up to now we have not accessed
and we might pull back because the conditions are not very good.
So given this situation, we at the Department of Finance believe that we really need to front-end our deficit
reduction. Because it is deficit that is causing the increase of the debt and we are in what we call a debt spiral.
The more debt you have, the more deficit you have because interest and debt service eats and eats more of
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TAXATION LAW REVIEW

your revenue. We need to get out of this debt spiral. And the only way, I think, we can get out of this debt
65
spiral is really have a front-end adjustment in our revenue base.
The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable catastrophe.
Whether the law is indeed sufficient to answer the states economic dilemma is not for the Court to judge. In
the Farias case, the Court refused to consider the various arguments raised therein that dwelt on the wisdom
of Section 14 of R.A. No. 9006 (The Fair Election Act), pronouncing that:
. . . policy matters are not the concern of the Court. Government policy is within the exclusive dominion of the
political branches of the government. It is not for this Court to look into the wisdom or propriety of legislative
determination. Indeed, whether an enactment is wise or unwise, whether it is based on sound economic
theory, whether it is the best means to achieve the desired results, whether, in short, the legislative discretion
within its prescribed limits should be exercised in a particular manner are matters for the judgment of the
legislature, and the serious conflict of opinions does not suffice to bring them within the range of judicial
66
cognizance.
In the same vein, the Court in this case will not dawdle on the purpose of Congress or the executive policy,
67
given that it is not for the judiciary to "pass upon questions of wisdom, justice or expediency of legislation."
II.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of
R.A. No. 9337, amending Section 114(C) of the NIRC, violate the following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1
A. Due Process and Equal Protection Clauses
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No. 9337, amending
Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337, amending Section 114 (C) of the NIRC are
arbitrary, oppressive, excessive and confiscatory. Their argument is premised on the constitutional right
against deprivation of life, liberty of property without due process of law, as embodied in Article III, Section 1 of
the Constitution.
Petitioners also contend that these provisions violate the constitutional guarantee of equal protection of the
law.
The doctrine is that where the due process and equal protection clauses are invoked, considering that they
are not fixed rules but rather broad standards, there is a need for proof of such persuasive character as would
lead to such a conclusion. Absent such a showing, the presumption of validity must prevail.68
Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the amount of input
tax that may be credited against the output tax. It states, in part: "[P]rovided, that the input tax inclusive of the
input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed
seventy percent (70%) of the output VAT: "
Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due from or paid
by a VAT-registered person on the importation of goods or local purchase of good and services, including
lease or use of property, in the course of trade or business, from a VAT-registered person, and Output Tax is
the value-added tax due on the sale or lease of taxable goods or properties or services by any person
registered or required to register under the law.

Petitioners claim that the contested sections impose limitations on the amount of input tax that may be
claimed. In effect, a portion of the input tax that has already been paid cannot now be credited against the
output tax.
Petitioners argument is not absolute. It assumes that the input tax exceeds 70% of the output tax, and
therefore, the input tax in excess of 70% remains uncredited. However, to the extent that the input tax is less
than 70% of the output tax, then 100% of such input tax is still creditable.
More importantly, the excess input tax, if any, is retained in a businesss books of accounts and remains
creditable in the succeeding quarter/s. This is explicitly allowed by Section 110(B), which provides that "if the
input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters." In
addition, Section 112(B) allows a VAT-registered person to apply for the issuance of a tax credit certificate or
refund for any unused input taxes, to the extent that such input taxes have not been applied against the output
taxes. Such unused input tax may be used in payment of his other internal revenue taxes.
The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners
exaggeratedly contend. Their analysis of the effect of the 70% limitation is incomplete and one-sided. It ends
at the net effect that there will be unapplied/unutilized inputs VAT for a given quarter. It does not proceed
further to the fact that such unapplied/unutilized input tax may be credited in the subsequent periods as
allowed by the carry-over provision of Section 110(B) or that it may later on be refunded through a tax credit
certificate under Section 112(B).
Therefore, petitioners argument must be rejected.
On the other hand, it appears that petitioner Garcia failed to comprehend the operation of the 70% limitation
on the input tax. According to petitioner, the limitation on the creditable input tax in effect allows VATregistered establishments to retain a portion of the taxes they collect, which violates the principle that tax
collection and revenue should be for public purposes and expenditures
As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller, when he buys
goods. Output tax meanwhile is the tax due to the person when he sells goods. In computing the VAT
payable, three possible scenarios may arise:
First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the input taxes that
he paid and passed on by the suppliers, then no payment is required;
Second, when the output taxes exceed the input taxes, the person shall be liable for the excess, which has to
be paid to the Bureau of Internal Revenue (BIR);69 and
Third, if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or
quarters. Should the input taxes result from zero-rated or effectively zero-rated transactions, any excess over
the output taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes, at
the taxpayers option.70
Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can credit his
input tax only up to the extent of 70% of the output tax. In laymans term, the value-added taxes that a
person/taxpayer paid and passed on to him by a seller can only be credited up to 70% of the value-added
taxes that is due to him on a taxable transaction. There is no retention of any tax collection because the
person/taxpayer has already previously paid the input tax to a seller, and the seller will subsequently remit
such input tax to the BIR. The party directly liable for the payment of the tax is the seller.71 What only needs to
be done is for the person/taxpayer to apply or credit these input taxes, as evidenced by receipts, against his
output taxes.
Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes the nature
of a property that may not be confiscated, appropriated, or limited without due process of law.

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The input tax is not a property or a property right within the constitutional purview of the due process clause. A
VAT-registered persons entitlement to the creditable input tax is a mere statutory privilege.

The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the
month the withholding was made.

The distinction between statutory privileges and vested rights must be borne in mind for persons have no
vested rights in statutory privileges. The state may change or take away rights, which were created by the law
72
of the state, although it may not take away property, which was vested by virtue of such rights.

Section 114(C) merely provides a method of collection, or as stated by respondents, a more simplified VAT
withholding system. The government in this case is constituted as a withholding agent with respect to their
payments for goods and services.

Under the previous system of single-stage taxation, taxes paid at every level of distribution are not
recoverable from the taxes payable, although it becomes part of the cost, which is deductible from the gross
revenue. When Pres. Aquino issued E.O. No. 273 imposing a 10% multi-stage tax on all sales, it was then that
the crediting of the input tax paid on purchase or importation of goods and services by VAT-registered persons
73
74
against the output tax was introduced. This was adopted by the Expanded VAT Law (R.A. No. 7716), and
75
The Tax Reform Act of 1997 (R.A. No. 8424). The right to credit input tax as against the output tax is clearly
a privilege created by law, a privilege that also the law can remove, or in this case, limit.

Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to be withheld -- 3%
on gross payments for purchases of goods; 6% on gross payments for services supplied by contractors other
than by public works contractors; 8.5% on gross payments for services supplied by public work contractors; or
10% on payment for the lease or use of properties or property rights to nonresident owners. Under the present
Section 114(C), these different rates, except for the 10% on lease or property rights payment to nonresidents,
were deleted, and a uniform rate of 5% is applied.

Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No. 9337,
amending Section 110(A) of the NIRC, which provides:
SEC. 110. Tax Credits.

The Court observes, however, that the law the used the word final. In tax usage, final, as opposed to
creditable, means full. Thus, it is provided in Section 114(C): "final value-added tax at the rate of five percent
(5%)."
In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of 1997), the concept of
final withholding tax on income was explained, to wit:

(A) Creditable Input Tax.

SECTION 2.57. Withholding of Tax at Source
Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business
for which deduction for depreciation is allowed under this Code, shall be spread evenly over the month of
acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods,
excluding the VAT component thereof, exceeds One million pesos (P1,000,000.00): Provided, however, That
if the estimated useful life of the capital goods is less than five (5) years, as used for depreciation purposes,
then the input VAT shall be spread over such a shorter period: Provided, finally, That in the case of purchase
of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or license
upon payment of the compensation, rental, royalty or fee.
The foregoing section imposes a 60-month period within which to amortize the creditable input tax on
purchase or importation of capital goods with acquisition cost of P1 Million pesos, exclusive of the VAT
component. Such spread out only poses a delay in the crediting of the input tax. Petitioners argument is
without basis because the taxpayer is not permanently deprived of his privilege to credit the input tax.
It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in this case
amounts to a 4-year interest-free loan to the government.76 In the same breath, Congress also justified its
move by saying that the provision was designed to raise an annual revenue of 22.6 billion.77 The legislature
also dispelled the fear that the provision will fend off foreign investments, saying that foreign investors have
other tax incentives provided by law, and citing the case of China, where despite a 17.5% non-creditable VAT,
foreign investments were not deterred.78 Again, for whatever is the purpose of the 60-month amortization, this
involves executive economic policy and legislative wisdom in which the Court cannot intervene.
With regard to the 5% creditable withholding tax imposed on payments made by the government for taxable
transactions, Section 12 of R.A. No. 9337, which amended Section 114 of the NIRC, reads:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Value-added Tax. The Government or any of its political subdivisions, instrumentalities or
agencies, including government-owned or controlled corporations (GOCCs) shall, before making payment on
account of each purchase of goods and services which are subject to the value-added tax imposed in
Sections 106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five percent (5%)
of the gross payment thereof: Provided, That the payment for lease or use of properties or property rights to
nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For purposes
of this Section, the payor or person in control of the payment shall be considered as the withholding agent.

(A) Final Withholding Tax. Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as full and final payment of the income tax due from the payee on the said
income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case
of his failure to withhold the tax or in case of underwithholding, the deficiency tax shall be collected from the
payor/withholding agent.
(B) Creditable Withholding Tax. Under the creditable withholding tax system, taxes withheld on certain
income payments are intended to equal or at least approximate the tax due of the payee on said income.
Taxes withheld on income payments covered by the expanded withholding tax (referred to in Sec. 2.57.2 of
these regulations) and compensation income (referred to in Sec. 2.78 also of these regulations) are creditable
in nature.
As applied to value-added tax, this means that taxable transactions with the government are subject to a 5%
rate, which constitutes as full payment of the tax payable on the transaction. This represents the net VAT
payable of the seller. The other 5% effectively accounts for the standard input VAT (deemed input VAT), in
lieu of the actual input VAT directly or attributable to the taxable transaction.79
The Court need not explore the rationale behind the provision. It is clear that Congress intended to treat
differently taxable transactions with the government.80 This is supported by the fact that under the old
provision, the 5% tax withheld by the government remains creditable against the tax liability of the seller or
contractor, to wit:
SEC. 114. Return and Payment of Value-added Tax.
(C) Withholding of Creditable Value-added Tax. The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall, before
making payment on account of each purchase of goods from sellers and services rendered by contractors
which are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold
the value-added tax due at the rate of three percent (3%) of the gross payment for the purchase of goods and
six percent (6%) on gross receipts for services rendered by contractors on every sale or installment payment
which shall be creditable against the value-added tax liability of the seller or contractor: Provided,
however, That in the case of government public works contractors, the withholding rate shall be eight and onehalf percent (8.5%): Provided, further, That the payment for lease or use of properties or property rights to
18

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nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For this
purpose, the payor or person in control of the payment shall be considered as the withholding agent.
The valued-added tax withheld under this Section shall be remitted within ten (10) days following the end of
the month the withholding was made. (Emphasis supplied)
As amended, the use of the word final and the deletion of the word creditable exhibits Congresss intention to
treat transactions with the government differently. Since it has not been shown that the class subject to the 5%
final withholding tax has been unreasonably narrowed, there is no reason to invalidate the provision.
Petitioners, as petroleum dealers, are not the only ones subjected to the 5% final withholding tax. It applies to
all those who deal with the government.
Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue Regulations
No. 14-2005 or the Consolidated Value-Added Tax Regulations 2005 issued by the BIR, provides that should
the actual input tax exceed 5% of gross payments, the excess may form part of the cost. Equally, should the
81
actual input tax be less than 5%, the difference is treated as income.
Petitioners also argue that by imposing a limitation on the creditable input tax, the government gets to tax a
profit or value-added even if there is no profit or value-added.
Petitioners stance is purely hypothetical, argumentative, and again, one-sided. The Court will not engage in a
legal joust where premises are what ifs, arguments, theoretical and facts, uncertain. Any disquisition by the
82
Court on this point will only be, as Shakespeare describes life in Macbeth, "full of sound and fury, signifying
nothing."
Whats more, petitioners contention assumes the proposition that there is no profit or value-added. It need not
take an astute businessman to know that it is a matter of exception that a business will sell goods or services
without profit or value-added. It cannot be overstressed that a business is created precisely for profit.
The equal protection clause under the Constitution means that "no person or class of persons shall be
deprived of the same protection of laws which is enjoyed by other persons or other classes in the same place
and in like circumstances."83
The power of the State to make reasonable and natural classifications for the purposes of taxation has long
been established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or
the amounts to be raised, the methods of assessment, valuation and collection, the States power is entitled to
presumption of validity. As a rule, the judiciary will not interfere with such power absent a clear showing of
unreasonableness, discrimination, or arbitrariness.84
Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of input tax, or
invests in capital equipment, or has several transactions with the government, is not based on real and
substantial differences to meet a valid classification.
The argument is pedantic, if not outright baseless. The law does not make any classification in the subject of
taxation, the kind of property, the rates to be levied or the amounts to be raised, the methods of assessment,
valuation and collection. Petitioners alleged distinctions are based on variables that bear different
consequences. While the implementation of the law may yield varying end results depending on ones profit
margin and value-added, the Court cannot go beyond what the legislature has laid down and interfere with the
affairs of business.
The equal protection clause does not require the universal application of the laws on all persons or things
without distinction. This might in fact sometimes result in unequal protection. What the clause requires is
equality among equals as determined according to a valid classification. By classification is meant the
grouping of persons or things similar to each other in certain particulars and different from all others in these
same particulars.85

