LIMITATIONS ON THE POWER OF TAXATION

A. Inherent Limitations
G.R. No. L-10405

December 29, 1960

WENCESLAO PASCUAL, in his official capacity as Provincial Governor of Rizal, petitionerappellant, vs. THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET
AL., respondents-appellees.
Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.
Office of the Asst. Solicitor General Jose G. Bautista and Solicitor A. A. Torres for appellee.

CONCEPCION, J.:
Appeal, by petitioner Wenceslao Pascual, from a decision of the Court of First Instance of Rizal,
dismissing the above entitled case and dissolving the writ of preliminary injunction therein issued,
without costs.
On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal, instituted this action
for declaratory relief, with injunction, upon the ground that Republic Act No. 920, entitled "An Act
Appropriating Funds for Public Works", approved on June 20, 1953, contained, in section 1-C (a) thereof,
an item (43[h]) of P85,000.00 "for the construction, reconstruction, repair, extension and improvement"
of Pasig feeder road terminals (Gen. Roxas Gen. Araneta Gen. Lucban Gen. Capinpin Gen.
Segundo Gen. Delgado Gen. Malvar Gen. Lim)"; that, at the time of the passage and approval of
said Act, the aforementioned feeder roads were "nothing but projected and planned subdivision roads, not
yet constructed, . . . within the Antonio Subdivision . . . situated at . . . Pasig, Rizal" (according to the
tracings attached to the petition as Annexes A and B, near Shaw Boulevard, not far away from the
intersection between the latter and Highway 54), which projected feeder roads "do not connect any
government property or any important premises to the main highway"; that the aforementioned Antonio
Subdivision (as well as the lands on which said feeder roads were to be construed) were private properties
of respondent Jose C. Zulueta, who, at the time of the passage and approval of said Act, was a member of
the Senate of the Philippines; that on May, 1953, respondent Zulueta, addressed a letter to the Municipal
Council of Pasig, Rizal, offering to donate said projected feeder roads to the municipality of Pasig, Rizal;
that, on June 13, 1953, the offer was accepted by the council, subject to the condition "that the donor
would submit a plan of the said roads and agree to change the names of two of them"; that no deed of
donation in favor of the municipality of Pasig was, however, executed; that on July 10, 1953, respondent
Zulueta wrote another letter to said council, calling attention to the approval of Republic Act. No. 920,
and the sum of P85,000.00 appropriated therein for the construction of the projected feeder roads in
question; that the municipal council of Pasig endorsed said letter of respondent Zulueta to the District
Engineer of Rizal, who, up to the present "has not made any endorsement thereon" that inasmuch as the
projected feeder roads in question were private property at the time of the passage and approval of
Republic Act No. 920, the appropriation of P85,000.00 therein made, for the construction, reconstruction,

repair, extension and improvement of said projected feeder roads, was illegal and, therefore, void ab
initio"; that said appropriation of P85,000.00 was made by Congress because its members were made to
believe that the projected feeder roads in question were "public roads and not private streets of a private
subdivision"'; that, "in order to give a semblance of legality, when there is absolutely none, to the
aforementioned appropriation", respondents Zulueta executed on December 12, 1953, while he was a
member of the Senate of the Philippines, an alleged deed of donation copy of which is annexed to the
petition of the four (4) parcels of land constituting said projected feeder roads, in favor of the
Government of the Republic of the Philippines; that said alleged deed of donation was, on the same date,
accepted by the then Executive Secretary; that being subject to an onerous condition, said donation
partook of the nature of a contract; that, such, said donation violated the provision of our fundamental law
prohibiting members of Congress from being directly or indirectly financially interested in any contract
with the Government, and, hence, is unconstitutional, as well as null and void ab initio, for the
construction of the projected feeder roads in question with public funds would greatly enhance or increase
the value of the aforementioned subdivision of respondent Zulueta, "aside from relieving him from the
burden of constructing his subdivision streets or roads at his own expense"; that the construction of said
projected feeder roads was then being undertaken by the Bureau of Public Highways; and that, unless
restrained by the court, the respondents would continue to execute, comply with, follow and implement
the aforementioned illegal provision of law, "to the irreparable damage, detriment and prejudice not only
to the petitioner but to the Filipino nation."
Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be declared null and void;
that the alleged deed of donation of the feeder roads in question be "declared unconstitutional and,
therefor, illegal"; that a writ of injunction be issued enjoining the Secretary of Public Works and
Communications, the Director of the Bureau of Public Works and Highways and Jose C. Zulueta from
ordering or allowing the continuance of the above-mentioned feeder roads project, and from making and
securing any new and further releases on the aforementioned item of Republic Act No. 920, and the
disbursing officers of the Department of Public Works and Highways from making any further payments
out of said funds provided for in Republic Act No. 920; and that pending final hearing on the merits, a
writ of preliminary injunction be issued enjoining the aforementioned parties respondent from making
and securing any new and further releases on the aforesaid item of Republic Act No. 920 and from
making any further payments out of said illegally appropriated funds.
Respondents moved to dismiss the petition upon the ground that petitioner had "no legal capacity to sue",
and that the petition did "not state a cause of action". In support to this motion, respondent Zulueta
alleged that the Provincial Fiscal of Rizal, not its provincial governor, should represent the Province of
Rizal, pursuant to section 1683 of the Revised Administrative Code; that said respondent is " not aware of
any law which makes illegal the appropriation of public funds for the improvements of . . . private
property"; and that, the constitutional provision invoked by petitioner is inapplicable to the donation in
question, the same being a pure act of liberality, not a contract. The other respondents, in turn, maintained
that petitioner could not assail the appropriation in question because "there is no actual bona fide case . . .
in which the validity of Republic Act No. 920 is necessarily involved" and petitioner "has not shown that
he has a personal and substantial interest" in said Act "and that its enforcement has caused or will cause
him a direct injury."

Acting upon said motions to dismiss, the lower court rendered the aforementioned decision, dated
October 29, 1953, holding that, since public interest is involved in this case, the Provincial Governor of
Rizal and the provincial fiscal thereof who represents him therein, "have the requisite personalities" to
question the constitutionality of the disputed item of Republic Act No. 920; that "the legislature is without
power appropriate public revenues for anything but a public purpose", that the instructions and
improvement of the feeder roads in question, if such roads where private property, would not be a public
purpose; that, being subject to the following condition:
The within donation is hereby made upon the condition that the Government of the Republic of
the Philippines will use the parcels of land hereby donated for street purposes only and for no
other purposes whatsoever; it being expressly understood that should the Government of the
Republic of the Philippines violate the condition hereby imposed upon it, the title to the land
hereby donated shall, upon such violation, ipso facto revert to the DONOR, JOSE C. ZULUETA.
(Emphasis supplied.)
which is onerous, the donation in question is a contract; that said donation or contract is "absolutely
forbidden by the Constitution" and consequently "illegal", for Article 1409 of the Civil Code of the
Philippines, declares in existence and void from the very beginning contracts "whose cause, objector
purpose is contrary to law, morals . . . or public policy"; that the legality of said donation may not be
contested, however, by petitioner herein, because his "interest are not directly affected" thereby; and that,
accordingly, the appropriation in question "should be upheld" and the case dismissed.
At the outset, it should be noted that we are concerned with a decision granting the aforementioned
motions to dismiss, which as much, are deemed to have admitted hypothetically the allegations of fact
made in the petition of appellant herein. According to said petition, respondent Zulueta is the owner of
several parcels of residential land situated in Pasig, Rizal, and known as the Antonio Subdivision, certain
portions of which had been reserved for the projected feeder roads aforementioned, which, admittedly,
were private property of said respondent when Republic Act No. 920, appropriating P85,000.00 for the
"construction, reconstruction, repair, extension and improvement" of said roads, was passed by Congress,
as well as when it was approved by the President on June 20, 1953. The petition further alleges that the
construction of said roads, to be undertaken with the aforementioned appropriation of P85,000.00, would
have the effect of relieving respondent Zulueta of the burden of constructing his subdivision streets or
roads at his own expenses, 1and would "greatly enhance or increase the value of the subdivision" of said
respondent. The lower court held that under these circumstances, the appropriation in question was
"clearly for a private, not a public purpose."
Respondents do not deny the accuracy of this conclusion, which is self-evident. 2However, respondent
Zulueta contended, in his motion to dismiss that:
A law passed by Congress and approved by the President can never be illegal because Congress is
the source of all laws . . . Aside from the fact that movant is not aware of any law which makes
illegal the appropriation of public funds for the improvement of what we, in the meantime, may
assume as private property . . . (Record on Appeal, p. 33.)

The first proposition must be rejected most emphatically, it being inconsistent with the nature of the
Government established under the Constitution of the Republic of the Philippines and the system of
checks and balances underlying our political structure. Moreover, it is refuted by the decisions of this
Court invalidating legislative enactments deemed violative of the Constitution or organic laws. 3
As regards the legal feasibility of appropriating public funds for a public purpose, the principle according
to Ruling Case Law, is this:
It is a general rule that the legislature is without power to appropriate public revenue for anything
but a public purpose. . . . It is the essential character of the direct object of the expenditure which
must determine its validity as justifying a tax, and not the magnitude of the interest to be affected
nor the degree to which the general advantage of the community, and thus the public welfare, may
be ultimately benefited by their promotion. Incidental to the public or to the state, which results
from the promotion of private interest and the prosperity of private enterprises or business, does
not justify their aid by the use public money. (25 R.L.C. pp. 398-400; Emphasis supplied.)
The rule is set forth in Corpus Juris Secundum in the following language:
In accordance with the rule that the taxing power must be exercised for public purposes only,
discussed supra sec. 14, money raised by taxation can be expended only for public purposes and
not for the advantage of private individuals. (85 C.J.S. pp. 645-646; emphasis supplied.)
Explaining the reason underlying said rule, Corpus Juris Secundum states:
Generally, under the express or implied provisions of the constitution, public funds may be used
only for public purpose. The right of the legislature to appropriate funds is correlative with its
right to tax, and, under constitutional provisions against taxation except for public purposes and
prohibiting the collection of a tax for one purpose and the devotion thereof to another purpose, no
appropriation of state funds can be made for other than for a public purpose.
xxx

xxx

xxx

The test of the constitutionality of a statute requiring the use of public funds is whether the statute
is designed to promote the public interest, as opposed to the furtherance of the advantage of
individuals, although each advantage to individuals might incidentally serve the public. (81 C.J.S.
pp. 1147; emphasis supplied.)
Needless to say, this Court is fully in accord with the foregoing views which, apart from being patently
sound, are a necessary corollary to our democratic system of government, which, as such, exists primarily
for the promotion of the general welfare. Besides, reflecting as they do, the established jurisprudence in
the United States, after whose constitutional system ours has been patterned, said views and jurisprudence
are, likewise, part and parcel of our own constitutional law.lawphil.net
This notwithstanding, the lower court felt constrained to uphold the appropriation in question, upon the
ground that petitioner may not contest the legality of the donation above referred to because the same

does not affect him directly. This conclusion is, presumably, based upon the following premises, namely:
(1) that, if valid, said donation cured the constitutional infirmity of the aforementioned appropriation; (2)
that the latter may not be annulled without a previous declaration of unconstitutionality of the said
donation; and (3) that the rule set forth in Article 1421 of the Civil Code is absolute, and admits of no
exception. We do not agree with these premises.
The validity of a statute depends upon the powers of Congress at the time of its passage or approval, not
upon events occurring, or acts performed, subsequently thereto, unless the latter consists of an
amendment of the organic law, removing, with retrospective operation, the constitutional limitation
infringed by said statute. Referring to the P85,000.00 appropriation for the projected feeder roads in
question, the legality thereof depended upon whether said roads were public or private property when the
bill, which, latter on, became Republic Act 920, was passed by Congress, or, when said bill was approved
by the President and the disbursement of said sum became effective, or on June 20, 1953 (see section 13
of said Act). Inasmuch as the land on which the projected feeder roads were to be constructed belonged
then to respondent Zulueta, the result is that said appropriation sought a private purpose, and hence, was
null and void. 4 The donation to the Government, over five (5) months after the approval and effectivity
of said Act, made, according to the petition, for the purpose of giving a "semblance of legality", or
legalizing, the appropriation in question, did not cure its aforementioned basic defect. Consequently, a
judicial nullification of said donation need not precede the declaration of unconstitutionality of said
appropriation.
Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to exceptions. For
instance, the creditors of a party to an illegal contract may, under the conditions set forth in Article 1177
of said Code, exercise the rights and actions of the latter, except only those which are inherent in his
person, including therefore, his right to the annulment of said contract, even though such creditors are not
affected by the same, except indirectly, in the manner indicated in said legal provision.
Again, it is well-stated that the validity of a statute may be contested only by one who will sustain a direct
injury in consequence of its enforcement. Yet, there are many decisions nullifying, at the instance of
taxpayers, laws providing for the disbursement of public funds, 5upon the theory that "the expenditure of
public funds by an officer of the State for the purpose of administering an unconstitutional act constitutes
a misapplication of such funds," which may be enjoined at the request of a taxpayer. 6Although there are
some decisions to the contrary, 7the prevailing view in the United States is stated in the American
Jurisprudence as follows:
In the determination of the degree of interest essential to give the requisite standing to attack the
constitutionality of a statute, the general rule is that not only persons individually affected, but
also taxpayers, have sufficient interest in preventing the illegal expenditure of moneys raised by
taxation and may therefore question the constitutionality of statutes requiring expenditure of
public moneys. (11 Am. Jur. 761; emphasis supplied.)
However, this view was not favored by the Supreme Court of the U.S. in Frothingham vs. Mellon (262
U.S. 447), insofar as federal laws are concerned, upon the ground that the relationship of a taxpayer of the
U.S. to its Federal Government is different from that of a taxpayer of a municipal corporation to its

government. Indeed, under the composite system of government existing in the U.S., the states of the
Union are integral part of the Federation from an international viewpoint, but, each state enjoys internally
a substantial measure of sovereignty, subject to the limitations imposed by the Federal Constitution. In
fact, the same was made by representatives of each state of the Union, not of the people of the U.S.,
except insofar as the former represented the people of the respective States, and the people of each State
has, independently of that of the others, ratified said Constitution. In other words, the Federal Constitution
and the Federal statutes have become binding upon the people of the U.S. in consequence of an act of,
and, in this sense, through the respective states of the Union of which they are citizens. The peculiar
nature of the relation between said people and the Federal Government of the U.S. is reflected in the
election of its President, who is chosen directly, not by the people of the U.S., but by electors chosen
by each State, in such manner as the legislature thereof may direct (Article II, section 2, of the Federal
Constitution).lawphi1.net
The relation between the people of the Philippines and its taxpayers, on the other hand, and the Republic
of the Philippines, on the other, is not identical to that obtaining between the people and taxpayers of the
U.S. and its Federal Government. It is closer, from a domestic viewpoint, to that existing between the
people and taxpayers of each state and the government thereof, except that the authority of the Republic
of the Philippines over the people of the Philippines is more fully direct than that of the states of the
Union, insofar as the simple and unitary type of our national government is not subject to limitations
analogous to those imposed by the Federal Constitution upon the states of the Union, and those imposed
upon the Federal Government in the interest of the Union. For this reason, the rule recognizing the right
of taxpayers to assail the constitutionality of a legislation appropriating local or state public funds
which has been upheld by the Federal Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601) has
greater application in the Philippines than that adopted with respect to acts of Congress of the United
States appropriating federal funds.
Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the expropriation of a land by the
Province of Tayabas, two (2) taxpayers thereof were allowed to intervene for the purpose of contesting
the price being paid to the owner thereof, as unduly exorbitant. It is true that in Custodio vs. President of
the Senate (42 Off. Gaz., 1243), a taxpayer and employee of the Government was not permitted to
question the constitutionality of an appropriation for backpay of members of Congress. However, in
Rodriguez vs. Treasurer of the Philippines and Barredo vs. Commission on Elections (84 Phil., 368; 45
Off. Gaz., 4411), we entertained the action of taxpayers impugning the validity of certain appropriations
of public funds, and invalidated the same. Moreover, the reason that impelled this Court to take such
position in said two (2) cases the importance of the issues therein raised is present in the case at bar.
Again, like the petitioners in the Rodriguez and Barredo cases, petitioner herein is not merely a taxpayer.
The Province of Rizal, which he represents officially as its Provincial Governor, is our most populated
political subdivision, 8and, the taxpayers therein bear a substantial portion of the burden of taxation, in the
Philippines.
Hence, it is our considered opinion that the circumstances surrounding this case sufficiently justify
petitioners action in contesting the appropriation and donation in question; that this action should not have
been dismissed by the lower court; and that the writ of preliminary injunction should have been
maintained.

Wherefore, the decision appealed from is hereby reversed, and the records are remanded to the lower
court for further proceedings not inconsistent with this decision, with the costs of this instance against
respondent Jose C. Zulueta. It is so ordered.
Footnotes
1 For, pursuant to section 19(h) of the existing rules and regulation of the Urban Planning
Commission, the owner of a subdivision is under obligation "to improve, repair and maintain all
streets, highways and other ways in his subdivision until their dedication to public use is accepted
by the government."
G.R. No. L-31156 February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant, vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant
appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and Assistant
Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for appellees.

MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294,
which was certified to Us by the Court of Appeals on October 6, 1969, as involving only pure questions
of law, challenging the power of taxation delegated to municipalities under the Local Autonomy Act
(Republic Act No. 2264, as amended, June 19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc.,
commenced a complaint with preliminary injunction before the Court of First Instance of Leyte for that
court to declare Section 2 of Republic Act No. 2264. 1 otherwise known as the Local Autonomy Act,
unconstitutional as an undue delegation of taxing authority as well as to declare Ordinances Nos. 23 and
27, series of 1962, of the municipality of Tanauan, Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which state
that, first, both Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the production
tax rates imposed therein are practically the same, and second, that on January 17, 1963, the acting
Municipal Treasurer of Tanauan, Leyte, as per his letter addressed to the Manager of the Pepsi-Cola
Bottling Plant in said municipality, sought to enforce compliance by the latter of the provisions of said
Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies and
collects "from soft drinks producers and manufacturers a tai of one-sixteenth (1/16) of a centavo for every
bottle of soft drink corked." 2 For the purpose of computing the taxes due, the person, firm, company or

corporation producing soft drinks shall submit to the Municipal Treasurer a monthly report, of the total
number of bottles produced and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies and
collects "on soft drinks produced or manufactured within the territorial jurisdiction of this municipality a
tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity." 4 For the
purpose of computing the taxes due, the person, fun company, partnership, corporation or plant producing
soft drinks shall submit to the Municipal Treasurer a monthly report of the total number of gallons
produced or manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the complaint
and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring Ordinance Nos. 23
and 27 legal and constitutional; ordering the plaintiff to pay the taxes due under the oft the said
Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals, which,
in turn, elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as amended.
There are three capital questions raised in this appeal:
1. Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory and
oppressive?
2. Do Ordinances Nos. 23 and 27 constitute double taxation and impose percentage or
specific taxes?
3. Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of
right to every independent government, without being expressly conferred by the people. 6 It is a power
that is purely legislative and which the central legislative body cannot delegate either to the executive or
judicial department of the government without infringing upon the theory of separation of powers. The
exception, however, lies in the case of municipal corporations, to which, said theory does not apply.
Legislative powers may be delegated to local governments in respect of matters of local concern. 7 This is
sanctioned by immemorial practice. 8 By necessary implication, the legislative power to create political
corporations for purposes of local self-government carries with it the power to confer on such local
governmental agencies the power to tax. 9 Under the New Constitution, local governments are granted the
autonomous authority to create their own sources of revenue and to levy taxes. Section 5, Article XI
provides: "Each local government unit shall have the power to create its sources of revenue and to levy
taxes, subject to such limitations as may be provided by law." Withal, it cannot be said that Section 2 of
Republic Act No. 2264 emanated from beyond the sphere of the legislative power to enact and vest in
local governments the power of local taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would
not suffice to invalidate the said law as confiscatory and oppressive. In delegating the authority, the State
is not limited 6 the exact measure of that which is exercised by itself. When it is said that the taxing
power may be delegated to municipalities and the like, it is meant that there may be delegated such
measure of power to impose and collect taxes as the legislature may deem expedient. Thus, municipalities

may be permitted to tax subjects which for reasons of public policy the State has not deemed wise to tax
for more general purposes. 10 This is not to say though that the constitutional injunction against
deprivation of property without due process of law may be passed over under the guise of the taxing
power, except when the taking of the property is in the lawful exercise of the taxing power, as when (1)
the tax is for a public purpose; (2) the rule on uniformity of taxation is observed; (3) either the person or
property taxed is within the jurisdiction of the government levying the tax; and (4) in the assessment and
collection of certain kinds of taxes notice and opportunity for hearing are provided. 11 Due process is
usually violated where the tax imposed is for a private as distinguished from a public purpose; a tax is
imposed on property outside the State, i.e., extraterritorial taxation; and arbitrary or oppressive methods
are used in assessing and collecting taxes. But, a tax does not violate the due process clause, as applied to
a particular taxpayer, although the purpose of the tax will result in an injury rather than a benefit to such
taxpayer. Due process does not require that the property subject to the tax or the amount of tax to be
raised should be determined by judicial inquiry, and a notice and hearing as to the amount of the tax and
the manner in which it shall be apportioned are generally not necessary to due process of law. 12
There is no validity to the assertion that the delegated authority can be declared unconstitutional on the
theory of double taxation. It must be observed that the delegating authority specifies the limitations and
enumerates the taxes over which local taxation may not be exercised. 13 The reason is that the State has
exclusively reserved the same for its own prerogative. Moreover, double taxation, in general, is not
forbidden by our fundamental law, since We have not adopted as part thereof the injunction against
double taxation found in the Constitution of the United States and some states of the Union. 14 Double
taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same
governmental entity 15 or by the same jurisdiction for the same purpose, 16 but not in a case where one tax
is imposed by the State and the other by the city or municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation, because these
two ordinances cover the same subject matter and impose practically the same tax rate. The thesis
proceeds from its assumption that both ordinances are valid and legally enforceable. This is not so. As
earlier quoted, Ordinance No. 23, which was approved on September 25, 1962, levies or collects from
soft drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo for .every bottle corked,
irrespective of the volume contents of the bottle used. When it was discovered that the producer or
manufacturer could increase the volume contents of the bottle and still pay the same tax rate, the
Municipality of Tanauan enacted Ordinance No. 27, approved on October 28, 1962, imposing a tax of one
centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The difference between the
two ordinances clearly lies in the tax rate of the soft drinks produced: in Ordinance No. 23, it was 1/16 of
a centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) on each gallon (128 fluid
ounces, U.S.) of volume capacity. The intention of the Municipal Council of Tanauan in enacting
Ordinance No. 27 is thus clear: it was intended as a plain substitute for the prior Ordinance No. 23, and
operates as a repeal of the latter, even without words to that effect. 18 Plaintiff-appellant in its brief
admitted that defendants-appellees are only seeking to enforce Ordinance No. 27, series of 1962. Even the
stipulation of facts confirms the fact that the Acting Municipal Treasurer of Tanauan, Leyte sought t6
compel compliance by the plaintiff-appellant of the provisions of said Ordinance No. 27, series of 1962.
The aforementioned admission shows that only Ordinance No. 27, series of 1962 is being enforced by
defendants-appellees. Even the Provincial Fiscal, counsel for defendants-appellees admits in his brief
"that Section 7 of Ordinance No. 27, series of 1962 clearly repeals Ordinance No. 23 as the provisions of
the latter are inconsistent with the provisions of the former."
That brings Us to the question of whether the remaining Ordinance No. 27 imposes a percentage or a
specific tax. Undoubtedly, the taxing authority conferred on local governments under Section 2, Republic
Act No. 2264, is broad enough as to extend to almost "everything, accepting those which are mentioned

therein." As long as the text levied under the authority of a city or municipal ordinance is not within the
exceptions and limitations in the law, the same comes within the ambit of the general rule, pursuant to the
rules of exclucion attehus and exceptio firmat regulum in cabisus non excepti 19 The limitation applies,
particularly, to the prohibition against municipalities and municipal districts to impose "any percentage
tax or other taxes in any form based thereon nor impose taxes on articles subject to specific tax except
gasoline, under the provisions of the National Internal Revenue Code." For purposes of this particular
limitation, a municipal ordinance which prescribes a set ratio between the amount of the tax and the
volume of sale of the taxpayer imposes a sales tax and is null and void for being outside the power of the
municipality to enact. 20But, the imposition of "a tax of one centavo (P0.01) on each gallon (128 fluid
ounces, U.S.) of volume capacity" on all soft drinks produced or manufactured under Ordinance No. 27
does not partake of the nature of a percentage tax on sales, or other taxes in any form based thereon. The
tax is levied on the produce (whether sold or not) and not on the sales. The volume capacity of the
taxpayer's production of soft drinks is considered solely for purposes of determining the tax rate on the
products, but there is not set ratio between the volume of sales and the amount of the tax. 21
Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified articles,
such as distilled spirits, wines, fermented liquors, products of tobacco other than cigars and cigarettes,
matches firecrackers, manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel oil,
cinematographic films, playing cards, saccharine, opium and other habit-forming drugs. 22 Soft drink is
not one of those specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all softdrinks,
produced or manufactured, or an equivalent of 1- centavos per case, 23 cannot be considered unjust and
unfair. 24 an increase in the tax alone would not support the claim that the tax is oppressive, unjust and
confiscatory. Municipal corporations are allowed much discretion in determining the reates of imposable
taxes. 25 This is in line with the constutional policy of according the widest possible autonomy to local
governments in matters of local taxation, an aspect that is given expression in the Local Tax Code (PD
No. 231, July 1, 1973). 26 Unless the amount is so excessive as to be prohibitive, courts will go slow in
writing off an ordinance as unreasonable. 27 Reluctance should not deter compliance with an ordinance
such as Ordinance No. 27 if the purpose of the law to further strengthen local autonomy were to be
realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than ten
crowners or P2,000.00 with ten but not more than twenty crowners imposed on manufacturers, producers,
importers and dealers of soft drinks and/or mineral waters under Ordinance No. 54, series of 1964, as
amended by Ordinance No. 41, series of 1968, of defendant Municipality, 29 appears not to affect the
resolution of the validity of Ordinance No. 27. Municipalities are empowered to impose, not only
municipal license taxes upon persons engaged in any business or occupation but also to levy for public
purposes, just and uniform taxes. The ordinance in question (Ordinance No. 27) comes within the second
power of a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known as the
Local Autonomy Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of the Municipality
of Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance No. 23, same series, is hereby declared
of valid and legal effect. Costs against petitioner-appellant.
SO ORDERED.
Castro, C.J., Teehankee, Barredo, Makasiar, Antonio, Esguerra, Muoz Palma, Aquino and Concepcion,
Jr., JJ., concur.

Separate Opinions
FERNANDO, J., concurring:
The opinion of the Court penned by Justice Martin is impressed with a scholarly and comprehensive
character. Insofar as it shows adherence to tried and tested concepts of the law of municipal taxation, I am
only in agreement. If I limit myself to concurrence in the result, it is primarily because with the article on
Local Autonomy found in the present Constitution, I feel a sense of reluctance in restating doctrines that
arose from a different basic premise as to the scope of such power in accordance with the 1935 Charter.
Nonetheless it is well-nigh unavoidable that I do so as I am unable to share fully what for me are the
nuances and implications that could arise from the approach taken by my brethren. Likewise as to the
constitutional aspect of the thorny question of double taxation, I would limit myself to what has been set
forth in City of Baguio v. De Leon. 1
1. The present Constitution is quite explicit as to the power of taxation vested in local and municipal
corporations. It is therein specifically provided: "Each local government unit shall have the power to
create its own sources of revenue and to levy taxes subject to such limitations as may be provided by
law. 2 That was not the case under the 1935 Charter. The only limitation then on the authority, plenary in
character of the national government, was that while the President of the Philippines was vested with the
power of control over all executive departments, bureaus, or offices, he could only . It exercise general
supervision over all local governments as may be provided by law ... 3 As far as legislative power over
local government was concerned, no restriction whatsoever was placed on the Congress of the
Philippines. It would appear therefore that the extent of the taxing power was solely for the legislative
body to decide. It is true that in 1939, there was a statute that enlarged the scope of the municipal taxing
power. 4 Thereafter, in 1959 such competence was further expanded in the Local Autonomy
Act. 5 Nevertheless, as late as December of 1964, five years after its enactment of the Local Autonomy
Act, this Court, through Justice Dizon, in Golden Ribbon Lumber Co. v. City of Butuan, 6reaffirmed the
traditional concept in these words: "The rule is well-settled that municipal corporations, unlike sovereign
states, after clothed with no power of taxation; that its charter or a statute must clearly show an intent to
confer that power or the municipal corporation cannot assume and exercise it, and that any such power
granted must be construed strictly, any doubt or ambiguity arising from the terms of the grant to be
resolved against the municipality." 7
Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of Pagbilao, 8 "is an
attribute of sovereignty which municipal corporations do not enjoy." 9 That case left no doubt either as to
weakness of a claim "based merely by inferences, implications and deductions, [as they have no place in
the interpretation of the power to tax of a municipal corporation." 10 As the conclusion reached by the
Court finds support in such grant of the municipal taxing power, I concur in the result. 2. As to any
possible infirmity based on an alleged double taxation, I would prefer to rely on the doctrine announced
by this Court in City of Baguio v. De Leon. 11 Thus: "As to why double taxation is not violative of due
process, Justice Holmes made clear in this language: 'The objection to the taxation as double may be laid
down on one side. ... The 14th Amendment [the due process clause) no more forbids double taxation than
it does doubling the amount of a tax, short of (confiscation or proceedings unconstitutional on other
grouse With that decision rendered at a time when American sovereignty in the Philippines was
recognized, it possesses more than just a persuasive effect. To some, it delivered the coup justice to the
bogey of double taxation as a constitutional bar to the exercise of the taxing power. It would seem though
that in the United States, as with us, its ghost, as noted by an eminent critic, still stalks the juridical stage.
'In a 1947 decision, however, we quoted with approval this excerpt from a leading American decision:
'Where, as here, Congress has clearly expressed its intention, the statute must be sustained even though
double taxation results. 12

So I would view the issues in this suit and accordingly concur in the result.
Separate Opinions
FERNANDO, J., concurring:
The opinion of the Court penned by Justice Martin is impressed with a scholarly and comprehensive
character. Insofar as it shows adherence to tried and tested concepts of the law of municipal taxation, I am
only in agreement. If I limit myself to concurrence in the result, it is primarily because with the article on
Local Autonomy found in the present Constitution, I feel a sense of reluctance in restating doctrines that
arose from a different basic premise as to the scope of such power in accordance with the 1935 Charter.
Nonetheless it is well-nigh unavoidable that I do so as I am unable to share fully what for me are the
nuances and implications that could arise from the approach taken by my brethren. Likewise as to the
constitutional aspect of the thorny question of double taxation, I would limit myself to what has been set
forth in City of Baguio v. De Leon. 1
1. The present Constitution is quite explicit as to the power of taxation vested in local and municipal
corporations. It is therein specifically provided: "Each local government unit shall have the power to
create its own sources of revenue and to levy taxes subject to such limitations as may be provided by
law. 2 That was not the case under the 1935 Charter. The only limitation then on the authority, plenary in
character of the national government, was that while the President of the Philippines was vested with the
power of control over all executive departments, bureaus, or offices, he could only . It exercise general
supervision over all local governments as may be provided by law ... 3 As far as legislative power over
local government was concerned, no restriction whatsoever was placed on the Congress of the
Philippines. It would appear therefore that the extent of the taxing power was solely for the legislative
body to decide. It is true that in 1939, there was a statute that enlarged the scope of the municipal taxing
power. 4 Thereafter, in 1959 such competence was further expanded in the Local Autonomy
Act. 5 Nevertheless, as late as December of 1964, five years after its enactment of the Local Autonomy
Act, this Court, through Justice Dizon, in Golden Ribbon Lumber Co. v. City of Butuan, 6reaffirmed the
traditional concept in these words: "The rule is well-settled that municipal corporations, unlike sovereign
states, after clothed with no power of taxation; that its charter or a statute must clearly show an intent to
confer that power or the municipal corporation cannot assume and exercise it, and that any such power
granted must be construed strictly, any doubt or ambiguity arising from the terms of the grant to be
resolved against the municipality." 7
Taxation, according to Justice Parades in the earlier case of Tan v. Municipality of Pagbilao, 8 "is an
attribute of sovereignty which municipal corporations do not enjoy." 9 That case left no doubt either as to
weakness of a claim "based merely by inferences, implications and deductions, [as they have no place in
the interpretation of the power to tax of a municipal corporation." 10 As the conclusion reached by the
Court finds support in such grant of the municipal taxing power, I concur in the result. 2. As to any
possible infirmity based on an alleged double taxation, I would prefer to rely on the doctrine announced
by this Court in City of Baguio v. De Leon. 11 Thus: "As to why double taxation is not violative of due
process, Justice Holmes made clear in this language: 'The objection to the taxation as double may be laid
down on one side. ... The 14th Amendment [the due process clause) no more forbids double taxation than
it does doubling the amount of a tax, short of (confiscation or proceedings unconstitutional on other
grouse With that decision rendered at a time when American sovereignty in the Philippines was
recognized, it possesses more than just a persuasive effect. To some, it delivered the coup justice to the
bogey of double taxation as a constitutional bar to the exercise of the taxing power. It would seem though
that in the United States, as with us, its ghost, as noted by an eminent critic, still stalks the juridical stage.
'In a 1947 decision, however, we quoted with approval this excerpt from a leading American decision:

