TAX I FULL TEXTS for 18 February 2017

COMMISSIONER OF INTERNAL G.R. No. 159647

REVENUE,
Petitioner, Present: The Facts
Panganiban, J.,
Chairman, The CA narrated the antecedent facts as follows:
Sandoval-Gutierrez,
- versus - Corona, Respondent is a domestic corporation primarily engaged in retailing of medicines and other
Carpio Morales, and pharmaceutical products. In 1996, it operated six (6) drugstores under the business name and
Garcia, JJ style Mercury Drug.
CENTRAL LUZON DRUG Promulgated:
CORPORATION, From January to December 1996, respondent granted twenty (20%) percent sales discount to
Respondent. April 15, 2005 qualified senior citizens on their purchases of medicines pursuant to Republic Act No. [R.A.] 7432
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x and its Implementing Rules and Regulations. For the said period, the amount allegedly
representing the 20% sales discount granted by respondent to qualified senior citizens
totaled P904,769.00.
DECISION
On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year 1996 declaring
therein that it incurred net losses from its operations.
PANGANIBAN, J.:
On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit in the amount
of P904,769.00 allegedly arising from the 20% sales discount granted by respondent to qualified
T he 20 percent discount required by the law to be given to senior citizens in compliance with [R.A.] 7432. Unable to obtain affirmative response from
senior citizens is a tax credit, not merely a tax deduction from the petitioner, respondent elevated its claim to the Court of Tax Appeals [(CTA or Tax Court)] via a
gross income or gross sale of the establishment concerned. A tax Petition for Review.
credit is used by a private establishment only after the tax has been
computed; a tax deduction, before the tax is computed. RA 7432 On February 12, 2001, the Tax Court rendered a Decision[5] dismissing respondents Petition for
unconditionally grants a tax credit to all covered entities. Thus, the lack of merit. In said decision, the [CTA] justified its ruling with the following ratiocination:
provisions of the revenue regulation that withdraw or modify such
grant are void. Basic is the rule that administrative regulations x x x, if no tax has been paid to the government, erroneously or illegally, or if no amount is due
cannot amend or revoke the law. and collectible from the taxpayer, tax refund or tax credit is unavailing. Moreover, whether the
recovery of the tax is made by means of a claim for refund or tax credit, before recovery is
The Case allowed[,] it must be first established that there was an actual collection and receipt by the
government of the tax sought to be recovered. x x x.
Before us is a Petition for Review[1] under Rule 45 of the Rules of xxxxxxxxx
Court, seeking to set aside the August 29, 2002 Decision[2] and the
August 11, 2003 Resolution[3] of the Court of Appeals (CA) in CA-GR Prescinding from the above, it could logically be deduced that tax credit is premised on the
SP No. 67439. The assailed Decision reads as follows: existence of tax liability on the part of taxpayer. In other words, if there is no tax liability, tax
credit is not available.
WHEREFORE, premises considered, the Resolution appealed from
is AFFIRMED in toto. No costs.[4] Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed resolution,[6] granted
respondents motion for reconsideration and ordered herein petitioner to issue a Tax Credit
Certificate in favor of respondent citing the decision of the then Special Fourth Division of [the CA]
The assailed Resolution denied petitioners Motion for in CA G.R. SP No. 60057 entitled Central [Luzon] Drug Corporation vs. Commissioner of Internal
Reconsideration. Revenue promulgated on May 31, 2001, to wit:
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However, Sec. 229 clearly does not apply in the instant case because
the tax sought to be refunded or credited by petitioner was not
erroneously paid or illegally collected. We take exception to the CTAs
sweeping but unfounded statement that both tax refund and tax
credit are modes of recovering taxes which are either erroneously or
illegally paid to the government. Tax refunds or credits do not
exclusively pertain to illegally collected or erroneously paid taxes as
they may be other circumstances where a refund is warranted. The
tax refund provided under Section 229 deals exclusively with illegally
collected or erroneously paid taxes but there are other possible
situations, such as the refund of excess estimated corporate
quarterly income tax paid, or that of excess input tax paid by a VAT-
registered person, or that of excise tax paid on goods locally
produced or manufactured but actually exported. The standards and
mechanics for the grant of a refund or credit under these situations
are different from that under Sec. 229. Sec. 4[.a)] of R.A. 7432, is yet
another instance of a tax credit and it does not in any way refer to
illegally collected or erroneously paid taxes, x x x.[7]
Ruling of the Court of Appeals
The CA affirmed in toto the Resolution of the Court of Tax Appeals
(CTA) ordering petitioner to issue a tax credit certificate in favor of
respondent in the reduced amount of P903,038.39. It reasoned that
Republic Act No. (RA) 7432 required neither a tax liability nor a
payment of taxes by private establishments prior to the availment of
a tax credit. Moreover, such credit is not tantamount to an
unintended benefit from the law, but rather a just compensation for
the taking of private property for public use.
Hence this Petition.[8]
The Issues
Petitioner raises the following issues for our consideration:
Whether the Court of Appeals erred in holding that respondent may
claim the 20% sales discount as a tax credit instead of as a
deduction from gross income or gross sales.
Whether the Court of Appeals erred in holding that respondent is
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entitled to a refund.[9]
These two issues may be summed up in only one: whether respondent, despite incurring a net
loss, may still claim the 20 percent sales discount as a tax credit.
The Courts Ruling
The Petition is not meritorious.
Sole Issue:
Claim of 20 Percent Sales Discount
as Tax Credit Despite Net Loss
Section 4a) of RA 7432[10] grants to senior citizens the privilege of obtaining a 20 percent
discount on their purchase of medicine from any private establishment in the country.[11] The
latter may then claim the cost of the discount as a tax credit.[12] But can such credit be claimed,
even though an establishment operates at a loss?
We answer in the affirmative.
Tax Credit versus
Tax Deduction
Although the term is not specifically defined in our Tax Code,[13] tax credit generally refers to an
amount that is subtracted directly from ones total tax liability.[14] It is an allowance against the
tax itself[15] or a deduction from what is owed[16] by a taxpayer to the government. Examples
of tax credits are withheld taxes, payments of estimated tax, and investment tax credits.[17]
Tax credit should be understood in relation to other tax concepts. One of these is tax deduction --
defined as a subtraction from income for tax purposes,[18] or an amount that is allowed by law to
reduce income prior to [the] application of the tax rate to compute the amount of tax which is
due.[19] An example of a tax deduction is any of the allowable deductions enumerated in Section
34[20] of the Tax Code.
A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due,
including -- whenever applicable -- the income tax that is determined after applying the
corresponding tax rates to taxable income.[21] A tax deduction, on the other, reduces the income
that is subject to tax[22] in order to arrive at taxable income.[23] To think of the former as the
latter is to avoid, if not entirely confuse, the issue. A tax credit is used only after the tax has been
computed; a tax deduction, before.
Tax Liability Required
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for Tax Credit
Since a tax credit is used to reduce directly the tax that is due, there
ought to be a tax liability before the tax credit can be applied.
Without that liability, any tax credit application will be useless. There
will be no reason for deducting the latter when there is, to begin
with, no existing obligation to the government. However, as will be
presented shortly, the existence of a tax credit or its grant by law is
not the same as the availment or use of such credit. While the grant
is mandatory, the availment or use is not.
If a net loss is reported by, and no other taxes are currently due
from, a business establishment, there will obviously be no tax
liability against which any tax credit can be applied.[24] For the
establishment to choose the immediate availment of a tax credit will
be premature and impracticable. Nevertheless, the irrefutable fact
remains that, under RA 7432, Congress has granted without
conditions a tax credit benefit to all covered establishments.
Although this tax credit benefit is available, it need not be used by
losing ventures, since there is no tax liability that calls for its
application. Neither can it be reduced to nil by the quick yet callow
stroke of an administrative pen, simply because no reduction of
taxes can instantly be effected. By its nature, the tax credit may still
be deducted from a future, not a present, tax liability, without which
it does not have any use. In the meantime, it need not move. But it
breathes.
Prior Tax Payments Not
Required for Tax Credit
While a tax liability is essential to the availment or use of any tax
credit, prior tax payments are not. On the contrary, for the existence
or grant solely of such credit, neither a tax liability nor a prior tax
payment is needed. The Tax Code is in fact replete with provisions
granting or allowing tax credits, even though no taxes have been
previously paid.
For example, in computing the estate tax due, Section 86(E) allows
a tax credit -- subject to certain limitations -- for estate taxes paid to
a foreign country. Also found in Section 101(C) is a similar provision
for donors taxes -- again when paid to a foreign country -- in
computing for the donors tax due. The tax credits in both instances
allude to the prior payment of taxes, even if not made to our
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government.
Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions --
whether or not subject to the VAT -- is also allowed a tax credit that includes a ratable portion of
any input tax not directly attributable to either activity. This input tax may either be the VAT on
the purchase or importation of goods or services that is merely due from -- not necessarily paid
by -- such VAT-registered person in the course of trade or business; or the transitional input tax
determined in accordance with Section 111(A). The latter type may in fact be an amount
equivalent to only eight percent of the value of a VAT-registered persons beginning inventory of
goods, materials and supplies, when such amount -- as computed -- is higher than the actual VAT
paid on the said items.[25] Clearly from this provision, the tax credit refers to an input tax that is
either due only or given a value by mere comparison with the VAT actually paid -- then later
prorated. No tax is actually paid prior to the availment of such credit.
In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed.
For the purchase of primary agricultural products used as inputs -- either in the processing of
sardines, mackerel and milk, or in the manufacture of refined sugar and cooking oil -- and for the
contract price of public work contracts entered into with the government, again, no prior tax
payments are needed for the use of the tax credit.
More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may,
under Section 112(A), apply for the issuance of a tax credit certificate for the amount of
creditable input taxes merely due -- again not necessarily paid to -- the government and
attributable to such sales, to the extent that the input taxes have not been applied against output
taxes.[26] Where a taxpayer
is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales, the
amount of creditable input taxes due that are not directly and entirely attributable to any one of
these transactions shall be proportionately allocated on the basis of the volume of sales. Indeed,
in availing of such tax credit for VAT purposes, this provision -- as well as the one earlier
mentioned -- shows that the prior payment of taxes is not a requisite.
It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax
credit allowed, even though no prior tax payments are not required. Specifically, in this provision,
the imposition of a final withholding tax rate on cash and/or property dividends received by a
nonresident foreign corporation from a domestic corporation is subjected to the condition that a
foreign tax credit will be given by the domiciliary country in an amount equivalent to taxes that
are merely deemed paid.[27] Although true, this provision actually refers to the tax credit as
a condition only for the imposition of a lower tax rate, not as a deduction from the corresponding
tax liability. Besides, it is not our government but the domiciliary country that credits against the
income tax payable to the latter by the foreign corporation, the tax to be foregone or spared.[28]
In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits,
against the income tax imposable under Title II, the amount of income taxes merely incurred --
not necessarily paid -- by a domestic corporation during a taxable year in any foreign country.
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Moreover, Section 34(C)(5) provides that for such taxes incurred but
not paid, a tax credit may be allowed, subject to the condition
precedent that the taxpayer shall simply give a bond with sureties
satisfactory to and approved by petitioner, in such sum as may be
required; and further conditioned upon payment by the taxpayer of
any tax found due, upon petitioners redetermination of it.
In addition to the above-cited provisions in the Tax Code, there are
also tax treaties and special laws that grant or allow tax credits,
even though no prior tax payments have been made.
Under the treaties in which the tax credit method is used as a relief
to avoid double taxation, income that is taxed in the state of
source is also taxable in the state of residence, but the tax paid in
the former is merely allowed as a credit against the tax levied in the
latter.[29] Apparently, payment is made to the state of source, not
the state of residence. No tax, therefore, has been previously paid to
the latter.
Under special laws that particularly affect businesses, there can also
be tax credit incentives. To illustrate, the incentives provided for in
Article 48 of Presidential Decree No. (PD) 1789, as amended by
Batas Pambansa Blg. (BP) 391, include tax credits equivalent to
either five percent of the net value earned, or five or ten percent of
the net local content of exports.[30] In order to avail of such credits
under the said law and still achieve its objectives, no prior tax
payments are necessary.
From all the foregoing instances, it is evident that prior tax payments
are not indispensable to the availment of a tax credit. Thus, the CA
correctly held that the availment under RA 7432 did not require prior
tax payments by private establishments concerned.[31] However,
we do not agree with its finding[32] that the carry-over of tax
credits under the said special law to succeeding taxable periods, and
even their application against internal revenue taxes, did not
necessitate the existence of a tax liability.
The examples above show that a tax liability is certainly important in
the availment or use, not the existence or grant, of a tax credit.
Regarding this matter, a private establishment reporting a net loss in
its financial statements is no different from another that presents
a net income. Both are entitled to the tax credit provided for under
RA 7432, since the law itself accords that unconditional benefit.
However, for the losing establishment to immediately apply such
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credit, where no tax is due, will be an improvident usance.
Sections 2.i and 4 of Revenue
Regulations No. 2-94 Erroneous
RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts
they grant.[33] In turn, the Implementing Rules and Regulations, issued pursuant thereto, provide
the procedures for its availment.[34] To deny such credit, despite the plain mandate of the law
and the regulations carrying out that mandate, is indefensible.
First, the definition given by petitioner is erroneous. It refers to tax credit as the amount
representing the 20 percent discount that shall be deducted by the said establishments from
their gross income for income tax purposes and from their gross sales for value-added tax or
other percentage tax purposes.[35] In ordinary business language, the tax credit represents the
amount of such discount. However, the manner by which the discount shall be credited against
taxes has not been clarified by the revenue regulations.
By ordinary acceptation, a discount is an abatement or reduction made from the gross amount or
value of anything.[36] To be more precise, it is in business parlance a deduction or lowering of an
amount of money;[37] or a reduction from the full amount or value of something, especially a
price.[38] In business there are many kinds of discount, the most common of which is that
affecting the income statement[39] or financial report upon which the income tax is based.
Business Discounts
Deducted from Gross Sales
A cash discount, for example, is one granted by business establishments to credit customers for
their prompt payment.[40] It is a reduction in price offered to the purchaser if payment is made
within a shorter period of time than the maximum time specified.[41] Also referred to as a sales
discount on the part of the seller and a purchase discount on the part of the buyer, it may be
expressed in such
terms as 5/10, n/30.[42]
A quantity discount, however, is a reduction in price allowed for purchases made in large
quantities, justified by savings in packaging, shipping, and handling.[43] It is also called
a volume or bulk discount.[44]
A percentage reduction from the list price x x x allowed by manufacturers to wholesalers and by
wholesalers to retailers[45] is known as a trade discount. No entry for it need be made in the
manual or computerized books of accounts, since the purchase or sale is already valued at the
net price actually charged the buyer.[46] The purpose for the discount is to encourage trading or
increase sales, and the prices at which the purchased goods may be resold are also suggested.
[47] Even a chain discount -- a series of discounts from one list price -- is recorded at net.[48]
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Finally, akin to a trade discount is a functional discount. It is a
suppliers price discount given to a purchaser based on the [latters]
role in the [formers] distribution system.[49] This role usually
involves warehousing or advertising.
Based on this discussion, we find that the nature of a sales
discount is peculiar. Applying generally accepted accounting
principles (GAAP) in the country, this type of discount is reflected in
the income statement[50] as a line item deducted -- along with
returns, allowances, rebates and other similar expenses -- from gross
sales to arrive at net sales.[51] This type of presentation is resorted
to, because the accounts receivable and sales figures that arise
from sales discounts, -- as well as from quantity, volume or bulk
discounts -- are recorded in the manual and computerized books of
accounts and reflected in the financial statements at the gross
amounts of the invoices.[52] This manner of recording credit sales --
known as the gross method -- is most widely used, because it is
simple, more convenient to apply than the net method, and
produces no material errors over time.[53]
However, under the net method used in
recording trade, chain or functional discounts, only the net amounts
of the invoices -- after the discounts have been deducted -- are
recorded in the books of accounts[54] and reflected in the financial
statements. A separate line item cannot be shown,[55]because the
transactions themselves involving both accounts
receivable and sales have already been entered into, net of the said
discounts.
The term sales discounts is not expressly defined in the Tax Code,
but one provision adverts to amounts whose sum -- along with sales
returns, allowances and cost of goods sold[56] -- is deducted
from gross sales to come up with the gross
income, profit or margin[57] derived from business.[58] In another
provision therein, sales discounts that are granted and indicated in
the invoices at the time of sale -- and that do not depend upon the
happening of any future event -- may be excluded from the gross
sales within the same quarter they were given.[59] While
determinative only of the VAT, the latter provision also appears as a
suitable reference point for income tax purposes already embraced
in the former. After all, these two provisions affirm that sales
discounts are amounts that are always deductible from gross sales.
Reason for the Senior Citizen Discount:
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The Law, Not Prompt Payment
A distinguishing feature of the implementing rules of RA 7432 is the private establishments
outright deduction of the discount from the invoice price of the medicine sold to the senior
citizen.[60] It is, therefore, expected that for each retail sale made under this law, the discount
period lasts no more than a day, because such discount is given -- and the net amount thereof
collected -- immediately upon perfection of the sale.[61]Although prompt payment is made for an
arms-length transaction by the senior citizen, the real and compelling reason for the private
establishment giving the discount is that the law itself makes it mandatory.
What RA 7432 grants the senior citizen is a mere discount privilege, not a sales discount or any of
the above discounts in particular. Prompt payment is not the reason for (although a necessary
consequence of) such grant. To be sure, the privilege enjoyed by the senior citizen must be
equivalent to the tax credit benefit enjoyed by the private establishment granting the discount.
Yet, under the revenue regulations promulgated by our tax authorities, this benefit has been
erroneously likened and confined to a sales discount.
To a senior citizen, the monetary effect of the privilege may be the same as that resulting from
a sales discount. However, to a private establishment, the effect is different from a simple
reduction in price that results from such discount. In other words, the tax credit benefit is not the
same as a sales discount. To repeat from our earlier discourse, this benefit cannot and should not
be treated as a tax deduction.
To stress, the effect of a sales discount on the income statement and income tax return of an
establishment covered by RA 7432 is different from that resulting from the availment or use of
its tax credit benefit. While the former is a deduction before, the latter is a deduction after,
the income tax is computed. As mentioned earlier, a discount is not necessarily a sales discount,
and a tax credit for a simple discount privilege should not be automatically treated like a sales
discount. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not
distinguish, we ought not to distinguish.
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent
discount deductible from gross income for income taxpurposes, or from gross sales for VAT or
other percentage tax purposes. In effect, the tax credit benefit under RA 7432 is related to a sales
discount. This contrived definition is improper, considering that the latter has to be deducted
from gross sales in order to compute the gross income in the income statement and cannot be
deducted again, even for purposes of computing the income tax.
When the law says that the cost of the discount may be claimed as a tax credit, it means that the
amount -- when claimed -- shall be treated as a reduction from any tax liability, plain and simple.
The option to avail of the tax credit benefit depends upon the existence of a tax liability, but to
limit the benefit to a sales discount -- which is not even identical to the discount privilege that is
granted by law -- does not define it at all and serves no useful purpose. The definition must,
therefore, be stricken down.
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Laws Not Amended
by Regulations
Second, the law cannot be amended by a mere regulation. In fact,
a regulation that operates to create a rule out of harmony with
the statute is a mere nullity;[62] it cannot prevail.
It is a cardinal rule that courts will and should respect the
contemporaneous construction placed upon a statute by the
executive officers whose duty it is to enforce it x x x.[63] In the
scheme of judicial tax administration, the need for certainty and
predictability in the implementation of tax laws is crucial.[64] Our
tax authorities fill in the details that Congress may not have the
opportunity or competence to provide.[65] The regulations these
authorities issue are relied upon by taxpayers, who are certain that
these will be followed by the courts.[66] Courts, however, will not
uphold these authorities interpretations when clearly absurd,
erroneous or improper.
In the present case, the tax authorities have given the term tax
credit in Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast
to what RA 7432 provides. Their interpretation has muddled up the
intent of Congress in granting a mere discount privilege, not a sales
discount. The administrative agency issuing these regulations may
not enlarge, alter or restrict the provisions of the law it administers;
it cannot engraft additional requirements not contemplated by the
legislature.[67]
In case of conflict, the law must prevail.[68] A regulation adopted
pursuant to law is law.[69] Conversely, a regulation or any portion
thereof not adopted pursuant to law is no law and has neither the
force nor the effect of law.[70]
Availment of Tax
Credit Voluntary
Third, the word may in the text of the statute[71] implies that the
availability of the tax credit benefit is neither unrestricted nor
mandatory.[72] There is no absolute right conferred upon
respondent, or any similar taxpayer, to avail itself of the tax
credit remedy whenever it chooses; neither does it impose a duty on
the part of the government to sit back and allow an important facet
of tax collection to be at the sole control and discretion of the
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taxpayer.[73] For the tax authorities to compel respondent to deduct the 20 percent discount
from either its gross income or its gross sales[74] is, therefore, not only to make an imposition
without basis in law, but also to blatantly contravene the law itself.
What Section 4.a of RA 7432 means is that the tax credit benefit is merely permissive, not
imperative. Respondent is given two options -- either to claim or not to claim the cost of the
discounts as a tax credit. In fact, it may even ignore the credit and simply consider the gesture as
an act of beneficence, an expression of its social conscience.
Granting that there is a tax liability and respondent claims such cost as a tax credit, then the tax
credit can easily be applied. If there is none, the credit cannot be used and will just have to be
carried over and revalidated[75] accordingly. If, however, the business continues to operate at a
loss and no other taxes are due, thus compelling it to close shop, the credit can never be applied
and will be lost altogether.
In other words, it is the existence or the lack of a tax liability that determines whether the cost of
the discounts can be used as a tax credit. RA 7432 does not give respondent the unfettered right
to avail itself of the credit whenever it pleases. Neither does it allow our tax administrators to
expand or contract the legislative mandate. The plain meaning rule or verba legis in statutory
construction is thus applicable x x x. Where the words of a statute are clear, plain and free from
ambiguity, it must be given its literal meaning and applied without attempted interpretation.[76]
Tax Credit Benefit
Deemed Just Compensation
Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent
domain. Be it stressed that the privilege enjoyed by senior citizens does not come directly from
the State, but rather from the private establishments concerned. Accordingly, the tax
credit benefit granted to these establishments can be deemed as their just compensation for
private property taken by the State for public use.[77]
The concept of public use is no longer confined to the traditional notion of use by the public, but
held synonymous with public interest, public benefit, public welfare, and public convenience.
[78] The discount privilege to which our senior citizens are entitled is actually a benefit enjoyed
by the general public to which these citizens belong. The discounts given would have entered the
coffers and formed part of the gross sales of the private establishments concerned, were it not for
RA 7432. The permanent reduction in their total revenues is a forced subsidy corresponding to the
taking of private property for public use or benefit.
As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just
compensation. This term refers not only to the issuance of a tax credit certificate indicating the
correct amount of the discounts given, but also to the promptness in its release. Equivalent to the
payment of property taken by the State, such issuance -- when not done within a reasonable
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time from the grant of the discounts -- cannot be considered as just
compensation. In effect, respondent is made to suffer the
consequences of being immediately deprived of its revenues while
awaiting actual receipt, through the certificate, of the equivalent
amount it needs to cope with the reduction in its revenues.[79]
Besides, the taxation power can also be used as an implement for
the exercise of the power of eminent domain.[80] Tax measures are
but enforced contributions exacted on pain of penal
sanctions[81] and clearly imposed for a public purpose.[82] In recent
years, the power to tax has indeed become a most effective tool to
realize social justice, public welfare, and the equitable distribution of
wealth.[83]
While it is a declared commitment under Section 1 of RA 7432, social
justice cannot be invoked to trample on the rights of property
owners who under our Constitution and laws are also entitled to
protection. The social justice consecrated in our [C]onstitution [is]
not intended to take away rights from a person and give them to
another who is not entitled thereto.[84] For this reason, a just
compensation for income that is taken away from respondent
becomes necessary. It is in the tax credit that our legislators find
support to realize social justice, and no administrative body can alter
that fact.
To put it differently, a private establishment that merely breaks
even[85] -- without the discounts yet -- will surely start to incur
losses because of such discounts. The same effect is expected if its
mark-up is less than 20 percent, and if all its sales come from retail
purchases by senior citizens. Aside from the observation we have
already raised earlier, it will also be grossly unfair to an
establishment if the discounts will be treated merely as deductions
from either its gross income or its gross sales. Operating at a loss
through no fault of its own, it will realize that the tax credit limitation
under RR 2-94 is inutile, if not improper. Worse, profit-generating
businesses will be put in a better position if they avail themselves
of tax creditsdenied those that are losing, because no taxes are due
from the latter.
Grant of Tax Credit
Intended by the Legislature
Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens
are assisted by the community as a whole and to establish a
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program beneficial to them.[86] These objectives are consonant with the constitutional policy of
making health x x x services available to all the people at affordable cost [87] and of giving
priority for the needs of the x x x elderly.[88] Sections 2.i and 4 of RR 2-94, however, contradict
these constitutional policies and statutory objectives.
Furthermore, Congress has allowed all private establishments a simple tax credit, not a
deduction. In fact, no cash outlay is required from the government for the availment or use of
such credit. The deliberations on February 5, 1992 of the Bicameral Conference Committee
Meeting on Social Justice, which finalized RA 7432, disclose the true intent of our legislators to
treat the sales discounts as a tax credit, rather than as a deduction from gross income. We quote
from those deliberations as follows:
"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions from taxable
income. I think we incorporated there a provision na - on the responsibility of the private hospitals
and drugstores, hindi ba?
SEN. ANGARA. Oo.
THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision here about the
deductions from taxable income of that private hospitals, di ba ganon 'yan?
MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting government and public
institutions, so, puwede na po nating hindi isama yung mga less deductions ng taxable income.
THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals. Yung isiningit natin?
MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the microphone).
SEN. ANGARA. Hindi pa, hindi pa.
THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?
SEN. ANGARA. Oo. You want to insert that?
THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e.
SEN. ANGARA. In the case of private hospitals they got the grant of 15% discount, provided that,
the private hospitals can claim the expense as a tax credit.
REP. AQUINO. Yah could be allowed as deductions in the perpetrations of (inaudible) income.
SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?
REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng establishments na covered.
7
TAX I FULL TEXTS for 18 February 2017
the other is general creates a presumption that the special is to be considered as remaining an
THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private exception to the general,[91] one as a general law of the land, the other as the law of a particular
hospitals lang. case.[92] It is a canon of statutory construction that a later statute, general in its terms and not
expressly repealing a prior special statute, will ordinarily not affect the special provisions of such
REP. AQUINO. Ano ba yung establishments na covered? earlier statute.[93]