Petitioners brought to the Courts attention the introduction of Senate Bill No. 2038 by Sens. S.R. Osmea III
and Ma. Ana Consuelo A.S. Madrigal on June 6, 2005, and House Bill No. 4493 by Rep. Eric D. Singson.
The proposed legislation seeks to amend the 70% limitation by increasing the same to 90%. This, according to
petitioners, supports their stance that the 70% limitation is arbitrary and confiscatory. On this score, suffice it to
say that these are still proposed legislations. Until Congress amends the law, and absent any unequivocal
basis for its unconstitutionality, the 70% limitation stays.
B. Uniformity and Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of
taxation.
Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at
the same rate. Different articles may be taxed at different amounts provided that the rate is uniform on the
same class everywhere with all people at all times.86
In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and
services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the
NIRC, provide for a rate of 10% (or 12%) on sale of goods and properties, importation of goods, and sale of
services and use or lease of properties. These same sections also provide for a 0% rate on certain sales and
transaction.
Neither does the law make any distinction as to the type of industry or trade that will bear the 70% limitation on
the creditable input tax, 5-year amortization of input tax paid on purchase of capital goods or the 5% final
withholding tax by the government. It must be stressed that the rule of uniform taxation does not deprive
Congress of the power to classify subjects of taxation, and only demands uniformity within the particular
class.87
R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or
12%) does not apply to sales of goods or services with gross annual sales or receipts not exceeding
P1,500,000.00.88 Also, basic marine and agricultural food products in their original state are still not subject to
the tax,89 thus ensuring that prices at the grassroots level will remain accessible. As was stated in Kapatiran
ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:90
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engaged
in business with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-sari stores are
consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine
products, so that the costs of basic food and other necessities, spared as they are from the incidence of the
VAT, are expected to be relatively lower and within the reach of the general public.
It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly favors
those with high profit margins. Congress was not oblivious to this. Thus, to equalize the weighty burden the
law entails, the law, under Section 116, imposed a 3% percentage tax on VAT-exempt persons under Section
109(v), i.e., transactions with gross annual sales and/or receipts not exceeding P1.5 Million. This acts as a
equalizer because in effect, bigger businesses that qualify for VAT coverage and VAT-exempt taxpayers stand
on equal-footing.
Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the tax on those
previously exempt. Excise taxes on petroleum products91 and natural gas92 were reduced. Percentage tax on
domestic carriers was removed.93 Power producers are now exempt from paying franchise tax.94
Aside from these, Congress also increased the income tax rates of corporations, in order to distribute the
burden of taxation. Domestic, foreign, and non-resident corporations are now subject to a 35% income tax
rate, from a previous 32%.95 Intercorporate dividends of non-resident foreign corporations are still subject to
15% final withholding tax but the tax credit allowed on the corporations domicile was increased to 20%. 96 The
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97

Philippine Amusement and Gaming Corporation (PAGCOR) is not exempt from income taxes anymore. Even
the sale by an artist of his works or services performed for the production of such works was not spared.
All these were designed to ease, as well as spread out, the burden of taxation, which would otherwise rest
largely on the consumers. It cannot therefore be gainsaid that R.A. No. 9337 is equitable.
C. Progressivity of Taxation
Lastly, petitioners contend that the limitation on the creditable input tax is anything but regressive. It is the
smaller business with higher input tax-output tax ratio that will suffer the consequences.

Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the judiciary
should stand ready to afford relief. There are undoubtedly many wrongs the judicature may not correct, for
instance, those involving political questions. . . .
Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies for all
political or social ills; We should not forget that the Constitution has judiciously allocated the powers of
government to three distinct and separate compartments; and that judicial interpretation has tended to the
preservation of the independence of the three, and a zealous regard of the prerogatives of each, knowing full
well that one is not the guardian of the others and that, for official wrong-doing, each may be brought to
100
account, either by impeachment, trial or by the ballot box.
101

Progressive taxation is built on the principle of the taxpayers ability to pay. This principle was also lifted from
Adam Smiths Canons of Taxation, and it states:
I. The subjects of every state ought to contribute towards the support of the government, as nearly as
possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively
enjoy under the protection of the state.
Taxation is progressive when its rate goes up depending on the resources of the person affected.

The words of the Court in Vera vs. Avelino holds true then, as it still holds true now. All things considered,
there is no raison d'tre for the unconstitutionality of R.A. No. 9337.
WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056, 168207,
168461, 168463, and 168730, are hereby DISMISSED.
There being no constitutional impediment to the full enforcement and implementation of R.A. No. 9337, the
temporary restraining order issued by the Court on July 1, 2005 is LIFTED upon finality of herein decision.

98

SO ORDERED.
The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of
progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the consumer or
business for every goods bought or services enjoyed is the same regardless of income. In
other words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies in the
income earned by a person or profit margin marked by a business, such that the higher the income or profit
margin, the smaller the portion of the income or profit that is eaten by VAT. A converso, the lower the income
or profit margin, the bigger the part that the VAT eats away. At the end of the day, it is really the lower income
group or businesses with low-profit margins that is always hardest hit.
Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it
simply provides is that Congress shall "evolve a progressive system of taxation." The Court stated in the
Tolentino case, thus:
The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive.
What it simply provides is that Congress shall evolve a progressive system of taxation. The constitutional
provision has been interpreted to mean simply that direct taxes are . . . to be preferred [and] as much as
possible, indirect taxes should be minimized. (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES
221 (Second ed. 1977)) Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax
system. Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would have been
prohibited with the proclamation of Art. VIII, 17 (1) of the 1973 Constitution from which the present Art. VI,
28 (1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to
avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law
minimizes the regressive effects of this imposition by providing for zero rating of certain transactions (R.A. No.
7716, 3, amending 102 (b) of the NIRC), while granting exemptions to other transactions. (R.A. No. 7716,
4 amending 103 of the NIRC)99
CONCLUSION
It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-aid
measure to resuscitate an economy in distress. The Court is neither blind nor is it turning a deaf ear on the
plight of the masses. But it does not have the panacea for the malady that the law seeks to remedy. As in
other cases, the Court cannot strike down a law as unconstitutional simply because of its yokes.
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G.R. No. 166006

March 14, 2008

WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiff and against
the defendant Planters Product, Inc., ordering the latter to pay the former:

PLANTERS PRODUCTS, INC., Petitioner,

vs.
FERTIPHIL CORPORATION, Respondent.

1) the sum of P6,698,144.00 with interest at 12% from the time of judicial demand;
2) the sum of P100,000 as attorneys fees;

REYES, R.T., J.:

3) the cost of suit.
THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the constitutionality of
statutes, executive orders, presidential decrees and other issuances. The Constitution vests that power not
only in the Supreme Court but in all Regional Trial Courts.
The principle is relevant in this petition for review on certiorari of the Decision1 of the Court of Appeals (CA)
2
affirming with modification that of the RTC in Makati City, finding petitioner Planters Products, Inc. (PPI) liable
to private respondent Fertiphil Corporation (Fertiphil) for the levies it paid under Letter of Instruction (LOI) No.
1465.
The Facts
3

Petitioner PPI and private respondent Fertiphil are private corporations incorporated under Philippine laws.
They are both engaged in the importation and distribution of fertilizers, pesticides and agricultural chemicals.
On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465
which provided, among others, for the imposition of a capital recovery component (CRC) on the domestic sale
of all grades of fertilizers in the Philippines.4 The LOI provides:
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a capital
contribution component of not less than P10 per bag. This capital contribution shall be collected until adequate
capital is raised to make PPI viable. Such capital contribution shall be applied by FPA to all domestic sales of
fertilizers in the Philippines.5 (Underscoring supplied)
Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic market to the Fertilizer
and Pesticide Authority (FPA). FPA then remitted the amount collected to the Far East Bank and Trust
Company, the depositary bank of PPI. Fertiphil paid P6,689,144 to FPA from July 8, 1985 to January 24,
1986.6
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. With the return of
democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No. 1465, but PPI refused
to accede to the demand.7
8

Fertiphil filed a complaint for collection and damages against FPA and PPI with the RTC in Makati. It
questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable, oppressive, invalid and an
unlawful imposition that amounted to a denial of due process of law.9 Fertiphil alleged that the LOI solely
favored PPI, a privately owned corporation, which used the proceeds to maintain its monopoly of the fertilizer
industry.
In its Answer,10 FPA, through the Solicitor General, countered that the issuance of LOI No. 1465 was a valid
exercise of the police power of the State in ensuring the stability of the fertilizer industry in the country. It also
averred that Fertiphil did not sustain any damage from the LOI because the burden imposed by the levy fell on
the ultimate consumer, not the seller.
RTC Disposition

SO ORDERED.

11

Ruling that the imposition of the P10 CRC was an exercise of the States inherent power of taxation, the RTC
invalidated the levy for violating the basic principle that taxes can only be levied for public purpose, viz.:
It is apparent that the imposition of P10 per fertilizer bag sold in the country by LOI 1465 is purportedly in the
exercise of the power of taxation. It is a settled principle that the power of taxation by the state is plenary.
Comprehensive and supreme, the principal check upon its abuse resting in the responsibility of the members
of the legislature to their constituents. However, there are two kinds of limitations on the power of taxation: the
inherent limitations and the constitutional limitations.
One of the inherent limitations is that a tax may be levied only for public purposes:
The power to tax can be resorted to only for a constitutionally valid public purpose. By the same token, taxes
may not be levied for purely private purposes, for building up of private fortunes, or for the redress of private
wrongs. They cannot be levied for the improvement of private property, or for the benefit, and promotion of
private enterprises, except where the aid is incident to the public benefit. It is well-settled principle of
constitutional law that no general tax can be levied except for the purpose of raising money which is to be
expended for public use. Funds cannot be exacted under the guise of taxation to promote a purpose that is
not of public interest. Without such limitation, the power to tax could be exercised or employed as an authority
to destroy the economy of the people. A tax, however, is not held void on the ground of want of public interest
unless the want of such interest is clear. (71 Am. Jur. pp. 371-372)
In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the Fertilizer and Pesticide Authority
pursuant to the P10 per bag of fertilizer sold imposition under LOI 1465 which, in turn, remitted the amount to
the defendant Planters Products, Inc. thru the latters depository bank, Far East Bank and Trust Co. Thus, by
virtue of LOI 1465 the plaintiff, Fertiphil Corporation, which is a private domestic corporation, became poorer
by the amount of P6,698,144.00 and the defendant, Planters Product, Inc., another private domestic
corporation, became richer by the amount of P6,698,144.00.
Tested by the standards of constitutionality as set forth in the afore-quoted jurisprudence, it is quite evident
that LOI 1465 insofar as it imposes the amount of P10 per fertilizer bag sold in the country and orders that the
said amount should go to the defendant Planters Product, Inc. is unlawful because it violates the mandate that
a tax can be levied only for a public purpose and not to benefit, aid and promote a private enterprise such as
Planters Product, Inc.12
PPI moved for reconsideration but its motion was denied.13 PPI then filed a notice of appeal with the RTC but
it failed to pay the requisite appeal docket fee. In a separate but related proceeding, this Court14 allowed the
appeal of PPI and remanded the case to the CA for proper disposition.
CA Decision
On November 28, 2003, the CA handed down its decision affirming with modification that of the RTC, with the
following fallo:

