Montero - Tax Digests (Block A 2014)
(iii) TAXATION OF SPECIAL ENTITIES
57. AMERICAN BIBLE SOCIETY VS. CITY OF MANILA
G.R. No. L-9637, April 30, 1957
PM Reyes Notes:
As held in American Bible Society vs. City of Manila, the municipal
ordinances imposing a tax on the sale of bibles were declared
unconstitutional as it would impair the free exercise and enjoyment of
its religious profession and worship, as well as its rights of
dissemination of religious beliefs.
(Actually it wasn’t declared unconstitutional but rather inapplicable.)
Facts:
• Plaintiff-appellant is a foreign, non-stock, non-profit,
religious, missionary corporation duly registered and doing
business in the Philippines through its Philippine agency
established in Manila in November, 1898, with its principal
office at 636 Isaac Peral in said City. The defendant appellee
is a municipal corporation with powers that are to be
exercised in conformity with the provisions of Republic Act
No. 409, known as the Revised Charter of the City of Manila.
• In the course of its ministry, plaintiff's Philippine agency has
been distributing and selling bibles and/or gospel portions
thereof (except during the Japanese occupation) throughout
the Philippines and translating the same into several
Philippine dialects.
• On May 29 1953, the acting City Treasurer of the City of
Manila informed plaintiff that it was conducting the business
of general merchandise since November, 1945, without
providing itself with the necessary Mayor's permit and
municipal license, in violation of Ordinance No. 3000, as
amended, and Ordinances Nos. 2529, 3028 and 3364, and
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required plaintiff to secure, within three days, the
corresponding permit and license fees, together with
compromise covering the period from the 4th quarter of 1945
to the 2nd quarter of 1953, in the total sum of P5,821.45.
• Plaintiff protested against this requirement, but the City
Treasurer demanded that plaintiff deposit and pay under
protest the sum of P5,891.45, if suit was to be taken in court
regarding the same (Annex B).
• To avoid the closing of its business as well as further fines
and penalties in the premises on October 24, 1953, plaintiff
paid to the defendant under protest the said permit and
license fees in the aforementioned amount, giving at the
same time notice to the City Treasurer that suit would be
taken in court to question the legality of the ordinances under
which, the said fees were being collected, which was done
on the same date by filing the complaint that gave rise to this
action.
• In its complaint plaintiff prays that judgment be rendered
declaring the said Municipal Ordinance No. 3000, as
amended, and Ordinances Nos. 2529, 3028 and 3364 illegal
and unconstitutional, and that the defendant be ordered to
refund to the plaintiff the sum of P5,891.45 paid under
protest, together with legal interest thereon, and the costs,
plaintiff further praying for such other relief and remedy as
the court may deem just equitable.
Issues: Whether or not American Bible Society is subject to tax
in this case.
Held:
• No
• With regard to Ordinance No. 2529, as amended by
Ordinances Nos. 2779, 2821 and 3028, appellant contends
that it is unconstitutional and illegal because it restrains the

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free exercise and enjoyment of the religious profession and
worship of appellant.
• Section 27 of Commonwealth Act No. 466, otherwise known
as the National Internal Revenue Code, provides:
SEC. 27. EXEMPTIONS FROM TAX ON
CORPORATIONS. — The following organizations
shall not be taxed under this Title in respect to
income received by them as such —
(e) Corporations or associations organized and
operated exclusively for religious, charitable, . . . or
educational purposes, . . .: Provided, however, That
the income of whatever kind and character from any
of its properties, real or personal, or from any activity
conducted for profit, regardless of the disposition
made of such income, shall be liable to the tax
imposed under this Code;
• Appellant's counsel claims that the Collector of Internal
Revenue has exempted the plaintiff from this tax and says
that such exemption clearly indicates that the act of
distributing and selling bibles, etc. is purely religious and
does not fall under the above legal provisions.
• It may be true that in the case at bar the price asked for
the bibles and other religious pamphlets was in some
instances a little bit higher than the actual cost of the
same but this cannot mean that appellant was engaged
in the business or occupation of selling said
"merchandise" for profit. For this reason We believe that
the provisions of City of Manila Ordinance No. 2529, as
amended, cannot be applied to appellant, for in doing so
it would impair its free exercise and enjoyment of its
religious profession and worship as well as its rights of
dissemination of religious beliefs.
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• With respect to Ordinance No. 3000, as amended, which
requires the obtention the Mayor's permit before any person
can engage in any of the businesses, trades or occupations
enumerated therein, We do not find that it imposes any
charge upon the enjoyment of a right granted by the
Constitution, nor tax the exercise of religious practices
58 CIR vs BISHOP
Reyes Notes:
Q11.1.If a hospital also admits paying patients, does it lose its
character as a charitable institution?
No. In CIR V. BISHOP OF MISSIONARY DISTRICT [14 SCRA 991],
the Supreme Court held that the admission of pay patients does not
detract from the charitable character of a hospital if its funds are
devoted exclusively to the maintenance of the institution as a public
charity (see also HERRERA V. QCBAA [3 SCRA 186])
FACTS:
• Respondent Bishop of the Missionary District of the Philippines
Islands of the Protestant, Episcopal Church in the U.S.A. is a
corporation sole duly registered with the Securities and
Exchange Commission. On the other hand, the Missionary
District of the Philippine Islands of the Protestant Episcopal
Church the U.S.A. (hereinafter referred to as Missionary District)
is a duly incorporated and established religious society and owns
and operates the St. Luke's Hospital in Quezon City, the Brent
Hospital in Zamboanga City and the St. Stephen's High School in
Manila.
• In 1957 to 1959, the Missionary District received various
shipments of materials, supplies, equipment and other articles
intended for use in the construction and operation of the new St.
Lukeâ€TMs Hospital. On these shipments, the Commissioner
collected compensation tax. The Missionary District filed claims
for refund, but which was denied by the Commissioner on the
ground that St. Lukeâ€TMs Hospital was not a charitable

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institution and therefore was not exempt from taxes because it
admits pay patients.
ISSUE: Whether or not the shipments for St. Lukeâ€TMs Hospital
are tax-exempt.
RULING:
• The following requisites must concur in order that a taxpayer
may claim exemption under the law (1) the imported articles
must have been donated; (2) the donee must be a duly
incorporated or established international civic organization,
religious or charitable society, or institution for civic religious or
charitable purposes; and (3) the articles so imported must have
been donated for the use of the organization, society or
institution or for free distribution and not for barter, sale or hire.
• As the law does not distinguish or qualify the enjoyment or the
exemption (as the Secretary of Finance did in Department Order
18, series of 1958), the admission of pay patients does not
detract from the charitable character of a hospital, if its funds are
devoted exclusively to the maintenance of the institution. Thus,
the shipments are tax exempt.
59. REV. FR. CASIMIRO LLADOC vs. COMMISSIONER OF
INTERNAL
G.R. No. L-19201 June 16, 1965
Reyes Notes: What are special entities that are granted tax
exemptions by the Constitution?
Under Article VI, Section 28, the following are exempt from real
property taxes:
1. Charitable institutions
2. Churches
3. Parsonages or convents appurtenant thereto
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4. Mosques
5. Non-profit cemeteries; and
6. All lands, buildings, and improvements, actually, directly and
exclusively used for religious, charitable or educational purposes.
The exemption provided for under Article VI, Section 28 pertains only
to real property taxes (LLADOC V. CIR [14 SCRA 292]).
Under Article XIV, Section 4(3), all revenues and assets of non-
stock, non-profit educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and
duties.
CASE:
Petitioner lodged a protest with the CIR to the assessment and
requested the withdrawal for donee's gift tax against the Catholic
Parish of Victorias, Negros Occidental. CIR and CTA denied. SC
affirmed decision appealed from insofar as tax liability is concerned;
it is modified, in the sense that petitioner herein is not personally
liable for the said gift tax.
FACTS:
• Sometime in 1957 - The M.B. Estate, Inc., of Bacolod City,
donated P10,000.00 in cash to Rev. Fr. Crispin Ruiz, then parish
priest of Victorias, Negros Occidental, and predecessor of herein
petitioner, for the construction of a new Catholic Church in the
locality. The total amount was actually spent for the purpose
intended.
• March 3, 1958 The donor M.B. Estate, Inc., filed the donor's gift
tax return.
• Under date of April 29, 1960, the respondent Commissioner of
Internal Revenue issued an assessment for donee's gift tax
against the Catholic Parish of Victorias, Negros Occidental, of
which petitioner was the priest. The tax amounted to P1,370.00
including surcharges, interests of 1% monthly from May 15, 1958

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to June 15, 1960, and the compromise for the late filing of the
return.
• Petitioner lodged a protest to the assessment and requested the
withdrawal thereof.
• The protest and the motion for reconsideration presented to the
Commissioner of Internal Revenue were denied.
• The petitioner appealed to the Court of Tax Appeals on
November 2, 1960.
• In the petition for review, the Rev. Fr. CasimiroLladoc claimed,
among others, that at the time of the donation, he was not the
parish priest in Victorias; that there is no legal entity or juridical
person known as the "Catholic Parish Priest of Victorias," and,
therefore, he should not be liable for the donee's gift tax. It was
also asserted that the assessment of the gift tax, even against
the Roman Catholic Church, would not be valid, for such would
be a clear violation of the provisions of the Constitution.
ISSUE: Whether or not petitioner should be liable for the assessed
donee's gift tax on the P10,000.00 donated for the construction of the
Victorias Parish Church?
HELD & RATIO:
NO, petition is not personally liable but the exemption was denied.
• The Constitution, exempts from taxation cemeteries, churches
and parsonages or convents, appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious
purposes. The exemption is only from the payment of taxes
assessed on such properties enumerated, as property taxes, as
contra distinguished from excise taxes.
• In the present case, what the Collector assessed was a donee's
gift tax; the assessment was not on the properties themselves.
o It did not rest upon general ownership; it was an excise
upon the use made of the properties, upon the exercise
of the privilege of receiving the properties.
o A gift tax is not a property tax, but an excise tax imposed
on the transfer of property by way of gift inter vivos, the
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imposition of which on property used exclusively for
religious purposes, does not constitute an impairment of
the Constitution.
o As well observed by the respondent Court, the phrase
"exempt from taxation," as employed in the
Constitution should not be interpreted to mean
exemption from all kinds of taxes. And there being no
clear, positive or express grant of such privilege by law,
in favor of petitioner, the exemption herein must be
denied.
FINAL VERDICT: The decision appealed from should be, as it is
hereby affirmed insofar as tax liability is concerned; it is modified, in
the sense that petitioner herein is not personally liable for the said
gift tax, and that the Head of the Diocese, herein substitute
petitioner, should pay, as he is presently ordered to pay, the said gift
tax, without special, pronouncement as to costs.
Source: (2012 digest)
60. JOSE HERRERA AND ESTER OCHANGCO V. THE QUEZON
CITY BOARD OF ASSESMENTS APPEALS
REYES NOTES/ CASE:
The exemption in favor of property used exclusively for
charitable or educational purposes is not limited to property actually
indispensable but extends to facilities which are incidental to or
reasonably necessary for the accomplishment of its purposes.
As to the “lands, buildings, and improvements,” such is
beyond the taxing power of the State irrespective
of the substantial profits as “all lands, buildings and improvements
used exclusively for religious, charitable or educational purposes” are
exempt from real property taxes. The school is a facility incidental or
reasonably necessary for the accomplishment of the purposes of the
hospital as the students practice therein.

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FACTS:
• Petitioners were authorized to establish and operate St.
Catherine’s Hospital in Sta. Mesa Heights, QC. They sent a
letter to QC assessor requesting exemption from real estate
tax on the lot, building and improvements on the hospital
being established for charitable and humanitarian purposes.
This was granted effective years 1953, 1954, and 1955.
• On Aug 10, 1955, the hospital property was reclassified from
tax exempt to “taxable” by the QC assessor effective 1956,
this was appealed to respondent but was denied.
• This was elevated to the Court of Tax Appeals, the issue
was raised as whether the lot, building and improvements
are exempt from real property tax. The resolution of this
issue boils down to whether the property is exclusively used
for charitable and educational purposes.
• The CTA decided the issue on the negative. The hospital
has 32 beds (20 for charity patients and 12 for pay-patients).
Charity patients admitted are given free medical service
while pay-patients are requited to pay hospital services
ranging from P5 to P40 per day. The income from pay-
patients is spent for the improvement of charity wards. The
hospital has 3 nurses, 2 graduate midwives, a resident
physician (P170 monthly salary) and Ester (Petitioner) is the
directress. The hospital mainly caters to obstetrical cases.
Within the hospital premises operates the St. Catherine
School of Midwifery with around 200 students paying P300
for tuition fee plus P50 board and lodging. Based on the
statement of accounts of the hospital from 1954-56, the
expenses incurred were larger than the income collected
resulting in deficit on all 3 years.
• The CTA’s decision was based on the ground that the
hospital has a pay ward for pay-patient like other hospitals
operated for profit and that the petitioner and their family
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occupy a portion of the building for their residence. With
regard to the school, the CTA conceded that the proposition
might be property if the property used for the School of
Midwifery were separate and distinct from the hospital.
However, the school property has not been shown to be
exclusively used for school purposes. Rather, it had a dual
use for classroom and hospital use.
ISSUES:
1. Whether or not the lot, building and improvements on
the Hospital are exempt from taxation?
HELD & RATIO:
• YES. The admission of pay-patients does not detract from the
charitable character of a hospital, if all funds are devoted
“exclusively to the maintenance of the institution” as a “public
charity.” If charity is the primary objective. The mere fact that
profit has been made will not deprive the hospital of its
benevolent character.
• Citing previous rulings: UST hospital is not for profit making
although it had 140 paying beds mainted only to partly finance
the expenses of free wards with 203 beds. St. Paul’s hospital in
Iloilo, cannot be considered engaged in business just because it
charges paying patients additional 10% of the price of the
medicine to partly offset cost of medicine free of charge for
charity patients.
FINAL VERDICT: Decision of CTA and QC Board is reversed and
set aside.
Notes/ Source: 2A-2015

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61. THE ROMAN CATHOLIC BISHOP OF NUEVA SEGOVIA, as
representative of the Roman Catholic Apostolic Church, vs. THE
PROVINCIAL BOARD OF ILOCOS NORTE, ET AL.
CASE:
P is the owner of land in Ilocos Norte, which several parts
had different purposes. R demanded payment for land tax, to which
P paid under protest. They claim that LOT 1 (lot adjoining the
convent and LOT 2 (former cemetery) are part of the exemption
fromm land tax. Court held that yes, the 2 lots are exempt from land
tax.
FACTS:
• P is the owner of a parcel of land in Ilocos Norte, all sides facing
the public streets
• South side: part of the churchyeard, the convent, lot used for
a vegetable garden, stable and well for convent
• Center: remainder of the churchyard and church
• North: old cemetery, tower
• R demanded payment from P, which paid under protest — LAND
TAX on the lot adjoining the convent (LOT 1) and the lot which was
formerly the cemetery (LOT 2)
• P filed an action for the recovery of the sum, alleging that the
collection of such is illegal
• Lower court decision: tax on LOT 1 legal; tax on LOT 2 illegal
ISSUES:
1. Whether or not Lots 1 and 2 are exempt from land tax
HELD & RATIO:
1. YES! BOTH LOTS ARE EXEMPT FROM LAND TAX, R to
refund to P whatever was paid
• Tax emption according to Sec.344 of the Administrative Code — to
the home of the parties who presides over the church and who has
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to take care of himself in order to discharge his duties. It must
include not only the land actually occupied by the church, but also
the adjacent ground destined to the ORDINARY INCIDENTAL
USES OF MAN.
• Except in large cities where the density of the population and the
development of commerce require the use of larger tracts of land
for buildings, a VEGETABLE GARDEN belongs to a house and, in
the case of a convent, it use is limited to the necessities of the
priest, which COMES UNDER THE EXEMPTION.
• In regard to the lot which formerly was the cemetery, while it is no
longer used as such, neither is it used for commercial purposes
and, according to the evidence, is now being used as a LODGING
HOUSE by the people who participate in religious festivities, which
constitutes an INCIDENTAL USE in religious functions, which also
comes within the exemption.
FINAL VERDICT: Petition is GRANTED.
62. CIR vs CA and YMCA
FACTS:
• Private Respondent YMCA is a non-stock, non-profit institution,
which conducts various programs and activities that are
beneficial to the public, especially the young people, pursuant to
its religious, educational and charitable objectives.
• In 1980, private respondent earned, among others, an income of
P676,829.80 from leasing out a portion of its premises to small
shop owners, like restaurants and canteen operators, and
P44,259.00 from parking fees collected from non-members. On
July 2, 1984, the commissioner of internal revenue (CIR) issued
an assessment to private respondent, in the total amount of
P415,615.01 including surcharge and interest, for deficiency
income tax, deficiency expanded withholding taxes on rentals
and professional fees and deficiency withholding tax on wages.

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Private respondent formally protested the assessment and, as a
supplement to its basic protest, filed a letter dated October 8,
1985. In reply, the CIR denied the claims of YMCA.
• Contesting the denial of its protest, the YMCA filed a petition for
review at the Court of Tax Appeals (CTA) on March 14, 1989. In
due course, the CTA issued this ruling in favor of the YMCA:
ISSUE: Whether or not the YMCA is exempted from rental income
derived from the lease of its properties
RULING
• Petitioner argues that while the income received by the
organizations enumerated in Section 27 (now Section 26) of the
NIRC is, as a rule, exempted from the payment of tax "in respect
to income received by them as such," the exemption does not
apply to income derived "xxx from any of their properties, real or
personal, or from any of their activities conducted for profit,
regardless of the disposition made of such income xxx" We
agree with the commissioner.
• In the instant case, the exemption claimed by the YMCA is
expressly disallowed by the very wording of the last paragraph of
then Section 27 of the NIRC which mandates that the income of
exempt organizations (such as the YMCA) from any of their
properties, real or personal, be subject to the tax imposed by the
same Code.
63. LUNG CENTER VS QC
Reyes Notes:
The Philippine Lung Center leased portions of its real property
out for commercial purposes. Are these exempt from real
property taxes?
No. In LUNG CENTER OF THE PHILIPPINES V. QUEZON CITY
[433 SCRA 119], the Supreme Court held that the hospital was not
exempt from real property tax on the portions of its property not
actually, directly, and exclusively used for charitable purposes. Thus,
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those leased out for commercial purposes are subject to real
property tax. Those used by the hospital even if used for paying
patients
FACTS:
• The petitioner, a non-stock and non-profit entity is the registered
owner of a parcel of land where erected in the middle of the
aforesaid lot is a hospital known as the Lung Center of the
Philippines. A big space at the ground floor is being leased to
private parties, for canteen and small store spaces, and to
medical or professional practitioners who use the same as their
private clinics for their patients whom they charge for their
professional services. Almost one-half of the entire area on the
left side of the building along Quezon Avenue is vacant and idle,
while a big portion on the right side, at the corner of Quezon
Avenue and Elliptical Road, is being leased for commercial
purposes to a private enterprise known as the Elliptical Orchids
and Garden Center.
• On June 7, 1993, both the land and the hospital building of the
petitioner were assessed for real property taxes in the amount of
P4,554,860 by the City Assessor of Quezon City but the former
filed a Claim for Exemption from real property taxes with the City
Assessor, predicated on its claim that it is a charitable institution.
ISSUE: Whether or not the petitioner’S real properties are exempted
from realty tax exemptions.
RULING:
• Even as we find that the petitioner is a charitable institution,
those portions of its real property that are leased to private
entities are not exempt from real property taxes as these are not
actually, directly and exclusively used for charitable purposes.
What is meant by actual, direct and exclusive use of the property
for charitable purposes is the direct and immediate and actual
application of the property itself to the purposes for which the
charitable institution is organized.