'Where, as here, Congress has clearly expressed its intention, the statute must be sustained even though
double taxation results. 12
So I would view the issues in this suit and accordingly concur in the result.
Footnotes
1 "Sec. 2. Taxation. Any provision of law to the contrary notwithstanding, all
chartered cities, municipalities and municipal districts shall have authority to impose
municipal license taxes or fees upon persons engaged in any occupation or business, or
exercising private in chartered cities, municipalities and municipal districts by requiring
them to secure licenses at rates fixed by the municipal board or city council of the city,
the municipal council of the municipality, or the municipal district council of the
municipal district to collect fees and charges for service rendered by the city,
municipality or municipal district; to regulate and impose reasonable for services
rendered in connection with any business, profession occupation being conducted within
the city, municipality or municipal district and otherwise to levy for public purposes, just
and uniform taxes, licenses or fees: Provided, That municipalities and municipal districts
shall, in no case, impose any percentage tax on sales or other taxes in any form based
thereon nor impose taxes on articles subject to specific tax, except gasoline, under the
provisions of the National Internal Revenue Code: Provided, however, That no city,
municipality or municipal district may levy or impose any of the following:
(a) Residence tax;
(b) Documentary stamp tax;
(c) Taxes on the business of any newspaper engaged in the printing and publication of
any newspaper, magazine, review or bulletin appearing at regular interval and having
fixed prices for subscription and sale, and which is not published primarily for the
purpose of publishing advertisements;
(d) Taxes on persons operating waterworks, irrigation and other public utilities except
electric light, heat and power;
(e) Taxes on forest products and forest concessions;
(f) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa
(g) Taxes on income of any kind whatsoever;
(h) Taxes or fees for the registration of motor vehicles and for the issuance of all kinds of
licenses or permits for the driving thereof;
(i) Customs duties registration, wharfage on wharves owned by the national government,
tonnage and all other kinds of customs fees, charges and dues;
(j) Taxes of any kind on banks, insurance companies, and persons paying franchise tax:

(k) Taxes on premiums paid by owners of property who obtain insurance directly with
foreign insurance companies; and
(i) Taxes, fees or levies, of any kind, which in effect impose a burden on exports of
Philippine finished, manufactured or processed products and products of Philippine
cottage industries.
G.R. No. 155650

July 20, 2006

MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs. COURT OF APPEALS,

CITY OF PARAAQUE, CITY MAYOR OF PARAAQUE, SANGGUNIANG PANGLUNGSOD
NG PARAAQUE, CITY ASSESSOR OF PARAAQUE, and CITY TREASURER OF
PARAAQUE, respondents.
DECISION
CARPIO, J.:
The Antecedents
Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino International
Airport (NAIA) Complex in Paraaque City under Executive Order No. 903, otherwise known as
the Revised Charter of the Manila International Airport Authority ("MIAA Charter"). Executive Order
No. 903 was issued on 21 July 1983 by then President Ferdinand E. Marcos. Subsequently, Executive
Order Nos. 9091 and 2982 amended the MIAA Charter.
As operator of the international airport, MIAA administers the land, improvements and equipment within
the NAIA Complex. The MIAA Charter transferred to MIAA approximately 600 hectares of
land,3 including the runways and buildings ("Airport Lands and Buildings") then under the Bureau of Air
Transportation.4 The MIAA Charter further provides that no portion of the land transferred to MIAA shall
be disposed of through sale or any other mode unless specifically approved by the President of the
Philippines.5
On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued Opinion No. 061.
The OGCC opined that the Local Government Code of 1991 withdrew the exemption from real estate tax
granted to MIAA under Section 21 of the MIAA Charter. Thus, MIAA negotiated with respondent City of
Paraaque to pay the real estate tax imposed by the City. MIAA then paid some of the real estate tax
already due.
On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City of
Paraaque for the taxable years 1992 to 2001. MIAA's real estate tax delinquency is broken down as
follows:

TAX
TAXABLE
DECLARATION YEAR

TAX DUE

PENALTY

TOTAL

E-016-01370

19,558,160.00

11,201,083.20

30,789,243.20

1992-2001

E-016-01374

1992-2001

111,689,424.90

68,149,479.59

179,838,904.49

E-016-01375

1992-2001

20,276,058.00

12,371,832.00

32,647,890.00

E-016-01376

1992-2001

58,144,028.00

35,477,712.00

93,621,740.00

E-016-01377

1992-2001

18,134,614.65

11,065,188.59

29,199,803.24

E-016-01378

1992-2001

111,107,950.40

67,794,681.59

178,902,631.99

E-016-01379

1992-2001

4,322,340.00

2,637,360.00

6,959,700.00

E-016-01380

1992-2001

7,776,436.00

4,744,944.00

12,521,380.00

*E-016-013-85

1998-2001

6,444,810.00

2,900,164.50

9,344,974.50

*E-016-01387

1998-2001

34,876,800.00

5,694,560.00

50,571,360.00

*E-016-01396

1998-2001

75,240.00

33,858.00

109,098.00

P392,435,861.95

P232,070,863.47

P 624,506,725.42

GRAND TOTAL

1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for P4,207,028.75
#9476101 for P28,676,480.00
#9476103 for P49,115.006

On 17 July 2001, the City of Paraaque, through its City Treasurer, issued notices of levy and warrants of
levy on the Airport Lands and Buildings. The Mayor of the City of Paraaque threatened to sell at public
auction the Airport Lands and Buildings should MIAA fail to pay the real estate tax delinquency. MIAA
thus sought a clarification of OGCC Opinion No. 061.
On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061. The OGCC
pointed out that Section 206 of the Local Government Code requires persons exempt from real estate tax
to show proof of exemption. The OGCC opined that Section 21 of the MIAA Charter is the proof that
MIAA is exempt from real estate tax.
On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition and
injunction, with prayer for preliminary injunction or temporary restraining order. The petition sought to
restrain the City of Paraaque from imposing real estate tax on, levying against, and auctioning for public
sale the Airport Lands and Buildings. The petition was docketed as CA-G.R. SP No. 66878.
On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it beyond the 60-day
reglementary period. The Court of Appeals also denied on 27 September 2002 MIAA's motion for
reconsideration and supplemental motion for reconsideration. Hence, MIAA filed on 5 December 2002
the present petition for review.7
Meanwhile, in January 2003, the City of Paraaque posted notices of auction sale at the Barangay Halls
of Barangays Vitalez, Sto. Nio, and Tambo, Paraaque City; in the public market of Barangay La
Huerta; and in the main lobby of the Paraaque City Hall. The City of Paraaque published the notices in
the 3 and 10 January 2003 issues of the Philippine Daily Inquirer, a newspaper of general circulation in
the Philippines. The notices announced the public auction sale of the Airport Lands and Buildings to the
highest bidder on 7 February 2003, 10:00 a.m., at the Legislative Session Hall Building of Paraaque
City.
A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed before this Court an
Urgent Ex-Parte and Reiteratory Motion for the Issuance of a Temporary Restraining Order. The motion
sought to restrain respondents the City of Paraaque, City Mayor of Paraaque, Sangguniang
Panglungsod ng Paraaque, City Treasurer of Paraaque, and the City Assessor of Paraaque
("respondents") from auctioning the Airport Lands and Buildings.
On 7 February 2003, this Court issued a temporary restraining order (TRO) effective immediately. The
Court ordered respondents to cease and desist from selling at public auction the Airport Lands and
Buildings. Respondents received the TRO on the same day that the Court issued it. However, respondents
received the TRO only at 1:25 p.m. or three hours after the conclusion of the public auction.
On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the TRO.
On 29 March 2005, the Court heard the parties in oral arguments. In compliance with the directive issued
during the hearing, MIAA, respondent City of Paraaque, and the Solicitor General subsequently
submitted their respective Memoranda.
MIAA admits that the MIAA Charter has placed the title to the Airport Lands and Buildings in the name
of MIAA. However, MIAA points out that it cannot claim ownership over these properties since the real
owner of the Airport Lands and Buildings is the Republic of the Philippines. The MIAA Charter mandates
MIAA to devote the Airport Lands and Buildings for the benefit of the general public. Since the Airport
Lands and Buildings are devoted to public use and public service, the ownership of these properties

remains with the State. The Airport Lands and Buildings are thus inalienable and are not subject to real
estate tax by local governments.
MIAA also points out that Section 21 of the MIAA Charter specifically exempts MIAA from the payment
of real estate tax. MIAA insists that it is also exempt from real estate tax under Section 234 of the Local
Government Code because the Airport Lands and Buildings are owned by the Republic. To justify the
exemption, MIAA invokes the principle that the government cannot tax itself. MIAA points out that the
reason for tax exemption of public property is that its taxation would not inure to any public advantage,
since in such a case the tax debtor is also the tax creditor.
Respondents invoke Section 193 of the Local Government Code, which expressly withdrew the tax
exemption privileges of "government-owned and-controlled corporations" upon the effectivity of the
Local Government Code. Respondents also argue that a basic rule of statutory construction is that the
express mention of one person, thing, or act excludes all others. An international airport is not among the
exceptions mentioned in Section 193 of the Local Government Code. Thus, respondents assert that MIAA
cannot claim that the Airport Lands and Buildings are exempt from real estate tax.
Respondents also cite the ruling of this Court in Mactan International Airport v. Marcos 8 where we held
that the Local Government Code has withdrawn the exemption from real estate tax granted to
international airports. Respondents further argue that since MIAA has already paid some of the real estate
tax assessments, it is now estopped from claiming that the Airport Lands and Buildings are exempt from
real estate tax.
The Issue
This petition raises the threshold issue of whether the Airport Lands and Buildings of MIAA are exempt
from real estate tax under existing laws. If so exempt, then the real estate tax assessments issued by the
City of Paraaque, and all proceedings taken pursuant to such assessments, are void. In such event, the
other issues raised in this petition become moot.
The Court's Ruling
We rule that MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by local
governments.
First, MIAA is not a government-owned or controlled corporation but an instrumentality of the National
Government and thus exempt from local taxation. Second, the real properties of MIAA are owned by the
Republic of the Philippines and thus exempt from real estate tax.
1. MIAA is Not a Government-Owned or Controlled Corporation
Respondents argue that MIAA, being a government-owned or controlled corporation, is not exempt from
real estate tax. Respondents claim that the deletion of the phrase "any government-owned or controlled so
exempt by its charter" in Section 234(e) of the Local Government Code withdrew the real estate tax
exemption of government-owned or controlled corporations. The deleted phrase appeared in Section 40(a)
of the 1974 Real Property Tax Code enumerating the entities exempt from real estate tax.
There is no dispute that a government-owned or controlled corporation is not exempt from real estate tax.
However, MIAA is not a government-owned or controlled corporation. Section 2(13) of the Introductory

Provisions of the Administrative Code of 1987 defines a government-owned or controlled corporation as

follows:
SEC. 2. General Terms Defined. x x x x
(13) Government-owned or controlled corporation refers to any agency organized as a stock or
non-stock corporation, vested with functions relating to public needs whether governmental or
proprietary in nature, and owned by the Government directly or through its instrumentalities
either wholly, or, where applicable as in the case of stock corporations, to the extent of at least
fifty-one (51) percent of its capital stock: x x x. (Emphasis supplied)
A government-owned or controlled corporation must be "organized as a stock or non-stock
corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock divided into shares. MIAA has no stockholders or voting
shares. Section 10 of the MIAA Charter9provides:
SECTION 10. Capital. The capital of the Authority to be contributed by the National
Government shall be increased from Two and One-half Billion (P2,500,000,000.00) Pesos to Ten
Billion (P10,000,000,000.00) Pesos to consist of:
(a) The value of fixed assets including airport facilities, runways and equipment and such other
properties, movable and immovable[,] which may be contributed by the National Government or
transferred by it from any of its agencies, the valuation of which shall be determined jointly with
the Department of Budget and Management and the Commission on Audit on the date of such
contribution or transfer after making due allowances for depreciation and other deductions taking
into account the loans and other liabilities of the Authority at the time of the takeover of the assets
and other properties;
(b) That the amount of P605 million as of December 31, 1986 representing about seventy
percentum (70%) of the unremitted share of the National Government from 1983 to 1986 to be
remitted to the National Treasury as provided for in Section 11 of E. O. No. 903 as amended,
shall be converted into the equity of the National Government in the Authority. Thereafter, the
Government contribution to the capital of the Authority shall be provided in the General
Appropriations Act.
Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.
Section 3 of the Corporation Code10 defines a stock corporation as one whose "capital stock is divided
into shares and x x x authorized to distribute to the holders of such shares dividends x x x." MIAA
has capital but it is not divided into shares of stock. MIAA has no stockholders or voting shares. Hence,
MIAA is not a stock corporation.
MIAA is also not a non-stock corporation because it has no members. Section 87 of the Corporation Code
defines a non-stock corporation as "one where no part of its income is distributable as dividends to its
members, trustees or officers." A non-stock corporation must have members. Even if we assume that the
Government is considered as the sole member of MIAA, this will not make MIAA a non-stock
corporation. Non-stock corporations cannot distribute any part of their income to their members. Section
11 of the MIAA Charter mandates MIAA to remit 20% of its annual gross operating income to the
National Treasury.11 This prevents MIAA from qualifying as a non-stock corporation.

Section 88 of the Corporation Code provides that non-stock corporations are "organized for charitable,
religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil
service, or similar purposes, like trade, industry, agriculture and like chambers." MIAA is not organized
for any of these purposes. MIAA, a public utility, is organized to operate an international and domestic
airport for public use.
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a governmentowned or controlled corporation. What then is the legal status of MIAA within the National Government?
MIAA is a government instrumentality vested with corporate powers to perform efficiently its
governmental functions. MIAA is like any other government instrumentality, the only difference is that
MIAA is vested with corporate powers. Section 2(10) of the Introductory Provisions of the Administrative
Code defines a government "instrumentality" as follows:
SEC. 2. General Terms Defined. x x x x
(10) Instrumentality refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some
if not all corporate powers, administering special funds, and enjoying operational autonomy,
usually through a charter. x x x (Emphasis supplied)
When the law vests in a government instrumentality corporate powers, the instrumentality does not
become a corporation. Unless the government instrumentality is organized as a stock or non-stock
corporation, it remains a government instrumentality exercising not only governmental but also corporate
powers. Thus, MIAA exercises the governmental powers of eminent domain, 12 police authority13 and the
levying of fees and charges. 14 At the same time, MIAA exercises "all the powers of a corporation under
the Corporation Law, insofar as these powers are not inconsistent with the provisions of this Executive
Order."15
Likewise, when the law makes a government instrumentality operationally autonomous, the
instrumentality remains part of the National Government machinery although not integrated with the
department framework. The MIAA Charter expressly states that transforming MIAA into a "separate and
autonomous body"16 will make its operation more "financially viable."17
Many government instrumentalities are vested with corporate powers but they do not become stock or
non-stock corporations, which is a necessary condition before an agency or instrumentality is deemed a
government-owned or controlled corporation. Examples are the Mactan International Airport Authority,
the Philippine Ports Authority, the University of the Philippines and Bangko Sentral ng Pilipinas. All
these government instrumentalities exercise corporate powers but they are not organized as stock or nonstock corporations as required by Section 2(13) of the Introductory Provisions of the Administrative
Code. These government instrumentalities are sometimes loosely called government corporate entities.
However, they are not government-owned or controlled corporations in the strict sense as understood
under the Administrative Code, which is the governing law defining the legal relationship and status of
government entities.
A government instrumentality like MIAA falls under Section 133(o) of the Local Government Code,
which states:

SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:
xxxx
(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities and local government units.(Emphasis and underscoring supplied)
Section 133(o) recognizes the basic principle that local governments cannot tax the national government,
which historically merely delegated to local governments the power to tax. While the 1987 Constitution
now includes taxation as one of the powers of local governments, local governments may only exercise
such power "subject to such guidelines and limitations as the Congress may provide." 18
When local governments invoke the power to tax on national government instrumentalities, such power is
construed strictly against local governments. The rule is that a tax is never presumed and there must be
clear language in the law imposing the tax. Any doubt whether a person, article or activity is taxable is
resolved against taxation. This rule applies with greater force when local governments seek to tax national
government instrumentalities.
Another rule is that a tax exemption is strictly construed against the taxpayer claiming the exemption.
However, when Congress grants an exemption to a national government instrumentality from local
taxation, such exemption is construed liberally in favor of the national government instrumentality. As
this Court declared in Maceda v. Macaraig, Jr.:
The reason for the rule does not apply in the case of exemptions running to the benefit of the
government itself or its agencies. In such case the practical effect of an exemption is merely to
reduce the amount of money that has to be handled by government in the course of its operations.
For these reasons, provisions granting exemptions to government agencies may be construed
liberally, in favor of non tax-liability of such agencies. 19
There is, moreover, no point in national and local governments taxing each other, unless a sound and
compelling policy requires such transfer of public funds from one government pocket to another.
There is also no reason for local governments to tax national government instrumentalities for rendering
essential public services to inhabitants of local governments. The only exception is when the legislature
clearly intended to tax government instrumentalities for the delivery of essential public services for
sound and compelling policy considerations. There must be express language in the law empowering
local governments to tax national government instrumentalities. Any doubt whether such power exists is
resolved against local governments.
Thus, Section 133 of the Local Government Code states that "unless otherwise provided" in the Code,
local governments cannot tax national government instrumentalities. As this Court held in Basco v.
Philippine Amusements and Gaming Corporation:
The states have no power by taxation or otherwise, to retard, impede, burden or in any
manner control the operation of constitutional laws enacted by Congress to carry into
execution the powers vested in the federal government. (MC Culloch v. Maryland, 4
Wheat 316, 4 L Ed. 579)

This doctrine emanates from the "supremacy" of the National Government over local
governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of
power on the part of the States to touch, in that way (taxation) at least, the
instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can be
agreed that no state or political subdivision can regulate a federal instrumentality in such
a way as to prevent it from consummating its federal responsibilities, or even to seriously
burden it in the accomplishment of them." (Antieau, Modern Constitutional Law, Vol. 2,
p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of what
local authorities may perceive to be undesirable activities or enterprise using the power to tax as
"a tool for regulation" (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the "power to destroy" (Mc Culloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity
which has the inherent power to wield it. 20
2. Airport Lands and Buildings of MIAA are Owned by the Republic
a. Airport Lands and Buildings are of Public Dominion
The Airport Lands and Buildings of MIAA are property of public dominion and therefore owned by the
State or the Republic of the Philippines. The Civil Code provides:
ARTICLE 419. Property is either of public dominion or of private ownership.
ARTICLE 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;
(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. (Emphasis supplied)
ARTICLE 421. All other property of the State, which is not of the character stated in the
preceding article, is patrimonial property.
ARTICLE 422. Property of public dominion, when no longer intended for public use or for public
service, shall form part of the patrimonial property of the State.
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, the MIAA Airport
Lands and Buildings are properties of public dominion and thus owned by the State or the Republic of the
Philippines.

The Airport Lands and Buildings are devoted to public use because they are used by the public for
international and domestic travel and transportation. The fact that the MIAA collects terminal fees
and other charges from the public does not remove the character of the Airport Lands and Buildings as
properties for public use. 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
indirectly through the taxes they pay the government, or only those among the public who actually use the
road through the toll fees they pay upon using the road. The tollway system is even a more 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 of 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 user's 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 user's tax is more equitable a principle of
taxation mandated in the 1987 Constitution.21
The Airport Lands and Buildings of MIAA, which its Charter calls the "principal airport of the
Philippines for both international and domestic air traffic," 22 are properties of public dominion because
they are intended for public use. As properties of public dominion, they indisputably belong to the
State or the Republic of the Philippines.
b. Airport Lands and Buildings are Outside the Commerce of Man
The Airport Lands and Buildings of MIAA are devoted to public use and thus are properties of public
dominion. As properties of public dominion, the Airport Lands and Buildings are outside the
commerce of man. The Court has ruled repeatedly that properties of public dominion are outside the
commerce of man. As early as 1915, this Court already ruled in Municipality of Cavite v. Rojas that
properties devoted to public use are outside the commerce of man, thus:
According to article 344 of the Civil Code: "Property for public use in provinces and in towns
comprises the provincial and town roads, the squares, streets, fountains, and public waters, the
promenades, and public works of general service supported by said towns or provinces."
The said Plaza Soledad being a promenade for public use, the municipal council of Cavite could
not in 1907 withdraw or exclude from public use a portion thereof in order to lease it for the sole
benefit of the defendant Hilaria Rojas. In leasing a portion of said plaza or public place to the
defendant for private use the plaintiff municipality exceeded its authority in the exercise of its
powers by executing a contract over a thing of which it could not dispose, nor is it empowered so
to do.
The Civil Code, article 1271, prescribes that everything which is not outside the commerce of
man may be the object of a contract, and plazas and streets are outside of this commerce, as was
decided by the supreme court of Spain in its decision of February 12, 1895, which says:

"Communal things that cannot be sold because they are by their very nature outside of
commerce are those for public use, such as the plazas, streets, common lands, rivers,
fountains, etc." (Emphasis supplied) 23
Again in Espiritu v. Municipal Council, the Court declared that properties of public dominion are outside
the commerce of man:
xxx Town plazas are properties of public dominion, to be devoted to public use and to be made
available to the public in general. They are outside the commerce of man and cannot be
disposed of or even leased by the municipality to private parties. While in case of war or during
an emergency, town plazas may be occupied temporarily by private individuals, as was done and
as was tolerated by the Municipality of Pozorrubio, when the emergency has ceased, said
temporary occupation or use must also cease, and the town officials should see to it that the town
plazas should ever be kept open to the public and free from encumbrances or illegal private
constructions.24 (Emphasis supplied)
The Court has also ruled that property of public dominion, being outside the commerce of man, cannot be
the subject of an auction sale.25
Properties of public dominion, being for public use, are not subject to levy, encumbrance or disposition
through public or private sale. Any encumbrance, levy on execution or auction sale of any property of
public dominion is void for being contrary to public policy. Essential public services will stop if
properties of public dominion are subject to encumbrances, foreclosures and auction sale. This will
happen if the City of Paraaque can foreclose and compel the auction sale of the 600-hectare runway of
the MIAA for non-payment of real estate tax.
Before MIAA can encumber 26 the Airport Lands and Buildings, the President must first withdraw from
public use the Airport Lands and Buildings. Sections 83 and 88 of the Public Land Law or
Commonwealth Act No. 141, which "remains to this day the existing general law governing the
classification and disposition of lands of the public domain other than timber and mineral
lands,"27 provide:
SECTION 83. Upon the recommendation of the Secretary of Agriculture and Natural Resources,
the President may designate by proclamation any tract or tracts of land of the public domain as
reservations for the use of the Republic of the Philippines or of any of its branches, or of the
inhabitants thereof, in accordance with regulations prescribed for this purposes, or for quasipublic uses or purposes when the public interest requires it, including reservations for highways,
rights of way for railroads, hydraulic power sites, irrigation systems, communal pastures or
lequas communales, public parks, public quarries, public fishponds, working men's village and
other improvements for the public benefit.
SECTION 88. The tract or tracts of land reserved under the provisions of Section eightythree shall be non-alienable and shall not be subject to occupation, entry, sale, lease, or
other disposition until again declared alienable under the provisions of this Act or by
proclamation of the President. (Emphasis and underscoring supplied)
Thus, unless the President issues a proclamation withdrawing the Airport Lands and Buildings from
public use, these properties remain properties of public dominion and are inalienable. Since the Airport
Lands and Buildings are inalienable in their present status as properties of public dominion, they are not

subject to levy on execution or foreclosure sale. As long as the Airport Lands and Buildings are reserved
for public use, their ownership remains with the State or the Republic of the Philippines.
The authority of the President to reserve lands of the public domain for public use, and to withdraw such
public use, is reiterated in Section 14, Chapter 4, Title I, Book III of the Administrative Code of 1987,
which states:
SEC. 14. Power to Reserve Lands of the Public and Private Domain of the Government .
(1) The President shall have the power to reserve for settlement or public use, and for
specific public purposes, any of the lands of the public domain, the use of which is not
otherwise directed by law. The reserved land shall thereafter remain subject to the specific
public purpose indicated until otherwise provided by law or proclamation;
x x x x. (Emphasis supplied)
There is no question, therefore, that unless the Airport Lands and Buildings are withdrawn by law or
presidential proclamation from public use, they are properties of public dominion, owned by the Republic
and outside the commerce of man.
c. MIAA is a Mere Trustee of the Republic
MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic. Section 48,
Chapter 12, Book I of the Administrative Code allows instrumentalities like MIAA to hold title to
real properties owned by the Republic, thus:
SEC. 48. Official Authorized to Convey Real Property. Whenever real property of the
Government is authorized by law to be conveyed, the deed of conveyance shall be executed in
behalf of the government by the following:
(1) For property belonging to and titled in the name of the Republic of the Philippines, by the
President, unless the authority therefor is expressly vested by law in another officer.
(2) For property belonging to the Republic of the Philippines but titled in the name of any
political subdivision or of any corporate agency or instrumentality, by the executive head of
the agency or instrumentality. (Emphasis supplied)
In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is clearer because even its
executive head cannot sign the deed of conveyance on behalf of the Republic. Only the President of the
Republic can sign such deed of conveyance.28
d. Transfer to MIAA was Meant to Implement a Reorganization
The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands and Buildings from
the Bureau of Air Transportation of the Department of Transportation and Communications. The MIAA
Charter provides:
SECTION 3. Creation of the Manila International Airport Authority. x x x x

The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned to the
ownership and administration of the Authority, subject to existing rights, if any. The Bureau
of Lands and other appropriate government agencies shall undertake an actual survey of the area
transferred within one year from the promulgation of this Executive Order and the corresponding
title to be issued in the name of the Authority. Any portion thereof shall not be disposed
through sale or through any other mode unless specifically approved by the President of the
Philippines. (Emphasis supplied)
SECTION 22. Transfer of Existing Facilities and Intangible Assets. All existing public
airport facilities, runways, lands, buildings and other property, movable or immovable,
belonging to the Airport, and all assets, powers, rights, interests and privileges belonging to the
Bureau of Air Transportation relating to airport works or air operations, including all
equipment which are necessary for the operation of crash fire and rescue facilities, are hereby
transferred to the Authority. (Emphasis supplied)
SECTION 25. Abolition of the Manila International Airport as a Division in the Bureau of Air
Transportation and Transitory Provisions. The Manila International Airport including the
Manila Domestic Airport as a division under the Bureau of Air Transportation is hereby
abolished.
x x x x.
The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the Republic receiving
cash, promissory notes or even stock since MIAA is not a stock corporation.
The whereas clauses of the MIAA Charter explain the rationale for the transfer of the Airport Lands and
Buildings to MIAA, thus:
WHEREAS, the Manila International Airport as the principal airport of the Philippines for both
international and domestic air traffic, is required to provide standards of airport accommodation
and service comparable with the best airports in the world;
WHEREAS, domestic and other terminals, general aviation and other facilities, have to be
upgraded to meet the current and future air traffic and other demands of aviation in Metro Manila;
WHEREAS, a management and organization study has indicated that the objectives of providing
high standards of accommodation and service within the context of a financially viable
operation, will best be achieved by a separate and autonomous body; and
WHEREAS, under Presidential Decree No. 1416, as amended by Presidential Decree No. 1772,
the President of the Philippines is given continuing authority to reorganize the National
Government, which authority includes the creation of new entities, agencies and
instrumentalities of the Government[.] (Emphasis supplied)
The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation to MIAA was not
meant to transfer beneficial ownership of these assets from the Republic to MIAA. The purpose was
merely to reorganize a division in the Bureau of Air Transportation into a separate and autonomous
body. The Republic remains the beneficial owner of the Airport Lands and Buildings. MIAA itself is

owned solely by the Republic. No party claims any ownership rights over MIAA's assets adverse to the
Republic.
The MIAA Charter expressly provides that the Airport Lands and Buildings "shall not be disposed
through sale or through any other mode unless specifically approved by the President of the
Philippines." This only means that the Republic retained the beneficial ownership of the Airport Lands
and Buildings because under Article 428 of the Civil Code, only the "owner has the right to x x x dispose
of a thing." Since MIAA cannot dispose of the Airport Lands and Buildings, MIAA does not own the
Airport Lands and Buildings.
At any time, the President can transfer back to the Republic title to the Airport Lands and Buildings
without the Republic paying MIAA any consideration. Under Section 3 of the MIAA Charter, the
President is the only one who can authorize the sale or disposition of the Airport Lands and Buildings.
This only confirms that the Airport Lands and Buildings belong to the Republic.
e. Real Property Owned by the Republic is Not Taxable
Section 234(a) of the Local Government Code exempts from real estate tax any "[r]eal property owned by
the Republic of the Philippines." Section 234(a) provides:
SEC. 234. Exemptions from Real Property Tax. The following are exempted from payment
of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person;
x x x. (Emphasis supplied)
This exemption should be read in relation with Section 133(o) of the same Code, which prohibits local
governments from imposing "[t]axes, fees or charges of any kind on the National Government, its
agencies and instrumentalities x x x." The real properties owned by the Republic are titled either in the
name of the Republic itself or in the name of agencies or instrumentalities of the National Government.
The Administrative Code allows real property owned by the Republic to be titled in the name of agencies
or instrumentalities of the national government. Such real properties remain owned by the Republic and
continue to be exempt from real estate tax.
The Republic may grant the beneficial use of its real property to an agency or instrumentality of the
national government. This happens when title of the real property is transferred to an agency or
instrumentality even as the Republic remains the owner of the real property. Such arrangement does not
result in the loss of the tax exemption. Section 234(a) of the Local Government Code states that real
property owned by the Republic loses its tax exemption only if the "beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person." MIAA, as a government instrumentality, is
not a taxable person under Section 133(o) of the Local Government Code. Thus, even if we assume that
the Republic has granted to MIAA the beneficial use of the Airport Lands and Buildings, such fact does
not make these real properties subject to real estate tax.
However, portions of the Airport Lands and Buildings that MIAA leases to private entities are not exempt
from real estate tax. For example, the land area occupied by hangars that MIAA leases to private
corporations is subject to real estate tax. In such a case, MIAA has granted the beneficial use of such land

area for a consideration to a taxable person and therefore such land area is subject to real estate tax.
In Lung Center of the Philippines v. Quezon City, the Court ruled:
Accordingly, we hold that the portions of the land leased to private entities as well as those parts
of the hospital leased to private individuals are not exempt from such taxes. On the other hand,
the portions of the land occupied by the hospital and portions of the hospital used for its patients,
whether paying or non-paying, are exempt from real property taxes. 29
3. Refutation of Arguments of Minority
The minority asserts that the MIAA is not exempt from real estate tax because Section 193 of the Local
Government Code of 1991 withdrew the tax exemption of "all persons, whether natural or juridical"
upon the effectivity of the Code. Section 193 provides:
SEC. 193. Withdrawal of Tax Exemption Privileges Unless otherwise provided in this Code,
tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural
or juridical, including government-owned or controlled corporations, except local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions are hereby withdrawn upon effectivity of this Code. (Emphasis supplied)
The minority states that MIAA is indisputably a juridical person. The minority argues that since the
Local Government Code withdrew the tax exemption of all juridical persons, then MIAA is not exempt
from real estate tax. Thus, the minority declares:
It is evident from the quoted provisions of the Local Government Code that the withdrawn
exemptions from realty tax cover not just GOCCs, but all persons. To repeat, the provisions
lay down the explicit proposition that the withdrawal of realty tax exemption applies to all
persons. The reference to or the inclusion of GOCCs is only clarificatory or illustrative of the
explicit provision.
The term "All persons" encompasses the two classes of persons recognized under our laws,
natural and juridical persons. Obviously, MIAA is not a natural person. Thus, the
determinative test is not just whether MIAA is a GOCC, but whether MIAA is a juridical
person at all. (Emphasis and underscoring in the original)
The minority posits that the "determinative test" whether MIAA is exempt from local taxation is its status
whether MIAA is a juridical person or not. The minority also insists that "Sections 193 and 234 may
be examined in isolation from Section 133(o) to ascertain MIAA's claim of exemption."
The argument of the minority is fatally flawed. Section 193 of the Local Government Code expressly
withdrew the tax exemption of all juridical persons "[u]nless otherwise provided in this Code." Now,
Section
133(o)
of
the
Local
Government
Code expressly
provides
otherwise,
specifically prohibiting local governments from imposing any kind of tax on national government
instrumentalities. Section 133(o) states:
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:
xxxx