On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as follows:
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IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby AFFIRMED, subject to the
15
MODIFICATION that the award of attorneys fees is hereby DELETED.
In affirming the RTC decision, the CA ruled that the lis mota of the complaint for collection was the
constitutionality of LOI No. 1465, thus:
The question then is whether it was proper for the trial court to exercise its power to judicially determine the
constitutionality of the subject statute in the instant case.
As a rule, where the controversy can be settled on other grounds, the courts will not resolve the
constitutionality of a law (Lim v. Pacquing, 240 SCRA 649 [1995]). The policy of the courts is to avoid ruling on
constitutional questions and to presume that the acts of political departments are valid, absent a clear and
unmistakable showing to the contrary.
However, the courts are not precluded from exercising such power when the following requisites are obtaining
in a controversy before it: First, there must be before the court an actual case calling for the exercise of judicial
review. Second, the question must be ripe for adjudication. Third, the person challenging the validity of the act
must have standing to challenge. Fourth, the question of constitutionality must have been raised at the earliest
opportunity; and lastly, the issue of constitutionality must be the very lis mota of the case (Integrated Bar of the
Philippines v. Zamora, 338 SCRA 81 [2000]).
Indisputably, the present case was primarily instituted for collection and damages. However, a perusal of the
complaint also reveals that the instant action is founded on the claim that the levy imposed was an unlawful
and unconstitutional special assessment. Consequently, the requisite that the constitutionality of the law in
question be the very lis mota of the case is present, making it proper for the trial court to rule on the
constitutionality of LOI 1465.16
The CA held that even on the assumption that LOI No. 1465 was issued under the police power of the state, it
is still unconstitutional because it did not promote public welfare. The CA explained:
In declaring LOI 1465 unconstitutional, the trial court held that the levy imposed under the said law was an
invalid exercise of the States power of taxation inasmuch as it violated the inherent and constitutional
prescription that taxes be levied only for public purposes. It reasoned out that the amount collected under the
levy was remitted to the depository bank of PPI, which the latter used to advance its private interest.
On the other hand, appellant submits that the subject statutes passage was a valid exercise of police power.
In addition, it disputes the court a quos findings arguing that the collections under LOI 1465 was for the
benefit of Planters Foundation, Incorporated (PFI), a foundation created by law to hold in trust for millions of
farmers, the stock ownership of PPI.
Of the three fundamental powers of the State, the exercise of police power has been characterized as the
most essential, insistent and the least limitable of powers, extending as it does to all the great public needs. It
may be exercised as long as the activity or the property sought to be regulated has some relevance to public
welfare (Constitutional Law, by Isagani A. Cruz, p. 38, 1995 Edition).
Vast as the power is, however, it must be exercised within the limits set by the Constitution, which requires the
concurrence of a lawful subject and a lawful method. Thus, our courts have laid down the test to determine the
validity of a police measure as follows: (1) the interests of the public generally, as distinguished from those of
a particular class, requires its exercise; and (2) the means employed are reasonably necessary for the
accomplishment of the purpose and not unduly oppressive upon individuals (National Development Company
v. Philippine Veterans Bank, 192 SCRA 257 [1990]).

impartiality. There is no way to treat the self-interest of a favored entity, like PPI, as identical with the general
interest of the countrys farmers or even the Filipino people in general. Well to stress, substantive due process
exacts fairness and equal protection disallows distinction where none is needed. When a statutes public
purpose is spoiled by private interest, the use of police power becomes a travesty which must be struck down
for being an arbitrary exercise of government power. To rule in favor of appellant would contravene the
general principle that revenues derived from taxes cannot be used for purely private purposes or for the
exclusive benefit of private individuals.17
The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was for the benefit of Planters
Foundation, Inc., a foundation created to hold in trust the stock ownership of PPI. The CA stated:
Appellant next claims that the collections under LOI 1465 was for the benefit of Planters Foundation,
Incorporated (PFI), a foundation created by law to hold in trust for millions of farmers, the stock ownership of
PFI on the strength of Letter of Undertaking (LOU) issued by then Prime Minister Cesar Virata on April 18,
1985 and affirmed by the Secretary of Justice in an Opinion dated October 12, 1987, to wit:
"2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in its fertilizer
pricing formula a capital recovery component, the proceeds of which will be used initially for the purpose of
funding the unpaid portion of the outstanding capital stock of Planters presently held in trust by Planters
Foundation, Inc. (Planters Foundation), which unpaid capital is estimated at approximately P206 million
(subject to validation by Planters and Planters Foundation) (such unpaid portion of the outstanding capital
stock of Planters being hereafter referred to as the Unpaid Capital), and subsequently for such capital
increases as may be required for the continuing viability of Planters.
The capital recovery component shall be in the minimum amount of P10 per bag, which will be added to the
price of all domestic sales of fertilizer in the Philippines by any importer and/or fertilizer mother company. In
this connection, the Republic hereby acknowledges that the advances by Planters to Planters Foundation
which were applied to the payment of the Planters shares now held in trust by Planters Foundation, have been
assigned to, among others, the Creditors. Accordingly, the Republic, through FPA, hereby agrees to deposit
the proceeds of the capital recovery component in the special trust account designated in the notice dated
April 2, 1985, addressed by counsel for the Creditors to Planters Foundation. Such proceeds shall be
deposited by FPA on or before the 15th day of each month.
The capital recovery component shall continue to be charged and collected until payment in full of (a) the
Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) any carrying cost
accruing from the date hereof on the amounts which may be outstanding from time to time of the Unpaid
Capital and/or the Subsidy Receivables and (d) the capital increases contemplated in paragraph 2 hereof. For
the purpose of the foregoing clause (c), the carrying cost shall be at such rate as will represent the full and
reasonable cost to Planters of servicing its debts, taking into account both its peso and foreign currencydenominated obligations." (Records, pp. 42-43)
Appellants proposition is open to question, to say the least. The LOU issued by then Prime Minister Virata
taken together with the Justice Secretarys Opinion does not preponderantly demonstrate that the collections
made were held in trust in favor of millions of farmers. Unfortunately for appellant, in the absence of sufficient
evidence to establish its claims, this Court is constrained to rely on what is explicitly provided in LOI 1465
that one of the primary aims in imposing the levy is to support the successful rehabilitation and continued
viability of PPI.18
PPI moved for reconsideration but its motion was denied.19 It then filed the present petition with this Court.
Issues
Petitioner PPI raises four issues for Our consideration, viz.:

It is upon applying this established tests that We sustain the trial courts holding LOI 1465 unconstitutional. To
be sure, ensuring the continued supply and distribution of fertilizer in the country is an undertaking imbued
with public interest. However, the method by which LOI 1465 sought to achieve this is by no means a measure
that will promote the public welfare. The governments commitment to support the successful rehabilitation
and continued viability of PPI, a private corporation, is an unmistakable attempt to mask the subject statutes

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THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY ATTACKED AND BE DECREED

VIA A DEFAULT JUDGMENT IN A CASE FILED FOR COLLECTION AND DAMAGES WHERE THE ISSUE
OF CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE CASE. NEITHER CAN LOI 1465 BE
CHALLENGED BY ANY PERSON OR ENTITY WHICH HAS NO STANDING TO DO SO.
II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE FERTILIZER SUPPLY
AND DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED BY LAW TO
HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK OWNERSHIP IN PPI CONSTITUTES A
VALID LEGISLATION PURSUANT TO THE EXERCISE OF TAXATION AND POLICE POWER FOR PUBLIC
PURPOSES.
III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS REMITTED TO THE
GOVERNMENT, AND BECAME GOVERNMENT FUNDS PURSUANT TO AN EFFECTIVE AND VALIDLY
ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED RIGHTS BY VIRTUE OF THE PRINCIPLE
OF "OPERATIVE FACT" PRIOR TO ANY DECLARATION OF UNCONSTITUTIONALITY OF LOI 1465.
IV
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO APPLICATION IN THE
INSTANT CASE.20 (Underscoring supplied)
Our Ruling
We shall first tackle the procedural issues of locus standi and the jurisdiction of the RTC to resolve
constitutional issues.
Fertiphil has locus standi because it suffered direct injury; doctrine of standing is a mere procedural
technicality which may be waived.
PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No. 1465 because it does
not have a "personal and substantial interest in the case or will sustain direct injury as a result of its
enforcement."21 It asserts that Fertiphil did not suffer any damage from the CRC imposition because
"incidence of the levy fell on the ultimate consumer or the farmers themselves, not on the seller fertilizer
company."22
We cannot agree. The doctrine of locus standi or the right of appearance in a court of justice has been
adequately discussed by this Court in a catena of cases. Succinctly put, the doctrine requires a litigant to have
a material interest in the outcome of a case. In private suits, locus standi requires a litigant to be a "real party
in interest," which is defined as "the party who stands to be benefited or injured by the judgment in the suit or
the party entitled to the avails of the suit."23

Recognizing that a strict application of the "direct injury" test may hamper public interest, this Court relaxed the
requirement in cases of "transcendental importance" or with "far reaching implications." Being a mere
27
procedural technicality, it has also been held that locus standi may be waived in the public interest.
Whether or not the complaint for collection is characterized as a private or public suit, Fertiphil has locus
standi to file it. Fertiphil suffered a direct injury from the enforcement of LOI No. 1465. It was required, and it
did pay, the P10 levy imposed for every bag of fertilizer sold on the domestic market. It may be true that
Fertiphil has passed some or all of the levy to the ultimate consumer, but that does not disqualify it from
attacking the constitutionality of the LOI or from seeking a refund. As seller, it bore the ultimate burden of
paying the levy. It faced the possibility of severe sanctions for failure to pay the levy. The fact of payment is
sufficient injury to Fertiphil.
Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was compelled to factor in its
product the levy. The levy certainly rendered the fertilizer products of Fertiphil and other domestic sellers much
more expensive. The harm to their business consists not only in fewer clients because of the increased price,
but also in adopting alternative corporate strategies to meet the demands of LOI No. 1465. Fertiphil and other
fertilizer sellers may have shouldered all or part of the levy just to be competitive in the market. The harm
occasioned on the business of Fertiphil is sufficient injury for purposes of locus standi.
Even assuming arguendo that there is no direct injury, We find that the liberal policy consistently adopted by
this Court on locus standi must apply. The issues raised by Fertiphil are of paramount public importance. It
involves not only the constitutionality of a tax law but, more importantly, the use of taxes for public purpose.
Former President Marcos issued LOI No. 1465 with the intention of rehabilitating an ailing private company.
This is clear from the text of the LOI. PPI is expressly named in the LOI as the direct beneficiary of the levy.
Worse, the levy was made dependent and conditional upon PPI becoming financially viable. The LOI provided
that "the capital contribution shall be collected until adequate capital is raised to make PPI viable."
The constitutionality of the levy is already in doubt on a plain reading of the statute. It is Our constitutional duty
to squarely resolve the issue as the final arbiter of all justiciable controversies. The doctrine of standing, being
a mere procedural technicality, should be waived, if at all, to adequately thresh out an important constitutional
issue.
RTC may resolve constitutional issues; the constitutional issue was adequately raised in the complaint; it is
the lis mota of the case.
PPI insists that the RTC and the CA erred in ruling on the constitutionality of the LOI. It asserts that the
constitutionality of the LOI cannot be collaterally attacked in a complaint for collection.28 Alternatively, the
resolution of the constitutional issue is not necessary for a determination of the complaint for collection.29
Fertiphil counters that the constitutionality of the LOI was adequately pleaded in its complaint. It claims that
the constitutionality of LOI No. 1465 is the very lis mota of the case because the trial court cannot determine
its claim without resolving the issue.30
It is settled that the RTC has jurisdiction to resolve the constitutionality of a statute, presidential decree or an
executive order. This is clear from Section 5, Article VIII of the 1987 Constitution, which provides:
SECTION 5. The Supreme Court shall have the following powers:

In public suits, this Court recognizes the difficulty of applying the doctrine especially when plaintiff asserts a
public right on behalf of the general public because of conflicting public policy issues. 24 On one end, there is
the right of the ordinary citizen to petition the courts to be freed from unlawful government intrusion and illegal
official action. At the other end, there is the public policy precluding excessive judicial interference in official
acts, which may unnecessarily hinder the delivery of basic public services.
In this jurisdiction, We have adopted the "direct injury test" to determine locus standi in public suits. In People
v. Vera,25 it was held that a person who impugns the validity of a statute must have "a personal and
substantial interest in the case such that he has sustained, or will sustain direct injury as a result." The "direct
injury test" in public suits is similar to the "real party in interest" rule for private suits under Section 2, Rule 3 of
the 1997 Rules of Civil Procedure.26

xxxx
(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may
provide, final judgments and orders of lower courts in:
(a) All cases in which the constitutionality or validity of any treaty, international or executive agreement, law,
presidential decree, proclamation, order, instruction, ordinance, or regulation is in question. (Underscoring
supplied)
23

TAXATION LAW REVIEW

In Mirasol v. Court of Appeals,

thus:

31

this Court recognized the power of the RTC to resolve constitutional issues,

On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to consider the
constitutionality of a statute, presidential decree, or executive order. The Constitution vests the power of
judicial review or the power to declare a law, treaty, international or executive agreement, presidential decree,
32
order, instruction, ordinance, or regulation not only in this Court, but in all Regional Trial Courts.
In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign Affairs,33 this Court reiterated:
There is no denying that regular courts have jurisdiction over cases involving the validity or constitutionality of
a rule or regulation issued by administrative agencies. Such jurisdiction, however, is not limited to the Court of
Appeals or to this Court alone for even the regional trial courts can take cognizance of actions assailing a
specific rule or set of rules promulgated by administrative bodies. Indeed, the Constitution vests the power of
judicial review or the power to declare a law, treaty, international or executive agreement, presidential decree,
34
order, instruction, ordinance, or regulation in the courts, including the regional trial courts.
Judicial review of official acts on the ground of unconstitutionality may be sought or availed of through any of
the actions cognizable by courts of justice, not necessarily in a suit for declaratory relief. Such review may be
had in criminal actions, as in People v. Ferrer35 involving the constitutionality of the now defunct Anti36
Subversion law, or in ordinary actions, as in Krivenko v. Register of Deeds involving the constitutionality of
laws prohibiting aliens from acquiring public lands. The constitutional issue, however, (a) must be properly
raised and presented in the case, and (b) its resolution is necessary to a determination of the case, i.e., the
37
issue of constitutionality must be the very lis mota presented.