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• Hence, a claim for exemption from tax payments must be clearly
shown and based on language in the law too plain to be
mistaken. Under Section 2 of Presidential Decree No. 1823, the
petitioner does not enjoy any property tax exemption privileges
for its real properties as well as the building constructed thereon.
If the intentions were otherwise, the same should have been
among the enumeration of tax exempt privileges under Section
2.
64. COMMISSION OF INTERNAL REVENUE vs. ST. LUKES
REYES NOTES/ CASE:
St. Lukes Medical Center is a hospital organized as a non-stock
and non-profit corporation. It admits both paying and non-
paying patients. The CIR claimed that St. Lukes was liable for
income tax at 10% as provided under Sec 27(B) (which provides
for 10% taxable income on propriety educational institutions
and hospitals which are non-profit), of the NIRC. St. Lukes
argues that it is a non-stock, non-profit institution for charitable
and social welfare purposes exempt from income tax under
Section 30(E) and (G) of the NIRC. Decide.
St. Lukes cannot claim full tax exemption under Section 30 because
it has paying patients this is notwithstanding the fact that it is a non-
profit hospital. For Section 27(B) to apply, the hospital must be non-
profit which means that no net income or asset accrues to or benefits
any member or specific person and all the activities of the hospital
1
are non-profit. On the other hand, Section 30(E) and (G), while
providing for an exemption is qualified by the last paragraph, which,
in turn, provides that activities conducted for profit, shall be taxable.
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1 hospital. The hospital admits non-paying patients as part of it’s work
!Section 30 (E), NIRC provides that a non-stock corporation or association organized
and operated exclusively for charitable purposes is exempt from income tax while
Section 30 (G) provides that a civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare is likewise exempt.
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Section 30 (E) and (G) requires that an institution to be operated
exclusively for charitable purposes to be completely exempt from
income tax. In this case, however, St. Lukes is not operated
exclusively for charitable purposes in so far as its revenues from
paying patients are concerned. Such revenue is subject to income
tax at 10% under Section 27(B).
Is the existence of paying patients material to the real property
tax exemption of the building, land and improvements of St.
Lukes?
No. The lands, buildings, and improvements of St. Lukes remain
exempt from real property taxes even if it admits paying patients.
This is consistent with the ruling in LUNG CENTER OF THE
PHILIPPINES v. QUEZON CITY [433 SCRA 119] where the
Supreme Court held that a charitable institution does not lose its
character as such and its exemption from real property taxes simply
because it derives income from paying patients.
If St. Lukes were to lease to private persons portions of its
property for profit, is the property and the profits exempt from
taxes?
The property will not be exempt from real property taxes and also the
profits will not be exempt from income tax. Pursuant to the ruling in
LUNG CENTER OF THE PHILS v. QUEZON CITY those portions of
real property not actually used for charitable purposes shall not be
exempt from real property taxes. Consistent with the ruling in CIR v.
CA, realized from real property by exempt institutions from whatever
source or wherever used are taxable.
CASE:
St. Lukes is a hospital organized as a non-stock and non-profit
as a “charitable” institution, but also admits paying patients that
allowed it to make a profit of more than a billion pesos. It was

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assessed by the BIR for deficiency taxes amounting to P.
76,036,116.06 but it was later on reduced to P63,935,351.57, which
St. Lukes still rejected. The BIR cited Sec 27(B) of the NIRC code
that taxes on 10% of income, non-profit hospitals for its propriety
function. St. Lukes argues that Sec 30 (E) and (G) of the NIRC
exempts them from payment of tax. The Supreme Court held that St.
Lukes is liable on the deficiency tax since it is not an institution that is
“operated exclusively” for charitable or social welfare purposes. The
Court also said that Sec 27(B), Sec 30(E) and (G) should be read as
a whole and the fact that a charitable institution engages in activity
that earns a profit does not make it lose its tax exemption, but it is
liable to pay 10% income tax on those for-profit activities.
FACTS:
• St. Luke's Medical Center, Inc. (St. Luke's) is a hospital
organized as a non-stock and non-profit corporation.
• On 16 December 2002, the Bureau of Internal Revenue
(BIR) assessed St. Luke's deficiency taxes amounting
toP76,063,116.06 for 1998, comprised of deficiency income
tax, value-added tax, withholding tax on compensation and
expanded withholding tax. The BIR reduced the amount
to P63,935,351.57 during trial in the First Division of the
CTA.
• St. Luke's filed an administrative protest with the BIR against
the deficiency tax assessments.
• The BIR argued before the CTA that Section 27(B) of the
NIRC, which imposes a 10% preferential tax rate on the
income of proprietary non-profit hospitals, should be
applicable to St. Luke's. According to the BIR, Section
27(B) introduced in 1997, "is a new provision intended to
amend the exemption on non-profit hospitals that were
previously categorized as non-stock, non-profit corporations
under Section 26 of the 1997 Tax Code x x x." 5 It is a
specific provision which prevails over the general exemption
on income tax granted under Section 30(E) and (G) for non-
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stock, non-profit charitable institutions and civic
organizations promoting social welfare.
• The BIR claimed that St. Luke's was actually operating for
profit in 1998 because only 13% of its revenues came from
charitable purposes.
• St. Luke's contended that the BIR should not consider its
total revenues, because its free services to patients
wasP218,187,498 or 65.20% of its 1998 operating income
(i.e., total revenues less operating expenses)
ofP334,642,615. 8 St. Luke's also claimed that its income
does not inure to the benefit of any individual
• St. Lukes argued that the making of profit per se does not
destroy its income tax exemption.
ISSUES:
1. The sole issue is whether St. Luke's is liable for deficiency
income tax in 1998 under Section 27(B) of the NIRC, which
imposes a preferential tax rate of 10% on the income of
proprietary non-profit hospitals.
HELD & RATIO:
1. YES. Section 27(B) makes a non-profit hospital liable to pay
10% income tax for profit-making acts. The Court finds that
St. Luke's is a corporation that is not "operated exclusively"
for charitable or social welfare purposes insofar as its
revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision
granting tax exemption, but also on the clear and plain text of
Section 30(E) and (G). Section 30(E) and (G) of the NIRC
requires that an institution be "operated exclusively" for
charitable or social welfare purposes to be completely
exempt from income tax. An institution under Section 30(E)
or (G) does not lose its tax exemption if it earns income from
its for-profit activities. Such income from for-profit activities,
under the last paragraph of Section 30, is merely subject to

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income tax, previously at the ordinary corporate rate but now
at the preferential 10% rate pursuant to Section 27(B).
• There is no dispute that St. Luke's is organized as a
non-stock and non-profit charitable institution.
However, this does not automatically exempt St.
Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets
the test of charity, a charitable institution is not ipso
facto tax exempt.
• To be exempt from income taxes, Section 30(E) of
the NIRC requires that a charitable institution must
be "organized and operated exclusively" for
charitable purposes. Likewise, to be exempt from
income taxes, Section 30(G) of the NIRC requires
that the institution be "operated exclusively" for
social welfare.
• Thus, even if the charitable institution must be
"organized and operated exclusively" for charitable
purposes, it is nevertheless allowed to engage in
"activities conducted for profit" without losing its tax
exempt status for its not-for-profit activities. The only
consequence is that the "income of whatever kind
and character" of a charitable institution "from any of
its activities conducted for profit, regardless of the
disposition made of such income, shall be subject to
tax." Prior to the introduction of Section 27(B), the
tax rate on such income from for-profit activities was
the ordinary corporate rate under Section 27(A).
With the introduction of Section 27(B), the tax rate is
now 10%.
• The Court cannot expand the meaning of the words
"operated exclusively" without violating the NIRC.
Services to paying patients are activities conducted
for profit. They cannot be considered any other way.
There is a "purpose to make profit over and above
the cost" of services. The P1.73 billion total
! 10!
Montero - Tax Digests (Block A 2014)
revenues from paying patients is not even incidental
to St. Luke's charity expenditure of P218,187,498 for
non-paying patients.
• St. Luke's fails to meet the requirements under
Section 30(E) and (G) of the NIRC to be completely
tax exempt from all its income. However, it remains a
proprietary non-profit hospital under Section 27(B) of
the NIRC as long as it does not distribute any of its
profits to its members and such profits are
reinvested pursuant to its corporate purposes. St.
Luke's, as a proprietary non-profit hospital, is entitled
to the preferential tax rate of 10% on its net income
from its for-profit activities.
• A charitable institution does not lose its charitable
character and its consequent exemption from
taxation merely because recipients of its benefits
who are able to pay are required to do so, where
funds derived in this manner are devoted to the
charitable purposes of the institution. The generation
of income from paying patients does not per se
destroy the charitable nature of St. Luke's.
• The 10% income tax rate under Section 27(B)
specifically pertains to proprietary educational
institutions and proprietary non-profit hospitals. The
BIR argues that Congress intended to remove the
exemption that non-profit hospitals previously
enjoyed under Section 27(E) of the NIRC of 1977,
which is now substantially reproduced in Section
30(E) of the NIRC of 1997.
• The Court partly grants the petition of the BIR but on
a different ground. We hold that Section 27(B) of the
NIRC does not remove the income tax exemption of
proprietary non-profit hospitals under Section 30(E)
and (G). Section 27(B) on one hand, and Section
30(E) and (G) on the other hand, can be construed
together without the removal of such tax exemption.
 Montero - Tax Digests (Block A 2014)
!

The effect of the introduction of Section 27(B) is to 2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746
subject the taxable income of two specific are MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO
institutions, namely, proprietary non-profit PAY the deficiency income tax in 1998 based on the 10%
educational institutions and proprietary non-profit preferential income tax rate under Section 27(B) of the National
hospitals, among the institutions covered by Section Internal Revenue Code. However, it is not liable for surcharges and
30, to the 10% preferential rate under Section 27(B) interest on such deficiency income tax under Sections 248 and 249
instead of the ordinary 30% corporate rate under the of the National Internal Revenue Code. All other parts of the Decision
last paragraph of Section 30 in relation to Section and Resolution of the Court of Tax Appeals are AFFIRMED.
27(A)(1).
• As a matter of efficiency, the government forgoes
taxes, which should have been spent to address
public needs, because certain private entities
already assume a part of the burden. This is the
rationale for the tax exemption of charitable
institutions. The loss of taxes by the government is
compensated by its relief from doing public works
which would have been funded by appropriations
from the Treasury.
• St. Luke's is therefore liable for deficiency income
tax in 1998 under Section 27(B) of the NIRC.
However, St. Luke's has good reasons to rely on the
letter dated 6 June 1990 by the BIR, which opined
that St. Luke's is "a corporation for purely charitable
and social welfare purposes"59 and thus exempt
from income tax. In Michael J. Lhuillier, Inc. v.
Commissioner of Internal Revenue, the Court said
that "good faith and honest belief that one is not
subject to tax on the basis of previous interpretation
of government agencies tasked to implement the tax
law, are sufficient justification to delete the
imposition of surcharges and interest."

FINAL VERDICT: WHEREFORE, the petition of the Commissioner

of Internal Revenue in G.R. No. 195909 is PARTLY GRANTED. The
Decision of the Court of Tax Appeals En Banc dated 19 November

! 11!

!
• SITUS OF TAXATION & DOUBLE
TAXATION
65. REPUBLIC BANK v. COURT OF TAX APPEALS
REYES NOTES/ CASE:
Petitioner claims that the value assessed of them by virtue of
the Central Bank Act and the assessment made by CIR constitutes
double taxation and must be struck down for imposing taxes twice for
the same cause.
In order to constitute double taxation in the objectionable or
prohibited sense the same property must be taxed twice when it
should be taxed but once; both taxes must be imposed on the same
property or subject-matter, for the same purpose, by the same State,
Government, or taxing authority, within the same jurisdiction or taxing
district, during the same taxing period, and they must be the same
kind or character of tax.”
FACTS:
• Sec. 100 of The Central Bank Act – provides that in order to
control the volume of money created by the credit operations
of the banking system, banks operating in the Philippines
shall be required to maintain reserves against their deposit
liabilities. The required reserves of each bank shall be
proportional to the volume of its deposit liabilities and shall
ordinarily take the form of a deposit in the Central Bank of
the Philippines.
o If a bank chronically has a reserve deficiency, the
Monetary Board may limit or prohibit the making of
new loans or investments by the bank and may
require that part or all of the net profits of the bank
be assigned to surplus.
! 12!
Montero - Tax Digests (Block A 2014)
On the other hand, pursuant to the Tax Code, the
•
respondent CIR assessed Republic Bank the amount of
P1,325,768.82 for taxable year 1969 and P1,953,132.67 for
taxable year 1970 as 1% monthly bank reserve deficiency
tax.
• Republic Bank filed a petition for review with the Tax Court
contesting the assessment for the taxable year 1969 and
another one for year 1970. The cases, involving similar
issues, were consolidated.
• Court of Tax Appeals – dismissed the petitions for review
and upheld the validity of the assessments. Hence the
current petition for review.
• Republic Bank’s arguments:
• That Section 249 of the 1970 Tax Code is no longer
enforceable, because Section 126 of Act 1459 (The
Corporation Law), which was allegedly the basis for the
imposition of the 1% reserve deficiency tax, was repealed by
the General Banking Act, and by the Central Bank Act.
o Section 249 of the Tax Code of 1970 – There shall
be collected upon the amount of reserve deficiencies
incurred by the bank, and for the period of their
duration, as provided in Section 126 of Act No. 1459,
as amended by Act No. 3610, 1% per month.
o Section 126 of the Corporation Law – ... Reserve
deficiencies shall be penalized at the rate of 1% per
month upon the amount of the deficiencies and for
the periods of their duration in accordance with the
regulation to be issued by the Bank Commissioner.
o Section 90 of the General Banking Act – ... Section
103 to 146 ... of Act 1459 (Corporation Law), as
amended; ... are hereby repealed.
• That in case of a reserve deficiency, the violating bank would
be liable at the same time for a tax of 1% a month (Section
249, NIRC) payable to the BIR as well as a penalty of 1/10 of
1% a day (Section 106, Central Bank Act) payable to the
Central Bank.

!
o It would be wrong, to say that the imposition in
Section 249 of the Tax Code is a tax, because taken
in the context of the referred statute, it is really a
penalty (from which it claims exemption under Letter
of Instruction 1330 to be discussed below).
• As the law stood during the years the petitioner was
assessed for taxes on reserve deficiencies (1969 & 1970),
petitioner had to pay twice -- the first, a penalty, to the
Central Bank (for violation of Secs. 100 and 101, Central
Bank Act) and the second, a tax to the BIR (Section 249,
NIRC) for incurring a reserve deficiency.
• RTC found petitioner guilty beyond reasonable doubt of a
violation of BP 22.
• The CA affirmed RTC’s decision. Petitioner filed for an MR
but was denied.
ISSUES: Whether or Not Section 249 of the Tax Code of 1970
has been rendered inoperative.
HELD & RATIO:
NO, the law states a tax is to be collected. Sec. 249 is under the title
“Miscellaneous Taxes”.
• It is clear from the statutes then in force that there was no double
taxation involved -- one was a penalty and the other was a tax.
o The payment of 1/10 of 1% for incurring reserve
deficiencies (Section 106, Central Bank Act) is a penalty
as the primary purpose involved is regulation, while the
payment of 1% for the same violation (Second
Paragraph, Section 249, NIRC) is a tax for the
generation of revenue which is the primary purpose in
this instance.
• Petitioner's case is covered by two special laws -- one a banking
law and the other, a tax law. These two laws should receive such
construction as to make them harmonize with each other and
with the other body of pre-existing laws.
! 13!
Montero - Tax Digests (Block A 2014)
• Petitioner should not complain that it is being asked to pay twice
for incurring reserve deficiencies. It can always avoid this
predicament by not having reserve deficiencies.
2. Reserve deficiencies for years 1969-1970 not covered by Letter of
Instruction 1330
• It does not exempt Republic Bank because this LOI does not
cover the years 1969 and 1970 as it was issued only on June 6,
1983 and covers the period when PHILSUCOM bought the then
ailing Republic Bank from the Roman family and renamed it the
Philippine Planters Bank to be used as its financial conduit for
the sugar industry.
FINAL VERDICT: Petition is denied.
Notes/ Source: 2A Digests 2015
66. P&G PHILIPPINE MANUFACTURING CORPORATION v. THE
MUNICIPALITY OF JAGNA, PROVINCE OF BOHOL
G.R. No. L-24265 December 28, 1979
REYES NOTES/ CASE:
The SC stated that there is no double taxation when the
same person is taxed twice by the same jurisdiction for the same
thing. A tax on products is different from a tax on the privilege of
storing copra in a bodega situated within the territorial jurisdiction of
the municipality. Furthermore, in the former, the taxing authority is
the national government while in the latter, the taxing authority is the
local government.
The validity of Ordinance no. 4 enacted by defendant
municipality is being assailed by P&G in this case. Said ordinance
imposes storage fees on all exportable copra deposited in the
bodega within the jurisdiction of the Municipality of Jagna Bohol.
P&G contends that to be compelled to pay the storage fees would

!
amount to double taxation so it seeks a refund for the storage fees it
paid. The Court held that for double taxation to exist, the same
property must be taxed twice, when it should be taxed but once.
Double taxation has also been defined as taxing the same person
twice by the same jurisdiction for the same thing. Surely, a tax on
plaintiff's products is different from a tax on the privilege of
storing copra in a bodega situated within the territorial
boundary of defendant municipality. (It wasn’t mentioned in the
case what tax P&G previously pays for its products; VAT maybe or
some form of sales tax?)
FACTS:
• P&G is a domestic corporation is engaged in the
manufacture of soap, edible oil, margarine and other similar
products, and for this purpose maintains a "bodega" in
defendant Municipality where it stores copra purchased in
the municipality and therefrom ships the same for its
manufacturing and other operations.
• It questions the validity of Ordinance No. 4, enacted by
defendant municipality, which imposes storage fees
(Municipal Treasury a storage fee of P0.10 FOR EVERY 100
kilos) on all exportable copra deposited in the bodega within
the jurisdiction of the Municipality of Jagna Bohol. It also
provides that all exportable copra deposited in the bodega
within the Municipality of Jagna Bohol, is part of the
surveillance and lookout of the Municipal Authorities
• For a period of six years, plaintiff paid defendant
Municipality, allegedly under protest, storage fees in the total
sum of 1142,265.13.
• Plaintiff prayed that Ordinance No. 4 be declared
inapplicable to it because it is not engaged in the business or
occupation of buying or selling of copra but is only storing
copra in connection with its main business of manufacturing
soap and other similar products, and that to be compelled
! 14!
Montero - Tax Digests (Block A 2014)
to pay the storage fees would amount to double taxation
and that defendant Municipality be ordered to refund to it the
amount of P42,265.13 which it had paid under protest; and
costs.
ISSUE: W/N the imposition of the storage fees under Ordinance No.
4 amounts to double taxation
HELD & RATIO:
No. Plaintiff's payment of storage fees imposed by the Ordinance in
question does not amount to double taxation
• The question of whether appellant is engaged in that
business or not is irrelevant because the storage fee is an
imposition on the privilege of storing copra in a bodega
within defendant municipality by persons, firms or
corporations.
o Section 1 of the Ordinance in question does not state
that said persons, firms or corporations should be
engaged in the business or occupation of buying or
selling copra.
o The storage fee imposed under the question Ordinance
is actually a municipal license tax or fee on persons,
firms and corporations, like plaintiff, exercising the
privilege of storing copra in a bodega within the
Municipality's territorial jurisdiction. For the term "license
tax" has not acquired a fixed meaning. It is often used
indiseriminately to designate impositions exacted for the
exercise of various privileges. In many instances, it
refers to revenue-raising exactions on privileges or
activities.
• For double taxation to exist, the same property must be
taxed twice, when it should be taxed but once. Double
taxation has also been defined as taxing the same
person twice by the same jurisdiction for the same
thing.
 Montero - Tax Digests (Block A 2014)
!

o A tax on plaintiff's products is different from a tax on o We have held that only where there is a clear showing
the privilege of storing copra in a bodega situated that what is being taxed is an export to any foreign
10
within the territorial boundary of defendant country would the prohibition come into play. When the
municipality. Ordinance itself speaks of "exportable" copra, the
meaning conveyed is not exclusively export to a foreign
Other doctrines/issues: country but shipment out of the municipality.
• The business of buying and selling and storing copra is • However, we find merit in plaintiff's contention that the lower
property the subject of regulation within the police power Court erred in ruling that its action has prescribed under
granted to municipalities under section 2238 of the Revised Article 1149 of the Civil Code, which provides for a period of
Administrative Code five years for all actions whose periods are not fixed in that
o For it has been held that a warehouse used for keeping Code.
or storing copra is an establishment likely to endanger o The case of Municipality of Opon vs. Caltex Phil., is
the public safety or likely to give rise to conflagration authority for the view that the period for prescription of
because the oil content of the copra when ignited is actions to recover municipal license taxes is six years
difficult to put under control by water and the use of under Article 1145(2) of the Civil Code. Thus, plaintiff's
chemicals is necessary to put out the fire. And as the action brought within six years from the time the right of
Ordinance itself states, all exportable copra deposited action first accrued in 1958 has not yet prescribed.
within the municipality is "part of the surveillance and
lookout of municipal authorities. FINAL VERDICT: Affirming the judgment appealed, from, we sustain
• Plaintiff's argument that the imposition of P0.10 per 100 kilos the validity of Ordinance No. 4, Series of 1957, of defendant
of copra stored in a bodega within defendant's territory is Municipality of Jagna Bohol, under the laws then prevailing.
beyond the cost of regulation and surveillance is not well
taken.
Notes/ Source:
o As enunciated in the case of Victorias Milling Co. vs.
Original digest
Municipality of Victorias, the cost of regulation cannot be
taken as a gauge, if the municipality really intended to
enact a revenue ordinance. For, 'if the charge exceeds
the expense of issuance of a license and costs of
regulation, it is a tax'. And if it is, and it is validly
imposed, 'the rule that license fees for regulation must
bear a reasonable relation to the expense of the
regulation has no application'.
• Plaintiff's further contention that the storage fee imposed by
the Ordinance is actually intended to be an export tax, which
is expressly prohibited by section 2287 of the Revised
Administrative Code, is without merit.

! 15!

