HILADO V.

CIR, 100 PHIL 288 (1956)

FACTS: Petitioner Emilio Hilado filed his income tax return for
1951 with the treasurer of Bacolod City. He claimed that the
amount P12, 837.65 was a deductible item from his gross
income pursuant to General Circular No. V-123 issued by the
CIR. Later on, the Secretary of Finance, through the CIR,
issued General Circular No. V-139, which revoked and
declared void, General Circular No. V-123. It laid down the rule
that the losses of property which occurred during the period of
the World War II from fires, storms, shipwreck or other
casualty or from robbery, theft, or embezzlement are
deductible in the year of actual loss or destruction of said
property. Thus, the amount of P 12, 837.65 was disallowed as
a deduction from the gross income of petitioner for 1951 and
the CIR demanded from him the payment of the sum of
P3,546 as deficiency income tax for the said year.
Petitioner claimed in his 1951 income tax return that the
deduction of the sum of P12, 837.65 is a loss consisting in the
portion of his war damage claim which had been duly
approved by the Philippine War Damage Commission under
the Philippine Rehabilitation Act of 1946 but which was not
paid and will not be paid until the US congress should make
further appropriation. He claims that the said amount
represents a business asset within the meaning of said Act
which he is entitled to deduct as a loss in his return for 1951.
Petitioner also argues that during the last war and as a
consequence of enemy occupation in the Philippines, the
internal revenue laws were at the time unenforceable.
ISSUE: WON the contentions Hilado can claim compensation
for destruction of his property during the war under the laws in
effect that time.

Internal revenue laws are not political in nature and as

such were continued in force during the period of enemy
occupation and in effect were actually enforced by the
occupation government. Income tax returns were filed
during that period and income tax payment were effected
and considered valid and legal. Such tax laws are deemed
to be the laws of the occupied territory and not of the
occupying enemy. Furthermore, it is a legal maxim, that
except that of a political nature, Law once established
continues until changed by some competent legislative power.
It is not changed merely by change of sovereignty.
The Court declared that said amount cannot be considered as
a business asset which can be deducted as a loss in
contemplation of law because its collection is not enforceable
as a matter of right, but is dependent merely upon the
generosity and magnanimity of the US government. As of the
end of 1945, there was absolutely no law under which
petitioner could claim compensation for the destruction of his
properties during the battle for the liberation of the Philippines.
And under the Philippine Rehabilitation Act of 1946, the
payments of claims by the War Damage Commission merely
depended upon its discretion to be exercised in the manner it
may see fir, but the non-payment of which cannot give rise to
any enforceable right.
An administrative officer cannot change a law enacted by
Congress. A regulation that is merely an interpretation of
the statute when once determined to have been erroneous
becomes nullity. An erroneous construction of the law by
the Treasury Department or the CIR does not preclude or
estop the government from collecting tax which is legally
due.

HELD: No

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CHAMBER OF REAL ESTATE AND BUILDERS

ASSOCIATIONS, INC., V. ROMULO, ET AL, G.R. NO
160756 (2010)
FACTS: Petitioner Chamber of Real Estate and Builders
Associations, Inc. (CREBA), an association of real estate
developers and builders in the Philippines, questioned the
validity of Section 27(E) of the Tax Code which imposes the
minimum corporate income tax (MCIT) on corporations. Under
the Tax Code, a corporation can become subject to the MCIT
at the rate of 2% of gross income, beginning on the 4thtaxable
year immediately following the year in which it commenced its
business operations, when such MCIT is greater than the
normal corporate income tax. If the regular income tax is
higher than the MCIT, the corporation does not pay the
MCIT.CREBA argued, among others, that the use of gross
income as MCIT base amounts to a confiscation of capital
because gross income, unlike net income, is not realized gain.
CREBA also sought to invalidate the provisions of RR No. 298, as amended, otherwise known as the Consolidated
Withholding Tax Regulations, which prescribe the rules and
procedures for the collection of CWT on sales of real
properties classified as ordinary assets, on the grounds that
these regulations:

Use gross selling price (GSP) or fair market

value(FMV) as basis for determining the income tax on
the sale of real estate classified as ordinary assets,
instead of the entitys net taxable income as provided
for under the Tax Code;
Mandate the collection of income tax on a per
transaction basis, contrary to the Tax Code provision
which imposes income tax on net income at the end of
the taxable period;

Go against the due process clause because the

government collects income tax even when the net
income has not yet been determined; gain is never
assured by mere receipt of the selling price; and

Contravene the equal protection clause because the

CWT is being charged upon real estate enterprises, but
not on other business enterprises, more particularly,
those in the manufacturing sector, which do business
similar to that of a real estate enterprise.

ISSUES:
1. Is the imposition of MCIT constitutional?
2. Is the imposition of CWT on income from sales of real
properties classified as ordinary assets constitutional?
HELD:
FIRST ISSUE:
Yes. The imposition of the MCIT is
constitutional. An income tax is arbitrary and confiscatory if it
taxes capital, because it is income, and not capital, which is
subject to income tax. However, MCIT is imposed on gross
income which is computed by deducting from gross sales the
capital spent by a corporation in the sale of its goods, i.e., the
cost of goods and other direct expenses from gross sales.
Clearly, the capital is not being taxed.
Various safeguards were incorporated into the law imposing
MCIT.
Firstly, recognizing the birth pangs of businesses and the
reality of the need to recoup initial major capital expenditures,
the MCIT is imposed only on the 4th taxable year immediately
following the year in which the corporation commenced its
operations.

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Secondly, the law allows the carry-forward of any excess of

the MCIT paid over the normal income tax which shall be
credited against the normal income tax for the three
immediately succeeding years. Thirdly, since certain
businesses may be incurring genuine repeated losses, the law
authorizes the Secretary of Finance to suspend the imposition
of MCIT if a corporation suffers losses due to prolonged labor
dispute, force majeure and legitimate business reverses.
SECOND ISSUE: Yes. Despite the imposition of CWT on
GSP or FMV, the income tax base for sales of real property
classified as ordinary assets remains as the entitys net
taxable income as provided in the Tax Code, i.e., gross
income less allowable costs and deductions. The seller shall
file its income tax return and credit the taxes withheld by the
withholding agent-buyer against its tax due. If the tax due is
greater than the tax withheld, then the taxpayer shall pay the
difference. If, on the other hand, the tax due is less than the
tax withheld, the taxpayer will be entitled to a refund or tax
credit. The use of the GSP or FMV as basis to determine the
CWT is for purposes of practicality and convenience. The
knowledge of the withholding agent-buyer is limited to the
particular transaction in which he is a party. Hence, his basis
can only be the GSP or FMV which figures are reasonably
known to him. Also, the collection of income tax via the CWT
on a per transaction basis, i.e., upon consummation of the
sale, is not contrary to the Tax Code which calls for the
payment of the net income at the end of the taxable period.
The taxes withheld are in the nature of advance tax payments
by a taxpayer in order to cancel its possible future tax
obligation. They are installments on the annual tax which may
be due at the end of the taxable year. The withholding agentbuyers act of collecting the tax at the time of the transaction,
by withholding the tax due from the income payable, is the
very essence of the withholding tax method of tax collection.
On the alleged violation of the equal protection clause, the

taxing power has the authority to make reasonable

classifications for purposes of taxation. Inequalities which
result from singling out a particular class for taxation, or
exemption, infringe no constitutional limitation. The real estate
industry is, by itself, a class and can be validly treated
differently from other business enterprises. What distinguishes
the real estate business from other manufacturing enterprises,
for purposes of the imposition of the CWT, is not their
production processes but the prices of their goods sold and
the number of transactions involved. The income from the sale
of a real property is bigger and its frequency of transaction
limited, making it less cumbersome for the parties to comply
with the withholding tax scheme. On the other hand, each
manufacturing enterprise may have tens of thousands of
transactions with several thousand customers every month
involving both minimal and substantial amounts.

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SISON V. ANCHETA, 130 SCRA 654 (1984)

FACTS: Petitioner assailed the validity of Sec 1 of BP 135
which further amends Sec 21 of NIRC, which provides for
rates of tax on citizens on (a) taxable compensation income;
(b) taxable net income; (c) royalties, prizes and other winnings;
(d) interest from bank deposits and yield or any other
monetary benefit from deposit substitutes and from trust and
similar arrangements; (e) dividends and share of individual
partner in the net profits of taxable partnership; and (f)
adjusted gross income
1. Petitioner alleged that by virtue thereof, he would be
unduly discriminated against the imposition of higher
rates of tax upon his income from the exercise of his
profession vis--vis those which are imposed upon
fixed income or salaried individual taxpayers. As such,
the said section is arbitrary amounting to class
legislation, oppressive and capricious in character
2. OSG filed a motion to dismiss on the ground that BP
135 is a valid exercise of the States power to tax.
ISSUE: WON BP 135 is violative of due process and equal
protection clause
HELD: No. the power to tax, an inherent prerogative of the
State, has to be availed to assure the performance of vital
state functions. It is the source of the bulk of public funds.
Taxes, being the lifeblood of the government, their prompt and
certain availability is of the essence.

revenue measures since the power to tax is not the power to

destroy.
However, mere allegation of arbitrariness is not sufficient.
There must be a factual foundation of such unconstitutional
taint. There is a need for such persuasive character as would
lead to such conclusion of arbitrariness. Absent such a
showing, the presumption of validity must prevail.
Classification, if rational in character, is allowable. In Lutz v.
Aranet, the SC held that it is the inherent in the power to tax
that a State be free to select the subjects of taxation, and that
inequalities which result from singling out one particular class
for taxation, or exemption, does not infringe constitutional
limitation.
Equity and uniformity in taxation, as required by the
Constitution, means that all taxable articles or kinds of
property of the same class shall be taxed at the same rate.
The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation.
The
differentiation complained conforms to the practical dictates of
justice and equity and is therefore not discriminatory. The
standard then is that the tax applies equally to all persons,
firms and corporations placed in similar situation.