The P10 levy under LOI No. 1465 is an exercise of the power of taxation.
At any rate, the Court holds that the RTC and the CA did not err in ruling against the constitutionality of the
LOI.
PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of taxation. It claims
that the LOI was implemented for the purpose of assuring the fertilizer supply and distribution in the country
and for benefiting a foundation created by law to hold in trust for millions of farmers their stock ownership in
PPI.
Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit to a private company.
The levy was imposed to pay the corporate debt of PPI. Fertiphil also argues that, even if the LOI is enacted
under the police power, it is still unconstitutional because it did not promote the general welfare of the people
or public interest.
Police power and the power of taxation are inherent powers of the State. These powers are distinct and have
different tests for validity. Police power is the power of the State to enact legislation that may interfere with
39
personal liberty or property in order to promote the general welfare, while the power of taxation is the power
to levy taxes to be used for public purpose. The main purpose of police power is the regulation of a behavior
or conduct, while taxation is revenue generation. The "lawful subjects" and "lawful means" tests are used to
40
determine the validity of a law enacted under the police power. The power of taxation, on the other hand, is
circumscribed by inherent and constitutional limitations.

Contrary to PPIs claim, the constitutionality of LOI No. 1465 was properly and adequately raised in the
complaint for collection filed with the RTC. The pertinent portions of the complaint allege:

We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation power.
While it is true that the power of taxation can be used as an implement of police power,41 the primary purpose
of the levy is revenue generation. If the purpose is primarily revenue, or if revenue is, at least, one of the real
and substantial purposes, then the exaction is properly called a tax.42

6. The CRC of P10 per bag levied under LOI 1465 on domestic sales of all grades of fertilizer in the
Philippines, is unlawful, unjust, uncalled for, unreasonable, inequitable and oppressive because:

In Philippine Airlines, Inc. v. Edu,43 it was held that the imposition of a vehicle registration fee is not an
exercise by the State of its police power, but of its taxation power, thus:

xxxx
(c) It favors only one private domestic corporation, i.e., defendant PPPI, and imposed at the expense and
disadvantage of the other fertilizer importers/distributors who were themselves in tight business situation and
were then exerting all efforts and maximizing management and marketing skills to remain viable;
xxxx
(e) It was a glaring example of crony capitalism, a forced program through which the PPI, having been
presumptuously masqueraded as "the" fertilizer industry itself, was the sole and anointed beneficiary;
7. The CRC was an unlawful; and unconstitutional special assessment and its imposition is tantamount to
illegal exaction amounting to a denial of due process since the persons of entities which had to bear the
burden of paying the CRC derived no benefit therefrom; that on the contrary it was used by PPI in trying to
regain its former despicable monopoly of the fertilizer industry to the detriment of other distributors and
importers.38 (Underscoring supplied)
The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for collection. Fertiphil filed the
complaint to compel PPI to refund the levies paid under the statute on the ground that the law imposing the
levy is unconstitutional. The thesis is that an unconstitutional law is void. It has no legal effect. Being void,
Fertiphil had no legal obligation to pay the levy. Necessarily, all levies duly paid pursuant to an
unconstitutional law should be refunded under the civil code principle against unjust enrichment. The refund is
a mere consequence of the law being declared unconstitutional. The RTC surely cannot order PPI to refund
Fertiphil if it does not declare the LOI unconstitutional. It is the unconstitutionality of the LOI which triggers the
refund. The issue of constitutionality is the very lis mota of the complaint with the RTC.

It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61 of the Land
Transportation and Traffic Code that the legislative intent and purpose behind the law requiring owners of
vehicles to pay for their registration is mainly to raise funds for the construction and maintenance of highways
and to a much lesser degree, pay for the operating expenses of the administering agency. x x x Fees may be
properly regarded as taxes even though they also serve as an instrument of regulation.
Taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil. 148). If the purpose
is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is
properly called a tax. Such is the case of motor vehicle registration fees. The same provision appears as
Section 59(b) in the Land Transportation Code. It is patent therefrom that the legislators had in mind a
regulatory tax as the law refers to the imposition on the registration, operation or ownership of a motor vehicle
as a "tax or fee." x x x Simply put, if the exaction under Rep. Act 4136 were merely a regulatory fee, the
imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees" such as
the special permit fees for certain types of motor vehicles (Sec. 10) and additional fees for change of
registration (Sec. 11). These are not to be understood as taxes because such fees are very minimal to be
revenue-raising. Thus, they are not mentioned by Sec. 59(b) of the Code as taxes like the motor vehicle
registration fee and chauffeurs license fee. Such fees are to go into the expenditures of the Land
Transportation Commission as provided for in the last proviso of Sec. 61.44 (Underscoring supplied)
The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The levy, no doubt,
was a big burden on the seller or the ultimate consumer. It increased the price of a bag of fertilizer by as much
as five percent.45 A plain reading of the LOI also supports the conclusion that the levy was for revenue
generation. The LOI expressly provided that the levy was imposed "until adequate capital is raised to make
PPI viable."
Taxes are exacted only for a public purpose. The P10 levy is unconstitutional because it was not for a public
purpose. The levy was imposed to give undue benefit to PPI.
24

TAXATION LAW REVIEW

An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public purpose.
They cannot be used for purely private purposes or for the exclusive benefit of private persons.46 The reason
for this is simple. The power to tax exists for the general welfare; hence, implicit in its power is the limitation
that it should be used only for a public purpose. It would be a robbery for the State to tax its citizens and use
the funds generated for a private purpose. As an old United States case bluntly put it: "To lay with one hand,
the power of the government on the property of the citizen, and with the other to bestow it upon favored
individuals to aid private enterprises and build up private fortunes, is nonetheless a robbery because it is done
47
under the forms of law and is called taxation."
The term "public purpose" is not defined. It is an elastic concept that can be hammered to fit modern
standards. Jurisprudence states that "public purpose" should be given a broad interpretation. It does not only
pertain to those purposes which are traditionally viewed as essentially government functions, such as building
roads and delivery of basic services, but also includes those purposes designed to promote social justice.
Thus, public money may now be used for the relocation of illegal settlers, low-cost housing and urban or
agrarian reform.

Republic of the Philippines

Office of the Prime Minister
Manila
LETTER OF UNDERTAKING
May 18, 1985
TO: THE BANKING AND FINANCIAL INSTITUTIONS
LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE "CREDITORS")
OF PLANTERS PRODUCTS, INC. ("PLANTERS")
Gentlemen:

While the categories of what may constitute a public purpose are continually expanding in light of the
expansion of government functions, the inherent requirement that taxes can only be exacted for a public
purpose still stands. Public purpose is the heart of a tax law. When a tax law is only a mask to exact funds
from the public when its true intent is to give undue benefit and advantage to a private enterprise, that law will
not satisfy the requirement of "public purpose."
The purpose of a law is evident from its text or inferable from other secondary sources. Here, We agree with
the RTC and that CA that the levy imposed under LOI No. 1465 was not for a public purpose.
First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company. The purpose is
explicit from Clause 3 of the law, thus:
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a capital
contribution component of not less than P10 per bag. This capital contribution shall be collected until adequate
capital is raised to make PPI viable. Such capital contribution shall be applied by FPA to all domestic sales of
fertilizers in the Philippines.48 (Underscoring supplied)
It is a basic rule of statutory construction that the text of a statute should be given a literal meaning. In this
case, the text of the LOI is plain that the levy was imposed in order to raise capital for PPI. The framers of the
LOI did not even hide the insidious purpose of the law. They were cavalier enough to name PPI as the
ultimate beneficiary of the taxes levied under the LOI. We find it utterly repulsive that a tax law would
expressly name a private company as the ultimate beneficiary of the taxes to be levied from the public. This is
a clear case of crony capitalism.
Second, the LOI provides that the imposition of the P10 levy was conditional and dependent upon PPI
becoming financially "viable." This suggests that the levy was actually imposed to benefit PPI. The LOI notably
does not fix a maximum amount when PPI is deemed financially "viable." Worse, the liability of Fertiphil and
other domestic sellers of fertilizer to pay the levy is made indefinite. They are required to continuously pay the
levy until adequate capital is raised for PPI.
Third, the RTC and the CA held that the levies paid under the LOI were directly remitted and deposited by
FPA to Far East Bank and Trust Company, the depositary bank of PPI.49 This proves that PPI benefited from
the LOI. It is also proves that the main purpose of the law was to give undue benefit and advantage to PPI.
Fourth, the levy was used to pay the corporate debts of PPI. A reading of the Letter of Understanding50 dated
May 18, 1985 signed by then Prime Minister Cesar Virata reveals that PPI was in deep financial problem
because of its huge corporate debts. There were pending petitions for rehabilitation against PPI before the
Securities and Exchange Commission. The government guaranteed payment of PPIs debts to its foreign
creditors. To fund the payment, President Marcos issued LOI No. 1465. The pertinent portions of the letter of
understanding read:

This has reference to Planters which is the principal importer and distributor of fertilizer, pesticides and
agricultural chemicals in the Philippines. As regards Planters, the Philippine Government confirms its
awareness of the following: (1) that Planters has outstanding obligations in foreign currency and/or pesos, to
the Creditors, (2) that Planters is currently experiencing financial difficulties, and (3) that there are presently
pending with the Securities and Exchange Commission of the Philippines a petition filed at Planters own
behest for the suspension of payment of all its obligations, and a separate petition filed by Manufacturers
Hanover Trust Company, Manila Offshore Branch for the appointment of a rehabilitation receiver for Planters.
In connection with the foregoing, the Republic of the Philippines (the "Republic") confirms that it considers and
continues to consider Planters as a major fertilizer distributor. Accordingly, for and in consideration of your
expressed willingness to consider and participate in the effort to rehabilitate Planters, the Republic hereby
manifests its full and unqualified support of the successful rehabilitation and continuing viability of Planters,
and to that end, hereby binds and obligates itself to the creditors and Planters, as follows:
xxxx
2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in its fertilizer
pricing formula a capital recovery component, the proceeds of which will be used initially for the purpose of
funding the unpaid portion of the outstanding capital stock of Planters presently held in trust by Planters
Foundation, Inc. ("Planters Foundation"), which unpaid capital is estimated at approximately P206 million
(subject to validation by Planters and Planters Foundation) such unpaid portion of the outstanding capital
stock of Planters being hereafter referred to as the "Unpaid Capital"), and subsequently for such capital
increases as may be required for the continuing viability of Planters.
xxxx
The capital recovery component shall continue to be charged and collected until payment in full of (a) the
Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c) any carrying cost
accruing from the date hereof on the amounts which may be outstanding from time to time of the Unpaid
Capital and/or the Subsidy Receivables, and (d) the capital increases contemplated in paragraph 2 hereof. For
the purpose of the foregoing clause (c), the "carrying cost" shall be at such rate as will represent the full and
reasonable cost to Planters of servicing its debts, taking into account both its peso and foreign currencydenominated obligations.
REPUBLIC OF THE PHILIPPINES
By:
(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance51
25

TAXATION LAW REVIEW

It is clear from the Letter of Understanding that the levy was imposed precisely to pay the corporate debts of
PPI. We cannot agree with PPI that the levy was imposed to ensure the stability of the fertilizer industry in the
country. The letter of understanding and the plain text of the LOI clearly indicate that the levy was exacted for
the benefit of a private corporation.

The doctrine of operative fact, as an exception to the general rule, only applies as a matter of equity and fair
play.55 It nullifies the effects of an unconstitutional law by recognizing that the existence of a statute prior to a
determination of unconstitutionality is an operative fact and may have consequences which cannot always be
56
ignored. The past cannot always be erased by a new judicial declaration.

All told, the RTC and the CA did not err in holding that the levy imposed under LOI No. 1465 was not for a
public purpose. LOI No. 1465 failed to comply with the public purpose requirement for tax laws.