!
67. PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES,
INC., vs. MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL
MAYOR, ET AL.
G.R. No. L-31156 February 27, 1976
Situs of Taxation and Double Taxation
REYES NOTES:
Q: A municipality enacted two ordinances. The first levies and
collects from soft drinks producers a tax for every bottle corked
while the second levies and collects on soft drinks produced
and manufactured within its territorial jurisdiction. Is there
double taxation?
A: Yes. All the elements of double taxation are present. However, it
must be noted, that while the factual milieu provided is similar to the
case of PEPSI COLA V. MUNICIPALITY OF TANUAN [69 SCRA
460], Supreme Court ruled that there was no double taxation in the
said case because the second ordinance repealed the first
ordinance. Otherwise, there would have been double taxation.
CASE:
Pepsi Cola has a bottling plant in the Municipality of Tanauan, Leyte.
In September 1962, the Municipality approved Ordinance No. 23
which levies and collects “from soft drinks producers and
manufacturers a tai of one-sixteenth (1/16) of a centavo for every
bottle of soft drink corked.” In December 1962, the Municipality also
approved Ordinance No. 27 which levies and collects “on soft drinks
produced or manufactured within the territorial jurisdiction of this
municipality a tax of one centavo P0.01) on each gallon of volume
capacity.
Pepsi Cola assailed the validity of the ordinances as it alleged that
they constitute double taxation in two instances: a) double taxation
because Ordinance No. 27 covers the same subject matter and
! 16!
Montero - Tax Digests (Block A 2014)
impose practically the same tax rate as with Ordinance No. 23, b)
double taxation because the two ordinances impose percentage or
specific taxes.
Pepsi Cola also questions the constitutionality of Republic Act 2264
which allows for the delegation of taxing powers to local government
units; that allowing local governments to tax companies like Pepsi
Cola is confiscatory and oppressive.
The Municipality assailed the arguments presented by Pepsi Cola. It
argued, among others, that only Ordinance No. 27 is being enforced
and that the latter law is an amendment of Ordinance No. 23, hence
there is no double taxation.
The issue in this case is whether or not there is double taxation. The
Court held that there is no double taxation. The argument of the
Municipality is well taken. Further, Pepsi Cola’s assertion that the
delegation of taxing power in itself constitutes double taxation cannot
be merited. It must be observed that the delegating authority
specifies the limitations and enumerates the taxes over which local
taxation may not be exercised. The reason is that the State has
exclusively reserved the same for its own prerogative. Moreover,
double taxation, in general, is not forbidden by our fundamental law
unlike in other jurisdictions. Double taxation becomes obnoxious only
where the taxpayer is taxed twice for the benefit of the same
governmental entity or by the same jurisdiction for the same
purpose, but not in a case where one tax is imposed by the State
and the other by the city or municipality.
FACTS: (please refer to digest #28 for the facts of the case. ☺)
• The plaintiff-appellant submits that Ordinance No. 23 and 27
constitute double taxation, because these two ordinances cover
the same subject matter and impose practically the same tax
rate. The thesis proceeds from its assumption that both
ordinances are valid and legally enforceable.

!
ISSUE: Whether or not there is double taxation.
HELD/RATIO:
No. There is no double taxation.
• Double taxation becomes obnoxious only where the taxpayer is
taxed twice for the benefit of the same governmental entity or by
the same jurisdiction for the same purpose, but not in a case
where one tax is imposed by the State and the other by the city
or municipality.
• Ordinance No. 23 – which was approved on September 25,
1962, levies or collects from soft drinks producers or
manufacturers a tax of one-sixteen (1/16) of a centavo for every
bottle corked, irrespective of the volume contents of the bottle
used.
• When it was discovered that the producer or manufacturer could
increase the volume contents of the bottle and still pay the same
tax rate, the Municipality of Tanauan enacted Ordinance No. 27,
approved on October 28, 1962, imposing a tax of one centavo
(P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity.
• The difference between the two ordinances clearly lies in the tax
rate of the soft drinks produced:
o Ordinance No. 23— it was 1/16 of a centavo for every
bottle corked
o Ordinance No. 27— it is one centavo (P0.01) on each
gallon (128 fluid ounces, U.S.) of volume capacity.
• The intention of the Municipal Council of Tanauan in enacting
Ordinance No. 27 is clear: it was intended as a plain substitute
for the prior Ordinance No. 23, and operates as a repeal of the
latter, even without words to that effect.
• Plaintiff-appellant in its brief admitted that defendants-appellees
are only seeking to enforce Ordinance No. 27
o Even the stipulation of facts confirms the fact that the
Acting Municipal Treasurer of Tanauan, Leyte sought to
compel compliance by the plaintiff-appellant of the
provisions of said Ordinance No. 27
! 17!
Montero - Tax Digests (Block A 2014)
• The aforementioned admission shows that only Ordinance No.
27is being enforced by defendants-appellees.
• Even the Provincial Fiscal, counsel for defendants-appellees
admits in his brief "that Section 7 of Ordinance No. 27, series of
1962 clearly repeals Ordinance No. 23 as the provisions of the
latter are inconsistent with the provisions of the former."
• Supreme Court ruled that there was no double taxation in
this case because the second ordinance repealed the first
ordinance. Otherwise, there would have been double
taxation.
Dispositive portion:
ACCORDINGLY, the constitutionality of Section 2 of Republic Act
No. 2264, otherwise known as the Local Autonomy Act, as amended,
is hereby upheld and Municipal Ordinance No. 27 of the Municipality
of Tanauan, Leyte, series of 1962, re-pealing Municipal Ordinance
No. 23, same series, is hereby declared of valid and legal effect.
Costs against petitioner-appellant.
Notes/Sources:
Got the ready-recit digests from Uberdigests. ☺
68. VILLANUEVA v. CITY OF ILOILO
Double Taxation
REYES NOTES/ CASE:
Q: A City passed an ordinance imposing license tax on persons
engaged in the business of operating tenement houses. Is there
double taxation given that buildings pay real estate taxes and
also income taxes besides the tenement tax imposed by the
ordinance?
A: No In order to constitute double taxation in the objectionable or
prohibited sense the same property must be taxed twice when it
should be taxed but once; both taxes must be imposed on the same

!
property or subject-matter, for the same purpose, by the same State,
Government, or taxing authority, within the same jurisdiction or taxing
district, within the same jurisdiction or taxing district, during the same
taxing period, and they must be the same kind or character of tax. It
has been shown that a real estate tax and tenement tax imposed by
the ordinance, although imposed by the same taxing authority, are
not of the same kind or character. Furthermore, while it is true that
they are taxable as real estate dealers (income tax) and still taxable
under the ordinance, the argument against double taxation may not
be invoked. The same tax may be imposed by the national
government as well as by the local government. There is nothing
inherently obnoxious in the exaction of license fees or taxes with
respect to the same occupation, calling or activity by both the State
and a political subdivision thereof.
FACTS:
• The municipal board of Iloilo City enacted Ordinance 11, AN
ORDINANCE IMPOSING MUNICIPAL LICENSE TAX ON
PERSONS ENGAGED IN THE BUSINESS OF OPERATING
TENEMENT HOUSES.
• In Iloilo City, the appellees Eusebio Villanueva and
Remedios S. Villanueva are owners of five tenement houses,
aggregately containing 43 apartments.
• By virtue of the ordinance in question, the appellant City
collected from spouses Eusebio Villanueva and Remedios S.
Villanueva, for the years 1960-1964, the sum of P5,824.30.
P1,317.00. Eusebio Villanueva has likewise been paying real
estate taxes on his property.
• The plaintiffs-appellees filed a complaint, and an amended
complaint, respectively, against the City of Iloilo, praying that
Ordinance 11, series of 1960, be declared "invalid” for
constituting double taxation.
• The lower court declared the ordinance invalid on the
ground, among others, that it constitutes double taxation.
Hence, this petition.
! 18!
Montero - Tax Digests (Block A 2014)
• Petitioner’s contention is that they are doubly taxed because
they are paying the real estate taxes and the tenement tax
imposed by the ordinance in question.
ISSUES:
2. Whether or not Ordinance 11, as promulgated by the
City of Iloilo, is illegal for imposing double taxation.
HELD & RATIO:
3. NO, the argument on double taxation may not be invoked.
• The same tax may be imposed by the national
government as well as by the local government.
There is nothing inherently obnoxious in the exaction
of license fees or taxes with respect to the same
occupation, calling or activity by both the State and a
political subdivision thereof.
• It is a well-settled rule that a license tax may be
levied upon a business or occupation although the
land or property used in connection therewith is
subject to property tax.
• In order to constitute double taxation in the
objectionable or prohibited sense the same property
must be taxed twice when it should be taxed but
once; both taxes must be imposed on the same
property or subject-matter, for the same purpose, by
the same State, Government, or taxing authority,
within the same jurisdiction or taxing district, during
the same taxing period, and they must be the same
kind or character of tax
• It has been shown that a real estate tax and the
tenement tax imposed by the ordinance, although
imposed by the same taxing authority, are not of the
same kind or character.
• At all events, there is no constitutional prohibition
against double taxation in the Philippines. It is
something not favored, but is permissible, provided
 Montero - Tax Digests (Block A 2014)
!

some other constitutional requirement is not thereby 69. COMPANIA GENERAL DE TABACOS v. CITY OF MANILA
violated, such as the requirement that taxes must be (Double taxation; Difference between license fee and sales tax)
uniform.
REYES NOTES:
FINAL VERDICT: Petition is denied. The CA and RTC decisions are
affirmed. Q: A city passed two ordinances. The first ordinance imposed a
tax on the privilege of selling liquor while the second ordinance
imposed a tax on the sales of liquor. Is there double taxation?
Notes/ Source:
Wayne Miranda A: NO. In Compania General de Tabacos v. City of Manila (8
SCRA 367), the Supreme Court held that both a license fee and a
tax may be imposed on the same business and occupation and such
as not a violation of the rule against double taxation. The impositions
are of a different character. The first is a license fee for the privilege
of engaging in the sale of liquor in the exercise of police power while
the other is imposed for revenue purposes based on the sales made.

FACTS:
• Tabacalera, a duly licensed first class wholesale and retail
liquor dealer, paid the City of Manila the license fees for
taxable years 1954-1957 pursuant to a City Ordinance.
• As prescribed by another City Ordinance, Tabacalera also
paid the City of Manila sales taxes.
• It appears that in the year 1954, the City, through its
treasurer, addressed a letter to SGV & Co., an accounting
firm, expressing the view that liquor dealers paying the
annual wholesale and retail fixed tax are not subject to the
wholesale and retail dealers' taxes.
• Upon learning of said opinion, Tabacalera was demanding
refund of the alleged overpayment. As the claim was
disallowed, the present action was instituted.

ISSUE: Whether or not Tabacalera is entitled to refund?

/Whether or not double taxation exists?

! 19!

!
HELD & RATIO:
NO. The first ordinance is clearly one that prescribes municipal
license fees for the privilege to engage in the business of selling
liquor or alcoholic beverages, having been enacted by the Municipal
Board of Manila pursuant to its charter power to fix license fees on,
and regulate, the sale of intoxicating liquors, whether imported or
locally manufactured. (Section 18 [p], Republic Act 409, as
amended). The license fees imposed by it are essentially for
purposes of regulation, and are justified, considering that the sale of
intoxicating liquor is, potentially at least, harmful to public health and
morals, and must be subject to supervision or regulation by the state
and by cities and municipalities authorized to act in the premises.
(MacQuillin, supra, p. 445.)
On the other hand, it is clear that the second ordinance impose taxes
on the sales of general merchandise, wholesale or retail, and are
revenue measures enacted by the Municipal Board of Manila by
virtue of its power to tax dealers for the sale of such merchandise.
(Section 10 [o], Republic Act No. 409, as amended.).
FINAL VERDICT: Petition is DISMISSED.
70. Province of Bulacan v. CA
G.R. No. 126232. November 27, 1998
Situs of Taxation and Double Taxation
REYES NOTES/ CASE:
The Sangguniang Panlalawigan of Bulacan wishes to
impose taxes on ordinary stones, sand, gravel, earth and other
quarry resources, among others, extracted from public lands within
its territorial jurisdiction. Pursuant thereto, Republic Cement was
assessed deficiency tax for extracting quarry resources from several
private lands in Bulacan. Republic Cement formally contested the
! 20!
Montero - Tax Digests (Block A 2014)
assessment arguing that the province had no authority to impose
taxes on quarry resources extracted from private lands.
W/N the provincial government could impose taxes on
stones, sand, gravel, earth and other quarry resources extracted
from private lands.
The local government unit may levy a tax on quarry
resources extracted from public lands but not from private lands. The
SC stated that NIRC levies a tax on all quarry resources, regardless
of origin, whether extracted from public or private land. Thus, a
province may not ordinarily impose taxes on stones, sand, gravel,
earth and other quarry resources, as the same are already taxed
under the NIRC. However, the province can impose a tax on stones,
sand, gravel, earth and other quarry resources extracted from public
land because it is expressly empowered to do so under the LGC.
As to stones, sand, gravel, earth and other quarry resources
extracted from private land, however, it may not do so, because of
the limitation provided by Section 133 of the Code in relation to
Section 151 of the NIRC.
FACTS:
• On June 26, 1992, the Sangguniang Panlalawigan of
Bulacan passed an ordinance (An ordinance Enacting the
Revenue Code of the Bulacan Province).
o Section 21. Imposition of Tax. There is hereby
levied and collected a tax of 10% of the fair market
value in the locality per cubic meter of ordinary
stones, sand, gravel, earth and other quarry
resources, such, but not limited to marble, granite,
volcanic cinders, basalt, tuff and rock phosphate,
extracted from public lands or from beds of seas,
lakes, rivers, streams, creeks and other public
waters within its territorial jurisdiction.
• Pursuant thereto, Republic Cement Corporation (Republic
Cement) was assessed P2,524,692.13 for extracting
limestone, shale and silica from several parcels of private

!
land in the province during the third quarter of 1992 until the
second quarter of 1993.
• Republic Cement formally contested the assessment
arguing that the province had no authority to impose taxes
on quarry resources extracted from private lands. The
same was denied by the Provincial Treasurer.
• RTC ruled that declaratory relief was improper, allegedly
because a breach of the ordinance had been committed by
Republic Cement.
• Republic Cement filed a petition for certiorari with the
Supreme Court seeking reversal of RTC’s dismissal of their
petition. SC referred the same to CA.
• In the interim, the Province of Bulacan issued a warrant of
levy against Republic Cement, allegedly because of its
unpaid tax liabilities.
• Negotiations between Republic Cement and petitioners
resulted in an agreement and modus vivendi whereby
Republic Cement agreed to pay under protest
P1,262,346.00, 50% of the tax assessed by petitioner, in
exchange for the lifting of the warrant of levy. In a
resolution, CA approved the same and limited the issue to
be resolved to the question whether or not the provincial
government could impose taxes on stones, sand, gravel,
earth and other quarry resources extracted from private
lands.
ISSUES:
3. W/N the provincial government could impose taxes on
stones, sand, gravel, earth and other quarry resources
extracted from private lands.
HELD & RATIO:
4. NO, a province have no authority to impose taxes on stones,
sand, gravel, earth and other quarry resources extracted
from private lands.
! 21!
Montero - Tax Digests (Block A 2014)
• The pertinent provisions of the Local Government
Code are as follows:
o Sec. 134. Scope of Taxing Powers. -
Except as otherwise provided in this Code,
the province may levy only the taxes, fees,
and charges as provided in this Article.
o Sec. 138. Tax on Sand, Gravel and Other
Quarry Resources.- The province may levy
and collect not more than ten percent (10%)
of fair market value in the locality per cubic
meter of ordinary stones, sand, gravel,
earth, and other quarry resources, as
defined under the National Internal Revenue
Code, as amended, extracted from public
lands … within its territorial jurisdiction.
• The tax imposed by the Province of Bulacan is an
excise tax, being a tax upon the performance,
carrying on, or exercise of an activity. The Local
Government Code provides:
o Section 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:
1. xxx; (h) Excise taxes on articles
enumerated under the National
Internal Revenue Code..; xxx
• A province may not, therefore, levy excise taxes on
articles already taxed by the NIRC. Unfortunately for
petitioners, the NIRC provides:
o Section 151. - Mineral Products. -
1. (A) Rates of Tax. - There shall be
levied, assessed and collected on
minerals, mineral products and

!
quarry resources, excise tax as
follows:
a. x x x (2) On all nonmetallic
minerals and quarry
resources, a tax of two
percent (2%)…; xxx
2. (B) [Definition of Terms]. - For
purposes of this Section, the term-
a. x x x (4) Quarry
resources shall mean any
common stone or other
common mineral
substances as the Director
of the Bureau of Mines and
Geo-Sciences may declare
to be quarry resources such
as, but not restricted to,
marl, marble, granite,
volcanic cinders, basalt, tuff
and rock phosphate;
Provided, That they contain
no metal or metals or other
valuable minerals in
economically workable
quantities. xxx
• It is clearly apparent from the above provision that
the NIRC Code levies a tax on all quarry resources,
regardless of origin, whether extracted from public
or private land.
o Thus, a province may not ordinarily
impose taxes on stones, sand, gravel,
earth and other quarry resources, as the
same are already taxed under the NIRC.
o However, the province can impose a tax
on stones, sand, gravel, earth and other
quarry resources extracted from public
! 22!
Montero - Tax Digests (Block A 2014)
land because it is expressly empowered
to do so under the Local Government
Code.
o As to stones, sand, gravel, earth and other
quarry resources extracted from private
land, however, it may not do so, because
of the limitation provided by Section 133 of
the Code in relation to Section 151 of the
NIRC.
• Furthermore, Section 21 of Provincial Ordinance No.
3 is practically only a reproduction of Section 138 of
the LGC.
o A cursory reading of both would show that
both refer to ordinary sand, stone, gravel,
earth and other quarry resources extracted
from public lands.
o Even if we disregard the limitation set by
Section 133 of the LGC, petitioners may not
impose taxes on stones, sand, gravel, earth
and other quarry resources extracted from
private lands as the latter clearly applies
only to quarry resources extracted from
public lands.
FINAL VERDICT: Petition is dismissed. Decision of CA is
AFFIRMED in toto.

!
71. SWEDISH MATCH v. TREASURER OF CITY OF MANILA
Double Taxation
REYES NOTES/ CASE:
Petitioner: Swedish Match Philippines Inc.
Respondent: The Treasurer of the City of Manila
Petitioner paid business taxes based on Sec. 14 and Sec. 21 of
Manila Revenue Code. Petitioner filed for Refund of business taxes
paid under Sec. 21 on the ground of double taxation. RTC and CTA
dismissed Petition for Refund.
SC: Payment of tax under Sec. 21 constitutes double taxation in view
of tax paid under Sec. 14. Six requisites were satisfied.
There is indeed double taxation if respondent is subjected to the
taxes under both Sections 14 and 21 of Manila Revenue Code, since
these are being imposed:
(1) on the same subject matter – the privilege of doing business in
the City of Manila;
(2) for the same purpose – to make persons conducting business
within the City of Manila contribute to city revenues;
(3) by the same taxing authority – petitioner City of Manila;
(4) within the same taxing jurisdiction – within the territorial
jurisdiction of the City of Manila;
(5) for the same taxing periods – per calendar year; and
(6) of the same kind or character – a local business tax imposed on
gross sales or receipts of the business.
FACTS:
• Petitioner paid business taxes. The assessed amount was
based on Sections 14 and 21 of Ordinance No. 7794
(Manila Revenue Code) as amended by Ordinance Nos.
7988 and 8011.
! 23!
Montero - Tax Digests (Block A 2014)
• Total amount was P470,932.21 and out of that amount
P164,552.04 corresponded to the payment under Section
21.
• Petition for Refund of Taxes with Manila RTC in accordance
with Sec. 196 of LGC: Petitioner claimed a refund of
business taxes paid under Section 21 and argued that it
constituted double taxation in view of its payment under
Section 14.
• RTC dismissed the petition and MR.
o Secs. 14 and 21 pertained to taxes of a different
nature and thus the elements of double taxation
were wanting in this case.
• CTA affirmed RTCs dismissal of the Petition for Refund of
Taxes.
• Opposing contentions:
o Petitioner: Enforcement of Sec. 21 of Manila
Revenue Code constitutes double taxation in view of
the taxes collected under Sec. 14 of the same code.
Sec. 21 is not itself invalid, but the enforcement of
this provision would constitute double taxation if
business taxes have already been paid under Sec.
14 of the same revenue code.
o Respondent: Sec.14 and 21 pertain to two different
objects of tax; thus, they are not of the same kind
and character so as to constitute double taxation.
Sec. 14 is a tax on manufacturers, assemblers, and
other processors.
Sec. 21 applies to business subject to excise, value-
added, or percentage tax.
Under Sec. 21, petitioner is merely a withholding tax
agent of the City of Manila.
ISSUE: Whether the imposition of tax under Sec. 21 of Manila
Revenue Code constitutes double taxation in view of the tax
collected and paid under Section 14 of the same code.
 Montero - Tax Digests (Block A 2014)
!