SEN. ANGARA. Restaurant lodging houses, recreation centers.
REP. AQUINO. All establishments covered siguro?
SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan
kung ganon. Can we go back to Section 4 ha?
RA 7432 is an earlier law not expressly repealed by, and therefore remains an exception to, the
Tax Code -- a later law. When the former states that a tax credit may be claimed, then the
requirement of prior tax payments under certain provisions of the latter, as discussed above,
cannot be made to apply. Neither can the instances of or references to a tax deduction under the
Tax Code[94] be made to restrict RA 7432. No provision of any revenue regulation can supplant or
modify the acts of Congress.

REP. AQUINO. Oho. WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of the Court of
Appeals AFFIRMED. No pronouncement as to costs.
SEN. ANGARA. Letter A. To capture that thought, we'll say the grant
of 20% discount from all establishments et cetera, et cetera,
provided that said establishments - provided that private
establishments may claim the cost as a tax credit. Ganon ba 'yon?

REP. AQUINO. Yah.

SEN. ANGARA. Dahil kung government, they don't need to claim it.

THE CHAIRMAN. (Rep. Unico). Tax credit.

SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction,

Okay.

REP. AQUINO Okay.

SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A".[89]

Special Law
Over General Law

Sixth and last, RA 7432 is a special law that should prevail over the
Tax Code -- a general law. x x x [T]he rule is that on a specific matter
the special law shall prevail over the general law, which shall
be resorted to only to supply deficiencies in the former.[90] In
addition, [w]here there are two statutes, the earlier special and the
later general -- the terms of the general broad enough to include the
matter provided for in the special -- the fact that one is special and
AL Ilagan-Malipol, AB, MD 8
TAX I FULL TEXTS for 18 February 2017
PLANTERS PRODUCTS, INC., G.R. No. 166006 legislative powers, issued LOI No. 1465 which provided, among others, for the imposition of a
Petitioner, capital recovery component (CRC) on the domestic sale of all grades of fertilizers in
Present: the Philippines.[4] The LOI provides:
YNARES-SANTIAGO, J.,
Chairperson, 3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula
AUSTRIA-MARTINEZ, a capital contribution component of not less than P10 per bag. This capital contribution shall be
- versus - CHICO-NAZARIO, collected until adequate capital is raised to make PPI viable. Such capital contribution shall be
NACHURA, and applied by FPA to all domestic sales of fertilizers in the Philippines.[5] (Underscoring supplied)
REYES, JJ.
Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic market to
the Fertilizer and Pesticide Authority (FPA). FPA then remitted the amount collected to the Far East
Promulgated: Bank and Trust Company, the depositary bank of PPI. Fertiphil paid P6,689,144 to FPA from July 8,
FERTIPHIL CORPORATION, 1985 to January 24, 1986.[6]
Respondent. March 14, 2008
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. With the
x-------------------------------------------------- return of democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No.
x 1465, but PPI refused to accede to the demand.[7]

DECISION Fertiphil filed a complaint for collection and damages[8] against FPA and PPI with the RTC
in Makati. It questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable,
oppressive, invalid and an unlawful imposition that amounted to a denial of due process of law.
REYES, R.T., J.: [9] Fertiphil alleged that the LOI solely favored PPI, a privately owned corporation, which used the
proceeds to maintain its monopoly of the fertilizer industry.

THE Regional Trial Courts (RTC) have the authority and jurisdiction to In its Answer,[10] FPA, through the Solicitor General, countered that the issuance of LOI No. 1465
consider the constitutionality of statutes, executive orders, was a valid exercise of the police power of the State in ensuring the stability of the fertilizer
presidential decrees and other issuances. The Constitution vests that industry in the country. It also averred that Fertiphil did not sustain any damage from the LOI
power not only in the Supreme Court but in all Regional Trial Courts. because the burden imposed by the levy fell on the ultimate consumer, not the seller.

The principle is relevant in this petition for review on certiorari of the
Decision[1] of the Court of Appeals (CA) affirming with modification
that of
the RTC in Makati City,[2] finding petitioner Planters Products, Inc.
(PPI) liable to private respondent Fertiphil Corporation (Fertiphil) for
the levies it paid under Letter of Instruction (LOI) No. 1465.
RTC Disposition
On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as follows:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the plaintiff
and against the defendant Planters Product, Inc., ordering the latter to pay the former:

The Facts 1) the sum of P6,698,144.00 with interest at 12% from the time of judicial demand;
2) the sum of P100,000 as attorneys fees;
Petitioner PPI and private respondent Fertiphil are private 3) the cost of suit.
corporations incorporated under Philippine laws.[3] They are both
engaged in the importation and distribution of fertilizers, pesticides SO ORDERED.[11]
and agricultural chemicals.