The doctrine is applicable when a declaration of unconstitutionality will impose an undue burden on those who
have relied on the invalid law. Thus, it was applied to a criminal case when a declaration of unconstitutionality
57
would put the accused in double jeopardy or would put in limbo the acts done by a municipality in reliance
upon a law creating it.58

The LOI is still unconstitutional even if enacted under the police power; it did not promote public interest.
Even if We consider LOI No. 1695 enacted under the police power of the State, it would still be invalid for
failing to comply with the test of "lawful subjects" and "lawful means." Jurisprudence states the test as follows:
(1) the interest of the public generally, as distinguished from those of particular class, requires its exercise;
and (2) the means employed are reasonably necessary for the accomplishment of the purpose and not unduly
52
oppressive upon individuals.
For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote public interest. The
law was enacted to give undue advantage to a private corporation. We quote with approval the CA
ratiocination on this point, thus:
It is upon applying this established tests that We sustain the trial courts holding LOI 1465
unconstitutional.1awphil To be sure, ensuring the continued supply and distribution of fertilizer in the country is
an undertaking imbued with public interest. However, the method by which LOI 1465 sought to achieve this is
by no means a measure that will promote the public welfare. The governments commitment to support the
successful rehabilitation and continued viability of PPI, a private corporation, is an unmistakable attempt to
mask the subject statutes impartiality. There is no way to treat the self-interest of a favored entity, like PPI, as
identical with the general interest of the countrys farmers or even the Filipino people in general. Well to stress,
substantive due process exacts fairness and equal protection disallows distinction where none is needed.
When a statutes public purpose is spoiled by private interest, the use of police power becomes a travesty
which must be struck down for being an arbitrary exercise of government power. To rule in favor of appellant
would contravene the general principle that revenues derived from taxes cannot be used for purely private
purposes or for the exclusive benefit of private individuals. (Underscoring supplied)

Here, We do not find anything iniquitous in ordering PPI to refund the amounts paid by Fertiphil under LOI No.
1465. It unduly benefited from the levy. It was proven during the trial that the levies paid were remitted and
deposited to its bank account. Quite the reverse, it would be inequitable and unjust not to order a refund. To
do so would unjustly enrich PPI at the expense of Fertiphil. Article 22 of the Civil Code explicitly provides that
"every person who, through an act of performance by another comes into possession of something at the
expense of the latter without just or legal ground shall return the same to him." We cannot allow PPI to profit
from an unconstitutional law. Justice and equity dictate that PPI must refund the amounts paid by Fertiphil.
WHEREFORE, the petition is DENIED. The Court of Appeals Decision dated November 28, 2003 is
AFFIRMED.
SO ORDERED.

The general rule is that an unconstitutional law is void; the doctrine of operative fact is inapplicable.
PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is declared unconstitutional. It banks
on the doctrine of operative fact, which provides that an unconstitutional law has an effect before being
declared unconstitutional. PPI wants to retain the levies paid under LOI No. 1465 even if it is subsequently
declared to be unconstitutional.
We cannot agree. It is settled that no question, issue or argument will be entertained on appeal, unless it has
been raised in the court a quo.53 PPI did not raise the applicability of the doctrine of operative fact with the
RTC and the CA. It cannot belatedly raise the issue with Us in order to extricate itself from the dire effects of
an unconstitutional law.
At any rate, We find the doctrine inapplicable. The general rule is that an unconstitutional law is void. It
produces no rights, imposes no duties and affords no protection. It has no legal effect. It is, in legal
contemplation, inoperative as if it has not been passed.54 Being void, Fertiphil is not required to pay the levy.
All levies paid should be refunded in accordance with the general civil code principle against unjust
enrichment. The general rule is supported by Article 7 of the Civil Code, which provides:
ART. 7. Laws are repealed only by subsequent ones, and their violation or non-observance shall not be
excused by disuse or custom or practice to the contrary.
When the courts declare a law to be inconsistent with the Constitution, the former shall be void and the latter
shall govern.
26
TAXATION LAW REVIEW

G. R. No. 119775

October 24, 2003

areas within Camp John Hay and Poro Point for the purpose of turning such places into principal tourist and
recreation spots, as originally envisioned by the parties under their Memorandum of Agreement.

JOHN HAY PEOPLES ALTERNATIVE COALITION, MATEO CARIO FOUNDATION INC., CENTER FOR
ALTERNATIVE SYSTEMS FOUNDATION INC., REGINA VICTORIA A. BENAFIN REPRESENTED AND
JOINED BY HER MOTHER MRS. ELISA BENAFIN, IZABEL M. LUYK REPRESENTED AND JOINED BY
HER MOTHER MRS. REBECCA MOLINA LUYK, KATHERINE PE REPRESENTED AND JOINED BY HER
MOTHER ROSEMARIE G. PE, SOLEDAD S. CAMILO, ALICIA C. PACALSO ALIAS "KEVAB," BETTY I.
STRASSER, RUBY C. GIRON, URSULA C. PEREZ ALIAS "BA-YAY," EDILBERTO T. CLARAVALL,
CARMEN CAROMINA, LILIA G. YARANON, DIANE MONDOC, Petitioners,
vs.
VICTOR LIM, PRESIDENT, BASES CONVERSION DEVELOPMENT AUTHORITY; JOHN HAY PORO
POINT DEVELOPMENT CORPORATION, CITY OF BAGUIO, TUNTEX (B.V.I.) CO. LTD., ASIAWORLD
INTERNATIONALE GROUP, INC., DEPARTMENT OF ENVIRONMENT AND NATURAL RESOURCES,
Respondents.
DECISION
CARPIO MORALES, J.:
By the present petition for prohibition, mandamus and declaratory relief with prayer for a temporary restraining
order (TRO) and/or writ of preliminary injunction, petitioners assail, in the main, the constitutionality of
Presidential Proclamation No. 420, Series of 1994, "CREATING AND DESIGNATING a portion of the area
covered by the former Camp John [Hay] as THE JOHN HAY Special Economic Zone pursuant to R.A. No.
7227."

The Baguio City government meanwhile passed a number of resolutions in response to the actions taken by
BCDA as owner and administrator of Camp John Hay.
7

By Resolution of September 29, 1993, the Sangguniang Panlungsod of Baguio City (the sanggunian) officially
asked BCDA to exclude all the barangays partly or totally located within Camp John Hay from the reach or
coverage of any plan or program for its development.
8

By a subsequent Resolution dated January 19, 1994, the sanggunian sought from BCDA an abdication,
waiver or quitclaim of its ownership over the home lots being occupied by residents of nine (9) barangays
surrounding the military reservation.
Still by another resolution passed on February 21, 1994, the sanggunian adopted and submitted to BCDA a
9
15-point concept for the development of Camp John Hay. The sanggunian's vision expressed, among other
things, a kind of development that affords protection to the environment, the making of a family-oriented type
of tourist destination, priority in employment opportunities for Baguio residents and free access to the base
area, guaranteed participation of the city government in the management and operation of the camp,
exclusion of the previously named nine barangays from the area for development, and liability for local taxes
10
of businesses to be established within the camp.
BCDA, Tuntex and AsiaWorld agreed to some, but rejected or modified the other proposals of the
sanggunian.11 They stressed the need to declare Camp John Hay a SEZ as a condition precedent to its full
development in accordance with the mandate of R.A. No. 7227.12

R.A. No. 7227, AN ACT ACCELERATING THE CONVERSION OF MILITARY RESERVATIONS INTO
OTHER PRODUCTIVE USES, CREATING THE BASES CONVERSION AND DEVELOPMENT AUTHORITY
FOR THIS PURPOSE, PROVIDING FUNDS THEREFOR AND FOR OTHER PURPOSES, otherwise known
as the "Bases Conversion and Development Act of 1992," which was enacted on March 13, 1992, set out the
policy of the government to accelerate the sound and balanced conversion into alternative productive uses of
the former military bases under the 1947 Philippines-United States of America Military Bases Agreement,
namely, the Clark and Subic military reservations as well as their extensions including the John Hay Station
(Camp John Hay or the camp) in the City of Baguio.1

On May 11, 1994, the sanggunian passed a resolution requesting the Mayor to order the determination of
realty taxes which may otherwise be collected from real properties of Camp John Hay.13 The resolution was
intended to intelligently guide the sanggunian in determining its position on whether Camp John Hay be
declared a SEZ, it (the sanggunian) being of the view that such declaration would exempt the camp's property
and the economic activity therein from local or national taxation.

As noted in its title, R.A. No. 7227 created public respondent Bases Conversion and Development Authority2
(BCDA), vesting it with powers pertaining to the multifarious aspects of carrying out the ultimate objective of
utilizing the base areas in accordance with the declared government policy.

More than a month later, however, the sanggunian passed Resolution No. 255, (Series of 1994),14 seeking
and supporting, subject to its concurrence, the issuance by then President Ramos of a presidential
proclamation declaring an area of 288.1 hectares of the camp as a SEZ in accordance with the provisions of
R.A. No. 7227. Together with this resolution was submitted a draft of the proposed proclamation for
consideration by the President.15

R.A. No. 7227 likewise created the Subic Special Economic [and Free Port] Zone (Subic SEZ) the metes and
bounds of which were to be delineated in a proclamation to be issued by the President of the Philippines.3
R.A. No. 7227 granted the Subic SEZ incentives ranging from tax and duty-free importations, exemption of
businesses therein from local and national taxes, to other hallmarks of a liberalized financial and business
climate.4
And R.A. No. 7227 expressly gave authority to the President to create through executive proclamation, subject
to the concurrence of the local government units directly affected, other Special Economic Zones (SEZ) in the
areas covered respectively by the Clark military reservation, the Wallace Air Station in San Fernando, La
Union, and Camp John Hay.5
On August 16, 1993, BCDA entered into a Memorandum of Agreement and Escrow Agreement with private
respondents Tuntex (B.V.I.) Co., Ltd (TUNTEX) and Asiaworld Internationale Group, Inc. (ASIAWORLD),
private corporations registered under the laws of the British Virgin Islands, preparatory to the formation of a
joint venture for the development of Poro Point in La Union and Camp John Hay as premier tourist
destinations and recreation centers. Four months later or on December 16, 1993, BCDA, TUNTEX and
ASIAWORD executed a Joint Venture Agreement6 whereby they bound themselves to put up a joint venture
company known as the Baguio International Development and Management Corporation which would lease

On July 5, 1994 then President Ramos issued Proclamation No. 420,16 the title of which was earlier indicated,
which established a SEZ on a portion of Camp John Hay and which reads as follows:
xxx
Pursuant to the powers vested in me by the law and the resolution of concurrence by the City Council of
Baguio, I, FIDEL V. RAMOS, President of the Philippines, do hereby create and designate a portion of the
area covered by the former John Hay reservation as embraced, covered, and defined by the 1947 Military
Bases Agreement between the Philippines and the United States of America, as amended, as the John Hay
Special Economic Zone, and accordingly order:
SECTION 1. Coverage of John Hay Special Economic Zone. - The John Hay Special Economic Zone shall
cover the area consisting of Two Hundred Eighty Eight and one/tenth (288.1) hectares, more or less, of the
total of Six Hundred Seventy-Seven (677) hectares of the John Hay Reservation, more or less, which have
been surveyed and verified by the Department of Environment and Natural Resources (DENR) as defined by
the following technical description:

27
TAXATION LAW REVIEW

A parcel of land, situated in the City of Baguio, Province of Benguet, Island of Luzon, and particularly
described in survey plans Psd-131102-002639 and Ccs-131102-000030 as approved on 16 August 1993 and
26 August 1993, respectively, by the Department of Environment and Natural Resources, in detail containing:

I. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1990 (sic) IN SO FAR AS IT GRANTS TAX
EXEMPTIONS IS INVALID AND ILLEGAL AS IT IS AN UNCONSTITUTIONAL EXERCISE BY THE
PRESIDENT OF A POWER GRANTED ONLY TO THE LEGISLATURE.

Lot 1, Lot 2, Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 13, Lot 14, Lot 15, and Lot 20 of Ccs-131102-000030

II .PRESIDENTIAL PROCLAMATION NO. 420, IN SO FAR AS IT LIMITS THE POWERS AND INTERFERES
WITH THE AUTONOMY OF THE CITY OF BAGUIO IS INVALID, ILLEGAL AND UNCONSTITUTIONAL.