HELD & RATIO:

YES the imposition of tax under Sec. 21 of Manila Revenue
Code constitutes double taxation in view of the tax collected
and paid under Sec. 14 of the same code.
• Double taxation means taxing the same property twice when
it should be taxed only once; that is, "taxing the same person
twice by the same jurisdiction for the same thing." (City of
Manila v. Coca-Cola Bottlers Philippines Inc)
• Requisites to raise double taxation: Using the
aforementioned test, the Court finds that there is indeed
double taxation if respondent is subjected to the taxes under
both Sections 14 and 21 of Manila Revenue Code, since
these are being imposed:
o (1) on the same subject matter – the privilege of
doing business in the City of Manila;
o (2) for the same purpose – to make persons
conducting business within the City of Manila
contribute to city revenues;
o (3) by the same taxing authority – petitioner City of
Manila;
o (4) within the same taxing jurisdiction – within the
territorial jurisdiction of the City of Manila;
o (5) for the same taxing periods – per calendar year;
and
o (6) of the same kind or character – a local business
tax imposed on gross sales or receipts of the
business.
• Based on the foregoing reasons, petitioners should not have
been subjected to taxes under Sec. 21 of the Manila
Revenue Code for the fourth quarter of 2001, considering
that it had already been paying local business tax under Sec.
14 of the same ordinance.
• Hence, payments made under Sec. 21 must be refunded in
favor of petitioner.
Notes:
SEC. 14. Tax on Manufacturers, Assemblers and other
Processors. - There is hereby imposed a graduated tax on
manufacturers, assemblers, repackers, processors, brewers,
distillers, rectifiers and compounders of liquors, distilled spirits, and
wines on manufacturers of any articles of commerce of whatever
kind or nature in accordance with the following schedule. With gross
receipts or sales for the preceding calendar year in the amount of:
xxx.
SEC. 21. Tax on Business Subject to the Excise, Value-Added or
Percentage Taxes under the NIRC - On any of the following
businesses and articles of commerce subject to the excise, value-
added or percentage taxes under the National Internal Revenue
Code, hereinafter referred to as NIRC, as amended, a tax of FIFTY
PERCENT (50%) OF ONE PERCENT (1%) per annum on the gross
sales or receipts of the preceding calendar year is hereby imposed:
A) On person who sells goods and services in the course of trade or
businesses; xxx
PROVIDED, that all registered businesses in the City of Manila
already paying the aforementioned tax shall be exempted from
payment thereof.

FINAL VERDICT: Petition is dismissed.

! 24!

!
• FORMS OF ESCAPE FROM
TAXATION
72. DELPHER TRADES CORPORATION V INTERMEDIATE
APPELLATE COURT
REYES NOTES/ CASE:
This is only a case of tax avoidance. The Supreme Court opined that
there was nothing wrong or objectionable about the “estate planning”
scheme resorted to by the taxpayers. The legal right of 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. In the said case, the taxpayer acquired 2,500 original
unissued no par value shares of stocks of the corporation in
exchange for their properties. By virtue of this exchange, the
taxpayers became stockholders of the corporation by subscription. In
effect, they changed the nature of their ownership from
unincorporated to incorporated form by organizing the corporation to
take control of properties and at the same save on inheritance tax.
FACTS:
• Delphin and Pelagia Pacheco (the Pachecos) are owners of Lot
1095, Malinta estate, in Bulacan covered by TCT
• They entered into a lease contract with Construction Components
International, Inc (CCII) providing that the latter would have the
right of first refusal should the Pachecos decide to sell the
property within the lease period
• CCII assigned all their rights to the property to Hydro. The lease
contract and assignment were annotated on the TCT
• The Pachecos and Delpher Trades executed a deed of exchange
where the former transferred ownership of Lot 1095 (and other
but no important here) in exchange for 2,500 shares of stock of
Delpher which was equivalent to 55% majority of the corporation
! 25!
Montero - Tax Digests (Block A 2014)
• Hydro filed a complaint for reconveyance because its right of first
refusal was violated and demands it be given the same condition
that Delpher had
• Edgardo Neria, a CPA and son-in-law of Pelagia Pacheco,
testified that:
o Delpher Trades is a family corporation owner and organized
by the Pelagia and Dephin Pacheco and their spouses
o It was done to perpetuate their ownership of some lands
(including herein lot 1095) to avoid taxes
o The deed of exchange was done so that lot 1095 would be
transferred to the corporation and the Pachecos would own
majority of the stocks of the corporation
o They called this “estate planning”
• Petitioners’ (Pachecos) arguments:
o There was no sale between Delpher and the Pachecos. It
was only a transfer in form, not substance; the actual
ownership and beneficial use of the land still belonged with
the Pachecos—the original co-owners
o Delpher Trades ia mere business conduit and alter-ego
o There is a sale when ownership is transferred for a price
certain in money or its equivalent (Article 1468, Civil Code)
while there is a barter or exchange when one thing is given
in consideration of another thing (Article 1638, Civil Code)
• Respondent’s (Hydro Pipes) argument:
o Delpher Trades is a distinct entity with a separate existence
which cannot be disregarded
o Therefore, it was an actual transfer of ownership violating
their right of first refusal
ISSUES: WON the exchange of the properties and the stocks
was a sale between Delpher Trades and the Pachecos? (NOTE:
If it were indeed a sale, then Hydro’s right of first refusal would
be violated.)
 Montero - Tax Digests (Block A 2014)
!

RATIO: A: Yes, since a corporation does not die, it can

• NO. THEY JUST CHANGED THEIR FORM OF OWNERSHIP continue to hold on to the property indefinitely for a
TO AVOID TAXES. period of at least 50 years. On the other hand, if the
• In ruling for the petitioners, it was held that the Pachecos property is held by the spouses, the property will be
became the stockholder of the corporation by subscription. The tied up in succession proceedings and the
essence of the stock subscription is an agreement to take and consequential payments of estate and inheritance
pay for original unissued shares of a corporation, formed or to be taxes when an owner dies
formed
Q: Now what advantage is this continuity in relation
• They took no par value shares and there as no attempt to state to ownership by a particular person of certain
the true value of the real estate (the Php 300.sq meter property
properties in respect to taxation?
was turned over to the corporation for only Php 14/sq,meter)
A: The property is NOT subjected to taxes on
• Owning 55% shares (the 45% actually belongs to members of succession as the corporation does not die
their family also), Delpher Trades is a business conduit of the
Pachecos Q: SO the benefit you are talking about are
• What they did was merely change the form of their ownership inheritance taxes?
form unincorporated to incorporated, to take control of their A: Yes, sir!
properties and save on inheritance taxes
• The records do not point to anything wrong or objectionable SOURCE OF DIGEST: Block A 2015
about this “estate planning” scheme resorted to by the
Pachecos. The legal right of a taxpayer to decrease the amount FINAL VERDICT: The exchange was not a sale. Hence,no violation
of what otherwise could be his taxes or altogether avoid them, by of the right of first refusal. Thus,action for reconveyance cannot
means of which the law permits, cannot be doubted. prosper.
• As to what taxes they were trying to avoid (TAKEN FROM
TESTIMONY OF THE CPA)
o A: Section 35 of NIRC under par C-sub par (2), Exceptions
regarding the provision: “No gain or loss shall also be
recognized if a person exchanges his property for stock in a
corproation of which as a result of such exchange said
person alone or together with others not exceeding 4
persons gains control of said corporation”

Q: Now also form the point of taxation, is there any

flexibility in the holding by the corporation of the
property in question?

! 26!

!
73. HENG TONG V. CIR
REYES NOTES/ CASE:
CIR assessed against the petitioner for deficiency sales tax
and surcharges. The Petitioner argued that he was the importer and
that he is not guilty of fraud so as to warrant the imposition of a
penalty of 50% on the deficiency. The issue is whether or not there
was fraud. An attempt to minimize ones tax does not constitute fraud.
Pan-Asiatic and Heng Tong had a private agreement. Heng Tong
shall be the importer and shall only pay at cost. Paying the sales tax
on sales of imported articles upon the removal of the goods from
Customs by Pan-Asiatic allowed Heng Tong to minimize its tax. The
goods were taxed at cost and not at the gross selling price.
FACTS:
Collector of Internal Revenue assessed against the petitioner
deficiency sales taxes and surcharges for the year 1949 and the first
four months of 1950 in the aggregate sum of P89,123.58.
This was appealed to the Board of Tax Appeals, whence the case
was transferred to the Court of Tax Appeals upon its organization in
1954, and there was affirmed in its decision dated February 28,
1952. The matter was thereafter elevated to this Court for review.
The deficiency taxes in question were assessed on importations of
textiles from abroad.
The goods were withdrawn from Customs by Pan-Asiatic
Commercial Co., Inc., which paid, in the name of the petitioner, the
corresponding advance sales tax under section 183(b) of the Internal
Revenue Code.
The assessment for the deficiency, however, was made against the
petitioner, Heng Tong Textiles Co., Inc. (now Philip Manufacturing
Corporation) on the ground that it was the real importer of the goods
! 27!
Montero - Tax Digests (Block A 2014)
and did not pay the taxes due on the basis of the gross selling prices
thereto
CTA: affirmed assessment based on the finding that Heng Tong was
the importer of the goods from the following:
1. Heng Tong and Pan-Asiatic Commercial were sister
coroporations
2. That the commercial documents covering the importations
were all in the name of Heng Tong
3. That in connection with advance sales tax, Pan-Asiatic wrote
Heng Tong a letter which states that Pan-Asiatic paid the 5%
Sales Tax in compliance with Heng Tong’s request.
4. That there are documentary and testimonial evidence that
Pan-Asiatic acted merely as an indentor.
Heng Tong:
1. the importation papers were placed in the name of Heng
Tong only for the purpose of accommodation, to introduce it
to textile suppliers abroad
2. Heng Tong was not in a financial position to make the
importations in questions, valued at over a million pesos, its
capital was only 30k
ISSUES:
(1) whether or not the petitioner was the importer of the goods; and
(2) whether or not it was guilty of fraud so as to warrant the
imposition of a penalty of 50% on the deficiency.
HELD & RATIO:
5. YES, Heng Tong was the importer. There was a private
arrangement between Heng Tong and Pan-Asiatic.
6. NO, there was no fraud. The set-up was an arrangement to
minimize the tax due. Tax was minimized by the advance
sales tax (paid upon removal of the goods from Customs)
being credited against the tax on the actual gross selling
price paid by the importer Heng Tong.

!
• NIRC Se. 183 as amended by RA 253 mandates
that the sales tax on sales of imported articles is
based on the gross selling price of the goods (they
paid the sales tax upon removal of the goods from
Customs
• Pan-Asiatic, as indorsee of the goods, withdrew
them from Customs upon payment of the advance
sales tax and then executed a sale to Heng Tong
Textiles at cost.
• The goods were made to appear as having been sold so that
Heng Tong paid no sales tax upon the sale of such goods to
the market. Neither was any sales tax paid on the supposed
sales between Pan-Asiatic to Heng Tong as the sales were
made at cost.
An attempt to minimize one’s tax does not constitute fraud. s far as
the right of the Government to collect the taxes was concerned the
petitioner was the real importer and hence must shoulder the tax
burden.
•
FINAL VERDICT: Court of Tax Appeals is modified, by eliminating
therefrom the penalty of 50% on the amount of deficiency sales
taxes imposed, and is affirmed in all other respects
74. COMMISSIONER OF INTERNAL REVENUE v. THE ESTATE
OF BENIGNO P. TODA, JR.
Forms of Escape from Taxation
CASE:
Cibeles Insurance Company (CIC) authorized its president
Benigno Toda, who also happens to own 99.991% of the company’s
issued and outstanding capital stock, to sell the Cibeles Building.
Toda allegedly sold the property to one Altonaga, who in turn, sold
the same property on the same day to Royal Match, Inc. (RMI).
Altonaga paid the capital gains tax, and Toda sold all his shares to a
! 28!
Montero - Tax Digests (Block A 2014)
third party. BIR assessed the deficiency income tax of CIC
amounting to almost 80M. But CIC insisted that the assessment
should be made against the old CIC, not against the new CIC, which
is owned by an entirely different set of stockholders. So BIR
assessed the deficiency income tax against the estate of Toda on
the ground that when he sold all his shares, he undertook to
shoulder the tax liabilities of CIC, and that the two sales that
happened on the same day were meant to defraud BIR.
The issue is whether the scheme that CIC, headed by
Today, designed was meant to evade tax or avoid tax.
[Reyes Notes] This is a case of tax evasion. The Supreme
Court held that the three factors (end to be achieved, state of mind,
and course of action) in tax evasion were present. The two transfers
were tainted with fraud since the intermediary transfer (from the
corporation to a natural person) was prompted only by the desire to
mitigate tax liabilities and not for any business purpose (instead of
paying 35% tax, the scheme made it appear that the liability was only
5%).
FACTS:
• Cibeles Insurance Company (CIC) authorized Benigno P. Toda,
Jr. (Toda), president and owner of 99.991% of its issued and
outstanding capital stock, to sell the Cibeles Building for an
amount not less than 90M. Purportedly, he was able to sell the
property for 100M to Altonaga, who in turn, sold the same
property on the same day to Royal Match, Inc (RMI) for 200M.
These were evidenced by Deeds of Sale notarized on the same
day by the same notary public.
o Altonaga paid capital gains tax (CGT) for the sale to RMI
in the amount of 10M.
• Toda sold all his shares to Le Hun Choa evidenced by Deed of
Sale of Shares of Stock. The deed also provides that Toda
undertook to hold Le Hun Choa and CIC free from all tax
liabilities for the fiscal years 1987-1989. Years later, Toda died.

!
• BIR assessed the deficiency income tax of CIC amounting to
79,099,999.22.
• CIC insists that the assessment should be directed against the
old CIC, and not against the new CIC, which is owned by an
entirely different set of stockholders; moreover, the Deed of Sale
of Shares of Stock provides that CIC is free from all tax liabilities
for the fiscal years 1987-1989.
• Because of this, BIR directed the assessment against the estate
of Toda.
• Toda’s estate filed a petition for review with the CTA, after BIR
dismissed its protest, alleging that the estate is not liable for the
deficiency income tax and that the inference of fraud of the sale
of the properties is unreasonable and unsupported.
• CTA and CA overturned the decision of BIR, hence this petition.
ISSUES:
4. Is the scheme tax evasion or tax avoidance?
1. Can the estate be held liable for the deficiency tax income of
CIC?
HELD & RATIO:
1. TAX EVASION, the three elements of tax evasion are present.
• Tax avoidance is a tax saving device within the means
sanctioned by law. This method should be used by the taxpayer
in good faith and at arm’s length.
• Tax evasion is a scheme used outside of those lawful means
and when availed of, it usually subjects the taxpayer to further or
additional civil or criminal liabilities. There are three factors
present in a tax evasion:
o the end to be achieved (i.e. the payment of less
than that known by the taxpayer to be legally due, or
the non-payment of tax when it is shown that a tax is
due);
o an accompanying state of mind which is described
as being “evil,” in “bad faith,” “willful,” or “deliberate
and not accidental” and
! 29!
Montero - Tax Digests (Block A 2014)
o a course of action or failure of action which is
unlawful.
• All of these requisites are present in this case. The execution of
two sales was calculated to mislead the BIR with the end in
view of reducing the consequent income tax liability, from
35% to 5%.
• A sale by one person cannot be transformed for tax purposes
into a sale by another by using the latter as a conduit through
which to pass title. The following events show that tax evasion
was planned:
o days before the purported sale, CIC received
millions of money from RMI, not from Altonaga,
which means the real buyer was RMI, not the
intermediary Altonaga.
o the sales (CIC to Altonaga, and Altonaga to RMI)
were both made on the same day.
2. YES, Toda’s estate can be held liable for the deficiency income
tax of CIC.
o This is an exception to the doctrine of corporate personality:
when an individual agrees to hold himself personally liable with
the corporation.
o As per the Deed of Sale of Shares of Stock, Toda undertook to
exempt the buyer and CIC from any tax liability, and as such, he
made himself personally liable.
o Therefore, Toda’s estate is liable for CIC’s deficiency income tax.
FINAL VERDICT: The petition is granted. The estate of Toda is
ordered to pay 79,099,999.22 as deficiency income tax of Cibeles
Insurance Corporation for the year 1989.
Source: Pertinent portions from Taxation 1 Digests 2A-2015; some
notes and facts were added.

!
• EXEMPTION FROM TAXATION
75. LUZON STEVEDORING v. CTA
CASE:
Luzon Stevedoring Co. seeks to secure a tax refund from the
Commissioner of Internal Revenue for its payment of compensating
tax in importing engine parts and other equipment for the repair and
maintenance of its tugboats. It contends that tugboats are included in
the term cargo vessel under the tax exemption provisions of Section
190 of the Revenue Code, as amended by Republic Act 3176; that
the law treats a tugboat towing a barge loaded with cargoes for
loading and unloading to constitute a single vessel. Thus, the
engines, spare parts and equipment imported by it to repair and
maintain its tugboats are exempt from compensating tax.
ISSUE: Whether or not petitioner's “tugboats” are considered "cargo
vessels" subject to compensating tax exemption under the law?
HELD: No, the instant petition is without merit. The law, specifically
the amendatory provisions of Republic Act 3176, limits tax exemption
from the compensating tax to imported items to be used by the
importer himself as operator of passenger or cargo vessel or both,
whether coastwise or oceangoing, including engines and spare parts
of said vessel.
Here, the petitioner’s "tugboats" are not "cargo vessels" because
they are mainly employed for towing and pulling purposes, not in
carrying or transporting passengers or cargoes. In fact, a tugboat is
defined as a strongly built, powerful steam or power vessel, used for
towing and, now, also used for attendance on vessel.
The general rule is that any claim for exemption from the tax statute
should be strictly construed against the taxpayer.
The petition is dismissed.
FACTS:
! 30!
Montero - Tax Digests (Block A 2014)
· This is a petition for review of the 21 Oct. 1968 decision of
the Court of Tax Appeals (CTA).
· Luzon Stevedoring Corp. (Luzon) in 1961 and 1962, for the
repair and maintenance of its tugboats, imported various
engine parts and other equipment for which it paid, under
protest, the assessed compensation tax. Unable to secure a
tax refund from the Commissioner of Internal Revenue, on 2
Jan. 1964, it filed a Petition for Review with the Court of Tax
Appeals. The CTA however denied the petition. Then the MR
was made but still denied.
· Luzon contends that the tugboats are embraced and
included in the term cargo vessel under the tax exemption
provisions of Sec. 190 of the Revenue Code, as amended by
RA o. 3176. He argues that in legal contemplation, the
tugboat and a barge loaded with cargoes with the former
towing the latter for loading and unloading of a vessel in part,
constitute a single vessel. Accordingly, it concludes that the
engines, spare parts and equipment imported by it and used
in the repair and maintenance of its tugboats are exempt
from compensating tax.
· On the other hand, CIR counter that Luzon’s “tugboats” are
not “Cargo vessel” because they are neither designed nor
used for carrying and/or transporting persons or goods by
themselves but are mainly employed for towing and pulling
purposes. As such, it cannot be claimed that the tugboats in
question are used in carrying and transporting passengers or
cargoes as a common carrier by water, either coastwise or
oceangoing and, therefore, not within the purview or Sec.
190 of the Tax Code, as amended by RA No. 3176.
ISSUES:
· Whether or not the lower court erred in holding that the
Luzon is engaged in business as stevedore, the work of
unloading and loading of a vessel in port, contrary to the
evidence on record? ---NO

!
· Whether or not the lower court erred in not holding that the
business in which Luzon is engaged, is part and parcel of the
shipping industry? ---NO
· Whether or not the lower court erred in not allowing the
refund sought by Luzon? ---NO
HELD & RATIO:
1. NO, on analysis of Luzon’s transactions, the CTA found tat
no evidence was adduced by Luzon that tugboats are
passenger and/or cargo vessels used in the shipping
industry as an independent business.
1.On the contrary, Luzon’s own evidence supports the
view that is engaged as a stevedore, that is, the work
of unloading and loading of a vessel in port; and
towing of barges containing cargoes is a part of
petitioner’s undertaking as a stevedore. In fact, even
its trade name is indicative that its sole and principal
business is stevedoring and lighterage, taxed under
Sec. 191 of the National Internal Revenue Code
(NIRC) as a contractor, and not an entity which
transports passengers or freight for hire which is taxed
under Sec. 192 of the same Code as a common
carrier by water.
2. No, Luzon’s tugboats clearly do not fall under the categories
of passenger and/or cargo vessels.
2.Thus, it is a cardinal principle statutory construction
that where a provision of law speaks categorically, the
needed for interpretation is obviated, no plausible
pretense being entertained to justify non-compliance.
All that has to be done is to apply it in every case that
falls within its terms.
3. No, the pivotal issue in this case is whether or not
petitioner’s tugboats can be interpreted to be included in the
term “cargo vessels” for purposes of the tax exemption.
! 31!
Montero - Tax Digests (Block A 2014)
a.Sec. 190 provides: ...and provided further, that the tax
imposed in this section shall not apply to articles to
be used by the importer himself in the manufacture
or preparation of articles subject to be used by the
importer himself as passenger and/or cargo vessel,
whether coastwise or oceangoing, including engines
and spare parts of said vessel. ...
b.This Court has laid down the rule that “as the power of
taxation is a high prerogative of sovereignty, the
relinquishment is never presumed and any reduction
or diminution thereof with respect to its mode or its
rate, must be strictly construed, and the same must
be coached in clear and unmistakable terms in order
that it may be applied.”
c.As correctly analyzed by the Court of Tax Appeals, in
order that the importations in question may be
declared exempt from the compensating tax, it is
indispensable that the requirements of the
amendatory law be complied with, namely:
i.(1) the engines and spare parts must be used
by the importer himself as a passenger
and/or cargo, vessel; and
ii.(2) the said passenger and/or cargo vessel
must be used in coastwise or oceangoing
navigation.
FINAL VERDICT: Petition is dismissed. Decision of lower court
AFFIRMED.
Notes:
Relevant Laws:
Sec. 190 of the National Internal Revenue Code (NIRC), as
amended by RA No. 3176
Source:
2A- 2015 Digests