According to J. Malcolm: The power to tax is an attribute of

sovereignty.
It is the strongest of all powers of the
government. It is to be admitted that for all its plenitude, the
power to tax is not unconfined. There are restrictions which
the Constitution sets forth. Adversely affecting as it does
property rights, both due process and equal protection clauses
may properly be invoked to invalidate in appropriate cases a

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SARASOLA V. TRINIDAD, 40 PHIL 259 (1919)

FACTS: Plaintiff Sarasola filed a complaint with a prayer for
injunction to restrain defendant Trinidad as Collector of Internal
Revenue (CIR) from collecting alleged illegal taxes amounting
to P11,739.29
1. CIR sought to dismiss the complaint on the following
grounds: (a) the court had no jurisdiction over the
subject-matter of the action because of Sec 1578
Administrative Code; and (b) the facts stated in the
complaint did not entitled the plaintiff to the relief
demanded
2. CFI held sustained the argument of Cir, citing that the
present case is controlled by the SC decision in the
case of Churchill v. Rafferty and that Sec 1579
Administrative Code does not allow interest on the
internal revenue recovered
3. Sarasola argued that:
a. The statute is a mere expression of the equity rule
and does not close the door of equity where there
is no adequate remedy at law
b. The legal remedy is grossly inadequate and the
injury irreparable. As such, the writ should issue
4. Plaintiff averred that he was not engaged in the
business of a commission merchant in manila and as
such, he was not liable to the payment of tax as such.
Moreover, he is without means of complying with the
demand of the defendant under protest or otherwise
5. Sec 1578 and 1579 Administrative Code provides:

amount disputed, or other question raised as to liability

therefor, the person against whom or against whose
property the same is sought to be enforced shall pay
the tax under instant protest, or upon protest within ten
days, and shall thereupon request the decision of the
Collector of Internal Revenue. If the decision of the
Collector of Internal Revenue is adverse, or if no
decision is made by him within six months from the
date when his decision was requested, the taxpayer
may proceed, at any time within two years after the
payment of the tax, to bring an action against the
Collector of Internal Revenue for the recovery without
interest of the sum alleged to have been illegally
collected, the process to be served upon him, upon the
provincial treasurer, or upon the officer collecting the
tax.
ISSUE: Does the addition of the words without interest in the
statute deprive an aggrieved taxpayer of his adequate remedy
at law
HELD: Sec 1578 and 1579 Administrative Code establish an
adequate remedy at law and that the enforcement of the tax
will not produce irreparable injury.

SEC. 1578. Injunction not available to restrain

collection of tax. No court shall have authority to
grant an injunction to restrain the collection of any
internal-revenue tax.

It is well settled both on principle and authority that interest is

not to be awarded against a sovereign government, as the
United States or a State, unless its consent has been
manifested by an Act of its Legislature or by a lawful contract
of its executive officers. If there be doubt upon the subject, that
doubt must be resolved in favor of the State. The recovery (in
tax suits) must be limited to the money received. . . . Interest is
recoverable only when expressly allowed by statute

SEC. 1579. Recovery of tax paid under protest.

When the validity of any tax is questioned, or its

taxes only draw interest as do sums of money when expressly

authorized. A corollary to the principle is also self-evident, that
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interest cannot be recovered on an abatement unless the

statute provides for it.

the conditions which the lawmakers have seen fit to attach to

the remedy provided.

The only contrary dictum is to the effect that where an illegal

tax has been collected, the citizen who has paid and is obliged
to bring suit against the collector is entitled to interest from the
time of the illegal exaction.
Interest allowed for nonpayment of judgments is in the nature
of statutory damages, and if the plaintiff in the present case
has received all such damages which accrued while his
judgment remained unpaid, there is no change or withdrawal
of remedy. His right was to collect such damages as the State,
in its discretion, provided should be paid by defendant who
should fail to promptly pay judgments which should be entered
against them, and such right has not been destroyed or
interfered with by legislation. The discretion exercised by the
legislature in prescribing what, if any, damages shall be paid
by way of compensation for delay in the payment of judgments
is based on reasons of public policy, and is altogether outside
the sphere of private contracts.
"The people of a state give to their government a right of
taxing themselves and their property, and as the exigencies of
the Government cannot be limited, they prescribe no limit to the
exercise of this right, resting confidently on the interest of the
legislator and on the influence of the constituents over their
representatives, to guard themselves against its abuse.
In the case at bar, legislature has considered that a law
providing for the payment of a tax with a right to bring a suit
before a tribunal to recover back the same without interest is a
full and adequate remedy for the aggrieved taxpayer. The
disallowance of interest in such case, like the other steps
prescribed as conditional to recovery, has been made one of

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CIR V. ALGUE, INC. GR NO. L-28896 (1988)

FACTS: On January 14, 1965, the private respondent, a
domestic corporation engaged in engineering, construction
and other allied activities, received a letter from the petitioner
assessing a delinquency income tax for the years 1958 and
1959. Algue filed a letter of protest or request for
reconsideration, despite this, respondent received a warrant of
distraint and levy. Algue refused to receive it on the ground of
the pending protest until he was informed that the BIR was not
taking any action on the protest. Algue filed a petition for
review on the CIR with the CTA. Petitioner contends that the
claimed deduction of P75,000 was properly disallowed since it
was not an ordinary reasonable or necessary business
expense. The CTA held that the amount had been legitimately
paid by the private respondent for actual services rendered,
being that the payment was in the form of promotional fees.
ISSUE: WON the CIR correctly disallowed the P75,000
deduction claimed by private respondent Algue as legitimate
business expenses in its income tax return.
HELD: No
The Court agrees with the CTA that the amount of the
promotional fees was not excessive and is in accord with the
provision of the Tax Code.

it. Hence, despite the natural reluctance to surrender part

of ones hard earned income to the taxing authorities,
every person who is able to must contribute his share in
the running of the government. The government for its
part, is expected to respond in the form of tangible and
intangible benefits intended to improve the lives of the
people and enhance their moral and material values. This
symbiotic relationship is the rationale of taxation and
should dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power.
Even if the taxation is inevitable and indispensable, it is a
requirement in all democratic regimes that it be exercised
reasonably and in accordance with the prescribed procedure.
Taxes are the lifeblood of the government and so should
be collected without unnecessary hindrance. On the other
hand, such collection should be made in accordance with
the law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile
the apparently conflicting interests of the authorities and
the taxpayers so that the real purpose of taxation, which
is the promotion of the common good, may be achieved.

The Solicitor General is correct when he says that the burden

is on the taxpayer to prove the validity of the claimed
deduction. The private respondent has proved that the
payment of the fees was necessary and reasonable in the light
of the efforts exerted by the respondent corporation to induce
investors to venture in an experimental enterprise.
It is said that taxes are what we pay for civilization
society. Without taxes, the government would be
paralyzed for lack of motive power to activate and operate

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ABAKADA GURO PARTY LIST OFFICERS V.ERMITA, G.R.

NO 168056 (2005)
FACTS: RA 9337 or the VAT Reform Act granted the
Secretary the authority to ascertain:
(a)
whether by Dec. 31, 2005, the VAT collection
as a Gross Domestic Product (GDP) exceeds 2.8% or
(b)
the National Government
Deficit
as a
percentage of the 2004 GDP exceeds 1.5%.
If either condition is met, the Secretary of Finance must inform
the President to impose the 12%% VAT rate (from 10%)
effective January 1, 2006.
Petitioners contend that the increase in the VAT rate of 12%
imposes an unfair and additional tax burden on the people.
ISSUE: WON the 12% Increase VAT Rate impose an Unfair
and Unnecessary Additional Tax Burden

healthy position. 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:
Every tax ought to be so contrived as both to take out and to
keep out of the pockets of the people as little as possible over
and above what it brings into the public treasury of the state.

HELD: NO.

It simply means that sources of revenues must be

adequate to meet government expenditures and their
variations.

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.

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:

Nat 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

1. Philippines is 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.
2. Next, our debt to GDP is approximately equal to our
GDP.

Page | 8

3. 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.
So given this situation, the Department of Finance believe that
they 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 your revenue. We need to get out of this debt
spiral. And the only way, I think, we can get out of this debt
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.

GEROCHI V. DOE, G.R. NO 159796 (2007)

FACTS: RA 9136 or Electric Power Industry Reform Act
(EPIRA) took effect in 2001. Said law provides for a universal
charge to be determined, fixed and approved by ERC which
shall be imposed on all electricity end-users
1. Subsequently, NPC-SPUG filed with ERC a petition for
the availment of the universal charge of its share for
missionary electrification
2. ERC approved the amount of P.0168/kWh as the share
of NPC-SPUG from the universal charge for missionary
electrification and authorized the collection of the same
from its end-users on a monthly basis
3. Petitioners alleged that the assailed provision of law
and its IRR is unconstitutional based on the following
grounds:
a. The universal charge is a tax which is to be
collected from all end-users. Since the power to
tax is generally a legislative function, the
delegation of said power to any executive or
administrative agency like the ERC is
unconstitutional
b. The imposition of the universal charge on all endusers is oppressive and confiscatory and
amounts to taxation without representation
4. DOE, ERC and NPC, through the OSG, contended that
the universal charge is not a tax because it is levied for
a specific regulatory purpose, i.e., to ensure the
viability of the countrys electric power industry, and as
such, an exercise of the States police power.
Moreover, the said charge does not possess the
essential characteristics of a tax: its imposition does
not redound to the benefit of the public and its rate is
uniformly levied on electricity end-users

Page | 9

ISSUES:
1. WON the universal charge imposed under Sec 34 of
EPIRA is a tax
2. WON there is undue delegation of the legislative power
to tax on the part of ERC

can be deduced from Sec 34 which enumerates the purposes

which the universal charge is imposed and which can be
amply discerned as regulatory in character. Moreover, it is a
well-established doctrine that the taxing power may be used
as an implement of police power as held in numerous cases.

HELD:
FIRST ISSUE
No. the universal charge is not a tax. The power to tax is an
incident of sovereignty; it rests on the principle that taxes are
the lifeblood of the government, and their prompt and certain
availability is an imperious need. Thus, the theory behind the
exercise of the power to tax emanates from necessity; without
taxes, the government cannot fulfill its mandate of promoting
the general welfare of the people.

SECOND ISSUE
No, there is no undue delegation of legislative power to tax
since the universal charge is not a tax.

On the other hand, police power is the power of the State to

promote public welfare by restraining and regulating the use of
liberty and property. Its justification is found in the Latin
maxims salus populi est suprema lex (the welfare of the
people is the supreme law) and sic utere tuo ut alienum non
laedas (so use your property as not to injure the property of
others). As an inherent attribute of sovereignty, police power
grants a wide panoply of instruments through which the State,
as parens patriae, gives effect to a host of its regulatory
powers.

A logical corollary to the doctrine of separation of powers is the

principle of non-delegation of power. This is based on the
ethical principle that such 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. Delegation of legislative power to
various specialized administrative agencies is allowed as an
exception. There is a need to delegate to administrative
bodiesthe principal agencies tasked to execute laws in their
specialized fieldsthe authority to promulgate rules and
regulations to implement a given statute and effectuate its
policies. All that is required for the valid exercise of this power
of subordinate legislation is that the regulation be germane to
the objects and purposes of the law and that the regulation be
not in contradiction to the standards prescribed by law
(completeness and sufficient standards test)

The conservative and pivotal distinction between the two rests

in the purpose for which the charge is made. If generation of
revenue is the primary purpose and regulation is merely
incidental, the imposition is a tax; but if regulation is the
primary purpose, the fact that revenue is incidentally raised
does not make the imposition a tax.

a. COMPLETENESS TEST The law must be complete

in all its terms and conditions when it leaves the
legislature such that when it reaches the delegate, the
only to be done is to enforce it. EPIRA, read in its
entirety and in relation to Sec 34, is complete in all its
essential terms and conditions.