-andLot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 8, Lot 9, Lot 10, Lot 11, Lot 14, Lot 15, Lot 16, Lot 17, and Lot 18 of Psd131102-002639 being portions of TCT No. T-3812, LRC Rec. No. 87.
With a combined area of TWO HUNDRED EIGHTY EIGHT AND ONE/TENTH HECTARES (288.1 hectares);
Provided that the area consisting of approximately Six and two/tenth (6.2) hectares, more or less, presently
occupied by the VOA and the residence of the Ambassador of the United States, shall be considered as part
of the SEZ only upon turnover of the properties to the government of the Republic of the Philippines.
Sec. 2. Governing Body of the John Hay Special Economic Zone. - Pursuant to Section 15 of R.A. No. 7227,
the Bases Conversion and Development Authority is hereby established as the governing body of the John
Hay Special Economic Zone and, as such, authorized to determine the utilization and disposition of the lands
comprising it, subject to private rights, if any, and in consultation and coordination with the City Government of
Baguio after consultation with its inhabitants, and to promulgate the necessary policies, rules, and regulations
to govern and regulate the zone thru the John Hay Poro Point Development Corporation, which is its
implementing arm for its economic development and optimum utilization.
Sec. 3. Investment Climate in John Hay Special Economic Zone. - Pursuant to Section 5(m) and Section 15 of
R.A. No. 7227, the John Hay Poro Point Development Corporation shall implement all necessary policies,
rules, and regulations governing the zone, including investment incentives, in consultation with pertinent
government departments. Among others, the zone shall have all the applicable incentives of the Special
Economic Zone under Section 12 of R.A. No. 7227 and those applicable incentives granted in the Export
Processing Zones, the Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, and new
investment laws that may hereinafter be enacted.
Sec. 4. Role of Departments, Bureaus, Offices, Agencies and Instrumentalities. - All Heads of departments,
bureaus, offices, agencies, and instrumentalities of the government are hereby directed to give full support to
Bases Conversion and Development Authority and/or its implementing subsidiary or joint venture to facilitate
the necessary approvals to expedite the implementation of various projects of the conversion program.
Sec. 5. Local Authority. - Except as herein provided, the affected local government units shall retain their basic
autonomy and identity.
Sec. 6. Repealing Clause. - All orders, rules, and regulations, or parts thereof, which are inconsistent with the
provisions of this Proclamation, are hereby repealed, amended, or modified accordingly.
Sec. 7. Effectivity. This proclamation shall take effect immediately.
Done in the City of Manila, this 5th day of July, in the year of Our Lord, nineteen hundred and ninety-four.
The issuance of Proclamation No. 420 spawned the present petition17 for prohibition, mandamus and
declaratory relief which was filed on April 25, 1995 challenging, in the main, its constitutionality or validity as
well as the legality of the Memorandum of Agreement and Joint Venture Agreement between public
respondent BCDA and private respondents Tuntex and AsiaWorld.

III. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1994 IS UNCONSTITUTIONAL IN THAT IT

VIOLATES THE RULE THAT ALL TAXES SHOULD BE UNIFORM AND EQUITABLE.
IV. THE MEMORANDUM OF AGREEMENT ENTERED INTO BY AND BETWEEN PRIVATE AND PUBLIC
RESPONDENTS BASES CONVERSION DEVELOPMENT AUTHORITY HAVING BEEN ENTERED INTO
ONLY BY DIRECT NEGOTIATION IS ILLEGAL.
V. THE TERMS AND CONDITIONS OF THE MEMORANDUM OF AGREEMENT ENTERED INTO BY AND
BETWEEN PRIVATE AND PUBLIC RESPONDENT BASES CONVERSION DEVELOPMENT AUTHORITY IS
(sic) ILLEGAL.
VI. THE CONCEPTUAL DEVELOPMENT PLAN OF RESPONDENTS NOT HAVING UNDERGONE
ENVIRONMENTAL IMPACT ASSESSMENT IS BEING ILLEGALLY CONSIDERED WITHOUT A VALID
ENVIRONMENTAL IMPACT ASSESSMENT.
A temporary restraining order and/or writ of preliminary injunction was prayed for to enjoin BCDA, John Hay
Poro Point Development Corporation and the city government from implementing Proclamation No. 420, and
Tuntex and AsiaWorld from proceeding with their plan respecting Camp John Hay's development pursuant to
their Joint Venture Agreement with BCDA.18
Public respondents, by their separate Comments, allege as moot and academic the issues raised by the
petition, the questioned Memorandum of Agreement and Joint Venture Agreement having already been
deemed abandoned by the inaction of the parties thereto prior to the filing of the petition as in fact, by letter of
November 21, 1995, BCDA formally notified Tuntex and AsiaWorld of the revocation of their said
agreements.19
In maintaining the validity of Proclamation No. 420, respondents contend that by extending to the John Hay
SEZ economic incentives similar to those enjoyed by the Subic SEZ which was established under R.A. No.
7227, the proclamation is merely implementing the legislative intent of said law to turn the US military bases
into hubs of business activity or investment. They underscore the point that the government's policy of bases
conversion can not be achieved without extending the same tax exemptions granted by R.A. No. 7227 to
Subic SEZ to other SEZs.
Denying that Proclamation No. 420 is in derogation of the local autonomy of Baguio City or that it is violative of
the constitutional guarantee of equal protection, respondents assail petitioners' lack of standing to bring the
present suit even as taxpayers and in the absence of any actual case or controversy to warrant this Court's
exercise of its power of judicial review over the proclamation.
Finally, respondents seek the outright dismissal of the petition for having been filed in disregard of the
hierarchy of courts and of the doctrine of exhaustion of administrative remedies.
Replying,20 petitioners aver that the doctrine of exhaustion of administrative remedies finds no application
herein since they are invoking the exclusive authority of this Court under Section 21 of R.A. No. 7227 to enjoin
or restrain implementation of projects for conversion of the base areas; that the established exceptions to the
aforesaid doctrine obtain in the present petition; and that they possess the standing to bring the petition which
is a taxpayer's suit.

Petitioners allege as grounds for the allowance of the petition the following:
Public respondents have filed their Rejoinder21 and the parties have filed their respective memoranda.

28
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Before dwelling on the core issues, this Court shall first address the preliminary procedural questions
confronting the petition.
The judicial policy is and has always been that this Court will not entertain direct resort to it except when the
redress sought cannot be obtained in the proper courts, or when exceptional and compelling circumstances
22
warrant availment of a remedy within and calling for the exercise of this Court's primary jurisdiction. Neither
will it entertain an action for declaratory relief, which is partly the nature of this petition, over which it has no
original jurisdiction.
23

Nonetheless, as it is only this Court which has the power under Section 21 of R.A. No. 7227 to enjoin
implementation of projects for the development of the former US military reservations, the issuance of which
injunction petitioners pray for, petitioners' direct filing of the present petition with it is allowed. Over and above
this procedural objection to the present suit, this Court retains full discretionary power to take cognizance of a
24
petition filed directly to it if compelling reasons, or the nature and importance of the issues raised, warrant.
Besides, remanding the case to the lower courts now would just unduly prolong adjudication of the issues.
The transformation of a portion of the area covered by Camp John Hay into a SEZ is not simply a reclassification of an area, a mere ascription of a status to a place. It involves turning the former US military
reservation into a focal point for investments by both local and foreign entities. It is to be made a site of
vigorous business activity, ultimately serving as a spur to the country's long awaited economic growth. For, as
R.A. No. 7227 unequivocally declares, it is the government's policy to enhance the benefits to be derived from
the base areas in order to promote the economic and social development of Central Luzon in particular and
25
the country in general. Like the Subic SEZ, the John Hay SEZ should also be turned into a "self-sustaining,
industrial, commercial, financial and investment center."26
More than the economic interests at stake, the development of Camp John Hay as well as of the other base
areas unquestionably has critical links to a host of environmental and social concerns. Whatever use to which
these lands will be devoted will set a chain of events that can affect one way or another the social and
economic way of life of the communities where the bases are located, and ultimately the nation in general.

An actual case or controversy refers to an existing case or controversy that is appropriate or ripe for
determination, not conjectural or anticipatory.30 The controversy needs to be definite and concrete, bearing
31
upon the legal relations of parties who are pitted against each other due to their adverse legal interests.
There is in the present case a real clash of interests and rights between petitioners and respondents arising
from the issuance of a presidential proclamation that converts a portion of the area covered by Camp John
Hay into a SEZ, the former insisting that such proclamation contains unconstitutional provisions, the latter
claiming otherwise.
R.A. No. 7227 expressly requires the concurrence of the affected local government units to the creation of
SEZs out of all the base areas in the country.32 The grant by the law on local government units of the right of
concurrence on the bases' conversion is equivalent to vesting a legal standing on them, for it is in effect a
recognition of the real interests that communities nearby or surrounding a particular base area have in its
utilization. Thus, the interest of petitioners, being inhabitants of Baguio, in assailing the legality of
Proclamation No. 420, is personal and substantial such that they have sustained or will sustain direct injury as
33
a result of the government act being challenged. Theirs is a material interest, an interest in issue affected by
34
the proclamation and not merely an interest in the question involved or an incidental interest, for what is at
stake in the enforcement of Proclamation No. 420 is the very economic and social existence of the people of
Baguio City.
Petitioners' locus standi parallels that of the petitioner and other residents of Bataan, specially of the town of
Limay, in Garcia v. Board of Investments35 where this Court characterized their interest in the establishment of
a petrochemical plant in their place as actual, real, vital and legal, for it would affect not only their economic
life but even the air they breathe.
Moreover, petitioners Edilberto T. Claravall and Lilia G. Yaranon were duly elected councilors of Baguio at the
time, engaged in the local governance of Baguio City and whose duties included deciding for and on behalf of
their constituents the question of whether to concur with the declaration of a portion of the area covered by
Camp John Hay as a SEZ. Certainly then, petitioners Claravall and Yaranon, as city officials who voted
against36 the sanggunian Resolution No. 255 (Series of 1994) supporting the issuance of the now challenged
Proclamation No. 420, have legal standing to bring the present petition.

Underscoring the fragility of Baguio City's ecology with its problem on the scarcity of its water supply,
petitioners point out that the local and national government are faced with the challenge of how to provide for
an ecologically sustainable, environmentally sound, equitable transition for the city in the wake of Camp John
Hay's reversion to the mass of government property.27 But that is why R.A. No. 7227 emphasizes the "sound
and balanced conversion of the Clark and Subic military reservations and their extensions consistent with
ecological and environmental standards."28 It cannot thus be gainsaid that the matter of conversion of the US
bases into SEZs, in this case Camp John Hay, assumes importance of a national magnitude.

That there is herein a dispute on legal rights and interests is thus beyond doubt. The mootness of the issues
concerning the questioned agreements between public and private respondents is of no moment.

Convinced then that the present petition embodies crucial issues, this Court assumes jurisdiction over the
petition.

As to the third and fourth requisites of a judicial inquiry, there is likewise no question that they have been
complied with in the case at bar. This is an action filed purposely to bring forth constitutional issues, ruling on
which this Court must take up. Besides, respondents never raised issues with respect to these requisites,
hence, they are deemed waived.

As far as the questioned agreements between BCDA and Tuntex and AsiaWorld are concerned, the legal
questions being raised thereon by petitioners have indeed been rendered moot and academic by the
revocation of such agreements. There are, however, other issues posed by the petition, those which center on
the constitutionality of Proclamation No. 420, which have not been mooted by the said supervening event
upon application of the rules for the judicial scrutiny of constitutional cases. The issues boil down to:
(1)
(2)
(3)

"By the mere enactment of the questioned law or the approval of the challenged act, the dispute is deemed to
have ripened into a judicial controversy even without any other overt act. Indeed, even a singular violation of
the Constitution and/or the law is enough to awaken judicial duty."37

Having cleared the way for judicial review, the constitutionality of Proclamation No. 420, as framed in the
second and third issues above, must now be addressed squarely.

The second issue refers to petitioners' objection against the creation by Proclamation No. 420 of a regime of
tax issues;
exemption within the John Hay SEZ. Petitioners argue that nowhere in R. A. No. 7227 is there a grant of
Whether the present petition complies with the requirements for this Court's exercise of jurisdiction over constitutional
tax exemption to SEZs yet to be established in base areas, unlike the grant under Section 12 thereof of tax
Whether Proclamation No. 420 is constitutional by providing for national and local tax exemption within and granting other economic incentives
exemption and investment incentives to the therein established Subic SEZ. The grant of tax exemption to the
to the John Hay Special Economic Zone; and
John Hay SEZ, petitioners conclude, thus contravenes Article VI, Section 28 (4) of the Constitution which
Whether Proclamation No. 420 is constitutional for limiting or interfering with the local autonomy of Baguio City;
provides that "No law granting any tax exemption shall be passed without the concurrence of a majority of all
the members of Congress."