!
76. MERALCO v. VERA
REYES NOTES/ CASE:
In MERALCO V. VERA [67 SCRA 352], the issue to be
resolved was whether MERALCO was exempt from excise tax on its
poles, wires, and transformers. The Supreme Court held that the “in
lieu of all taxes” provision is limited in scope to taxes “upon the
privileges, earnings, income, franchise and poles, wires,
transformers, and insulators of the grantee.” Construing this
provision strictly against MERALCO, the Supreme Court held that the
provision covers only an exemption from property taxes on the poles,
wires, and transformers.
FACTS:
• MERALCO is the holder of a franchise to construct, maintain,
and operate an electric light, heat, and power system in the
City of Manila and its suburbs.
• MERALCO imported and received from abroad on various
dates copper wires, transformers, and insulators for use in
the operation of its business.
• The Collector of Customs, as Deputy of Commissioner of
Internal Revenue, levied and collected a compensating tax
amounting to a total of P62,335.00. A claim for refund of said
amount was presented by MERALCO and because no action
was taken by the Commissioner of Internal Revenue on its
claim, it appealed to the Court of Tax Appeals.
• Again, MERALCO imported certain quantities of copper
wires, transformers and insulators also to be used in its
business and again a compensating tax of P6,587.00 on said
purchases was collected.
• Its claim for refund of the amount having been denied by the
Commissioner of Internal Revenue.
• MERALCO claims for exemption from the compensating tax
on poles, wires, transformers and insulators purchased by it
! 32!
Montero - Tax Digests (Block A 2014)
from abroad. MERALCO’s basis for such is on paragraph 9
of its franchise:
The grantee shall be liable to pay the same taxes upon its
real estate, buildings, plant (not including poles, wires,
transformers, and insulators), machinery, and personal
property as other persons are or may be hereafter by law to
pay… the grantee shall pay to the City of Manila a five per
centum of the gross earnings received form its business
under this franchise in the City and its suburbs…
PROVIDED, That two and one-half per centum of the gross
earnings received from the business of the line to Malabon
shall be paid to the Province of Rizal… and shall be in lieu
of all taxes and assessments of whatsoever nature, and
by whatsoever authority upon the privileges, earnings,
income, franchise, and poles, wires, transformers, and
insulators of the grantee, from which taxes and
assessments the grantee is hereby expressly exempted.
ISSUES: Whether or not Manila Electric Company (MERALCO)
exempt from payment of a compensating tax on poles, wires,
transformers, and insulators imported by it for use in the
operation of its electric light, heat, and power system?
HELD & RATIO:
1. NO.
• One who claims to be exempt from the payment of a
particular tax must do so under clear and unmistakable
terms found in the statute.
Tax exemptions are strictly construed against the taxpayer, they
being highly disfavored and may almost be said "to be odious to
the law." He who claims an exemption must be able to print to
some positive provision of law creating the right; it cannot be
allowed to exist upon a mere vague implication or inference. The
right of taxation will not beheld to have been surrendered unless

!
the intention to surrender is manifested by words too plain to be
mistaken, for the state cannot strip itself of the most essential
power of taxation by doubtful words; it cannot, by ambiguous
language, be deprived of this highest attribute of sovereignty.
• It is a well-settled rule or principle in taxation that a
compensating tax is not a property tax but is an excise tax.
Generally stated, an excise tax is one that is imposed on the
performance of an act, the engaging in an occupation, or the
enjoyment of a privilege. A tax upon property because of its
ownership is a direct tax, whereas one levied upon property
because of its use is an excise duty. Thus, where a tax which is
not on the property as such, is upon certain kinds of property,
having reference to their origin and their intended use, that is an
excise tax.
The compensating tax being imposed upon petitioner herein,
MERALCO, is an impost on its use of imported articles and is not
in the nature of a direct tax on the articles themselves, the latter
tax falling within the exemption. Thus, in International Business
Machine Corp. vs. Collector of Internal Revenue, 1956, 98 Phil.
Reports 595, 593, which involved the collection of a
compensating tax from the plaintiff-petitioner on business
machines imported by it, this Court stated in unequivocal terms
that "it is not the act of importation that is taxed under section
190, but the use of imported goods not subjected to sales tax"
because "the compensating tax was expressly designed as a
substitute to make up or compensate for the revenue lost to the
government through the avoidance of sales taxes by means of
direct purchases abroad. ..."
FINAL VERDICT: Petition is denied.
! 33!
Montero - Tax Digests (Block A 2014)
77. DAVAO GULF LUMBER CORP. v. CIR
REYES NOTES:
Q21.6. Can there be a tax exemption on the ground of equity?
No. The Supreme Court held that there is no tax exemption solely on
the ground of equity.
FACTS:
• Davao Gulf Lumber Corp. is a licensed forest concessionaire
possessing a Timber License Agreement granted by the
Ministry of Natural Resources (now DENR).
• From July 1, 1980 to January 31, 1982 petitioner purchased,
from various oil companies, refined and manufactured
mineral oils as well as motor and diesel fuels, which it used
exclusively for the exploitation and operation of its forest
concession. Said oil companies paid the specific taxes
imposed, under Secs. 153 and 156 of the 1977 NIRC, on the
sale of said products.
• On December 13, 1982, petitioner filed before Respondent
Commissioner of Internal Revenue (CIR) a claim for refund
in the amount of P120,825.11, representing 25% of the
specific taxes actually paid on the above-mentioned fuels
and oils that were used by petitioner in its operations as
forest concessionaire. The claim was based on Insular
Lumber Co. vs. Court of Tax Appeals and Section 5 of RA
1435 which reads:
o Sec. 5. “The proceeds of the additional tax on
manufactured oils shall accrue to the road and
bridge funds of the political subdivision for whose
benefit the tax is collected: Provided, however, That
whenever any oils mentioned above are used by
miners or forest concessionaires in their operations,
twenty-five per centum of the specific tax paid
thereon shall be refunded by the Collector of Internal
Revenue upon submission of proof of actual use of

!
oils and under similar conditions enumerated in
subparagraphs one and two of section one hereof,
amending section one hundred forty-two of the
Internal Revenue Code…”
• CTA rendered its decision finding petitioner entitled to a
partial refund of specific taxes the latter had paid in the
reduced amount of P2,923.15. The CTA ruled that the claim
on purchases of lubricating oil (from July 1, 1980 to January
19, 1981) and on manufactured oils other than lubricating
oils (from July 1, 1980 to January 4, 1981) had prescribed.
Disallowed on the ground that they were not included in the
original claim filed before the CIR were the claims for refund
on purchases of manufactured oils from January 1, 1980 to
June 30, 1980 and from February 1, 1982 to June 30, 1982.
In regard to the other purchases, the CTA granted the claim,
but it computed the refund based on rates deemed paid
under RA 1435, and not on the higher rates actually paid by
petitioner under the NIRC.
• Insisting that the basis for computing the refund should be
the increased rates prescribed by Sections 153 and 156 of
the NIRC, petitioner elevated the matter to the Court of
Appeals. As noted earlier, the Court of Appeals affirmed the
CTA Decision. Hence, this petition for review.
ISSUES: Whether or not petitioner’s refund should be based on
the increased rates of specific taxes which it actually paid, as
prescribed in Secs. 153 and 156 of the NIRC.
HELD & RATIO:
1. NO,
• The rationale for this grant of partial refund of specific taxes paid
on purchases of manufactured diesel and fuel oils rests on the
character of the Highway Special Fund. The specific taxes
collected on gasoline and fuel accrue to the Fund, which is to be
used for the construction and maintenance of the highway
system. But because the gasoline and fuel purchased by mining
! 34!
Montero - Tax Digests (Block A 2014)
and lumber concessionaires are used within their own
compounds and roads, and their vehicles seldom use the
national highways, they do not directly benefit from the Fund and
its use. Hence, the tax refund gives the mining and the logging
companies a measure of relief in light of their peculiar situation.
When the Highway Special Fund was abolished in 1985, the
reason for the refund likewise ceased to exist. Since petitioner
purchased the subject manufactured diesel and fuel oils from
July 1, 1980 to January 31, 1982 and submitted the required
proof that these were actually used in operating its forest
concession, it is entitled to claim the refund under Section 5 of
RA 1435.
• Since the partial refund authorized under Section 5, RA 1435, is
in the nature of a tax exemption, it must be construed strictissimi
Juris against the grantee. Hence, petitioner's claim of refund on
the basis of the specific taxes it actually paid must expressly be
granted in a statute stated in a language too clear to be
mistaken.
• The SC has carefully scrutinized RA 1435 and the subsequent
pertinent statutes and found no expression of a legislative will
authorizing a refund based on the higher rates claimed by
petitioner. The mere fact that the privilege of refund was included
in Section 5, and not in Section 1, is insufficient to support
petitioner's claim. When the law itself does not explicitly provide
that a refund under RA 1435 may be based on higher rates
which were nonexistent at the time of its enactment, this Court
cannot presume otherwise. A legislative lacuna cannot be filled
by judicial fiat.
• Finally, petitioner asserts that "equity and justice demand that
the computation of the tax refunds be based on actual amounts
paid under Sections 153 and 156 of the NIRC." The Court
disagrees. According to an eminent authority on taxation, "there
is no tax exemption solely on the, ground of equity."
FINAL VERDICT: Petition is denied.

!
78. COMMISSIONER OF INTERNAL REVENUE VS. COURTS OF
TAX APPEAL, ET AL
G.R. No. 115349 April 18, 1997
Summary:
The Commissioner of internal Revenue issued an order with
assessment of tax delinquencies as “contractor’s tax” against ADMU/
its Institute for Philippine Culture (IPC) for IPC’s various research
activities which CIR claimed was a form of “sale of services”, hence
was subject to 3% contractors tax under Sec 205 of the NIRC, and
NEITHER WAS IT COVERED BY THE EXEMPTIONS
ENUMERATED IN THE SAME SECTION.
Ruling on the issue of whether or not ADMU-IPC was subject to
contractor’s tax, the SC pronounced that ADMU as a university, nor
IPC as it’s auxiliary unit was subject to the 3% contractors’ tax
because the research done by the IPC was neither for a fee, nor a
sale of services covered by Sec. 205 of the NIRC. Rather, the
research done on Philippine society and culture was actually for the
public and for academic purposes of maintaining ADMU’s status as a
University. (Hence, the question of the tax exemptions need not even
be touched, because looking first at the question of COVERAGE, the
ADMU-IPC was not even covered in the first place)
FACTS:
• Ateneo de Manila is an educational institution with auxiliary
units and branches all over the Philippines. One such
auxiliary unit is the Institute of Philippine Culture (IPC),
which has no legal personality separate and distinct from
that of private respondent.
• The IPC is a Philippine unit engaged in social science
studies of Philippine society and culture. Occasionally, it
accepts sponsorships for its research activities from
international organizations, private foundations and
government agencies.
! 35!
Montero - Tax Digests (Block A 2014)
• On July 8, 1983, private respondent received from petitioner
Commissioner of Internal Revenue a demand letter dated
June 3, 1983, assessing private respondent the sum of
P174,043.97 for alleged deficiency contractor's tax the value
of which was later on, upon private respondent’s request for
reinvestigation, reduced to P46,516.41,
• Unsatisfied, Private respondent filed in the Court of Tax
Appeals a petition for review of the said letter-decision of
the petitioner which rendered a decision in its favor and
ordered the tax assessment cancelled.
• Petitioner Commissioner of Internal Revenue’s contentions:
o Private Respondent Ateneo de Manila University
“falls within the definition” of an independent
contractor and “is not one of those mentioned as
excepted”; hence, it is properly a subject of the three
percent contractor’s tax levied by the foregoing
provision of law.
o The “term ‘independent contractor’ is not specifically
defined so as to delimit the scope thereof, so much
so that any person who x x x renders physical and
mental service for a fee, is now indubitably
considered an independent contractor liable to 3%
contractor’s tax.” according to petitioner, Ateneo has
the burden of proof to show its exemption from the
coverage of the law.
ISSUE: Is Ateneo de Manila University, through its auxiliary unit or
branch — the Institute of Philippine Culture — performing the work
of an independent contractor and, thus, subject to the three percent
contractor's tax levied by then Section 205 of the National Internal
Revenue Code? No.
RULING:
Not subject to Contractors’ tax; interpretation of tax
exemptions

!
• Petitioner Commissioner of Internal Revenue erred in
applying the principles of tax exemption without first applying
the well-settled doctrine of strict interpretation in the
imposition of taxes.
o It is obviously both illogical and impractical to
determine who are exempted without first
determining who are covered by the aforesaid
provision.
o The Commissioner should have determined first if
private respondent was covered by Section 205,
applying the rule of strict interpretation of laws
imposing taxes and other burdens on the populace,
before asking Ateneo to prove its exemption
therefrom.
• The Supreme Court held that Ateneo de Manila University
is not subject to the contractor’s tax as the IPC is not an
“independent contractor”.
• “SEC. 205. Contractors, proprietors or operators of
dockyards, and others. -- A contractor’s tax of three per
centum of the gross receipts is hereby imposed on the
following:
• To fall under its coverage, Section 205 of the National
xxx xxx xxx
(16) Business agents and other independent
contractors, except persons, associations and corporations
under contract for embroidery and apparel for export, as
well as their agents and contractors, and except gross
receipts of or from a pioneer industry registered with the
Board of Investments under the provisions of Republic Act
No. 5186;
xxx xxx xxx
! 36!
Montero - Tax Digests (Block A 2014)
The term ‘independent contractors’ include persons
(juridical or natural) not enumerated above (but not
including individuals subject to the occupation tax under
Section 12 of the Local Tax Code) whose activity
consists essentially of the sale of all kinds of services
for a fee regardless of whether or not the performance
of the service calls for the exercise or use of the
physical or mental faculties of such contractors or
their employees.
The term ‘independent contractor’ shall not include
regional or area headquarters established in the
Philippines by multinational corporations, including their
alien executives, and which headquarters do not earn or
derive income from the Philippines and which act as
supervisory, communications and coordinating centers for
their affiliates, subsidiaries or branches in the Asia-Pacific
Region.
The term ‘gross receipts’ means all amounts received by
the prime or principal contractor as the total contract price,
undiminished by amount paid to the subcontractor, shall be
excluded from the taxable gross receipts of the
subcontractor.”
Internal Revenue Code requires that the independent
contractor be engaged in the business of SELLING its
services.
o Hence, to impose the three percent contractor’s tax
on Ateneo’s Institute of Philippine Culture, it should
be sufficiently proven that the private respondent is
indeed selling its services for a fee in pursuit of an
independent business. And it is only after private
respondent has been found clearly to be subject to
the provisions of Sec. 205 that the question of
exemption therefrom would arise.
o Only after such coverage is shown does the rule of
construction -- that tax exemptions are to be strictly

!
construed against the taxpayer -- come into play,
contrary to petitioner’s position.
IPCs research was not done for “clients” for a fee, but was
pursuant to the requirement of research to maintain ADMU’s
status as a university.
• The Court, however, found no evidence that Ateneo's
Institute of Philippine Culture ever sold its services for
a fee to anyone or was ever engaged in a business
apart from and independently of the academic
purposes of the university.
• Moreover, the Court of Tax Appeals accurately and
• Furthermore, it is clear that the research activity of the
Institute of Philippine Culture is done in pursuance of
maintaining Ateneo’s university status and not in the course
of an independent business of selling such research with
profit in mind. This is clear from a reading of the regulations
governing universities:
‘31.In addition to the legal requisites an institution must
meet, among others, the following requirements before
an application for university status shall be considered:
xxx xxx xxx
(e) The institution must undertake research
and operate with a competent qualified staff at
least three graduate departments in accordance
with the rules and standards for graduate
education. One of the departments shall be
science and technology. The competence of the
staff shall be judged by their effective teaching,
scholarly publications and research activities
published in its school journal as well as their
leadership activities in the profession.
! 37!
Montero - Tax Digests (Block A 2014)
(f) The institution must show evidence of
adequate and stable financial resources and
support, a reasonable portion of which should be
devoted to institutional development and research.
(underscoring supplied)
xxx xxx x x x’
‘32. University status may be withdrawn, after due
notice and hearing, for failure to maintain satisfactorily
the standards and requirements therefor.”
correctly declared that the “funds received by the Ateneo
de Manila University are technically not a fee. They may
however fall as gifts or donations which are tax-exempt" as
shown by private respondent's compliance with the
requirement of Section 123 of the National Internal
Revenue Code providing for the exemption of such gifts to
an educational institution.
o Rather, the amounts are in the nature of an
endowment or donation given by IPC’s benefactors
solely for the purpose of sponsoring or funding the
research with no strings attached. As found by the
two courts below, such sponsorships are subject to
IPC’s terms and conditions.
o No proprietary or commercial research is done, and
IPC retains the ownership of the results of the
research, including the absolute right to publish the
same. The copyrights over the results of the
research are owned by Ateneo and, consequently,
no portion thereof may be reproduced without its
permission. The amounts given to IPC, therefore,
may not be deemed, it bears stressing, as fees
or gross receipts that can be subjected to the
three percent contractor’s tax.

!
FINAL VERDICT: WHEREFORE, premises considered, the petition
is DENIED and the assailed Decision of the Court of Appeals is
hereby AFFIRMED in full.
79. CALTEX vs. COMMISSION ON AUDIT
Tax exemptions strictly construed vs claimant, Setting of Taxes
REYES NOTES/ CASE:
Taxes cannot be subject of compensation between
government and taxpayer because the government and the taxpayer
are not mutually creditors and debtors of each other. A claim for
taxes is not such a debt, demand, contract or judgment as is allowed
to be set-off.
FACTS:
• The main issue is based on Section 8 of PD No. 1956, as
amended by EO No. 137. It reads as follows:
SECTION 8. There is hereby created a Trust Account in the
books of accounts of the Ministry of Energy to be designated
as Oil Price Stabilization Fund (OPSF)...
The Fund herein created shall be used for the following:
1.1)To reimburse the oil companies for cost increases in
crude oil and imported petroleum products resulting from
exchange rate adjustment and/or increase in world market
prices of crude oil;
2.2)To reimburse the oil companies for possible cost
underrecovery incurred as a result of the reduction of
domestic prices of petroleum products. The magnitude
of the underrecovery, if any, shall be determined by the
Ministry of Finance. ‘Cost underrecovery’ shall include
the following:
1. Reduction in oil company take as directed by
the Board of Energy without the corresponding
reduction in the landed cost of oil inventories in
! 38!
Montero - Tax Digests (Block A 2014)
the possession of the oil companies at the time
of the price change;
2. Reduction in internal ad valorem taxes as a
result of foregoing government mandated price
reductions;
3. Other factors as may be determined by the
Ministry of Finance to result in cost
underrecovery.
• COA sent a letter to Caltex directing it to remit its collection
of the additional tax on petroleum products pursuant to sec.
8. Pending such remittance, all reimbursements from the
OPSF shall be held in abeyance.
• In another letter COA showed Caltex the grand total of the
unremitted collections as well as interest and surcharges and
directed it to stop offsetting taxes with collections against its
outstanding claims for reimbursement. Caltex requested for
early release of its certificates for reimbursement from
OPSF.
• COA denied and repeated its earlier directives. Caltex
instead submitted a proposal for payment plan—the plan
again included offsetting COA’s uncollected remittances with
the reimbursements Caltex is entitled to.
• COA handed down a decision accepting the proposal in part,
still rejecting the offsetting scheme. The reimbursements
Caltex is seeking stems from finance charges and those
arising from sales to NAPOCOR, ATLAS and MARCOPPER.
• Basically: All Caltex really wants to do is offset the
reimbursements it is entitled to from OPSF, with the
remittances it still owes COA for additional tax on petroleum
products, authorized under Sec. 8 above.
• Caltex filed an Omnibus request for reconsideration of the
decision of COA. COA allowed recovery from export sales,
but not from sales to MARCOPPER or ATLAS. Unsatisfied,
Caltex filed this certiorari petition.