In exacting the assailed universal charge, the States police

power, particularly its regulatory dimension, is invoked. Such

b. SUFFICIENT STANDARDS TEST It mandates

adequate guidelines or limitations in the law to

Page | 10

determine the boundaries of the delegates authority

and prevent the delegation from running riot. The
provisions of EPIRA, among others, to ensure the total
electrification of the country and the quality, reliability,
security and affordability of the supply of electric power
and watershed rehabilitation and management, meet
the requirements for valid delegation, as they provide
limitations on the ERCs power to formulate the IRR.

MATALIN COCONUT CO INC V. MUNICIPAL COUNCIL OF

MALABANG, 143 SCRA 404 (1986)
FACTS:
An ordinance was passed imposing a police
inspection fee of P0.30 per sack of cassava starch produced
and shipped out of the Municipality of Malabang and imposing
penalties for violation thereof.
Any person or company or group of individuals violating the
ordinance is liable of a fine of not less than P100.00, but not
more than P1,000.00, and to pay P1.00 for every sack of flour
being illegally shipped outside the municipality or suffer
imprisonment of 20 days, in the discretion of the court.
The validity of the ordinance was challenged by the Matalin
Coconut Co., Inc.
ISSUE: WON Ordinance No. 45-66 enacted by respondent
Municipal Council of Malabang, Lanao del Sur, is valid
HELD: The ordinance in question is invalid. The Court finds
the inspection fee of P0.30 per bag, imposed by the ordinance
in question to be excessive and confiscatory. It has been
shown by the petitioner, Matalin Coconut company, Inc. that it
is merely realizing a marginal average profit of P0.40 per bag
of cassava flour starch shipped out of the Municipality of
Malabang because the average production is P15.60 per bag,
including transportation costs, while the prevailing market price
is P16.00 per bag. The further imposition, therefore, of the tax
of P0.30 per bag, by the ordinance in question would force the
petitioner to close or stop its cassava flour starch milling
business considering that it is maintaining a big labor force in
its operation, including a force of security guards to guard its
properties. The ordinance, therefore, has an adverse effect on
the economic growth of the Municipality of Malabang, in
particular, and of the nation, in general, and is contrary to the
economic policy of the government.

Page | 11

LUTZ V. ARANETA, 98 PHIL 48 (1955)

Said the court a quo:
xxx It has been proven that the only service rendered by the
Municipality of Malabang, by way of inspection, is for the
policeman to verify from the driver of the trucks of the
petitioner passing by at the police checkpoint the number of
bags loaded per trip which are to be shipped out of the
municipality based on trip tickets for the purpose of computing
the total amount of tax to be collected and for no other
purpose. The pretention of respondents that the police, aside
from counting the number of bags shipped out, is also
inspecting the cassava flour starch contained in the bags to
find out if the said cassava flour starch is fit for human
consumption could not be given credence by the Court
because, aside from the fact that said purpose is not so stated
in the ordinance in question, the policemen of said municipality
are not competent to determine if the cassava flour starch are
fit for human consumption. The further pretention of
respondents that the trucks of the petitioner hauling the bags
of cassava flour starch from the mill to the bodega at the
beach of Malabang are escorted by a policeman from the
police checkpoint to the beach for the purpose of protecting
the trucks and its cargoes from molestation by undesirable
elements could not be given credence by the Court because it
has been shown, beyond doubt, that the petitioner has not
asked for the said police protection because there has been
no occasion where its trucks have been molested, even for
once, by bad elements from the police checkpoint to the
bodega at the beach, it is solely for the purpose of verifying the
correct number of bags of cassava flour starch loaded on the
trucks of the petitioner as stated in the trip tickets, when
unloaded at its bodega at the beach.
The imposition,
therefore, of a police inspection fee of P0.30 per bag, imposed
by said ordinance is unjust and unreasonable.

FACTS: Walter Lutz, in his capacity as Judicial Administrator

of the Intestate Estate of Antonio Jayme Ledesma, seeks to
recover from the CIR the amount paid by the estate as taxes,
under Section 3 of Commonwealth Act No. 567, Sugar
Adjustment Act; alleging that such tax is unconstitutional and
void, being levied for the aid and support of the sugar industry
exclusively, which in plaintiffs opinion is not a public purpose
for which a tax may be consititutionally levied.
ISSUE: WON the tax levied as provided for in Commonwealth
Act No. 567 is a valid exercise of state power.
HELD: Yes
The basic defect in the plaintiffs position is his
assumption that the tax provided in Commonwealth Act.
No. 567 is a pure exercise of the taxing power. Analysis of
the Act, and particularly of section 6, will show that the
tax is levied with a regulatory purpose, to provide means
for the rehabilitation and stabilization of the threatened
sugar industry. In other words, the act is primarily an
exercise of the police power.
The Court can take judicial notice of the fact that sugar
production is one of the great industries of our nation, sugar
occupying a leading position among its export products; that it
gives employment to thousands of laborers in fields and
factories; that it is a great source of the states wealth, is one
of the important source of foreign exchange needed by our
government., and is thus pivotal in the plans of a regime
committed to a policy of currency stability. Its promotion,
protection and advancement, therefore redounds greatly
to the general welfare. Hence it is competent for the
legislature to find that the general welfare demanded that
the industry should be stabilized in turn; and in the wide

Page | 12

field of its police power, the lawmaking body could

provide that the distribution of benefits therefrom be
adjusted among its components to enable it to resist the
added strain of the increase in taxes that it had to sustain.
That the tax to be levied should burden the sugar producers
themselves can hardly be a ground of complaint; indeed, it
appears rational that the tax obtained precisely from those
who are to be benefited from the expenditure of the funds
derived from it. At any rate, it is inherent in the power to tax
that a state be free to select the subjects of taxation, and
it has been repeatedly held that inequalities which result
from a singling out of one particular class for taxation or
exemption infringe no constitutional limitation.
Even from the standpoint that the Act is a pure tax measure, it
cannot be said that the devotion of tax money to experimental
stations to seek increase of efficiency in sugar production,
utilization of by-products and solution of allied problems, as
well as to the improvements of living and working conditions in
sugar mills or plantations, without any part of such money
being channeled to private persons, constitutes expenditure of
tax money for private purposes.

NATIONAL TELECOMMUNICATIONS COMMISSION V. CA,

311 SCRA 508 (1999)
FACTS: Sometime in 1988, the NTC served on the PLDT
some assessment notices with computation and demand
payments for supervision and regulation fee and some permit
fees under section 40 (F) of the Public Service Act (PSA)
based on the par value of the subscribed capital stock..
PLDT argues that petitioner has no authority to compel PLDTs
payment of the assessed fees under section 40 for the
increase of its capital stock since NTC did not render any
supervisory or regulatory activity and incurred no expenses in
relation thereto.
ISSUES:
1. WON NTC may impose such fees to PLDT?
2. WON the computation of supervision and regulation
fees under section 40n of Public Service Act should be
based on the Par value of the subscribed capital?

HELD:
FIRST ISSUE: It bears stressing that it is not the NTC that
imposed such a fee. It is the legislature itself. Since
Congress has the power to exercise the State inherent powers
of Police Power, Eminent Domain and Taxation, the distinction
between police power and the power to tax, which could be
significant if the exercising authority were mere political
subdivisions (since delegation by it to such political
subdivisions of one power does not necessarily include the
other), would not be of any moment when, as in the case
under consideration, Congress itself exercises the power. All
that is to be done would be to apply and enforce the law when
sufficiently definitive and not constitutional infirm.

Page | 13

SECOND ISSUE;
No. It should be based on the market
value of PLDTs outstanding capital stock inclusive of stock
dividends and premium, and not on the par value of PLDTs
capital stock excluding stock dividends and premium.
The basis for computation of the fee to be charged is the
capital stock subscribed or paid and not the property and
equipment.
Capital refers to the value of the property or assets of a
corporation. The capital subscribed is the total amount of the
capital that persons (subscribers or shareholders) have agreed
to take and pay for, which need not necessarily be, and can be
more than, the par value of the shares.
In fine, it is the amount that the corporation receives, inclusive
of the premiums if any, in consideration of the original
issuance of the shares. In the case of stock dividends, it is the
amount that the corporation transfers from its surplus profit
account to its capital account. It is the same amount that can
loosely be termed as the trust fund of the corporation.
The Trust Fund doctrine considers this subscribed capital as
a trust fund for the payment of the debts of the corporation, to
which the creditors may look for satisfaction. Until the
liquidation of the corporation, no part of the subscribed capital
may be returned or released to the stockholder (except in the
redemption of redeemable shares) without violating this
principle. Thus, dividends must never impair the subscribed
capital; subscription commitments cannot be condoned or
remitted; nor can the corporation buy its own shares using the
subscribed capital as the consideration therefor.

REPUBLIC V. PHILIPPINE RABBIT BUS LINES INC, G.R

NO L-26862 (1970)
FACTS: Plaintiff Republic filed a complaint against Philippine
Rabbit Bus Lines Inc, as the registered owner of 238 motor
vehicles, paid to the Motor Vehicles Office (LTO) P78,636.17
as 2nd installment of registration fees in the form of negotiable
certificate of indebtedness, Phil Rabbit being merely an
assignee and not the backpay holder itself.
1. Republic sought the payment of said amount with
surcharges plus the legal rate of interest from the date
of filing
2. Defendant Phil Rabbit alleged that said payment was in
accordance with the Backpay Law since the Treasurer
of the Philippines and the General Auditing Office
consented to the said mode of payment
3. Plaintiff argued that only the holders of backpay
certificates themselves could apply the same to the
payment of motor vehicle registration fees.
ISSUES:
1. WON registration fee a tax and as such, its payment by
backpay certificates valid
2. WON estoppel lies against the government for the
erroneous interpretation of the national treasurer and
the auditor general
HELD:
FIRST ISSUE
No, registration fee is different from tax. A tax refers to a
financial obligation imposed by a State on persons, whether
natural or juridical, within its jurisdiction, for property owned,
income earned, business or profession engaged in, or any
such activity analogous in character for raising the necessary
revenues to take care of the responsibilities of government.
As defined by Cooley, taxes are the enforced proportional
contributions from persons and property levied by the State by

Page | 14

virtue of its sovereignty for the support of government and for

all public needs.
A tax is neither a penalty that must be satisfied nor a liability
arising from a contract. It is not a license or a fee as a
manifestation of an exercise of police power. The purpose of
tax is to raise revenue as opposed to police power which aims
to regulate the relations between individuals and also between
private parties and the political society.
Revised Motor Vehicle Law consistently used the term
registration fees. It can be concluded, then, that the said law
requires the payment of a registration fee under the police
power. Hence the provisions of the Back Pay Law invoked by
Phil Rabbit are inapplicable; it cannot make use of a back pay
certificate to meet such an obligation.
SECOND ISSUE
No, estoppel does not lie. Insofar as the taxing power is
concerned, the SC held that the government is never estopped
by mistake or error on the part of its agents. It follows that,
insofar as the record shows, the petitioners have not made it
appear that the additional tax claimed by the Collector is not in
fact due and collectible.