It is settled that when questions of constitutional significance are raised, the court can exercise its power of
judicial review only if the following requisites are present: (1) the existence of an actual and appropriate case;
(2) a personal and substantial interest of the party raising the constitutional question; (3) the exercise of
judicial review is pleaded at the earliest opportunity; and (4) the constitutional question is the lis mota of the
case.29

Section 3 of Proclamation No. 420, the challenged provision, reads:

Sec. 3. Investment Climate in John Hay Special Economic Zone. - Pursuant to Section 5(m) and Section 15 of
R.A. No. 7227, the John Hay Poro Point Development Corporation shall implement all necessary policies,
29

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rules, and regulations governing the zone, including investment incentives, in consultation with pertinent
government departments. Among others, the zone shall have all the applicable incentives of the Special
Economic Zone under Section 12 of R.A. No. 7227 and those applicable incentives granted in the
Export Processing Zones, the Omnibus Investment Code of 1987, the Foreign Investment Act of 1991,
and new investment laws that may hereinafter be enacted. (Emphasis and underscoring supplied)

The deliberations of the Senate confirm the exclusivity to Subic SEZ of the tax and investment privileges
accorded it under the law, as the following exchanges between our lawmakers show during the second
reading of the precursor bill of R.A. No. 7227 with respect to the investment policies that would govern Subic
SEZ which are now embodied in the aforesaid Section 12 thereof:
xxx

Upon the other hand, Section 12 of R.A. No. 7227 provides:

xxx
(a) Within the framework and subject to the mandate and limitations of the Constitution and the pertinent
provisions of the Local Government Code, the Subic Special Economic Zone shall be developed into a selfsustaining, industrial, commercial, financial and investment center to generate employment opportunities in
and around the zone and to attract and promote productive foreign investments;

Senator Maceda: This is what I was talking about. We get into problems here because all of these following
policies are centered around the concept of free port. And in the main paragraph above, we have declared
both Clark and Subic as special economic zones, subject to these policies which are, in effect, a free-port
arrangement.
Senator Angara: The Gentleman is absolutely correct, Mr. President. So we must confine these policies only
to Subic.

b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory
ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special
Economic Zone, as well as provide incentives such as tax and duty free importations of raw materials, capital
and equipment. However, exportation or removal of goods from the territory of the Subic Special Economic
Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the
Customs and Tariff Code and other relevant tax laws of the Philippines;

May I withdraw then my amendment, and instead provide that "THE SPECIAL ECONOMIC ZONE OF SUBIC
SHALL BE ESTABLISHED IN ACCORDANCE WITH THE FOLLOWING POLICIES." Subject to style, Mr.
President.

(c) The provisions of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and
national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent
(3%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone
shall be remitted to the National Government, one percent (1%) each to the local government units affected by
the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby
established a development fund of one percent (1%) of the gross income earned by all businesses and
enterprises within the Subic Special Economic Zone to be utilized for the Municipality of Subic, and other
municipalities contiguous to be base areas. In case of conflict between national and local laws with respect to
tax exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the latter;

Senator Paterno: Mr. President.

(d) No exchange control policy shall be applied and free markets for foreign exchange, gold, securities and
futures shall be allowed and maintained in the Subic Special Economic Zone;
(e) The Central Bank, through the Monetary Board, shall supervise and regulate the operations of banks and
other financial institutions within the Subic Special Economic Zone;
(f) Banking and Finance shall be liberalized with the establishment of foreign currency depository units of local
commercial banks and offshore banking units of foreign banks with minimum Central Bank regulation;
(g) Any investor within the Subic Special Economic Zone whose continuing investment shall not be less than
Two Hundred fifty thousand dollars ($250,000), his/her spouse and dependent children under twenty-one (21)
years of age, shall be granted permanent resident status within the Subic Special Economic Zone. They shall
have freedom of ingress and egress to and from the Subic Special Economic Zone without any need of
special authorization from the Bureau of Immigration and Deportation. The Subic Bay Metropolitan Authority
referred to in Section 13 of this Act may also issue working visas renewable every two (2) years to foreign
executives and other aliens possessing highly-technical skills which no Filipino within the Subic Special
Economic Zone possesses, as certified by the Department of Labor and Employment. The names of aliens
granted permanent residence status and working visas by the Subic Bay Metropolitan Authority shall be
reported to the Bureau of Immigration and Deportation within thirty (30) days after issuance thereof;
x x x (Emphasis supplied)

Thus, it is very clear that these principles and policies are applicable only to Subic as a free port.

The President: Senator Paterno is recognized.

Senator Paterno: I take it that the amendment suggested by Senator Angara would then prevent the
establishment of other special economic zones observing these policies.
Senator Angara: No, Mr. President, because during our short caucus, Senator Laurel raised the point that if
we give this delegation to the President to establish other economic zones, that may be an unwarranted
delegation.
So we agreed that we will simply limit the definition of powers and description of the zone to Subic, but that
does not exclude the possibility of creating other economic zones within the baselands.
Senator Paterno: But if that amendment is followed, no other special economic zone may be created under
authority of this particular bill. Is that correct, Mr. President?
Senator Angara: Under this specific provision, yes, Mr. President. This provision now will be confined only to
Subic.38
x x x (Underscoring supplied).
As gathered from the earlier-quoted Section 12 of R.A. No. 7227, the privileges given to Subic SEZ consist
principally of exemption from tariff or customs duties, national and local taxes of business entities therein
(paragraphs (b) and (c)), free market and trade of specified goods or properties (paragraph d), liberalized
banking and finance (paragraph f), and relaxed immigration rules for foreign investors (paragraph g). Yet,
apart from these, Proclamation No. 420 also makes available to the John Hay SEZ benefits existing in other
laws such as the privilege of export processing zone-based businesses of importing capital equipment and
raw materials free from taxes, duties and other restrictions;39 tax and duty exemptions, tax holiday, tax credit,
and other incentives under the Omnibus Investments Code of 1987;40 and the applicability to the subject zone
of rules governing foreign investments in the Philippines.41

It is clear that under Section 12 of R.A. No. 7227 it is only the Subic SEZ which was granted by Congress with
tax exemption, investment incentives and the like. There is no express extension of the aforesaid benefits to
other SEZs still to be created at the time via presidential proclamation.
30
TAXATION LAW REVIEW

While the grant of economic incentives may be essential to the creation and success of SEZs, free trade
zones and the like, the grant thereof to the John Hay SEZ cannot be sustained. The incentives under R.A. No.
7227 are exclusive only to the Subic SEZ, hence, the extension of the same to the John Hay SEZ finds no
support therein. Neither does the same grant of privileges to the John Hay SEZ find support in the other laws
specified under Section 3 of Proclamation No. 420, which laws were already extant before the issuance of the
proclamation or the enactment of R.A. No. 7227.
More importantly, the nature of most of the assailed privileges is one of tax exemption. It is the legislature,
unless limited by a provision of the state constitution, that has full power to exempt any person or corporation
or class of property from taxation, its power to exempt being as broad as its power to tax.42 Other than
43
Congress, the Constitution may itself provide for specific tax exemptions, or local governments may pass
44
ordinances on exemption only from local taxes.
The challenged grant of tax exemption would circumvent the Constitution's imposition that a law granting any
tax exemption must have the concurrence of a majority of all the members of Congress.45 In the same vein,
the other kinds of privileges extended to the John Hay SEZ are by tradition and usage for Congress to
legislate upon.
Contrary to public respondents' suggestions, the claimed statutory exemption of the John Hay SEZ from
taxation should be manifest and unmistakable from the language of the law on which it is based; it must be
46
expressly granted in a statute stated in a language too clear to be mistaken. Tax exemption cannot be
implied as it must be categorically and unmistakably expressed.47
If it were the intent of the legislature to grant to the John Hay SEZ the same tax exemption and incentives
given to the Subic SEZ, it would have so expressly provided in the R.A. No. 7227.

agency of the John Hay SEZ, the law merely emphasizes or reiterates the statutory role or functions it has
been granted.
The unconstitutionality of the grant of tax immunity and financial incentives as contained in the second
sentence of Section 3 of Proclamation No. 420 notwithstanding, the entire assailed proclamation cannot be
declared unconstitutional, the other parts thereof not being repugnant to law or the Constitution. The
delineation and declaration of a portion of the area covered by Camp John Hay as a SEZ was well within the
51
powers of the President to do so by means of a proclamation. The requisite prior concurrence by the Baguio
City government to such proclamation appears to have been given in the form of a duly enacted resolution by
the sanggunian. The other provisions of the proclamation had been proven to be consistent with R.A. No.
7227.
Where part of a statute is void as contrary to the Constitution, while another part is valid, the valid portion, if
52
separable from the invalid, may stand and be enforced. This Court finds that the other provisions in
Proclamation No. 420 converting a delineated portion of Camp John Hay into the John Hay SEZ are separable
from the invalid second sentence of Section 3 thereof, hence they stand.
WHEREFORE, the second sentence of Section 3 of Proclamation No. 420 is hereby declared NULL AND
VOID and is accordingly declared of no legal force and effect. Public respondents are hereby enjoined from
implementing the aforesaid void provision.
Proclamation No. 420, without the invalidated portion, remains valid and effective.
SO ORDERED.

This Court no doubt can void an act or policy of the political departments of the government on either of two
grounds-infringement of the Constitution or grave abuse of discretion.48
This Court then declares that the grant by Proclamation No. 420 of tax exemption and other privileges to the
John Hay SEZ is void for being violative of the Constitution. This renders it unnecessary to still dwell on
petitioners' claim that the same grant violates the equal protection guarantee.
With respect to the final issue raised by petitioners -- that Proclamation No. 420 is unconstitutional for being in
derogation of Baguio City's local autonomy, objection is specifically mounted against Section 2 thereof in
which BCDA is set up as the governing body of the John Hay SEZ.49
Petitioners argue that there is no authority of the President to subject the John Hay SEZ to the governance of
BCDA which has just oversight functions over SEZ; and that to do so is to diminish the city government's
power over an area within its jurisdiction, hence, Proclamation No. 420 unlawfully gives the President power of
control over the local government instead of just mere supervision.
Petitioners' arguments are bereft of merit. Under R.A. No. 7227, the BCDA is entrusted with, among other
50
things, the following purpose:
xxx
(a) To own, hold and/or administer the military reservations of John Hay Air Station, Wallace Air Station,
O'Donnell Transmitter Station, San Miguel Naval Communications Station, Mt. Sta. Rita Station (Hermosa,
Bataan) and those portions of Metro Manila Camps which may be transferred to it by the President;
x x x (Underscoring supplied)
With such broad rights of ownership and administration vested in BCDA over Camp John Hay, BCDA virtually
has control over it, subject to certain limitations provided for by law. By designating BCDA as the governing
31
TAXATION LAW REVIEW

G.R. No. 188550

11

August 19, 2013

DEUTSCHE BANK AG MANILA BRANCH, PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
SERENO, CJ.:
This is a Petition for Review1 filed by Deutsche Bank AG Manila Branch (petitioner) under Rule 45 of the 1997
2
Rules of Civil Procedure assailing the Court of Tax Appeals En Banc (CTA En Banc) Decision dated 29 May
3
2009 and Resolution dated 1 July 2009 in C.T.A. EB No. 456.

168531 filed by Mirant for failure to sufficiently show any reversible error in the assailed judgment. The CTA
En Banc ruled that once a case has been decided in one way, any other case involving exactly the same point
at issue should be decided in the same manner.
The court likewise ruled that the 15-day rule for tax treaty relief application under RMO No. 1-2000 cannot be
12
relaxed for petitioner, unlike in CBK Power Company Limited v. Commissioner of Internal Revenue. In that
case, the rule was relaxed and the claim for refund of excess final withholding taxes was partially granted.
While it issued a ruling to CBK Power Company Limited after the payment of withholding taxes, the ITAD did
not issue any ruling to petitioner even if it filed a request for confirmation on 4 October 2005 that the
remittance of branch profits to DB Germany is subject to a preferential tax rate of 10% pursuant to Article 10 of
the RP-Germany Tax Treaty.
ISSUE

THE FACTS
4

In accordance with Section 28(A)(5) of the National Internal Revenue Code (NIRC) of 1997, petitioner
withheld and remitted to respondent on 21 October 2003 the amount of PHP 67,688,553.51, which
represented the fifteen percent (15%) branch profit remittance tax (BPRT) on its regular banking unit (RBU)
5
net income remitted to Deutsche Bank Germany (DB Germany) for 2002 and prior taxable years.
Believing that it made an overpayment of the BPRT, petitioner filed with the BIR Large Taxpayers Assessment
and Investigation Division on 4 October 2005 an administrative claim for refund or issuance of its tax credit
certificate in the total amount of PHP 22,562,851.17. On the same date, petitioner requested from the
International Tax Affairs Division (ITAD) a confirmation of its entitlement to the preferential tax rate of 10%
under the RP-Germany Tax Treaty.6
Alleging the inaction of the BIR on its administrative claim, petitioner filed a Petition for Review7 with the CTA
on 18 October 2005. Petitioner reiterated its claim for the refund or issuance of its tax credit certificate for the
amount of PHP 22,562,851.17 representing the alleged excess BPRT paid on branch profits remittance to DB
Germany.