(o) Taxes, fees or charges of any kinds on the National Government, its agencies and
instrumentalities, and local government units. (Emphasis and underscoring supplied)
By express mandate of the Local Government Code, local governments cannot impose any kind of tax on
national government instrumentalities like the MIAA. Local governments are devoid of power to tax the
national government, its agencies and instrumentalities. The taxing powers of local governments do not
extend to the national government, its agencies and instrumentalities, "[u]nless otherwise provided in this
Code" as stated in the saving clause of Section 133. The saving clause refers to Section 234(a) on the
exception to the exemption from real estate tax of real property owned by the Republic.
The minority, however, theorizes that unless exempted in Section 193 itself, all juridical persons are
subject to tax by local governments. The minority insists that the juridical persons exempt from local
taxation are limited to the three classes of entities specifically enumerated as exempt in Section 193.
Thus, the minority states:
x x x Under Section 193, the exemption is limited to (a) local water districts; (b) cooperatives
duly registered under Republic Act No. 6938; and (c) non-stock and non-profit hospitals and
educational institutions. It would be belaboring the obvious why the MIAA does not fall within
any of the exempt entities under Section 193. (Emphasis supplied)
The minority's theory directly contradicts and completely negates Section 133(o) of the Local
Government Code. This theory will result in gross absurdities. It will make the national government,
which itself is a juridical person, subject to tax by local governments since the national government is not
included in the enumeration of exempt entities in Section 193. Under this theory, local governments can
impose any kind of local tax, and not only real estate tax, on the national government.
Under the minority's theory, many national government instrumentalities with juridical personalities will
also be subject to any kind of local tax, and not only real estate tax. Some of the national government
instrumentalities vested by law with juridical personalities are: Bangko Sentral ng Pilipinas, 30 Philippine
Rice Research Institute,31Laguna Lake
Development Authority,32 Fisheries Development Authority,33 Bases Conversion Development
Authority,34Philippine Ports Authority,35 Cagayan de Oro Port Authority,36 San Fernando Port
Authority,37 Cebu Port Authority,38 and Philippine National Railways.39
The minority's theory violates Section 133(o) of the Local Government Code which expressly prohibits
local governments from imposing any kind of tax on national government instrumentalities. Section
133(o) does not distinguish between national government instrumentalities with or without juridical
personalities. Where the law does not distinguish, courts should not distinguish. Thus, Section 133(o)
applies to all national government instrumentalities, with or without juridical personalities. The
determinative test whether MIAA is exempt from local taxation is not whether MIAA is a juridical
person, but whether it is a national government instrumentality under Section 133(o) of the Local
Government Code. Section 133(o) is the specific provision of law prohibiting local governments from
imposing any kind of tax on the national government, its agencies and instrumentalities.
Section 133 of the Local Government Code starts with the saving clause "[u]nless otherwise provided in
this Code." This means that unless the Local Government Code grants an express authorization, local
governments have no power to tax the national government, its agencies and instrumentalities. Clearly,
the rule is local governments have no power to tax the national government, its agencies and

instrumentalities. As an exception to this rule, local governments may tax the national government, its
agencies and instrumentalities only if the Local Government Code expressly so provides.
The saving clause in Section 133 refers to the exception to the exemption in Section 234(a) of the Code,
which makes the national government subject to real estate tax when it gives the beneficial use of its real
properties to a taxable entity. Section 234(a) of the Local Government Code provides:
SEC. 234. Exemptions from Real Property Tax The following are exempted from payment of
the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person.
x x x. (Emphasis supplied)
Under Section 234(a), real property owned by the Republic is exempt from real estate tax. The exception
to this exemption is when the government gives the beneficial use of the real property to a taxable entity.
The exception to the exemption in Section 234(a) is the only instance when the national government, its
agencies and instrumentalities are subject to any kind of tax by local governments. The exception to the
exemption applies only to real estate tax and not to any other tax. The justification for the exception to the
exemption is that the real property, although owned by the Republic, is not devoted to public use or public
service but devoted to the private gain of a taxable person.
The minority also argues that since Section 133 precedes Section 193 and 234 of the Local Government
Code, the later provisions prevail over Section 133. Thus, the minority asserts:
x x x Moreover, sequentially Section 133 antecedes Section 193 and 234. Following an accepted
rule of construction, in case of conflict the subsequent provisions should prevail. Therefore,
MIAA, as a juridical person, is subject to real property taxes, the general exemptions attaching to
instrumentalities under Section 133(o) of the Local Government Code being qualified by Sections
193 and 234 of the same law. (Emphasis supplied)
The minority assumes that there is an irreconcilable conflict between Section 133 on one hand, and
Sections 193 and 234 on the other. No one has urged that there is such a conflict, much less has any one
presenteda persuasive argument that there is such a conflict. The minority's assumption of an
irreconcilable conflict in the statutory provisions is an egregious error for two reasons.
First, there is no conflict whatsoever between Sections 133 and 193 because Section 193 expressly admits
its subordination to other provisions of the Code when Section 193 states "[u]nless otherwise provided in
this Code." By its own words, Section 193 admits the superiority of other provisions of the Local
Government Code that limit the exercise of the taxing power in Section 193. When a provision of law
grants a power but withholds such power on certain matters, there is no conflict between the grant of
power and the withholding of power. The grantee of the power simply cannot exercise the power on
matters withheld from its power.
Second, Section 133 is entitled "Common Limitations on the Taxing Powers of Local Government Units."
Section 133 limits the grant to local governments of the power to tax, and not merely the exercise of a
delegated power to tax. Section 133 states that the taxing powers of local governments "shall not extend

to the levy" of any kind of tax on the national government, its agencies and instrumentalities. There is no
clearer limitation on the taxing power than this.
Since Section 133 prescribes the "common limitations" on the taxing powers of local governments,
Section 133 logically prevails over Section 193 which grants local governments such taxing powers. By
their very meaning and purpose, the "common limitations" on the taxing power prevail over the grant or
exercise of the taxing power. If the taxing power of local governments in Section 193 prevails over the
limitations on such taxing power in Section 133, then local governments can impose any kind of tax on
the national government, its agencies and instrumentalities a gross absurdity.
Local governments have no power to tax the national government, its agencies and instrumentalities,
except as otherwise provided in the Local Government Code pursuant to the saving clause in Section 133
stating "[u]nless otherwise provided in this Code." This exception which is an exception to the
exemption of the Republic from real estate tax imposed by local governments refers to Section 234(a)
of the Code. The exception to the exemption in Section 234(a) subjects real property owned by the
Republic, whether titled in the name of the national government, its agencies or instrumentalities, to real
estate tax if the beneficial use of such property is given to a taxable entity.
The minority also claims that the definition in the Administrative Code of the phrase "government-owned
or controlled corporation" is not controlling. The minority points out that Section 2 of the Introductory
Provisions of the Administrative Code admits that its definitions are not controlling when it provides:
SEC. 2. General Terms Defined. Unless the specific words of the text, or the context as a
whole, or a particular statute, shall require a different meaning:
xxxx
The minority then concludes that reliance on the Administrative Code definition is "flawed."
The minority's argument is a non sequitur. True, Section 2 of the Administrative Code recognizes that a
statute may require a different meaning than that defined in the Administrative Code. However, this does
not automatically mean that the definition in the Administrative Code does not apply to the Local
Government Code. Section 2 of the Administrative Code clearly states that "unless the specific words x x
x of a particular statute shall require a different meaning," the definition in Section 2 of the
Administrative Code shall apply. Thus, unless there is specific language in the Local Government Code
defining the phrase "government-owned or controlled corporation" differently from the definition in the
Administrative Code, the definition in the Administrative Code prevails.
The minority does not point to any provision in the Local Government Code defining the phrase
"government-owned or controlled corporation" differently from the definition in the Administrative Code.
Indeed, there is none. The Local Government Code is silent on the definition of the phrase "governmentowned or controlled corporation." The Administrative Code, however, expressly defines the phrase
"government-owned or controlled corporation." The inescapable conclusion is that the Administrative
Code definition of the phrase "government-owned or controlled corporation" applies to the Local
Government Code.
The third whereas clause of the Administrative Code states that the Code "incorporates in a unified
document the major structural, functional and procedural principles and rules of governance." Thus, the
Administrative Code is the governing law defining the status and relationship of government departments,
bureaus, offices, agencies and instrumentalities. Unless a statute expressly provides for a different status

and relationship for a specific government unit or entity, the provisions of the Administrative Code
prevail.
The minority also contends that the phrase "government-owned or controlled corporation" should apply
only to corporations organized under the Corporation Code, the general incorporation law, and not to
corporations created by special charters. The minority sees no reason why government corporations with
special charters should have a capital stock. Thus, the minority declares:
I submit that the definition of "government-owned or controlled corporations" under the
Administrative Code refer to those corporations owned by the government or its instrumentalities
which are created not by legislative enactment, but formed and organized under the Corporation
Code through registration with the Securities and Exchange Commission. In short, these are
GOCCs without original charters.
xxxx
It might as well be worth pointing out that there is no point in requiring a capital structure for
GOCCs whose full ownership is limited by its charter to the State or Republic. Such GOCCs are
not empowered to declare dividends or alienate their capital shares.
The contention of the minority is seriously flawed. It is not in accord with the Constitution and existing
legislations. It will also result in gross absurdities.
First, the Administrative Code definition of the phrase "government-owned or controlled corporation"
does not distinguish between one incorporated under the Corporation Code or under a special charter.
Where the law does not distinguish, courts should not distinguish.
Second, Congress has created through special charters several government-owned corporations organized
as stock corporations. Prime examples are the Land Bank of the Philippines and the Development Bank of
the Philippines. The special charter40 of the Land Bank of the Philippines provides:
SECTION 81. Capital. The authorized capital stock of the Bank shall be nine billion pesos,
divided into seven hundred and eighty million common shares with a par value of ten pesos each,
which shall be fully subscribed by the Government, and one hundred and twenty million
preferred shares with a par value of ten pesos each, which shall be issued in accordance with the
provisions of Sections seventy-seven and eighty-three of this Code. (Emphasis supplied)
Likewise, the special charter41 of the Development Bank of the Philippines provides:
SECTION 7. Authorized Capital Stock Par value. The capital stock of the Bank shall be Five
Billion Pesos to be divided into Fifty Million common shares with par value of P100 per share.
These shares are available for subscription by the National Government. Upon the effectivity of
this Charter, the National Government shall subscribe to Twenty-Five Million common shares of
stock worth Two Billion Five Hundred Million which shall be deemed paid for by the
Government with the net asset values of the Bank remaining after the transfer of assets and
liabilities as provided in Section 30 hereof. (Emphasis supplied)
Other government-owned corporations organized as stock corporations under their special charters are the
Philippine Crop Insurance Corporation,42 Philippine International Trading Corporation,43 and the
Philippine National Bank44 before it was reorganized as a stock corporation under the Corporation Code.

All these government-owned corporations organized under special charters as stock corporations are
subject to real estate tax on real properties owned by them. To rule that they are not government-owned or
controlled corporations because they are not registered with the Securities and Exchange Commission
would remove them from the reach of Section 234 of the Local Government Code, thus exempting them
from real estate tax.
Third, the government-owned or controlled corporations created through special charters are those that
meet the two conditions prescribed in Section 16, Article XII of the Constitution. The first condition is
that the government-owned or controlled corporation must be established for the common good. The
second condition is that the government-owned or controlled corporation must meet the test of economic
viability. Section 16, Article XII of the 1987 Constitution provides:
SEC. 16. The Congress shall not, except by general law, provide for the formation, organization,
or regulation of private corporations. Government-owned or controlled corporations may be
created or established by special charters in the interest of the common good and subject to the
test of economic viability. (Emphasis and underscoring supplied)
The Constitution expressly authorizes the legislature to create "government-owned or controlled
corporations" through special charters only if these entities are required to meet the twin conditions of
common good and economic viability. In other words, Congress has no power to create governmentowned or controlled corporations with special charters unless they are made to comply with the two
conditions of common good and economic viability. The test of economic viability applies only to
government-owned or controlled corporations that perform economic or commercial activities and need
to compete in the market place. Being essentially economic vehicles of the State for the common good
meaning for economic development purposes these government-owned or controlled corporations with
special charters are usually organized as stock corporations just like ordinary private corporations.
In contrast, government instrumentalities vested with corporate powers and performing governmental or
public functions need not meet the test of economic viability. These instrumentalities perform essential
public services for the common good, services that every modern State must provide its citizens. These
instrumentalities need not be economically viable since the government may even subsidize their entire
operations. These instrumentalities are not the "government-owned or controlled corporations" referred to
in Section 16, Article XII of the 1987 Constitution.
Thus, the Constitution imposes no limitation when the legislature creates government instrumentalities
vested with corporate powers but performing essential governmental or public functions. Congress has
plenary authority to create government instrumentalities vested with corporate powers provided these
instrumentalities perform essential government functions or public services. However, when the
legislature creates through special charters corporations that perform economic or commercial activities,
such entities known as "government-owned or controlled corporations" must meet the test of
economic viability because they compete in the market place.
This is the situation of the Land Bank of the Philippines and the Development Bank of the Philippines
and similar government-owned or controlled corporations, which derive their income to meet operating
expenses solely from commercial transactions in competition with the private sector. The intent of the
Constitution is to prevent the creation of government-owned or controlled corporations that cannot
survive on their own in the market place and thus merely drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the Constitutional
Commission the purpose of this test, as follows:

MR. OPLE: Madam President, the reason for this concern is really that when the government
creates a corporation, there is a sense in which this corporation becomes exempt from the test of
economic performance. We know what happened in the past. If a government corporation loses,
then it makes its claim upon the taxpayers' money through new equity infusions from the
government and what is always invoked is the common good. That is the reason why this year,
out of a budget of P115 billion for the entire government, about P28 billion of this will go into
equity infusions to support a few government financial institutions. And this is all taxpayers'
money which could have been relocated to agrarian reform, to social services like health and
education, to augment the salaries of grossly underpaid public employees. And yet this is all
going down the drain.
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the "common
good," this becomes a restraint on future enthusiasts for state capitalism to excuse themselves
from the responsibility of meeting the market test so that they become viable. And so, Madam
President, I reiterate, for the committee's consideration and I am glad that I am joined in this
proposal by Commissioner Foz, the insertion of the standard of "ECONOMIC VIABILITY OR
THE ECONOMIC TEST," together with the common good.45
Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his textbook
The 1987 Constitution of the Republic of the Philippines: A Commentary:
The second sentence was added by the 1986 Constitutional Commission. The significant addition,
however, is the phrase "in the interest of the common good and subject to the test of economic
viability." The addition includes the ideas that they must show capacity to function efficiently in
business and that they should not go into activities which the private sector can do better.
Moreover, economic viability is more than financial viability but also includes capability to make
profit and generate benefits not quantifiable in financial terms. 46 (Emphasis supplied)
Clearly, the test of economic viability does not apply to government entities vested with corporate powers
and performing essential public services. The State is obligated to render essential public services
regardless of the economic viability of providing such service. The non-economic viability of rendering
such essential public service does not excuse the State from withholding such essential services from the
public.
However, government-owned or controlled corporations with special charters, organized essentially for
economic or commercial objectives, must meet the test of economic viability. These are the governmentowned or controlled corporations that are usually organized under their special charters as stock
corporations, like the Land Bank of the Philippines and the Development Bank of the Philippines. These
are the government-owned or controlled corporations, along with government-owned or controlled
corporations organized under the Corporation Code, that fall under the definition of "government-owned
or controlled corporations" in Section 2(10) of the Administrative Code.
The MIAA need not meet the test of economic viability because the legislature did not create MIAA to
compete in the market place. MIAA does not compete in the market place because there is no competing
international airport operated by the private sector. MIAA performs an essential public service as the
primary domestic and international airport of the Philippines. The operation of an international airport
requires the presence of personnel from the following government agencies:

1. The Bureau of Immigration and Deportation, to document the arrival and departure of
passengers, screening out those without visas or travel documents, or those with hold departure
orders;
2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited importations;
3. The quarantine office of the Department of Health, to enforce health measures against the
spread of infectious diseases into the country;
4. The Department of Agriculture, to enforce measures against the spread of plant and animal
diseases into the country;
5. The Aviation Security Command of the Philippine National Police, to prevent the entry of
terrorists and the escape of criminals, as well as to secure the airport premises from terrorist
attack or seizure;
6. The Air Traffic Office of the Department of Transportation and Communications, to authorize
aircraft to enter or leave Philippine airspace, as well as to land on, or take off from, the airport;
and
7. The MIAA, to provide the proper premises such as runway and buildings for the
government personnel, passengers, and airlines, and to manage the airport operations.
All these agencies of government perform government functions essential to the operation of an
international airport.
MIAA performs an essential public service that every modern State must provide its citizens. MIAA
derives its revenues principally from the mandatory fees and charges MIAA imposes on passengers and
airlines. The terminal fees that MIAA charges every passenger are regulatory or administrative fees 47 and
not income from commercial transactions.
MIAA falls under the definition of a government instrumentality under Section 2(10) of the Introductory
Provisions of the Administrative Code, which provides:
SEC. 2. General Terms Defined. x x x x
(10) Instrumentality refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some
if not all corporate powers, administering special funds, and enjoying operational autonomy,
usually through a charter. x x x (Emphasis supplied)
The fact alone that MIAA is endowed with corporate powers does not make MIAA a government-owned
or controlled corporation. Without a change in its capital structure, MIAA remains a government
instrumentality under Section 2(10) of the Introductory Provisions of the Administrative Code. More
importantly, as long as MIAA renders essential public services, it need not comply with the test of
economic viability. Thus, MIAA is outside the scope of the phrase "government-owned or controlled
corporations" under Section 16, Article XII of the 1987 Constitution.

The minority belittles the use in the Local Government Code of the phrase "government-owned or
controlled corporation" as merely "clarificatory or illustrative." This is fatal. The 1987 Constitution
prescribes explicit conditions for the creation of "government-owned or controlled corporations." The
Administrative Code defines what constitutes a "government-owned or controlled corporation." To
belittle this phrase as "clarificatory or illustrative" is grave error.
To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13) of the
Introductory Provisions of the Administrative Code because it is not organized as a stock or non-stock
corporation. Neither is MIAA a government-owned or controlled corporation under Section 16, Article
XII of the 1987 Constitution because MIAA is not required to meet the test of economic viability. MIAA
is a government instrumentality vested with corporate powers and performing essential public services
pursuant to Section 2(10) of the Introductory Provisions of the Administrative Code. As a government
instrumentality, MIAA is not subject to any kind of tax by local governments under Section 133(o) of the
Local Government Code. The exception to the exemption in Section 234(a) does not apply to MIAA
because MIAA is not a taxable entity under the Local Government Code. Such exception applies only if
the beneficial use of real property owned by the Republic is given to a taxable entity.
Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and thus are
properties of public dominion. Properties of public dominion are owned by the State or the Republic.
Article 420 of the Civil Code provides:
Art. 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores, roadsteads, and others of similar character;
(2) Those which belong to the State, without being for public use, and are intended for some
public service or for the development of the national wealth. (Emphasis supplied)
The term "ports x x x constructed by the State" includes airports and seaports. The Airport Lands and
Buildings of MIAA are intended for public use, and at the very least intended for public service. Whether
intended for public use or public service, the Airport Lands and Buildings are properties of public
dominion. As properties of public dominion, the Airport Lands and Buildings are owned by the Republic
and thus exempt from real estate tax under Section 234(a) of the Local Government Code.
4. Conclusion
Under Section 2(10) and (13) of the Introductory Provisions of the Administrative Code, which governs
the legal relation and status of government units, agencies and offices within the entire government
machinery, MIAA is a government instrumentality and not a government-owned or controlled
corporation. Under Section 133(o) of the Local Government Code, MIAA as a government
instrumentality is not a taxable person because it is not subject to "[t]axes, fees or charges of any kind" by
local governments. The only exception is when MIAA leases its real property to a "taxable person" as
provided in Section 234(a) of the Local Government Code, in which case the specific real property leased
becomes subject to real estate tax. Thus, only portions of the Airport Lands and Buildings leased to
taxable persons like private parties are subject to real estate tax by the City of Paraaque.
Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to public
use, are properties of public dominion and thus owned by the State or the Republic of the Philippines.
Article 420 specifically mentions "ports x x x constructed by the State," which includes public airports

and seaports, as properties of public dominion and owned by the Republic. As properties of public
dominion owned by the Republic, there is no doubt whatsoever that the Airport Lands and Buildings are
expressly exempt from real estate tax under Section 234(a) of the Local Government Code. This Court
has also repeatedly ruled that properties of public dominion are not subject to execution or foreclosure
sale.
WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the Court of
Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No. 66878. We DECLARE the
Airport Lands and Buildings of the Manila International Airport Authority EXEMPT from the real estate
tax imposed by the City of Paraaque. We declare VOID all the real estate tax assessments, including the
final notices of real estate tax delinquencies, issued by the City of Paraaque on the Airport Lands and
Buildings of the Manila International Airport Authority, except for the portions that the Manila
International Airport Authority has leased to private parties. We also declare VOID the assailed auction
sale, and all its effects, of the Airport Lands and Buildings of the Manila International Airport Authority.
No costs.
SO ORDERED.
Panganiban, C.J., Puno, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Austria-Martinez, Corona,
Carpio Morales, Callejo, Sr., Azcuna, Tinga, Chico-Nazario, Garcia, Velasco, Jr., J.J., concur.

x-------------------------------------------------------------------------------x
DISSENTING OPINION
TINGA, J. :
The legally correct resolution of this petition would have had the added benefit of an utterly fair and
equitable result a recognition of the constitutional and statutory power of the City of Paraaque to
impose real property taxes on the Manila International Airport Authority (MIAA), but at the same time,
upholding a statutory limitation that prevents the City of Paraaque from seizing and conducting an
execution sale over the real properties of MIAA. In the end, all that the City of Paraaque would hold
over the MIAA is a limited lien, unenforceable as it is through the sale or disposition of MIAA properties.
Not only is this the legal effect of all the relevant constitutional and statutory provisions applied to this
case, it also leaves the room for negotiation for a mutually acceptable resolution between the City of
Paraaque and MIAA.
Instead, with blind but measured rage, the majority today veers wildly off-course, shattering statutes and
judicial precedents left and right in order to protect the precious Ming vase that is the Manila International
Airport Authority (MIAA). While the MIAA is left unscathed, it is surrounded by the wreckage that once
was the constitutional policy, duly enacted into law, that was local autonomy. Make no mistake, the
majority has virtually declared war on the seventy nine (79) provinces, one hundred seventeen (117)
cities, and one thousand five hundred (1,500) municipalities of the Philippines. 1

The icing on this inedible cake is the strained and purposely vague rationale used to justify the majority
opinion. Decisions of the Supreme Court are expected to provide clarity to the parties and to students of
jurisprudence, as to what the law of the case is, especially when the doctrines of long standing are
modified or clarified. With all due respect, the decision in this case is plainly so, so wrong on many
levels. More egregious, in the majority's resolve to spare the Manila International Airport Authority
(MIAA) from liability for real estate taxes, no clear-cut rule emerges on the important question of the
power of local government units (LGUs) to tax government corporations, instrumentalities or agencies.
The majority would overturn sub silencio, among others, at least one dozen precedents enumerated
below:
1) Mactan-Cebu International Airport Authority v. Hon. Marcos, 2 the leading case penned in 1997 by
recently retired Chief Justice Davide, which held that the express withdrawal by the Local Government
Code of previously granted exemptions from realty taxes applied to instrumentalities and governmentowned or controlled corporations (GOCCs) such as the Mactan-Cebu International Airport Authority
(MCIAA). The majority invokes the ruling in Basco v. Pagcor, 3 a precedent discredited in Mactan, and a
vanguard of a doctrine so noxious to the concept of local government rule that the Local Government
Code was drafted precisely to counter such philosophy. The efficacy of several rulings that expressly rely
on Mactan, such as PHILRECA v. DILG Secretary,4City Government of San Pablo v. Hon. Reyes 5 is now
put in question.
2) The rulings in National Power Corporation v. City of Cabanatuan, 6 wherein the Court, through Justice
Puno, declared that the National Power Corporation, a GOCC, is liable for franchise taxes under the Local
Government Code, and succeeding cases that have relied on it such as Batangas Power Corp. v. Batangas
City7 The majority now states that deems instrumentalities as defined under the Administrative Code of
1987 as purportedly beyond the reach of any form of taxation by LGUs, stating "[l]ocal governments are
devoid of power to tax the national government, its agencies and instrumentalities." 8 Unfortunately, using
the definition employed by the majority, as provided by Section 2(d) of the Administrative Code, GOCCs
are also considered as instrumentalities, thus leading to the astounding conclusion that GOCCs may not
be taxed by LGUs under the Local Government Code.
3) Lung Center of the Philippines v. Quezon City,9 wherein a unanimous en banc Court held that the Lung
Center of the Philippines may be liable for real property taxes. Using the majority's reasoning, the Lung
Center would be properly classified as an instrumentality which the majority now holds as exempt from
all forms of local taxation.10
4) City of Davao v. RTC,11 where the Court held that the Government Service Insurance System (GSIS)
was liable for real property taxes for the years 1992 to 1994, its previous exemption having been
withdrawn by the enactment of the Local Government Code. 12 This decision, which expressly relied on
Mactan, would be directly though silently overruled by the majority.
5) The common essence of the Court's rulings in the two Philippine Ports Authority v. City of
Iloilo,13 cases penned by Justices Callejo and Azcuna respectively, which relied in part on Mactan in
holding the Philippine Ports Authority (PPA) liable for realty taxes, notwithstanding the fact that it is a
GOCC. Based on the reasoning of the majority, the PPA cannot be considered a GOCC. The reliance of
these cases on Mactan, and its rationale for holding governmental entities like the PPA liable for local
government taxation is mooted by the majority.
6) The 1963 precedent of Social Security System Employees Association v. Soriano, 14 which declared the
Social Security Commission (SSC) as a GOCC performing proprietary functions. Based on the rationale

employed by the majority, the Social Security System is not a GOCC. Or perhaps more accurately, "no
longer" a GOCC.
7) The decision penned by Justice (now Chief Justice) Panganiban, Light Rail Transit Authority v. Central
Board of Assessment.15 The characterization therein of the Light Rail Transit Authority (LRTA) as a
"service-oriented commercial endeavor" whose patrimonial property is subject to local taxation is now
rendered inconsequential, owing to the majority's thinking that an entity such as the LRTA is itself exempt
from local government taxation16, irrespective of the functions it performs. Moreover, based on the
majority's criteria, LRTA is not a GOCC.
8) The cases of Teodoro v. National Airports Corporation 17 and Civil Aeronautics Administration v. Court
of Appeals.18 wherein the Court held that the predecessor agency of the MIAA, which was similarly
engaged in the operation, administration and management of the Manila International Agency, was
engaged in the exercise of proprietary, as opposed to sovereign functions. The majority would hold
otherwise that the property maintained by MIAA is actually patrimonial, thus implying that MIAA is
actually engaged in sovereign functions.
9) My own majority in Phividec Industrial Authority v. Capitol Steel, 19 wherein the Court held that the
Phividec Industrial Authority, a GOCC, was required to secure the services of the Office of the
Government Corporate Counsel for legal representation. 20 Based on the reasoning of the majority,
Phividec would not be a GOCC, and the mandate of the Office of the Government Corporate Counsel
extends only to GOCCs.
10) Two decisions promulgated by the Court just last month (June 2006), National Power Corporation v.
Province of Isabela21 and GSIS v. City Assessor of Iloilo City.22 In the former, the Court pronounced that
"[a]lthough as a general rule, LGUs cannot impose taxes, fees, or charges of any kind on the National
Government, its agencies and instrumentalities, this rule admits of an exception, i.e., when specific
provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the aforementioned
entities." Yet the majority now rules that the exceptions in the LGC no longer hold, since "local
governments are devoid of power to tax the national government, its agencies and
instrumentalities."23 The ruling in the latter case, which held the GSIS as liable for real property taxes, is
now put in jeopardy by the majority's ruling.
There are certainly many other precedents affected, perhaps all previous jurisprudence regarding local
government taxation vis-a-vis government entities, as well as any previous definitions of GOCCs, and
previous distinctions between the exercise of governmental and proprietary functions (a distinction laid
down by this Court as far back as 191624). What is the reason offered by the majority for overturning or
modifying all these precedents and doctrines? None is given, for the majority takes comfort instead in the
pretense that these precedents never existed. Only children should be permitted to subscribe to the theory
that something bad will go away if you pretend hard enough that it does not exist.
I.
Case Should Have Been Decided
Following Mactan Precedent
The core issue in this case, whether the MIAA is liable to the City of Paraaque for real property taxes
under the Local Government Code, has already been decided by this Court in the Mactan case, and should
have been resolved by simply applying precedent.

Mactan Explained
A brief recall of the Mactan case is in order. The Mactan-Cebu International Airport Authority (MCIAA)
claimed that it was exempt from payment of real property taxes to the City of Cebu, invoking the specific
exemption granted in Section 14 of its charter, Republic Act No. 6958, and its status as an instrumentality
of the government performing governmental functions. 25 Particularly, MCIAA invoked Section 133 of the
Local Government Code, precisely the same provision utilized by the majority as the basis for MIAA's
exemption. Section 133 reads:
Sec. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless otherwise
provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall
not extend to the levy of the following:
xxx
(o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities and
local government units. (emphasis and underscoring supplied).
However, the Court in Mactan noted that Section 133 qualified the exemption of the National
Government, its agencies and instrumentalities from local taxation with the phrase "unless otherwise
provided herein." It then considered the other relevant provisions of the Local Government Code,
particularly the following:
SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax
exemption or incentives granted to, or enjoyed by all persons, whether natural or juridical, including
government-owned and controlled corporations, except local water districts, cooperatives duly registered
under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code.26
SECTION 232. Power to Levy Real Property Tax. A province or city or a municipality within the
Metropolitan Manila area may levy an annual ad valorem tax on real property such as land, building,
machinery, and other improvements not hereafter specifically exempted. 27
SECTION 234. Exemptions from Real Property Tax. -- The following are exempted from payment of the
real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person:
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or
religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used
for religious charitable or educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively used by local water districts
and government-owned and controlled corporations engaged in the distribution of water and/or generation
and transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and

(e) Machinery and equipment used for pollution control and environmental protection.
Except as provided herein, any exemption from payment of real property tax previously granted to, or
presently enjoyed by, all persons, whether natural or juridical, including all government-owned or
controlled corporations are hereby withdrawn upon the effectivity of this Code. 28
Clearly, Section 133 was not intended to be so absolute a prohibition on the power of LGUs to tax the
National Government, its agencies and instrumentalities, as evidenced by these cited provisions which
"otherwise provided." But what was the extent of the limitation under Section 133? This is how the Court,
correctly to my mind, defined the parameters in Mactan:
The foregoing sections of the LGC speak of: (a) the limitations on the taxing powers of local government
units and the exceptions to such limitations; and (b) the rule on tax exemptions and the exceptions thereto.
The use of exceptions or provisos in these sections, as shown by the following clauses:
(1) "unless otherwise provided herein" in the opening paragraph of Section 133;
(2) "Unless otherwise provided in this Code" in Section 193;
(3) "not hereafter specifically exempted" in Section 232; and
(4) "Except as provided herein" in the last paragraph of Section 234
initially hampers a ready understanding of the sections. Note, too, that the aforementioned clause in
Section 133 seems to be inaccurately worded. Instead of the clause "unless otherwise provided herein,"
with the "herein" to mean, of course, the section, it should have used the clause "unless otherwise
provided in this Code." The former results in absurdity since the section itself enumerates what are
beyond the taxing powers of local government units and, where exceptions were intended, the exceptions
are explicitly indicated in the next. For instance, in item (a) which excepts income taxes "when levied on
banks and other financial institutions"; item (d) which excepts "wharfage on wharves constructed and
maintained by the local government unit concerned"; and item (1) which excepts taxes, fees and charges
for the registration and issuance of licenses or permits for the driving of "tricycles." It may also be
observed that within the body itself of the section, there are exceptions which can be found only in other
parts of the LGC, but the section interchangeably uses therein the clause, "except as otherwise provided
herein" as in items (c) and (i), or the clause "except as provided in this Code" in item (j). These clauses
would be obviously unnecessary or mere surplusages if the opening clause of the section were "Unless
otherwise provided in this Code" instead of "Unless otherwise provided herein." In any event, even if the
latter is used, since under Section 232 local government units have the power to levy real property tax,
except those exempted therefrom under Section 234, then Section 232 must be deemed to qualify Section
133.
Thus, reading together Sections 133, 232, and 234 of the LGC, we conclude that as a general rule, as laid
down in Section 133, the taxing powers of local government units cannot extend to the levy of, inter alia,
"taxes, fees and charges of any kind on the National Government, its agencies and instrumentalities, and
local government units"; however, pursuant to Section 232, provinces, cities, and municipalities in the
Metropolitan Manila Area may impose the real property tax except on, inter alia, "real property owned by
the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof
has been granted, for consideration or otherwise, to a taxable person," as provided in item (a) of the first
paragraph of Section 234.

As to tax exemptions or incentives granted to or presently enjoyed by natural or judicial persons,

including government-owned and controlled corporations, Section 193 of the LGC prescribes the general
rule, viz., they are withdrawn upon the effectivity of the LGC, except those granted to local water
districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, and unless otherwise provided in the LGC. The latter proviso could refer to
Section 234 which enumerates the properties exempt from real property tax. But the last paragraph of
Section 234 further qualifies the retention of the exemption insofar as real property taxes are concerned
by limiting the retention only to those enumerated therein; all others not included in the enumeration lost
the privilege upon the effectivity of the LGC. Moreover, even as to real property owned by the Republic
of the Philippines or any of its political subdivisions covered by item (a) of the first paragraph of Section
234, the exemption is withdrawn if the beneficial use of such property has been granted to a taxable
person for consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC,
exemptions from payment of real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except as provided in the said section, and the petitioner is,
undoubtedly, a government-owned corporation, it necessarily follows that its exemption from such tax
granted it in Section 14 of its Charter, R.A. No. 6958, has been withdrawn. Any claim to the contrary can
only be justified if the petitioner can seek refuge under any of the exceptions provided in Section 234, but
not under Section 133, as it now asserts, since, as shown above, the said section is qualified by Sections
232 and 234.29
The Court in Mactan acknowledged that under Section 133, instrumentalities were generally exempt from
all forms of local government taxation, unless otherwise provided in the Code. On the other hand, Section
232 "otherwise provided" insofar as it allowed LGUs to levy an ad valorem real property tax, irrespective
of who owned the property. At the same time, the imposition of real property taxes under Section 232 is in
turn qualified by the phrase "not hereinafter specifically exempted." The exemptions from real property
taxes are enumerated in Section 234, which specifically states that only real properties owned "by the
Republic of the Philippines or any of its political subdivisions" are exempted from the payment of the tax.
Clearly, instrumentalities or GOCCs do not fall within the exceptions under Section 234. 30
Mactan Overturned the
Precedents Now Relied
Upon by the Majority
But the petitioners in Mactan also raised the Court's ruling in Basco v. PAGCOR, 31 decided before the
enactment of the Local Government Code. The Court in Basco declared the PAGCOR as exempt from
local taxes, justifying the exemption in this wise:
Local governments have no power to tax instrumentalities of the National Government. PAGCOR is a
government owned or controlled corporation with an original charter, PD 1869. All of its shares of stocks
are owned by the National Government. In addition to its corporate powers (Sec. 3, Title II, PD 1869) it
also exercises regulatory powers xxx
PAGCOR has a dual role, to operate and to regulate gambling casinos. The latter role is governmental,
which places it in the category of an agency or instrumentality of the Government. Being an
instrumentality of the Government, PAGCOR should be and actually is exempt from local taxes.
Otherwise, its operation might be burdened, impeded or subjected to control by a mere Local government.