!
ISSUES:
1. Whether or not sales of petroleum products to
NAPOCOR, MARCOPPER and ATLAS is exempt from
taxation
2. Whether or not Caltex has a right to offset the
remittances it owes COA with the reimbursements from
OPSF
HELD & RATIO:
1. YES, it is exempt, but only as to NAPOCOR
(MARCOPPER and ATLAS sales not covered by
exemption
• The intention to exempt sales of petroleum products to the
NAPOCOR is evident in the recently passed Republic Act
No. 6952, so claims arising from these sales are recoverable
• Caltex relies on LOI 1416, which ordered the suspension of
payments of all taxes, duties, fees and other charges,
whether direct or indirect, due and payable by the copper
mining companies in distress to the national government.
Minister of Energy issued memorandum stating that
MARCOPPER and ATLAS are among those in distress.
However, LOI was issued at a time when the OPSF had not
yet even been created
• Also, LOI 1416 caused the ‘suspension of all taxes..due and
payable by the copper mining companies in distress.’ On the
other hand, OPSF dues are not payable by distressed
copper companies but by oil companies
• While LOI 1416 suspends the payment of taxes by
distressed mining companies, it does not accord petitioner
the same privilege with respect to its obligation to pay OPSF
dues.
• Tax exemptions are strictly construed against the one
claiming it; and it’s up to the person claiming the
exemption to prove it clearly. Here, Caltex failed
! 39!
Montero - Tax Digests (Block A 2014)
2. NO. There can be no offsetting of taxes against the
claims that a taxpayer may have against the
government, as taxes do not arise from contracts or
depend upon the will of the taxpayer, but are imposed
by law.
• The Revised Administrative Code empowers the COA to
withhold payment of government indebtedness to a person
who is also indebted to the government and apply the
government indebtedness to the satisfaction of the obligation
of the person to the government; but like authority or right to
make compensation is not given to the private person. So
Caltex cannot offset the remittances with its reimbursement
claims.
• However, Caltex argues that the remittances aren’t taxes,
but contribution to a special fund (OPSF) because the fund
isn’t used for a public purpose anyway.
o Taxation is no longer envisioned as a measure
merely to raise revenue to support the existence of
the government; taxes may be levied with a
regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened
industry, which is affected with public interest as to
be within the police power of the state.
o Also, P.D. No. 1956, as amended by E.O. No. 137,
explicitly provides that the source of OPSF is
taxation
Notes/ Source: 2A 2015 Digests

!
80. NATIONAL DEVELOPMENT COMPANY V. CIR
G.R. No. L-53961; June 30, 1987
Exemption from Taxation
REYES NOTES :
Can Tax Exemptions be merely implied ?
No. In NDC v CIR, at issue whether the undertaking signed by
the Secretary of Finance in the promissory not can be
considered an exemption on taxes on the interest remitted. The
Supreme Court ruled in the negative and opined that tax
exemptions cannot be merely implied but must be categorically
and unmistakably expressed.
What is the “legislative grace concept”?
The legislative grace concept provides that any tax relief
provided is the result of specific acts of Congress that must be
applied and interpreted strictly. In NDC v. CIR, SC ruled that the
fact that the Secretary of Finance guaranteed the loans of the
NDC cannot be taken to mean that the payments of NDC to the
Japanese creditors are exempt from withholding since the
undertaking was not tantamount to a waiver of collection to taxes
which must be express.
CASE:
NDC entered into contracts in Tokyo with several Japanese
shipbuilding companies for the construction of twelve ocean-going
vessels. Fourteen promissory notes were signed for the balance by
the NDC and, as required by the shipbuilders, guaranteed by the
Republic of the Philippines. The NDC remitted to the shipbuilders in
Tokyo the total amount of US$4,066,580.70 as interest on the
balance of the purchase price. But, No tax was withheld. In line
with this, CIR then held NDC liable on such tax.
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The relevant issue in this case is whether or not the
undertaking signed by the Secretary of Finance in the
promissory not can be considered an exemption on taxes on
the interest remitted. SC ruled that there is no basis for saying that
the interest payments were obligations of the Republic of the
Philippines and that the promissory notes of the NDC were
government securities exempt from taxation under Sec 29(b)[4] of
the Tax Code. Also, there is nothing in the undertaking of the
Sec of Finance exempting the interests from taxes. Nowhere in
the said undertaking do we find any inhibition against the collection
of the disputed taxes. Manifestly, the said undertaking of the
Republic of the Philippines merely guaranteed the obligations of the
NDC but without diminution of its taxing power under existing laws.
Thus, NDC has not established a clear waiver therein of the
right to tax interests. Tax exemptions cannot be merely implied
but must be categorically and unmistakably expressed. Any
doubt concerning this question must be resolved in favor of the
taxing power.
FACTS:
• The National Development Company (NDC) entered into
contracts in Tokyo with several Japanese shipbuilding
companies for the construction of twelve ocean-going vessels.
o The purchase price was to come from the proceeds of
bonds issued by the Central Bank.
o Initial payments were made in cash and through irrevocable
letters of credit.
o Fourteen promissory notes were signed for the balance by
the NDC and, as required by the shipbuilders, guaranteed
by the Republic of the Philippines.
o Pursuant thereto, the remaining payments and the interests
thereon were remitted in due time by the NDC to Tokyo.
o The NDC remitted to the shipbuilders in Tokyo the total
amount of US$4,066,580.70 as interest on the balance of
the purchase price.

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o No tax was withheld.
• The vessels were eventually completed and delivered to
the NDC in Tokyo.
1. The Commissioner of Internal Revenue then held the NDC liable
on such tax in the total sum of P5,115,234.74.
1. After negotiations with NDC and BIR failed, BIR thereupon
served on the NDC a warrant of distraint and levy to enforce
collection of the claimed amount.
2. NDC then went to the CTA.CTA sustained BIR except for a
slight reduction of the tax deficiency.
ISSUE:
A. whether or not the Japanese shipbuilders were liable on the
interest remitted to them by NDC.
B. whether or not the undertaking signed by the Secretary of
Finance in the promissory not can be considered an exemption
on taxes on the interest remitted
RATIO:
• Yes, the Japanese shipbuilders were liable to tax on the interest
remitted to them under Section 37 of the Tax Code.
NDC’s Contention:
The Japanese shipbuilders were not subject to tax under the
above provision because all the related activities — the
signing of the contract, the construction of the vessels, the
payment of the stipulated price, and their delivery to the NDC
— were done in Tokyo.
SC RULING: Contrary to the contention of NDC, the Japanese
shipbuilders were liable to tax on the interest remitted to them under
Section 37 of the Tax Code.
According to Sec 37 of the Tax Code:
SEC. 37. Income from sources within the Philippines. — (a)
Gross income from sources within the Philippines. — The
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following items of gross income shall be treated as gross
income from sources within the Philippines:
(1) Interest. — Interest derived from sources within the
Philippines, and interest on bonds, notes,
or other interest-bearing obligations of residents, corporate
or otherwise;
• Based on the above provision, the law does not speak of activity
but of "source," which in this case is the NDC which is a
domestic and resident corporation with principal offices in
Manila.
• The Government's right to levy and collect income tax on
interest received by foreign corporations not engaged in
trade or business within the Philippines is not planted upon
the condition that 'the activity or labor — and the sale from
which the (interest) income flowed had its situs' in the
Philippines.
• The residence of the obligor who pays the interest rather
than the physical location of the securities, bonds or notes
or the place of payment, is the determining factor of the
source of interest income.
• If the obligor is a resident of the Philippines the interest
payment paid by him can have no other source than within
the Philippines. The interest is paid not by the bond, note or
other interest-bearing obligations, but by the obligor.
• In the case at bar, NDC, a corporation duly organised and
existing under the laws of the Republic of the Philippines,
unconditionally promised to pay the Japanese shipbuilders,
as obligor in fourteen (14) promissory notes for each vessel,
the balance of the contract price of the twelve (12) ocean-
going vessels purchased and acquired by it from the
Japanese corporations, including the interest on the
principal sum. Pursuant to such, NDC remitted to the
Japanese shipbuilders in Japan during the years 1960,

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1961, and 1962 the sum of $830,613.17, $1,654,936.52 and
$1,541.031.00, respectively, as interest on the unpaid
balance of the purchase price of the aforesaid vessels.
• Clearly therefore, the interest remitted to the Japanese
shipbuilders in Japan in 1960, 1961 and 1962 on the unpaid
balance of the purchase price of the vessels acquired by the
NDC, as the obligor, is interest derived from sources within
the Philippines subject to income tax under the then Sec 24
b(1) of the National Internal Revenue Code.
• There is no basis for saying that the interest payments were
obligations of the Republic of the Philippines and that the
promissory notes of the NDC were government securities
exempt from taxation under Sec 29(b)[4] of the Tax Code. Also,
there is nothing in the undertaking of the Sec of Finance
exempting the interests from taxes
• Sec 29(b)[4] of the Tax Code states that:
SEC. 29. Gross Income. — xxxx xxx xxx xxx
(b) Exclusion from gross income. — The following
items shall not be included in gross income and shall
be exempt from taxation under this Title:
xxx xxx xxx
(4) Interest on Government Securities. — Interest
upon the obligations of the Government of the
Republic of the Philippines or any political
subdivision thereof, but in the case of such
obligations issued after approval of this Code, only
to the extent provided in the act authorizing the issue
thereof. (As amended by Section 6, R.A. No. 82;
emphasis supplied)
• The law invoked NDC as authorizing the issuance of
securities is R.A. No. 1407, which in fact is silent on this
FINAL VERDICT: appealed decision is AFFIRMED.
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matter. R.A. No. 1407, does not exempt from taxes the
interests on such securities.
• It is also incorrect to suggest that the Republic of the
Philippines could not collect taxes on the interest remitted
because of the undertaking signed by the Secretary of
Finance in each of the promissory notes which states:
“Upon authority of the President of the Republic of
the Philippines, the undersigned, for value received,
hereby absolutely and unconditionally guarantee
(sic), on behalf of the Republic of the Philippines, the
due and punctual payment of both principal and
interest of the above note.”
• There is nothing in such undertaking exempting the interests
from taxes. Nowhere in the said undertaking do we find any
inhibition against the collection of the disputed taxes.
Manifestly, the said undertaking of the Republic of the
Philippines merely guaranteed the obligations of the NDC
but without diminution of its taxing power under existing
laws.
• Thus, NDC has not established a clear waiver therein of the
right to tax interests. Tax exemptions cannot be merely
implied but must be categorically and unmistakably
expressed. Any doubt concerning this question must be
resolved in favor of the taxing power.
1. Lastly, it is not the NDC that is being taxed. The tax was
due on the interests earned by the Japanese shipbuilders. It
was the income of these companies and not the Republic of
the Philippines that was subject to the tax the NDC did not
withhold. In effect, therefore, the imposition of the deficiency
taxes on the NDC is a penalty for its failure to withhold the
same from the Japanese shipbuilders. NDC was remiss in
the discharge of its obligation as the withholding agent of
the government and so should be held liable for its
omission.

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81. SMART COMMUNICATIONS INC. VS. CITY OF DAVAO
G.R. No. 155491, July 21, 2009
PM Reyes Notes/Case:
Smart claims exemption from the local franchise tax of the
City of Davao invoking sections 9 and 23 of R.A. 7925 of R.A
7925 which states that there shall be a 3% franchise tax
Issue: Whether or not by virtue of Sections 9 and 23 of R.A.
based on gross receipts which shall be in lieu of all taxes
7925, Smart is exempt from local franchise tax.
on this franchise or earnings thereof.
The Supreme Court held that Smart is not exempt.
Held:
Exemption from tax is strictly construed against taxpayer and
NO
in favor of the taxing authority. Tax exemptions are highly
• In Digital Telecommunications Philippines, Inc. (Digitel) v.
disfavored and that a tax exemption must be expressed in
the statute in clear language that leaves no doubt of the
intention of the legislature to grant such exemption.
Facts:
• On February 18, 2002, Smart filed a special civil action for
declaratory relief for the ascertainment of its rights and
obligations under the Tax Code of the City of Davao, which
imposes a franchise tax on businesses enjoying a franchise
within the territorial jurisdiction of Davao. Smart avers that its
telecenter in Davao City is exempt from payment of
franchise tax to the City.
• On July 19, 2002, the RTC rendered a Decision denying the
petition. Smart filed a motion for reconsideration, which was
denied by the trial court in an Order dated September 26,
2002. Smart filed an appeal before this Court, but the same
was denied in a decision dated September 16, 2008.
• Hence, the instant motion for reconsideration raising the
following grounds: (1) the “in lieu of all taxes” clause in
Smart’s franchise, Republic Act No. 7294 (RA 7294), covers
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local taxes; the rule of strict construction against tax
exemptions is not applicable; (2) the “in lieu of all taxes”
clause is not rendered ineffective by the Expanded VAT
Law; (3) Section 23 of Republic Act No. 7925[4] (RA 7925)
includes a tax exemption; and (4) the imposition of a local
franchise tax on Smart would violate the constitutional
prohibition against impairment of the obligation of contracts.
Province of Pangasinan, Digitel used as an argument the “in
lieu of all taxes” clauses/provisos found in the legislative
franchises of Globe, Smart and Bell, vis-à-vis Section 23 of
RA 7925, in order to claim exemption from the payment of
local franchise tax. Digitel claimed, just like the petitioner in
this case, that it was exempt from the payment of any other
taxes except the national franchise and income taxes.
Digitel alleged that Smart was exempted from the payment
of local franchise tax.
o Congress did not intend it to operate as a blanket tax
exemption to all telecommunications entities. Section
23 cannot be considered as having amended PLDT’s
franchise so as to entitle it to exemption from the
imposition of local franchise taxes. The Court further
held that tax exemptions are highly disfavored
and that a tax exemption must be expressed in
the statute in clear language that leaves no doubt
of the intention of the legislature to grant such
exemption. And, even in the instances when it is
 Montero - Tax Digests (Block A 2014)
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granted, the exemption must be interpreted in
strictissimi juris against the taxpayer and
liberally in favor of the taxing authority.
o The Court also clarified the meaning of the word
“exemption” in Section 23 of RA 7925: that the word
“exemption” as used in the statute refers or pertains
merely to an exemption from regulatory or reporting
requirements of the Department of Transportation
and Communication or the National Transmission
Corporation and not to an exemption from the
grantee’s tax liability.
• In Philippine Long Distance Telephone Company (PLDT) v.
Province of Laguna:
o Applying the rule of strict construction of laws
granting tax exemptions and the rule that doubts are
resolved in favor of municipal corporations in
interpreting statutory provisions on municipal taxing
powers, the Court held that Section 23 of RA 7925
could not be considered as having amended
petitioner's franchise so as to entitle it to exemption
from the imposition of local franchise taxes.
• In sum, the aforecited jurisprudence suggests that aside
from the national franchise tax, the franchisee is still liable to
pay the local franchise tax, unless it is expressly and
unequivocally exempted from the payment thereof
under its legislative franchise. The “in lieu of all taxes”
clause in a legislative franchise should categorically
state that the exemption applies to both local and
national taxes; otherwise, the exemption claimed should
be strictly construed against the taxpayer and liberally
in favor of the taxing authority.
buildings and personal property, exclusive of this franchise, as other
persons or corporations which are now or hereafter may be required
by law to pay. In addition thereto, the grantee, its successors or
assigns shall pay a franchise tax equivalent to three percent
(3%) of all gross receipts of the business transacted under this
franchise by the grantee, its successors or assigns and the said
percentage shall be in lieu of all taxes on this franchise or
earnings thereof: Provided, That the grantee, its successors or
assigns shall continue to be liable for income taxes payable under
Title II of the National Internal Revenue Code pursuant to Section 2
of Executive Order No. 72 unless the latter enactment is amended or
repealed, in which case the amendment or repeal shall be applicable
thereto.
*SEC. 23. Equality of Treatment in the Telecommunications
Industry — Any advantage, favor, privilege, exemption, or immunity
granted under existing franchises, or may hereafter be granted, shall
ipso facto become part of previously granted telecommunications
franchises and shall be accorded immediately and unconditionally to
the grantees of such franchises: Provided, however, That the
foregoing shall neither apply to nor affect provisions of
telecommunications franchises concerning territory covered by the
franchise, the life span of the franchise, or the type of the service
authorized by the franchise

*Section 9. Tax provisions. — The grantee, its successors or

assigns shall be liable to pay the same taxes on their real estate

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82. NITAFAN vs CIR
G.R. No. 78780, July 23, 1987
[judges seek to prohibit deduction for taxes, Alleging Consti
protection vs. decrease of salaries]
REYES NOTES:
Q21.9. Are salaries of judges taxable?
Yes. In NITAFAN V. CIR [152 SCRA 284], the Supreme Court held
that the salaries of members of the judiciary are subject to income
tax as applied to all taxpayers. The payment of income tax by
Justices and Judges do not fall within the constitutional protection
against decrease of their salaries during their continuance in office.
CASE:
Petitioners in this case ask for the exemption from taxes from their
salaries since the provision from the 1973 Constitution: “No salary or
any form of emolument of any public officer or employee, including
constitutional officers, shall be exempt from payment of income tax.”
Is no longer adopted in the 1987 Constitution. Petitioners pray for the
reinstatement of the Doctrine in Endencia vs. David and Perfecto vs.
Meer wherein under the 1935 Constitution, the salaries of the
members of the judiciary are exempt from income tax.
The Supreme Court held that although the said provision from the
1973 Constitution was absent from 1987 Constitution, the intent of
the framers shows that the salaries of the Judges and justices are no
longer exempt from income tax and that the ruling in the case of
Endencia vs. David and Perfecto vs. Meer is deemed discarded.
*Note: Endencia vs. David and Perfecto vs Meer are 1953 and 1950
cases respectively, hence they are governed by the 1935
Constitution.
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CASE:
• Petitioners, the duly appointed and qualified Judges presiding
over Branches 52, 19 and 53, respectively, of the Regional Trial
Court, National Capital Judicial Region, all with stations in
Manila, seek to prohibit and/or perpetually enjoin respondents,
the Commissioner of Internal Revenue and the Financial Officer
of the Supreme Court, from making any deduction of withholding
taxes from their salaries.
• In a nutshell, they submit that "any tax withheld from their
emoluments or compensation as judicial officers constitutes a
decrease or diminution of their salaries, contrary to the provision
of Section 10, Article VIII of the 1987 Constitution mandating that
"(d)uring their continuance in office, their salary shall not be
decreased," even as it is anathema to the Ideal of an
independent judiciary envisioned in and by said Constitution."
• It may be pointed out that, early on, the Court had dealt with the
matter administratively in response to representations that the
Court direct its Finance Officer to discontinue the withholding of
taxes from salaries of members of the Bench. Thus, on June 4,
1987, the Court en banc had reaffirmed the Chief Justice's
directive as follows:
RE: Question of exemption from income taxation. — The Court
REAFFIRMED the Chief Justice's previous and standing
directive to the Fiscal Management and Budget Office of this
Court to continue with the deduction of the withholding taxes
from the salaries of the Justices of the Supreme Court as well as
from the salaries of all other members of the judiciary.
• That should have resolved the question. However, with the filing
of this petition, the Court has deemed it best to settle the legal
issue raised through this judicial pronouncement.

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ISSUE: Whether or not the salaries of Judges and Justices are
subject to tax.
HELD:
• Yes
• This intent was somehow and inadvertently not clearly set forth
in the final text of the Constitution as approved and ratified in
February, 1987. Although the intent may have been obscured by
the failure to include in the General Provisions a proscription
against exemption of any public officer or employee, including
constitutional officers, from payment of income tax, the Court
since then has authorized the continuation of the deduction
of the withholding tax from the salaries of the members of
the Supreme Court, as well as from the salaries of all other
members of the Judiciary.
• The Court hereby makes of record that it had then discarded the
ruling in Perfecto vs. Meer and Endencia vs. David*, infra, that
declared the salaries of members of the Judiciary exempt from
payment of the income tax and considered such payment as a
diminution of their salaries during their continuance in office. The
Court hereby reiterates that the salaries of Justices and
Judges are properly subject to a general income tax law
applicable to all income earners and that the payment of
such income tax by Justices and Judges does not fall within
the constitutional protection against decrease of their
salaries during their continuance in office.
• A comparison of the Constitutional provisions involved is called
for. The 1935 Constitution provided:
... (The members of the Supreme Court and all judges of inferior
courts) shall receive such compensation as may be fixed by law,
which shall not be diminished during their continuance in office ...
• Under the 1973 Constitution, the same provision read:
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The salary of the Chief Justice and of the Associate Justices of
the Supreme Court, and of judges of inferior courts shall be fixed
by law, which shall not be decreased during their continuance in
office. ...
And in respect of income tax exemption, another provision in the
same 1973 Constitution specifically stipulated:
No salary or any form of emolument of any public officer or
employee, including constitutional officers, shall be exempt from
payment of income tax.
• The provision in the 1987 Constitution, which petitioners rely on,
reads:
The salary of the Chief Justice and of the Associate Justices of
the Supreme Court, and of judges of lower courts shall be fixed
by law. During their continuance in office, their salary shall not be
decreased.
• The deliberations of the 1986 Constitutional Commission
relevant to Section 10, Article VIII, negate such contention.
• Commissioner Aquino argued that the exclusion of judges from
tax violates the uniformity of taxation and the equal protection
clause.
• Commissioner Ople also stated that in trying to erect a bastion of
justice, we might end up with the fortress of privileges, an island
of extra territoriality under the Republic of the Philippines,
because a good number of powers and rights accorded to the
Judiciary here may not be enjoyed in the remotest degree by
other employees of the government.
• All in all, the commissioners amended the provision dropping the
phrase “shall not be subject in income tax”. Furthermore, putting
a period (.) after the word DECREASED on the new provision to

!
emphasize that the salaries of the Justices and Judges are
subject to income tax and that the Doctrine in Endencia vs.
David and Perfecto vs. Meer inapplicable.
• With the foregoing interpretation, and as stated heretofore, the
ruling that "the imposition of income tax upon the salary of
judges is a dimunition thereof, and so violates the Constitution"
in Perfecto vs. Meer, as affirmed in Endencia vs. David must be
declared discarded. The framers of the fundamental law, as the
alter ego of the people, have expressed in clear and
unmistakable terms the meaning and import of Section 10,
Article VIII, of the 1987 Constitution that they have adopted.
Final Verdict: WHEREFORE, the instant petition for Prohibition
is hereby dismissed.
! liabilities on the ground that the interest earned by Mitsubishi on
83. CIR V. MITSUBISHI METAL
181 SCRA 215 January 22, 1990
Note: Previously discussed under international comity.
Reyes Notes:
Q21.11. How are tax exemptions construed and interpreted?
Taxation is the rule and exemption is the exception. The burden of
proof rests upon the party claiming the exemption to prove that it is in
fact covered by the exemption so claimed (CIR V. MITSUBISHI
METAL [181 SCRA 215]).
FACTS:
• Atlas Consolidated Mining entered into a Loan and Sales
Contract with Mitsubishi where it was provided that Mitsubishi
would LEND Atlas $20M for the installation of a new
concentrator for copper production. In turn, Atlas would SELL to
Mitsubishi all the copper concentrates produced from the
machine for the next 15 years.
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• Thereafter, Mitsubishi applied for a loan with Eximbank of Japan
and other consortium of Japanese banks so that it could comply
with its obligations under the contract. The total amount of both
loans was $20M.
• Approval of the loan by Eximbank to Mitsubishi was subject to
the condition that Mitsubishi would use the amount as loan to
Atlas and as consideration for importing copper concentrates
from Atlas.
• Atlas made interest payments in favor of Mitsubishi totaling
P13M. The corresponding 15% tax on the interest in the amount
of P1.9M was withheld and remitted to the Government.
• Subsequently, Mitsubishi and Atlas filed a claim for tax credit,
requesting that the P1.9M be applied against their existing tax
the loan was exempt from tax.
• The NIRC provides that income received from loans in the
Philippines extended by financing institutions owned, controlled,
or financed by foreign governments are exempt from tax.
• Mitsubishi and Atlas claim that the interest earned from the loan
falls under the above exemption because Mitsubishi was merely
acting as an agent of Eximbank, which is a financing institution
owned, controlled, and financed by the Japanese Government.
They allege that Mitsubishi was merely the conduit between
Atlas and Eximbank, and that the ultimate creditor was really
Eximbank.
ISSUE: W/N the interest income from loans extended to Atlas by
Mitsubishi is excluded from gross income taxation and therefore
excluded from withholding tax.
HELD & RATIO:
NO, interest income is NOT exempt from tax.
• NIRC provides that income received from loans in the Phils
extended by financial institutions owned, controlled or financed