On June 3, 1985, then President Ferdinand Marcos, exercising his

AL Ilagan-Malipol, AB, MD 9
TAX I
Ruling that the imposition of the P10 CRC was an exercise of the
States inherent power of taxation, the RTC invalidated the levy for
violating the basic principle that taxes can only be levied for public
purpose, viz.:
It is apparent that the imposition of P10 per fertilizer bag sold in the
country by LOI 1465 is purportedly in the exercise of the power of
taxation. It is a settled principle that the power of taxation by the
state is plenary. Comprehensive and supreme, the principal check
upon its abuse resting in the responsibility of the members of the
legislature to their constituents. However, there are two kinds of
limitations on the power of taxation: the inherent limitations and the
constitutional limitations.
One of the inherent limitations is that a tax may be levied only for
public purposes:
The power to tax can be resorted to only for a constitutionally valid
public purpose. By the same token, taxes may not be levied for
purely private purposes, for building up of private fortunes, or for the
redress of private wrongs. They cannot be levied for the
improvement of private property, or for the benefit, and promotion of
private enterprises, except where the aid is incident to the public
benefit. It is well-settled principle of constitutional law that no
general tax can be levied except for the purpose of raising money
which is to be expended for public use. Funds cannot be exacted
under the guise of taxation to promote a purpose that is not of public
interest. Without such limitation, the power to tax could be exercised
or employed as an authority to destroy the economy of the people. A
tax, however, is not held void on the ground of want of public
interest unless the want of such interest is clear. (71 Am. Jur. pp.
371-372)
In the case at bar, the plaintiff paid the amount of P6,698,144.00 to
the Fertilizer and Pesticide Authority pursuant to the P10 per bag of
fertilizer sold imposition under LOI 1465 which, in turn, remitted the
amount to the defendant Planters Products, Inc. thru the latters
depository bank, Far East Bank and Trust Co. Thus, by virtue of LOI
1465 the plaintiff, Fertiphil Corporation, which is a private domestic
corporation, became poorer by the amount of P6,698,144.00 and the
defendant, Planters Product, Inc., another private domestic
corporation, became richer by the amount of P6,698,144.00.
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
Tested by the standards of constitutionality as set forth in the afore-quoted jurisprudence, it is
quite evident that LOI 1465 insofar as it imposes the amount of P10 per fertilizer bag sold in the
country and orders that the said amount should go to the defendant Planters Product, Inc. is
unlawful because it violates the mandate that a tax can be levied only for a public purpose and
not to benefit, aid and promote a private enterprise such as Planters Product, Inc.[12]
PPI moved for reconsideration but its motion was denied.[13] PPI then filed a notice of appeal with
the RTC but it failed to pay the requisite appeal docket fee. In a separate but related proceeding,
this Court[14] allowed the appeal of PPI and remanded the case to the CA for proper disposition.
CA Decision
On November 28, 2003, the CA handed down its decision affirming with modification that of
the RTC, with the following fallo:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby AFFIRMED, subject to
the MODIFICATION that the award of attorneys fees is hereby DELETED.[15]
In affirming the RTC decision, the CA ruled that the lis mota of the complaint for collection was the
constitutionality of LOI No. 1465, thus:
The question then is whether it was proper for the trial court to exercise its power to judicially
determine the constitutionality of the subject statute in the instant case.
As a rule, where the controversy can be settled on other grounds, the courts will not resolve the
constitutionality of a law (Lim v. Pacquing, 240 SCRA 649 [1995]). The policy of the courts is to
avoid ruling on constitutional questions and to presume that the acts of political departments are
valid, absent a clear and unmistakable showing to the contrary.
However, the courts are not precluded from exercising such power when the following requisites
are obtaining in a controversy before it: First, there must be before the court an actual case
calling for the exercise of judicial review. Second, the question must be ripe for
adjudication. Third, the person challenging the validity of the act must have standing to
challenge. Fourth, the question of constitutionality must have been raised at the earliest
opportunity; and lastly, the issue of constitutionality must be the very lis mota of the case
(Integrated Bar of the Philippines v. Zamora, 338 SCRA 81 [2000]).
Indisputably, the present case was primarily instituted for collection and damages. However, a
perusal of the complaint also reveals
that the instant action is founded on the claim that the levy imposed was an unlawful and
unconstitutional special assessment. Consequently, the requisite that the constitutionality of the
law in question be the very lis mota of the case is present, making it proper for the trial court to
rule on the constitutionality of LOI 1465.[16]
10
TAX I
The CA held that even on the assumption that LOI No. 1465 was
issued under the police power of the state, it is still unconstitutional
because it did not promote public welfare. The CA explained:
In declaring LOI 1465 unconstitutional, the trial court held that the
levy imposed under the said law was an invalid exercise of the States
power of taxation inasmuch as it violated the inherent and
constitutional prescription that taxes be levied only for public
purposes. It reasoned out that the amount collected under the levy
was remitted to the depository bank of PPI, which the latter used to
advance its private interest.
On the other hand, appellant submits that the subject statutes
passage was a valid exercise of police power. In addition, it disputes
the court a quos findings arguing that the collections under LOI 1465
was for the benefit of Planters Foundation, Incorporated (PFI), a
foundation created by law to hold in trust for millions of farmers, the
stock ownership of PPI.
Of the three fundamental powers of the State, the exercise of police
power has been characterized as the most essential, insistent and
the least limitable of powers, extending as it does to all the great
public needs. It may be exercised as long as the activity or the
property sought to be regulated has some relevance to public
welfare (Constitutional Law, by Isagani A. Cruz, p. 38, 1995 Edition).
Vast as the power is, however, it must be exercised within the limits
set by the Constitution, which requires the concurrence of a lawful
subject and a lawful method. Thus, our courts have laid down the
test to determine the validity of a police measure as follows: (1) the
interests of the public generally, as distinguished from those of a
particular class, requires its exercise; and (2) the means employed
are reasonably necessary for the accomplishment of the purpose and
not unduly oppressive upon individuals (National Development
Company v. Philippine Veterans Bank, 192 SCRA 257 [1990]).
It is upon applying this established tests that We sustain the trial
courts holding LOI 1465 unconstitutional. To be sure, ensuring the
continued supply and distribution of fertilizer in the country is an
undertaking imbued with public interest. However, the method by
which LOI 1465 sought to achieve this is by no means a measure
that will promote the public welfare. The governments commitment
to support the successful rehabilitation and continued viability of PPI,
a private corporation, is an unmistakable attempt to mask the
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
subject statutes impartiality. There is no way to treat the self-interest of a favored entity,
like PPI, as identical with the general interest of the countrys farmers or even the Filipino people
in general. Well to stress, substantive due process exacts fairness and equal protection disallows
distinction where none is needed. When a statutes public purpose is spoiled by private interest,
the use of police power becomes a travesty which must be struck down for being an arbitrary
exercise of government power. To rule in favor of appellant would contravene the general
principle that revenues derived from taxes cannot be used for purely private purposes or for the
exclusive benefit of private individuals.[17]
The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was for the benefit of
Planters Foundation, Inc., a foundation created to hold in trust the stock ownership of PPI. The CA
stated:
Appellant next claims that the collections under LOI 1465 was for the benefit of Planters
Foundation, Incorporated (PFI), a foundation created by law to hold in trust for millions of farmers,
the stock ownership of PFI on the strength of Letter of Undertaking (LOU) issued by then Prime
Minister Cesar Virata on April 18, 1985 and affirmed by the Secretary of Justice in an Opinion
dated October 12, 1987, to wit:
2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in
its fertilizer pricing formula a capital recovery component, the proceeds of which will be used
initially for the purpose of funding the unpaid portion of the outstanding capital stock of Planters
presently held in trust by Planters Foundation, Inc. (Planters Foundation), which unpaid capital is
estimated at approximately P206 million (subject to validation by Planters and Planters
Foundation) (such unpaid portion of the outstanding capital stock of Planters being hereafter
referred to as the Unpaid Capital), and subsequently for such capital increases as may be
required for the continuing viability of Planters.
The capital recovery component shall be in the minimum amount of P10 per bag, which will be
added to the price of all domestic sales of fertilizer in the Philippines by any importer and/or
fertilizer mother company. In this connection, the Republic hereby acknowledges that the
advances by Planters to Planters Foundation which were applied to the payment of the Planters
shares now held in trust by Planters Foundation, have been assigned to, among others, the
Creditors. Accordingly, the Republic, through FPA, hereby agrees to deposit the proceeds of the
capital recovery component in the special trust account designated in the notice dated April 2,
1985, addressed by counsel for the Creditors to Planters Foundation. Such proceeds shall be
deposited by FPA on or before the 15th day of each month.
The capital recovery component shall continue to be charged and collected until payment in full
of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c)
any carrying cost accruing from the date hereof on the amounts which may be outstanding from
time to time of the Unpaid Capital and/or the Subsidy Receivables and (d) the capital increases
11
TAX I
contemplated in paragraph 2 hereof. For the purpose of the
foregoing clause (c), the carrying cost shall be at such rate as will
represent the full and reasonable cost to Planters of servicing its
debts, taking into account both its peso and foreign currency-
denominated obligations. (Records, pp. 42-43)
Appellants proposition is open to question, to say the least. The LOU
issued by then Prime Minister Virata taken together with the Justice
Secretarys Opinion does not preponderantly demonstrate that the
collections made were held in trust in favor of millions of
farmers. Unfortunately for appellant, in the absence of sufficient
evidence to establish its claims, this Court is constrained to rely on
what is explicitly provided in LOI 1465 that one of the primary aims
in imposing the levy is to support the successful rehabilitation and
continued viability of PPI.[18]
PPI moved for reconsideration but its motion was denied.[19] It then
filed the present petition with this Court.
Issues
Petitioner PPI raises four issues for Our consideration, viz.:
I requires a litigant to have a material interest in the outcome of a case. In private suits, locus
THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY
ATTACKED AND BE DECREED VIA A DEFAULT JUDGMENT IN A CASE
FILED FOR COLLECTION AND DAMAGES WHERE THE ISSUE OF
CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE
CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR
ENTITY WHICH HAS NO STANDING TO DO SO.
II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF
ASSURING THE FERTILIZER SUPPLY AND DISTRIBUTION IN THE
COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED BY LAW
TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK
OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT
TO THE EXERCISE OF TAXATION AND POLICE POWER FOR PUBLIC
PURPOSES.
III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY
COMPONENT WAS REMITTED TO THE GOVERNMENT, AND BECAME
GOVERNMENT FUNDS PURSUANT TO AN EFFECTIVE AND VALIDLY
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED RIGHTS BY VIRTUE OF THE PRINCIPLE
OF OPERATIVE FACT PRIOR TO ANY DECLARATION OF UNCONSTITUTIONALITY OF LOI 1465.
IV
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO APPLICATION IN THE
INSTANT CASE.[20] (Underscoring supplied)
Our Ruling
We shall first tackle the procedural issues of locus standi and the jurisdiction of the RTC to resolve
constitutional issues.
Fertiphil has locus standi because it suffered direct injury; doctrine of standing is a mere
procedural technicality which may be waived.
PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No. 1465
because it does not have a personal and substantial interest in the case or will sustain direct
injury as a result of its enforcement.[21] It asserts that Fertiphil did not suffer any damage from
the CRC imposition because incidence of the levy fell on the ultimate consumer or the farmers
themselves, not on the seller fertilizer company.[22]
We cannot agree. The doctrine of locus standi or the right of appearance in a court of justice has
been adequately discussed by this Court in a catena of cases. Succinctly put, the doctrine
standi requires a litigant to be a real party in interest, which is defined as the
party who stands to be benefited or injured by the judgment in the suit or the party entitled to
the avails of the suit.[23]
In public suits, this Court recognizes the difficulty of applying the doctrine especially
when plaintiff asserts a public right on behalf of the general public because of conflicting public
policy issues. [24] On one end, there is the right of the ordinary citizen to petition the courts to be
freed from unlawful government intrusion and illegal official action. At the other end, there is the
public policy precluding excessive judicial interference in official acts, which may unnecessarily
hinder the delivery of basic public services.
In this jurisdiction, We have adopted the direct injury test to determine locus standi in public
suits. In People v. Vera,[25] it was held that a person who impugns the validity of a statute must
have a personal and substantial interest in the case such that he has sustained, or will sustain
direct injury as a result. The direct injury test in public suits is similar to the real party in interest
rule for private suits under Section 2, Rule 3 of the 1997 Rules of Civil Procedure.[26]
Recognizing that a strict application of the direct injury test may hamper public interest, this
Court relaxed the requirement in cases of transcendental importance or with far reaching
implications. Being a mere procedural technicality, it has also been held that locus standi may be
12
TAX I
waived in the public interest.[27]
Whether or not the complaint for collection is characterized as a
private or public suit, Fertiphil has locus standi to file it. Fertiphil
suffered a direct injury from the enforcement of LOI No. 1465. It was
required, and it did pay, the P10 levy imposed for every bag of
fertilizer sold on the domestic market. It may be true that Fertiphil
has passed some or all of the levy to the ultimate consumer, but that
does not disqualify it from attacking the constitutionality of the LOI
or from seeking a refund. As seller, it bore the ultimate burden of
paying the levy. It faced the possibility of severe sanctions for failure
to pay the levy. The fact of payment is sufficient injury to Fertiphil.
Moreover, Fertiphil suffered harm from the enforcement of the LOI
because it was compelled to factor in its product the levy. The levy
certainly rendered the fertilizer products of Fertiphil and other
domestic sellers much more expensive. The harm to their business
consists not only in fewer clients because of the increased price, but
also in adopting alternative corporate strategies to meet the
demands of LOI No. 1465. Fertiphil and other fertilizer sellers may
have shouldered all or part of the levy just to be competitive in the
market. The harm occasioned on the business of Fertiphil is sufficient
injury for purposes of locus standi.
Even assuming arguendo that there is no direct injury, We find that
the liberal policy consistently adopted by this Court on locus
standi must apply. The issues raised by Fertiphil are of paramount
public importance. It involves not only the constitutionality of a tax
law but, more importantly, the use of taxes for public
purpose. Former President Marcos issued LOI No. 1465 with the
intention of rehabilitating an ailing private company. This is clear
from the text of the LOI. PPI is expressly named in the LOI as the
direct beneficiary of the levy. Worse, the levy was made dependent
and conditional upon PPI becoming financially viable. The LOI
provided that the capital contribution shall be collected until
adequate capital is raised to make PPI viable.
The constitutionality of the levy is already in doubt on a plain reading
of the statute. It is Our constitutional duty to squarely resolve the
issue as the final arbiter of all justiciable controversies. The doctrine
of standing, being a mere procedural technicality, should be waived,
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
if at all, to adequately thresh out an important constitutional issue.
RTC may resolve constitutional issues; the constitutional issue was adequately raised in the
complaint; it is the lis mota of the case.
PPI insists that the RTC and the CA erred in ruling on the constitutionality of the LOI. It asserts that
the constitutionality of the LOI cannot be collaterally attacked in a complaint for collection.
[28] Alternatively, the resolution of the constitutional issue is not necessary for a determination of
the complaint for collection.[29]
Fertiphil counters that the constitutionality of the LOI was adequately pleaded in its complaint. It
claims that the constitutionality of LOI No. 1465 is the very lis mota of the case because the trial
court cannot determine its claim without resolving the issue.[30]
It is settled that the RTC has jurisdiction to resolve the constitutionality of a statute, presidential
decree or an executive order. This is clear from Section 5, Article VIII of the 1987 Constitution,
which provides:
SECTION 5. The Supreme Court shall have the following powers:
xxxx
(2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of
Court may provide, final judgments and orders of lower courts in:
(a) All cases in which the constitutionality or validity of any treaty, international or executive
agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is
in question. (Underscoring supplied)
In Mirasol v. Court of Appeals,[31] this Court recognized the power of the RTC to resolve
constitutional issues, thus:
On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction to
consider the constitutionality of a statute, presidential decree, or executive order. The
Constitution vests the power of judicial review or the power to declare a law, treaty, international
or executive agreement, presidential decree, order, instruction, ordinance, or regulation not only
in this Court, but in all Regional Trial Courts.[32]
In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign Affairs,[33] this Court
reiterated:
13
TAX I
There is no denying that regular courts have jurisdiction over cases
involving the validity or constitutionality of a rule or regulation
issued by administrative agencies.Such jurisdiction, however, is not
limited to the Court of Appeals or to this Court alone for even the
regional trial courts can take cognizance of actions assailing a
specific rule or set of rules promulgated by administrative
bodies. Indeed, the Constitution vests the power of judicial review or
the power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or
regulation in the courts, including the regional trial courts.[34]
Judicial review of official acts on the ground of unconstitutionality