"The states have no power by taxation or otherwise, to retard impede, burden or in any manner control the
operation of constitutional laws enacted by Congress to carry into execution the powers vested in the
federal government." (McCulloch v. Marland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government over local governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power on the
part of the States to touch, in that way (taxation) at least, the instrumentalities of the United States
(Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision can regulate a
federal instrumentality in such a way as to prevent it from consummating its federal responsibilities, or
even to seriously burden it in the accomplishment of them." (Antieau, Modern Constitutional Law, Vol. 2,
p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of what local
authorities may perceive to be undesirable activates or enterprise using the power to tax as "a tool for
regulation" (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the "power to destroy" (McCulloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which has
the inherent power to wield it.32
Basco is as strident a reiteration of the old guard view that frowned on the principle of local autonomy,
especially as it interfered with the prerogatives and privileges of the national government. Also consider
the following citation from Maceda v. Macaraig, 33 decided the same year as Basco. Discussing the rule of
construction of tax exemptions on government instrumentalities, the sentiments are of a similar vein.
Moreover, it is a recognized principle that the rule on strict interpretation does not apply in the case of
exemptions in favor of a government political subdivision or instrumentality.
The basis for applying the rule of strict construction to statutory provisions granting tax exemptions or
deductions, even more obvious than with reference to the affirmative or levying provisions of tax statutes,
is to minimize differential treatment and foster impartiality, fairness, and equality of treatment among tax
payers.
The reason for the rule does not apply in the case of exemptions running to the benefit of the government
itself or its agencies. In such case the practical effect of an exemption is merely to reduce the amount of
money that has to be handled by government in the course of its operations. For these reasons, provisions
granting exemptions to government agencies may be construed liberally, in favor of non tax-liability of
such agencies.
In the case of property owned by the state or a city or other public corporations, the express exemption
should not be construed with the same degree of strictness that applies to exemptions contrary to the
policy of the state, since as to such property "exemption is the rule and taxation the exception." 34
Strikingly, the majority cites these two very cases and the stodgy rationale provided therein. This evinces
the perspective from which the majority is coming from. It is admittedly a viewpoint once shared by this
Court, and en vogue prior to the enactment of the Local Government Code of 1991.
However, the Local Government Code of 1991 ushered in a new ethos on how the art of governance
should be practiced in the Philippines, conceding greater powers once held in the private reserve of the

national government to LGUs. The majority might have private qualms about the wisdom of the policy of
local autonomy, but the members of the Court are not expected to substitute their personal biases for the
legislative will, especially when the 1987 Constitution itself promotes the principle of local autonomy.
Article II. Declaration of Principles and State Policies
xxx
Sec. 25. The State shall ensure the autonomy of local governments.
Article X. Local Government
xxx
Sec. 2. The territorial and political subdivisions shall enjoy local autonomy.
Section 3. The Congress shall enact a local government code which shall provide for a more responsive
and accountable local government structure instituted through a system of decentralization with effective
mechanisms of recall, initiative, and referendum, allocate among the different local government units
their powers, responsibilities, and resources, and provide for the qualifications, election, appointment and
removal, term, salaries, powers and functions and duties of local officials, and all other matters relating to
the organization and operation of the local units.
xxx
Section 5. Each local government unit shall have the power to create its own sources of revenues and to
levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively
to the local governments.
xxx
The Court in Mactan recognized that a new day had dawned with the enactment of the 1987 Constitution
and the Local Government Code of 1991. Thus, it expressly rejected the contention of the MCIAA that
Basco was applicable to them. In doing so, the language of the Court was dramatic, if only to emphasize
how monumental the shift in philosophy was with the enactment of the Local Government Code:
Accordingly, the position taken by the [MCIAA] is untenable. Reliance on Basco v. Philippine
Amusement and Gaming Corporation is unavailing since it was decided before the effectivity of the
[Local Government Code]. Besides, nothing can prevent Congress from decreeing that even
instrumentalities or agencies of the Government performing governmental functions may be subject to
tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can doubt its
wisdom.35 (emphasis supplied)
The Court Has Repeatedly
Reaffirmed Mactan Over the
Precedents Now Relied Upon

By the Majority
Since then and until today, the Court has been emphatic in declaring the Basco doctrine as dead. The
notion that instrumentalities may be subjected to local taxation by LGUs was again affirmed in National
Power Corporation v. City of Cabanatuan, 36 which was penned by Justice Puno. NPC or Napocor,
invoking its continued exemption from payment of franchise taxes to the City of Cabanatuan, alleged that
it was an instrumentality of the National Government which could not be taxed by a city government. To
that end, Basco was cited by NPC. The Court had this to say about Basco.
xxx[T]he doctrine in Basco vs. Philippine Amusement and Gaming Corporation relied upon by the
petitioner to support its claim no longer applies. To emphasize, the Basco case was decided prior to the
effectivity of the LGC, when no law empowering the local government units to tax instrumentalities of
the National Government was in effect. However, as this Court ruled in the case of Mactan Cebu
International Airport Authority (MCIAA) vs. Marcos, nothing prevents Congress from decreeing that
even instrumentalities or agencies of the government performing governmental functions may be subject
to tax. In enacting the LGC, Congress exercised its prerogative to tax instrumentalities and agencies of
government as it sees fit. Thus, after reviewing the specific provisions of the LGC, this Court held that
MCIAA, although an instrumentality of the national government, was subject to real property tax. 37
In the 2003 case of Philippine Ports Authority v. City of Iloilo, 38 the Court, in the able ponencia of Justice
Azcuna, affirmed the levy of realty taxes on the PPA. Although the taxes were assessed under the old Real
Property Tax Code and not the Local Government Code, the Court again cited Mactan to refute PPA's
invocation of Basco as the basis of its exemption.
[Basco] did not absolutely prohibit local governments from taxing government instrumentalities. In fact
we stated therein:
The power of local government to "impose taxes and fees" is always subject to "limitations" which
Congress may provide by law. Since P.D. 1869 remains an "operative" law until "amended, repealed or
revoked". . . its "exemption clause" remains an exemption to the exercise of the power of local
governments to impose taxes and fees.
Furthermore, in the more recent case of Mactan Cebu International Airport Authority v. Marcos, where
the Basco case was similarly invoked for tax exemption, we stated: "[N]othing can prevent Congress from
decreeing that even instrumentalities or agencies of the Government performing governmental functions
may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no
one can doubt its wisdom." The fact that tax exemptions of government-owned or controlled corporations
have been expressly withdrawn by the present Local Government Code clearly attests against petitioner's
claim of absolute exemption of government instrumentalities from local taxation. 39
Just last month, the Court in National Power Corporation v. Province of Isabela 40 again rejected Basco in
emphatic terms. Held the Court, through Justice Callejo, Sr.:
Thus, the doctrine laid down in the Basco case is no longer true. In the Cabanatuan case, the Court noted
primarily that the Basco case was decided prior to the effectivity of the LGC, when no law empowering
the local government units to tax instrumentalities of the National Government was in effect. It further
explained that in enacting the LGC, Congress empowered the LGUs to impose certain taxes even on
instrumentalities of the National Government. 41

The taxability of the PPA recently came to fore in Philippine Ports Authority v. City of Iloilo 42 case, a
decision also penned by Justice Callejo, Sr., wherein the Court affirmed the sale of PPA's properties at
public auction for failure to pay realty taxes. The Court again reiterated that "it was the intention of
Congress to withdraw the tax exemptions granted to or presently enjoyed by all persons, including
government-owned or controlled corporations, upon the effectivity" of the Code. 43 The Court in the
second Public Ports Authority case likewise cited Mactan as providing the "raison d'etre for the
withdrawal of the exemption," namely, "the State policy to ensure autonomy to local governments and the
objective of the [Local Government Code] that they enjoy genuine and meaningful local autonomy to
enable them to attain their fullest development as self-reliant communities. . . . " 44
Last year, the Court, in City of Davao v. RTC,45 affirmed that the legislated exemption from real property
taxes of the Government Service Insurance System (GSIS) was removed under the Local Government
Code. Again, Mactan was relied upon as the governing precedent. The removal of the tax exemption
stood even though the then GSIS law 46 prohibited the removal of GSIS' tax exemptions unless the
exemption was specifically repealed, "and a provision is enacted to substitute the declared policy of
exemption from any and all taxes as an essential factor for the solvency of the fund." 47 The Court, citing
established doctrines in statutory construction and Duarte v. Dade 48 ruled that such proscription on future
legislation was itself prohibited, as "the legislature cannot bind a future legislature to a particular mode of
repeal."49
And most recently, just less than one month ago, the Court, through Justice Corona in Government
Service Insurance System v. City Assessor of Iloilo 50 again affirmed that the Local Government Code
removed the previous exemption from real property taxes of the GSIS. Again Mactan was cited as having
"expressly withdrawn the [tax] exemption of the [GOCC]. 51
Clearly then, Mactan is not a stray or unique precedent, but the basis of a jurisprudential rule employed
by the Court since its adoption, the doctrine therein consistent with the Local Government Code.
Corollarily, Basco, the polar opposite of Mactan has been emphatically rejected and declared inconsistent
with the Local Government Code.
II.
Majority, in Effectively Overturning Mactan,
Refuses to Say Why Mactan Is Wrong
The majority cites Basco in support. It does not cite Mactan, other than an incidental reference that it is
relied upon by the respondents. 52 However, the ineluctable conclusion is that the majority rejects the
rationale and ruling in Mactan. The majority provides for a wildly different interpretation of Section 133,
193 and 234 of the Local Government Code than that employed by the Court in Mactan. Moreover, the
parties in Mactan and in this case are similarly situated, as can be obviously deducted from the fact that
both petitioners are airport authorities operating under similarly worded charters. And the fact that the
majority cites doctrines contrapuntal to the Local Government Code as in Basco and Maceda evinces an
intent to go against the Court's jurisprudential trend adopting the philosophy of expanded local
government rule under the Local Government Code.
Before I dwell upon the numerous flaws of the majority, a brief comment is necessitated on the majority's
studied murkiness vis--vis the Mactan precedent. The majority is obviously inconsistent with Mactan
and there is no way these two rulings can stand together. Following basic principles in statutory
construction, Mactan will be deemed as giving way to this new ruling.

However, the majority does not bother to explain why Mactan is wrong. The interpretation in Mactan of
the relevant provisions of the Local Government Code is elegant and rational, yet the majority refuses to
explain why this reasoning of the Court in Mactan is erroneous. In fact, the majority does not even engage
Mactan in any meaningful way. If the majority believes that Mactan may still stand despite this ruling, it
remains silent as to the viable distinctions between these two cases.
The majority's silence on Mactan is baffling, considering how different this new ruling is with the
ostensible precedent. Perhaps the majority does not simply know how to dispense with the ruling in
Mactan. If Mactan truly deserves to be discarded as precedent, it deserves a more honorable end than
death by amnesia or ignonominous disregard. The majority could have devoted its discussion in
explaining why it thinks Mactan is wrong, instead of pretending that Mactan never existed at all. Such an
approach might not have won the votes of the minority, but at least it would provide some degree of
intellectual clarity for the parties, LGUs and the national government, students of jurisprudence and
practitioners. A more meaningful debate on the matter would have been possible, enriching the study of
law and the intellectual dynamic of this Court.
There is no way the majority can be justified unless Mactan is overturned. The MCIAA and the MIAA are
similarly situated. They are both, as will be demonstrated, GOCCs, commonly engaged in the business of
operating an airport. They are the owners of airport properties they respectively maintain and hold title
over these properties in their name. 53 These entities are both owned by the State, and denied by their
respective charters the absolute right to dispose of their properties without prior approval
elsewhere.54 Both of them are
not empowered to obtain loans or encumber their properties without prior approval the prior approval of
the President.55
III.
Instrumentalities, Agencies
And GOCCs Generally
Liable for Real Property Tax
I shall now proceed to demonstrate the errors in reasoning of the majority. A bulwark of my position lies
with Mactan, which will further demonstrate why the majority has found it inconvenient to even grapple
with the precedent that is Mactan in the first place.
Mactan held that the prohibition on taxing the national government, its agencies and instrumentalities
under Section 133 is qualified by Section 232 and Section 234, and accordingly, the only relevant
exemption now applicable to these bodies is as provided under Section 234(o), or on "real property owned
by the Republic of the Philippines or any of its political subdivisions except when the beneficial use
thereof has been granted, for consideration or otherwise, to a taxable person."
It should be noted that the express withdrawal of previously granted exemptions by the Local
Government Code do not even make any distinction as to whether the exempt person is a governmental
entity or not. As Sections 193 and 234 both state, the withdrawal applies to "all persons, including
[GOCCs]", thus encompassing the two classes of persons recognized under our laws, natural
persons56 and juridical persons.57

The fact that the Local Government Code mandates the withdrawal of previously granted exemptions
evinces certain key points. If an entity was previously granted an express exemption from real property
taxes in the first place, the obvious conclusion would be that such entity would ordinarily be liable for
such taxes without the exemption. If such entities were already deemed exempt due to some overarching
principle of law, then it would be a redundancy or surplusage to grant an exemption to an already exempt
entity. This fact militates against the claim that MIAA is preternaturally exempt from realty taxes, since it
required the enactment of an express exemption from such taxes in its charter.
Amazingly, the majority all but ignores the disquisition in Mactan and asserts that government
instrumentalities are not taxable persons unless they lease their properties to a taxable person. The general
rule laid down in Section 232 is given short shrift. In arriving at this conclusion, several leaps in
reasoning are committed.
Majority's Flawed Definition
of GOCCs.
The majority takes pains to assert that the MIAA is not a GOCC, but rather an instrumentality. However,
and quite grievously, the supposed foundation of this assertion is an adulteration.
The majority gives the impression that a government instrumentality is a distinct concept from a
government corporation.58 Most tellingly, the majority selectively cites a portion of Section 2(10) of the
Administrative Code of 1987, as follows:
Instrumentality refers to any agency of the National Government not integrated within the department
framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate
powers, administering special funds, and enjoying operational autonomy, usually through a charter.
xxx59 (emphasis omitted)
However, Section 2(10) of the Administrative Code, when read in full, makes an important clarification
which the majority does not show. The portions omitted by the majority are highlighted below:
(10)Instrumentality refers to any agency of the National Government not integrated within the department
framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate
powers, administering special funds, and enjoying operational autonomy, usually through a charter. This
term includes regulatory agencies, chartered institutions and governmentowned or controlled
corporations.60
Since Section 2(10) makes reference to "agency of the National Government," Section 2(4) is also worth
citing in full:
(4) Agency of the Government refers to any of the various units of the Government, including a
department, bureau, office, instrumentality, or government-owned or controlled corporation, or a local
government or a distinct unit therein. (emphasis supplied) 61
Clearly then, based on the Administrative Code, a GOCC may be an instrumentality or an agency of the
National Government. Thus, there actually is no point in the majority's assertion that MIAA is not a
GOCC, since based on the majority's premise of Section 133 as the key provision, the material question is
whether MIAA is either an instrumentality, an agency, or the National Government itself. The very

provisions of the Administrative Code provide that a GOCC can be either an instrumentality or an agency,
so why even bother to extensively discuss whether or not MIAA is a GOCC?
Indeed as far back as the 1927 case of Government of the Philippine Islands v. Springer, 62 the Supreme
Court already noted that a corporation of which the government is the majority stockholder "remains an
agency or instrumentality of government."63
Ordinarily, the inconsequential verbiage stewing in judicial opinions deserve little rebuttal. However, the
entire discussion of the majority on the definition of a GOCC, obiter as it may ultimately be, deserves
emphatic refutation. The views of the majority on this matter are very dangerous, and would lead to
absurdities, perhaps unforeseen by the majority. For in fact, the majority effectively declassifies many
entities created and recognized as GOCCs and would give primacy to the Administrative Code of 1987
rather than their respective charters as to the definition of these entities.
Majority Ignores the Power
Of Congress to Legislate and
Define Chartered Corporations
First, the majority declares that, citing Section 2(13) of the Administrative Code, a GOCC must be
"organized as a stock or non-stock corporation," as defined under the Corporation Code. To insist on this
as an absolute rule fails on bare theory. Congress has the undeniable power to create a corporation by
legislative charter, and has been doing so throughout legislative history. There is no constitutional
prohibition on Congress as to what structure these chartered corporations should take on. Clearly,
Congress has the prerogative to create a corporation in whatever form it chooses, and it is not bound by
any traditional format. Even if there is a definition of what a corporation is under the Corporation Code or
the Administrative Code, these laws are by no means sacrosanct. It should be remembered that these two
statutes fall within the same level of hierarchy as a congressional charter, since they all are legislative
enactments. Certainly, Congress can choose to disregard either the Corporation Code or the
Administrative Code in defining the corporate structure of a GOCC, utilizing the same extent of
legislative powers similarly vesting it the putative ability to amend or abolish the Corporation Code or the
Administrative Code.
These principles are actually recognized by both the Administrative Code and the Corporation Code. The
definition of GOCCs, agencies and instrumentalities under the Administrative Code are laid down in the
section entitled "General Terms Defined," which qualifies:
Sec. 2. General Terms Defined. Unless the specific words of the text, or the context as a whole, or a
particular statute, shall require a different meaning: (emphasis supplied)
xxx
Similar in vein is Section 6 of the Corporation Code which provides:
SEC. 4. Corporations created by special laws or charters. Corporations created by special laws or
charters shall be governed primarily by the provisions of the special law or charter creating them or
applicable to them, supplemented by the provisions of this Code, insofar as they are applicable. (emphasis
supplied)

Thus, the clear doctrine emerges the law that governs the definition of a corporation or entity created by
Congress is its legislative charter. If the legislative enactment defines an entity as a corporation, then it is
a corporation, no matter if the Corporation Code or the Administrative Code seemingly provides
otherwise. In case of conflict between the legislative charter of a government corporation, on one hand,
and the Corporate Code and the Administrative Code, on the other, the former always prevails.
Majority, in Ignoring the
Legislative Charters, Effectively
Classifies Duly Established GOCCs,
With Disastrous and Far Reaching
Legal Consequences
Second, the majority claims that MIAA does not qualify either as a stock or non-stock corporation, as
defined under the Corporation Code. It explains that the MIAA is not a stock corporation because it does
not have any capital stock divided into shares. Neither can it be considered as a non-stock corporation
because it has no members, and under Section 87, a non-stock corporation is one where no part of its
income is distributable as dividends to its members, trustees or officers.
This formulation of course ignores Section 4 of the Corporation Code, which again provides that
corporations created by special laws or charters shall be governed primarily by the provisions of the
special law or charter, and not the Corporation Code.
That the MIAA cannot be considered a stock corporation if only because it does not have a stock structure
is hardly a plausible proposition. Indeed, there is no point in requiring a capital stock structure for GOCCs
whose full ownership is limited by its charter to the State or Republic. Such GOCCs are not empowered
to declare dividends or alienate their capital shares.
Admittedly, there are GOCCs established in such a manner, such as the National Power Corporation
(NPC), which is provided with authorized capital stock wholly subscribed and paid for by the
Government of the Philippines, divided into shares but at the same time, is prohibited from transferring,
negotiating, pledging, mortgaging or otherwise giving these shares as security for payment of any
obligation.64 However, based on the Corporation Code definition relied upon by the majority, even the
NPC cannot be considered as a stock corporation. Under Section 3 of the Corporation Code, stock
corporations are defined as being "authorized to distribute to the holders of its shares dividends or
allotments of the surplus profits on the basis of the shares held." 65 On the other hand, Section 13 of the
NPC's charter states that "the Corporation shall be non-profit and shall devote all its returns from its
capital investment, as well as excess revenues from its operation, for expansion." 66 Can the holder of the
shares of NPC, the National Government, receive its surplus profits on the basis of its shares held? It
cannot, according to the NPC charter, and hence, following Section 3 of the Corporation Code, the NPC is
not a stock corporation, if the majority is to be believed.
The majority likewise claims that corporations without members cannot be deemed non-stock
corporations. This would seemingly exclude entities such as the NPC, which like MIAA, has no
ostensible members. Moreover, non-stock corporations cannot distribute any part of its income as
dividends to its members, trustees or officers. The majority faults MIAA for remitting 20% of its gross
operating income to the national government. How about the Philippine Health Insurance Corporation,

created with the "status of a tax-exempt government corporation attached to the Department of Health"
under Rep. Act No. 7875.67 It too cannot be considered as a stock corporation because it has no capital
stock structure. But using the criteria of the majority, it is doubtful if it would pass muster as a non-stock
corporation, since the PHIC or Philhealth, as it is commonly known, is expressly empowered "to collect,
deposit, invest, administer and disburse" the National Health Insurance Fund. 68 Or how about the Social
Security System, which under its revised charter, Republic Act No. 8282, is denominated as a "corporate
body."69 The SSS has no capital stock structure, but has capital comprised of contributions by its
members, which are eventually remitted back to its members. Does this disqualify the SSS from
classification as a GOCC, notwithstanding this Court's previous pronouncement in Social Security
System Employees Association v. Soriano?70
In fact, Republic Act No. 7656, enacted in 1993, requires that all GOCCs, whether stock or nonstock,71 declare and remit at least fifty percent (50%) of their annual net earnings as cash, stock or
property dividends to the National Government. 72 But according to the majority, non-stock corporations
are prohibited from declaring any part of its income as dividends. But if Republic Act No. 7656 requires
even non-stock corporations to declare dividends from income, should it not follow that the prohibition
against declaration of dividends by non-stock corporations under the Corporation Code does not apply to
government-owned or controlled corporations? For if not, and the majority's illogic is pursued, Republic
Act No. 7656, passed in 1993, would be fatally flawed, as it would contravene the Administrative Code of
1987 and the Corporation Code.
In fact, the ruinous effects of the majority's hypothesis on the nature of GOCCs can be illustrated by
Republic Act No. 7656. Following the majority's definition of a GOCC and in accordance with Republic
Act No. 7656, here are but a few entities which are not obliged to remit fifty (50%) of its annual net
earnings to the National Government as they are excluded from the scope of Republic Act No. 7656:
1) Philippine Ports Authority73 has no capital stock74, no members, and obliged to apply the balance of
its income or revenue at the end of each year in a general reserve. 75
2) Bases Conversion Development Authority76 - has no capital stock,77 no members.
3) Philippine Economic Zone Authority78 - no capital stock,79 no members.
4) Light Rail Transit Authority80 - no capital stock,81 no members.
5) Bangko Sentral ng Pilipinas82 - no capital stock,83 no members, required to remit fifty percent (50%) of
its net profits to the National Treasury.84
6) National Power Corporation85 - has capital stock but is prohibited from "distributing to the holders of
its shares dividends or allotments of the surplus profits on the basis of the shares held;" 86 no members.
7) Manila International Airport Authority no capital stock 87, no members88, mandated to remit twenty
percent (20%) of its annual gross operating income to the National Treasury.89
Thus, for the majority, the MIAA, among many others, cannot be considered as within the coverage of
Republic Act No. 7656. Apparently, President Fidel V. Ramos disagreed. How else then could Executive
Order No. 483, signed in 1998 by President Ramos, be explained? The issuance provides:
WHEREAS, Section 1 of Republic Act No. 7656 provides that:

"Section 1. Declaration of Policy. - It is hereby declared the policy of the State that in order for the
National Government to realize additional revenues, government-owned and/or controlled corporations,
without impairing their viability and the purposes for which they have been established, shall share a
substantial amount of their net earnings to the National Government."
WHEREAS, to support the viability and mandate of government-owned and/or controlled corporations
[GOCCs], the liquidity, retained earnings position and medium-term plans and programs of these GOCCs
were considered in the determination of the reasonable dividend rates of such corporations on their 1997
net earnings.
WHEREAS, pursuant to Section 5 of RA 7656, the Secretary of Finance recommended the adjustment on
the percentage of annual net earnings that shall be declared by the Manila International Airport Authority
[MIAA] and Phividec Industrial Authority [PIA] in the interest of national economy and general welfare.
NOW, THEREFORE, I, FIDEL V. RAMOS, President of the Philippines, by virtue of the powers vested
in me by law, do hereby order:
SECTION 1. The percentage of net earnings to be declared and remitted by the MIAA and PIA as
dividends to the National Government as provided for under Section 3 of Republic Act No. 7656 is
adjusted from at least fifty percent [50%] to the rates specified hereunder:
1. Manila International Airport Authority - 35% [cash]
2. Phividec Industrial Authority - 25% [cash]
SECTION 2. The adjusted dividend rates provided for under Section 1 are only applicable on 1997 net
earnings of the concerned government-owned and/or controlled corporations.
Obviously, it was the opinion of President Ramos and the Secretary of Finance that MIAA is a GOCC, for
how else could it have come under the coverage of Republic Act No. 7656, a law applicable only to
GOCCs? But, the majority apparently disagrees, and resultantly holds that MIAA is not obliged to remit
even the reduced rate of thirty five percent (35%) of its net earnings to the national government, since it
cannot be covered by Republic Act No. 7656.
All this mischief because the majority would declare the Administrative Code of 1987 and the
Corporation Code as the sole sources of law defining what a government corporation is. As I stated
earlier, I find it illogical that chartered corporations are compelled to comply with the templates of the
Corporation Code, especially when the Corporation Code itself states that these corporations are to be
governed by their own charters. This is especially true considering that the very provision cited by the
majority, Section 87 of the Corporation Code, expressly says that the definition provided therein is laid
down "for the purposes of this [Corporation] Code." Read in conjunction with Section 4 of the
Corporation Code which mandates that corporations created by charter be governed by the law creating
them, it is clear that contrary to the majority, MIAA is not disqualified from classification as a non-stock
corporation by reason of Section 87, the provision not being applicable to corporations created by special
laws or charters. In fact, I see no real impediment why the MIAA and similarly situated corporations such
as the PHIC, the SSS, the Philippine Deposit Insurance Commission, or maybe even the NPC could at the
very least, be deemed as no stock corporations (as differentiated from non-stock corporations).
The point, stripped to bare simplicity, is that entity created by legislative enactment is a corporation if the
legislature says so. After all, it is the legislature that dictates what a corporation is in the first place. This

is better illustrated by another set of entities created before martial law. These include the Mindanao
Development Authority,90 the Northern Samar Development Authority,91 the Ilocos Sur Development
Authority,92 the Southeastern Samar Development Authority93 and the Mountain Province Development
Authority.94 An examination of the first section of the statutes creating these entities reveal that they were
established "to foster accelerated and balanced growth" of their respective regions, and towards such end,
the charters commonly provide that "it is recognized that a government corporation should be created for
the purpose," and accordingly, these charters "hereby created a body corporate." 95 However, these
corporations do not have capital stock nor members, and are obliged to return the unexpended balances of
their appropriations and earnings to a revolving fund in the National Treasury. The majority effectively
declassifies these entities as GOCCs, never mind the fact that their very charters declare them to be
GOCCs.
I mention these entities not to bring an element of obscurantism into the fray. I cite them as examples to
emphasize my fundamental pointthat it is the legislative charters of these entities, and not the
Administrative Code, which define the class of personality of these entities created by Congress. To adopt
the view of the majority would be, in effect, to sanction an implied repeal of numerous congressional
charters for the purpose of declassifying GOCCs. Certainly, this could not have been the intent of the
crafters of the Administrative Code when they drafted the "Definition of Terms" incorporated therein.
MIAA Is Without
Doubt, A GOCC
Following the charters of government corporations, there are two kinds of GOCCs, namely: GOCCs
which are stock corporations and GOCCs which are no stock corporations (as distinguished from nonstock corporation). Stock GOCCs are simply those which have capital stock while no stock GOCCs are
those which have no capital stock. Obviously these definitions are different from the definitions of the
terms in the Corporation Code. Verily, GOCCs which are not incorporated with the Securities and
Exchange Commission are not governed by the Corporation Code but by their respective charters.
For the MIAA's part, its charter is replete with provisions that indubitably classify it as a GOCC. Observe
the following provisions from MIAA's charter:
SECTION 3. Creation of the Manila International Airport Authority.There is hereby established a body
corporate to be known as the Manila International Airport Authority which shall be attached to the
Ministry of Transportation and Communications. The principal office of the Authority shall be located at
the New Manila International Airport. The Authority may establish such offices, branches, agencies or
subsidiaries as it may deem proper and necessary; Provided, That any subsidiary that may be organized
shall have the prior approval of the President.
The land where the Airport is presently located as well as the surrounding land area of approximately six
hundred hectares, are hereby transferred, conveyed and assigned to the ownership and administration of
the Authority, subject to existing rights, if any. The Bureau of Lands and other appropriate government
agencies shall undertake an actual survey of the area transferred within one year from the promulgation of
this Executive Order and the corresponding title to be issued in the name of the Authority. Any portion
thereof shall not be disposed through sale or through any other mode unless specifically approved by the
President of the Philippines.
xxx

SECTION 5. Functions, Powers, and Duties. The Authority shall have the following functions, powers
and duties:
xxx
(d) To sue and be sued in its corporate name;
(e) To adopt and use a corporate seal;
(f) To succeed by its corporate name;
(g) To adopt its by-laws, and to amend or repeal the same from time to time;
(h) To execute or enter into contracts of any kind or nature;
(i) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise dispose of any land, building,
airport facility, or property of whatever kind and nature, whether movable or immovable, or any interest
therein;
(j) To exercise the power of eminent domain in the pursuit of its purposes and objectives;
xxx
(o) To exercise all the powers of a corporation under the Corporation Law, insofar as these powers are not
inconsistent with the provisions of this Executive Order.
xxx
SECTION 16. Borrowing Power. The Authority may, after consultation with the Minister of Finance
and with the approval of the President of the Philippines, as recommended by the Minister of
Transportation and Communications, raise funds, either from local or international sources, by way of
loans, credits or securities, and other borrowing instruments, with the power to create pledges, mortgages
and other voluntary liens or encumbrances on any of its assets or properties.
All loans contracted by the Authority under this Section, together with all interests and other sums
payable in respect thereof, shall constitute a charge upon all the revenues and assets of the Authority and
shall rank equally with one another, but shall have priority over any other claim or charge on the revenue
and assets of the Authority: Provided, That this provision shall not be construed as a prohibition or
restriction on the power of the Authority to create pledges, mortgages, and other voluntary liens or
encumbrances on any assets or property of the Authority.
Except as expressly authorized by the President of the Philippines the total outstanding indebtedness of
the Authority in the principal amount, in local and foreign currency, shall not at any time exceed the net
worth of the Authority at any given time.
xxx

The President or his duly authorized representative after consultation with the Minister of Finance may
guarantee, in the name and on behalf of the Republic of the Philippines, the payment of the loans or other
indebtedness of the Authority up to the amount herein authorized.
These cited provisions establish the fitness of MIAA to be the subject of legal relations. 96 MIAA under its
charter may acquire and possess property, incur obligations, and bring civil or criminal actions. It has the
power to contract in its own name, and to acquire title to real or personal property. It likewise may
exercise a panoply of corporate powers and possesses all the trappings of corporate personality, such as a
corporate name, a corporate seal and by-laws. All these are contained in MIAA's charter which, as
conceded by the Corporation Code and even the Administrative Code, is the primary law that governs the
definition and organization of the MIAA.
In fact, MIAA itself believes that it is a GOCC represents itself as such. It said so itself in the very first
paragraph of the present petition before this Court. 97 So does, apparently, the Department of Budget and
Management, which classifies MIAA as a "government owned & controlled corporation" on its internet
website.98 There is also the matter of Executive Order No. 483, which evinces the belief of the thenpresident of the Philippines that MIAA is a GOCC. And the Court before had similarly characterized
MIAA as a government-owned and controlled corporation in the earlier MIAA case, Manila International
Airport Authority v. Commission on Audit.99
Why then the hesitance to declare MIAA a GOCC? As the majority repeatedly asserts, it is because
MIAA is actually an instrumentality. But the very definition relied upon by the majority of an
instrumentality under the Administrative Code clearly states that a GOCC is likewise an instrumentality
or an agency. The question of whether MIAA is a GOCC might not even be determinative of this Petition,
but the effect of the majority's disquisition on that matter may even be more destructive than the ruling
that MIAA is exempt from realty taxes. Is the majority ready to live up to the momentous consequences
of its flawed reasoning?
Novel Proviso in 1987 Constitution
Prescribing Standards in the
Creation of GOCCs Necessarily
Applies only to GOCCs Created
After 1987.
One last point on this matter on whether MIAA is a GOCC. The majority triumphantly points to Section
16, Article XII of the 1987 Constitution, which mandates that the creation of GOCCs through special
charters be "in the interest of the common good and subject to the test of economic viability." For the
majority, the test of economic viability does not apply to government entities vested with corporate
powers and performing essential public services. But this test of "economic viability" is new to the
constitutional framework. No such test was imposed in previous Constitutions, including the 1973
Constitution which was the fundamental law in force when the MIAA was created. How then could the
MIAA, or any GOCC created before 1987 be expected to meet this new precondition to the creation of a
GOCC? Does the dissent seriously suggest that GOCCs created before 1987 may be declassified on
account of their failure to meet this "economic viability test"?
Instrumentalities and Agencies