CALTEX V. COA, 208 SCRA 726 (1992)

FACTS:Respondent
COA
directed
petitioner
Caltex
Philippines, Inc. (CPI) to remit to the Oil Price Stabilization
Fund (OPSF) its collection of the additional tax on petroleum
products pursuant to P.D. 1956, as well as unremitted
collections of the above tax covering the years 1986, 1987,
and 1988, with interests and surcharges, and advising it that
all its claims for reimbursement from the OPSF shall be held in
abeyance pending such remittance. COA further directed
petitioner oil company to desist from further offsetting the
taxes collected against outstanding claims for 1989 and
subsequent periods.
Its motion for reconsideration of the eventual decision of the
COA on the matter having been denied, CPI imputes that
respondent commission erred, inter alia, in preventing the
former from exercising the right to offset its remittances
against its reimbursement vis- a vis the OPSF.
HELD: On the issue of whether or not the amounts due to the
OPSF from petitioner may be offset against the latters
outstanding claims of said fund, it is settled that a taxpayer
may not offset taxes due from claims that he may have against
the Government and the taxpayer are not mutually creditors
and debtors of each other and a claim for taxes is not such a
debt, demand, contract or judgment as is allowed to be set off.
The Court further ruled that taxation is no longer envisioned as
a measure merely to raise revenue to support the existence of
the Government. Taxes may be levied for a regulatory
purpose such as to provide means for the rehabilitation and
stabilization of a threatened industry which is affected with
public interest, a concern which is within the police power of
the State to address.

Page | 15

FRANCIA V. IAC 162 SCRA 753 (1988)

FACTS: Engracio Francia is the registered owner of a
residential lot and a two-storey house located in Pasay City.
On October 15, 1977, a 125 square meter portion of Francias
property was expropriated by the Republic of the Philippines
for the sum of P4,116. Since 1963 up to 1977 inclusive,
Francia failed to pay his real estate taxes. Thus on December
5, 1977, his property was sold at public auction by the City
Treasurer of Pasay City pursuant to Section 73 of PD No. 464
Real Property Tax Code, in order to satisfy a tax delinquency
of P2,400. Ho Fernandez was the highest bidder for the
property. Francia was not present during the auction sale
since he was in Iligan City at that time, helping his uncle ship
bananas. On March 3, 1979, Francia received a notice of
hearing filed by Ho Fernandez, seeking the cancellation of
TCT and the issuance in his name of a new Certificate of title.
Upon verification, Francia discovered that a Final Bill of Sale
had been issued in favor of Ho Fernandez by the City
Treasurer on December 11, 1978. The auction sale and the
final bill of sale were both annotated at the back of the TCT by
the Register of Deeds. Francia filed a complaint to annul the
auction sale. The lower court rendered a decision against his
favor. The IAC affirmed the decision of the lower court in toto.
Petitioner contends that his tax delinquency of P2,400 has
been extinguished by legal compensation. He claims that the
government owed him P4, 116 when a portion of his land was
expropriated. Hence, his tax obligation had been set-off by
operation of law as of October 15, 1977.
ISSUE: WON the petitioner is correct in holding that his
obligation to pay P2,400 for supposed tax delinquency was
set-off by the amount of P4,116 which the government is
indebted to the former.
HELD: No

There is no legal basis for the contention. By legal

compensation, obligations of persons, who in their own right
are reciprocally debtors and creditors of each other are
extinguished. The circumstances of the case do not satisfy the
requirement provided by Art. 1279: (1) that each one of the
obligor be bound principally and that he be at the same time a
principal creditor of the other; (2) that the two debts be due.
The Court ruled that there can be no off-setting of taxes
against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the
ground that the government owes him an amount equal to or
greater than the tax collected. The collection of a tax cannot
await the results of a lawsuit against the government. A claim
for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off under the statutes of
set-off, which are construed uniformly in the light of
public policy, to exclude the remedy in an action or any
indebtedness of the state or municipality to one who is
liable to the state or municipality for taxes. Neither are they
a proper subject of recoupment since they do not arise out of
the contract or transaction sued on. The general rule based
on grounds of public policy is well settled that no set-off
admissible against demands for taxes levied for general
or local government purposes. The reason for this is that
taxes are not in the nature of contracts between the party
but grow out of duty to, and are the positive acts of the
government to the making and enforcing of which, the
personal consent of individual taxpayers is not required.
The Court also took notice that the amount of P4,116 was paid
by the national government and was deposited with PNB
which was received by the petitioner on Sept. 30, 1977 but he
admitted that he did not withdraw it. Also, the tax was due to
the city government while the expropriation was effected by
the national government.

Page | 16

PHILEX MINING V. COMMISSION OF INTERNAL

REVENUE, G.R. NO 125704 (1998)
FACTS: Philex Mining Corporation assails the decision of the
CA which affirmed the decision of the court of tax appeals
ordering philex to pay its excise tax liability.
Philex refused to pay and contended that it has pending claims
for vat input credit or refund against the government which
should be made compensate or set-off its tax liability since
both had already became due and demandable, as well as
fully liquidated. Hence, legal compensation can properly take
place.
ISSUE: WON tax can be subject for set-off?
HELD: NO.
Tax cannot be the subject for compensation for simple reason
that the government and the tax payer are not mutual creditors
and debtors of each other. Debts are due in the government
in its corporate capacity while taxes are due to the government
in its sovereign capacity.
A taxpayer cannot refuse to pay his taxes when they fall due
simply because he has a claim against the government that
the collection of the tax is contingent on the result of the law
suit it filed against the government.
We have consistently ruled that there can be no off-setting of
taxes against the claims that the taxpayer may have against
the government. A person cannot refuse to pay a tax on the
ground that the government owes him an amount equal to or
greater than the tax being collected. The collection of a tax
cannot await the results of a lawsuit against the government.

PROGRESSIVE DEVELOPMENT CORP V. QUEZON CITY,

172 SCRA 629 (1989)
FACTS: The City Council of Quezon City adopted Ordinance
no 7997 (1969) which requires private and public markets to
pay 10% of the gross receipts from stall rentals to the city as
supervision fee. Later, this ordinance was amended by
Ordinance no 9236 (1972) which imposes a 5% tax on gross
receipts on rentals or lease of space in privately-owned public
markets in Quezon City
1. Petitioner Progressive Devt Corp, owner and operator
of Farmers Market, filed a complaint against
respondent Quezon City on the ground that the
supervision fee or license tax imposed is in reality a tax
on income which respondent may not impose pursuant
to RA 2264
2. Respondent contended that it had the authority to
enact said ordinances on the account that the tax on
gross receipts imposed is not a tax on income but one
imposed for the enjoyment of the privilege to engage in
a particular trade or business
3. The lower court held in favor of respondent, ruling that
the questioned imposition is not a tax on income but a
privilege tax or license fee which local governments are
empowered to impose and collect
ISSUE: WON the supervision fee is an income tax or a license
fee
HELD: The 5% tax imposed by the questioned ordinance
does not constitute a tax on income nor a city income tax
within the meaning of Sec 2(g) of the Local Autonomy Act, but
rather a license tax or fee for the regulation of business in
which the company is engaged.
License fees is a legal concept different from tax: the former is
imposed in the exercise of police power for purposes of

Page | 17

regulation, while the latter is imposed under the taxing power

primarily for the purposes of raising revenues. Thus, if the
generating of a revenue is the primary purpose and regulation
is merely incidental, the imposition is a tax; but if regulation is
the primary purpose, the fact that incidentally revenue is also
obtained, does not make the imposition a tax.
To be considered a license fee, the imposition questioned
must relate to an occupation or activity that so engages the
public interest in health, morals, safety and development as to
require regulation for the protection and promotion of such
public interest. The imposition must also bear a reasonable
relation to the probable expenses of regulation, taking into
account not only the costs of direct regulation but also its
incidental consequence as well. When an activity, occupation
or profession is of such a character that inspection or
supervision by public officials is reasonably necessary for the
safeguarding and furtherance of public health, morals and
safety, or the general welfare, the legislature may provide that
such inspection or supervision or other form of regulation shall
be carried out at the expense of the persons engaged in such
occupation or performing such activity, and that no one shall
engage in the occupation or carry out the activity until a fee or
charge sufficient to cover the costs of the inspection or
supervision has been paid. A charge of a fixed sum which
bears no relation at all to the cost of inspection and regulation
may held to be a tax rather than an exercise of police power.

Upon the other hand, it has not been suggested that such
basis has no reasonable relationship to the probable costs of
regulation and supervision of the petitioner's kind of business.
For, ordinarily, the higher the amount of stall rentals, the
higher the aggregate volume of foodstuffs and related items
sold in petitioner's privately owned market; and the higher the
volume of goods sold in such private market, the greater the
extent and frequency of inspection and supervision that may
be reasonably required in the interest of the buying public.

While it is true that the amount imposed by the questioned

ordinances may be considered in determining whether the
exaction is really one for revenue or prohibition, instead of one
of regulation under the police power, it nevertheless will be
presumed to be reasonable. The use of the gross amount of
stall rentals as basis for determining the collectible amount of
license tax, does not by itself, upon the one hand, convert or
render the license tax into a prohibited city tax on income.

Page | 18

PAL ESSO V. CIR, 175 SCRA 149 (1989)

FACTS: Petitioner, Esso deducted from its gross income for
1959, as part of its ordinary and necessary business expenses
, the amount it had spent for drilling and exploration of its
petroleum concessions. This claim was disallowed by the
respondent Commissioner Of Internal Revenue on the ground
that the expenses should be capitalized and might be written
off as a loss only when a dry hole should result.
Esso then filed an amended return where it asked for the
refund of P323,279.00 by reason of its abandonment as dry
holes of several of its oil wells.
Moreover, Esso claimed as ordinary and necessary expenses
in the same return was the amount of P340,822.04
representing margin fees it had paid to the Central Bank on its
profit remittances to its New York head office. The
Commissioner of Internal Revenue disallowed the claimed
deduction for the margin fees paid.

3. it must be paid or incurred in carrying on a trade or

business. In addition, not only must the taxpayer meet
the business test, he must substantially prove by
evidence or records the deductions claimed under the
law, otherwise, the same will be disallowed. The mere
allegation of the taxpayer that an item of expense is
ordinary and necessary does not justify its deduction.
The margin fees in question were incurred for the remittance
of funds to petitioners Head Office in New York, which is a
separate and distinct income taxpayer from the branch in the
Philippines, for its disposal abroad, it can never be said
therefore that the margin fees were appropriate and helpful in
the development of petitioners business in the Philippines
exclusively or were incurred for purposes proper to the
conduct of the affairs of the petitioners branch in the
Philippines exclusively or for the purpose of realizing a profit or
of minimizing a loss in the Philippines exclusively. If at all, the
margin fees were incurred for purposes proper to the conduct
of the corporate affairs of Standard Vacuum Oil Company in
New York, but certainly not in the Philippines.