may be sought or availed of through any of the actions cognizable by
courts of justice, not necessarily in a suit for declaratory relief. Such
review may be had in criminal actions, as in People v.
Ferrer[35] involving the constitutionality of the now defunct Anti-
Subversion law, or in ordinary actions, as in Krivenko v. Register of
Deeds[36] involving the constitutionality of laws prohibiting aliens
from acquiring public lands. The constitutional issue, however, (a)
must be properly raised and presented in the case, and (b) its
resolution is necessary to a determination of the case, i.e., the issue
of constitutionality must be the very lis mota presented.[37]
Contrary to PPIs claim, the constitutionality of LOI No. 1465 was
properly and adequately raised in the complaint for collection filed
with the RTC. The pertinent portions of the complaint allege:
6. The CRC of P10 per bag levied under LOI 1465 on domestic sales
of all grades of fertilizer in the Philippines, is unlawful, unjust,
uncalled for, unreasonable, inequitable and oppressive because:
xxxx
(c) It favors only one private domestic corporation, i.e., defendant
PPPI, and imposed at the expense and disadvantage of the other
fertilizer importers/distributors who were themselves in tight
business situation and were then exerting all efforts and maximizing
management and marketing skills to remain viable;
xxxx
(e) It was a glaring example of crony capitalism, a forced program
through which the PPI, having been presumptuously masqueraded as
the fertilizer industry itself, was the sole and anointed beneficiary;
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
7. The CRC was an unlawful; and unconstitutional special assessment and its imposition is
tantamount to illegal exaction amounting to a denial of due process since the persons of entities
which had to bear the burden of paying the CRC derived no benefit therefrom; that on the
contrary it was used by PPI in trying to regain its former despicable monopoly of the fertilizer
industry to the detriment of other distributors and importers.[38] (Underscoring supplied)
The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for
collection. Fertiphil filed the complaint to compel PPI to refund the levies paid under the statute
on the ground that the law imposing the levy is unconstitutional. The thesis is that an
unconstitutional law is void. It has no legal effect. Being void, Fertiphil had no legal obligation to
pay the levy. Necessarily, all levies duly paid pursuant to an unconstitutional law should be
refunded under the civil code principle against unjust enrichment. The refund is a mere
consequence of the law being declared unconstitutional. The RTC surely cannot order PPI to
refund Fertiphil if it does not declare the LOI unconstitutional. It is the unconstitutionality of the
LOI which triggers the refund. The issue of constitutionality is the very lis mota of the complaint
with the RTC.
The P10 levy under LOI No. 1465 is an exercise of the power of taxation.
At any rate, the Court holds that the RTC and the CA did not err in ruling against the
constitutionality of the LOI.
PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of
taxation. It claims that the LOI was implemented for the purpose of assuring the fertilizer supply
and distribution in the country and for benefiting a foundation created by law to hold in trust for
millions of farmers their stock ownership in PPI.
Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit to a
private company. The levy was imposed to pay the corporate debt of PPI. Fertiphil also argues
that, even if the LOI is enacted under the police power, it is still unconstitutional because it did
not promote the general welfare of the people or public interest.
Police power and the power of taxation are inherent powers of the State. These powers are
distinct and have different tests for validity. Police power is the power of the State to enact
legislation that may interfere with personal liberty or property in order to promote the general
welfare,[39] while the power of taxation is the power to levy taxes to be used for public
purpose. The main purpose of police power is the regulation of a behavior or conduct, while
taxation is revenue generation. The lawful subjects and lawful means tests are used to determine
the validity of a law enacted under the police power.[40] The power of taxation, on the other
hand, is circumscribed by inherent and constitutional limitations.
We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation
power. While it is true that the power of taxation can be used as an implement of police power,
[41] the primary purpose of the levy is revenue generation. If the purpose is primarily revenue, or
14
TAX I
if revenue is, at least, one of the real and substantial purposes, then
the exaction is properly called a tax.[42]
In Philippine Airlines, Inc. v. Edu,[43] it was held that the imposition
of a vehicle registration fee is not an exercise by the State of its
police power, but of its taxation power, thus:
It is clear from the provisions of Section 73 of Commonwealth Act
123 and Section 61 of the Land Transportation and Traffic Code that
the legislative intent and purpose behind the law requiring owners of
vehicles to pay for their registration is mainly to raise funds for the
construction and maintenance of highways and to a much lesser
degree, pay for the operating expenses of the administering agency.
x x x Fees may be properly regarded as taxes even though they also
serve as an instrument of regulation.
Taxation may be made the implement of the state's police power
(Lutz v. Araneta, 98 Phil. 148). If the purpose is primarily revenue, or
if revenue is, at least, one of the real and substantial purposes, then
the exaction is properly called a tax. Such is the case of motor
vehicle registration fees. The same provision appears as Section
59(b) in the Land Transportation Code. It is patent therefrom that the
legislators had in mind a regulatory tax as the law refers to the
imposition on the registration, operation or ownership of a motor
vehicle as a tax or fee. x x x Simply put, if the exaction under Rep.
Act 4136 were merely a regulatory fee, the imposition in Rep. Act
5448 need not be an additional tax. Rep. Act 4136 also speaks of
other fees such as the special permit fees for certain types of motor
vehicles (Sec. 10) and additional fees for change of registration (Sec.
11). These are not to be understood as taxes because such fees are
very minimal to be revenue-raising. Thus, they are not mentioned by
Sec. 59(b) of the Code as taxes like the motor vehicle registration fee
and chauffeurs license fee. Such fees are to go into the expenditures
of the Land Transportation Commission as provided for in the last
proviso of Sec. 61.[44] (Underscoring supplied)
The P10 levy under LOI No. 1465 is too excessive to serve a mere
regulatory purpose. The levy, no doubt, was a big burden on the
seller or the ultimate consumer. It increased the price of a bag of
fertilizer by as much as five percent.[45] A plain reading of the LOI
also supports the conclusion that the levy was for revenue
generation. The LOI expressly provided that the levy was
imposed until adequate capital is raised to make PPI viable.
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
Taxes are exacted only for a public purpose. The P10 levy is unconstitutional because it was not
for a public purpose. The levy was imposed to give undue benefit to PPI.
An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a
public purpose. They cannot be used for purely private purposes or for the exclusive benefit of
private persons.[46] The reason for this is simple. The power to tax exists for the general welfare;
hence, implicit in its power is the limitation that it should be used only for a public purpose. It
would be a robbery for the State to tax its citizens and use the funds generated for a private
purpose. As an old United States case bluntly put it: To lay with one hand, the power of the
government on the property of the citizen, and with the other to bestow it upon favored
individuals to aid private enterprises and build up private fortunes, is nonetheless a robbery
because it is done under the forms of law and is called taxation.[47]
The term public purpose is not defined. It is an elastic concept that can be hammered to fit
modern standards. Jurisprudence states that public purpose should be given a broad
interpretation. It does not only pertain to those purposes which are traditionally viewed as
essentially government functions, such as building roads and delivery of basic services, but also
includes those purposes designed to promote social justice. Thus, public money may now be used
for the relocation of illegal settlers, low-cost housing and urban or agrarian reform.
While the categories of what may constitute a public purpose are continually expanding in light of
the expansion of government functions, the inherent requirement that taxes can only be exacted
for a public purpose still stands. Public purpose is the heart of a tax law. When a tax law is only a
mask to exact funds from the public when its true intent is to give undue benefit and advantage
to a private enterprise, that law will not satisfy the requirement of public purpose.
The purpose of a law is evident from its text or inferable from other secondary sources. Here, We
agree with the RTC and that CA that the levy imposed under LOI No. 1465 was not for a public
purpose.
First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company. The
purpose is explicit from Clause 3 of the law, thus:
3. The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula
a capital contribution component of not less than P10 per bag. This capital contribution shall be
collected until adequate capital is raised to make PPI viable. Such capital contribution shall be
applied by FPA to all domestic sales of fertilizers in the Philippines.[48] (Underscoring supplied)
It is a basic rule of statutory construction that the text of a statute should be given a literal
meaning. In this case, the text of the LOI is plain that the levy was imposed in order to raise
capital for PPI. The framers of the LOI did not even hide the insidious purpose of the law. They
were cavalier enough to name PPI as the ultimate beneficiary of the taxes levied under the
15
TAX I
LOI. We find it utterly repulsive that a tax law would expressly name
a private company as the ultimate beneficiary of the taxes to be
levied from the public. This is a clear case of crony capitalism.
Second, the LOI provides that the imposition of the P10 levy was
conditional and dependent upon PPI becoming financially viable. This
suggests that the levy was actually imposed to benefit PPI. The LOI
notably does not fix a maximum amount when PPI is deemed
financially viable. Worse, the liability of Fertiphil and other domestic
sellers of fertilizer to pay the levy is made indefinite. They are
required to continuously pay the levy until adequate capital is raised
for PPI.
Third, the RTC and the CA held that the levies paid under the LOI
were directly remitted and deposited by FPA to Far East Bank and
Trust Company, the depositary bank of PPI.[49] This proves that PPI
benefited from the LOI. It is also proves that the main purpose of the
law was to give undue benefit and advantage to PPI.
Fourth, the levy was used to pay the corporate debts of PPI. A
reading of the Letter of Understanding[50] dated May 18,
1985 signed by then Prime Minister Cesar Virata reveals that PPI was
in deep financial problem because of its huge corporate debts. There
were pending petitions for rehabilitation against PPI before the
Securities and Exchange Commission. The government guaranteed
payment of PPIs debts to its foreign creditors. To fund the payment,
President Marcos issued LOI No. 1465. The pertinent portions of the
letter of understanding read:
Republic of the Philippines
Office of the Prime Minister
Manila
LETTER OF UNDERTAKING
May 18, 1985
TO: THE BANKING AND FINANCIAL INSTITUTIONS
LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE CREDITORS)
OF PLANTERS PRODUCTS, INC. (PLANTERS)
Gentlemen:
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
This has reference to Planters which is the principal importer and distributor of fertilizer,
pesticides and agricultural chemicals in the Philippines. As regards Planters, the Philippine
Government confirms its awareness of the following: (1) that Planters has outstanding obligations
in foreign currency and/or pesos, to the Creditors, (2) that Planters is currently experiencing
financial difficulties, and (3) that there are presently pending with the Securities and Exchange
Commission of the Philippines a petition filed at Planters own behest for the suspension of
payment of all its obligations, and a separate petition filed by Manufacturers Hanover Trust
Company, Manila Offshore Branch for the appointment of a rehabilitation receiver for Planters.
In connection with the foregoing, the Republic of the Philippines (the Republic) confirms that it
considers and continues to consider Planters as a major fertilizer distributor. Accordingly, for and
in consideration of your expressed willingness to consider and participate in the effort to
rehabilitate Planters, the Republic hereby manifests its full and unqualified support of the
successful rehabilitation and continuing viability of Planters, and to that end, hereby binds and
obligates itself to the creditors and Planters, as follows:
xxxx
2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA to include in
its fertilizer pricing formula a capital recovery component, the proceeds of which will be used
initially for the purpose of funding the unpaid portion of the outstanding capital stock of Planters
presently held in trust by Planters Foundation, Inc. (Planters Foundation), which unpaid capital is
estimated at approximately P206 million (subject to validation by Planters and Planters
Foundation) such unpaid portion of the outstanding capital stock of Planters being hereafter
referred to as the Unpaid Capital), and subsequently for such capital increases as may be
required for the continuing viability of Planters.
xxxx
The capital recovery component shall continue to be charged and collected until payment in full
of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c)
any carrying cost accruing from the date hereof on the amounts which may be outstanding from
time to time of the Unpaid Capital and/or the Subsidy Receivables, and (d) the capital increases
contemplated in paragraph 2 hereof. For the purpose of the foregoing clause (c), the carrying cost
shall be at such rate as will represent the full and reasonable cost to Planters of servicing its
debts, taking into account both its peso and foreign currency-denominated obligations.
REPUBLIC OF THE PHILIPPINES
By:
(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance[51]
It is clear from the Letter of Understanding that the levy was imposed precisely to pay the
16
TAX I
corporate debts of PPI. We cannot agree with PPI that the levy was
imposed to ensure the stability of the fertilizer industry in the
country. The letter of understanding and the plain text of the LOI
clearly indicate that the levy was exacted for the benefit of a private
corporation.
All told, the RTC and the CA did not err in holding that the levy
imposed under LOI No. 1465 was not for a public purpose. LOI No.
1465 failed to comply with the public purpose requirement for tax
laws.
The LOI is still unconstitutional even if enacted under the police
power; it did not promote public interest.
Even if We consider LOI No. 1695 enacted under the police power of
the State, it would still be invalid for failing to comply with the test of
lawful subjects and lawful means. Jurisprudence states the test as
follows: (1) the interest of the public generally, as distinguished from
those of particular class, requires its exercise; and (2) the means
employed are reasonably necessary for the accomplishment of the
purpose and not unduly oppressive upon individuals.[52]
For the same reasons as discussed, LOI No. 1695 is invalid because it
did not promote public interest. The law was enacted to give undue
advantage to a private corporation. We quote with approval the CA
ratiocination on this point, thus:
It is upon applying this established tests that We sustain the trial
courts holding LOI 1465 unconstitutional. To be sure, ensuring the
continued supply and distribution of fertilizer in the country is an
undertaking imbued with public interest. However, the method by
which LOI 1465 sought to achieve this is by no means a measure
that will promote the public welfare. The governments commitment
to support the successful rehabilitation and continued viability of PPI,
a private corporation, is an unmistakable attempt to mask the
subject statutes impartiality. There is no way to treat the self-interest
of a favored entity, like PPI, as identical with the general interest of
the countrys farmers or even the Filipino people in general. Well to
stress, substantive due process exacts fairness and equal protection
disallows distinction where none is needed. When a statutes public
purpose is spoiled by private interest, the use of police power
becomes a travesty which must be struck down for being an
arbitrary exercise of government power. To rule in favor of appellant
would contravene the general principle that revenues derived from
taxes cannot be used for purely private purposes or for the exclusive
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
benefit of private individuals. (Underscoring supplied)
The general rule is that an unconstitutional law is void; the doctrine of operative fact is
inapplicable.
PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is declared
unconstitutional. It banks on the doctrine of operative fact, which provides that an
unconstitutional law has an effect before being declared unconstitutional. PPI wants to retain the
levies paid under LOI No. 1465 even if it is subsequently declared to be unconstitutional.
We cannot agree. It is settled that no question, issue or argument will be entertained on appeal,
unless it has been raised in the court a quo.[53] PPI did not raise the applicability of the doctrine
of operative fact with the RTC and the CA. It cannot belatedly raise the issue with Us in order to
extricate itself from the dire effects of an unconstitutional law.
At any rate, We find the doctrine inapplicable. The general rule is that an unconstitutional law is
void. It produces no rights, imposes no duties and affords no protection. It has no legal effect. It
is, in legal contemplation, inoperative as if it has not been passed.[54] Being void, Fertiphil is not
required to pay the levy. All levies paid should be refunded in accordance with the general civil
code principle against unjust enrichment. The general rule is supported by Article 7 of the Civil
Code, which provides:
ART. 7. Laws are repealed only by subsequent ones, and their violation or non-observance shall
not be excused by disuse or custom or practice to the contrary.
When the courts declare a law to be inconsistent with the Constitution, the former shall be
void and the latter shall govern.
The doctrine of operative fact, as an exception to the general rule, only applies as a matter of
equity and fair play.[55] It nullifies the effects of an unconstitutional law by recognizing that the
existence of a statute prior to a determination of unconstitutionality is an operative fact and may
have consequences which cannot always be ignored. The past cannot always be erased by a new
judicial declaration.[56]
The doctrine is applicable when a declaration of unconstitutionality will impose an undue burden
on those who have relied on the invalid law. Thus, it was applied to a criminal case when a
declaration of unconstitutionality would put the accused in double jeopardy[57] or would put in
limbo the acts done by a municipality in reliance upon a law creating it.[58]
Here, We do not find anything iniquitous in ordering PPI to refund the amounts paid by Fertiphil
under LOI No. 1465. It unduly benefited from the levy. It was proven during the trial that the levies
paid were remitted and deposited to its bank account. Quite the reverse, it would be inequitable
and unjust not to order a refund. To do so would unjustly enrich PPI at the expense of
Fertiphil. Article 22 of the Civil Code explicitly provides that every person who, through an act of
17
TAX I FULL TEXTS for 18 February 2017
performance by another comes into possession of something at the
expense of the latter without just or legal ground shall return the
same to him. We cannot allow PPI to profit from an unconstitutional
law. Justice and equity dictate that PPI must refund the amounts paid
by Fertiphil.