Also Generally Liable For

Real Property Taxes
Next, the majority, having bludgeoned its way into asserting that MIAA is not a GOCC, then argues that
MIAA is an instrumentality. It cites incompletely, as earlier stated, the provision of Section 2(10) of the
Administrative Code. A more convincing view offered during deliberations, but which was not adopted by
the ponencia, argued that MIAA is not an instrumentality but an agency, considering the fact that under
the Administrative Code, the MIAA is attached within the department framework of the Department of
Transportation and Communications. 100Interestingly, Executive Order No. 341, enacted by President
Arroyo in 2004, similarly calls MIAA an agency. Since instrumentalities are expressly defined as "an
agency not integrated within the department framework," that view concluded that MIAA cannot be
deemed an instrumentality.
Still, that distinction is ultimately irrelevant. Of course, as stated earlier, the Administrative Code
considers GOCCs as agencies,101 so the fact that MIAA is an agency does not exclude it from
classification as a GOCC. On the other hand, the majority justifies MIAA's purported exemption on
Section 133 of the Local Government Code, which similarly situates "agencies and instrumentalities" as
generally exempt from the taxation powers of LGUs. And on this point, the majority again evades Mactan
and somehow concludes that Section 133 is the general rule, notwithstanding Sections 232 and 234(a) of
the Local Government Code. And the majority's ultimate conclusion? "By express mandate of the Local
Government Code, local governments cannot impose any kind of tax on national government
instrumentalities like the MIAA. Local governments are devoid of power to tax the national government,
its agencies and instrumentalities."102
The Court's interpretation of the Local Government Code in Mactan renders the law integrally
harmonious and gives due accord to the respective prerogatives of the national government and LGUs.
Sections 133 and 234(a) ensure that the Republic of the Philippines or its political subdivisions shall not
be subjected to any form of local government taxation, except realty taxes if the beneficial use of the
property owned has been granted for consideration to a taxable entity or person. On the other hand,
Section 133 likewise assures that government instrumentalities such as GOCCs may not be arbitrarily
taxed by LGUs, since they could be subjected to local taxation if there is a specific proviso thereon in the
Code. One such proviso is Section 137, which as the Court found in National Power
Corporation,103 permits the imposition of a franchise tax on businesses enjoying a franchise, even if it be a
GOCC such as NPC. And, as the Court acknowledged in Mactan, Section 232 provides another exception
on the taxability of instrumentalities.
The majority abjectly refuses to engage Section 232 of the Local Government Code although it provides
the indubitable general rule that LGUs "may levy an annual ad valorem tax on real property such as land,
building, machinery, and other improvements not hereafter specifically exempted." The specific
exemptions are provided by Section 234. Section 232 comes sequentially after Section 133(o), 104 and even
if the sequencing is irrelevant, Section 232 would fall under the qualifying phrase of Section 133, "Unless
otherwise provided herein." It is sad, but not surprising that the majority is not willing to consider or even
discuss the general rule, but only the exemptions under Section 133 and Section 234. After all, if the
majority is dead set in ruling for MIAA no matter what the law says, why bother citing what the law does
say.
Constitution, Laws and
Jurisprudence Have Long

Explained the Rationale

Behind the Local Taxation
Of GOCCs.
This blithe disregard of precedents, almost all of them unanimously decided, is nowhere more evident
than in the succeeding discussion of the majority, which asserts that the power of local governments to tax
national government instrumentalities be construed strictly against local governments. The Maceda case,
decided before the Local Government Code, is cited, as is Basco. This section of the majority employs
deliberate pretense that the Code never existed, or that the fundamentals of local autonomy are of limited
effect in our country. Why is it that the Local Government Code is barely mentioned in this section of the
majority? Because Section 5 of the Code, purposely omitted by the majority provides for a different rule
of interpretation than that asserted:
Section 5. Rules of Interpretation. In the interpretation of the provisions of this Code, the following
rules shall apply:
(a) Any provision on a power of a local government unit shall be liberally interpreted in its favor, and in
case of doubt, any question thereon shall be resolved in favor of devolution of powers and of the lower
local government unit. Any fair and reasonable doubt as to the existence of the power shall be interpreted
in favor of the local government unit concerned;
(b) In case of doubt, any tax ordinance or revenue measure shall be construed strictly against the local
government unit enacting it, and liberally in favor of the taxpayer. Any tax exemption, incentive or relief
granted by any local government unit pursuant to the provisions of this Code shall be construed strictly
against the person claiming it; xxx
Yet the majority insists that "there is no point in national and local governments taxing each other, unless
a sound and compelling policy requires such transfer of public funds from one government pocket to
another."105 I wonder whether the Constitution satisfies the majority's desire for "a sound and compelling
policy." To repeat:
Article II. Declaration of Principles and State Policies
xxx
Sec. 25. The State shall ensure the autonomy of local governments.
Article X. Local Government
xxx
Sec. 2. The territorial and political subdivisions shall enjoy local autonomy.
xxx
Section 5. Each local government unit shall have the power to create its own sources of revenues and to
levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide,

consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively
to the local governments.
Or how about the Local Government Code, presumably an expression of sound and compelling policy
considering that it was enacted by the legislature, that veritable source of all statutes:
SEC. 129. Power to Create Sources of Revenue. - Each local government unit shall exercise its power to
create its own sources of revenue and to levy taxes, fees, and charges subject to the provisions herein,
consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively
to the local government units.
Justice Puno, in National Power Corporation v. City of Cabanatuan, 106 provides a more "sound and
compelling policy considerations" that would warrant sustaining the taxability of government-owned
entities by local government units under the Local Government Code.
Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance and
support myriad activities of the local government units for the delivery of basic services essential to the
promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people.
As this Court observed in the Mactan case, "the original reasons for the withdrawal of tax exemption
privileges granted to government-owned or controlled corporations and all other units of government
were that such privilege resulted in serious tax base erosion and distortions in the tax treatment of
similarly situated enterprises." With the added burden of devolution, it is even more imperative for
government entities to share in the requirements of development, fiscal or otherwise, by paying taxes or
other charges due from them.107
I dare not improve on Justice Puno's exhaustive disquisition on the statutory and jurisprudential shift
brought about the acceptance of the principles of local autonomy:
In recent years, the increasing social challenges of the times expanded the scope of state activity, and
taxation has become a tool to realize social justice and the equitable distribution of wealth, economic
progress and the protection of local industries as well as public welfare and similar objectives. Taxation
assumes even greater significance with the ratification of the 1987 Constitution. Thenceforth, the power
to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority
to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution, viz:
"Section 5. Each Local Government unit shall have the power to create its own sources of revenue, to
levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively
to the Local Governments."
This paradigm shift results from the realization that genuine development can be achieved only by
strengthening local autonomy and promoting decentralization of governance. For a long time, the
country's highly centralized government structure has bred a culture of dependence among local
government leaders upon the national leadership. It has also "dampened the spirit of initiative, innovation
and imaginative resilience in matters of local development on the part of local government leaders." 35
The only way to shatter this culture of dependence is to give the LGUs a wider role in the delivery of
basic services, and confer them sufficient powers to generate their own sources for the purpose. To
achieve this goal, section 3 of Article X of the 1987 Constitution mandates Congress to enact a local
government code that will, consistent with the basic policy of local autonomy, set the guidelines and
limitations to this grant of taxing powers, viz:

"Section 3. The Congress shall enact a local government code which shall provide for a more responsive
and accountable local government structure instituted through a system of decentralization with effective
mechanisms of recall, initiative, and referendum, allocate among the different local government units
their powers, responsibilities, and resources, and provide for the qualifications, election, appointment and
removal, term, salaries, powers and functions and duties of local officials, and all other matters relating to
the organization and operation of the local units."
To recall, prior to the enactment of the Rep. Act No. 7160, also known as the Local Government Code of
1991 (LGC), various measures have been enacted to promote local autonomy. These include the Barrio
Charter of 1959, the Local Autonomy Act of 1959, the Decentralization Act of 1967 and the Local
Government Code of 1983. Despite these initiatives, however, the shackles of dependence on the national
government remained. Local government units were faced with the same problems that hamper their
capabilities to participate effectively in the national development efforts, among which are: (a) inadequate
tax base, (b) lack of fiscal control over external sources of income, (c) limited authority to prioritize and
approve development projects, (d) heavy dependence on external sources of income, and (e) limited
supervisory control over personnel of national line agencies.
Considered as the most revolutionary piece of legislation on local autonomy, the LGC effectively deals
with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes which were
prohibited by previous laws such as the imposition of taxes on forest products, forest concessionaires,
mineral products, mining operations, and the like. The LGC likewise provides enough flexibility to
impose tax rates in accordance with their needs and capabilities. It does not prescribe graduated fixed
rates but merely specifies the minimum and maximum tax rates and leaves the determination of the actual
rates to the respective sanggunian.108
And the Court's ruling through Justice Azcuna in Philippine Ports Authority v. City of Iloilo 109, provides
especially clear and emphatic rationale:
In closing, we reiterate that in taxing government-owned or controlled corporations, the State ultimately
suffers no loss. In National Power Corp. v. Presiding Judge, RTC, Br. XXV, 38 we elucidated:
Actually, the State has no reason to decry the taxation of NPC's properties, as and by way of real property
taxes. Real property taxes, after all, form part and parcel of the financing apparatus of the Government in
development and nation-building, particularly in the local government level.
xxxxxxxxx
To all intents and purposes, real property taxes are funds taken by the State with one hand and given to
the other. In no measure can the government be said to have lost anything.
Finally, we find it appropriate to restate that the primary reason for the withdrawal of tax exemption
privileges granted to government-owned and controlled corporations and all other units of government
was that such privilege resulted in serious tax base erosion and distortions in the tax treatment of similarly
situated enterprises, hence resulting in the need for these entities to share in the requirements of
development, fiscal or otherwise, by paying the taxes and other charges due from them. 110
How does the majority counter these seemingly valid rationales which establish the soundness of a policy
consideration subjecting national instrumentalities to local taxation? Again, by simply ignoring that these
doctrines exist. It is unfortunate if the majority deems these cases or the principles of devolution and local
autonomy as simply too inconvenient, and relies instead on discredited precedents. Of course, if the

majority faces the issues squarely, and expressly discusses why Basco was right and Mactan was wrong,
then this entire endeavor of the Court would be more intellectually satisfying. But, this is not a game the
majority wants to play.
Mischaracterization of My
Views on the Tax Exemption
Enjoyed by the National Government
Instead, the majority engages in an extended attack pertaining to Section 193, mischaracterizing my views
on that provision as if I had been interpreting the provision as making "the national government, which
itself is a juridical person, subject to tax by local governments since the national government is not
included in the enumeration of exempt entities in Section 193."111
Nothing is farther from the truth. I have never advanced any theory of the sort imputed in the majority.
My main thesis on the matter merely echoes the explicit provision of Section 193 that unless otherwise
provided in the Local Government Code (LGC) all tax exemptions enjoyed by all persons, whether
natural or juridical, including GOCCs, were withdrawn upon the effectivity of the Code. Since the
provision speaks of withdrawal of tax exemptions of persons, it follows that the exemptions theretofore
enjoyed by MIAA which is definitely a person are deemed withdrawn upon the advent of the Code.
On the other hand, the provision does not address the question of who are beyond the reach of the taxing
power of LGUs. In fine, the grant of tax exemption or the withdrawal thereof assumes that the person or
entity involved is subject to tax. Thus, Section 193 does not apply to entities which were never given any
tax exemption. This would include the national government and its political subdivisions which, as a
general rule, are not subjected to tax in the first place. 112 Corollarily, the national government and its
political subdivisions do not need tax exemptions. And Section 193 which ordains the withdrawal of tax
exemptions is obviously irrelevant to them.
Section 193 is in point for the disposition of this case as it forecloses dependence for the grant of tax
exemption to MIAA on Section 21 of its charter. Even the majority should concede that the charter
section is now ineffectual, as Section 193 withdraws the tax exemptions previously enjoyed by all
juridical persons.
With Section 193 mandating the withdrawal of tax exemptions granted to all persons upon the effectivity
of the LGC, for MIAA to continue enjoying exemption from realty tax, it will have to rely on a basis
other than Section 21 of its charter.
Lung Center of the Philippines v. Quezon City113 provides another illustrative example of the
jurisprudential havoc wrought about by the majority. Pursuant to its charter, the Lung Center was
organized as a trust administered by an eponymous GOCC organized with the SEC. 114 There is no doubt it
is a GOCC, even by the majority's reckoning. Applying the Administrative Code, it is also considered as
an agency, the term encompassing even GOCCs. Yet since the Administrative Code definition of
"instrumentalities" encompasses agencies, especially those not attached to a line department such as the
Lung Center, it also follows that the Lung Center is an instrumentality, which for the majority is exempt
from all local government taxes, especially real estate taxes. Yet just in 2004, the Court unanimously held
that the Lung Center was not exempt from real property taxes. Can the majority and Lung Center be
reconciled? I do not see how, and no attempt is made to demonstrate otherwise.

Another key point. The last paragraph of Section 234 specifically asserts that any previous exemptions
from realty taxes granted to or enjoyed by all persons, including all GOCCs, are thereby withdrawn. The
majority's interpretation of Sections 133 and 234(a) however necessarily implies that all instrumentalities,
including GOCCs, can never be subjected to real property taxation under the Code. If that is so, what then
is the sense of the last paragraph specifically withdrawing previous tax exemptions to all persons,
including GOCCs when juridical persons such as MIAA are anyway, to his view, already exempt from
such taxes under Section 133? The majority's interpretation would effectively render the express and
emphatic withdrawal of previous exemptions to GOCCs inutile. Ut magis valeat quam pereat. Hence,
where a statute is susceptible of more than one interpretation, the court should adopt such reasonable and
beneficial construction which will render the provision thereof operative and effective, as well as
harmonious with each other.115
But, the majority seems content rendering as absurd the Local Government Code, since it does not have
much use anyway for the Code's general philosophy of fiscal autonomy, as evidently seen by the
continued reliance on Basco or Maceda. Local government rule has never been a grant of emancipation
from the national government. This is the favorite bugaboo of the opponents of local autonomythe
fallacy that autonomy equates to independence.
Thus, the conclusion of the majority is that under Section 133(o), MIAA as a government instrumentality
is beyond the reach of local taxation because it is not subject to taxes, fees or charges of any kind.
Moreover, the taxation of national instrumentalities and agencies by LGUs should be strictly construed
against the LGUs, citing Maceda and Basco. No mention is made of the subsequent rejection of these
cases in jurisprudence following the Local Government Code, including Mactan. The majority is similarly
silent on the general rule under Section 232 on real property taxation or Section 5 on the rules of
construction of the Local Government Code.
V.
MIAA, and not the National Government
Is the Owner of the Subject Taxable Properties
Section 232 of the Local Government Code explicitly provides that there are exceptions to the general
rule on rule property taxation, as "hereafter specifically exempted." Section 234, certainly "hereafter,"
provides indubitable basis for exempting entities from real property taxation. It provides the most viable
legal support for any claim that an governmental entity such as the MIAA is exempt from real property
taxes. To repeat:
SECTION 234. Exemptions from Real Property Tax. -- The following are exempted from payment of the
real property tax:
xxx
(f) Real property owned by the Republic of the Philippines or any of its political subdivisions except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person:
The majority asserts that the properties owned by MIAA are owned by the Republic of the Philippines,
thus placing them under the exemption under Section 234. To arrive at this conclusion, the majority
employs four main arguments.

MIAA Property Is Patrimonial

And Not Part of Public Dominion
The majority claims that the Airport Lands and Buildings are property of public dominion as defined by
the Civil Code, and therefore owned by the State or the Republic of the Philippines. But as pointed out by
Justice Azcuna in the first PPA case, if indeed a property is considered part of the public dominion, such
property is "owned by the general public and cannot be declared to be owned by a public corporation,
such as [the PPA]."
Relevant on this point are the following provisions of the MIAA charter:
Section 3. Creation of the Manila International Airport Authority. xxx
The land where the Airport is presently located as well as the surrounding land area of approximately six
hundred hectares, are hereby transferred, conveyed and assigned to the ownership and administration of
the Authority, subject to existing rights, if any. xxx Any portion thereof shall not be disposed through sale
or through any other mode unless specifically approved by the President of the Philippines.
Section 22. Transfer of Existing Facilities and Intangible Assets. All existing public airport facilities,
runways, lands, buildings and other property, movable or immovable, belonging to the Airport, and all
assets, powers rights, interests and privileges belonging to the Bureau of Air Transportation relating to
airport works or air operations, including all equipment which are necessary for the operation of crash fire
and rescue facilities, are hereby transferred to the Authority.
Clearly, it is the MIAA, and not either the State, the Republic of the Philippines or the national
government that asserts legal title over the Airport Lands and Buildings. There was an express transfer of
ownership between the MIAA and the national government. If the distinction is to be blurred, as the
majority does, between the State/Republic/Government and a body corporate such as the MIAA, then the
MIAA charter showcases the remarkable absurdity of an entity transferring property to itself.
Nothing in the Civil Code or the Constitution prohibits the State from transferring ownership over
property of public dominion to an entity that it similarly owns. It is just like a family transferring
ownership over the properties its members own into a family corporation. The family exercises effective
control over the administration and disposition of these properties. Yet for several purposes under the law,
such as taxation, it is the corporation that is deemed to own those properties. A similar situation obtains
with MIAA, the State, and the Airport Lands and Buildings.
The second Public Ports Authority case, penned by Justice Callejo, likewise lays down useful doctrines in
this regard. The Court refuted the claim that the properties of the PPA were owned by the Republic of the
Philippines, noting that PPA's charter expressly transferred ownership over these properties to the PPA, a
situation which similarly obtains with MIAA. The Court even went as far as saying that the fact that the
PPA "had not been issued any torrens title over the port and port facilities and appurtenances is of no legal
consequence. A torrens title does not, by itself, vest ownership; it is merely an evidence of title over
properties. xxx It has never been recognized as a mode of acquiring ownership over real properties." 116
The Court further added:
xxx The bare fact that the port and its facilities and appurtenances are accessible to the general public
does not exempt it from the payment of real property taxes. It must be stressed that the said port facilities

and appurtenances are the petitioner's corporate patrimonial properties, not for public use, and that the
operation of the port and its facilities and the administration of its buildings are in the nature of ordinary
business. The petitioner is clothed, under P.D. No. 857, with corporate status and corporate powers in the
furtherance of its proprietary interests xxx The petitioner is even empowered to invest its funds in such
government securities approved by the Board of Directors, and derives its income from rates, charges or
fees for the use by vessels of the port premises, appliances or equipment. xxx Clearly then, the petitioner
is a profit-earning corporation; hence, its patrimonial properties are subject to tax. 117
There is no doubt that the properties of the MIAA, as with the PPA, are in a sense, for public use. A
similar argument was propounded by the Light Rail Transit Authority in Light Rail Transit Authority v.
Central Board of Assessment, 118 which was cited in Philippine Ports Authority and deserves renewed
emphasis. The Light Rail Transit Authority (LRTA), a body corporate, "provides valuable transportation
facilities to the paying public."119 It claimed that its carriage-ways and terminal stations are immovably
attached to government-owned national roads, and to impose real property taxes thereupon would be to
impose taxes on public roads. This view did not persuade the Court, whose decision was penned by
Justice (now Chief Justice) Panganiban. It was noted:
Though the creation of the LRTA was impelled by public service to provide mass transportation to
alleviate the traffic and transportation situation in Metro Manila its operation undeniably partakes of
ordinary business. Petitioner is clothed with corporate status and corporate powers in the furtherance of
its proprietary objectives. Indeed, it operates much like any private corporation engaged in the mass
transport industry. Given that it is engaged in a service-oriented commercial endeavor, its carriageways
and terminal stations are patrimonial property subject to tax, notwithstanding its claim of being a
government-owned or controlled corporation.
xxx
Petitioner argues that it merely operates and maintains the LRT system, and that the actual users of the
carriageways and terminal stations are the commuting public. It adds that the public use character of the
LRT is not negated by the fact that revenue is obtained from the latter's operations.
We do not agree. Unlike public roads which are open for use by everyone, the LRT is accessible only to
those who pay the required fare. It is thus apparent that petitioner does not exist solely for public service,
and that the LRT carriageways and terminal stations are not exclusively for public use. Although
petitioner is a public utility, it is nonetheless profit-earning. It actually uses those carriageways and
terminal stations in its public utility business and earns money therefrom. 120
xxx
Even granting that the national government indeed owns the carriageways and terminal stations, the
exemption would not apply because their beneficial use has been granted to petitioner, a taxable entity. 121
There is no substantial distinction between the properties held by the PPA, the LRTA, and the MIAA.
These three entities are in the business of operating facilities that promote public transportation.
The majority further asserts that MIAA's properties, being part of the public dominion, are outside the
commerce of man. But if this is so, then why does Section 3 of MIAA's charter authorize the President of
the Philippines to approve the sale of any of these properties? In fact, why does MIAA's charter in the
first place authorize the transfer of these airport properties, assuming that indeed these are beyond the
commerce of man?

No Trust Has Been Created

Over MIAA Properties For
The Benefit of the Republic
The majority posits that while MIAA might be holding title over the Airport Lands and Buildings, it is
holding it in trust for the Republic. A provision of the Administrative Code is cited, but said provision
does not expressly provide that the property is held in trust. Trusts are either express or implied, and only
those situations enumerated under the Civil Code would constitute an implied trust. MIAA does not fall
within this enumeration, and neither is there a provision in MIAA's charter expressly stating that these
properties are being held in trust. In fact, under its charter, MIAA is obligated to retain up to eighty
percent (80%) of its gross operating income, not an inconsequential sum assuming that the beneficial
owner of MIAA's properties is actually the Republic, and not the MIAA.
Also, the claim that beneficial ownership over the MIAA remains with the government and not MIAA is
ultimately irrelevant. Section 234(a) of the Local Government Code provides among those exempted
from paying real property taxes are "[r]eal property owned by the [Republic] except when the
beneficial use thereof has been granted, for consideration or otherwise, to a taxable person." In the context
of Section 234(a), the identity of the beneficial owner over the properties is not determinative as to
whether the exemption avails. It is the identity of the beneficial user of the property owned by the
Republic or its political subdivisions that is crucial, for if said beneficial user is a taxable person, then the
exemption does not lie.
I fear the majority confuses the notion of what might be construed as "beneficial ownership" of the
Republic over the properties of MIAA as nothing more than what arises as a consequence of the fact that
the capital of MIAA is contributed by the National Government. 122 If so, then there is no difference
between the State's ownership rights over MIAA properties than those of a majority stockholder over the
properties of a corporation. Even if such shareholder effectively owns the corporation and controls the
disposition of its assets, the personality of the stockholder remains separately distinct from that of the
corporation. A brief recall of the entrenched rule in corporate law is in order:
The first consequence of the doctrine of legal entity regarding the separate identity of the corporation and
its stockholders insofar as their obligations and liabilities are concerned, is spelled out in this general rule
deeply entrenched in American jurisprudence:
Unless the liability is expressly imposed by constitutional or statutory provisions, or by the charter, or by
special agreement of the stockholders, stockholders are not personally liable for debts of the corporation
either at law or equity. The reason is that the corporation is a legal entity or artificial person, distinct from
the members who compose it, in their individual capacity; and when it contracts a debt, it is the debt of
the legal entity or artificial person the corporation and not the debt of the individual members. (13A
Fletcher Cyc. Corp. Sec. 6213)
The entirely separate identity of the rights and remedies of a corporation itself and its individual
stockholders have been given definite recognition for a long time. Applying said principle, the Supreme
Court declared that a corporation may not be made to answer for acts or liabilities of its stockholders or
those of legal entities to which it may be connected, or vice versa. (Palay Inc. v. Clave et. al. 124 SCRA
638) It was likewise declared in a similar case that a bonafide corporation should alone be liable for
corporate acts duly authorized by its officers and directors. (Caram Jr. v. Court of Appeals et.al. 151
SCRA, p. 372)123

It bears repeating that MIAA under its charter, is expressly conferred the right to exercise all the powers
of a corporation under the Corporation Law, including the right to corporate succession, and the right to
sue and be sued in its corporate name. 124 The national government made a particular choice to divest
ownership and operation of the Manila International Airport and transfer the same to such an empowered
entity due to perceived advantages. Yet such transfer cannot be deemed consequence free merely because
it was the State which contributed the operating capital of this body corporate.
The majority claims that the transfer the assets of MIAA was meant merely to effect a reorganization. The
imputed rationale for such transfer does not serve to militate against the legal consequences of such
assignment. Certainly, if it was intended that the transfer should be free of consequence, then why was it
effected to a body corporate, with a distinct legal personality from that of the State or Republic? The
stated aims of the MIAA could have very well been accomplished by creating an agency without
independent juridical personality.
VI.
MIAA Performs Proprietary Functions
Nonetheless, Section 234(f) exempts properties owned by the Republic of the Philippines or its political
subdivisions from realty taxation. The obvious question is what comprises "the Republic of the
Philippines." I think the key to understanding the scope of "the Republic" is the phrase "political
subdivisions." Under the Constitution, political subdivisions are defined as "the provinces, cities,
municipalities and barangays."125 In correlation, the Administrative Code of 1987 defines "local
government" as referring to "the political subdivisions established by or in accordance with the
Constitution."
Clearly then, these political subdivisions are engaged in the exercise of sovereign functions and are
accordingly exempt. The same could be said generally of the national government, which would be
similarly exempt. After all, even with the principle of local autonomy, it is inherently noxious and selfdefeatist for local taxation to interfere with the sovereign exercise of functions. However, the exercise of
proprietary functions is a different matter altogether.
Sovereign and Proprietary
Functions Distinguished
Sovereign or constituent functions are those which constitute the very bonds of society and are
compulsory in nature, while ministrant or proprietary functions are those undertaken by way of advancing
the general interests of society and are merely optional. 126 An exhaustive discussion on the matter was
provided by the Court in Bacani v. NACOCO:127
xxx This institution, when referring to the national government, has reference to what our Constitution
has established composed of three great departments, the legislative, executive, and the judicial, through
which the powers and functions of government are exercised. These functions are twofold: constituent
and ministrant. The former are those which constitute the very bonds of society and are compulsory in
nature; the latter are those that are undertaken only by way of advancing the general interests of society,
and are merely optional. President Wilson enumerates the constituent functions as follows:
"'(1) The keeping of order and providing for the protection of persons and property from violence and
robbery.

'(2) The fixing of the legal relations between man and wife and between parents and children.
'(3) The regulation of the holding, transmission, and interchange of property, and the determination of its
liabilities for debt or for crime.
'(4) The determination of contract rights between individuals.
'(5) The definition and punishment of crime.
'(6) The administration of justice in civil cases.
'(7) The determination of the political duties, privileges, and relations of citizens.
'(8) Dealings of the state with foreign powers: the preservation of the state from external danger or
encroachment and the advancement of its international interests.'" (Malcolm, The Government of the
Philippine Islands, p. 19.)
The most important of the ministrant functions are: public works, public education, public charity, health
and safety regulations, and regulations of trade and industry. The principles determining whether or not a
government shall exercise certain of these optional functions are: (1) that a government should do for the
public welfare those things which private capital would not naturally undertake and (2) that a government
should do these things which by its very nature it is better equipped to administer for the public welfare
than is any private individual or group of individuals. (Malcolm, The Government of the Philippine
Islands, pp. 19-20.)
From the above we may infer that, strictly speaking, there are functions which our government is required
to exercise to promote its objectives as expressed in our Constitution and which are exercised by it as an
attribute of sovereignty, and those which it may exercise to promote merely the welfare, progress and
prosperity of the people. To this latter class belongs the organization of those corporations owned or
controlled by the government to promote certain aspects of the economic life of our people such as the
National Coconut Corporation. These are what we call government-owned or controlled corporations
which may take on the form of a private enterprise or one organized with powers and formal
characteristics of a private corporations under the Corporation Law.128
The Court in Bacani rejected the proposition that the National Coconut Corporation exercised sovereign
functions:
Does the fact that these corporations perform certain functions of government make them a part of the
Government of the Philippines?
The answer is simple: they do not acquire that status for the simple reason that they do not come under
the classification of municipal or public corporation. Take for instance the National Coconut Corporation.
While it was organized with the purpose of "adjusting the coconut industry to a position independent of
trade preferences in the United States" and of providing "Facilities for the better curing of copra products
and the proper utilization of coconut by-products," a function which our government has chosen to
exercise to promote the coconut industry, however, it was given a corporate power separate and distinct
from our government, for it was made subject to the provisions of our Corporation Law in so far as its
corporate existence and the powers that it may exercise are concerned (sections 2 and 4, Commonwealth
Act No. 518). It may sue and be sued in the same manner as any other private corporations, and in this
sense it is an entity different from our government. As this Court has aptly said, "The mere fact that the

Government happens to be a majority stockholder does not make it a public corporation" (National Coal
Co. vs. Collector of Internal Revenue, 46 Phil., 586-587). "By becoming a stockholder in the National
Coal Company, the Government divested itself of its sovereign character so far as respects the
transactions of the corporation. . . . Unlike the Government, the corporation may be sued without its
consent, and is subject to taxation. Yet the National Coal Company remains an agency or instrumentality
of government." (Government of the Philippine Islands vs. Springer, 50 Phil., 288.)
The following restatement of the entrenched rule by former SEC Chairperson Rosario Lopez bears
noting:
The fact that government corporations are instrumentalities of the State does not divest them with
immunity from suit. (Malong v. PNR, 138 SCRA p. 63) It is settled that when the government engages in
a particular business through the instrumentality of a corporation, it divests itself pro hoc vice of its
sovereign character so as to subject itself to the rules governing private corporations, (PNB v. Pabolan 82
SCRA 595) and is to be treated like any other corporation. (PNR v. Union de Maquinistas Fogonero y
Motormen, 84 SCRA 223)
In the same vein, when the government becomes a stockholder in a corporation, it does not exercise
sovereignty as such. It acts merely as a corporator and exercises no other power in the management of the
affairs of the corporation than are expressly given by the incorporating act. Nor does the fact that the
government may own all or a majority of the capital stock take from the corporation its character as such,
or make the government the real party in interest. (Amtorg Trading Corp. v. US 71 F2d 524, 528) 129
MIAA Performs Proprietary
Functions No Matter How
Vital to the Public Interest
The simple truth is that, based on these accepted doctrinal tests, MIAA performs proprietary functions.
The operation of an airport facility by the State may be imbued with public interest, but it is by no means
indispensable or obligatory on the national government. In fact, as demonstrated in other countries, it
makes a lot of economic sense to leave the operation of airports to the private sector.
The majority tries to becloud this issue by pointing out that the MIAA does not compete in the
marketplace as there is no competing international airport operated by the private sector; and that MIAA
performs an essential public service as the primary domestic and international airport of the Philippines.
This premise is false, for one. On a local scale, MIAA competes with other international airports situated
in the Philippines, such as Davao International Airport and MCIAA. More pertinently, MIAA also
competes with other international airports in Asia, at least. International airlines take into account the
quality and conditions of various international airports in determining the number of flights it would
assign to a particular airport, or even in choosing a hub through which destinations necessitating
connecting flights would pass through.
Even if it could be conceded that MIAA does not compete in the market place, the example of the
Philippine National Railways should be taken into account. The PNR does not compete in the
marketplace, and performs an essential public service as the operator of the railway system in the
Philippines. Is the PNR engaged in sovereign functions? The Court, in Malong v. Philippine National
Railways,130 held that it was not.131

Even more relevant to this particular case is Teodoro v. National Airports Corporation, 132 concerning the
proper appreciation of the functions performed by the Civil Aeronautics Administration (CAA), which
had succeeded the defunction National Airports Corporation. The CAA claimed that as an unincorporated
agency of the Republic of the Philippines, it was incapable of suing and being sued. The Court noted:
Among the general powers of the Civil Aeronautics Administration are, under Section 3, to execute
contracts of any kind, to purchase property, and to grant concession rights, and under Section 4, to charge
landing fees, royalties on sales to aircraft of aviation gasoline, accessories and supplies, and rentals for the
use of any property under its management.
These provisions confer upon the Civil Aeronautics Administration, in our opinion, the power to sue and
be sued. The power to sue and be sued is implied from the power to transact private business. And if it has
the power to sue and be sued on its behalf, the Civil Aeronautics Administration with greater reason
should have the power to prosecute and defend suits for and against the National Airports Corporation,
having acquired all the properties, funds and choses in action and assumed all the liabilities of the latter.
To deny the National Airports Corporation's creditors access to the courts of justice against the Civil
Aeronautics Administration is to say that the government could impair the obligation of its corporations
by the simple expedient of converting them into unincorporated agencies. 133
xxx
Eventually, the charter of the CAA was revised, and it among its expanded functions was "[t]o administer,
operate, manage, control, maintain and develop the Manila International Airport." 134 Notwithstanding this
expansion, in the 1988 case of CAA v. Court of Appeals 135 the Court reaffirmed the ruling that the CAA
was engaged in "private or non-governmental functions." 136 Thus, the Court had already ruled that the
predecessor agency of MIAA, the CAA was engaged in private or non-governmental functions. These are
more precedents ignored by the majority. The following observation from the Teodoro case very well
applies to MIAA.
The Civil Aeronautics Administration comes under the category of a private entity. Although not a body
corporate it was created, like the National Airports Corporation, not to maintain a necessary function of
government, but to run what is essentially a business, even if revenues be not its prime objective but
rather the promotion of travel and the convenience of the traveling public. It is engaged in an enterprise
which, far from being the exclusive prerogative of state, may, more than the construction of public roads,
be undertaken by private concerns.137
If the determinative point in distinguishing between sovereign functions and proprietary functions is the
vitality of the public service being performed, then it should be noted that there is no more important
public service performed than that engaged in by public utilities. But notably, the Constitution itself
authorizes private persons to exercise these functions as it allows them to operate public utilities in this
country138 If indeed such functions are actually sovereign and belonging properly to the government,
shouldn't it follow that the exercise of these tasks remain within the exclusive preserve of the State?
There really is no prohibition against the government taxing itself, 139 and nothing obscene with allowing
government entities exercising proprietary functions to be taxed for the purpose of raising the coffers of
LGUs. On the other hand, it would be an even more noxious proposition that the government or the
instrumentalities that it owns are above the law and may refuse to pay a validly imposed tax. MIAA, or
any similar entity engaged in the exercise of proprietary, and not sovereign functions, cannot avoid the
adverse-effects of tax evasion simply on the claim that it is imbued with some of the attributes of
government.