ISSUE: WON the margin fees Esso paid to the Central Bank
on its profit remittances to its New York head office is
deductible and considered ordinary and necessary business
expenses.
HELD: The margin fees are not deductible. The margin fees
are not expenses in connection with the production or earning
of petitioners income in the Philippines. They were expenses
incurred in the disposition of said incomes.
Statutory test of deductibility as a business expense.
1. the expense must be ordinary and necessary
2. it must be paid or incurred within a taxable year

Page | 19

APOSTOLIC PREFECT V. TREASURER OF BAGUIO, 71

PHIL 547 (1941)
FACTS: The Apostolic Prefect is a corporation, of religious
character, organized under the Philippine laws and with
residence in Baguio. The City imposed a special assessment
against properties within its territorial jurisdiction, including
those of the Apostolic Prefect, which benefits from its drainage
and sewerage system. The Apostolic Prefect contends that its
properties should be free of tax being of religious in character.

the assessment is not taxation per se but rather a system for

the benefits of the inhabitants of the city.
Furthermore, arguendo that exemption may encompass such
assessment, the Apostolic Prefect cannot claim exemption as
it has not proven the property in question is used exclusively
for religious purposes; but that it appears that the same is
being used to other non-religious purposes. Thus, the
Apostolic Prefect is required to pay the special assessment.

ISSUE: Whether the Apostolic Prefect, as a religious entity, is

exempt from the payment of the special assessment.
HELD: No
A special assessment is not a tax; and neither the decree
nor the Constitution exempt petitioner from payment of
said special assessment. In its broad meaning, tax includes
both general and special assessment. Yet, there is a
recognized distinction between them in that assessment is
confined to local impositions upon property for the
payment of the cost of public improvements in its
immediate vicinity and levied with reference to special
benefits to the property assessed. The difference between a
special assessment and a tax are that (1) a special
assessment can be levied only on land; (2) a special
assessment cannot be made a personal liability of the person
assessed; (3) a special assessment is based wholly on
benefits; and (4) a special assessment is exceptional both as
to time and locality. The impositions of a charge on all
property, real and personal, in a prescribed area, is a tax and
not an assessment, although the purpose is to make a local
improvement on a street or highway. A charge imposed only
on property owners benefited is a special assessment rather
than a tax notwithstanding the statute calls it a tax. In the case
at bar, the Apostolic Prefect cannot claim exemption because

Page | 20

DIAZ AND TIMBOL V. CIR, G.R. NO 193007 (2011)

FACTS: Petitiones Diaz and Timbol filed a petition for
declaratory relief assailing the validity of the imposition of VAT
by BIR on the collections of the toll way operators.
They claim that:
VAT would result in increased toll fees;
That the Congress In enacting the Tax Code, did not intend
to include toll fees within the meaning of sale of services that
are subject to VAT;
Petitioners argue that a toll fee is a "user's tax" and to
impose VAT on toll fees is tantamount to taxing a tax.
That to impose VAT on toll fees would amount to a tax on
public service.
The OSG, on the other hand, stated that the Tax Code
imposes VAT on all kinds of services of franchise grantees,
including toll way
operations, except where the law provides otherwise.
ISSUE:
WON the imposition of VAT on toll way
operators amounts to a tax on tax and not a tax on service
HELD: NO.
Tollway fees are not taxes. Indeed, they are not assessed and
collected by the BIR and do not go to the general coffers of the
government.

A tax is imposed under the taxing power of the government

principally for the purpose of raising revenues to fund public
expenditures. Toll fees, on the other hand, are collected by
private tollway operators as reimbursement for the costs and
expenses incurred in the construction, maintenance and

operation of the tollways, as well as to assure them a

reasonable margin of income. Although toll fees are charged
for the use of public facilities, therefore, they are not
government exactions that can be properly treated as a tax.
Taxes may be imposed only by the government under its
sovereign authority, toll fees may be demanded by either the
government or private individuals or entities, as an attribute of
ownership.
VAT on tollway operations is not really a tax on the tollway
user, but on the tollway operator. Under Section 105 of the
Code, VAT is imposed on any person who, in the course of
trade or business, sells or renders services for a fee. In other
words, the seller of services, who in this case is the tollway
operator, is the person liable for VAT. The latter merely shifts
the burden of VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on
tax even if toll fees were deemed as a "user's tax." VAT is
assessed against the tollway operator's gross receipts and not
necessarily on the toll fees.
OTHER ISSUES PERTINENT TO TOLL FEES:
ISSUE:
ARE TOLLWAY OPERATORS COVERED BY VAT?
Ruling: YES, BECAUSE THEY RENDER SERVICES FOR
AFEE. THEY ARE JUST LIKE LESSORS, WAREHOUSE
OPERATORS,
AND
OTHER
GROUPS
EXPRESSLYMENTIONED IN THE LAW.
ISSUE: NOW, DO TOLLWAY OPERATORS RENDER
SERVICES FOR A FEE?
Ruling: Presidential Decree (P.D.) 1112 or the Toll Operation
Decree establishes the legal basis for the services that tollway

Page | 21

operators render. Essentially, tollway operators construct,

maintain, and operate expressways, also called tollways, at
the operators expense. Tollways serve as alternatives to
regular public highways that meander through populated areas
and branch out to local roads. Traffic in the regular public
highways is for this reason slow-moving. In consideration for
constructing tollway sat their expense, the operators are
allowed to collect government-approved fees from motorists
using the tollways until such operators could fully recover their
expenses and earn reasonable returns from their investments.
When a tollway operator takes a toll fee from a motorist ,the
fee is in effect for the latters use of the tollway facilities over
which the operator enjoys private proprietary rights that its
contract and the law recognize. In this sense, the tollway
operator is no different from the following service providers
under Section108 who allow others to use their properties or
facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels,
motels,resthouses, pension houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods
or cargoes, including persons who transport goods or
cargoes for hire and other domestic common carriers
by land relative to their transport of goods or cargoes;
and
7. Common carriers by air and sea relative to their
transport of passengers, goods or cargoes from one
place in the Philippines to another place in the
Philippines. It does not help petitioners cause that
Section 108 subjects to VAT all kinds of services
rendered for a fee regardless of whether or not the
performance thereof calls for the exercise or use of the
physical or mental faculties. This means that

services to be subject to VAT need not fall under the

traditional concept of services, the personal or
professional kinds that require the use of human
knowledge and skills.
ISSUE: GOVERNMENT ARGUES THAT TOLL OPERATORS
ARE FRANCHISEES AND THEREFORE EXPRESSLY
COVERED BY VAT LAW. PETITIONERS ARGUE THAT
THEY ARE NOT FRANCHISEES BECAUSE THEY DO
NOTHAVE
LEGISLATIVE
FRANCHISE.
WHAT
IS
CORRECT?
Toll operators are francishees because franchise covers
government grants of a special right to do an act or series of
acts of public concern. The construction, operation, and
maintenance of toll facilities on public improvements are
activities of public consequence that necessarily require a
special grant of authority from the state. Also, the VAT law
does not define franchisees as only those who have legislative
franchise. And not only do tollway operators come under the
broad term all kinds of services, they also come under the
specific class described in Section 108 as all other franchise
grantees who are subject to VAT, except those under
Section 119 of this Code.
Tollway operators are franchise grantees and they do not
belong to exceptions (the low-income radio and/or television
broadcasting companies with gross annual incomes of less
than P10 million and gas and water utilities) that
Section119[9][13] spares from the payment of VAT
. The word franchise broadly covers government grants of a
special right to do an act or series of acts of public concern.
Petitioners, of course contend that tollway operators cannot be
considered franchise grantees under Section 108 since they
do not hold legislative franchises. But nothing in Section
108indicates that the franchise grantees it speaks of are

Page | 22

those who hold legislative franchises. Petitioners give no

reason, and the Court cannot surmise any, for making a
distinction between franchises granted by Congress and
franchises granted by some other government agency. The
latter, properly constituted, may grant franchises. Indeed,
franchises conferred or granted by local authorities, as agents
of the state, constitute as much a legislative franchise as
though the grant had been made by Congress itself. The term
franchise has been broadly construed as referring, not only
to authorizations that Congress directly issues in the form of a
special law, but also to those granted by administrative
agencies to which the power to grant franchises has been
delegated by Congress.

Tollway operators are, owing to the nature and object of their

business, franchise grantees. The construction, operation,
and maintenance of toll facilities on public improvements are
activities of public consequence that necessarily require a
special grant of authority from the state. Indeed, Congress
granted special franchise for the operation of tollways to the
Philippine National Construction Company, the former tollway
concessionaire for the North and South Luzon Expressways.
Apart from Congress, tollway franchises may also be granted
by the TRB, pursuant to the exercise of its delegated powers
under P.D. 1112.[13][17] The franchise in this case is
evidenced by a Toll Operation Certificate.

services rendered by tollway operators excludes such services

from the term sale of services under Section 108 of the
Code. But, again, nothing in Section 108 supports this
contention. The reverse is true. In specifically including by way
of example electric utilities, telephone, telegraph, and
broadcasting companies in its list of VAT-covered businesses,
Section 108 opens other companies rendering public service
for a fee to the imposition of VAT. Businesses of a public
nature such as public utilities and the collection of tolls or
charges for its use or service is a franchise.
ISSUE:
PETITIONERS
ARGUE
THAT
THE
STATEMENTSMADE BY SOME LAWMAKERS DURING
THE THEDELIBERATIONS ON THE VAT LAW SHOW
INTENT TOEXEMPT TOLLWAY OPERATORS.
CAN THESTATEMENTS OF THESE LAWMAKERS
BECONSIDERED BINDING ON THE INTERPRETATION
OFVAT COVERAGE?
RULING: No. Statements made by individual members of
congress in the consideration of a bill do not necessarily reflect
the sense of that body and are, consequently, not controlling in
the interpretation of law. The congressional will is ultimately
determined by the language of the law that the lawmakers
voted on.

ISSUE: PETITIONERS CONTEND THAT TOLL FEES ARE

OF PUBLIC NATURE AND THEREFORE NOT SALE
OFSERVICES. IS THEIR CONTENTION CORRECT?

ISSUE: BUT IN THE CASE OF MIAA VS. CA FEES PAIDTO

AIRPORTS WERE CONSIDERED TAX. DOES THE CASEOF
MIAA APPLY?