WHEREFORE, the petition is DENIED. The Court of Appeals Decision

dated November 28, 2003 is AFFIRMED.

SO ORDERED.

AL Ilagan-Malipol, AB, MD 18
TAX I FULL TEXTS for 18 February 2017
G.R. No. 155650 July 20, 2006 E-016-01378 1992-2001 111,107,950.40 67,794,681.59 178,902,631.99
MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner, E-016-01379 1992-2001 4,322,340.00 2,637,360.00 6,959,700.00
vs.
COURT OF APPEALS, CITY OF PARAAQUE, CITY MAYOR OF E-016-01380 1992-2001 7,776,436.00 4,744,944.00 12,521,380.00
PARAAQUE, SANGGUNIANG PANGLUNGSOD NG PARAAQUE, CITY *E-016-013-85 1998-2001 6,444,810.00 2,900,164.50 9,344,974.50
ASSESSOR OF PARAAQUE, and CITY TREASURER OF *E-016-01387 1998-2001 34,876,800.00 5,694,560.00 50,571,360.00
PARAAQUE, respondents. *E-016-01396 1998-2001 75,240.00 33,858.00 109,098.00
DECISION
CARPIO, J.: GRAND TOTAL P392,435,861.9 P232,070,863.4 P 624,506,725.4
The Antecedents 5 7 2
Petitioner Manila International Airport Authority (MIAA) operates the 1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for P4,207,028.75
Ninoy Aquino International Airport (NAIA) Complex in Paraaque City #9476101 for P28,676,480.00
under Executive Order No. 903, otherwise known as the Revised #9476103 for P49,115.006
Charter of the Manila International Airport Authority ("MIAA On 17 July 2001, the City of Paraaque, through its City Treasurer, issued notices of levy and
Charter"). Executive Order No. 903 was issued on 21 July 1983 by warrants of levy on the Airport Lands and Buildings. The Mayor of the City of Paraaque
then President Ferdinand E. Marcos. Subsequently, Executive Order threatened to sell at public auction the Airport Lands and Buildings should MIAA fail to pay the
Nos. 9091 and 2982 amended the MIAA Charter. real estate tax delinquency. MIAA thus sought a clarification of OGCC Opinion No. 061.
As operator of the international airport, MIAA administers the land, On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061. The OGCC
improvements and equipment within the NAIA Complex. The MIAA pointed out that Section 206 of the Local Government Code requires persons exempt from real
Charter transferred to MIAA approximately 600 hectares of estate tax to show proof of exemption. The OGCC opined that Section 21 of the MIAA Charter is
land,3 including the runways and buildings ("Airport Lands and the proof that MIAA is exempt from real estate tax.
Buildings") then under the Bureau of Air Transportation.4 The MIAA On 1 October 2001, MIAA filed with the Court of Appeals an original petition for prohibition and
Charter further provides that no portion of the land transferred to injunction, with prayer for preliminary injunction or temporary restraining order. The petition
MIAA shall be disposed of through sale or any other mode unless sought to restrain the City of Paraaque from imposing real estate tax on, levying against, and
specifically approved by the President of the Philippines.5 auctioning for public sale the Airport Lands and Buildings. The petition was docketed as CA-G.R.
On 21 March 1997, the Office of the Government Corporate Counsel SP No. 66878.
(OGCC) issued Opinion No. 061. The OGCC opined that the Local On 5 October 2001, the Court of Appeals dismissed the petition because MIAA filed it beyond the
Government Code of 1991 withdrew the exemption from real estate 60-day reglementary period. The Court of Appeals also denied on 27 September 2002 MIAA's
tax granted to MIAA under Section 21 of the MIAA Charter. Thus, motion for reconsideration and supplemental motion for reconsideration. Hence, MIAA filed on 5
MIAA negotiated with respondent City of Paraaque to pay the real December 2002 the present petition for review.7
estate tax imposed by the City. MIAA then paid some of the real Meanwhile, in January 2003, the City of Paraaque posted notices of auction sale at the Barangay
estate tax already due. Halls of Barangays Vitalez, Sto. Nio, and Tambo, Paraaque City; in the public market of
On 28 June 2001, MIAA received Final Notices of Real Estate Tax Barangay La Huerta; and in the main lobby of the Paraaque City Hall. The City of Paraaque
Delinquency from the City of Paraaque for the taxable years 1992 published the notices in the 3 and 10 January 2003 issues of the Philippine Daily Inquirer, a
to 2001. MIAA's real estate tax delinquency is broken down as newspaper of general circulation in the Philippines. The notices announced the public auction sale
follows: of the Airport Lands and Buildings to the highest bidder on 7 February 2003, 10:00 a.m., at the
TAX Legislative Session Hall Building of Paraaque City.
TAXABLE YEAR TAX DUE PENALTY TOTALA day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed before this Court
DECLARATION
an Urgent Ex-Parte and Reiteratory Motion for the Issuance of a Temporary Restraining Order. The
E-016-01370 1992-2001 19,558,160.00 11,201,083.20 30,789,243.20
motion sought to restrain respondents the City of Paraaque, City Mayor of
E-016-01374 1992-2001 111,689,424.90 68,149,479.59 179,838,904.49
Paraaque, Sangguniang Panglungsod ng Paraaque, City Treasurer of Paraaque, and the City
E-016-01375 1992-2001 Assessor of Paraaque ("respondents") from auctioning the Airport Lands and Buildings.
20,276,058.00 12,371,832.00 32,647,890.00
E-016-01376 1992-2001 On 7 February 2003, this Court issued a temporary restraining order (TRO) effective immediately.
58,144,028.00 35,477,712.00 93,621,740.00
The Court ordered respondents to cease and desist from selling at public auction the Airport
E-016-01377 1992-2001 18,134,614.65 11,065,188.59 29,199,803.24
AL Ilagan-Malipol, AB, MD 19
TAX I
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. Marcos8 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
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
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 Charter9 provides:
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
20
TAX I
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 government-owned 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,
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
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 non-stock 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
21
TAX I
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)
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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
22
TAX I
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
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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 encumber26 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 quasi-
public 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 eighty-three 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.
23
TAX I
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
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. 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
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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
24
TAX I
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
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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,
25
TAX I
"[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
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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
26
TAX I
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
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
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
"government-owned 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
27
TAX I
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
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
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 government-owned 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.
28
TAX I
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
government-owned 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
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
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 fees47 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
29
TAX I FULL TEXTS for 18 February 2017
the Introductory Provisions of the Administrative Code because it is which case the specific real property leased becomes subject to real estate tax. Thus, only
not organized as a stock or non-stock corporation. Neither is MIAA a portions of the Airport Lands and Buildings leased to taxable persons like private parties are
government-owned or controlled corporation under Section 16, subject to real estate tax by the City of Paraaque.
Article XII of the 1987 Constitution because MIAA is not required to Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being devoted to
meet the test of economic viability. MIAA is a government public use, are properties of public dominion and thus owned by the State or the Republic of the
instrumentality vested with corporate powers and performing Philippines. Article 420 specifically mentions "ports x x x constructed by the State," which
essential public services pursuant to Section 2(10) of the includes public airports and seaports, as properties of public dominion and owned by the
Introductory Provisions of the Administrative Code. As a government Republic. As properties of public dominion owned by the Republic, there is no doubt whatsoever
instrumentality, MIAA is not subject to any kind of tax by local that the Airport Lands and Buildings are expressly exempt from real estate tax under Section
governments under Section 133(o) of the Local Government Code. 234(a) of the Local Government Code. This Court has also repeatedly ruled that properties of
The exception to the exemption in Section 234(a) does not apply to public dominion are not subject to execution or foreclosure sale.
MIAA because MIAA is not a taxable entity under the Local WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions of the Court of
Government Code. Such exception applies only if the beneficial use Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP No. 66878. We DECLARE the
of real property owned by the Republic is given to a taxable entity. Airport Lands and Buildings of the Manila International Airport Authority EXEMPT from the real
Finally, the Airport Lands and Buildings of MIAA are properties estate tax imposed by the City of Paraaque. We declare VOID all the real estate tax
devoted to public use and thus are properties of public dominion. assessments, including the final notices of real estate tax delinquencies, issued by the City of
Properties of public dominion are owned by the State or the Republic. Paraaque on the Airport Lands and Buildings of the Manila International Airport Authority, except
Article 420 of the Civil Code provides: for the portions that the Manila International Airport Authority has leased to private parties. We
Art. 420. The following things are property of public dominion: also declare VOID the assailed auction sale, and all its effects, of the Airport Lands and Buildings
(1) Those intended for public use, such as roads, canals, rivers, of the Manila International Airport Authority.
torrents, ports and bridges constructed by the State, banks, shores, No costs.
roadsteads, and others of similar character; SO ORDERED.
(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
AL Ilagan-Malipol, AB, MD 30
TAX I
G.R. No. 167330 September 18, 2009
PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
RESOLUTION
CORONA, J.:
ARTICLE II
Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right to health of
the people and instill health consciousness among them.
ARTICLE XIII
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and comprehensive
approach to health development which shall endeavor to make
essential goods, health and other social services available to all the
people at affordable cost. There shall be priority for the needs of the
underprivileged sick, elderly, disabled, women, and children. The
State shall endeavor to provide free medical care to paupers.1
For resolution are a motion for reconsideration and supplemental
motion for reconsideration dated July 10, 2008 and July 14, 2008,
respectively, filed by petitioner Philippine Health Care Providers,
Inc.2
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is "[t]o
establish, maintain, conduct and operate a prepaid group practice
health care delivery system or a health maintenance organization to
take care of the sick and disabled persons enrolled in the health care
plan and to provide for the administrative, legal, and financial
responsibilities of the organization." Individuals enrolled in its health
care programs pay an annual membership fee and are entitled to
various preventive, diagnostic and curative medical services
provided by its duly licensed physicians, specialists and other
professional technical staff participating in the group practice health
delivery system at a hospital or clinic owned, operated or accredited
by it.
xxx xxx xxx
On January 27, 2000, respondent Commissioner of Internal Revenue
[CIR] sent petitioner a formal demand letter and the corresponding
assessment notices demanding the payment of deficiency taxes,
including surcharges and interest, for the taxable years 1996 and
1997 in the total amount of P224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment was
imposed on petitioners health care agreement with the members
of its health care program pursuant to Section 185 of the 1997 Tax
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
Code xxxx
xxx xxx xxx
Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not
act on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking
the cancellation of the deficiency VAT and DST assessments.
On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED.
Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to P22,054,831.75 inclusive of
25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT
deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20,
1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared
void and without force and effect. The 1996 and 1997 deficiency DST assessment against
petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from
collecting the said DST deficiency tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the
DST assessment. He claimed that petitioners health care agreement was a contract of
insurance subject to DST under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held that petitioners health care agreement
was in the nature of a non-life insurance contract subject to DST.
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals,
insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax
assessment and ordered petitioner to desist from collecting the same is REVERSED and SET
ASIDE.
Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency
Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment
and 20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax
Code, until the same shall have been fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.
xxx xxx xxx
In a decision dated June 12, 2008, the Court denied the petition and affirmed the CA s decision.
We held that petitioners health care agreement during the pertinent period was in the nature of
non-life insurance which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v.
Olivares3 and Philamcare Health Systems, Inc. v. CA.4We also ruled that petitioners contention
that it is a health maintenance organization (HMO) and not an insurance company is irrelevant
because contracts between companies like petitioner and the beneficiaries under their plans are
treated as insurance contracts. Moreover, DST is not a tax on the business transacted but an
excise on the privilege, opportunity or facility offered at exchanges for the transaction of the
business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration and
supplemental motion for reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on a
company engaged in the business of fidelity bonds and other insurance policies. Petitioner, as an
31
TAX I
HMO, is a service provider, not an insurance company.
(b) The Court, in dismissing the appeal in CIR v. Philippine National
Bank, affirmed in effect the CAs disposition that health care
services are not in the nature of an insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from items
subject to DST is clear, especially in the light of the amendments
made in the DST law in 2002.
(e) Assuming arguendo that petitioners agreements are contracts
of indemnity, they are not those contemplated under Section 185.
(f) Assuming arguendo that petitioners agreements are akin to
health insurance, health insurance is not covered by Section 185.
(g) The agreements do not fall under the phrase "other branch of
insurance" mentioned in Section 185.
(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for
the taxable year 2005 and all prior years. Therefore, the questioned
assessments on the DST are now rendered moot and academic.6
Oral arguments were held in Baguio City on April 22, 2009. The
parties submitted their memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time
that it availed of a tax amnesty under RA 94807 (also known as the
"Tax Amnesty Act of 2007") by fully paying the amount
of P5,127,149.08 representing 5% of its net worth as of the year
ending December 31, 2005.8
We find merit in petitioners motion for reconsideration.
Petitioner was formally registered and incorporated with the
Securities and Exchange Commission on June 30, 1987.9 It is
engaged in the dispensation of the following medical services to
individuals who enter into health care agreements with it:
Preventive medical services such as periodic monitoring of health
problems, family planning counseling, consultation and advices on
diet, exercise and other healthy habits, and immunization;
Diagnostic medical services such as routine physical examinations,
x-rays, urinalysis, fecalysis, complete blood count, and the like and
Curative medical services which pertain to the performing of other
remedial and therapeutic processes in the event of an injury or
sickness on the part of the enrolled member.10
Individuals enrolled in its health care program pay an annual
membership fee. Membership is on a year-to-year basis. The medical
services are dispensed to enrolled members in a hospital or clinic
owned, operated or accredited by petitioner, through physicians,
medical and dental practitioners under contract with it. It negotiates
with such health care practitioners regarding payment schemes,
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
financing and other procedures for the delivery of health services. Except in cases of emergency,
the professional services are to be provided only by petitioner's physicians, i.e. those directly
employed by it11 or whose services are contracted by it.12 Petitioner also provides hospital
services such as room and board accommodation, laboratory services, operating rooms, x-ray
facilities and general nursing care.13 If and when a member avails of the benefits under the
agreement, petitioner pays the participating physicians and other health care providers for the
services rendered, at pre-agreed rates.14
To avail of petitioners health care programs, the individual members are required to sign and
execute a standard health care agreement embodying the terms and conditions for the provision
of the health care services. The same agreement contains the various health care services that
can be engaged by the enrolled member, i.e., preventive, diagnostic and curative medical
services. Except for the curative aspect of the medical service offered, the enrolled member may
actually make use of the health care services being offered by petitioner at any time.
Health Maintenance Organizations Are Not Engaged In The Insurance Business
We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an
insurer because its agreements are treated as insurance contracts and the DST is not a tax on the
business but an excise on the privilege, opportunity or facility used in the transaction of the
business.15
Petitioner, however, submits that it is of critical importance to characterize the business it is
engaged in, that is, to determine whether it is an HMO or an insurance company, as this
distinction is indispensable in turn to the issue of whether or not it is liable for DST on its health
care agreements.16
A second hard look at the relevant law and jurisprudence convinces the Court that the arguments
of petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made or
renewed by any person, association or company or corporation transacting the business
of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and all
bonds, undertakings, or recognizances, conditioned for the performance of the duties of any
office or position, for the doing or not doing of anything therein specified, and on all obligations
guaranteeing the validity or legality of any bond or other obligations issued by any province, city,
municipality, or other public body or organization, and on all obligations guaranteeing the title to
any real estate, or guaranteeing any mercantile credits, which may be made or renewed by any
such person, company or corporation, there shall be collected a documentary stamp tax of fifty
centavos (P0.50) on each four pesos (P4.00), or fractional part thereof, of the premium charged.
(Emphasis supplied)
It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a
statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this
end, a construction which renders every word operative is preferred over that which makes some
words idle and nugatory.17 This principle is expressed in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation which gives effect to the whole of the statute its
every word.18
32
TAX I
From the language of Section 185, it is evident that two
requisites must concur before the DST can apply, namely: (1) the
document must be a policy of insurance or an obligation in the
nature of indemnity and (2) the maker should be transacting the
business of accident, fidelity, employers liability, plate, glass,
steam boiler, burglar, elevator, automatic sprinkler, or other branch
of insurance (except life, marine, inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or "The National
Health Insurance Act of 1995"), an HMO is "an entity that provides,
offers or arranges for coverage of designated health services needed
by plan members for a fixed prepaid premium."19 The payments do
not vary with the extent, frequency or type of services provided.
The question is: was petitioner, as an HMO, engaged in the business
of insurance during the pertinent taxable years? We rule that it was
not.
Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code)
enumerates what constitutes "doing an insurance business" or
"transacting an insurance business:"
a) making or proposing to make, as insurer, any insurance contract;
b) making or proposing to make, as surety, any contract of
suretyship as a vocation and not as merely incidental to any other
legitimate business or activity of the surety;
c) doing any kind of business, including a reinsurance business,
specifically recognized as constituting the doing of an insurance
business within the meaning of this Code;
d) doing or proposing to do any business in substance equivalent to
any of the foregoing in a manner designed to evade the provisions of
this Code.
In the application of the provisions of this Code, the fact that no
profit is derived from the making of insurance contracts, agreements
or transactions or that no separate or direct consideration is received
therefore, shall not be deemed conclusive to show that the making
thereof does not constitute the doing or transacting of an insurance
business.
Various courts in the United States, whose jurisprudence has a
persuasive effect on our decisions,21 have determined that HMOs
are not in the insurance business. One test that they have applied is
whether the assumption of risk and indemnification of loss (which
are elements of an insurance business) are the principal object and
purpose of the organization or whether they are merely incidental to
its business. If these are the principal objectives, the business is that
of insurance. But if they are merely incidental and service is the
principal purpose, then the business is not insurance.
Applying the "principal object and purpose test,"22 there is
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
significant American case law supporting the argument that a corporation (such as an HMO,
whether or not organized for profit), whose main object is to provide the members of a group with
health services, is not engaged in the insurance business.
The rule was enunciated in Jordan v. Group Health Association23 wherein the Court of Appeals of
the District of Columbia Circuit held that Group Health Association should not be considered as
engaged in insurance activities since it was created primarily for the distribution of health care
services rather than the assumption of insurance risk.
xxx Although Group Healths activities may be considered in one aspect as creating security
against loss from illness or accident more truly they constitute the quantity purchase of well-
rounded, continuous medical service by its members. xxx The functions of such an organization
are not identical with those of insurance or indemnity companies. The latter are concerned
primarily, if not exclusively, with risk and the consequences of its descent, not with service, or its
extension in kind, quantity or distribution; with the unusual occurrence, not the daily routine of
living. Hazard is predominant. On the other hand, the cooperative is concerned principally with
getting service rendered to its members and doing so at lower prices made possible by quantity
purchasing and economies in operation. Its primary purpose is to reduce the cost rather than the
risk of medical care; to broaden the service to the individual in kind and quantity; to enlarge the
number receiving it; to regularize it as an everyday incident of living, like purchasing food and
clothing or oil and gas, rather than merely protecting against the financial loss caused by
extraordinary and unusual occurrences, such as death, disaster at sea, fire and tornado. It is, in
this instance, to take care of colds, ordinary aches and pains, minor ills and all the temporary
bodily discomforts as well as the more serious and unusual illness. To summarize, the distinctive
features of the cooperative are the rendering of service, its extension, the bringing of physician
and patient together, the preventive features, the regularization of service as well as payment,
the substantial reduction in cost by quantity purchasing in short, getting the medical job done
and paid for; not, except incidentally to these features, the indemnification for cost after the
services is rendered. Except the last, these are not distinctive or generally characteristic of the
insurance arrangement. There is, therefore, a substantial difference between contracting in this
way for the rendering of service, even on the contingency that it be needed, and contracting
merely to stand its cost when or after it is rendered.
That an incidental element of risk distribution or assumption may be present should not outweigh
all other factors. If attention is focused only on that feature, the line between insurance or
indemnity and other types of legal arrangement and economic function becomes faint, if not
extinct. This is especially true when the contract is for the sale of goods or services on
contingency. But obviously it was not the purpose of the insurance statutes to regulate all
arrangements for assumption or distribution of risk. That view would cause them to engulf
practically all contracts, particularly conditional sales and contingent service agreements. The
fallacy is in looking only at the risk element, to the exclusion of all others present or their