VII.
MIAA Property Not Subject to
Execution Sale Without Consent
Of the President.
Despite the fact that the City of Paraaque ineluctably has the power to impose real property taxes over
the MIAA, there is an equally relevant statutory limitation on this power that must be fully upheld.
Section 3 of the MIAA charter states that "[a]ny portion [of the [lands transferred, conveyed and assigned
to the ownership and administration of the MIAA] shall not be disposed through sale or through any other
mode unless specifically approved by the President of the Philippines." 140
Nothing in the Local Government Code, even with its wide grant of powers to LGUs, can be deemed as
repealing this prohibition under Section 3, even if it effectively forecloses one possible remedy of the
LGU in the collection of delinquent real property taxes. While the Local Government Code withdrew all
previous local tax exemptions of the MIAA and other natural and juridical persons, it did not similarly
withdraw any previously enacted prohibitions on properties owned by GOCCs, agencies or
instrumentalities. Moreover, the resulting legal effect, subjecting on one hand the MIAA to local taxes but
on the other hand shielding its properties from any form of sale or disposition, is not contradictory or
paradoxical, onerous as its effect may be on the LGU. It simply means that the LGU has to find another
way to collect the taxes due from MIAA, thus paving the way for a mutually acceptable negotiated
solution.141
There are several other reasons this statutory limitation should be upheld and applied to this case. It is at
this juncture that the importance of the Manila Airport to our national life and commerce may be accorded
proper consideration. The closure of the airport, even by reason of MIAA's legal omission to pay its taxes,
will have an injurious effect to our national economy, which is ever reliant on air travel and traffic. The
same effect would obtain if ownership and administration of the airport were to be transferred to an LGU
or some other entity which were not specifically chartered or tasked to perform such vital function. It is
for this reason that the MIAA charter specifically forbids the sale or disposition of MIAA properties
without the consent of the President. The prohibition prevents the peremptory closure of the MIAA or the
hampering of its operations on account of the demands of its creditors. The airport is important enough to
be sheltered by legislation from ordinary legal processes.
Section 3 of the MIAA charter may also be appreciated as within the proper exercise of executive control
by the President over the MIAA, a GOCC which despite its separate legal personality, is still subsumed
within the executive branch of government. The power of executive control by the President should be
upheld so long as such exercise does not contravene the Constitution or the law, the President having the
corollary duty to faithfully execute the Constitution and the laws of the land. 142 In this case, the exercise
of executive control is precisely recognized and authorized by the legislature, and it should be upheld
even if it comes at the expense of limiting the power of local government units to collect real property
taxes.
Had this petition been denied instead with Mactan as basis, but with the caveat that the MIAA properties
could not be subject of execution sale without the consent of the President, I suspect that the parties
would feel little distress. Through such action, both the Local Government Code and the MIAA charter
would have been upheld. The prerogatives of LGUs in real property taxation, as guaranteed by the Local
Government Code, would have been preserved, yet the concerns about the ruinous effects of having to

close the Manila International Airport would have been averted. The parties would then be compelled to
try harder at working out a compromise, a task, if I might add, they are all too willing to engage
in.143 Unfortunately, the majority will cause precisely the opposite result of unremitting hostility, not only
to the City of Paraaque, but to the thousands of LGUs in the country.
VIII.
Summary of Points
My points may be summarized as follows:
1) Mactan and a long line of succeeding cases have already settled the rule that under the Local
Government Code, enacted pursuant to the constitutional mandate of local autonomy, all natural and
juridical persons, even those GOCCs, instrumentalities and agencies, are no longer exempt from local
taxes even if previously granted an exemption. The only exemptions from local taxes are those
specifically provided under the Local Government Code itself, or those enacted through subsequent
legislation.
2) Under the Local Government Code, particularly Section 232, instrumentalities, agencies and GOCCs
are generally liable for real property taxes. The only exemptions therefrom under the same Code are
provided in Section 234, which include real property owned by the Republic of the Philippines or any of
its political subdivisions.
3) The subject properties are owned by MIAA, a GOCC, holding title in its own name. MIAA, a separate
legal entity from the Republic of the Philippines, is the legal owner of the properties, and is thus liable for
real property taxes, as it does not fall within the exemptions under Section 234 of the Local Government
Code.
4) The MIAA charter expressly bars the sale or disposition of MIAA properties. As a result, the City of
Paraaque is prohibited from seizing or selling these properties by public auction in order to satisfy
MIAA's tax liability. In the end, MIAA is encumbered only by a limited lien possessed by the City of
Paraaque.
On the other hand, the majority's flaws are summarized as follows:
1) The majority deliberately ignores all precedents which run counter to its hypothesis, including Mactan.
Instead, it relies and directly cites those doctrines and precedents which were overturned by Mactan. By
imposing a different result than that warranted by the precedents without explaining why Mactan or the
other precedents are wrong, the majority attempts to overturn all these ruling sub silencio and without
legal justification, in a manner that is not sanctioned by the practices and traditions of this Court.
2) The majority deliberately ignores the policy and philosophy of local fiscal autonomy, as mandated by
the Constitution, enacted under the Local Government Code, and affirmed by precedents. Instead, the
majority asserts that there is no sound rationale for local governments to tax national government
instrumentalities, despite the blunt existence of such rationales in the Constitution, the Local Government
Code, and precedents.
3) The majority, in a needless effort to justify itself, adopts an extremely strained exaltation of the
Administrative Code above and beyond the Corporation Code and the various legislative charters, in

order to impose a wholly absurd definition of GOCCs that effectively declassifies innumerable existing
GOCCs, to catastrophic legal consequences.
4) The majority asserts that by virtue of Section 133(o) of the Local Government Code, all national
government agencies and instrumentalities are exempt from any form of local taxation, in contravention
of several precedents to the contrary and the proviso under Section 133, "unless otherwise provided
herein [the Local Government Code]."
5) The majority erroneously argues that MIAA holds its properties in trust for the Republic of the
Philippines, and that such properties are patrimonial in character. No express or implied trust has been
created to benefit the national government. The legal distinction between sovereign and proprietary
functions, as affirmed by jurisprudence, likewise preclude the classification of MIAA properties as
patrimonial.
IX.
Epilogue
If my previous discussion still fails to convince on how wrong the majority is, then the following points
are well-worth considering. The majority cites the Bangko Sentral ng Pilipinas (Bangko Sentral) as a
government instrumentality that exercises corporate powers but not organized as a stock or non-stock
corporation. Correspondingly for the majority, the Bangko ng Sentral is exempt from all forms of local
taxation by LGUs by virtue of the Local Government Code.
Section 125 of Rep. Act No. 7653, The New Central Bank Act, states:
SECTION 125. Tax Exemptions. The Bangko Sentral shall be exempt for a period of five (5) years
from the approval of this Act from all national, provincial, municipal and city taxes, fees, charges and
assessments.
The New Central Bank Act was promulgated after the Local Government Code if the BSP is already
preternaturally exempt from local taxation owing to its personality as an "government instrumentality,"
why then the need to make a new grant of exemption, which if the majority is to be believed, is actually a
redundancy. But even more tellingly, does not this provision evince a clear intent that after the lapse of
five (5) years, that the Bangko Sentral will be liable for provincial, municipal and city taxes? This is the
clear congressional intent, and it is Congress, not this Court which dictates which entities are subject to
taxation and which are exempt.
Perhaps this notion will offend the majority, because the Bangko Sentral is not even a government owned
corporation, but a government instrumentality, or perhaps "loosely", a "government corporate entity."
How could such an entity like the Bangko Sentral , which is not even a government owned corporation,
be subjected to local taxation like any mere mortal? But then, see Section 1 of the New Central Bank Act:
SECTION 1. Declaration of Policy. The State shall maintain a central monetary authority that shall
function and operate as an independent and accountable body corporate in the discharge of its mandated
responsibilities concerning money, banking and credit. In line with this policy, and considering its unique
functions and responsibilities, the central monetary authority established under this Act, while being a
government-owned corporation, shall enjoy fiscal and administrative autonomy.

Apparently, the clear legislative intent was to create a government corporation known as the Bangko
Sentral ng Pilipinas. But this legislative intent, the sort that is evident from the text of the provision and
not the one that needs to be unearthed from the bowels of the archival offices of the House and the
Senate, is for naught to the majority, as it contravenes the Administrative Code of 1987, which after all, is
"the governing law defining the status and relationship of government agencies and instrumentalities" and
thus superior to the legislative charter in determining the personality of a chartered entity. Its like saying
that the architect who designed a school building is better equipped to teach than the professor because at
least the architect is familiar with the geometry of the classroom.
Consider further the example of the Philippine Institute of Traditional and Alternative Health Care
(PITAHC), created by Republic Act No. 8243 in 1997. It has similar characteristics as MIAA in that it is
established as a body corporate,144 and empowered with the attributes of a corporation, 145 including the
power to purchase or acquire real properties. 146 However the PITAHC has no capital stock and no
members, thus following the majority, it is not a GOCC.
The state policy that guides PITAHC is the development of traditional and alternative health care, 147 and
its objectives include the promotion and advocacy of alternative, preventive and curative health care
modalities that have been proven safe, effective and cost effective. 148 "Alternative health care modalities"
include "other forms of non-allophatic, occasionally non-indigenous or imported healing methods" which
include, among others "reflexology, acupuncture, massage, acupressure" and chiropractics. 149
Given these premises, there is no impediment for the PITAHC to purchase land and construct thereupon a
massage parlor that would provide a cheaper alternative to the opulent spas that have proliferated around
the metropolis. Such activity is in line with the purpose of the PITAHC and with state policy. Is such
massage parlor exempt from realty taxes? For the majority, it is, for PITAHC is an instrumentality or
agency exempt from local government taxation, which does not fall under the exceptions under Section
234 of the Local Government Code. Hence, this massage parlor would not just be a shelter for frazzled
nerves, but for taxes as well.
Ridiculous? One might say, certainly a decision of the Supreme Court cannot be construed to promote an
absurdity. But precisely the majority, and the faulty reasoning it utilizes, opens itself up to all sorts of
mischief, and certainly, a tax-exempt massage parlor is one of the lesser evils that could arise from the
majority ruling. This is indeed a very strange and very wrong decision.
I dissent.
DANTE O. TINGA
Associate Justice

G.R. No. 122605

April 30, 2001

SEA-LAND SERVICE, INC., petitioner, vs. COURT OF APPEALS and COMMISSIONER OF

INTERNAL REVENUE, respondents.
PARDO, J.:

The Case
Appeal via certiorari from the decision of the Court of Appeals affirming in toto that of the Court of Tax
Appeals which denied petitioners claim for tax credit or refund of income tax paid on its gross Philippine
billings for taxable year 1984, in the amount of P870,093.12.1
The Facts
The facts, as found by the Court of Appeals, are as follows:
"Sea-Land Service Incorporated (SEA-LAND), an American international shipping
company licensed by the Securities and Exchange Commission to do business in the
Philippines entered into a contract with the United States Government to transport
military household goods and effects of U.S. military personnel assigned to the Subic
Naval Base.
"From the aforesaid contract, SEA-LAND derived an income for the taxable year 1984
amounting to P58,006,207.54. During the taxable year in question, SEA-LAND filed
with the Bureau of Internal Revenue (BIR) the corresponding corporate Income Tax
Return (ITR) and paid the income tax due thereon of 1.5% as required in Section 25 (a)
(2) of the National Internal Revenue Code (NIRC) in relation to Article 9 of the RP-US
Tax Treaty, amounting to P870,093.12.
"Claiming that it paid the aforementioned income tax by mistake, a written claim for
refund was filed with the BIR on 15 April 1987. However, before the said claim for
refund could be acted upon by public respondent Commissioner of Internal Revenue,
petitioner-appellant filed a petition for review with the CTA docketed as CTA Case No.
4149, to judicially pursue its claim for refund and to stop the running of the two-year
prescriptive period under the then Section 243 of the NIRC.
"On 21 February 1995, CTA rendered its decision denying SEA-LANDs claim for
refund of the income tax it paid in 1984."2
On March 30, 1995, petitioner appealed the decision of the Court of Tax Appeals to the Court of Appeals. 3
After due proceedings, on October 26, 1995, the Court of Appeals promulgated its decision dismissing the
appeal and affirming in toto the decision of the Court of Tax Appeals.4
Hence, this petition.5
The Issue
The issue raised is whether or not the income that petitioner derived from services in transporting the
household goods and effects of U.S. military personnel falls within the tax exemption provided in Article
XII, paragraph 4 of the RP-US Military Bases Agreement.

The Courts Ruling

We deny the petition.
The RP-US Military Bases Agreement provides:
"No national of the United States, or corporation organized under the laws of the United
States, shall be liable to pay income tax in the Philippines in respect of any profits
derived under a contract made in the United States with the government of the United
States in connection with the construction, maintenance, operation and defense of the
bases, or any tax in the nature of a license in respect of any service or work for the United
States in connection with the construction, maintenance, operation and defense of the
bases."6
Petitioner Sea-Land Service, Inc. a US shipping company licensed to do business in the Philippines
earned income during taxable year 1984 amounting to P58,006,207.54, and paid income tax thereon of
1.5% amounting to P870,093.12.
The question is whether petitioner is exempted from the payment of income tax on its revenue earned
from the transport or shipment of household goods and effects of US personnel assigned at Subic Naval
Base.
"Laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in
favor of the taxing power. Taxation is the rule and exemption is the exception." 7 The law "does not look
with favor on tax exemptions and that he who would seek to be thus privileged must justify it by
words too plain to be mistaken and too categorical to be misinterpreted."8
Under Article XII (4) of the RP-US Military Bases Agreement, the Philippine Government agreed to
exempt from payment of Philippine income tax nationals of the United States, or corporations organized
under the laws of the United States, residents in the United States in respect of any profit derived under a
contract made in the United States with the Government of the United States in connection with
the construction, maintenance, operation and defense of the bases.
It is obvious that the transport or shipment of household goods and effects of U.S. military personnel is
not included in the term "construction, maintenance, operation and defense of the bases." Neither could
the performance of this service to the U.S. government be interpreted as directly related to the defense
and security of the Philippine territories. "When the law speaks in clear and categorical language, there is
no reason for interpretation or construction, but only for application." 9 Any interpretation that would give
it an expansive construction to encompass petitioners exemption from taxation would be unwarranted.
The avowed purpose of tax exemption "is some public benefit or interest, which the lawmaking body
considers sufficient to offset the monetary loss entailed in the grant of the exemption." 10 The hauling or
transport of household goods and personal effects of U. S. military personnel would not directly
contribute to the defense and security of the Philippines.

We see no reason to reverse the ruling of the Court of Appeals, which affirmed the decision of the Court
of Tax Appeals. The Supreme "Court will not set aside lightly the conclusion reached by the Court of Tax
Appeals which, by the very nature of its function, is dedicated exclusively to the consideration of tax
problems and has necessarily developed an expertise on the subject, unless there has been an abuse or
improvident exercise of authority."11
Hence, the Court of Appeals did not err or gravely abuse its discretion in dismissing the petition for
review. We can not grant the petition.1wphi1.nt
The Judgment
WHEREFORE, the Court DENIES the petition for lack of merit.
No costs.
SO ORDERED.
G.R. No. 33403

September 4, 1930

THIRTY-FIRST INFANTRY POST EXCHANGE and FIRST LIEUTENANT DAVID L.

HARDEE, THIRTY-FIRST INFANTRY, UNITED STATES ARMY, plaintiffs, vs. JUAN
POSADAS, JR., Collector of Internal Revenue, Philippine Islands, defendant.
Wm. Taylor, Mark E. Guerin, and Thomas T. Trapnell for plaintiffs.
Attorney-General Jaranilla for defendant.
MALCOLM, J.:
The question involved in these original proceedings of prohibition is whether a tax may be levied by the
Government of the Philippine Islands on sales made by merchants to Post Exchanges of the United States
Army in the Philippines. The point of jurisdiction of this court has not been raised by the AttorneyGeneral in representation of the defendant, and we do not propose to be supercritical in this respect.
The parties have submitted the case on the following agreed statement of facts:
1. The plaintiff, Thirty-first Infantry Post Exchange, is now and for all the times material to this
suit has been constituted as a post exchange in accordance with the Army Regulations (of which
the court may take judicial notice) and the laws of the United States, with its place of business in
the Cuartel de Espaa in the City of Manila, P. I. It is an agency within the United States Army,
under the control of the officers of the Army. It is recognized and authorized in general terms by
the Congress of the United States in various enactments. First Lieutenant David L. Hardee,
Thirty-first Infantry, whose residence is in the City of Manila, P. I., is the duly appointed and
acting Exchange Officer of said exchange, and is charged with the immediate conduct and
management of the business of said plaintiff Exchange. The defendant, Juan Posadas, jr., is the
duly qualified and acting Collector of Internal Revenue of the Philippine islands, with office and
residence in the City of Manila, P. I.

2. The said plaintiff Exchange is designed for the accommodation, convenience, and assistance of
the personnel of the Army. All of the goods sold to and purchased by the said plaintiff Exchange
are intended for resale to and are in fact resold, as they have been in the past, to the officers,
soldiers and the civilian employees of the Army, and their families. The goods sold to and
purchased by the said plaintiff Exchange have consisted and do consist largely of sundry articles
for personal use, such as soaps, shaving materials, and other toilet articles, and other goods
generally found in a well-stocked general store. Such purchases and resales, though fully
authorized by law and the Army Regulations, are not specifically required by statutory enactment.
The net proceeds derived from all such resales do not accrue to the general funds of the United
States, that is, they are not deposited in the Treasury of the United States, but are used for the
betterment of the condition of the enlisted personnel of the Army, to the end that thereby the
morale and efficiency of the armed forces of the United States may be improved and increased.
3. In the course of its duly authorized business transactions, the said plaintiff Exchange, under the
direction of the said plaintiff David L. Hardee, as Exchange Officer, and his predecessors in that
office, has, during the period of several years last past, made many purchases of various and
divers commodities, goods, wares, and merchandise from various and divers merchants in the
Philippine Islands, and is continuing to do so, and like purchases by the said plaintiff Exchange
from merchants in the Philippine Islands are intended and contemplated as necessary in the
conduct of its duly authorized business.
4. Following many and divers of the aforesaid purchases by the said plaintiff Exchange, the
defendant, Juan Posadas, Jr., Collector of Internal Revenue of the Philippine Islands, and his
predecessors in that office, have collected from the merchants who made the sales of the
commodities, goods, wares, and merchandise to the plaintiff Exchange, taxes at the rate of one
and one-half per centum on the gross value in money of the commodities, goods, wares, and
merchandise, sold by them to the plaintiff Exchange, and based on the actual prices at which the
sales were made, and the average amount of money per annum for several years last past
demanded and collected by the defendant and his predecessors in office as such taxes on the
aforesaid sales to the plaintiff Exchange has been several thousand pesos, averaging more than
two thousand pesos per annum since January 1, 1927.
5. The defendant persists in demanding and collecting such taxes and at the said rates on the sales
of commodities, goods, wares, and merchandise which are being effected by merchants in the
Philippine Islands to the plaintiff Exchange. He intends and expects to continue to demand and
collect such taxes and at said rates on sales of commodities, goods, wares, and merchandise sold
by merchants in the Philippine Islands to plaintiff Exchange, and all other Army post exchanges
in the Philippine Islands, unless certain statutes of the Philippine Islands and of the United States
in respect thereof shall be modified or repealed, or he be restrained and prohibited therefrom by
judgment of the proper tribunal. The statutes upon which the defendant relies as his authority for
such demand and collection of taxes, particularly, are section 1459 of Act. No. 2711, and Act No.
3243 of the public laws enacted by the Philippine Legislature; also the Act of June 4, 1918 (40
Stat., 597) and the Act of March 3, 1927 (44 Stat., 1390), enacted by the Congress of the United
States, ratifying the said two enactments of the Philippine Legislature.
6. The effect of the demand and collection of taxes by the defendant on the sales of such
commodities, goods, wares and merchandise thus sold to and bought by the plaintiff Exchange
has been, is, and in the future will be unless the defendant be commanded to desist and refrain
from such demand and collection, to increase the cost thereof to the plaintiff Exchange, by at least
the amounts of such taxes demanded and collected as aforesaid in each instance.

What is known as the sales tax is in force in the Philippines. A percentage tax of 1 1/2 per centum is
collected on merchants' sales. (Administrative Code, sec. 1459; Act No. 3243.) The taxes imposed by the
Philippine Legislature in said section 1459 and in Act No. 3243 have by Acts of Congress been "legalized
and ratified, and the collection of all such taxes . . . legalized, ratified, and confirmed to all intents and
purposes as if the same had by prior Act of Congress been specifically authorized and directed." (Acts of
Congress of June 4, 1918, and March 3, 1927, 40 Stat. L., 597, and 44 Stat. L., 1390.) Philippine law as
thus enacted and expressly confirmed by the Congress, makes particular mention of the persons exempt
from this tax, without, however, including in the enumeration commercial transactions with Army Post
Exchanges. On the other hand, our general law provides express exemptions from the other taxes for the
United States and its agencies. (Administrative Code, sec. 344, 1418, 1439, 1449 [s], 1450, 1474, and
1478.)
Taxes have been collected from merchants who make sales to Army Post Exchanges since 1904. (Act No.
1189, sec. 139.) Similar taxes are paid by those who sell merchandise to the Philippine Government
through the Bureau of Supply (Ruling, Bureau of Internal Revenue, March 5, 1925, and prior precedents),
and we likewise assume, by those who do business with the United States Army and Navy in the
Philippines. Only in the case at bar has formal legal protest been made.
In 1916, the case of Walter E. Olsen & Co. vs. Rafferty ([1919], 39 Phil., 464), pertaining to the payment
of specific taxes by Army Post Exchanges, arose. The revenue laws at that time, as they do now, provided
that "no specific tax shall be collected on any articles sold and delivered directly to the United States
Army or Navy for actual use or issue by the Army or Navy, and any taxes which have been paid on
articles so sold and delivered for such use or issue shall be refunded upon such sale and delivery, . . . ."
Although in this case passing reference was made in the court below and in appellant's brief to some of
the larger constitutional aspects, the Supreme Court confined its decision to determining whether or not
merchandise, which is generally subject to the payment of internal revenue tax, is relieved from said tax
when it is sold to the Army or Navy of the United States for resale to individuals by means or through the
post exchanges or ship's stores. The court, in resolving against the contention of the plaintiff merchant,
said:
While "post exchanges" and "ship's stores" are institutions within the Army and Navy of the
United States, and are recognized by Acts of Congress, and are under the control of the Army and
Navy, and are organized for the convenience and assistance of the soldiers and sailors, we are not
inclined to believe that goods sold to the soldiers and sailors of the Army and Navy, even though
they be sold through said exchanges by the intervention of officers of the Army and Navy, are
goods sold directly to the United States Army or Navy for actual use or issue by the Army or
Navy. They are goods sold for the use and benefit of the post exchanges, etc., and not for the
actual use or issue by the Army or Navy. We do not believe that the exemption provided for in the
above-quoted section applies to goods sold to the United States Army and Navy to be resold to
the individuals of said organization. The money used for the purchase of merchandise sold
through the post exchanges, etc., is not supplied by, nor for, the United States Army and Navy.
Neither does the money received in the resale of such merchandise through the post exchanges,
etc., become a part of the general funds of the Army and Navy. In our opinion, the sale of
merchandise through the post exchanges to the individuals of the United States Army and Navy
are not goods sold and delivered directly to the United States Army or Navy for the actual
use or issue by the Army or Navy and are therefore, not exempt from the payment of the internal
revenue tax imposed by the law. (Emphasis those of court.)
The laws to be applied are, in effect, Acts of the Congress of the United States, and so form a part of
Philippine Organic Law. (Mitsui Bussan Kaisha vs. Manila E. R. R. & L. Co. [1919], 39 Phil., 624.) We

do not wish to be guilty of overstating the proper principle, but it would seem that since no law of the
Congress forbids the taxation of merchants who deal with Army Post Exchanges, and since the Congress
has legalized the applicable law, and in doing so has granted no immunity from taxation to merchants who
deal with Army Post Exchanges, the Congress has permitted such transactions with Army Post
Exchanges, on the assumption that Post Exchanges are agencies of the United States, to be taxed by the
Philippine Government. It must be understood, however, that the waiver must be clear, and that every
well grounded doubt should be resolved in favor of the exemption. (Austin vs. Aldermen of Boston
[1869], 7 Wall., 694.)
As to the facts, the nature of Army Post Exchanges is explained in the stipulation of facts and in the case
of Walter E. Olsen & Co. vs. Rafferty, supra. In addition, it might be advisable to state that the
construction, equipment, and maintenance of post exchange buildings are provided for by appropriation
Acts of the Congress. The Court of Claims in holding an officer in charge of a post exchange not a retail
dealer in liquors, said that post exchanges "though conducted without financial liability to the
Government, are, in their creation and management, governmental agencies . . . ." (Dugan vs. U. S.
[1899], 34 Court of Claims, 458.) The Judge Advocate General has said that "a post exchange is a
voluntary unincorporated cooperative association of Army organizations, a kind of cooperative store, in
which all share in the benefits and all assume a position analogous to that of partners." (Opinion, J. A. G.,
June 4, 1918.) Again, although we do not desire to overstate the matter, the rule is that whenever a state
engages in a business which is of a private nature, that business is not withdrawn from the taxing power
of the Nation, or, conversely stated, whenever the National Government permits an organization under its
control to engage in a business which is of a private nature, that business is not withdrawn from the taxing
power of the state. (South Carolina vs. U. S. [1905], 199 U. S., 437.)
The plaintiffs in this case are the Thirty-first Infantry Post Exchange and the Exchange Officer of that
Exchange. But the stipulation of facts concedes that it is the merchants who effect the sales to the Post
Exchange who pay the tax. And it is the officers, soldiers, and civilian employees and their families who
are benefited by the post exchange to whom the tax is ultimately shifted. Justice Holmes of the Supreme
Court of the United States had quite similar facts in mind when in his dissenting opinion in the case of
Panhandle Oil Co. vs. Knox ([1928], 277 U. S., 218), he said: "If the plaintiff in error had paid the tax and
had added it to the price, the Government would have had nothing to say." Here, it must again be stated
that it is not the vendors of merchandise who are protesting, but it is the Army Post Exchange which is the
complainant.
The foregoing might be sufficient to dispose of the case. However, we would not like to be charged with
dodging the more vital issues, and so will take under view the larger constitutional aspects of the
question.
Chief Justice Marshall was originally responsible for the rule that without Congressional consent, no
Federal agency or instrumentality can be taxed by state authority. (McCulloch vs. State of Maryland
[1819], 4 Wheat., 316; Jaybird Mining Co. vs. Weir [1926], 271 U. S., 609.) Naturally, in the course of
time, attempts have been made to extend the exemption from state taxation, established by the case of
McCulloch vs. State of Maryland, supra, beyond its terms. Only those agencies through which the Federal
Government immediately and directly exercises its sovereign powers are immune from the taxing power
of the states. The reason upon which the rule rests must be the guiding principle to control its operation.
The limitations upon the taxing power of the state must receive a practical construction which does not
seriously impair the taxing power of the Government imposing the tax. The effect of the tax upon the
functions of the Government and the nature of the governmental agency determine finally the extent of
the exemption. (Metcalf vs. Mitchell [1926], 269 U. S., 514; Thomson vs. Union Pacific Railroad Co.
[1869], 9 Wall., 579.)

It would be impracticable to point out all of the limitations to the general rule, but a few may be noted.
Thus in the well considered decision in Union Pacific Railroad Co. vs. Peniston ([1873], 18 Wall., 5), it
was said: "It cannot be that a state tax which remotely affects the efficient exercise of a federal power is
for that reason alone inhibited by the Constitution." Again, with more direct application, although
contained in a dissenting opinion, Justice Thompson, in Weston vs. City Council of Charleston ([1829], 2
Pet., 449), said: "The unqualified proposition that a State cannot directly or indirectly tax any instrument
or means employed by the general government in the execution of its power, cannot be literally sustained.
Congress has power to raise armies, such armies are made up of officers and soldiers, and are instruments
employed by the government in executing its powers; and although the army, as such, cannot be taxed, yet
it will not be claimed that all such officers and soldiers are exempt from State taxation." The United
States Supreme Court has held that the use of machinery and boats in the harbor of San Juan, Porto Rico,
in the performance of a dredging contract with the United States, does not exempt them from location
taxation. (Gromer vs. Standard Dredging Co. [1911], 224 U. S., 362.)
It has been contended during the course of our deliberations that, all other questions to one side, the case
is governed by the comparatively recent decision of the Supreme Court of the United States in the case of
Panhandle Oil Co. vs. Knox, supra. There it was held by a closely divided court that (1) A state tax
imposed on dealers in gasoline for the privilege of selling, and measured at so many cents per gallon of
gasoline sold, is void under the Federal Constitution as applied to sales to instrumentalities of the United
States, such as the Coast Guard Fleet and a Veterans' Hospital; (2) that the substance and legal effect is to
tax the sale, and thus burden and tax the United States, exacting tribute on its transactions for the support
of the State; and (3) that such an exaction infringes the right of the dealer to have the constitutional
independence of the United States in respect of such purchases remain untrammeled. With all due
deference to the pronouncements of the higher court which we are bound to abide by, we are yet
convinced that the cited case is not controlling. We will point out some of the differences between the two
cases. There the plaintiff in error was a private oil company which had been sued by the state to recover
taxes; here the plaintiffs are not the private individuals who paid the taxes but are an Army Post Exchange
and its Exchange Officer. There the law in question was an Act of the State Legislature; here the laws in
question are Acts of the Philippine Legislature which have been ratified by the Congress of the United
States and raised to the level of organic laws. There the right of the United States to make purchases was
derived from the United States' Constitution; here the right of the Army Post Exchange to make purchases
is derived from Army regulations and Army practice. There the sale was made to instrumentalities
authorized by the constitution, which consumed the merchandise; here the sales were made to Army Post
Exchanges not so constitutionally authorized, which merely acted as intermediaries. There it must be
taken for granted that the Coast Guard Fleet and the Veterans' Hospital were constructed and operated by
Government funds; here, except that buildings are provided by the United States Government for the
Army Post Exchanges, the latter are not so constructed and operated.
The majority decision in the Panhandle Oil case carries the Marshallian theory of national supremacy just
about to its extreme limits. We do not think that the present case falls within those limits. When a
merchant sells a case of hair pins to an Army post exchange, and the wife of an Army officer purchases a
package of those hair pins, and when a merchant sells a quantity of tobacco to an Army post exchange,
and a soldier provides himself with his tobacco; and when the merchants who perfect the sales make good
the required taxes, "the exertion of national power" is not so burdened or interfered with, and "the
exactions demanded" do not so infringe the constitutional independence of the United States as to exempt
the sales from taxation, which every one else, including the merchant who sells to the Philippine
Government, must pay. That is our understanding of the authorities and of the law.

There can exist no measure of doubt that the basic rule, together with its qualifications, applies not only to
the States of the American Union, but also to unincorporated territories with the status of the Government
of the Philippine Islands.
Placing some emphasis on the point of long acquiescence in the imposition of the sales tax on vendors of
merchandise to Army Post Exchanges; on the point that the Congress of the United States has virtually
sanctioned such a sales tax by confirming Philippine revenue laws without reservation; and on the point
that a kind of cooperative store in the Army is akin to a private business enterprise which is not
withdrawn from taxation, we desire with more emphasis to indicate the lack of standing of the plaintiffs to
contest the tax. On still broader grounds, we would consider the effects of the sales tax upon the United
States Army, and the nature of an Army Post Exchange. The tax laid upon Philippine merchants who sell
to Army Post Exchanges does not interfere with the supremacy of the United States Government, or with
the operations of its instrumentality, the United States Army, to such an extent or in such a manner as to
render the tax illegal. The tax does not deprive the Army of the power to serve the Government as it was
intended to serve it, or hinder the efficient exercise of its power.
We rule that an Army Post Exchange, although an agency within the United States Army, cannot secure
exemption from taxation for merchants who make sales to the Post Exchange. The question must,
therefore, be answered in the affirmative. The plaintiffs have not made out a case.
Wherefore, the complaint will be dismissed, with costs.
Avancea, C.J., Street, Villamor, Romualdez and Villa-Real, JJ., concur.