This Court is now confronted with the issue of whether the failure to strictly comply with RMO No. 1-2000 will
deprive persons or corporations of the benefit of a tax treaty.
THE COURTS RULING
The Petition is meritorious.
Under Section 28(A)(5) of the NIRC, any profit remitted to its head office shall be subject to a tax of 15%
based on the total profits applied for or earmarked for remittance without any deduction of the tax component.
However, petitioner invokes paragraph 6, Article 10 of the RP-Germany Tax Treaty, which provides that where
a resident of the Federal Republic of Germany has a branch in the Republic of the Philippines, this branch
may be subjected to the branch profits remittance tax withheld at source in accordance with Philippine law but
shall not exceed 10% of the gross amount of the profits remitted by that branch to the head office.
By virtue of the RP-Germany Tax Treaty, we are bound to extend to a branch in the Philippines, remitting to its
head office in Germany, the benefit of a preferential rate equivalent to 10% BPRT.

THE CTA SECOND DIVISION RULING8

After trial on the merits, the CTA Second Division found that petitioner indeed paid the total amount of PHP
67,688,553.51 representing the 15% BPRT on its RBU profits amounting to PHP 451,257,023.29 for 2002 and
prior taxable years. Records also disclose that for the year 2003, petitioner remitted to DB Germany the
amount of EURO 5,174,847.38 (or PHP 330,175,961.88 at the exchange rate of PHP 63.804:1 EURO), which
is net of the 15% BPRT.
However, the claim of petitioner for a refund was denied on the ground that the application for a tax treaty
relief was not filed with ITAD prior to the payment by the former of its BPRT and actual remittance of its branch
profits to DB Germany, or prior to its availment of the preferential rate of ten percent (10%) under the RPGermany Tax Treaty provision. The court a quo held that petitioner violated the fifteen (15) day period
mandated under Section III paragraph (2) of Revenue Memorandum Order (RMO) No. 1-2000.
Further, the CTA Second Division relied on Mirant (Philippines) Operations Corporation (formerly Southern
Energy Asia-Pacific Operations [Phils.], Inc.) v. Commissioner of Internal Revenue9 (Mirant) where the CTA
En Banc ruled that before the benefits of the tax treaty may be extended to a foreign corporation wishing to
avail itself thereof, the latter should first invoke the provisions of the tax treaty and prove that they indeed
apply to the corporation.
THE CTA EN BANC RULING10
The CTA En Banc affirmed the CTA Second Divisions Decision dated 29 August 2008 and Resolution dated
14 January 2009. Citing Mirant, the CTA En Banc held that a ruling from the ITAD of the BIR must be secured
prior to the availment of a preferential tax rate under a tax treaty. Applying the principle of stare decisis et non
quieta movere, the CTA En Banc took into consideration that this Court had denied the Petition in G.R. No.

On the other hand, the BIR issued RMO No. 1-2000, which requires that any availment of the tax treaty relief
must be preceded by an application with ITAD at least 15 days before the transaction. The Order was issued
to streamline the processing of the application of tax treaty relief in order to improve efficiency and service to
the taxpayers. Further, it also aims to prevent the consequences of an erroneous interpretation and/or
application of the treaty provisions (i.e., filing a claim for a tax refund/credit for the overpayment of taxes or for
deficiency tax liabilities for underpayment).13
The crux of the controversy lies in the implementation of RMO No. 1-2000.
Petitioner argues that, considering that it has met all the conditions under Article 10 of the RP-Germany Tax
Treaty, the CTA erred in denying its claim solely on the basis of RMO No. 1-2000. The filing of a tax treaty
relief application is not a condition precedent to the availment of a preferential tax rate. Further, petitioner
posits that, contrary to the ruling of the CTA, Mirant is not a binding judicial precedent to deny a claim for
refund solely on the basis of noncompliance with RMO No. 1-2000.
Respondent counters that the requirement of prior application under RMO No. 1-2000 is mandatory in
character. RMO No. 1-2000 was issued pursuant to the unquestioned authority of the Secretary of Finance to
promulgate rules and regulations for the effective implementation of the NIRC. Thus, courts cannot ignore
administrative issuances which partakes the nature of a statute and have in their favor a presumption of
legality.
The CTA ruled that prior application for a tax treaty relief is mandatory, and noncompliance with this
prerequisite is fatal to the taxpayers availment of the preferential tax rate.
We disagree.
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A minute resolution is not a binding precedent

At the outset, this Courts minute resolution on Mirant is not a binding precedent. The Court has clarified this
14
matter in Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue as follows:
It is true that, although contained in a minute resolution, our dismissal of the petition was a disposition of the
merits of the case. When we dismissed the petition, we effectively affirmed the CA ruling being questioned. As
a result, our ruling in that case has already become final. When a minute resolution denies or dismisses a
petition for failure to comply with formal and substantive requirements, the challenged decision, together with
its findings of fact and legal conclusions, are deemed sustained. But what is its effect on other cases?
With respect to the same subject matter and the same issues concerning the same parties, it constitutes res
judicata. However, if other parties or another subject matter (even with the same parties and issues) is
involved, the minute resolution is not binding precedent. Thus, in CIR v. Baier-Nickel, the Court noted that a
previous case, CIR v. Baier-Nickel involving the same parties and the same issues, was previously disposed
of by the Court thru a minute resolution dated February 17, 2003 sustaining the ruling of the CA. Nonetheless,
the Court ruled that the previous case "ha(d) no bearing" on the latter case because the two cases involved
different subject matters as they were concerned with the taxable income of different taxable years.
Besides, there are substantial, not simply formal, distinctions between a minute resolution and a decision. The
constitutional requirement under the first paragraph of Section 14, Article VIII of the Constitution that the facts
and the law on which the judgment is based must be expressed clearly and distinctly applies only to decisions,
not to minute resolutions. A minute resolution is signed only by the clerk of court by authority of the justices,
unlike a decision. It does not require the certification of the Chief Justice. Moreover, unlike decisions, minute
resolutions are not published in the Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII
speaks of a decision. Indeed, as a rule, this Court lays down doctrines or principles of law which constitute
binding precedent in a decision duly signed by the members of the Court and certified by the Chief Justice.
(Emphasis supplied)
Even if we had affirmed the CTA in Mirant, the doctrine laid down in that Decision cannot bind this Court in
cases of a similar nature. There are differences in parties, taxes, taxable periods, and treaties involved; more
importantly, the disposition of that case was made only through a minute resolution.
Tax Treaty vs. RMO No. 1-2000
Our Constitution provides for adherence to the general principles of international law as part of the law of the
land.15 The time-honored international principle of pacta sunt servanda demands the performance in good faith
of treaty obligations on the part of the states that enter into the agreement. Every treaty in force is binding
upon the parties, and obligations under the treaty must be performed by them in good faith.16 More
importantly, treaties have the force and effect of law in this jurisdiction.17
Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and, in turn,
help the taxpayer avoid simultaneous taxations in two different jurisdictions."18 CIR v. S.C. Johnson and Son,
Inc. further clarifies that "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 to 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
economies. 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." 19

under international agreements. More so, when the RP-Germany Tax Treaty does not provide for any prerequisite for the availment of the benefits under said agreement.
Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which would indicate a deprivation of
entitlement to a tax treaty relief for failure to comply with the 15-day period. We recognize the clear intention of
the BIR in implementing RMO No. 1-2000, but the CTAs outright denial of a tax treaty relief for failure to
strictly comply with the prescribed period is not in harmony with the objectives of the contracting state to
ensure that the benefits granted under tax treaties are enjoyed by duly entitled persons or corporations.
Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as
required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute a
violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax
relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance would
impair the value of the tax treaty. At most, the application for a tax treaty relief from the BIR should merely
operate to confirm the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 12000.1wphi1 Logically, noncompliance with tax treaties has negative implications on international relations,
and unduly discourages foreign investors. While the consequences sought to be prevented by RMO No. 12000 involve an administrative procedure, these may be remedied through other system management
processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those who are entitled to the
benefit of a treaty for failure to strictly comply with an administrative issuance requiring prior application for tax
treaty relief.
Prior Application vs. Claim for Refund
Again, RMO No. 1-2000 was implemented to obviate any erroneous interpretation and/or application of the
treaty provisions. The objective of the BIR is to forestall assessments against corporations who erroneously
availed themselves of the benefits of the tax treaty but are not legally entitled thereto, as well as to save such
investors from the tedious process of claims for a refund due to an inaccurate application of the tax treaty
provisions. However, as earlier discussed, noncompliance with the 15-day period for prior application should
not operate to automatically divest entitlement to the tax treaty relief especially in claims for refund.
The underlying principle of prior application with the BIR becomes moot in refund cases, such as the present
case, where the very basis of the claim is erroneous or there is excessive payment arising from non-availment
of a tax treaty relief at the first instance. In this case, petitioner should not be faulted for not complying with
RMO No. 1-2000 prior to the transaction. It could not have applied for a tax treaty relief within the period
prescribed, or 15 days prior to the payment of its BPRT, precisely because it erroneously paid the BPRT not
on the basis of the preferential tax rate under
the RP-Germany Tax Treaty, but on the regular rate as prescribed by the NIRC. Hence, the prior application
requirement becomes illogical. Therefore, the fact that petitioner invoked the provisions of the RP-Germany
Tax Treaty when it requested for a confirmation from the ITAD before filing an administrative claim for a refund
should be deemed substantial compliance with RMO No. 1-2000.
Corollary thereto, Section 22921 of the NIRC provides the taxpayer a remedy for tax recovery when there has
been an erroneous payment of tax.1wphi1 The outright denial of petitioners claim for a refund, on the sole
ground of failure to apply for a tax treaty relief prior to the payment of the BPRT, would defeat the purpose of
Section 229.
Petitioner is entitled to a refund

Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of international juridical
double taxation, which is why they are also known as double tax treaty or double tax agreements.
"A state that has contracted valid international obligations is bound to make in its legislations those
modifications that may be necessary to ensure the fulfillment of the obligations undertaken." 20 Thus, laws and
issuances must ensure that the reliefs granted under tax treaties are accorded to the parties entitled thereto.
The BIR must not impose additional requirements that would negate the availment of the reliefs provided for

It is significant to emphasize that petitioner applied though belatedly for a tax treaty relief, in substantial
compliance with RMO No. 1-2000. A ruling by the BIR would have confirmed whether petitioner was entitled to
the lower rate of 10% BPRT pursuant to the RP-Germany Tax Treaty.
Nevertheless, even without the BIR ruling, the CTA Second Division found as follows:
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Based on the evidence presented, both documentary and testimonial, petitioner was able to establish the
following facts:
a. That petitioner is a branch office in the Philippines of Deutsche Bank AG, a corporation
organized and existing under the laws of the Federal Republic of Germany;
b. That on October 21, 2003, it filed its Monthly Remittance Return of Final Income Taxes Withheld
under BIR Form No. 1601-F and remitted the amount of P67,688,553.51 as branch profits
remittance tax with the BIR; and
c. That on October 29, 2003, the Bangko Sentral ng Pilipinas having issued a clearance, petitioner
remitted to Frankfurt Head Office the amount of EUR5,174,847.38 (or P330,175,961.88 at 63.804
Peso/Euro) representing its 2002 profits remittance.22
The amount of PHP 67,688,553.51 paid by petitioner represented the 15% BPRT on its RBU net income, due
23
for remittance to DB Germany amounting to PHP 451,257,023.29 for 2002 and prior taxable years.
Likewise, both the administrative and the judicial actions were filed within the two-year prescriptive period
24
pursuant to Section 229 of the NIRC.
Clearly, there is no reason to deprive petitioner of the benefit of a preferential tax rate of 10% BPRT in
accordance with the RP-Germany Tax Treaty.
Petitioner is liable to pay only the amount of PHP 45,125,702.34 on its RBU net income amounting to PHP
451,257,023.29 for 2002 and prior taxable years, applying the 10% BPRT. Thus, it is proper to grant petitioner
a refund ofthe difference between the PHP 67,688,553.51 (15% BPRT) and PHP 45,125,702.34 (10% BPRT)
or a total of PHP 22,562,851.17.
WHEREFORE, premises considered, the instant Petition is GRANTED. Accordingly, the Court of Tax Appeals
En Banc Decision dated 29 May 2009 and Resolution dated 1 July 2009 are REVERSED and SET ASIDE. A
new one is hereby entered ordering respondent Commissioner of Internal Revenue to refund or issue a tax
credit certificate in favor of petitioner Deutsche Bank AG Manila Branch the amount of TWENTY TWO
MILLION FIVE HUNDRED SIXTY TWO THOUSAND EIGHT HUNDRED FIFTY ONE PESOS AND
SEVENTEEN CENTAVOS (PHP 22,562,851.17), Philippine currency, representing the erroneously paid
BPRT for 2002 and prior taxable years.
SO ORDERED.

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