subordination to it. The question turns, not on whether risk is involved or assumed, but on
whether that or something else to which it is related in the particular plan is its principal object
purpose.24 (Emphasis supplied)
In California Physicians Service v. Garrison,25 the California court felt that, after scrutinizing the
plan of operation as a whole of the corporation, it was service rather than indemnity which stood
as its principal purpose.
33
TAX I
There is another and more compelling reason for holding that the
service is not engaged in the insurance business. Absence or
presence of assumption of risk or peril is not the sole test to be
applied in determining its status. The question, more broadly, is
whether, looking at the plan of operation as a whole, service
rather than indemnity is its principal object and
purpose. Certainly the objects and purposes of the corporation
organized and maintained by the California physicians have a wide
scope in the field of social service. Probably there is no more
impelling need than that of adequate medical care on a voluntary,
low-cost basis for persons of small income. The medical profession
unitedly is endeavoring to meet that need. Unquestionably this is
service of a high order and not indemnity.26 (Emphasis services intended to keep members from developing medical conditions or diseases.30 As an
supplied)
American courts have pointed out that the main difference between
an HMO and an insurance company is that HMOs undertake to
provide or arrange for the provision of medical services through
participating physicians while insurance companies simply undertake
to indemnify the insured for medical expenses incurred up to a pre-
agreed limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue
Cross and Blue Shield of New Jersey27 is clear on this point:
The basic distinction between medical service corporations and
ordinary health and accident insurers is that the former undertake to
provide prepaid medical services through participating
physicians, thus relieving subscribers of any further financial burden,
while the latter only undertake to indemnify an insured for medical
expenses up to, but not beyond, the schedule of rates contained in
the policy.
xxx xxx xxx
The primary purpose of a medical service corporation, however, is an
undertaking to provide physicians who will render services to
subscribers on a prepaid basis. Hence, if there are no physicians
participating in the medical service corporations plan, not only will
the subscribers be deprived of the protection which they might
reasonably have expected would be provided, but the corporation
will, in effect, be doing business solely as a health and accident
indemnity insurer without having qualified as such and rendering
itself subject to the more stringent financial requirements of the
General Insurance Laws.
A participating provider of health care services is one who agrees in
writing to render health care services to or for persons covered by a
contract issued by health service corporation in return for which the
health service corporation agrees to make payment directly to the
participating provider.28 (Emphasis supplied)
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
Consequently, the mere presence of risk would be insufficient to override the primary purpose of
the business to provide medical services as needed, with payment made directly to the provider
of these services.29 In short, even if petitioner assumes the risk of paying the cost of these
services even if significantly more than what the member has prepaid, it nevertheless cannot be
considered as being engaged in the insurance business.
By the same token, any indemnification resulting from the payment for services rendered in case
of emergency by non-participating health providers would still be incidental to petitioners
purpose of providing and arranging for health care services and does not transform it into an
insurer. To fulfill its obligations to its members under the agreements, petitioner is required to set
up a system and the facilities for the delivery of such medical services. This indubitably shows
that indemnification is not its sole object.
In fact, a substantial portion of petitioners services covers preventive and diagnostic medical
HMO, it is its obligation to maintain the good health of its members. Accordingly, its health care
programs are designed to prevent or to minimize the possibility of any assumption of risk on its
part. Thus, its undertaking under its agreements is not to indemnify its members against any loss
or damage arising from a medical condition but, on the contrary, to provide the health and
medical services needed to prevent such loss or damage.31
Overall, petitioner appears to provide insurance-type benefits to its members (with respect to
its curative medical services), but these are incidental to the principal activity of providing them
medical care. The "insurance-like" aspect of petitioners business is miniscule compared to its
noninsurance activities. Therefore, since it substantially provides health care services rather than
insurance services, it cannot be considered as being in the insurance business.
It is important to emphasize that, in adopting the "principal purpose test" used in the above-
quoted U.S. cases, we are not saying that petitioners operations are identical in every respect
to those of the HMOs or health providers which were parties to those cases. What we are stating
is that, for the purpose of determining what "doing an insurance business" means, we have to
scrutinize the operations of the business as a whole and not its mere components. This is of
course only prudent and appropriate, taking into account the burdensome and strict laws, rules
and regulations applicable to insurers and other entities engaged in the insurance business.
Moreover, we are also not unmindful that there are other American authorities who have found
particular HMOs to be actually engaged in insurance activities.32
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is
evident from the fact that it is not supervised by the Insurance Commission but by the
Department of Health.33 In fact, in a letter dated September 3, 2000, the Insurance
Commissioner confirmed that petitioner is not engaged in the insurance business. This
determination of the commissioner must be accorded great weight. It is well-settled that the
interpretation of an administrative agency which is tasked to implement a statute is accorded
great respect and ordinarily controls the interpretation of laws by the courts. The reason behind
this rule was explained in Nestle Philippines, Inc. v. Court of Appeals:34
The rationale for this rule relates not only to the emergence of the multifarious needs of a modern
or modernizing society and the establishment of diverse administrative agencies for addressing
and satisfying those needs; it also relates to the accumulation of experience and growth of
specialized capabilities by the administrative agency charged with implementing a particular
34
TAX I
statute. In Asturias Sugar Central, Inc. vs. Commissioner of
Customs,35the Court stressed that executive officials are presumed
to have familiarized themselves with all the considerations pertinent
to the meaning and purpose of the law, and to have formed an
independent, conscientious and competent expert opinion thereon.
The courts give much weight to the government agency officials
charged with the implementation of the law, their competence,
expertness, experience and informed judgment, and the fact that
they frequently are the drafters of the law they interpret.36
A Health Care Agreement Is Not An Insurance Contract Contemplated
Under Section 185 Of The NIRC of 1997
Section 185 states that DST is imposed on "all policies of insurance
or obligations of the nature of indemnity for loss, damage, or
liability." In our decision dated June 12, 2008, we ruled that
petitioners health care agreements are contracts of indemnity and
are therefore insurance contracts:
It is incorrect to say that the health care agreement is not based
on loss or damage because, under the said agreement, petitioner
assumes the liability and indemnifies its member for hospital,
medical and related expenses (such as professional fees of
physicians). The term "loss or damage" is broad enough to cover the
monetary expense or liability a member will incur in case of illness or
injury.
Under the health care agreement, the rendition of hospital, medical
and professional services to the member in case of sickness, injury
or emergency or his availment of so-called "out-patient services"
(including physical examination, x-ray and laboratory tests, medical
consultations, vaccine administration and family planning
counseling) is the contingent event which gives rise to liability on the
part of the member. In case of exposure of the member to liability,
he would be entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from
liability by paying for expenses arising from the stipulated
contingencies belies its claim that its services are prepaid. The
expenses to be incurred by each member cannot be predicted
beforehand, if they can be predicted at all. Petitioner assumes the
risk of paying for the costs of the services even if they are
significantly and substantially more than what the member has
"prepaid." Petitioner does not bear the costs alone but distributes or
spreads them out among a large group of persons bearing a similar
risk, that is, among all the other members of the health care
program. This is insurance.37
We reconsider. We shall quote once again the pertinent portion of
Section 185:
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made or
renewed by any person, association or company or corporation transacting the business of
accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), xxxx
(Emphasis supplied)
In construing this provision, we should be guided by the principle that tax statutes are strictly
construed against the taxing authority.38 This is because taxation is a destructive power which
interferes with the personal and property rights of the people and takes from them a portion of
their property for the support of the government.39Hence, tax laws may not be extended by
implication beyond the clear import of their language, nor their operation enlarged so as to
embrace matters not specifically provided.40
We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care
agreement is in the nature of non-life insurance, which is primarily a contract of indemnity.
However, those cases did not involve the interpretation of a tax provision. Instead, they dealt with
the liability of a health service provider to a member under the terms of their health care
agreement. Such contracts, as contracts of adhesion, are liberally interpreted in favor of the
member and strictly against the HMO. For this reason, we reconsider our ruling that Blue
Cross and Philamcare are applicable here.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from
an unknown or contingent event. An insurance contract exists where the following elements
concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designed peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a large
group of persons bearing a similar risk and
5. In consideration of the insurers promise, the insured pays a premium.41
Do the agreements between petitioner and its members possess all these elements? They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a
contract contains all the elements of an insurance contract, if its primary purpose is the rendering
of service, it is not a contract of insurance:
It does not necessarily follow however, that a contract containing all the four elements mentioned
above would be an insurance contract. The primary purpose of the parties in making the contract
may negate the existence of an insurance contract. For example, a law firm which enters into
contracts with clients whereby in consideration of periodical payments, it promises to represent
such clients in all suits for or against them, is not engaged in the insurance business. Its contracts
are simply for the purpose of rendering personal services. On the other hand, a contract by which
a corporation, in consideration of a stipulated amount, agrees at its own expense to defend a
physician against all suits for damages for malpractice is one of insurance, and the corporation
will be deemed as engaged in the business of insurance. Unlike the lawyers retainer contract,
the essential purpose of such a contract is not to render personal services, but to indemnify
against loss and damage resulting from the defense of actions for malpractice.42 (Emphasis
35
TAX I
supplied)
Second. Not all the necessary elements of a contract of insurance
are present in petitioners agreements. To begin with, there is no
loss, damage or liability on the part of the member that should be
indemnified by petitioner as an HMO. Under the agreement, the
member pays petitioner a predetermined consideration in exchange
for the hospital, medical and professional services rendered by the
petitioners physician or affiliated physician to him. In case of
availment by a member of the benefits under the agreement,
petitioner does not reimburse or indemnify the member as the latter
does not pay any third party. Instead, it is the petitioner who pays
the participating physicians and other health care providers for the
services rendered at pre-agreed rates. The member does not make
any such payment.
In other words, there is nothing in petitioner's agreements that gives
rise to a monetary liability on the part of the member to any third
party-provider of medical services which might in turn necessitate
indemnification from petitioner. The terms "indemnify" or
"indemnity" presuppose that a liability or claim has already been
incurred. There is no indemnity precisely because the member
merely avails of medical services to be paid or already paid in
advance at a pre-agreed price under the agreements.
Third. According to the agreement, a member can take advantage of
the bulk of the benefits anytime, e.g. laboratory services, x-ray,
routine annual physical examination and consultations, vaccine
administration as well as family planning counseling, even in the
absence of any peril, loss or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the
member who receives care from a non-participating physician or
hospital. However, this is only a very minor part of the list of services
available. The assumption of the expense by petitioner is not
confined to the happening of a contingency but includes incidents
even in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care
Program, Inc.,43 although the health care contracts called for the
defendant to partially reimburse a subscriber for treatment received
from a non-designated doctor, this did not make defendant an
insurer. Citing Jordan, the Court determined that "the primary
activity of the defendant (was) the provision of podiatric services to
subscribers in consideration of prepayment for such
services."44 Since indemnity of the insured was not the focal point of
the agreement but the extension of medical services to the member
at an affordable cost, it did not partake of the nature of a contract of
insurance.
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that
risk alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation
always bears a certain degree of financial risk. Consequently, there is a need to distinguish
prepaid service contracts (like those of petitioner) from the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health
services: the risk that it might fail to earn a reasonable return on its investment. But it is not the
risk of the type peculiar only to insurance companies. Insurance risk, also known as actuarial risk,
is the risk that the cost of insurance claims might be higher than the premiums paid. The amount
of premium is calculated on the basis of assumptions made relative to the insured.45
However, assuming that petitioners commitment to provide medical services to its members
can be construed as an acceptance of the risk that it will shell out more than the prepaid fees, it
still will not qualify as an insurance contract because petitioners objective is to provide medical
services at reduced cost, not to distribute risk like an insurer.
In sum, an examination of petitioners agreements with its members leads us to conclude that it
is not an insurance contract within the context of our Insurance Code.
There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs
Furthermore, militating in convincing fashion against the imposition of DST on petitioners health
care agreements under Section 185 of the NIRC of 1997 is the provisions legislative history. The
text of Section 185 came into U.S. law as early as 1904 when HMOs and health care agreements
were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act
No. 1189 (otherwise known as the "Internal Revenue Law of 1904")46 enacted on July 2, 1904 and
became effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is
a verbatim reproduction of the pertinent portion of Section 116, to wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in respect to the several bonds,
debentures, or certificates of stock and indebtedness, and other documents, instruments,
matters, and things mentioned and described in this section, or for or in respect to the vellum,
parchment, or paper upon which such instrument, matters, or things or any of them shall be
written or printed by any person or persons who shall make, sign, or issue the same, on and after
January first, nineteen hundred and five, the several taxes following:
xxx xxx xxx
Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for loss,
damage, or liability made or renewed by any person, association, company, or corporation
transacting the business of accident, fidelity, employers liability, plate glass, steam boiler,
burglar, elevator, automatic sprinkle, or other branch of insurance (except life, marine, inland,
and fire insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and
consolidating the laws relating to internal revenue. The aforecited pertinent portion of Section
116, Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III of Act No.
2339. The very detailed and exclusive enumeration of items subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section
1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10,
1917, the pertinent DST provision became Section 1449 (l) of Act No. 2711, otherwise known as
36
TAX I
the Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act
No. 466 (the NIRC of 1939), which codified all the internal revenue
laws of the Philippines. In an amendment introduced by RA 40 on
October 1, 1946, the DST rate was increased but the provision
remained substantially the same.
Thereafter, on June 3, 1977, the same provision with the same DST
rate was reproduced in PD 1158 (NIRC of 1977) as Section 234.
Under PDs 1457 and 1959, enacted on June 11, 1978 and October
10, 1984 respectively, the DST rate was again increased.1avvphi1
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section
234 of the NIRC of 1977 was renumbered as Section 198. And under
Section 23 of EO47 273 dated July 25, 1987, it was again
renumbered and became Section 185.
On December 23, 1993, under RA 7660, Section 185 was amended
but, again, only with respect to the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977
by RA 8424 (or the NIRC of 1997), the subject legal provision was
retained as the present Section 185. In 2004, amendments to the
DST provisions were introduced by RA 924348 but Section 185 was
untouched.
On the other hand, the concept of an HMO was introduced in the
Philippines with the formation of Bancom Health Care Corporation in
1974. The same pioneer HMO was later reorganized and renamed
Integrated Health Care Services, Inc. (or Intercare). However, there
are those who claim that Health Maintenance, Inc. is the HMO
industry pioneer, having set foot in the Philippines as early as 1965
and having been formally incorporated in 1991. Afterwards, HMOs
proliferated quickly and currently, there are 36 registered HMOs with
a total enrollment of more than 2 million.49
We can clearly see from these two histories (of the DST on the one
hand and HMOs on the other) that when the law imposing the DST
was first passed, HMOs were yet unknown in the Philippines.
However, when the various amendments to the DST law were
enacted, they were already in existence in the Philippines and the
term had in fact already been defined by RA 7875. If it had been the
intent of the legislature to impose DST on health care agreements, it
could have done so in clear and categorical terms. It had many
opportunities to do so. But it did not. The fact that the NIRC
contained no specific provision on the DST liability of health care
agreements of HMOs at a time they were already known as such,
belies any legislative intent to impose it on them. As a matter of fact,
petitioner was assessed its DST liability only on January 27, 2000,
after more than a decade in the business as an HMO.50
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be
safe to say that health care agreements were never, at any time, recognized as insurance
contracts or deemed engaged in the business of insurance within the context of the provision.
The Power To Tax Is Not The Power To Destroy
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found only in
the responsibility of the legislature which imposes the tax on the constituency who is to pay
it.51 So potent indeed is the power that it was once opined that "the power to tax involves the
power to destroy."52
Petitioner claims that the assessed DST to date which amounts to P376 million53 is way beyond
its net worth of P259 million.54 Respondent never disputed these assertions. Given the realities
on the ground, imposing the DST on petitioner would be highly oppressive. It is not the purpose of
the government to throttle private business. On the contrary, the government ought to encourage
private enterprise.55 Petitioner, just like any concern organized for a lawful economic activity, has
a right to maintain a legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57
The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden
egg."58
Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence.
Incurring losses because of a tax imposition may be an acceptable consequence but killing the
business of an entity is another matter and should not be allowed. It is counter-productive and
ultimately subversive of the nations thrust towards a better economy which will ultimately
benefit the majority of our people.59
Petitioners Tax Liability Was Extinguished Under The Provisions Of RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996
and 1997 became moot and academic60 when it availed of the tax amnesty under RA 9480 on
December 10, 2007. It paid P5,127,149.08 representing 5% of its net worth as of the year ended
December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of
RA 9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the
appurtenant civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising
from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.61
Far from disagreeing with petitioner, respondent manifested in its memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity
from payment of the tax involved, including the civil, criminal, or administrative penalties
provided under the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years.
In view of petitioners availment of the benefits of [RA 9840], and without conceding the merits
of this case as discussed above, respondent concedes that such tax amnesty extinguishes the tax
liabilities of petitioner. This admission, however, is not meant to preclude a revocation of the
amnesty granted in case it is found to have been granted under circumstances amounting to tax
fraud under Section 10 of said amnesty law.62(Emphasis supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty
program under RA 9480.63 There is no other conclusion to draw than that petitioners liability
for DST for the taxable years 1996 and 1997 was totally extinguished by its availment of the tax
37
TAX I
amnesty under RA 9480.
Is The Court Bound By A Minute Resolution In Another Case?
Petitioner raises another interesting issue in its motion for
reconsideration: whether this Court is bound by the ruling of the
CA64 in CIR v. Philippine National Bank65 that a health care
agreement of Philamcare Health Systems is not an insurance
contract for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001
minute resolution of this Court dismissing the appeal in Philippine
National Bank (G.R. No. 148680).66 Petitioner argues that the
dismissal of G.R. No. 148680 by minute resolution was a judgment
on the merits; hence, the Court should apply the CA ruling there that
a health care agreement is not an insurance contract.
It is true that, although contained in a minute resolution, our
dismissal of the petition was a disposition of the merits of the case.
When we dismissed the petition, we effectively affirmed the CA
ruling being questioned. As a result, our ruling in that case has
already become final.67 When a minute resolution denies or
dismisses a petition for failure to comply with formal and substantive
requirements, the challenged decision, together with its findings of
fact and legal conclusions, are deemed sustained.68 But what is its
effect on other cases?
With respect to the same subject matter and the same issues
concerning the same parties, it constitutes res judicata.69 However,
if other parties or another subject matter (even with the same
parties and issues) is involved, the minute resolution is not binding
precedent. Thus, in CIR v. Baier-Nickel,70 the Court noted that a
previous case, CIR v. Baier-Nickel71 involving the same parties and
the same issues, was previously disposed of by the Court thru a
minute resolution dated February 17, 2003 sustaining the ruling of
the CA. Nonetheless, the Court ruled that the previous case "ha(d)
no bearing" on the latter case because the two cases involved
different subject matters as they were concerned with the taxable
income of different taxable years.72
Besides, there are substantial, not simply formal, distinctions
between a minute resolution and a decision. The constitutional
requirement under the first paragraph of Section 14, Article VIII of
the Constitution that the facts and the law on which the judgment is
based must be expressed clearly and distinctly applies only to
decisions, not to minute resolutions. A minute resolution is signed
only by the clerk of court by authority of the justices, unlike a
decision. It does not require the certification of the Chief Justice.
Moreover, unlike decisions, minute resolutions are not published in
the Philippine Reports. Finally, the proviso of Section 4(3) of Article
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
VIII speaks of a decision.73 Indeed, as a rule, this Court lays down doctrines or principles of law
which constitute binding precedent in a decision duly signed by the members of the Court and
certified by the Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioners liability
for DST on its health care agreement was not the subject matter of G.R. No. 148680, petitioner
cannot successfully invoke the minute resolution in that case (which is not even binding
precedent) in its favor. Nonetheless, in view of the reasons already discussed, this does not
detract in any way from the fact that petitioners health care agreements are not subject to DST.
A Final Note
Taking into account that health care agreements are clearly not within the ambit of Section 185 of
the NIRC and there was never any legislative intent to impose the same on HMOs like petitioner,