Separate Opinions
JOHNS, J., dissenting:
This was case tried and submitted upon a stipulation of facts, from which it appears that the plaintiff is a
post exchange operated under Army Regulations, of which the courts take judicial notice, and the laws of
the United States, with its place of business in the City of Manila. "It is an agency within the United
States Army, under the control of the officers of the Army. It is recognized and authorized in general
terms by the Congress of the United States in various enactments." First Lieutenant Hardee "is its duly
appointed and acting Exchange Officer, and is charged with the immediate conduct and management of
its business."
2. The said plaintiff Exchange is designed for the accommodation, convenience, and assistance of
the personnel of the Army. All of the goods sold to and purchased by the said plaintiff Exchange
are intended for resale to and are in fact resold, as they have been in the past, to the officers,
soldiers and the civilian employees of the Army, and their families. . . . Such purchases and
resales, though fully authorized by law and the Army Regulations, are not specifically required by
statutory enactment. The net proceeds derived from all such resales do not accrue to the general
funds of the United States, that is, they are not deposited in the Treasury of the United States, but
are used for the betterment of the condition of the enlisted personnel of the Army, to the end that
thereby the morale and efficiency of the armed forces of the United States may be improved and
increased.

3. In the course of its duly authorized business transactions, the said plaintiff Exchange, under the
direction of the said plaintiff David L. Hardee, as Exchange Officer, and his predecessors in that
office, has, during the period of several years last past, made many purchases of various and
divers commodities, goods, wares, and merchandise from various and divers merchants in the
Philippine Islands, and is continuing to do so, and like purchases by the said plaintiff Exchange
from merchants in the Philippine Islands are intended and contemplated as necessary in the
conduct of its duly authorized business.
xxx

xxx

xxx

6. The effect of the demand and collection of taxes by the defendant on the sales of such
commodities, goods, wares, and merchandise thus sold to and bought by the plaintiff Exchange
has been, is, and in the future will be unless the defendant be commanded to desist and refrain
from such demand and collection, to increase the cost thereof to the plaintiff Exchange, by at least
the amounts of such taxes demanded and collected as aforesaid in each instance.
Army Regulations are prescribed by the Secretary of War, under section 161 of the Revised Statutes, and
have the force of law when they do not contravene statute law. When Congress permits regulations to be
promulgated and published and carried into effect year after year, legislative ratification must be implied.
(Maddux vs. United States, 20 Court of Claims, 193, 198), and in Chattamal vs. Collector of Customs (42
Phil., 916-919), this court said that it would take judicial notice of Army Regulations. Congress in every
annual appropriation since June 30, 1902, has made an appropriation "For the construction, equipment
and maintenance of suitable buildings at military posts and stations for the conduct of post exchange,
school, library, reading lunch and amusement rooms."
In Dugan vs. United States, supra, at page 467 of the opinion, it is said that Army post exchanges, in their
creation and management, are "governmental agencies."
In Post Exchange, 31st Infantry, vs. Kinney, G. R. No. 30920,1 in speaking of them, this court said:
While they are in a sense associations of military organizations for business purposes, they are simply
governmental agencies or instrumentalities expressly recognized by Congress in the annual appropriation
acts, and are designed to carry out a governmental purpose. (Dugan vs. U. S., 34 Court of Claims, 458.)"
Hence, we have a post exchange established and operated under Army Rules and Regulations empowered
and authorized to buy and sell its goods, wares, and merchandise to the personnel of the Army, and the
question is squarely presented as to whether or not it is liable for the payment of the sales tax provided for
by section 1459 of Act No. 2711 and Act No. 3243 of the Public Laws enacted by the Philippine
Legislature, as such laws are ratified by the Congress of the United States. It will be noted that in neither
section 1459 of Act No. 2711 nor Act No. 3243 or either act of Congress is there any reference to sales
made to the United States or any of its instrumentalities, and it must be conceded that no State of the
Union has the power to levy taxes upon property of the United States or its instrumentalities without the
consent of Congress.
Plaintiffs contend that if the Philippine Legislature intended that the tax in question should apply to the
sales made to the United States or its instrumentalities, they are void as against the Constitution, citing 37
Cyc., p. 865, which says:
The United States has no authority to tax the property of a state, nor a state to extract revenue
from the property of the federal government, and from the nature of the case neither government

will lay taxes upon its own property. Hence as a general rule all public property is exempt from
taxation, either by express exemption or by necessary implication, including not only the property
of the state itself, but also the public property of its political subdivisions, such as counties and
municipal corporations. While in the absence of Constitutional prohibition the state may include
in its scheme of taxation such property of its own or of its municipal subdivisions, the
presumption is always against an intention to do so, and such property is impliedly exempt unless
an intention to include it is clearly manifested.
As we construe the stipulation of facts and the Army Rules and Regulations, the United States has created
and operates the Army post exchange as an instrumentality for the carrying out of its functions in the
exercise of its constitutional powers "To raise and support armies," and "To make all laws which shall be
necessary for carrying into execution the foregoing powers."
It is stipulated that the plaintiff exchange "is designed for the accommodation, convenience, and
assistance of the personnel of the Army," and that the net proceeds of all such resales "are used for the
betterment of the condition of the enlisted personnel of the Army, to the end that thereby the morale and
efficiency of the armed forces of the United States may be improved and increased." In other words, it is
agreed that the post exchange is established and operated under Army Rules and Regulations designed for
the accommodation, convenience, and assistance of the personnel of the Army "to the end that thereby the
moral and efficiency of the armed forces of the United States may be improved and increased," and yet in
the exercise of that right post exchanges in the Philippine Islands are required to pay a sales tax to the
local government, the effect of which under paragraph 6 of the stipulation of facts is "To increase the cost
thereof to the plaintiff Exchange, by at least the amounts of such taxes demanded, and collected as
aforesaid." In other words, for the privilege of operating a post exchange must pay a sales tax to the
Government of the Philippine Islands.
In the case of Panhandle Oil Company vs. State of Mississippi (72 Law. ed., 857), the syllabus says:
1. States may not burden or interfere with the exertion of national power or make it a source of
revenue or take the funds raised or tax the means used for the performance of Federal functions.
2. A state may not impose a tax measured by the quantity sold upon the privilege of one of its
citizens of selling gasoline to the Federal government for use of its Coast Guard Fleet or Veterans'
Hospital which the United States is empowered by the Constitution to maintain and operate.
And in the opinion, it is said:
The validity of the taxes claimed is to be determined by the practical effect of enforcement in
respect of sales of the government. (Wagner vs. Covington, 251 U. S., 95, 102; 64 L. ed., 157,
167; 40 Sup. Ct. Rep., 93.) A charge at the prescribed rate is made on account of every gallon
acquired by the United States. It is immaterial that the seller and not the purchaser is required to
report and make payment to the state. Sale and purchase constitute a transaction by which the tax
is measured and on which the burden rests. The amount of money claimed by the state rises and
falls precisely as does the quantity of gasoline so secured by the Government. It depends
immediately upon the number of gallons. The necessary operation of these enactments when so
construed is directly to retard, impede and burden the exertion by the United States, of its
constitutional powers to operate the fleet and hospital.

It is true that decision was rendered by a divided court, but it is also true that the majority opinion is the
law of that court, and upon the stipulation of facts it would seem to apply to this case, and hence should
be followed by this court.
In the final analysis, you have this situation. The United States at its own expense maintains an army in
the Philippine Islands. Under long established rules and regulations, and as incidental to and as a part of
it, the United States Army maintains and operates its post exchanges, one of which is the plaintiff, to
improve and promote "the morale and efficiency of the armed forces of the United States."
Why then should the plaintiff be required to pay a sales tax to promote "the morale and efficiency" of the
personnel of the Army? Yet, in the final analysis, that is the legal effect of the majority opinion. It would
seem on principle that where the United States at its own expense maintains an army in the Philippine
Islands, and under Army Rules and Regulations has established and operates a post exchange, to improve
the "morale and efficiency" of its members, that the personnel of the Army which affords that protection
should be exempt from the payment of the sales tax to the Philippine Government which does not pay a
centavo for such protection.
The writ should be granted, and we dissent.
Ostrand, J., concurs.
G.R. No. L-26379

December 27, 1969

WILLIAM C. REAGAN, ETC., petitioner, vs. COMMISSIONER OF INTERNAL

REVENUE, respondent.
FERNANDO, J.:
A question novel in character, the answer to which has far-reaching implications, is raised by petitioner
William C. Reagan, at one time a civilian employee of an American corporation providing technical
assistance to the United States Air Force in the Philippines. He would dispute the payment of the income
tax assessed on him by respondent Commissioner of Internal Revenue on an amount realized by him on a
sale of his automobile to a member of the United States Marine Corps, the transaction having taken place
at the Clark Field Air Base at Pampanga. It is his contention, seriously and earnestly expressed, that in
legal contemplation the sale was made outside Philippine territory and therefore beyond our jurisdictional
power to tax.
Such a plea, far-fetched and implausible, on its face betraying no kinship with reality, he would justify by
invoking, mistakenly as will hereafter be more fully shown an observation to that effect in a 1951
opinion, 1 petitioner ignoring that such utterance was made purely as a flourish of rhetoric and by way of
emphasizing the decision reached, that the trading firm as purchaser of army goods must respond for the
sales taxes due from an importer, as the American armed forces being exempt could not be taxed as such
under the National Internal Revenue Code. 2 Such an assumption, inspired by the commendable aim to
render unavailing any attempt at tax evasion on the part of such vendee, found expression anew in a 1962
decision,3 coupled with the reminder however, to render the truth unmistakable, that "the areas covered by
the United States Military Bases are not foreign territories both in the political and geographical sense."

As thus clarified, it is manifest that such a view amounts at most to a legal fiction and is moreover obiter.
It certainly cannot control the resolution of the specific question that confronts us. We declare our stand in
an unequivocal manner. The sale having taken place on what indisputably is Philippine territory,
petitioner's liability for the income tax due as a result thereof was unavoidable. As the Court of Tax
Appeals reached a similar conclusion, we sustain its decision now before us on appeal.
In the decision appealed from, the Court of Tax Appeals, after stating the nature of the case, started the
recital of facts thus: "It appears that petitioner, a citizen of the United States and an employee of Bendix
Radio, Division of Bendix Aviation Corporation, which provides technical assistance to the United States
Air Force, was assigned at Clark Air Base, Philippines, on or about July 7, 1959 ... . Nine (9) months
thereafter and before his tour of duty expired, petitioner imported on April 22, 1960 a tax-free 1960
Cadillac car with accessories valued at $6,443.83, including freight, insurance and other charges." 4 Then
came the following: "On July 11, 1960, more than two (2) months after the 1960 Cadillac car was
imported into the Philippines, petitioner requested the Base Commander, Clark Air Base, for a permit to
sell the car, which was granted provided that the sale was made to a member of the United States Armed
Forces or a citizen of the United States employed in the U.S. military bases in the Philippines. On the
same date, July 11, 1960, petitioner sold his car for $6,600.00 to a certain Willie Johnson, Jr. (Private first
class), United States Marine Corps, Sangley Point, Cavite, Philippines, as shown by a Bill of Sale . . .
executed at Clark Air Base. On the same date, Pfc. Willie (William) Johnson, Jr. sold the car to Fred
Meneses for P32,000.00 as evidenced by a deed of sale executed in Manila." 5
As a result of the transaction thus made, respondent Commissioner of Internal Revenue, after deducting
the landed cost of the car as well as the personal exemption to which petitioner was entitled, fixed as his
net taxable income arising from such transaction the amount of P17,912.34, rendering him liable for
income tax in the sum of P2,979.00. After paying the sum, he sought a refund from respondent claiming
that he was exempt, but pending action on his request for refund, he filed the case with the Court of Tax
Appeals seeking recovery of the sum of P2,979.00 plus the legal rate of interest.
As noted in the appealed decision: "The only issue submitted for our resolution is whether or not the said
income tax of P2,979.00 was legally collected by respondent for petitioner." 6 After discussing the legal
issues raised, primarily the contention that the Clark Air Base "in legal contemplation, is a base outside
the Philippines" the sale therefore having taken place on "foreign soil", the Court of Tax Appeals found
nothing objectionable in the assessment and thereafter the payment of P2,979.00 as income tax and
denied the refund on the same. Hence, this appeal predicated on a legal theory we cannot accept.
Petitioner cannot make out a case for reversal.
1. Resort to fundamentals is unavoidable to place things in their proper perspective, petitioner apparently
feeling justified in his refusal to defer to basic postulates of constitutional and international law, induced
no doubt by the weight he would accord to the observation made by this Court in the two opinions earlier
referred to. To repeat, scant comfort, if at all is to be derived from such an obiter dictum, one which is
likewise far from reflecting the fact as it is.
Nothing is better settled than that the Philippines being independent and sovereign, its authority may be
exercised over its entire domain. There is no portion thereof that is beyond its power. Within its limits, its

decrees are supreme, its commands paramount. Its laws govern therein, and everyone to whom it applies
must submit to its terms. That is the extent of its jurisdiction, both territorial and personal. Necessarily,
likewise, it has to be exclusive. If it were not thus, there is a diminution of its sovereignty.
It is to be admitted that any state may, by its consent, express or implied, submit to a restriction of its
sovereign rights. There may thus be a curtailment of what otherwise is a power plenary in character. That
is the concept of sovereignty as auto-limitation, which, in the succinct language of Jellinek, "is the
property of a state-force due to which it has the exclusive capacity of legal self-determination and selfrestriction."7 A state then, if it chooses to, may refrain from the exercise of what otherwise is illimitable
competence.
Its laws may as to some persons found within its territory no longer control. Nor does the matter end
there. It is not precluded from allowing another power to participate in the exercise of jurisdictional right
over certain portions of its territory. If it does so, it by no means follows that such areas become
impressed with an alien character. They retain their status as native soil. They are still subject to its
authority. Its jurisdiction may be diminished, but it does not disappear. So it is with the bases under lease
to the American armed forces by virtue of the military bases agreement of 1947. They are not and cannot
be foreign territory.
Decisions coming from petitioner's native land, penned by jurists of repute, speak to that effect with
impressive unanimity. We start with the citation from Chief Justice Marshall, announced in the leading
case of Schooner Exchange v. M'Faddon,8 an 1812 decision: "The jurisdiction of the nation within its own
territory is necessarily exclusive and absolute. It is susceptible of no limitation not imposed by itself. Any
restriction upon it, deriving validity from an external source, would imply a diminution of its sovereignty
to the extent of the restriction, and an investment of that sovereignty to the same extent in that power
which could impose such restriction." After which came this paragraph: "All exceptions, therefore, to the
full and complete power of a nation within its own territories, must be traced up to the consent of the
nation itself. They can flow from no other legitimate source."
Chief Justice Taney, in an 1857 decision, 9 affirmed the fundamental principle of everyone within the
territorial domain of a state being subject to its commands: "For undoubtedly every person who is found
within the limits of a government, whether the temporary purposes or as a resident, is bound by its laws."
It is no exaggeration then for Justice Brewer to stress that the United States government "is one having
jurisdiction over every foot of soil within its territory, and acting directly upon each [individual found
therein]; . . ."10
Not too long ago, there was a reiteration of such a view, this time from the pen of Justice Van Devanter.
Thus: "It now is settled in the United States and recognized elsewhere that the territory subject to its
jurisdiction includes the land areas under its dominion and control the ports, harbors, bays, and other in
closed arms of the sea along its coast, and a marginal belt of the sea extending from the coast line outward
a marine league, or 3 geographic miles." 11 He could cite moreover, in addition to many American
decisions, such eminent treatise-writers as Kent, Moore, Hyde, Wilson, Westlake, Wheaton and
Oppenheim.

As a matter of fact, the eminent commentator Hyde in his three-volume work on International Law, as
interpreted and applied by the United States, made clear that not even the embassy premises of a foreign
power are to be considered outside the territorial domain of the host state. Thus: "The ground occupied by
an embassy is not in fact the territory of the foreign State to which the premises belong through
possession or ownership. The lawfulness or unlawfulness of acts there committed is determined by the
territorial sovereign. If an attache commits an offense within the precincts of an embassy, his immunity
from prosecution is not because he has not violated the local law, but rather for the reason that the
individual is exempt from prosecution. If a person not so exempt, or whose immunity is waived, similarly
commits a crime therein, the territorial sovereign, if it secures custody of the offender, may subject him to
prosecution, even though its criminal code normally does not contemplate the punishment of one who
commits an offense outside of the national domain. It is not believed, therefore, that an ambassador
himself possesses the right to exercise jurisdiction, contrary to the will of the State of his sojourn, even
within his embassy with respect to acts there committed. Nor is there apparent at the present time any
tendency on the part of States to acquiesce in his exercise of it." 12
2. In the light of the above, the first and crucial error imputed to the Court of Tax Appeals to the effect
that it should have held that the Clark Air Force is foreign soil or territory for purposes of income tax
legislation is clearly without support in law. As thus correctly viewed, petitioner's hope for the reversal of
the decision completely fades away. There is nothing in the Military Bases Agreement that lends support
to such an assertion. It has not become foreign soil or territory. This country's jurisdictional rights therein,
certainly not excluding the power to tax, have been preserved. As to certain tax matters, an appropriate
exemption was provided for.
Petitioner could not have been unaware that to maintain the contrary would be to defy reality and would
be an affront to the law. While his first assigned error is thus worded, he would seek to impart plausibility
to his claim by the ostensible invocation of the exemption clause in the Agreement by virtue of which a
"national of the United States serving in or employed in the Philippines in connection with the
construction, maintenance, operation or defense of the bases and residing in the Philippines only by
reason of such employment" is not to be taxed on his income unless "derived from Philippine source or
sources other than the United States sources." 13 The reliance, to repeat, is more apparent than real for as
noted at the outset of this opinion, petitioner places more faith not on the language of the provision on
exemption but on a sentiment given expression in a 1951 opinion of this Court, which would be made to
yield such an unwarranted interpretation at war with the controlling constitutional and international law
principles. At any rate, even if such a contention were more adequately pressed and insisted upon, it is on
its face devoid of merit as the source clearly was Philippine.
In Saura Import and Export Co. v. Meer,14 the case above referred to, this Court affirmed a decision
rendered about seven months previously,15 holding liable as an importer, within the contemplation of the
National Internal Revenue Code provision, the trading firm that purchased army goods from a United
States government agency in the Philippines. It is easily understandable why. If it were not thus, tax
evasion would have been facilitated. The United States forces that brought in such equipment later
disposed of as surplus, when no longer needed for military purposes, was beyond the reach of our tax
statutes.

Justice Tuason, who spoke for the Court, adhered to such a rationale, quoting extensively from the earlier
opinion. He could have stopped there. He chose not to do so. The transaction having occurred in 1946, not
so long after the liberation of the Philippines, he proceeded to discuss the role of the American military
contingent in the Philippines as a belligerent occupant. In the course of such a dissertion, drawing on his
well-known gift for rhetoric and cognizant that he was making an as if statement, he did say: "While in
army bases or installations within the Philippines those goods were in contemplation of law on foreign
soil."
It is thus evident that the first, and thereafter the controlling, decision as to the liability for sales taxes as
an importer by the purchaser, could have been reached without any need for such expression as that given
utterance by Justice Tuason. Its value then as an authoritative doctrine cannot be as much as petitioner
would mistakenly attach to it. It was clearly obiter not being necessary for the resolution of the issue
before this Court.16It was an opinion "uttered by the way." 17 It could not then be controlling on the
question before us now, the liability of the petitioner for income tax which, as announced at the opening
of this opinion, is squarely raised for the first time. 18
On this point, Chief Justice Marshall could again be listened to with profit. Thus: "It is a maxim, not to be
disregarded, that general expressions, in every opinion, are to be taken in connection with the case in
which those expressions are used. If they go beyond the case, they may be respected, but ought not to
control the judgment in a subsequent suit when the very point is presented for decision." 19
Nor did the fact that such utterance of Justice Tuason was cited in Co Po v. Collector of Internal
Revenue,20 a 1962 decision relied upon by petitioner, put a different complexion on the matter. Again, it
was by way of pure embellishment, there being no need to repeat it, to reach the conclusion that it was the
purchaser of army goods, this time from military bases, that must respond for the advance sales taxes as
importer. Again, the purpose that animated the reiteration of such a view was clearly to emphasize that
through the employment of such a fiction, tax evasion is precluded. What is more, how far divorced from
the truth was such statement was emphasized by Justice Barrera, who penned the Co Po opinion, thus: "It
is true that the areas covered by the United States Military Bases are not foreign territories both in the
political and geographical sense."21
Justice Tuason moreover made explicit that rather than corresponding with reality, what was said by him
was in the way of a legal fiction. Note his stress on "in contemplation of law." To lend further support to a
conclusion already announced, being at that a confirmation of what had been arrived at in the earlier case,
distinguished by its sound appreciation of the issue then before this Court and to preclude any tax
evasion, an observation certainly not to be taken literally was thus given utterance.
This is not to say that it should have been ignored altogether afterwards. It could be utilized again, as it
undoubtedly was, especially so for the purpose intended, namely to stigmatize as without support in law
any attempt on the part of a taxpayer to escape an obligation incumbent upon him. So it was quoted with
that end in view in the Co Po case. It certainly does not justify any effort to render futile the collection of
a tax legally due, as here. That was farthest from the thought of Justice Tuason.
What is more, the statement on its face is, to repeat, a legal fiction. This is not to discount the uses of
a fictio juris in the science of the law. It was Cardozo who pointed out its value as a device "to advance

the ends of justice" although at times it could be "clumsy" and even "offensive". 22 Certainly, then, while
far from objectionable as thus enunciated, this observation of Justice Tuason could be misused or
misconstrued in a clumsy manner to reach an offensive result. To repeat, properly used, a legal fiction
could be relied upon by the law, as Frankfurter noted, in the pursuit of legitimate ends. 23 Petitioner then
would be well-advised to take to heart such counsel of care and circumspection before invoking not a
legal fiction that would avoid a mockery of the law by avoiding tax evasion but what clearly is a
misinterpretation thereof, leading to results that would have shocked its originator.
The conclusion is thus irresistible that the crucial error assigned, the only one that calls for discussion to
the effect that for income tax purposes the Clark Air Force Base is outside Philippine territory, is utterly
without merit. So we have said earlier.
3. To impute then to the statement of Justice Tuason the meaning that petitioner would fasten on it is, to
paraphrase Frankfurter, to be guilty of succumbing to the vice of literalness. To so conclude is, whether by
design or inadvertence, to misread it. It certainly is not susceptible of the mischievous consequences now
sought to be fastened on it by petitioner.
That it would be fraught with such peril to the enforcement of our tax statutes on the military bases under
lease to the American armed forces could not have been within the contemplation of Justice Tuason. To so
attribute such a bizarre consequence is to be guilty of a grave disservice to the memory of a great jurist.
For his real and genuine sentiment on the matter in consonance with the imperative mandate of
controlling constitutional and international law concepts was categorically set forth by him, not as
an obiter but as the rationale of the decision, in People v. Acierto24 thus: "By the [Military Bases]
Agreement, it should be noted, the Philippine Government merely consents that the United States exercise
jurisdiction in certain cases. The consent was given purely as a matter of comity, courtesy, or expediency
over the bases as part of the Philippine territory or divested itself completely of jurisdiction over offenses
committed therein."
Nor did he stop there. He did stress further the full extent of our territorial jurisdiction in words that do
not admit of doubt. Thus: "This provision is not and can not on principle or authority be construed as a
limitation upon the rights of the Philippine Government. If anything, it is an emphatic recognition and
reaffirmation of Philippine sovereignty over the bases and of the truth that all jurisdictional rights granted
to the United States and not exercised by the latter are reserved by the Philippines for itself." 25
It is in the same spirit that we approach the specific question confronting us in this litigation. We hold, as
announced at the outset, that petitioner was liable for the income tax arising from a sale of his automobile
in the Clark Field Air Base, which clearly is and cannot otherwise be other than, within our territorial
jurisdiction to tax.
4. With the mist thus lifted from the situation as it truly presents itself, there is nothing that stands in the
way of an affirmance of the Court of Tax Appeals decision. No useful purpose would be served by
discussing the other assigned errors, petitioner himself being fully aware that if the Clark Air Force Base
is to be considered, as it ought to be and as it is, Philippine soil or territory, his claim for exemption from
the income tax due was distinguished only by its futility.

There is further satisfaction in finding ourselves unable to indulge petitioner in his plea for reversal. We
thus manifest fealty to a pronouncement made time and time again that the law does not look with favor
on tax exemptions and that he who would seek to be thus privileged must justify it by words too plain to
be mistaken and too categorical to be misinterpreted. 26 Petitioner had not done so. Petitioner cannot do so.
WHEREFORE, the decision of the Court of Tax Appeals of May 12, 1966 denying the refund of
P2,979.00 as the income tax paid by petitioner is affirmed. With costs against petitioner.
G.R. No. L-54908 January 22, 1990
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND
DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS, respondents.
G.R. No. 80041 January 22, 1990
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND
DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS, respondents..
REGALADO, J.:
These cases, involving the same issue being contested by the same parties and having originated from the
same factual antecedents generating the claims for tax credit of private respondents, the same were
consolidated by resolution of this Court dated May 31, 1989 and are jointly decided herein.
The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development Corporation
(hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation
(Mitsubishi, for brevity), a Japanese corporation licensed to engage in business in the Philippines, for
purposes of the projected expansion of the productive capacity of the former's mines in Toledo, Cebu.
Under said contract, Mitsubishi agreed to extend a loan to Atlas 'in the amount of $20,000,000.00, United
States currency, for the installation of a new concentrator for copper production. Atlas, in turn undertook
to sell to Mitsubishi all the copper concentrates produced from said machine for a period of fifteen (15)
years. It was contemplated that $9,000,000.00 of said loan was to be used for the purchase of the
concentrator machinery from Japan. 1
Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short)
obviously for purposes of its obligation under said contract. Its loan application was approved on May 26,
1970 in the sum of 4,320,000,000.00, at about the same time as the approval of its loan for
2,880,000,000.00 from a consortium of Japanese banks. The total amount of both loans is equivalent to
$20,000,000.00 in United States currency at the then prevailing exchange rate. The records in the Bureau
of Internal Revenue show that the approval of the loan by Eximbank to Mitsubishi was subject to the
condition that Mitsubishi would use the amount as a loan to Atlas and as a consideration for importing

copper concentrates from Atlas, and that Mitsubishi had to pay back the total amount of loan by
September 30, 1981. 2
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the
latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in the
amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the
National Internal Revenue Code, as amended by Presidential Decree No. 131, and duly remitted to the
Government. 3
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of
P1,971,595.01 be applied against their existing and future tax liabilities. Parenthetically, it was later noted
by respondent Court of Tax Appeals in its decision that on August 27, 1976, Mitsubishi executed a waiver
and
disclaimer
of
its
interest
in
the
claim for
tax credit
in favor
of
4
Atlas.
The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed a
petition for review with respondent court, docketed therein as CTA Case No. 2801. 5 The petition was
grounded on the claim that Mitsubishi was a mere agent of Eximbank, which is a financing institution
owned, controlled and financed by the Japanese Government. Such governmental status of Eximbank, if it
may be so called, is the basis for private repondents' claim for exemption from paying the tax on the
interest payments on the loan as earlier stated. It was further claimed that the interest payments on the
loan from the consortium of Japanese banks were likewise exempt because said loan supposedly came
from or were financed by Eximbank. The provision of the National Internal Revenue Code relied upon is
Section 29 (b) (7) (A), 6 which excludes from gross income:
(A) Income received from their investments in the Philippines in loans, stocks, bonds or
other domestic securities, or from interest on their deposits in banks in the Philippines by
(1) foreign governments, (2) financing institutions owned, controlled, or enjoying
refinancing from them, and (3) international or regional financing institutions established
by governments.
Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 6, 1977 but was later
reset upon manifestation of petitioner that the claim for tax credit of the alleged erroneous payment was
still being reviewed by the Appellate Division of the Bureau of Internal Revenue. The records show that
on November 16, 1976, the said division recommended to petitioner the approval of private respondent's
claim. However, before action could be taken thereon, respondent court scheduled the case for hearing on
September 30, 1977, during which trial private respondents presented their evidence while petitioner
submitted his case on the basis of the records of the Bureau of Internal Revenue and the pleadings. 7
On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit in
favor of Atlas in the amount of P1,971,595.01. Interestingly, the tax court held that petitioner admitted the
material averments of private respondents when he supposedly prayed "for judgment on the pleadings
without off-spring proof as to the truth of his allegations." 8 Furthermore, the court declared that all papers
and documents pertaining to the loan of 4,320,000,000.00 obtained by Mitsubishi from Eximbank show
that this was the same amount given to Atlas. It also observed that the money for the loans from the

consortium of private Japanese banks in the sum of 2,880,000,000.00 "originated" from Eximbank.
From these, respondent court concluded that the ultimate creditor of Atlas was Eximbank with Mitsubishi
acting as a mere "arranger or conduit through which the loans flowed from the creditor Export-Import
Bank of Japan to the debtor Atlas Consolidated Mining & Development Corporation." 9
A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an appeal to
this Court, docketed herein as G.R. No. 54908.
While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the
amount of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was withheld
and remitted to the Government. Atlas again filed a claim for tax credit with the petitioner, repeating the
same basis for exemption.
On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals docketed
as CTA Case No. 3015. Petitioner filed his answer thereto on August 14, 1979, and, in a letter to private
respondents dated November 12, 1979, denied said claim for tax credit for lack of factual or legal basis. 10
On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered
judgment ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for
reconsideration, filed on March 10, 1981, was denied by respondent court in a resolution dated September
7, 1987. A notice of appeal was filed on September 22, 1987 by petitioner with respondent court and a
petition for review was filed with this Court on December 19, 1987. Said later case is now before us as
G.R. No. 80041 and is consolidated with G.R. No. 54908.
The principal issue in both petitions is whether or not the interest income from the loans extended to Atlas
by Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A) of the tax code
and, therefore, exempt from withholding tax. Apropos thereto, the focal question is whether or not
Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor whose
investments in the Philippines on loans are exempt from taxes under the code.
Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that petitioner
should be deemed to have admitted the allegations of the private respondents when it submitted the case
on the basis of the pleadings and records of the bureau. There is nothing to indicate such admission on the
part of petitioner nor can we accept respondent court's pronouncement that petitioner did not offer to
prove the truth of its allegations. The records of the Bureau of Internal Revenue relevant to the case were
duly submitted and admitted as petitioner's supporting evidence. Additionally, a hearing was conducted,
with presentation of evidence, and the findings of respondent court were based not only on the pleadings
but on the evidence adduced by the parties. There could, therefore, not have been a judgment on the
pleadings, with the theorized admissions imputed to petitioner, as mistakenly held by respondent court.
Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to the highest
respect and can only be disturbed on appeal if they are not supported by substantial evidence or if there is
a showing of gross error or abuse on the part of the tax court. 11 Thus, ordinarily, we could give due
consideration to the holding of respondent court that Mitsubishi is a mere agent of Eximbank. Compelling
circumstances obtaining and proven in these cases, however, warrant a departure from said general rule

since we are convinced that there is a misapprehension of facts on the part of the tax court to the extent
that its conclusions are speculative in nature.
The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential
reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the
contract of loan and Atlas as the seller of the copper concentrates. From the categorical language used in
the document, one prestation was in consideration of the other. The specific terms and the reciprocal
nature of their obligations make it implausible, if not vacuous to give credit to the cavalier assertion that
Mitsubishi was a mere agent in said transaction.
Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi
stated in its loan application with the former was that the amount being procured would be used as a loan
to and in consideration for importing copper concentrates from Atlas. 12 Such an innocuous statement of
purpose could not have been intended for, nor could it legally constitute, a contract of agency. If that had
been the purpose as respondent court believes, said corporations would have specifically so stated,
especially considering their experience and expertise in financial transactions, not to speak of the amount
involved and its purchasing value in 1970.
A thorough analysis of the factual and legal ambience of these cases impels us to give weight to the
following arguments of petitioner:
The nature of the above contract shows that the same is not just a simple contract of loan.
It is not a mere creditor-debtor relationship. It is more of a reciprocal obligation between
ATLAS and MITSUBISHI where the latter shall provide the funds in the installation of a
new concentrator at the former's Toledo mines in Cebu, while ATLAS in consideration of
which, shall sell to MITSUBISHI, for a term of 15 years, the entire copper concentrate
that will be produced by the installed concentrator.
Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the
specified term was the consideration of the granting of the amount of $20 million to
ATLAS. MITSUBISHI, in order to fulfill its part of the contract, had to obtain funds.
Hence, it had to secure a loan or loans from other sources. And from what sources, it is
immaterial as far as ATLAS in concerned. In this case, MITSUBISHI obtained the $20
million from the EXIMBANK, of Japan and the consortium of Japanese banks financed
through the EXIMBANK, of Japan.
When MITSUBISHI therefore secured such loans, it was in its own independent capacity
as a private entity and not as a conduit of the consortium of Japanese banks or the
EXIMBANK of Japan. While the loans were secured by MITSUBISHI primarily "as a
loan to and in consideration for importing copper concentrates from ATLAS," the fact
remains that it was a loan by EXIMBANK of Japan to MITSUBISHI and not to ATLAS.
Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct
and separate contract from that entered into by MITSUBISHI and ATLAS. Surely, in the
latter contract, it is not EXIMBANK, that was intended to be benefited. It is

MITSUBISHI which stood to profit. Besides, the Loan and Sales Contract cannot be any
clearer. The only signatories to the same were MITSUBISHI and ATLAS. Nowhere in the
contract can it be inferred that MITSUBISHI acted for and in behalf of EXIMBANK, of
Japan nor of any entity, private or public, for that matter.
Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule that
when a contract of loan is completed, the money ceases to be the property of the former
owner and becomes the sole property of the obligor (Tolentino and Manio vs. Gonzales
Sy, 50 Phil. 558).
In the case at bar, when MITSUBISHI obtained the loan of $20 million from
EXIMBANK, of Japan, said amount ceased to be the property of the bank and became
the property of MITSUBISHI.
The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the sole creditor
of ATLAS, the former being the owner of the $20 million upon completion of its loan
contract with EXIMBANK of Japan.
The interest income of the loan paid by ATLAS to MITSUBISHI is therefore entirely
different from the interest income paid by MITSUBISHI to EXIMBANK, of Japan. What
was the subject of the 15% withholding tax is not the interest income paid by
MITSUBISHI to EXIMBANK, but the interest income earned by MITSUBISHI from the
loan to ATLAS. . . . 13
To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself,
does not appear to be suppletory or collateral to another contract and is, therefore, not to be distorted by
other considerations aliunde. The application for the loan was approved on May 20, 1970, or more than a
month after the contract between Mitsubishi and Atlas was entered into on April 17, 1970. It is true that
under the contract of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to and in
consideration for importing copper concentrates from Atlas, but all that this proves is the justification for
the loan as represented by Mitsubishi, a standard banking practice for evaluating the prospects of due
repayment. There is nothing wrong with such stipulation as the parties in a contract are free to agree on
such lawful terms and conditions as they see fit. Limiting the disbursement of the amount borrowed to a
certain person or to a certain purpose is not unusual, especially in the case of Eximbank which, aside from
protecting its financial exposure, must see to it that the same are in line with the provisions and objectives
of its charter.
Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it from
making loans except to Japanese individuals and corporations. We are not impressed. Not only is there a
failure to establish such submission by adequate evidence but it posits the unfair and unexplained
imputation that, for reasons subject only of surmise, said financing institution would deliberately
circumvent its own charter to accommodate an alien borrower through a manipulated subterfuge, but with
it as a principal and the real obligee.