Ruling: No. The law in the same manner includes electric

utilities, telephone, telegraph, and broadcasting companies in
its list of vat-covered businesses. Their services are also of
public nature. Petitioners contend that the public nature of the

RULING:
No. The subject of the MIAA case is terminal
fee which goes to the government. Also the issue in the MIAA
case is whether paranaque city can sell at auction property of
the national government. The discussion on the terminal fee is

Page | 23

just to emphasize the fact that the local government cannot tax
the national government. Two. Petitioners argue that a toll fee
is a users tax and to impose VAT on toll fees is tantamount
to taxing a tax. Actually, petitioners base this argument on the
following discussion in Manila International Airport Authority
(MIAA) v.Court of Appeals: No one can dispute that properties
of public dominion mentioned in Article 420 of the Civil Code,
like roads, canals, rivers, torrents, ports and bridges
constructed by the State, are owned by the State. The term
ports includes seaports and airports. The MIAA Airport Lands
and Buildings constitute a port constructed by the State.
Under Article 420 of the Civil Code, theMIAA Airport Lands
and Buildings are properties of public dominion and thus
owned by the State or the Republic of the Philippines.x x x The
operation by the government of a tollway does not change the
character of the road as one for public use.
Someone must pay for the maintenance of the road, either the
public in directly through the taxes they pay the government,
or only those among the public who actually use the road
through the tollfees they pay upon using the road. The tollway
system is even amore efficient and equitable manner of taxing
the public for the maintenance of public roads. The charging of
fees to the public does not determine the character of the
property whether it is for public dominion or not. Article 420 of
the Civil Code defines property of public dominion as one
intended for public use. Even if the government collects toll
fees, the road is still intended for public use if anyone can
use the road under the same terms and conditions as the rest
of the public. The charging of fees, the limitation on the kind of
vehicles that can use the road, the speed restrictions and
other conditions for the use of the road do not affect the public
character of the road. The terminal fees MIAA charges to
passengers, as well as the landing fees MIAA charges to
airlines, constitute the bulk of the income that maintains the
operations of MIAA. The collection of such fees does not

change the character of MIAA as an airport for public use.

Such fees are often termed users tax. This means taxing
those among the public who actually use a public facility
instead of taxing all the public including those who never use
the particular public facility. A users tax is more equitable a
principle of taxation mandated in the 1987 Constitution.
Petitioners assume that what the Court said above, equating
terminal fees to a users tax must also pertain to tollway fees.
But the main issue in the MIAA case was whether or not
Paraaque City could sell airport lands and buildings under
MIAA administration at public auction to satisfy unpaid real
estate taxes. Since local governments have no power to tax
the national government, the Court held that the City could not
proceed with the auction sale. MIAA forms part of the national
government although not integrated in the department
framework. Thus, its airport lands and buildings are properties
of public dominion beyond the commerce of man under
Article420(1)[21][25] of the Civil Code and could not be sold at
publicauction. As can be seen, the discussion in the MIAA
case on toll roads and toll fees was made, not to establish a
rule that tollway fees are users tax, but to make the point that
airport lands and buildings are properties of public dominion
and that the collection of terminal fees for their use does not
make them private properties. Tollway fees are not taxes.
Indeed, they are not assessed and collected by the BIR and
do not go to the general coffers of the government. It would of
course be another matter if Congress enacts a law imposing a
users tax, collectible from motorists, for the construction and
maintenance of certain roadways. The tax in such a case goes
directly to the government for the replenishment of resources it
spends for the roadways. This is not the case here. What the
government seeks to tax here are fees collected from tollways
that are constructed, maintained, and operated by private
tollway operators at their own expense under the build,
operate, and transfer scheme that the government has
adopted for expressways. Except for a fraction given to the

Page | 24

government, the toll fees essentially end up as earnings of the

tollway operators.I n sum, fees paid by the public to tollway
operators for use of the tollways, are not taxes in any sense. A
tax is imposed under the taxing power of the government
principally for the purpose of raising revenues to fund public
expenditures. Toll fees, on the other hand, are collected by
private tollway operators as reimbursement for the costs and
expenses incurred in the construction, maintenance and
operation of the tollways, as well as to assure them a
reasonable margin of income. Although tollfees are charged
for the use of public facilities, therefore, they are not
government exactions that can be properly treated as a tax.
Taxes may be imposed only by the government under its
sovereign authority, toll fees may be demanded by either the
government or private individuals or entities, as an attribute of
ownership.

is the person liable for VAT. The latter merely shifts the burden
of VAT to the tollway user as part of the toll fees. For this
reason, VAT on tollway operations cannot be a tax on tax even
if toll fees were deemed as a users tax. VAT is assessed
against the tollway operators gross receipts and not
necessarily on the toll fees. Although the tollway operator may
shift the VAT burden to the tollway user, it will not make the
latter directly liable for the VAT. The shifted VAT burden
simply becomes part of the toll fees that one has to pay in
order to use the tollways

Parenthetically, VAT on tollway operations cannot be

deemed a tax on tax due to the nature of VAT as an
indirect tax. In indirect taxation, a distinction is made
between the liability for the tax and burden of the tax. The
seller who is liable for the VAT may shift or pass on the
amount of VAT it paid on goods, properties or services to the
buyer. In such a case, what is transferred is not the sellers
liability but merely the burden of the VAT.Thus, the seller
remains directly and legally liable for payment of the VAT, but
the buyer bears its burden since the amount of VAT paid by
the former is added to the selling price. Once shifted, the VAT
ceases to be a tax[26][30] and simply becomes part of the cost
that the buyer must pay in order to purchase the good,
property or service. Consequently, VAT on tollway operations
is not really a tax on the tollway user, but on the tollway
operator. Under Section 105of the Code, [27][31] VAT is
imposed on any person who, in the course of trade or
business, sells or renders services for a fee. In other words,
the seller of services, who in this case is the tollway operator,

Page | 25

NATIONAL DEVELOPMENT CO V. COMMISSIONER OF

INTERNAL REVENUE, 151 SCRA 472 (1987)
FACTS: NDC entered into contracts with several Japanese
companies in Tokyo for the construction of vessels. Initial
payments were made in cash and through irrevocable letters
of credit.
1. When the ships were delivered, NDC remitted to Tokyo
a total amount of US$4,066,580.70 as interest on the
balance of the purchase price. No tax was withheld.
2. Commissioner on Internal Revenue (CIR) then held
NDC liable on such tax in the amount of
P5,115,234.74.
3. BIR thereupon served upon NDC a warrant of distraint
and levy to enforce its collection after negotiations with
NDC failed. NDC went to the Court of Tax Appeals
4. NDC argued that the Japanese shipbuilders were not
subject to tax under Sec 37 of the Tax Code because
the signing of the contract, the construction of the
vessels and the payment of the price to the delivery of
the ships were all done in Tokyo.

The law specifies interest derived from sources within the

Philippines, and interest on bonds, notes, or other interestbearing obligations of residents, corporate or otherwise.
Nothing here speaks of the act or activity of non-resident
corporations in the Philippines, nor the place where the
contract is signed. The residence of the obligor who pays the
interest rather than the physical location of the securities,
bonds or notes or the place of payment is the determining
factor of the source of interest income.
The imposition of deficiency tax in this case is a PENALTY for
its failure to withhold the same from the Japanese
shipbuilders. Such liability is imposed by Sec 53(c) of the Tax
Code. Petitioner NDC was remiss in the discharge of its
obligation as the withholding agent of the government and so it
should be liable for its omission.

ISSUE: WON NDC is liable for deficiency tax

HELD: No. The Japanese Shipbuilders were liable to tax on
the interest remitted to them under Sec 37 of the Tax Code.
The provision does not speak of activity but of source which
in this case is the NDC. NDC is a domestic and resident
corporation with principal offices in Manila. Under the terms of
the law, then, the Governments right to levy and collect
income tax on interest received by foreign corporations not
engaged in trade or business within the Philippines is not
planted upon the condition that the activity or laborand the
sale from which the (interest) income flowed from its situs in
the Philippines.

Page | 26

MACEDA V. MACARAIG, 223 SCRA 217 (1993)

FACTS: Petitioner moves for reconsideration of the decision
in the instant case promulgated on May 31,1991 sustaining the
exemption of private respondent National Power Corporation
(NPC) from all forms of taxation.
HELD: A chronological review of the NPC laws will show that
it has been the lawmakers intention that the NPC was to be
completely exempt from all forms of taxes direct or indirect.
On the issues as to who pays for the taxes due the
Government fro the sale of bunker fuel oil to the NPC, the
Court, quoting DOJ Opinion No. 106, series of 1954, ruled that
oil companies which supply bunker fuel oil to the NPC have to
pay the taxes imposed upon said bunker fuel oil sold to the
NPC. By the very nature of indirect taxation, the economic
burden of such taxation is expected to be passed on through
the channels of commerce to the user or consumer of the
goods sold. Because, however, the NPC has been exempted
from both direct and indirect taxation, the NPC must be held
exempted from absorbing the economic burden of indirect
taxation. If the NPC purchases oil from the oil companies, the
NPC is entitled to be reimbursed by the BIR for the part of the
buying price of NPC which verifiably represents the tax already
paid by the oil company vendor to the BIR.

HYDRO RESOURCES V. CA, GR NO. 80276 192 SCRA 604

(1990)
FACTS: Sometime in Ausgust 1978, the National Irrigation
Administration (NIA), a government owned and controlled
corporation entered into an agreement with petitioner Hydro
Resources Contractors Corporation (Hydro), for the
construction of the Magat River Multipurpose Project in
Isabela. The contract provided that Hydro will import parts,
construction equipment and tools and NIA undertakes the
payment of all the import duties and taxes incident to the
importations deductible from the proceeds of the contract
price. Tools and equipment arrived during 1978 and 1979.
NIA reneged and failed in the compliance of its tax obligation,
thus, causing the transfer and its sale to Hydro on December
6, 1982 and March 24, 1983. Upon the transfer of the
ownership of the said equipment, Hydro was assessed by the
Bureau of Customs the corresponding customs duty and
compensating tax which was later on paid by Hydro. In
addition, Hydro was assessed addition 3% ad valorem duty
pursuant to EO 860 which took effect in December 21, 1982.
Hydro also paid this amount but this time under protest. The
Collector of Customs and Customs Commissioner ordered the
refund of the amount paid for the ad valorem duty in the form
of a tax credit. But it was denied by the Secretary of Finance
and motion was denied by the CTA.
ISSUE: WON the EO 860 should have retroactive effect.
HELD: No
If the sale or transfer of the ownership of the equipment were
effected to petitioner Hydro after December 21, 1982, the
effective date of EO No. 830, the #% ad valorem duty is
imposable as said EO 860 was applied prospectively and
rightly. If the sale or transfer of ownership of the
equipment to Hydro were prior to the effectivity of EO 860
then said EO 860 is inapplicable, and petitioner is not

Page | 27

liable to pay the 3% ad valorem duty and is entitled to the

refund thereof.
It is a cardinal rule that laws shall have no retroactive effect,
unless the contrary is provided. Except for a statement
providing for its immediate execution, EO 860 does not
provide for its retroactivity. Consequently, the importations
in question which arrived in 1977 and 1978 are not subject to
the 3% additional ad valorem duty, the same being imposed
only on those whose letter of credit were opened after the
promulgation of EO 860. The formality of vesting of title over
the equipment was not an unwarranted expectation but a
matter of an implementation of a pre-existing agreement,
hence the imported articles can only be subject to the rates of
import duties/taxes prevailing at the time of entry or withdrawal
from customs custody in 1978 and 1979, thus foreclosing any
retroactive application of the 1982 EO.