the same should not be arbitrarily and unjustly included in its coverage.
It is a matter of common knowledge that there is a great social need for adequate medical
services at a cost which the average wage earner can afford. HMOs arrange, organize and
manage health care treatment in the furtherance of the goal of providing a more efficient and
inexpensive health care system made possible by quantity purchasing of services and economies
of scale. They offer advantages over the pay-for-service system (wherein individuals are charged
a fee each time they receive medical services), including the ability to control costs. They protect
their members from exposure to the high cost of hospitalization and other medical expenses
brought about by a fluctuating economy. Accordingly, they play an important role in society as
partners of the State in achieving its constitutional mandate of providing its citizens with
affordable health services.
The rate of DST under Section 185 is equivalent to 12.5% of the premium charged.74 Its
imposition will elevate the cost of health care services. This will in turn necessitate an increase in
the membership fees, resulting in either placing health services beyond the reach of the ordinary
wage earner or driving the industry to the ground. At the end of the day, neither side wins,
considering the indispensability of the services offered by HMOs.
WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the
Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997
deficiency DST assessment against petitioner is hereby CANCELLED and SET ASIDE. Respondent
is ordered to desist from collecting the said tax.
No costs.
SO ORDERED.
38
TAX I FULL TEXTS for 18 February 2017
G.R. No. 166408 October 6, 2008 franchise tax equivalent to three percent (3%) of all gross receipts of the radio/television business
QUEZON CITY and THE CITY TREASURER OF QUEZON transacted under this franchise by the grantee, its successors or assigns, and the said percentage
CITY, petitioners, tax shall be in lieu of all taxes on this franchise or earnings thereof; Provided that the grantee, its
vs. successors or assigns shall continue to be liable for income taxes under Title II of the National
ABS-CBN BROADCASTING CORPORATION, respondent. Internal Revenue Code pursuant to Section 2 of Executive No. 72 unless the latter enactment is
DECISION amended or repealed, in which case the amendment or repeal shall be applicable thereto.
REYES, R.T., J.: (Emphasis added)
CLAIMS for tax exemption must be based on language in law too ABS-CBN had been paying local franchise tax imposed by Quezon City. However, in view of the
plain to be mistaken. It cannot be made out of inference or above provision in R.A. No. 9766 that it "shall pay a franchise tax x x x in lieu of all taxes," the
implication. corporation developed the opinion that it is not liable to pay the local franchise tax imposed by
The principle is relevant in this petition for review on certiorari of the Quezon City. Consequently, ABS-CBN paid under protest the local franchise tax imposed by
Decision1 of the Court of Appeals (CA) and that2 of the Regional Trial Quezon City on the dates, in the amounts and under the official receipts as follows:
Court (RTC) ordering the refund and declaring invalid the imposition O.R. No. Date Amount Paid
and collection of local franchise tax by the City Treasurer of Quezon 2464274 7/18/1995 P 1,489,977.28
City on ABS-CBN Broadcasting Corporation (ABS-CBN).
The Facts 2484651 10/20/1995 1,489,977.28
Petitioner City Government of Quezon City is a local government unit 2536134 1/22/1996 2,880,975.65
duly organized and existing by virtue of Republic Act (R.A.) No. 537, 8354906 1/23/1997 8,621,470.83
otherwise known as the Revised Charter of Quezon City. Petitioner 48756 1/23/1997 2,731,135.81
City Treasurer of Quezon City is primarily responsible for the
imposition and collection of taxes within the territorial jurisdiction of 67352 4/3/1997 2,731,135.81
Quezon City. Total P19,944,672.665
Under Section 31, Article 13 of the Quezon City Revenue Code of On January 29, 1997, ABS-CBN filed a written claim for refund for local franchise tax paid to
1993,3 a franchise tax was imposed on businesses operating within Quezon City for 1996 and for the first quarter of 1997 in the total amount of Fourteen Million Two
its jurisdiction. The provision states: Hundred Thirty-Three Thousand Five Hundred Eighty-Two and 29/100 centavos (P14,233,582.29)
Section 31. Imposition of Tax. - Any provision of special laws or grant broken down as follows:
of tax exemption to the contrary notwithstanding, any person, O.R. No. Date Amount Paid
corporation, partnership or association enjoying a franchise whether
2536134 1-22-96 P 2,880,975.65
issued by the national government or local government and, doing
business in Quezon City, shall pay a franchise tax at the rate of ten 8354906 1-23-97 8,621,470.83
percent (10%) of one percent (1%) for 1993-1994, twenty percent 0048756 1-23-97 2,731,135.81
(20%) of one percent (1%) for 1995, and thirty percent (30%) of one Total P14,233,582.296
percent (1%) for 1996 and the succeeding years thereafter, of gross In a letter dated March 3, 1997 to the Quezon City Treasurer, ABS-CBN reiterated its claim for
receipts and sales derived from the operation of the business in refund of local franchise taxes paid.
Quezon City during the preceding calendar year. On June 25, 1997, for failure to obtain any response from the Quezon City Treasurer, ABS-CBN
On May 3, 1995, ABS-CBN was granted the franchise to install and filed a complaint before the RTC in Quezon City seeking the declaration of nullity of the imposition
operate radio and television broadcasting stations in the Philippines of local franchise tax by the City Government of Quezon City for being unconstitutional. It likewise
under R.A. No. 7966.4 Section 8 of R.A. No. 7966 provides the tax prayed for the refund of local franchise tax in the amount of Nineteen Million Nine Hundred Forty-
liabilities of ABS-CBN which reads: Four Thousand Six Hundred Seventy-Two and 66/100 centavos (P19,944,672.66) broken down as
Section 8. Tax Provisions. - The grantee, its successors or assigns, follows:
shall be liable to pay the same taxes on their real estate, buildings
O.R. No. Date Amount Paid
and personal property, exclusive of this franchise, as other persons
or corporations are now hereafter may be required by law to pay. In 2464274 7-18-95 P 1,489,977.28
addition thereto, the grantee, its successors or assigns, shall pay a 2484651 10-20-95 1,489,977.28
AL Ilagan-Malipol, AB, MD 39
TAX I
2536134 1-22-96 2,880,975.65
8354906 1-23-97 8,621,470.83
0048756 1-23-97 2,731,135.81
0067352 4-03-97 2,731,135.81
Total P19,944,672.667
Quezon City argued that the "in lieu of all taxes" provision in R.A. No.
9766 could not have been intended to prevail over a constitutional
mandate which ensures the viability and self-sufficiency of local
government units. Further, that taxes collectible by and payable to
the local government were distinct from taxes collectible by and
payable to the national government, considering that the
Constitution specifically declared that the taxes imposed by local
government units "shall accrue exclusively to the local
governments." Lastly, the City contended that the exemption
claimed by ABS-CBN under R.A. No. 7966 was withdrawn by
Congress when the Local Government Code (LGC) was
passed.8 Section 193 of the LGC provides:
Section 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.
6938, non-stock and non-profit hospitals and educational institutions,
are hereby withdrawn upon the effectivity of this Code. (Emphasis
added)
On August 13, 1997, ABS-CBN filed a supplemental complaint adding
to its claim for refund the local franchise tax paid for the third
quarter of 1997 in the amount of Two Million Seven Hundred Thirty-
One Thousand One Hundred Thirty-Five and 81/100 centavos
(P2,731,135.81) and of other amounts of local franchise tax as may
have been and will be paid by ABS-CBN until the resolution of the
case.
Quezon City insisted that the claim for refund must fail because of
the absence of a prior written claim for it.
RTC and CA Dispositions
On January 20, 1999, the RTC rendered judgment declaring as invalid
the imposition on and collection from ABS-CBN of local franchise tax
paid pursuant to Quezon City Ordinance No. SP-91, S-93, after the
enactment of R.A. No. 7966, and ordered the refund of all payments
made. The dispositive portion of the RTC decision reads:
WHEREFORE, judgment is hereby rendered declaring the imposition
on and collection from plaintiff ABS-CBN BROADCASTING
CORPORATION of local franchise taxes pursuant to Quezon City
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
Ordinance No. SP-91, S-93 after the enactment of Republic Act No. 7966 to be invalid, and,
accordingly, the Court hereby orders the defendants to refund all its payments made after the
effectivity of its legislative franchise on May 3, 1995.
SO ORDERED.9
In its decision, the RTC ruled that the "in lieu of all taxes" provision contained in Section 8 of R.A.
No. 7966 absolutely excused ABS-CBN from the payment of local franchise tax imposed under
Quezon City Ordinance No. SP-91, S-93. The intent of the legislature to excuse ABS-CBN from
payment of local franchise tax could be discerned from the usage of the "in lieu of all taxes"
provision and from the absence of any qualification except income taxes. Had Congress intended
to exclude taxes imposed from the exemption, it would have expressly mentioned so in a fashion
similar to the proviso on income taxes.
The RTC also based its ruling on the 1990 case of Province of Misamis Oriental v. Cagayan Electric
Power and Light Company, Inc. (CEPALCO).10 In said case, the exemption of respondent electric
company CEPALCO from payment of provincial franchise tax was upheld on the ground that the
franchise of CEPALCO was a special law, while the Local Tax Code, on which the provincial
ordinance imposing the local franchise tax was based, was a general law. Further, it was held that
whenever there is a conflict between two laws, one special and particular and the other general,
the special law must be taken as intended to constitute an exception to the general act.
The RTC noted that the legislative franchise of ABS-CBN was granted years after the effectivity of
the LGC. Thus, it was unavoidable to conclude that Section 8 of R.A. No. 7966 was an exception
since the legislature ought to be presumed to have enacted it with the knowledge and awareness
of the existence and prior enactment of Section 13711 of the LGC.
In addition, the RTC, again citing the case of Province of Misamis Oriental v. Cagayan Electric
Power and Light Company, Inc. (CEPALCO),12 ruled that the imposition of the local franchise tax
was an impairment of ABS-CBN's contract with the government. The imposition of another
franchise on the corporation by the local authority would constitute an impairment of the former's
charter, which is in the nature of a private contract between it and the government.
As to the amounts to be refunded, the RTC rejected Quezon City's position that a written claim for
refund pursuant to Section 196 of the LGC was a condition sine qua non before filing the case in
court. The RTC ruled that although Fourteen Million Two Hundred Thirty-Three Thousand Five
Hundred Eighty-Two and 29/100 centavos (P14,233,582.29) was the only amount stated in the
letter to the Quezon City Treasurer claiming refund, ABS-CBN should nonetheless be also refunded
of all payments made after the effectivity of R.A. No. 7966. The inaction of the City Treasurer on
the claim for refund of ABS-CBN legally rendered any further claims for refund on the part of
plaintiff absurd and futile in relation to the succeeding payments.
The City of Quezon and its Treasurer filed a motion for reconsideration which was subsequently
denied by the RTC. Thus, appeal was made to the CA. On September 1, 2004, the CA dismissed
the petition of Quezon City and its Treasurer. According to the appellate court, the issues raised
were purely legal questions cognizable only by the Supreme Court. The CA ratiocinated:
For another, the issues which appellants submit for this Court's consideration are more of legal
query necessitating a legal opinion rather than a call for adjudication on the matter in dispute.
xxxx
The first issue has earlier been categorized in Province of Misamis Oriental v. Cagayan Electric
and Power Co., Inc. to be a legal one. There is no more argument to this.
40
TAX I
The next issue although it may need the reexamination of the
pertinent provisions of the local franchise and the legislative
franchise given to appellee, also needs no evaluation of facts. It
suffices that there may be a conflict which may need to be
reconciled, without regard to the factual backdrop of the case.
The last issue deals with a legal question, because whether or not
there is a prior written claim for refund is no longer in dispute.
Rather, the question revolves on whether the said requirement may
be dispensed with, which obviously is not a factual issue.13
On September 23, 2004, petitioner moved for reconsideration. The
motion was, however, denied by the CA in its Resolution dated
December 16, 2004. Hence, the present recourse.
Issues
Petitioner submits the following issues for resolution:
I.
Whether or not the phrase "in lieu of all taxes" indicated in the
franchise of the respondent appellee (Section 8 of RA 7966) serves
to exempt it from the payment of the local franchise tax imposed by
the petitioners-appellants.
II.
Whether or not the petitioners-appellants raised factual and legal
issues before the Honorable Court of Appeals.14
Our Ruling
The second issue, being procedural in nature, shall be dealt with
immediately. But there are other resultant issues linked to the first.
I. The dismissal by the CA of petitioners' appeal is in order because it
raised purely legal issues, namely:
1) Whether appellee, whose franchise expressly provides that its
payment of franchise tax shall be in lieu of all taxes in this
franchise or earnings thereof, is absolutely excused from paying the
franchise tax imposed by appellants;
2) Whether appellants' imposition of local franchise tax is a violation
of appellee's legislative franchise; and
3) Whether one can do away with the requirement on prior written
claim for refund.15
Obviously, these are purely legal questions, cognizable by this Court,
to the exclusion of all other courts. There is a question of law when
the doubt or difference arises as to what the law is pertaining to a
certain state of facts.16
Section 2, Rule 50 of the Rules of Court provides that an appeal
taken to the CA under Rule 41 raising only questions of law is
erroneous and shall be dismissed, issues of pure law not being within
its jurisdiction.17Consequently, the dismissal by the CA of
petitioners' appeal was in order.
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
In the recent case of Sevilleno v. Carilo,18 this Court ruled that the dismissal of the appeal of
petitioner was valid, considering the issues raised there were pure questions of law, viz.:
Petitioners interposed an appeal to the Court of Appeals but it was dismissed for being the wrong
mode of appeal. The appellate court held that since the issue being raised is whether the RTC has
jurisdiction over the subject matter of the case, which is a question of law, the appeal should
have been elevated to the Supreme Court under Rule 45 of the 1997 Rules of Civil Procedure, as
amended. Section 2, Rule 41 of the same Rules which governs appeals from judgments and final
orders of the RTC to the Court of Appeals, provides:
SEC. 2. Modes of appeal. -
(a) Ordinary appeal. - The appeal to the Court of Appeals in cases decided by the Regional Trial
Court in the exercise of its original jurisdiction shall be taken by filing a notice of appeal with the
court which rendered the judgment or final order appealed from and serving a copy thereof upon
the adverse party. No record on appeal shall be required except in special proceedings and other
cases of multiple or separate appeals where the law or these Rules so require. In such cases, the
record on appeal shall be filed and served in like manner.
(b) Petition for review. - The appeal to the Court of Appeals in cases decided by the Regional Trial
Court in the exercise of its appellate jurisdiction shall be by petition for review in accordance with
Rule 42.
(c) Appeal by certiorari. - In all cases where only questions of law are raised or involved, the
appeal shall be to the Supreme Court by petition for review on certiorari in accordance with Rule
45.
In Macawili Gold Mining and Development Co., Inc. v. Court of Appeals, we summarized the rule
on appeals as follows:
(1) In all cases decided by the RTC in the exercise of its original jurisdiction, appeal may be made
to the Court of Appeals by mere notice of appeal where the appellant raises questions of fact or
mixed questions of fact and law;
(2) In all cases decided by the RTC in the exercise of its original jurisdiction where the appellant
raises only questions of law, the appeal must be taken to the Supreme Court on a petition for
review on certiorari under Rule 45;
(3) All appeals from judgments rendered by the RTC in the exercise of its appellate jurisdiction,
regardless of whether the appellant raises questions of fact, questions of law, or mixed questions
of fact and law, shall be brought to the Court of Appeals by filing a petition for review under Rule
42.
It is not disputed that the issue brought by petitioners to the Court of Appeals involves the
jurisdiction of the RTC over the subject matter of the case. We have a long standing rule that a
court's jurisdiction over the subject matter of an action is conferred only by the Constitution or by
statute. Otherwise put, jurisdiction of a court over the subject matter of the action is a matter of
law. Consequently, issues which deal with the jurisdiction of a court over the subject matter of a
case are pure questions of law. As petitioners' appeal solely involves a question of law, they
should have directly taken their appeal to this Court by filing a petition for review on certiorari
under Rule 45, not an ordinary appeal with the Court of Appeals under Rule 41. Clearly, the
appellate court did not err in holding that petitioners pursued the wrong mode of appeal.
Indeed, the Court of Appeals did not err in dismissing petitioners' appeal. Section 2, Rule 50 of the
same Rules provides that an appeal from the RTC to the Court of Appeals raising only questions of
41
TAX I
law shall be dismissed; and that an appeal erroneously taken to the
Court of Appeals shall be dismissed outright, x x x.19(Emphasis
added)
However, to serve the demands of substantial justice and equity, the
Court opts to relax procedural rules and rule upon on the merits of
the case. In Ong Lim Sing Jr. v. FEB Leasing and Finance
Corporation,20 this Court stated:
Courts have the prerogative to relax procedural rules of even the
most mandatory character, mindful of the duty to reconcile both the
need to speedily put an end to litigation and the parties' right to due
process. In numerous cases, this Court has allowed liberal
construction of the rules when to do so would serve the demands of
substantial justice and equity. In Aguam v. Court of Appeals, the
Court explained:
"The court has the discretion to dismiss or not to dismiss an
appellant's appeal. It is a power conferred on the court, not a duty.
The "discretion must be a sound one, to be exercised in accordance
with the tenets of justice and fair play, having in mind the
circumstances obtaining in each case." Technicalities, however, must
be avoided. The law abhors technicalities that impede the cause of
justice. The court's primary duty is to render or dispense justice. "A
litigation is not a game of technicalities." "Lawsuits unlike duels are
not to be won by a rapier's thrust. Technicality, when it deserts its
proper office as an aid to justice and becomes its great hindrance
and chief enemy, deserves scant consideration from courts."
Litigations must be decided on their merits and not on technicality.
Every party litigant must be afforded the amplest opportunity for the
proper and just determination of his cause, free from the
unacceptable plea of technicalities. Thus, dismissal of appeals purely
on technical grounds is frowned upon where the policy of the court is
to encourage hearings of appeals on their merits and the rules of
procedure ought not to be applied in a very rigid, technical sense;
rules of procedure are used only to help secure, not override
substantial justice. It is a far better and more prudent course of
action for the court to excuse a technical lapse and afford the parties
a review of the case on appeal to attain the ends of justice rather
than dispose of the case on technicality and cause a grave injustice
to the parties, giving a false impression of speedy disposal of cases
while actually resulting in more delay, if not a miscarriage of
justice.21
II. The "in lieu of all taxes" provision in its franchise does not exempt
ABS-CBN from payment of local franchise tax.
A. The present controversy essentially boils down to a dispute
between the inherent taxing power of Congress and the delegated
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
authority to tax of local governments under the 1987 Constitution and effected under the LGC of
1991.
The power of the local government of Quezon City to impose franchise tax is based on Section
151 in relation to Section 137 of the LGC, to wit:
Section 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other special
law, the province may impose a tax on businesses enjoying a franchise, at the rate not exceeding
fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar
year based on the incoming receipt, or realized within its territorial jurisdiction. x x x
xxxx
Section 151. Scope of Taxing Powers. - Except as otherwise provided in this Code, the city may
levy the taxes, fees and charges which the province or municipality may impose: Provided,
however, That the taxes, fees and charges levied and collected by highly urbanized and
component cities shall accrue to them and distributed in accordance with the provisions of this
Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the province
or municipality by not more than fifty percent (50%) except the rates of professional and
amusement taxes. (Emphasis supplied)
Such taxing power by the local government, however, is limited in the sense that Congress can
enact legislation granting exemptions. This principle was upheld in City Government of Quezon
City, et al. v. Bayan Telecommunications, Inc.22 Said this Court:
This thus raises the question of whether or not the City's Revenue Code pursuant to which the
city treasurer of Quezon City levied real property taxes against Bayantel's real properties located
within the City effectively withdrew the tax exemption enjoyed by Bayantel under its franchise, as
amended.
Bayantel answers the poser in the negative arguing that once again it is only "liable to pay the
same taxes, as any other persons or corporations on all its real or personal properties, exclusive
of its franchise."
Bayantel's posture is well-taken. While the system of local government taxation has changed with
the onset of the 1987 Constitution, the power of local government units to tax is still limited. As
we explained in Mactan Cebu International Airport Authority:
"The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be
exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before,
but pursuant to direct authority conferred by Section 5, Article X of the Constitution. Under the
latter, the exercise of the power may be subject to such guidelines and limitations as the
Congress may provide which, however, must be consistent with the basic policy of local
autonomy. x x x"
Clearly then, while a new slant on the subject of local taxation now prevails in the sense that the
former doctrine of local government units' delegated power to tax had been effectively modified
with Article X, Section 5 of the 1987 Constitution now in place, the basic doctrine on local taxation
remains essentially the same. For as the Court stressed in Mactan, "the power to tax is [still]
primarily vested in the Congress."
This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a Commissioner of
the 1986 Constitutional Commission which crafted the 1987 Constitution, thus:
"What is the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does
42
TAX I
not change the doctrine that municipal corporations do not possess
inherent powers of taxation. What it does is to confer municipal
corporations a general power to levy taxes and otherwise create
sources of revenue. They no longer have to wait for a statutory grant
of these powers. The power of the legislative authority relative to the
fiscal powers of local governments has been reduced to the authority
to impose limitations on municipal powers. Moreover, these
limitations must be "consistent with the basic policy of local
autonomy." The important legal effect of Section 5 is thus to reverse
the principle that doubts are resolved against municipal
corporations. Henceforth, in interpreting statutory provisions on
municipal fiscal powers, doubts will be resolved in favor of municipal
corporations. It is understood, however, that taxes imposed by local
government must be for a public purpose, uniform within a locality,
must not be confiscatory, and must be within the jurisdiction of the
local unit to pass."
In net effect, the controversy presently before the Court involves, at
bottom, a clash between the inherent taxing power of the legislature,
which necessarily includes the power to exempt, and the local
government's delegated power to tax under the aegis of the 1987
Constitution.
Now to go back to the Quezon City Revenue Code which imposed
real estate taxes on all real properties within the city's territory and
removed exemptions theretofore "previously granted to, or presently
enjoyed by all persons, whether natural or juridical [x x x]" there can
really be no dispute that the power of the Quezon City Government
to tax is limited by Section 232 of the LGC which expressly provides
that "a province or city or municipality within the Metropolitan Manila
Area may levy an annual ad valorem tax on real property such as
land, building, machinery, and other improvement not hereinafter
specifically exempted." Under this law, the Legislature highlighted its
power to thereafter exempt certain realties from the taxing power of
local government units. An interpretation denying Congress such
power to exempt would reduce the phrase "not hereinafter
specifically exempted" as a pure jargon, without meaning
whatsoever. Needless to state, such absurd situation is
unacceptable.
For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT)
vs. City of Davao, this Court has upheld the power of Congress to
grant exemptions over the power of local government units to
impose taxes. There, the Court wrote:
"Indeed, the grant of taxing powers to local government units under
the Constitution and the LGC does not affect the power of Congress
to grant exemptions to certain persons, pursuant to a declared
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
national policy. The legal effect of the constitutional grant to local governments simply means
that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in
favor of municipal corporations."23 (Emphasis supplied)
In the case under review, the Philippine Congress enacted R.A. No. 7966 on March 30, 1995,
subsequent to the effectivity of the LGC on January 1, 1992. Under it, ABS-CBN was granted the
franchise to install and operate radio and television broadcasting stations in the Philippines.
Likewise, Section 8 imposed on ABS-CBN the duty of paying 3% franchise tax. It bears stressing,