!
by foreign govs are exempt from tax. Mitsubishi and Atlas thus
claim that interest income from the loan falls under such
exemption because Mitsubishi was merely an agent of
Eximbank, a financing institution owned,controlled and financed
by the Jap gov.
• HOWEVER, Mitsubishi was NOT a mere agent of Eximbank. It
entered into the agreement with Atlas in its own independent
capacity.
• The transaction between Mitsubishi and Atlas on one hand,
AND Mitsubishi and Eximbank on the other, were separate
and distinct.
• Thus, the interest income of the loan paid by Atlas to Mitsubishi
is entirely different from the interest income paid by Mitsubishi to
Eximbank. What was subject of the withholding tax is not the
interest income paid by Mitsubishi to Eximbank but the interest
income earned by Mitsubishi from the loan to Atlas.
• Since the transaction was between Mitsubishi and Atlas, the
exemption that would have been applicable to Eximbank, does
not apply. The interest is therefore not exempt from tax.
• It is true that under the contract of loan with Eximbank,
Mitsubishi agreed to use the amount as a loan to and in
consideration for importing copper concentrates from Atlas, but
this only proves the justification for the loan as represented by
Mitsubishi which is a standard banking practice for evaluating the
prospects of due repayment.
• Laws granting exemption from tax are construed strictissimi juris
against the taxpayer and liberally in favor of the taxing power.
• While international comity is invoked in this case on the nebulous
representation that the funds involved in the loans are those of a
foreign government, scrupulous care must be taken to avoid
opening means to violate our tax laws. Otherwise, the mere
expedient of having Phil corp enter into a contract for loans with
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private foreign entities, which in turn will negotiate independently
with their governments, could be availed to take advantage of
the tax exemption law under discussion.
FINAL VERDICT: CTA decisions REVERSED and SET ASIDE.
84. PLDT V. CITY OF DAVAO
REYES NOTES/ CASE: NONE
FACTS:
• Petitioner Philippine Long Distance Telephone Co., Inc.
(PLDT) applied for a Mayor's Permit to operate its Davao
Metro Exchange. However, Respondent City of Davao
withheld action on the application pending payment by
petitioner of the local franchise tax in the amount of
P3,681,985.72 for the first to the fourth quarter of 1999.
• Petitioner protested the assessment of the local franchise tax
and requested a refund of the franchise tax paid by it for the
year 1997 and the first to the third quarters of 1998.
Petitioner contended that it was exempted from the payment
of franchise tax based on an opinion of the Bureau of Local
Government Finance (BLGF) citing Section 23 of RA 7925
which provides equality of treatment in the
telecommunication industry.
• Nevertheless, respondent Adelaida B. Barcelona, City
Treasurer of Davao, denied the protest and claim for tax
refund of petitioner.
ISSUES: Whether or not PLDT is exempted to pay the local
franchise tax.
 Montero - Tax Digests (Block A 2014)
!

Immigration Act, civilian employees in the US Military Base,,

HELD & RATIO: incomes are solely derived from salaries from the US Government
• NO. SC held that Petitioner PLDT is not exempted from the local • Frank Robertson is an American Citizen born in the
Philippines, resided in the Philippines until her repatriated to
franchise tax because it does not appear that, in approving Åò23
of R.A. No. 7925, Congress intended it to operate as a blanket the US and took resident at Long Beach, CA. He was
tax exemption to all telecommunications entities. It explained that employed with a job at the US Navy, eventually assigned at
the US Naval Ship Repair Facility at Subic Bay, Olongapo,
the acceptance of petitioner's theory would result in absurd
PI
consequences.
• James Robertson was born in the PI and had resided in the
• It is different if Congress enacts a law specifically granting country until repatriated to US and then established hi
uniform advantages, favor, privilege, exemption, or immunity to domicile. Landed a job with the US Navy Shipyard at Long
all telecommunications entities. Furthermore, the court Beach, CA as a US Federal Civil Service employee.
emphasized that tax exemptions are highly disfavored. Returned to the PI with assignent at the US Naval Base at
Subic Bay, Olongapo and had remained since
FINAL VERDICT: Petition is Denied. • Robert Cathey is a US born citizen, came to the PI with the
US liberation force in 1944, turned a US Navy’s civilian
employee in Makati, MM
• John Garrison is a Philippine born American citizen also
Notes/ Source: 2014
repatriated to the US establishing his domicile at San
Francisco, CA. Employed in US’ military installations.
Returned to the PI at the US Naval Base in Subic Bay
85. COMMISSIONER OF INTERNAL REVENUE, vs.FRANK
• CTA Decision: in favor of Rs — cancelled the assessment for
ROBERTSON, JAMES W. ROBERTSON, ROBERT H. CATHEY,
deficiency INCOME TAXES of inclusive of interests and penalties
JOHN L. GARRISON AND THE COURT OF TAX APPEALS
ISSUES: Whether or not Rs are exempt from Income Tax
CASE:
HELD & RATIO:
Rs are US citizens, US passport holders, getting income
• YES — its according to RP-US Military Bases Agreement of 1947
solely from the US Government as employees at the US Naval Base
• No national of the United States serving in or employed in the
in Subic Bay, Olongapo City. P demanded that they should pay
Philippines in connection with the construction, maintenance,
income tax. CTA ruled that they are exempted according to the RP-
operation or defense of the bases and residing in the Philippines
US Military Bases Agreement of 1947. The SC held that yes , under
by reason only of such employment, or his spouse and minor
the agreement they are exempted from paying income taxes.
children and dependent parents of either spouse, shall be liable to
pay income tax in the Philippines except in respect of income
FACTS:
derived from Philippine sources or sources other than the United
• All respondents are citizens of the US, holders of US passports
and admitted as Special Temporary Visitors under Philippine

! 49!

!
States sources. (Article XII, Par. 2, of the RP-US Military Bases
Agreement of 1947)
• “In order to avail oneself of the tax exemption under the RP-US
Military Bases Agreement: he must be a national of the United
States employed in connection with the construction, maintenance,
operation or defense, of the bases, residing in the Philippines by
reason of such employment, and the income derived is from the
U.S. Government (Art. XII par. 2 of PI-US Military Bases
Agreement of 1947). Said circumstances are all present in the
case at bar.
• Purpose of the Agreement: "to exempt all U.S. citizens working in
the Military Bases from the burden of paying Philippine Income Tax
without distinction as to whether born locally or born in their
country of origin
• This Court will not deem itself authorized to depart from the plain
meaning of the tax exemption provision so explicit in terms and so
searching in extent
FINAL VERDICT: Petition is DENIED.
86. REPUBLIC VS IAC
Reyes Notes:
Q22. What is a tax amnesty?
A tax amnesty is a general pardon or intentional overlooking by the
State of its authority to impose penalties on persons otherwise guilty
of evasion or violation of a revenue or tax. (REPUBLIC V. IAC
[196 SCRA 335].
FACTS:
• On April 15, 1980, the Republic of the Philippines, through the
Bureau of Internal Revenue, commenced an action to collect
from the spouses Antonio Pastor and Clara Reyes-Pastor
deficiency income taxes for the years 1955 to 1959.
• The Pastors filed a motion to dismiss the complaint, but the
motion was denied. On August 2, 1975, they filed an answer
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Montero - Tax Digests (Block A 2014)
admitting there was an assessment against them of P17,117.08
for income tax deficiency but denying liability therefor.
• They contended that they had availed of the tax amnesty under
P.D.'s Nos. 23, 213 and 370 and had paid the corresponding
amnesty taxes amounting to P10,400 or 10% of their reported
untaxed income under P.D. 23, P2,951.20 or 20% of the
reported untaxed income under P.D. 213, and a final payment on
October 26, 1973 under P.D. 370 evidenced by the
Government's Official Receipt No. 1052388. Consequently, the
Government is in estoppel to demand and compel further
payment of income taxes by them.
ISSUE: Whether or not the payment of deficiency income tax under
the tax amnesty and its acceptance by the Government operated to
divest the Government of the right to further recover from the
taxpayer, even if there was an existing assessment against the latter
at the time he paid the amnesty tax.
RULING:
• Even assuming that the deficiency tax assessment of
P17,117.08 against the Pastor spouses were correct, since the
latter have already paid almost the equivalent amount to the
Government by way of amnesty taxes under P.D. No. 213, and
were granted not merely an exemption, but an amnesty, for their
past tax failings, the Government is estopped from collecting the
difference between the deficiency tax assessment and the
amount already paid by them as amnesty tax.
• A tax amnesty, being a general pardon or intentional overlooking
by the State of its authority to impose penalties on persons
otherwise guilty of evasion or violation of a revenue or tax law,
partakes of an absolute forgiveness or waiver by the
Government of its right to collect what otherwise would be due it,
and in this sense, prejudicial thereto, particularly to give tax
evaders, who wish to relent and are willing to reform a chance to
do so and thereby become a part of the new society with a clean
slate.

!
87. PHILIPPINE ACETYLENE V COURT OF INDUSTRIAL
RELATIONS
Tax exemptions
REYES NOTES/ CASE:
Can the Seller claim an exemption on indirect taxes if it sold
products to buyers who, under the law, are tax-exempt entities?
No. The seller cannot claim an exemption or a refund on the indirect
taxes it paid for those goods sold or services rendered to an entity
exempt from indirect taxes. As a tax exempt entity, the buyer is
exempted from absorbing the burden of indirect taxation and it is the
seller then that shall shoulder this burden. The tax exemption of the
buyer cannot be the basis of a claim for tax exemption of the
manufacturer.
CASE:
Petitioner Philippine Acetylene Co. Inc. is engaged in
the manufacture and sale of oxygen and acetylene gases. Itsold its
products to the National Power Corporation (Napocor), an agency of
the Philippine Government, andthe Voice of America (VOA), an
agency of the United States Government. The
Commissioner assess deficiency sales tax and surcharges against
the company. The company denied liability for the payment of tax on
the ground that both Napocor and VOA are exempt from taxes.
So the issue is whether Philippine Acetylene Co. is exempt from the
tax. Court ruled on the negative which further explained that sales
tax are paid by the manufacturer or producer who must make a true
and complete return of theamount of his, her or its gross monthly
sales, receipts or earnings or gross value of output actually
removedfrom the factory or mill, warehouse and to pay the tax due
thereon. The tax imposed by Section 186 of theTax Code is a tax on
the manufacturer or producer and not a tax on the purchaser except
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Montero - Tax Digests (Block A 2014)
probably in a veryremote and inconsequential sense. Accordingly, its
levy on the sales made to tax-exempt entities like theNapocor is
permissible. On the other hand, there is nothing in the language of
the Military Bases Agreementto warrant the general exemption
granted by General Circular V-41 (1947). Thus, the expansive
constructionof the tax exemption is void; and the sales to the VOA
are subject to the payment of percentage taxes underSection 186 of
the Tax Code. Therefore, tax exemption is strictly construed and
exemption will nbot be heldto be conferred unless the terms under
which it is granted clearly and distinctly show that such was
the intention.
FACTS:
• Philippine Acetylene Co. Inc. is a corporation engaged in the
manufacture and sale of oxygen and acetylene gases.
• From 2 June 1953 to 30 June 1958, it made various sales of
its products to the National Power Corporation, an agency of
the Philippine Government, and to the Voice of America, an
agency of the United States Government.
• The sales to the NPC amounted to P145,866.70, while
those to the VOA amounted to P1,683, on account of which
the Commission of Internal Revenue assessed against, and
demanded from, the company the payment of P12,910.60
as deficiency sales tax and surcharge, pursuant to the
Sections 183 and 186 of the National Internal Revenue
Code.
• The company denied liability for the payment of the tax on
the ground that both the Napocor and the VOA are exempt
from taxation. It asked for a reconsideration of the
assessment and, failing to secure one, appealed to the
Court of Tax Appeals.
1. The CTA ruled that the tax on the sale of articles or goods in
section 186 of the Code is a tax on the manufacturer and not
on the buyer with the result that the “ Philippine Acetylene
Company, the manufacturer or producer of oxygen and
acetylene gases sold to the Napocor, cannot claim exemption

!
from the payment of sales tax simply because its buyer,
Napocor, is exempt from the payment of all taxes.
1. With respect to the sales made to the VOA, the court held
that goods purchased by the American Government or its
agencies from manufacturers or producers are exempt from
the payment of the sales tax under the agreement between
the Government of the Philippines and that of the United
States, provided the purchases are supported by certificates
of exemption, and since purchases amounting to only P558,
out of a total of P1,683, were not covered by certificates of
exemption, only the sales in the sum of P558 were subject to
the payment of tax.
2. Accordingly, the assessment was revised and the company’s
liability was reduced from P12,910.60, as assessed by the
Commission, to P12,812.16. Hence, the appeal by the
company.
ISSUES: Whether or not Philippine Acetylene is exempt from tax
HELD & RATIO:
NO, the Supreme Court modified the decision a quo by ordering the
company to pay to the Commission the amount of P12,910.60 as
sales tax and surcharge, with costs against Philippine Acetylene.
• Section 186 of the National Internal Revenue Code;
Percentage tax on sales of other articles - Section
186 provides that “there shall be levied, assessed and
collected once only on every original sale, barter,
exchange, and similar transaction either for nominal or
valuable considerations, intended to transfer ownership
of, or title to, the articles not enumerated in sections one
hundred and eighty- four and one hundred and eighty-
five a tax equivalent to seven per centum of the gross
selling price or gross value in money of the articles so
sold, bartered, exchanged, or transferred, such tax to be
paid by the manufacturer or producer: . . .”
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Montero - Tax Digests (Block A 2014)
• Section 183 of the National Internal Revenue Code;
Payment of percentage taxes - provides that “In
general, It shall be the duty of every person conducting
a business on which a percentage tax is imposed under
this Title, to make a true and complete return of the
amount of his, her or its gross monthly sales, receipts or
earnings, or gross value of output actually removed from
the factory or mill warehouse and within twenty days
after the end of each month, pay the tax due thereon:
Provided, That any person retiring from a business
subject to the percentage tax shall notify the nearest
internal revenue officer thereof, file his return or
declaration and pay the tax due thereon within twenty
days after closing his business. If the percentage tax on
any business is not paid within the time specified above,
the amount of the tax shall be increased by twenty-five
per centum, the increment to be a part of the tax.”
• Napocor’s tax exemption - The Napocor enjoys tax
exemption by virtue of an act of Congress, which
provides “To facilitate the payment of its indebtedness,
the National Power Corporation shall be exempt from all
taxes, except real property tax, and from all duties, fees,
imposts, charges, and restrictions of the Republic of the
Philippines, its provinces, cities and municipalities
(Section 2).”
• Doctrine of intergovernmental tax immunity - In the
case of Panhandle Oil Co. vs. Mississippi, the doctrine
of intergovernmental tax immunity was held as
prohibiting the imposition of a tax on sales of gasoline
made to the Federal Government. Said the Supreme
Court of the United States: “A charge at the prescribed
rate is made on account of every gallon acquired by the
United States. It is immaterial that the seller and not the
purchaser is required to report and make payment to the
state. Sale and purchase constitute a transaction by

!
which the tax is measured and on which the burden
rests . . .”
o Levy on sales made to tax-exempt entities is
permissible - The tax imposed by section 186 of the
National Internal Revenue Code is a tax on the
manufacturer or producer and not a tax on the
purchaser except probably in a very remote and
inconsequential sense. Accordingly its levy on the sales
made to tax-exempt entities like the NPC is permissible.
o Agreement does not contain general exemption
granted by Circular V-41 dated 16 October 1947 -
General Circular No. V-41 provides that “Goods
purchased locally by U.S. civilian agencies directly from
manufacturers, producers, or importers shall be exempt
from the sales tax.” Said circular was issued purportedly
to implement the Agreement between the Republic of
the Philippines and the United States of America
Concerning Military Bases, but there is nothing in the
language of the Agreement to warrant the general
exemption granted by that circular. Thus only sales
made “for exclusive use in the construction,
maintenance, operation or defense of the bases,” in a
word, only sales to the quartermaster, are exempt under
article V from taxation. Sales of goods to any other party
even if it be an agency of the United States, such as the
VOA, or even to the quartermaster but for a different
purpose, are not free from the payment of the tax. On
the other hand, article XVIII exempts from the payment
of the tax sales made within the bases by (not sales to)
commissaries and the like in recognition of the principle
that a sales tax is a tax on the seller and not on the
purchaser.
FINAL VERDICT: Petition is dismissed.
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88. COMMISSIONER OF INTERNAL REVENUE vs GOTAMCO &
SONS, Inc.
REYES NOTES:
Can the seller claim an exemption on indirect taxes if it sold products
to buyers who, under the law, are tax-exempt entities?
At issue was whether Gotamco & Sons should pay the contractor’s
tax (an indirect tax) on gross receipts it realized from the construction
of the WHO building in Manila. The Supreme Court ruled in the
affirmative. The Court opined that WHO, as a tax-exempt entity,
cannot be made liable for the tax indirect taxes.
CASE:
The World Health Organization under the Host Agreement is
granted tax exemptions both direct and indirect by the Philippine
Government. Gotamco &Sons won the public bidding and
subsequently constructed the WHO building. The CIR assessed
Gotamco & Sons for 3% Contractor’s tax, but they rejected it arguing
that they were told by the WHO to exclude taxes in their pricing since
WHO was exempt from any direct or indirect taxes. CIR on the other
hand argued that the contractor’s tax was not an indirect tax but an
excise tax, a tax to do ones work.
The Supreme Court held that the contractor’s tax was an
indirect tax since it would be included in the pricing of the
construction of the building and thus the burden to be shifted to
WHO. Gotamco & Sons cannot be made to pay the 3% contractor’s
tax for it would be in violation of the Host Agreement between the
Philippine government and WHO.
Note: What makes this case different from Phil Acetlyene according
to the SC is that in this case there was an international agreement
that specifically exempted WHO from indirect taxes.