COMMISSION OF INTERNAL REVENUE (CIR) V. AYALA

SECURITIES CORP, 101 SCRA 231 (1980)
FACTS: Petitioner CIR filed a MR of the Courts decision
holding that the 25% surtax assessment made by CIR in 1961
against Ayala securities corp. fell under the five-year
prescriptive period provided in sec. 331 of the National Internal
Revenue Code (NIRC) and that the assessment had been
made after the expiration of the said five-year prescriptive
period and was of no binding force and effect.
Section 331 of the Revenue Code provides:
SEC. 331. Period of limitation upon assessment and
collection. Except as provided in the succeeding section,
internal revenue taxes shall be assessed within five years after
the return was filed, and no proceeding in court without
assessment for the collection of such taxes shall be begun
after the expiration of such period. For the purpose of this
section a return filed before the last day prescribed by law for
the filing thereof shall be considered as filed on such last day;
Provided, That this limitation shall not apply to cases already
investigated prior to the approval of this Code.
SEC. 332 Exceptions as to period of limitation of assessment
and collection of taxes. (a) In the case of a false or
fraudulent return with intent to evade tax or of failure to file a
return, the tax may be assessed, or a proceeding in court for
the collection of such tax may be begun without assessment,
at any time within ten years after the discovery of the falsity,
fraud, or omission.
(b) Where before the expiration of the time prescribed in the
preceding section for the assessment of the tax, both the
Commissioner of Internal Revenue and the taxpayer have
consented in writing to its assessment after such time, the tax
may be assessed at any time prior to the expiration of the
period agreed upon. The period so agreed upon may be

Page | 28

extended by subsequent agreements in writing made before

the expiration of the period previously agreed upon.
(c) Where the assessment of any internal revenue tax has
been made within the period of limitation above-prescribed
such tax may be collected by distraint or levy by a proceeding
in court, but only if begun (1) within five years after the
assessment of the tax, or (2) prior to the expiration of any
period for collection agreed upon in writing by the
Commissioner of Internal Revenue and the taxpayer before
the expiration of such five-year period. The period so agreed
upon may be extended by subsequent agreements in writing
made before the expiration of the period previously agreed
upon.
ISSUE:
WON the right to assess unpaid taxes is
imprescriptible
HELD: YES.

partnership then set up by the individual shareholders

belonging to the same family and that the prima facie evidence
and presumption set up by the Tax Code, therefore applied
without having been adequately rebutted by the respondent
corporation.
Petitioner commissioner's plausible alternative contention is
that even if the 25% surtax were to be deemed subject to
prescription, computed from the filing of the income tax return
in 1955, the intent to evade payment of the surtax is an
inherent quality of the violation and the return filed must
necessarily partake of a false and/or fraudulent character
which would make applicable the 10-year prescriptive period
provided in section 332(a) of the Tax Code and since the
assessment was made in 1961 (the sixth year), the
assessment was clearly within the 10-year prescriptive period.
The Court sees no necessity, however, for ruling on this point
in view of its adherence to the ruling in the earlier raise of
United Equipment & Supply Co., supra, holding that the 25%
surtax is not subject to any statutory prescriptive period.

In the absence of express statutory provision, the right of the

government to assess unpaid taxes is imprescriptible. Since
there is no express statutory provision limiting the right of the
Commissioner of Internal Revenue to assess the tax on
unreasonable accumulation of surplus provided in Section 25
of the Revenue Code, said tax may be assessed at any time.
The underlying purpose of the additional tax in question on a
corporation's improperly accumulated profits or surplus is as
set forth in the text of section 25 of the Tax Code itself to avoid
the situation where a corporation unduly retains its surplus
instead of declaring and paving dividends to its shareholders
or members who would then have to pay the income tax due
on such dividends received by them. The record amply shows
that respondent corporation is a mere holding company of its
shareholders through its mother company, a registered co-

Page | 29

VILLANUEVA V. CITY OF ILOILO, 26 SCRA 578 (1968)

FACTS: In 1946, the Municipal Board of Iloilo City enacted
Ordinance 86 imposing license tax fees on the following: (1)
tenement house; (2) tenement house, partly or wholly engaged
in or dedicated to business in the streets of JM Basa, Iznart;
(3) tenement house, partly or wholly engaged in business in
any other streets
1. Petitioners Villanueva assailed the validity and
constitutionality of the said ordinance. Spouses were
the owners of 4 tenement houses
2. The SC held in City of Iloilo v. Villanueva (1959) that
the ordinance is ultra vires
3. With the passage of RA 2264 (Local Autonomy Act),
the City of Iloilo enacted Ordinance 11, imposing a
license tax on persons engaged in the business of
operating tenement houses
4. Villanueva filed a complaint praying that the Ordinance
be declared invalid for being beyond the powers of the
Municipal Board to enact
5. The lower court held in favor of Villanueva citing the
following grounds: (a) RA 2264 does not empower
cities to impose apartment taxes; (b) the same is
oppressive and unreasonable since it penalizes
tenement owners who fail to pay the tax; (c) it
constitutes double taxation; and (d) it violates the rule
of uniformity of taxation
ISSUE: Is Ordinance 11 (1960) of respondent City illegal
because it imposes double taxation
HELD: No. Villanuevas contention that they are doubly taxed
because they are paying the real estate taxes and the
tenement tax imposed by the ordinance in question, is devoid
of merit. It is well-settled that a license tax may be levied upon
a business or occupation although the land or property used in
connection therewith is subject to property tax. The State may

collect an ad valorem tax on property used in a calling, and at

the same time impose a license tax on that calling, the
imposition of the latter kind of tax being in no sense a double
tax.
In order to constitute double taxation in the objectionable or
prohibited sense:
1. The property must be taxed twice when it should be
taxed but once
2. Both taxes must be imposed on the same property or
subject-matter, for the same purpose by the same
State, Government or taxing authority, within the same
jurisdiction or taxing district, during the same taxing
period; and
3. They must be the same kind or character of tax
It has been shown that a real estate tax and the tenement tax
imposed by the Ordinance, although imposed by the same
taxing authority, are not of the same kind or character.
At any rate, there is no constitutional prohibition against
double taxation in the Philippines. It is something not favored,
but is permissible, provided that some other constitutional
requirement is not thereby violated, such as the requirement
that taxes must be uniform.
UNIFORMITY OF TAXATION
The SC held that tenement houses constitute a distinct class
of property; and that taxes are uniform and equal when
imposed upon all property of the same class or character
within the taxing authority. The fact that the owners of other
classes of buildings in Iloilo are not imposed upon by the
ordinance, or that tenement taxes are imposed in other cities
do not violate the rule of equality and uniformity. The rule
does not require that taxes for the same purpose should be
imposed on different territorial subdivisions at the same time.

Page | 30

So long as the burden tax falls equally and impartially on all

owners or operators of tenement houses similarly classified or
situated, equality and uniformity is accomplished.

SANCHEZ V. CIR, 97 PHIL 687 (1955)

FACTS:
Veronica Sanchez plaintiff and appellant
constructed her 4-door (apartment) accessoria purposely for
rent (or profit)

She has been continuously leasing the same to

3rd persons since its construction in 1947; that she
manages her property herself; that said leased holding
appears to be her main source of income

She is engaged in the leasing of real estate,

and is a real estate dealer as defined by Section 194(s)
of the Internal Revenue Code, as amended by
Republic Act No. 42.
ISSUE: Whether there is double taxation
HELD: Separated tax levied upon a business or occupation
and the property used therein does not amount to double
taxation. A license tax may be levied upon a business or
occupation although the land or property used therein is
subject to property tax; and the State may collect an ad
valorem tax on property used in a calling, and at the same
time imposes a license tax on the pursuit of that calling, the
imposition of the latter kind of tax being in no sense a double
tax.
Note:
The law applicable to this case is Section 194(s) of the Tax
Code before it was amended by Republic Act No. 588 which
defines real estate dealers as follows:
Real Estate dealers, includes all persons who for their own
account are engaged in the sale of lands, buildings or interests
therein or in leasing real estate. (R.A. No. 42)

Page | 31

PUNSALAN V. MUNICIPA BOARD OF MANILA 95 PHIL 46

(1954)
FACTS: Ordinance 3398 was approved by the Municipal
Board of the City of Manila on July 25, 1950, imposing a
municipal occupation tax on persons exercising various
professions in the city. The Ordinance was enacted pursuant
to RA 409 Section 18[1] which empowers the Municipal Board
of said city to impose a municipal occupation tax, not to
exceed P50 per annum, on persons engaged in the various
professions. Petitioners who are professionals (lawyers,
medical practitioner, public accountant, dental surgeon and
pharmacist) in the City filed a suit calling for the annulment of
Ordinance No. 3398 together with the provision of the Manila
Charter authorizing it and the refund of taxes collected under
the ordinance but paid under protest. The lower court upheld
the validity of the provision of law authorizing the enactment of
the ordinance but the ordinance was declared illegal and void
on the ground that the penalty therein provided for nonpayment of the tax was not legally authorized. Petitioner filed
an appeal to the SC and contends that this ordinance and the
law authorizing it constitute class legislation, are unjust and
oppressive, and authorize what amounts to double taxation.

peculiarly within the domain of the political department

and the courts would do well not to encroach upon it.
The argument against double taxation may not be invoked
where one tax is imposed by the state and the other is
imposed by the city, it being widely recognized that there
is nothing inherently obnoxious in the requirement that
license fees or taxes be exacted with respect to the same
occupation, calling or activity by both the state and the
political subdivision thereof. The SC reversed the judgment
of the lower court with regards to the ordinance and affirmed
as to the law authorizing it.
SEPARATE OPINION:
Paras, C.J., dissenting:
A professional who has paid the occupation tax under the
National Internal Revenue Code should be allowed to practice
in Manila even without paying the similar tax imposed by
Ordinance No. 3398. The City cannot give what said
professional already has, said ordinance is not invalid. But that
only one tax, either under the Internal Revenue Code or under
Ordinance 3398 should be imposed upon a practitioner in
Manila.