The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank, assuming
the truth thereof, is too tenuous and conjectural to support the proposition that Mitsubishi is a mere
conduit. Furthermore, the remittance of the interest payments may also be logically viewed as an
arrangement in paying Mitsubishi's obligation to Eximbank. Whatever arrangement was agreed upon by
Eximbank and Mitsubishi as to the manner or procedure for the payment of the latter's obligation is their
own concern. It should also be noted that Eximbank's loan to Mitsubishi imposes interest at the rate of
75% per annum, while Mitsubishis contract with Atlas merely states that the "interest on the amount of
the loan shall be the actual cost beginning from and including other dates of releases against loan." 14
It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting
exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing
power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the party
claiming exemption to prove that it is in fact covered by the exemption so claimed, which onus petitioners
have failed to discharge. Significantly, private respondents are not even among the entities which, under
Section 29 (b) (7) (A) of the tax code, are entitled to exemption and which should indispensably be the
party in interest in this case.
Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad,
pragmatic analysis" alone without substantial supportive evidence, lest governmental operations suffer
due to diminution of much needed funds. Nor can we close this discussion without taking cognizance of
petitioner's warning, of pervasive relevance at this time, that while international comity is invoked in this
case on the nebulous representation that the funds involved in the loans are those of a foreign
government, scrupulous care must be taken to avoid opening the floodgates to the violation of our tax
laws. Otherwise, the mere expedient of having a Philippine corporation enter into a contract for loans or
other domestic securities with private foreign entities, which in turn will negotiate independently with
their governments, could be availed of to take advantage of the tax exemption law under discussion.
WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015, dated April
18, 1980 and January 15, 1981, respectively, are hereby REVERSED and SET ASIDE.
SO ORDERED.
G.R. No. 137377

December 18, 2001

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MARUBENI

CORPORATION, respondent.
PUNO, J.:
In this petition for review, the Commissioner of Internal Revenue assails the decision dated January 15,
1999 of the Court of Appeals in CA-G.R. SP No. 42518 which affirmed the decision dated July 29, 1996
of the Court of Tax Appeals in CTA Case No. 4109. The tax court ordered the Commissioner of Internal
Revenue to desist from collecting the 1985 deficiency income, branch profit remittance and contractor's
taxes from Marubeni Corporation after finding the latter to have properly availed of the tax amnesty
under Executive Orders Nos. 41 and 64, as amended.

Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws of
Japan. It is engaged in general import and export trading, financing and the construction business. It is
duly registered to engage in such business in the Philippines and maintains a branch office in Manila.
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of authority to
examine the books of accounts of the Manila branch office of respondent corporation for the fiscal year
ending March 1985. In the course of the examination, petitioner found respondent to have undeclared
income from two (2) contracts in the Philippines, both of which were completed in 1984. One of the
contracts was with the National Development Company (NDC) in connection with the construction and
installation of a wharf/port complex at the Leyte Industrial Development Estate in the municipality of
Isabel, province of Leyte. The other contract was with the Philippine Phosphate Fertilizer Corporation
(Philphos) for the construction of an ammonia storage complex also at the Leyte Industrial Development
Estate.
On March 1, 1986, petitioner's revenue examiners recommended an assessment for deficiency income,
branch profit remittance, contractor's and commercial broker's taxes. Respondent questioned this
assessment in a letter dated June 5, 1986.
On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from petitioner
assessing respondent several deficiency taxes. The assessed deficiency internal revenue taxes, inclusive of
surcharge and interest, were as follows:

I. DEFICIENCY INCOME TAX

FY ended March 31, 1985

Undeclared gross income (Philphos and

NDC construction projects)
P967,269,811.14

Less: Cost and expenses (50%)

483,634,905.57

Net undeclared income

483,634,905.57

Income tax due thereon

169,272,217.00

Add:

50% surcharge

84,636,108.50

20% int. p.a.fr. 7-15-85 to 8-15-86

36,675,646.90

TOTAL AMOUNT DUE

P290,583,972.40

II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX

FY ended March 31, 1985

Undeclared gross income from Philphos and

NDC construction projects
P483,634,905.57

Less: Income tax thereon

169,272,217.00

Amount subject to Tax

314,362,688.57

Tax due thereon

47,154,403.00

Add:

50% surcharge

23,577,201.50

20% int. p.a.fr. 4-26-85 to 8-15-86

12,305,360.66

TOTAL AMOUNT DUE

III. DEFICIENCY CONTRACTOR'S TAX

FY ended March 31, 1985

P83,036,965.16

Undeclared gross receipts/gross income from

Philphos and NDC construction projects
P967,269,811.14

Contractor's tax due thereon (4%)

38,690,792.00

Add:

50% surcharge for non-declaration

19,345,396.00

20% surcharge for late payment

9,672,698.00

Sub-total

67,708,886.00

Add:

17,854,739.46

20% int. p.a.fr. 4-21-85 to 8-15-86

TOTAL AMOUNT DUE

P85,563,625.46

IV. DEFICIENCY COMMERCIAL BROKER'S TAX

FY ended March 31, 1985

Undeclared share from commission income

(denominated as "subsidy from Home
Office")
P24,683,114.50

Tax due thereon

1,628,569.00

Add:

814,284.50

50% surcharge for non-declaration

20% surcharge for late payment

407,142.25

Sub-total

Add:

2,849,995.75

20% int. p.a.fr. 4-21-85 to 8-15-86

TOTAL AMOUNT DUE

751,539.98

P3,600,535.68

The 50% surcharge was imposed for your client's failure to report for tax purposes the aforesaid taxable
revenues while the 25% surcharge was imposed because of your client's failure to pay on time the above
deficiency percentage taxes.
xxx

xxx

xxx"1

Petitioner found that the NDC and Philphos contracts were made on a "turn-key" basis and that the gross
income from the two projects amounted to P967,269,811.14. Each contract was for a piece of work and
since the projects called for the construction and installation of facilities in the Philippines, the entire
income therefrom constituted income from Philippine sources, hence, subject to internal revenue taxes.
The assessment letter further stated that the same was petitioner's final decision and that if respondent
disagreed with it, respondent may file an appeal with the Court of Tax Appeals within thirty (30) days
from receipt of the assessment.
On September 26, 1986, respondent filed two (2) petitions for review with the Court of Tax Appeals. The
first petition, CTA Case No. 4109, questioned the deficiency income, branch profit remittance and
contractor's tax assessments in petitioner's assessment letter. The second, CTA Case No. 4110, questioned
the deficiency commercial broker's assessment in the same letter.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 2 declaring a one-time amnesty covering unpaid
income taxes for the years 1981 to 1985 was issued. Under this E.O., a taxpayer who wished to avail of
the income tax amnesty should, on or before October 31, 1986: (a) file a sworn statement declaring his
net worth as of December 31, 1985; (b) file a certified true copy of his statement declaring his net worth
as of December 31, 1980 on record with the Bureau of Internal Revenue (BIR), or if no such record
exists, file a statement of said net worth subject to verification by the BIR; and (c) file a return and pay a
tax equivalent to ten per cent (10%) of the increase in net worth from December 31, 1980 to December
31, 1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated October 30,
1986 and attached thereto its sworn statement of assets and liabilities and net worth as of Fiscal Year (FY)
1981 and FY 1986. The return was received by the BIR on November 3, 1986 and respondent paid the
amount of P2,891,273.00 equivalent to ten percent (10%) of its net worth increase between 1981 and
1986.
The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to December 5, 1986
by E.O. No. 54 dated November 4, 1986.

On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive Order (E.O.)
No. 64. In addition to the income tax amnesty granted by E.O. No. 41 for the years 1981 to 1985, E.O.
No. 64 3 included estate and donor's taxes under Title III and the tax on business under Chapter II, Title V
of the National Internal Revenue Code, also covering the years 1981 to 1985. E.O. No. 64 further
provided that the immunities and privileges under E.O. No. 41 were extended to the foregoing tax
liabilities, and the period within which the taxpayer could avail of the amnesty was extended to December
15, 1986. Those taxpayers who already filed their amnesty return under E.O. No. 41, as amended, could
avail themselves of the benefits, immunities and privileges under the new E.O. by filing an amended
return and paying an additional 5% on the increase in net worth to cover business, estate and donor's tax
liabilities.
The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95 dated
December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax amnesty return under the benefit of E.O. No.
64 and paid a further amount of P1,445,637.00 to the BIR equivalent to five percent (5%) of the increase
of its net worth between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals rendered a
decision in CTA Case No. 4109. The tax court found that respondent had properly availed of the tax
amnesty under E.O. Nos. 41 and 64 and declared the deficiency taxes subject of said case as deemed
cancelled and withdrawn. The Court of Tax Appeals disposed of as follows:
"WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED to
DESIST from collecting the 1985 deficiency taxes it had assessed against petitioner and the same
are deemed considered [sic] CANCELLED and WITHDRAWN by reason of the proper
availment by petitioner of the amnesty under Executive Order No. 41, as amended." 4
Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the Court of
Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the decision of the Court
of Tax Appeals. Hence, this recourse.
Before us, petitioner raises the following issues:
"(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of Tax
Appeals which ruled that herein respondent's deficiency tax liabilities were extinguished upon
respondent's availment of tax amnesty under Executive Orders Nos. 41 and 64.
(2) Whether or not respondent is liable to pay the income, branch profit remittance, and
contractor's taxes assessed by petitioner."5
The main controversy in this case lies in the interpretation of the exception to the amnesty coverage of
E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein income tax, branch profit
remittance tax and contractor's tax. These taxes are covered by the amnesties granted by E.O. Nos. 41 and
64. Petitioner claims, however, that respondent is disqualified from availing of the said amnesties because
the latter falls under the exception in Section 4 (b) of E.O. No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted thereunder, viz:

"Sec. 4. Exceptions. The following taxpayers may not avail themselves of the amnesty herein
granted:
a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;
b) Those with income tax cases already filed in Court as of the effectivity hereof;
c) Those with criminal cases involving violations of the income tax law already filed in court as
of the effectivity hereof;
d) Those that have withholding tax liabilities under the National Internal Revenue Code, as
amended, insofar as the said liabilities are concerned;
e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of the
effectivity hereof as a result of information furnished under Section 316 of the National Internal
Revenue Code, as amended;
f) Those with pending cases involving unexplained or unlawfully acquired wealth before the
Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and Transactions) and
Chapter Four (Malversation of Public Funds and Property) of the Revised Penal Code, as
amended."
Petitioner argues that at the time respondent filed for income tax amnesty on October 30, 1986, CTA Case
No. 4109 had already been filed and was pending; before the Court of Tax Appeals. Respondent therefore
fell under the exception in Section 4 (b) of E.O. No. 41.
Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and unambiguous. It
excepts from income tax amnesty those taxpayers "with income tax cases already filed in court as of the
effectivity hereof." The point of reference is the date of effectivity of E.O. No. 41. The filing of income
tax cases in court must have been made before and as of the date of effectivity of E.O. No. 41. Thus, for a
taxpayer not to be disqualified under Section 4 (b) there must have been no income tax cases filed in court
against him when E.O. No. 41 took effect. This is regardless of when the taxpayer filed for income tax
amnesty, provided of course he files it on or before the deadline for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985 deficiency income,
branch profit remittance and contractor's tax assessments was filed by respondent with the Court of Tax
Appeals on September 26, 1986. When E.O. No. 41 became effective on August 22, 1986, CTA Case No.
4109 had not yet been filed in court. Respondent corporation did not fall under the said exception in
Section 4 (b), hence, respondent was not disqualified from availing of the amnesty for income tax under
E.O. No. 41.
The same ruling also applies to the deficiency branch profit remittance tax assessment. A branch profit
remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II, Chapter III of the National
Internal Revenue Code.6 In the tax code, this tax falls under Title II on Income Tax. It is a tax on income.
Respondent therefore did not fall under the exception in Section 4 (b) when it filed for amnesty of its
deficiency branch profit remittance tax assessment.

The difficulty herein is with respect to the contractor's tax assessment and respondent's availment of the
amnesty under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41 by including estate and
donor's taxes and tax on business. Estate and donor's taxes fall under Title III of the Tax Code while
business taxes fall under Chapter II, Title V of the same. The contractor's tax is provided in Section 205,
Chapter II, Title V of the Tax Code; it is defined and imposed under the title on business taxes, and is
therefore a tax on business.7
When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to the coverage of
the amnesty for business, estate and donor's taxes. Instead, Section 8 of E.O. No. 64 provided that:
"Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or
inconsistent with this amendatory Executive Order shall remain in full force and effect."
By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or inconsistent with
the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the exceptions to
amnesty coverage also applied to E.O. No. 64. With respect to Section 4 (b) in particular, this provision
excepts from tax amnesty coverage a taxpayer who has "income tax cases already filed in court as of the
effectivity hereof." As to what Executive Order the exception refers to, respondent argues that because of
the words "income" and "hereof," they refer to Executive Order No. 41. 8
In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to refer to E.O.
No. 41 and its date of effectivity. The general rule is that an amendatory act operates
prospectively.9 While an amendment is generally construed as becoming a part of the original act as if it
had always been contained therein, 10 it may not be given a retroactive effect unless it is so provided
expressly or by necessary implication and no vested right or obligations of contract are thereby
impaired.11
There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of E.O. No.
41, the original issuance. Neither is it necessarily implied from E.O. No. 64 that it or any of its provisions
should apply retroactively. Executive Order No. 64 is a substantive amendment of E.O. No. 41. It does
not merely change provisions in E.O. No. 41. It supplements the original act by adding other taxes not
covered in the first.12 It has been held that where a statute amending a tax law is silent as to whether it
operates retroactively, the amendment will not be given a retroactive effect so as to subject to tax past
transactions not subject to tax under the original act. 13 In an amendatory act, every case of doubt must be
resolved against its retroactive effect. 14
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or
intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of
evasion or violation of a revenue or tax law.15 It partakes of an absolute forgiveness or waiver by the
government of its right to collect what is due it and to give tax evaders who wish to relent a chance to
start with a clean slate. 16 A tax amnesty, much like a tax exemption, is never favored nor presumed in
law.17 If granted, the terms of the amnesty, like that of a tax exemption, must be construed strictly against
the taxpayer and liberally in favor of the taxing authority.18For the right of taxation is inherent in
government. The State cannot strip itself of the most essential power of taxation by doubtful words. He
who claims an exemption (or an amnesty) from the common burden must justify his claim by the clearest
grant of organic or state law. It cannot be allowed to exist upon a vague implication. If a doubt arises as to
the intent of the legislature, that doubt must be resolved in favor of the state. 19
In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should therefore be
construed strictly against the taxpayer. The term "income tax cases" should be read as to refer to estate

and donor's taxes and taxes on business while the word "hereof," to E.O. No. 64. Since Executive Order
No. 64 took effect on November 17, 1986, consequently, insofar as the taxes in E.O. No. 64 are
concerned, the date of effectivity referred to in Section 4 (b) of E.O. No. 41 should be November 17,
1986.
Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect on
November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By the time respondent
filed its supplementary tax amnesty return on December 15, 1986, respondent already fell under the
exception in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified from availing of the business tax
amnesty granted therein.
It is respondent's other argument that assuming it did not validly avail of the amnesty under the two
Executive Orders, it is still not liable for the deficiency contractor's tax because the income from the
projects came from the "Offshore Portion" of the contracts. The two contracts were divided into two parts,
i.e., the Onshore Portion and the Offshore Portion. All materials and equipment in the contract under the
"Offshore Portion" were manufactured and completed in Japan, not in the Philippines, and are therefore
not subject to Philippine taxes.
Before going into respondent's arguments, it is necessary to discuss the background of the two contracts,
examine their pertinent provisions and implementation.
The NDC and Philphos are two government corporations. In 1980, the NDC, as the corporate investment
arm of the Philippine Government, established the Philphos to engage in the large-scale manufacture of
phosphatic fertilizer for the local and foreign markets. 20 The Philphos plant complex which was
envisioned to be the largest phosphatic fertilizer operation in Asia, and among the largest in the world,
covered an area of 180 hectares within the 435-hectare Leyte Industrial Development Estate in the
municipality of Isabel, province of Leyte.
In 1982, the NDC opened for public bidding a project to construct and install a modern, reliable, efficient
and integrated wharf/port complex at the Leyte Industrial Development Estate. The wharf/port complex
was intended to be one of the major facilities for the industrial plants at the Leyte Industrial Development
Estate. It was to be specifically adapted to the site for the handling of phosphate rock, bagged or bulk
fertilizer products, liquid materials and other products of Philphos, the Philippine Associated Smelting
and Refining Corporation (Pasar),21and other industrial plants within the Estate. The bidding was
participated in by Marubeni Head Office in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered into an
agreement entitled "Turn-Key Contract for Leyte Industrial Estate Port Development Project Between
National Development Company and Marubeni Corporation." 22 The Port Development Project would
consist of a wharf, berths, causeways, mechanical and liquids unloading and loading systems, fuel oil
depot, utilities systems, storage and service buildings, offsite facilities, harbor service vessels,
navigational aid system, fire-fighting system, area lighting, mobile equipment, spare parts and other
related facilities.23 The scope of the works under the contract covered turn-key supply, which included
grants of licenses and the transfer of technology and know-how,24 and:
". . . the design and engineering, supply and delivery, construction, erection and installation,
supervision, direction and control of testing and commissioning of the Wharf-Port Complex as set
forth in Annex I of this Contract, as well as the coordination of tie-ins at boundaries and schedule
of the use of a part or the whole of the Wharf/Port Complex through the Owner, with the design
and construction of other facilities around the site. The scope of works shall also include any

activity, work and supply necessary for, incidental to or appropriate under present international
industrial port practice, for the timely and successful implementation of the object of this
Contract, whether or not expressly referred to in the abovementioned Annex I." 25
The contract price for the wharf/port complex was 12,790,389,000.00 and P44,327,940.00. In the
contract, the price in Japanese currency was broken down into two portions: (1) the Japanese Yen Portion
I; (2) the Japanese Yen Portion II, while the price in Philippine currency was referred to as the Philippine
Pesos Portion. The Japanese Yen Portions I and II were financed in two (2) ways: (a) by yen credit loan
provided by the Overseas Economic Cooperation Fund (OECF); and (b) by supplier's credit in favor of
Marubeni from the Export-Import Bank of Japan. The OECF is a Fund under the Ministry of Finance of
Japan extended by the Japanese government as assistance to foreign governments to promote economic
development.26 The OECF extended to the Philippine Government a loan of 7,560,000,000.00 for the
Leyte Industrial Estate Port Development Project and authorized the NDC to implement the same. 27 The
other type of financing is an indirect type where the supplier, i.e., Marubeni, obtained a loan from the
Export-Import Bank of Japan to advance payment to its sub-contractors. 28
Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos Portion were
further broken down and subdivided according to the materials, equipment and services rendered on the
project. The price breakdown and the corresponding materials, equipment and services were contained in
a list attached as Annex III to the contract. 29
A few months after execution of the NDC contract, Philphos opened for public bidding a project to
construct and install two ammonia storage tanks in Isabel. Like the NDC contract, it was Marubeni Head
Office in Japan that participated in and won the bidding. Thus, on May 2, 1982, Philphos and respondent
corporation entered into an agreement entitled "Turn-Key Contract for Ammonia Storage Complex
Between Philippine Phosphate Fertilizer Corporation and Marubeni Corporation." 30 The object of the
contract was to establish and place in operating condition a modern, reliable, efficient and integrated
ammonia storage complex adapted to the site for the receipt and storage of liquid anhydrous
ammonia31 and for the delivery of ammonia to an integrated fertilizer plant adjacent to the storage
complex and to vessels at the dock. 32 The storage complex was to consist of ammonia storage tanks,
refrigeration system, ship unloading system, transfer pumps, ammonia heating system, fire-fighting
system, area lighting, spare parts, and other related facilities. 33 The scope of the works required for the
completion of the ammonia storage complex covered the supply, including grants of licenses and transfer
of technology and know-how,34 and:
". . . the design and engineering, supply and delivery, construction, erection and installation,
supervision, direction and control of testing and commissioning of the Ammonia Storage
Complex as set forth in Annex I of this Contract, as well as the coordination of tie-ins at
boundaries and schedule of the use of a part or the whole of the Ammonia Storage Complex
through the Owner with the design and construction of other facilities at and around the Site. The
scope of works shall also include any activity, work and supply necessary for, incidental to or
appropriate under present international industrial practice, for the timely and successful
implementation of the object of this Contract, whether or not expressly referred to in the
abovementioned Annex I."35
The contract price for the project was 3,255,751,000.00 and P17,406,000.00. Like the NDC contract, the
price was divided into three portions. The price in Japanese currency was broken down into the Japanese
Yen Portion I and Japanese Yen Portion II while the price in Philippine currency was classified as the
Philippine Pesos Portion. Both Japanese Yen Portions I and II were financed by supplier's credit from the
Export-Import Bank of Japan. The price stated in the three portions were further broken down into the

corresponding materials, equipment and services required for the project and their individual prices. Like
the NDC contract, the breakdown in the Philphos contract is contained in a list attached to the latter as
Annex III.36
The division of the price into Japanese Yen Portions I and II and the Philippine Pesos Portion under the
two contracts corresponds to the two parts into which the contracts were classified the Foreign
Offshore Portion and the Philippine Onshore Portion. In both contracts, the Japanese Yen Portion I
corresponds to the Foreign Offshore Portion. 37 Japanese Yen Portion II and the Philippine Pesos Portion
correspond to the Philippine Onshore Portion.38
Under the Philippine Onshore Portion, respondent does not deny its liability for the contractor's tax on the
income from the two projects. In fact respondent claims, which petitioner has not denied, that the income
it derived from the Onshore Portion of the two projects had been declared for tax purposes and the taxes
thereon already paid to the Philippine government. 39 It is with regard to the gross receipts from the
Foreign Offshore Portion of the two contracts that the liabilities involved in the assessments subject of
this case arose. Petitioner argues that since the two agreements are turn-key, 40 they call for the supply of
both materials and services to the client, they are contracts for a piece of work and are indivisible. The
situs of the two projects is in the Philippines, and the materials provided and services rendered were all
done and completed within the territorial jurisdiction of the Philippines. 41 Accordingly, respondent's entire
receipts from the contracts, including its receipts from the Offshore Portion, constitute income from
Philippine sources. The total gross receipts covering both labor and materials should be subjected to
contractor's tax in accordance with the ruling in Commissioner of Internal Revenue v. Engineering
Equipment & Supply Co.42
A contractor's tax is imposed in the National Internal Revenue Code (NIRC) as follows:
"Sec. 205. Contractors, proprietors or operators of dockyards, and others. A contractor's tax of
four percent of the gross receipts is hereby imposed on proprietors or operators of the following
business establishments and/or persons engaged in the business of selling or rendering the
following services for a fee or compensation:
(a) General engineering, general building and specialty contractors, as defined in
Republic Act No. 4566;
xxx

xxx

xxx

(q) Other independent contractors. The term "independent contractors" includes persons
(juridical or natural) not enumerated above (but not including individuals subject to the
occupation tax under the Local Tax Code) whose activity consists essentially of the sale
of all kinds of services for a fee regardless of whether or not the performance of the
service calls for the exercise or use of the physical or mental faculties of such contractors
or their employees. It does not include regional or area headquarters established in the
Philippines by multinational corporations, including their alien executives, and which
headquarters do not earn or derive income from the Philippines and which act as
supervisory, communications and coordinating centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region.
xxx

xxx

xxx43

Under the afore-quoted provision, an independent contractor is a person whose activity consists
essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance of the
service calls for the exercise or use of the physical or mental faculties of such contractors or their
employees. The word "contractor" refers to a person who, in the pursuit of independent business,
undertakes to do a specific job or piece of work for other persons, using his own means and methods
without submitting himself to control as to the petty details. 44
A contractor's tax is a tax imposed upon the privilege of engaging in business. 45 It is generally in the
nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on
products;46 and is directly collectible from the person exercising the privilege. 47 Being an excise tax, it can
be levied by the taxing authority only when the acts, privileges or business are done or performed within
the jurisdiction of said authority.48 Like property taxes, it cannot be imposed on an occupation or privilege
outside the taxing district.49
In the case at bar, it is undisputed that respondent was an independent contractor under the terms of the
two subject contracts. Respondent, however, argues that the work therein were not all performed in the
Philippines because some of them were completed in Japan in accordance with the provisions of the
contracts.
An examination of Annex III to the two contracts reveals that the materials and equipment to be made and
the works and services to be performed by respondent are indeed classified into two. The first part,
entitled "Breakdown of Japanese Yen Portion I" provides:
"Japanese Yen Portion I of the Contract Price has been subdivided according to discrete portions
of materials and equipment which will be shipped to Leyte as units and lots. This subdivision of
price is to be used by owner to verify invoice for Progress Payments under Article 19.2.1 of the
Contract. The agreed subdivision of Japanese Yen Portion I is as follows:
xxx

xxx

xxx50

The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese Yen Portion II
and the Philippine Pesos Portion enumerate other materials and equipment and the construction and
installation work on the project. In other words, the supplies for the project are listed under Portion I
while labor and other supplies are listed under Portion II and the Philippine Pesos Portion. Mr. Takeshi
Hojo, then General Manager of the Industrial Plant Section II of the Industrial Plant Department of
Marubeni Corporation in Japan who supervised the implementation of the two projects, testified that all
the machines and equipment listed under Japanese Yen Portion I in Annex III were manufactured in
Japan.51 The machines and equipment were designed, engineered and fabricated by Japanese firms subcontracted by Marubeni from the list of sub-contractors in the technical appendices to each
contract.52 Marubeni sub-contracted a majority of the equipment and supplies to Kawasaki Steel
Corporation which did the design, fabrication, engineering and manufacture thereof; 53 Yashima & Co.
Ltd. which manufactured the mobile equipment; Bridgestone which provided the rubber fenders of the
mobile equipment;54 and B.S. Japan for the supply of radio equipment. 55 The engineering and design
works made by Kawasaki Steel Corporation included the lay-out of the plant facility and calculation of
the design in accordance with the specifications given by respondent. 56 All sub-contractors and
manufacturers are Japanese corporations and are based in Japan and all engineering and design works
were performed in that country.57
The materials and equipment under Portion I of the NDC Port Project is primarily composed of two (2)
sets of ship unloader and loader; several boats and mobile equipment. 58 The ship unloader unloads bags or

bulk products from the ship to the port while the ship loader loads products from the port to the ship. The
unloader and loader are big steel structures on top of each is a large crane and a compartment for
operation of the crane. Two sets of these equipment were completely manufactured in Japan according to
the specifications of the project. After manufacture, they were rolled on to a barge and transported to
Isabel, Leyte.59 Upon reaching Isabel, the unloader and loader were rolled off the barge and pulled to the
pier to the spot where they were installed. 60 Their installation simply consisted of bolting them onto the
pier.61
Like the ship unloader and loader, the three tugboats and a line boat were completely manufactured in
Japan. The boats sailed to Isabel on their own power. The mobile equipment, consisting of three to four
sets of tractors, cranes and dozers, trailers and forklifts, were also manufactured and completed in Japan.
They were loaded on to a shipping vessel and unloaded at the Isabel Port. These pieces of equipment were
all on wheels and self-propelled. Once unloaded at the port, they were ready to be driven and perform
what they were designed to do.62
In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex III to the NDC
contract. These other items consist of supplies and materials for five (5) berths, two (2) roads, a causeway,
a warehouse, a transit shed, an administration building and a security building. Most of the materials
consist of steel sheets, steel pipes, channels and beams and other steel structures, navigational and
communication as well as electrical equipment. 63
In connection with the Philphos contract, the major pieces of equipment supplied by respondent were the
ammonia storage tanks and refrigeration units. 64 The steel plates for the tank were manufactured and cut
in Japan according to drawings and specifications and then shipped to Isabel. Once there, respondent's
employees put the steel plates together to form the storage tank. As to the refrigeration units, they were
completed and assembled in Japan and thereafter shipped to Isabel. The units were simply installed there.
65 Annex III to the Philphos contract lists down under the Japanese Yen Portion I the materials for the
ammonia storage tank, incidental equipment, piping facilities, electrical and instrumental apparatus,
foundation material and spare parts.
All the materials and equipment transported to the Philippines were inspected and tested in Japan prior to
shipment in accordance with the terms of the contracts. 66 The inspection was made by representatives of
respondent corporation, of NDC and Philphos. NDC, in fact, contracted the services of a private
consultancy firm to verify the correctness of the tests on the machines and equipment 67 while Philphos
sent a representative to Japan to inspect the storage equipment. 68
The sub-contractors of the materials and equipment under Japanese Yen Portion I were all paid by
respondent in Japan. In his deposition upon oral examination, Kenjiro Yamakawa, formerly the Assistant
General Manager and Manager of the Steel Plant Marketing Department, Engineering & Construction
Division, Kawasaki Steel Corporation, testified that the equipment and supplies for the two projects
provided by Kawasaki under Japanese Yen Portion I were paid by Marubeni in Japan. Receipts for such
payments were duly issued by Kawasaki in Japanese and English. 69 Yashima & Co. Ltd. and B.S. Japan
were likewise paid by Marubeni in Japan.70
Between Marubeni and the two Philippine corporations, payments for all materials and equipment under
Japanese Yen Portion I were made to Marubeni by NDC and Philphos also in Japan. The NDC, through
the Philippine National Bank, established letters of credit in favor of respondent through the Bank of
Tokyo. The letters of credit were financed by letters of commitment issued by the OECF with the Bank of
Tokyo. The Bank of Tokyo, upon respondent's submission of pertinent documents, released the amount in

the letters of credit in favor of respondent and credited the amount therein to respondent's account within
the same bank.71
Clearly, the service of "design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning, coordination. . . " 72 of the
two projects involved two taxing jurisdictions. These acts occurred in two countries Japan and the
Philippines. While the construction and installation work were completed within the Philippines, the
evidence is clear that some pieces of equipment and supplies were completely designed and engineered in
Japan. The two sets of ship unloader and loader, the boats and mobile equipment for the NDC project and
the ammonia storage tanks and refrigeration units were made and completed in Japan. They were already
finished products when shipped to the Philippines. The other construction supplies listed under the
Offshore Portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus, these
were not finished products when shipped to the Philippines. They, however, were likewise fabricated and
manufactured by the sub-contractors in Japan. All services for the design, fabrication, engineering and
manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in
Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore
not subject to contractor's tax.
Contrary to petitioner's claim, the case of Commissioner of Internal Revenue v. Engineering Equipment &
Supply Co73 is not in point. In that case, the Court found that Engineering Equipment, although an
independent contractor, was not engaged in the manufacture of air conditioning units in the Philippines.
Engineering Equipment designed, supplied and installed centralized air-conditioning systems for clients
who contracted its services. Engineering, however, did not manufacture all the materials for the airconditioning system. It imported some items for the system it designed and installed. 74 The issues in that
case dealt with services performed within the local taxing jurisdiction. There was no foreign element
involved in the supply of materials and services.
With the foregoing discussion, it is unnecessary to discuss the other issues raised by the parties.
IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is affirmed.
SO ORDERED.
Davide, Jr., C .J ., Kapunan, Pardo, and Ynares-Santiago, JJ ., concur.