however, that payment of the percentage franchise tax shall be "in lieu of all taxes" on the said
franchise.24
Congress has the inherent power to tax, which includes the power to grant tax exemptions. On
the other hand, the power of Quezon City to tax is prescribed by Section 151 in relation to Section
137 of the LGC which expressly provides that notwithstanding any exemption granted by any law
or other special law, the City may impose a franchise tax. It must be noted that Section 137 of the
LGC does not prohibit grant of future exemptions. As earlier discussed, this Court in City
Government of Quezon City v. Bayan Telecommunications, Inc.25 sustained the power of
Congress to grant tax exemptions over and above the power of the local government's delegated
power to tax.
B. The more pertinent issue now to consider is whether or not by passing R.A. No. 7966, which
contains the "in lieu of all taxes" provision, Congress intended to exempt ABS-CBN from local
franchise tax.
Petitioners argue that the "in lieu of all taxes" provision in ABS-CBN's franchise does not expressly
exempt it from payment of local franchise tax. They contend that a tax exemption cannot be
created by mere implication and that one who claims tax exemptions must be able to justify his
claim by clearest grant of organic law or statute.
Taxes are what civilized people pay for civilized society. They are the lifeblood of the nation. Thus,
statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally
in favor of the taxing authority. A claim of tax exemption must be clearly shown and based on
language in law too plain to be mistaken. Otherwise stated, taxation is the rule, exemption is the
exception.26 The burden of proof rests upon the party claiming the exemption to prove that it is
in fact covered by the exemption so claimed.27
The basis for the rule on strict construction to statutory provisions granting tax exemptions or
deductions is to minimize differential treatment and foster impartiality, fairness and equality of
treatment among taxpayers.28 He who claims an exemption from his share of common burden
must justify his claim that the legislature intended to exempt him by unmistakable terms. For
exemptions from taxation are not favored in law, nor are they presumed. They must be expressed
in the clearest and most unambiguous language and not left to mere implications. It has been
held that "exemptions are never presumed, the burden is on the claimant to establish clearly his
right to exemption and cannot be made out of inference or implications but must be laid beyond
reasonable doubt. In other words, since taxation is the rule and exemption the exception, the
intention to make an exemption ought to be expressed in clear and unambiguous terms.29
Section 8 of R.A. No. 7966 imposes on ABS-CBN a franchise tax equivalent to three (3) percent of
all gross receipts of the radio/television business transacted under the franchise and the franchise
tax shall be "in lieu of all taxes" on the franchise or earnings thereof.
The "in lieu of all taxes" provision in the franchise of ABS-CBN does not expressly provide what
43
TAX I
kind of taxes ABS-CBN is exempted from. It is not clear whether the
exemption would include both local, whether municipal, city or
provincial, and national tax. What is clear is that ABS-CBN shall be
liable to pay three (3) percent franchise tax and income taxes under
Title II of the NIRC. But whether the "in lieu of all taxes provision"
would include exemption from local tax is not unequivocal.
As adverted to earlier, the right to exemption from local franchise
tax must be clearly established and cannot be made out of inference
or implications but must be laid beyond reasonable doubt. Verily, the
uncertainty in the "in lieu of all taxes" provision should be construed
against ABS-CBN. ABS-CBN has the burden to prove that it is in fact
covered by the exemption so claimed. ABS-CBN miserably failed in
this regard.
ABS-CBN cites the cases Carcar Electric & Ice Plant v. Collector of
Internal Revenue,30 Manila Railroad v. Rafferty,31 Philippine Railway
Co. v. Collector of Internal Revenue,32 and Visayan Electric Co. v.
David33 to support its claim that that the "in lieu of all taxes" clause
includes exemption from all taxes.
However, a review of the foregoing case law reveals that the
grantees' respective franchises expressly exempt them from
municipal and provincial taxes. Said the Court in Manila Railroad v.
Rafferty:34
On the 7th day of July 1906, by an Act of the Philippine Legislature, a
special charter was granted to the Manila Railroad Company.
Subsection 12 of Section 1 of said Act (No. 1510) provides that:
"In consideration of the premises and of the granting of this
concession or franchise, there shall be paid by the grantee to the
Philippine Government, annually, for the period of thirty (30) years
from the date hereof, an amount equal to one-half (1/2) of one per
cent of the gross earnings of the grantee in respect of the lines
covered hereby for the preceding year; after said period of thirty (30)
years, and for the fifty (50) years thereafter, the amount so to be
paid annually shall be an amount equal to one and one-half (1 1/2)
per cent of such gross earnings for the preceding year; and after
such period of eighty (80) years, the percentage and amount so to
be paid annually by the grantee shall be fixed by the Philippine
Government.
Such annual payments, when promptly and fully made by the
grantee, shall be in lieu of all taxes of every name and nature -
municipal, provincial or central - upon its capital stock, franchises,
right of way, earnings, and all other property owned or operated by
the grantee under this concession or franchise."35 (Underscoring
supplied)
In the case under review, ABS-CBN's franchise did not embody an
AL Ilagan-Malipol, AB, MD
FULL TEXTS for 18 February 2017
exemption similar to those in Carcar, Manila Railroad, Philippine Railway, and Visayan Electric.
Too, the franchise failed to specify the taxing authority from whose jurisdiction the taxing power is
withheld, whether municipal, provincial, or national. In fine, since ABS-CBN failed to justify its
claim for exemption from local franchise tax, by a grant expressed in terms "too plain to be
mistaken" its claim for exemption for local franchise tax must fail.
C. The "in lieu of all taxes" clause in the franchise of ABS-CBN has become functus officio with the
abolition of the franchise tax on broadcasting companies with yearly gross receipts exceeding Ten
Million Pesos.
In its decision dated January 20, 1999, the RTC held that pursuant to the "in lieu of all taxes"
provision contained in Section 8 of R.A. No. 7966, ABS-CBN is exempt from the payment of the
local franchise tax. The RTC further pronounced that ABS-CBN shall instead be liable to pay a
franchise tax of 3% of all gross receipts in lieu of all other taxes.
On this score, the RTC ruling is flawed. In keeping with the laws that have been passed since the
grant of ABS-CBN's franchise, the corporation should now be subject to VAT, instead of the 3%
franchise tax.
At the time of the enactment of its franchise on May 3, 1995, ABS-CBN was subject to 3%
franchise tax under Section 117(b) of the 1977 National Internal Revenue Code (NIRC), as
amended, viz.:
SECTION 117. Tax on franchises. - Any provision of general or special laws to the contrary
notwithstanding, there shall be levied, assessed and collected in respect to all franchise, upon the
gross receipts from the business covered by the law granting the franchise, a tax in accordance
with the schedule prescribed hereunder:
(a) On electric utilities, city gas, and water supplies Two (2%) percent
(b) On telephone and/or telegraph systems, radio and/or broadcasting stations
Three (3%) percent
(c) On other franchises Five (5%) percent. (Emphasis supplied)
On January 1, 1996, R.A. No. 7716, otherwise known as the Expanded Value Added Tax
Law,36 took effect and subjected to VAT those services rendered by radio and/or broadcasting
stations. Section 3 of R.A. No. 7716 provides:
Section 3. Section 102 of the National Internal Revenue Code, as amended is hereby further
amended to read as follows:
SEC. 102. Value-added tax on sale of services and use or lease of properties. - (a) Rate and base
of tax. - There shall be levied, assessed and collected, as value-added tax equivalent to 10% of
gross receipts derived from the sale or exchange of services, including the use or lease of
properties.
The phrase "sale or exchange of services" means the performance of all kinds of services in the
Philippines, for others for a fee, remuneration or consideration, including those performed or
rendered by construction and service contractors; x x x services of franchise grantees of
telephone and telegraph, radio and television broadcasting and all other franchise
grantees except those under Section 117 of this Code; x x x (Emphasis supplied)
Notably, under the same law, "telephone and/or telegraph systems, broadcasting stations and
other franchise grantees" were omitted from the list of entities subject to franchise tax. The
impression was that these entities were subject to 10% VAT but not to franchise tax. Only the
franchise tax on "electric, gas and water utilities" remained. Section 12 of R.A. No. 7716 provides:
44
TAX I FULL TEXTS for 18 February 2017
Section 12. Section 117 of the National Internal Revenue Code, as since it is a broadcasting company with yearly gross receipts exceeding Ten Million Pesos
amended, is hereby further amended to read as follows: (P10,000,000.00).
SEC. 117. Tax on Franchises. - Any provision of general or special law VAT is a percentage tax imposed on any person whether or not a franchise grantee, who in the
to the contrary notwithstanding there shall be levied, assessed and course of trade or business, sells, barters, exchanges, leases, goods or properties, renders
collected in respect to all franchises on electric, gas and water services. It is also levied on every importation of goods whether or not in the course of trade or
utilities a tax of two percent (2%) on the gross receipts derived from business. The tax base of the VAT is limited only to the value added to such goods, properties, or
the business covered by the law granting the franchise. (Emphasis services by the seller, transferor or lessor. Further, the VAT is an indirect tax and can be passed
added) on to the buyer.
Subsequently, R.A. No. 824137 took effect on January 1, The franchise tax, on the other hand, is a percentage tax imposed only on franchise holders. It is
199738 containing more amendments to the NIRC. Radio and/or imposed under Section 119 of the Tax Code and is a direct liability of the franchise grantee.
television companies whose annual gross receipts do not The clause "in lieu of all taxes" does not pertain to VAT or any other tax. It cannot apply when
exceed P10,000,000.00 were granted the option to choose between what is paid is a tax other than a franchise tax. Since the franchise tax on the broadcasting
paying 3% national franchise tax or 10% VAT. Section 9 of R.A. No. companies with yearly gross receipts exceeding ten million pesos has been abolished, the "in lieu
8241 provides: of all taxes" clause has now become functus officio, rendered inoperative.
SECTION 9. Section 12 of Republic Act No. 7716 is hereby amended In sum, ABS-CBN's claims for exemption must fail on twin grounds. First, the "in lieu of all taxes"
to read as follows: clause in its franchise failed to specify the taxes the company is sought to be exempted from.
"Sec. 12. Section 117 of the National Internal Revenue Code, as Neither did it particularize the jurisdiction from which the taxing power is withheld. Second, the
amended, is hereby further amended to read as follows: clause has become functus officio because as the law now stands, ABS-CBN is no longer subject
"Sec. 117. Tax on franchise. - Any provision of general or special law to a franchise tax. It is now liable for VAT.
to the contrary, notwithstanding, there shall be levied, assessed and WHEREFORE, the petition is GRANTED and the appealed Decision REVERSED AND SET ASIDE. The
collected in respect to all franchises on radio and/or television petition in the trial court for refund of local franchise tax is DISMISSED.
broadcasting companies whose annual gross receipts of the SO ORDERED.
preceding year does not exceed Ten million pesos (P10,000,000.00),
subject to Section 107(d) of this Code, a tax of three percent
(3%) and on electric, gas and water utilities, a tax of two percent
(2%) on the gross receipts derived from the business covered by the
law granting the franchise: Provided, however, That radio and
television broadcasting companies referred to in this section, shall
have an option to be registered as a value-added tax payer and pay
the tax due thereon: Provided, further, That once the option is
exercised, it shall not be revoked. (Emphasis supplied)
On the other hand, radio and/or television companies with yearly
gross receipts exceeding P10,000,000.00 were subject to 10% VAT,
pursuant to Section 102 of the NIRC.
On January 1, 1998, R.A. No. 842439 was passed confirming the 10%
VAT liability of radio and/or television companies with yearly gross
receipts exceeding P10,000,000.00.
R.A. No. 9337 was subsequently enacted and became effective on
July 1, 2005. The said law further amended the NIRC by increasing
the rate of VAT to 12%. The effectivity of the imposition of the 12%
VAT was later moved from January 1, 2006 to February 1, 2006.
In consonance with the above survey of pertinent laws on the
matter, ABS-CBN is subject to the payment of VAT. It does not have
the option to choose between the payment of franchise tax or VAT
AL Ilagan-Malipol, AB, MD 45
TAX I
G.R. No. L-69259 January 26, 1988
DELPHER TRADES CORPORATION, and DELPHIN
PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES,
INC., respondents.
GUTIERREZ, JR., J.:
The petitioners question the decision of the Intermediate Appellate
Court which sustained the private respondent's contention that the
deed of exchange whereby Delfin Pacheco and Pelagia Pacheco
conveyed a parcel of land to Delpher Trades Corporation in exchange
for 2,500 shares of stock was actually a deed of sale which violated a
right of first refusal under a lease contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the
owners of 27,169 square meters of real estate Identified as Lot. No.
1095, Malinta Estate, in the Municipality of Polo (now Valenzuela),
Province of Bulacan (now Metro Manila) which is covered by Transfer
Certificate of Title No. T-4240 of the Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction
Components International Inc. the same property and providing that
during the existence or after the term of this lease the lessor should
he decide to sell the property leased shall first offer the same to the
lessee and the letter has the priority to buy under similar conditions
(Exhibits A to A-5)
On August 3, 1974, lessee Construction Components International,
Inc. assigned its rights and obligations under the contract of lease in
favor of Hydro Pipes Philippines, Inc. with the signed conformity and
consent of lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-
6 inclusive)
The contract of lease, as well as the assignment of lease were
annotated at he back of the title, as per stipulation of the parties
(Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed between
lessors Delfin and Pelagia Pacheco and defendant Delpher Trades
Corporation whereby the former conveyed to the latter the leased
property (TCT No.T-4240) together with another parcel of land also
located in Malinta Estate, Valenzuela, Metro Manila (TCT No. 4273)
for 2,500 shares of stock of defendant corporation with a total value
of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)
On the ground that it was not given the first option to buy the leased
property pursuant to the proviso in the lease agreement, respondent
Hydro Pipes Philippines, Inc., filed an amended complaint for
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FULL TEXTS for 18 February 2017
reconveyance of Lot. No. 1095 in its favor under conditions similar to those whereby Delpher
Trades Corporation acquired the property from Pelagia Pacheco and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive
portion of the decision reads:
ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the plaintiffs
preferential right to acquire the subject property (right of first refusal) and ordering the
defendants and all persons deriving rights therefrom to convey the said property to plaintiff who
may offer to acquire the same at the rate of P14.00 per square meter, more or less, for Lot 1095
whose area is 27,169 square meters only. Without pronouncement as to attorney's fees and costs.
(Appendix I; Rec., pp. 246- 247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)
The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for certiorari to review the
appellate court's decision.
We initially denied the petition but upon motion for reconsideration, we set aside the resolution
denying the petition and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from petitioners a
parcel of industrial land consisting of 27,169 square meters or 2.7 hectares (located right after
the Valenzuela, Bulacan exit of the toll expressway) for only P14/sq. meter, or a total of P380,366,
although the prevailing value thereof is approximately P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first refusal even if there is no "sale" or
transfer of actual ownership interests by petitioners to third parties; and
3. Assuming arguendo that there has been a transfer of actual ownership interests, private
respondent will acquire the land not under "similar conditions" by which it was transferred to
petitioner Delpher Trades Corporation, as provided in the same contractual provision invoked by
private respondent. (pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties
executed by the Pachecos on the one hand and the Delpher Trades Corporation on the other was
meant to be a contract of sale which, in effect, prejudiced the private respondent's right of first
refusal over the leased property included in the "deed of exchange."
Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified
that Delpher Trades Corporation is a family corporation; that the corporation was organized by the
children of the two spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses
Delfin Pacheco and Pilar Angeles) who owned in common the parcel of land leased to Hydro Pipes
Philippines in order to perpetuate their control over the property through the corporation and to
avoid taxes; that in order to accomplish this end, two pieces of real estate, including Lot No. 1095
which had been leased to Hydro Pipes Philippines, were transferred to the corporation; that the
leased property was transferred to the corporation by virtue of a deed of exchange of property;
that in exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value
shares of stock which are equivalent to a 55% majority in the corporation because the other
owners only owned 2,000 shares; and that at the time of incorporation, he knew all about the
contract of lease of Lot. No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for
reconsideration, they refer to this scheme as "estate planning." (p. 252, Rollo)
46
TAX I
Under this factual backdrop, the petitioners contend that there was
actually no transfer of ownership of the subject parcel of land since
the Pachecos remained in control of the property. Thus, the
petitioners allege: "Considering that the beneficial ownership and
control of petitioner corporation remained in the hands of the
original co-owners, there was no transfer of actual ownership
interests over the land when the same was transferred to petitioner
corporation in exchange for the latter's shares of stock. The transfer
of ownership, if anything, was merely in form but not in substance. In
reality, petitioner corporation is a mere alter ego or conduit of the
Pacheco co-owners; hence the corporation and the co-owners should
be deemed to be the same, there being in substance and in effect an
Identity of interest." (p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the property.
They argue that there was no sale and that they exchanged the land
for shares of stocks in their own corporation. "Hence, such transfer is
not within the letter, or even spirit of the contract. There is a sale
when ownership is transferred for a price certain in money or its
equivalent (Art. 1468, Civil Code) while there is a barter or exchange
when one thing is given in consideration of another thing (Art. 1638,
Civil Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that Delpher
Trades Corporation is a corporate entity separate and distinct from
the Pachecos. Thus, it contends that it cannot be said that Delpher
Trades Corporation is the Pacheco's same alter ego or conduit; that
petitioner Delfin Pacheco, having treated Delpher Trades Corporation
as such a separate and distinct corporate entity, is not a party who
may allege that this separate corporate existence should be
disregarded. It maintains that there was actual transfer of ownership
interests over the leased property when the same was transferred to
Delpher Trades Corporation in exchange for the latter's shares of
stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by
subscription or by purchasing stock directly from the corporation or
from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47
Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the case at
bar, in exchange for their properties, the Pachecos acquired 2,500
original unissued no par value shares of stocks of the Delpher Trades
Corporation. Consequently, the Pachecos became stockholders of the
corporation by subscription "The essence of the stock subscription is
an agreement to take and pay for original unissued shares of a
corporation, formed or to be formed." (Rohrlich 243, cited in
Agbayani, Commentaries and Jurisprudence on the Commercial Laws
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FULL TEXTS for 18 February 2017
of the Philippines, Vol. III, 1980 Edition, p. 430) It is significant that the Pachecos took no par
value shares in exchange for their properties.
A no-par value share does not purport to represent any stated proportionate interest in the capital
stock measured by value, but only an aliquot part of the whole number of such shares of the
issuing corporation. The holder of no-par shares may see from the certificate itself that he is only
an aliquot sharer in the assets of the corporation. But this character of proportionate interest is
not hidden beneath a false appearance of a given sum in money, as in the case of par value
shares. The capital stock of a corporation issuing only no-par value shares is not set forth by a
stated amount of money, but instead is expressed to be divided into a stated number of shares,
such as, 1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot sharer in
the assets of the corporation, no matter what value they may have, to the extent of 100/1,000 or
1/10. Thus, by removing the par value of shares, the attention of persons interested in the
financial condition of a corporation is focused upon the value of assets and the amount of its
debts. (Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines,
Vol. III, 1980 Edition, p. 107).
Moreover, there was no attempt to state the true or current market value of the real estate. Land
valued at P300.00 a square meter was turned over to the family's corporation for only P14.00 a
square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have
control of the corporation. Their equity capital is 55% as against 45% of the other stockholders,
who also belong to the same family group.
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really
did was to invest their properties and change the nature of their ownership from unincorporated
to incorporated form by organizing Delpher Trades Corporation to take control of their properties
and at the same time save on inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses Hernandez and
Pacheco in connection with their execution of a deed of exchange on the properties for no par
value shares of the defendant corporation?
A Yes, sir.
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation in entering in the deed of exchange.
ATTY. LINSANGAN:
Q (What do you mean by "point of view"?) What are these benefits to the spouses of this deed of
exchange?
A Continuous control of the property, tax exemption benefits, and other inherent benefits in a
corporation.
Q What are these advantages to the said spouses from the point of view of taxation in entering in
the deed of exchange?
A Having fulfilled the conditions in the income tax law, providing for tax free exchange of
property, they were able to execute the deed of exchange free from income tax and acquire a
47
TAX I FULL TEXTS for 18 February 2017
corporation. hands. Hence, the private respondent has no basis for its claim of a light of first refusal under the
Q What provision in the income tax law are you referring to? lease contract.
A I refer to Section 35 of the National Internal Revenue Code under WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution of
par. C-sub-par. (2) Exceptions regarding the provision which I quote: the then Intermediate Appellate Court are REVERSED and SET ASIDE. The amended complaint in
"No gain or loss shall also be recognized if a person exchanges his Civil Case No. 885-V-79 of the then Court of First Instance of Bulacan is DISMISSED. No costs.
property for stock in a corporation of which as a result of such SO ORDERED.
exchange said person alone or together with others not exceeding
four persons gains control of said corporation."
Q Did you explain to the spouses this benefit at the time you
executed the deed of exchange?
A Yes, sir
Q You also, testified during the last hearing that the decision to have
no par value share in the defendant corporation was for the purpose
of flexibility. Can you explain flexibility in connection with the
ownership of the property in question?
A There is flexibility in using no par value shares as the value is
determined by the board of directors in increasing capitalization. The
board can fix the value of the shares equivalent to the capital
requirements of the corporation.
Q Now also from the point of taxation, is there any flexibility in the
holding by the corporation of the property in question?
A Yes, since a corporation does not die it can continue to hold on to
the property indefinitely for a period of at least 50 years. On the
other hand, if the property is held by the spouse the property will be
tied up in succession proceedings and the consequential payments
of estate and inheritance taxes when an owner dies.
Q Now what advantage is this continuity in relation to ownership by
a particular person of certain properties in respect to taxation?
A The property is not subjected to taxes on succession as the
corporation does not die.
Q So the benefit you are talking about are inheritance taxes?
A Yes, sir. (pp. 3-5, tsn., December 15, 1981)
The records do not point to anything wrong or objectionable about
this "estate planning" scheme resorted to by the Pachecos. "The
legal right of a taxpayer to decrease the amount of what otherwise
could be his taxes or altogether avoid them, by means which the law
permits, cannot be doubted." (Liddell & Co., Inc. v. The collector of
Internal Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S.
465, 7 L. ed. 596).
The "Deed of Exchange" of property between the Pachecos and
Delpher Trades Corporation cannot be considered a contract of sale.
There was no transfer of actual ownership interests by the Pachecos
to a third party. The Pacheco family merely changed their ownership
from one form to another. The ownership remained in the same
AL Ilagan-Malipol, AB, MD 48