ISSUE: WON the ordinance and law authorizing it constitute

class legislation, and authorize what amounts to double
taxation.
HELD: No
The Legislature may, in its discretion, select what
occupations shall be taxed , and in the exercise of that
discretion it may tax all, or it may select for taxation
certain classes and leave the others untaxed. It is not for
the courts to judge what particular cities or municipalities
should be empowered to impose occupation taxes in addition
to those imposed by the National Government. The matter is

Page | 32

THE CITY OF MANILA V.

COCA-COLA BOTTLERS
PHILIPPINES, G.R. NO 181845 (2009)
FACTS: Coca-cola had been paying the City of Manila local
business tax only under section 14 of Tax Ordinance 7794,
being expressly exempted from the business tax under section
21 of the same Tax ordinance 7794.

7988, as amended, were not of the same kind or character;

therefore, there was no double taxation.

Petitioner City of Manila subsequently approved Tax

Ordinance No. 7988, amending section 14 of Tax Ordinance
No. 7794, by increasing the tax rates applicable to certain
establishments operating within the territorial jurisdiction of the
City of Manila; and Section 21, by deleting the proviso found
therein, which stated that all registered businesses in the City
of Manila that are already paying the aforementioned tax shall
be exempted from payment thereof. Petitioner City of Manila
approved only after a year, another tax ordinance, Tax
Ordinance No. 8011, amending Tax Ordinance No. 7988.

HELD: YES.

Tax Ordinances No. 7988 and No. 8011 were later declared
by the Court null and void.
However, before the Court could declare Tax Ordinance No.
7988 and Tax Ordinance No. 8011 null and void, petitioner
City of Manila assessed respondent on the basis of Section 21
of Tax Ordinance No. 7794, as amended by the
aforementioned tax ordinances, for deficiency local business
taxes, penalties, and interest, in the total amount of
P18,583,932.04, for the third and fourth quarters of the year
2000. Respondent filed a protest with petitioner Toledo
on the ground that the said assessment amounted to
double taxation, as respondent was taxed twice, i.e.,
under Sections 14 and 21 of Tax Ordinance No. 7794, as
amended by Tax Ordinances No. 7988 and No. 8011.
The RTC ruled that the business taxes imposed upon the
respondent under Sections 14 and 21 of Tax Ordinance No.

ISSUE:
WON the enforcement of section 21 of the Tax
Ordinance no. 7794 as amended constitutes DOUBLE
TAXATION

Double taxation means taxing the same property twice when it

should be taxed only once; that is, taxing the same person
twice by the same jurisdiction for the same thing. It is
obnoxious when the taxpayer is taxed twice, when it should be
but once. Otherwise described as direct duplicate taxation,
the two taxes must be imposed on the same subject matter,
for the same purpose, by the same taxing authority, within the
same jurisdiction, during the same taxing period; and the taxes
must be of the same kind or character.
Using the aforementioned test, the Court finds that there is
indeed double taxation if respondent is subjected to the taxes
under both Sections 14 and 21 of Tax Ordinance No. 7794,
since these are being imposed: (1) on the same subject matter
the privilege of doing business in the City of Manila; (2) for
the same purpose to make persons conducting business
within the City of Manila contribute to city revenues; (3) by the
same taxing authority petitioner City of Manila; (4) within the
same taxing jurisdiction within the territorial jurisdiction of the
City of Manila; (5) for the same taxing periods per calendar
year; and (6) of the same kind or character a local business
tax imposed on gross sales or receipts of the business.
The distinction petitioners attempt to make between the taxes
under Sections 14 and 21 of Tax Ordinance No. 7794 is
specious. The Court revisits Section 143 of the LGC, the very
source of the power of municipalities and cities to impose a

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local business tax, and to which any local business tax

imposed by petitioner City of Manila must conform. It is
apparent from a perusal thereof that when a municipality
or city has already imposed a business tax on
manufacturers, etc. of liquors, distilled spirits, wines, and
any other article of commerce, pursuant to Section 143(a)
of the LGC, said municipality or city may no longer
subject the same manufacturers, etc. to a business tax
under Section 143(h) of the same Code. Section 143(h)
may be imposed only on businesses that are subject to excise
tax, VAT, or percentage tax under the NIRC, and that are not
otherwise specified in preceding paragraphs. In the same
way, businesses such as respondents, already subject to a
local business tax under Section 14 of Tax Ordinance No.
7794 [which is based on Section 143(a) of the LGC], can no
longer be made liable for local business tax under Section 21
of the same Tax Ordinance [which is based on Section 143(h)
of the LGC].

CIR V. SC JOHNSON & SONS, 309 SCRA 87 (1999)

FACTS: SC Johnson, a domestic corporation, entered into a
license agreement with SC Johnson USA. For the use of the
trademark or technology, respondent SC Johnson was obliged
to pay SC Johnson USA royalties based on a percentage of
net sales and subjected the same to 25% withholding tax on
royalty payments which respondent paid from July 1992 to
May 1993
1. Subsequently, respondent filed with the International
Tax Affairs Division (ITAD) of BIR a claim for refund of
overpaid withholding tax on royalties arguing that only
10% withholding tax is applicable to them pursuant to
the most-favored nation clause of the RP-US Tax
Treaty in relation to the RP-West Germany Tax Treaty
2. Petitioner argues that under Art 12(2)(b)(iii) of the RPUS Tax Treaty, the lowest rate of the Philippine tax at
10% may be imposed on royalties derived by a US
resident from sources within the Philippines only if the
circumstances of the US resident are similar to those of
West Germany. CIR further argues that SC Johnsons
invocation of the most favored nation clause is in the
nature of a claim for exemption from the application of
the regular tax rate at 25% for royalties, the provisions
of the treaty must be construed strictly against it
3. SC Johnson, on the other hand, avers that the most
favored nation clause under the RP-US Tax Treaty
refers to royalties paid under similar circumstances as
those royalties subject to tax in other treaties; paid
under similar circumstances does not refer to payment
of the tax but to the subject matter of the tax, i.e.
royalties, because the most favored nation clause is
intended to allow the taxpayer in one state to avail of
more liberal provisions contained in another tax treaty
wherein the country of residence of such taxpayer in
that other tax treaty is the same as that in the original
tax treaty under which the taxpayer is liable

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ISSUE: WON SC Johnson USA is entitled to the most favored

nation tax rate of 10% on royalties, as provided in the RP-US
Tax Treaty in relation to the RP-West Germany Tax Treaty
HELD: No. In negotiating tax treaties, the underlying rationale
for reducing the tax rate is that the Philippines will give up a
part of the tax in the expectation that the tax given up for this
particular investment is not taxed by the other country. In the
case at bar, the state of source is the Philippines because the
royalties are paid for the right to use property rights, i.e.
trademarks, patents and technology, located within the
Philippines. The US is the state of residence since the
taxpayer, SC Johnson USA, is based there. Under the RP-US
Tax Treaty, the state of residence and the state of source are
both permitted to tax the royalties, with a restraint on the tax
that may be collected by the state of source. Furthermore, the
method employed to give relief from double taxation is the
allowance of a tax credit to US citizens or residents against US
tax, but such amount shall not exceed the limitations provided
by the US law for the taxable year. Under Art 13 of the
agreement, the Philippines may impose 3 rates: 25% of the
gross amount of the royalties; 15% when the royalties are paid
by a corporation registered within the Philippine Board of
Investment and engaged in preferred areas or activities; or the
lower rate of Philippine tax that may be imposed on royalties of
the same kind paid under similar circumstances to a resident
of a third state.
Given the purpose underlying tax treaties and the rationale for
the most favored nation clause, the concessional tax rate of
10% provided for in the RP-Germany Tax Treaty should apply
only if the taxes imposed upon royalties in the RP-US Tax
Treaty and in the RP-Germany Tax Treaty are paid under
similar circumstances. This would mean that SC Johnson
must prove that the RP-US Tax Treaty grants similar tax reliefs

to US residents in respect of the taxes imposable upon

royalties earned from sources within the Philippines as those
allowed to their German counterparts in the RP-Germany Tax
Treaty.
The RP-US and RP-Germany Tax Treaties do not contain
similar provisions on tax crediting. Art 24 of the RP-Germany
Tax Treaty expressly allows crediting against German income
and corporation tax of 20% of the gross amount of royalties
paid under the law of the Philippines. On the other hand, Art
23 of the RP-US Tax Treaty, which is the counterpart provision
with respect to relief for double taxation, does not provide for
similar crediting of 20% of the gross amount of royalties paid.
The ultimate reason for avoiding double taxation is to
encourage foreign investors to invest in the Philippines. The
goal of double taxation would be thwarted if such treaties did
not provide for effective measures to minimize, if not
completely eliminate, the tax burden laid upon the income or
capital of the investor. Thus, if the rates of tax are lowered by
the state of source (Philippines), there should be a
concomitant commitment on the part of the state of residence
(US) to grant some form of tax relief, whether this be in the
form of tax credit or exemption.
The purpose of a most favored nation clause is to grant to the
contracting party treatment not less favorable than that which
has been or may be granted to the "most favored" among
other countries. The most favored nation clause is intended to
establish the principle of equality of international treatment by
providing that the citizens or subjects of the contracting
nations may enjoy the privileges accorded by either party to
those of the most favored nation. The essence of the principle
is to allow the taxpayer in one state to avail of more liberal
provisions granted in another tax treaty to which the country of
residence of such taxpayer is also a party provided that the

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subject matter of taxation, in this case royalty income, is the

same as that in the tax treaty under which the taxpayer is
liable. Both Art 13 of the RP-US Tax Treaty and Art 12 (2) (b)
of the RP-West Germany Tax Treaty speaks of tax on royalties
for the use of trademark, patent, and technology. The
entitlement of the 10% rate by US firms despite the absence of
a matching credit (20% for royalties) would derogate from the
design behind the most grant equality of international
treatment since the tax burden laid upon the income of the
investor is not the same in the two countries. The similarity in
the circumstances of payment of taxes is a condition for the
enjoyment of most favored nation treatment precisely to
underscore the need for equality of treatment.

CIR V. LEDNICKY, G.R. NO L-18169 (1964)

FACTS: Respondents, Sps. Lednicky, both American citizens
residing in the Philippines, and have derived all their income
from Philippine sources for the taxable years in question.
ISSUE: WON a citizen of the United States residing in the
Philippines, who derives income wholly from sources within
the Republic of the Philippines, may deduct from his gross
income the income taxes he has paid to the United States
government for the taxable year on the strength of Section 30
(C-1) of the Philippine Internal Revenue Code. (reading as
follows:)
HELD: An alien resident who derives income wholly from
sources within the Philippines may not deduct from gross
income the income taxes he paid to his home country for the
taxable year.
An alien resident is not entitled to tax credit for foreign income
taxes paid when his income his income is derived wholly from
sources within the Philippines.
Double taxation becomes obnoxious only when the taxpayer is
taxed twice for the benefit of the same government entity. In
the present case, although the taxpayer would have to pay two
(2) taxes on the same income but the Philippine government
only receives the proceeds of one tax, there is no obnoxious
double taxation.

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