!
FACTS:
• The World Health Organization (WHO for short) is an
international organization which has a regional office in
Manila. As an international organization, it enjoys privileges
and immunities which are defined more specifically in the
Host Agreement entered into between the Republic of the
Philippines and the said Organization on July 22, 1951.
Section 11 of that Agreement provides, inter alia, that "the
Organization, its assets, income and other properties shall
be: (a) exempt from all direct and indirect taxes. It is
understood, however, that the Organization will not claim
exemption from taxes which are, in fact, no more than
charges for public utility services; . . .
• WHO decided to construct a building to house its own
offices, as well as the other United Nations offices stationed
in Manila, it entered into a further agreement with the
Govermment of the Republic of the Philippines on November
26, 1957. This agreement contained the following provision
(Article III, paragraph 2):
o The Organization may import into the country
materials and fixtures required for the construction
free from all duties and taxes and agrees not to
utilize any portion of the international reserves of the
Government.
• Article VIII of the above-mentioned agreement referred to the
Host Agreement concluded on July 22, 1951 which granted
the Organization exemption from all direct and indirect
taxes.
• In inviting bids for the construction of the building, the WHO
informed the bidders that the building to be constructed
belonged to an international organization with diplomatic
status and thus exempt from the payment of all fees,
licenses, and taxes, and that therefore their bids "must take
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Montero - Tax Digests (Block A 2014)
this into account and should not include items for such taxes,
licenses and other payments to Government agencies."
• The construction contract was awarded to respondent John
Gotamco & Sons, Inc.
• the WHO received an opinion from the Commissioner of the
Bureau of Internal Revenue stating that WHO are exempt
from tax in accordance with . . . the Host Agreement."
Subsequently, however, on June 3, 1958, the Commissioner
of Internal Revenue reversed his opinion and stated that "as
the 3% contractor's tax is not a direct nor an indirect tax on
the WHO, but a tax that is primarily due from the contractor,
the same is not covered by . . . the Host Agreement."
• The Commissioner of Internal Revenue sent a letter of
demand to Gotamco demanding payment of P 16,970.40,
representing the 3% contractor's tax plus surcharges on the
gross receipts it received from the WHO in the construction
of the latter's building.
• Petitioner maintains that the 3% contractor's tax assessed
on Gotamco is not an "indirect tax" within its purview.
Petitioner's position is that the contractor's tax "is in the
nature of an excise tax which is a charge imposed upon the
performance of an act, the enjoyment of a privilege or the
engaging in an occupation. . . It is a tax due primarily and
directly on the contractor, not on the owner of the building.
Since this tax has no bearing upon the WHO, it cannot be
deemed an indirect taxation upon it."
ISSUES:
5. Whether or not the Gotamco & Sons is liable for the 3%
Contractor’s tax.
6. (Minor issue) W/N the Host Agreement is invalid since it
was not ratified by the Senate. -> NO, since it is an
International Agreement
HELD & RATIO:

!
7. NO, the Host Agreement specifically provides that the WHO
is exempted from all Direct and Indirect Taxes. The 3%
Contractor’s tax is an indirect tax.
• In context, direct taxes are those that are demanded
from the very person who, it is intended or desired,
should pay them; while indirect taxes are those that
are demanded in the first instance from one person
in the expectation and intention that he can shift the
burden to someone else.
• The contractor's tax is of course payable by the
contractor but in the last analysis it is the owner of
the building that shoulders the burden of the tax
because the same is shifted by the contractor to the
owner as a matter of self-preservation. Thus, it is an
indirect tax. And it is an indirect tax on the WHO
because, although it is payable by the petitioner, the
latter can shift its burden on the WHO. In the last
analysis it is the WHO that will pay the tax indirectly
through the contractor and it certainly cannot be said
that 'this tax has no bearing upon the World Health
Organization.
• Petitioner claims that under the authority of the
Philippine Acetylene Company versus
3
Commissioner of Internal Revenue, et al., the 3%
contractor's tax fans directly on Gotamco and cannot
be shifted to the WHO. The Court of Tax Appeals,
however, held that the said case is not controlling in
this case, since the Host Agreement specifically
exempts the WHO from "indirect taxes."
• Taxes on the sale of movable and immovable
property which form part of the price to be paid,
nevertheless, when the Organization is
making important purchases for official use of
property on which such duties and taxes have been
charged or are chargeable the Government of the
Republic of the Philippines shall make appropriate
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Montero - Tax Digests (Block A 2014)
administrative arrangements for the remission or
return of the amount of duty or tax.
FINAL VERDICT: Accordingly, finding no reversible error committed
by the respondent Court of Tax Appeals, the appealed decision is
hereby affirmed.
89. MACEDA v. MACARAIG
REYES NOTES/ CASE:
Senator Maceda prays that NAPOCOR’s tax exemptions be
limited only to direct taxes since the law conferring such application
should be strictly construed against the party claiming such
exemption.
The rule on strict application to tax exemptions does not
apply to a government body, be it an instrumentality or a political
subdivision.
FACTS:
• RA 6395 revised the charter of NAPOCOR (hereinafter
NPC), being a non-profit corporation, Section 13 of the law
provided in detail the exemption of the NPC from all taxes,
duties, fees, imposts and other charges by the government
and its instrumentalities.
• P.D. 380 – Amended Sec. 13 of R.A. 6395 by specifying,
among others, the exemption of NPC from such taxes,
duties, fees, imposts and other charges imposed directly
or indirectly, on all petroleum products used by NPC in
its operation.
• PD 938 dated May 27, 1976 further amended the aforesaid
provision by integrating the tax exemption in general terms
under one paragraph.

!
• Since May 27, 1976 when P.D. 938 was issued until June
11, 1984 when P.D. 1931 was promulgated abolishing the
tax exemptions of all GOCCs, the oil firms never paid
excise or specific and ad valorem taxes for petroleum
products sold and delivered to the NPC. This non-
payment of taxes therefore spanned a period of eight (8)
years.
• The oil companies started to pay specific and ad valorem
taxes on their sales of oil products to NPC only after the
promulgation of PD 1931 w/c withdrew all exemptions
granted in favor of GOCCs and empowering the Fiscal
Incentives Review Board (FIRB) to recommend to the
President or to the Minister of Finance the restoration of the
exemptions which were withdrawn.
• FIRB issued Resolution 1085 w/c restored the tax exemption
privileges of NPC effective retroactively to June 11, 1984 up
to June 30, 1985. Thus, the NPC applied with the BIR for a
refund of Specific Taxes paid on petroleum products in the
total amount of about P58k+.
• Senator Maceda, Introduced Resolution 22 w/c was aimed at
conducting an inquiry in aid of legislation in line w/ the
reported tax manipulations and evasions by oil companies
(particularly Caltex, Shell and Petrophil) by availing of their
non-existing exemption of NPC from indirect taxes, w/c
resulted in obtaining a tax refund totaling P1.55 Billion from
the Department of Finance
• Maceda’s contentions:
o the exemption of NPC from INDIRECT TAXATION
was revoked and repealed by the latest amendment
to the NPC charter by PD 938, by the deletion of the
phrases “directly or indirectly” and “on all petroleum
products used by the Corporation in the generation,
transmission, utilization and sale of electric power”
o the exemption of NPC provided in PD 938 regarding
the payments of “all forms of taxes…” cannot be
interpreted to include the exception on payment of
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Montero - Tax Digests (Block A 2014)
indirect taxes since tax statutes are to be strictly
construed against the party claiming the exemption
ISSUES:
Whether or not the respondent NPC has ceased to enjoy
indirect tax and duty exemption with the enactment of P.D. 938
on May 27, 1976 which amended P.D. 80, issued on January 11,
1974
HELD & RATIO:
8. NO, petition is devoid of merit.
• PD No. 938 amended the tax exemption by
simplifying the same law in general terms. It
succinctly exempts NPC from all forms of taxes,
duties, fees, imposts, as well as costs and service
fees including filing fees, bonds, in any court or
administrative proceedings.
• The use of the phrase all forms of taxes demonstrate
the intention of the law to give NPC all the tax
exemptions it has been enjoying before.
• The NPC is a non-profit public corporation created
for the general good and welfare wholly owned by
the government of the Republic of the Philippines.
From the very beginning of its corporate existence,
the NPC enjoyed preferential tax treatment.
• It is evident from the preamble of PD 938 that the
lawmaker did not intend that the said provisions of
P.D. No. 938 shall be construed strictly against NPC.
On the contrary, the law mandates that it should be
interpreted liberally so as to enhance the tax exempt
status of NPC.
• Moreover, it is a recognized principle that the rule on
strict interpretation does not apply in the case of
exemptions in favor of a government political
subdivision or instrumentality.

!
FINAL VERDICT: Petition is denied.
Notes/ Source: 2A Digests 2015
90. SILKAIR (SINGAPORE) PTE. LTD. v. COMMISSIONER OF
INTERNAL REVENUE
G.R. No. 184398 February 25, 2010
REYES NOTES/ CASE:
Not in PM Reyes Notes
Petitioner, a foreign corporation, is an online international
carrier plying the Singapore-Cebu-Singapore and Singapore-Cebu-
Davao-Singapore routes. It filed with the BIR a claim for the refund of
P3,983,590.49 in excise taxes which it allegedly erroneously paid on
its purchases of aviation jet fuel from Petron Corporation. Petitioner
used as basis therefor a BIR Ruling which declared that the
petitioner’s Singapore-Cebu-Singapore route is an international flight
by an international carrier and that the petroleum products
purchased by the petitioner should not be subject to excise taxes
under Section 135 of the National Internal Revenue Code (NIRC)
which exempts from excise taxes the entities covered by tax treaties,
conventions and other international agreements; provided that the
country of said carrier or exempt entity likewise exempts from similar
taxes the petroleum products sold to Philippine carriers or entities. In
this regard, petitioner relied on the reciprocity clause under Article
4(2) of the Air Transport Agreement entered between the
Republic of the Philippines and the Republic of Singapore.
The Court ruled that petitioner is NOT the proper party
to claim for a refund since it is not the one liable to pay for the
tax at the first place. In the earlier case of Silkair (Singapore) Pte,
Ltd. v. CIR (2008) we have categorically held that Petron, not
petitioner, is the proper party to question, or seek a refund of,
an indirect tax. Even if Petron Corporation passed on to Silkair the
burden of the tax, the additional amount billed to Silkair for jet fuel is
! 57!
Montero - Tax Digests (Block A 2014)
not a tax but part of the price which Silkair had to pay as a
purchaser. The burden is passed on to Silkair but the liability to pay
for the tax remains with Petron. Hence Petron is the proper party to
claim for a refund and not Silkair. Furthermore, tax exemptions are
strictly construed against the taxpayer, as taxes are the lifeblood of
the government.
FACTS:
• Petitioner, a foreign corporation organized under the laws of
Singapore with a Philippine representative office in Cebu
City, is an online international carrier plying the Singapore-
Cebu-Singapore and Singapore-Cebu-Davao-Singapore
routes.
• Petitioner filed with the BIR an administrative claim for the
refund of P3,983,590.49 in excise taxes which it allegedly
erroneously paid on its purchases of aviation jet fuel from
Petron Corporation (Petron).
• Petitioner used as basis therefor BIR Ruling No. 339-92
dated December 1, 1992, which declared that the
petitioner’s Singapore-Cebu-Singapore route is an
international flight by an international carrier and that the
petroleum products purchased by the petitioner should not
be subject to excise taxes under Section 135 of the NIRC.
o Section 135(b) of the NIRC exempts from excise
taxes the entities covered by tax treaties,
conventions and other international agreements;
provided that the country of said carrier or exempt
entity likewise exempts from similar taxes the
petroleum products sold to Philippine carriers or
entities. In this regard, petitioner relied on the
reciprocity clause under Article 4(2) of the Air
Transport Agreement entered between the
Republic of the Philippines and the Republic of
Singapore.

!
• Since the BIR took no action on petitioner’s claim for refund,
petitioner filed a petition for review with the CTA. This was
however denied by the CTA and the CTA en banc, hence
this petition.
• Petitioner’s contention: Petitioner claims that the instant
case involves a clear grant of tax exemption to it by law and
by virtue of an international agreement between two
governments. Consequently, being the entity which was
granted the tax exemption and which made the erroneous
tax payment of the excise tax, it is the proper party to file the
claim for refund.
• Respondent’s contention: Respondent maintains that an
excise tax, being an indirect tax, is the direct liability of the
manufacturer or producer. Respondent reiterates that when
an excise tax on petroleum products is added to the cost of
goods sold to the buyer, it is no longer a tax but becomes
part of the price which the buyer has to pay to obtain the
article. According to respondent, petitioner cannot seek
reimbursement for its alleged erroneous payment of the
excise tax since it is neither the entity required by law nor the
entity statutorily liable to pay the said tax.
• In the second Silkair case, the Court explained that an
ISSUE:
W/N Silkair can claim for a tax refund of the alleged erroneous
payment of the excise taxes
HELD & RATIO:
No. Petron and not Silkair is the proper party to claim for a
refund.
• In the first Silkair case (Silkair (Singapore) Pte, Ltd. v.
Commissioner of Internal Revenue, 2008) – earlier case
involving the same parties and the same cause of action but
pertaining to different periods of taxation, the Court have
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Montero - Tax Digests (Block A 2014)
categorically held that Petron, not petitioner, is the proper
party to question, or seek a refund of, an indirect tax.
o The proper party to question, or seek a refund of, an
indirect tax is the statutory taxpayer, the person on
whom the tax is imposed by law and who paid the
same even if he shifts the burden thereof to
another.
o Section 130 (A) (2) of the NIRC provides that
“[u]nless otherwise specifically allowed, the return
shall be filed and the excise tax paid by the
manufacturer or producer before removal of
domestic products from place of production.”
o Thus, Petron Corporation, not Silkair, is the statutory
taxpayer which is entitled to claim a refund based on
Section 135 of the NIRC of 1997 and Article 4(2) of
the Air Transport Agreement between RP
and Singapore.
o Even if Petron Corporation passed on to Silkair the
burden of the tax, the additional amount billed to
Silkair for jet fuel is not a tax but part of the price
which Silkair had to pay as a purchaser.
excise tax is an indirect tax where the burden can be shifted
or passed on to the consumer but the tax liability remains
with the manufacturer or seller. Thus, the manufacturer or
seller has the option of shifting or passing on the burden of
the tax to the buyer. However, where the burden of the tax
is shifted, the amount passed on to the buyer is no longer a
tax but a part of the purchase price of the goods sold.
o When Petron removes its petroleum products from
its refinery in Limay, Bataan, it pays the excise tax
due on the petroleum products thus removed.
Petron, as manufacturer or producer, is the
person liable for the payment of the excise tax as
shown in the Excise Tax Returns filed with the
BIR. Stated otherwise, Petron is the taxpayer that is

!
primarily, directly and legally liable for the payment
of the excise taxes. However, since an excise tax is
an indirect tax, Petron can transfer to its customers
the amount of the excise tax paid by treating it as
part of the cost of the goods and tacking it on the
selling price.
• From the foregoing discussion, it is clear that the proper
party to question, or claim a refund or tax credit of an
indirect tax is the statutory taxpayer, which is Petron in
this case, as it is the company on which the tax is
imposed by law and which paid the same even if the
burden thereof was shifted or passed on to another. It
bears stressing that even if Petron shifted or passed on
to petitioner the burden of the tax, the additional amount
which petitioner paid is not a tax but a part of the
purchase price which it had to pay to obtain the goods.
• Time and again, we have held that tax refunds are in the
nature of tax exemptions which represent a loss of revenue
to the government. These exemptions, therefore, must
not rest on vague, uncertain or indefinite inference, but
should be granted only by a clear and unequivocal
provision of law on the basis of language too plain to be
mistaken. Such exemptions must be strictly construed
against the taxpayer, as taxes are the lifeblood of the
government.
Other doctrines:
• Commissioner of Internal Revenue v. Philippine Long
Distance Telephone Company
o Direct taxes are those that are exacted from the very
person who, it is intended or desired, should pay them;
they are impositions for which a taxpayer is directly liable
on the transaction or business he is engaged in.
o Indirect taxes are those that are demanded, in the first
instance, from, or are paid by, one person in the
expectation and intention that he can shift the burden to
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Montero - Tax Digests (Block A 2014)
someone else. Stated elsewise, indirect taxes are taxes
wherein the liability for the payment of the tax falls on
one person but the burden thereof can be shifted or
passed on to another person, such as when the tax is
imposed upon goods before reaching the consumer who
ultimately pays for it. When the seller passes on the tax
to his buyer, he, in effect, shifts the tax burden, not the
liability to pay it, to the purchaser as part of the purchase
price of goods sold or services rendered.
• Excise taxes - refer to taxes applicable to certain specified
or selected goods or articles manufactured or produced in
the Philippines for domestic sale or consumption or for any
other disposition and to things imported into the
Philippines. These excise taxes may be considered taxes
on production as they are collected only from
manufacturers and producers. Basically an indirect tax,
excise taxes are directly levied upon the manufacturer
or importer upon removal of the taxable goods from its
place of production or from the customs
custody. These taxes, however, may be actually passed
on to the end consumer as part of the transfer value or
selling price of the goods sold, bartered or exchanged.
o SEC. 129, NIRC. Goods Subject to Excise
Taxes. – Excise taxes apply to goods
manufactured or produced in the Philippines for
domestic sale or consumption or for any other
disposition and to things imported. x x x.
FINAL VERDICT: The instant petition for review is DENIED.
Notes/ Source:
Original digest
91. COMMISSIONER OF INTERNAL REVENUE v. PILIPINAS
SHELL PETROLEUM CORPORATION
G.R. No. 188497, February 19, 2014

!
Exemption from Taxation
REYES NOTES
Q: Can the seller claim an exemption on indirect taxes if it sold
products to buyers who, under the law, are tax- exempt entities?
A: In CIR v. PILIPINAS SHELL [G.R. 188497, APRIL 25, 2012], Shell
claimed a refund for excise taxes it paid on the sales of gas and fuel
oils to various international carriers. The Supreme Court held that the
Section 135 of the NIRC which grants exemption from excise tax on
petroleum products to international l carriers is construed to mean
that the manufacturer cannot pas on the tax to the carriers by
incorporating the excise tax into the selling rice or effectively shifting
the tax burden. The seller shall shoulder the burden of the indirect
taxes.
CASE:
Respondent Shell argues that (1) a plain reading of Section 135 of
the NIRC reveals that it is the petroleum products sold to
international carriers which are exempt from excise tax for which
reason no excise taxes are deemed to have been due in the first
place; (2) the Court’s ruling that Section 135 only prohibits local
petroleum manufacturers like respondent from shifting the burden of
excise tax to international carriers has adverse economic impact as it
severely curtails the domestic oil industry; and (3) the imposition by
the Philippine Government of excise tax on petroleum products sold
to international carriers is in violation of the Chicago Convention to
which it is a signatory, as well as other international agreements.
The issue in this case is whether or not the manufacturer was
entitled to claim the refund of the excise taxes paid on the petroleum
products sold to international carriers exempt under Section 135(a)
of the NIRC.
! 60!
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The Court held that the respondent, as the statutory taxpayer who is
directly liable to pay the excise tax on its petroleum products, is
entitled to a refund or credit of the excise taxes it paid for
petroleum products sold to international carriers, the latter
having been granted exemption from the payment of said excise tax
under Sec. 135 (a) of the NIRC.
FACTS:
• Respondent Pilipinas Shell Petroleum Corporation (Shell) argues
that—
1. A plain reading of Section 135 of the NIRC reveals that it
is the petroleum products sold to international carriers
which are exempt from excise tax for which reason no
excise taxes are deemed to have been due in the first
place.
• It points out that excise tax being an indirect tax, Section
135 in relation to Section 148 should be interpreted as
referring to a tax exemption from the point of production
and removal from the place of production considering
that it is only at that point that an excise tax is imposed.
! The situation is unlike the VAT which is imposed
at every point of turnover – from production to
wholesale, to retail and to end–consumer.
! Respondent thus concludes that exemption
could only refer to the imposition of the tax
on the statutory seller, in this case the
respondent. This is because when a tax paid by
the statutory seller is passed on to the buyer it is
no longer in the nature of a tax but an added
cost to the purchase price of the product sold.
2. The Court’s ruling that Section 135 only prohibits local
petroleum manufacturers like respondent from shifting
the burden of excise tax to international carriers has
adverse economic impact as it severely curtails the

!
domestic oil industry.
o Requiring local petroleum manufacturers to absorb the
tax burden in the sale of its products to international
carriers is contrary to the State’s policy of “protecting
gasoline dealers and distributors from unfair and
onerous trade conditions,” and places them at a
competitive disadvantage since foreign oil producers,
particularly those whose governments with which we
have entered into bilateral service agreements, are not
subject to excise tax for the same transaction.
Respondent fears this could lead to cessation of supply
of petroleum products to international carriers,
retrenchment of employees of domestic
manufacturers/producers to prevent further losses, or
worse, shutting down of their production of jet A–1 fuel
and aviation gas due to unprofitability of sustaining
operations.
! Under this scenario, participation of Filipino
capital, management and labor in the domestic
oil industry is effectively diminished.
3. The imposition by the Philippine Government of excise
tax on petroleum products sold to international carriers
is in violation of the Chicago Convention to which it is a
signatory, as well as other international agreements (the
Republic of the Philippines’ air transport agreements
with the United States of America, Netherlands, Belgium
and Japan).
• SolGen underscores the statutory basis of this Court’s ruling that
the exemption under Section 135 does not attach to the
products.
• Exxonmobil Petroleum & Chemical Holdings, Inc.–
Philippine Branch v. Commissioner of Internal Revenue
o Excise tax, when passed on to the purchaser,
becomes part of the purchase price, the Solicitor
General claims this refutes respondent’s theory
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that the exemption attaches to the petroleum
product itself and not to the purchaser for it
would have been erroneous for the seller to pay
the excise tax and inequitable to pass it on to the
purchaser if the excise tax exemption attaches
to the product
• As to respondent’s reliance in the cases of Silkair (Singapore)
3
Pte. Ltd. v. Commissioner of Internal Revenue and Exxonmobil
Petroleum & Chemical Holdings, Inc.–Philippine Branch v.
Commissioner of Internal Revenue, the SolGen points out that
there was no pronouncement in these cases that petroleum
manufacturers selling petroleum products to international carriers
are exempt from paying excise taxes. In fact, Exxonmobil even
cited the case of Philippine Acetylene Co, Inc. v. Commissioner
of Internal Revenue. Further, the ruling in Maceda v. Macaraig,
Jr. which confirms that Section 135 does not intend to exempt
manufacturers or producers of petroleum products from the
payment of excise tax.
ISSUES:
Whether or not the manufacturer was entitled to claim the refund of
the excise taxes paid on the petroleum products sold to international
carriers exempt under Section 135(a) of the NIRC. ✓
HELD & RATIO:
YES. Respondent, as the statutory taxpayer who is directly liable to
pay the excise tax on its petroleum products, is entitled to a refund
or credit of the excise taxes it paid for petroleum products sold
to international carriers, the latter having been granted exemption
from the payment of said excise tax under Sec. 135 (a) of the NIRC.
• Excise taxes are those applied to goods manufactured or
produced in the Philippines for domestic sale or consumption or

!
for any other disposition and to things imported.2
o Two types:
(1) specific tax –based on weight or volume capacity
and other physical unit of measurement, and
(2) ad valorem tax – based on selling price or other
specified value of the goods
• Aviation fuel is subject to specific tax under Section 148 (g)
which attaches to said product “as soon as they are in existence
as such.”
• A tax is not excise where it does not subject directly the produce
or goods to tax but indirectly as an incident to, or in connection
with, the business to be taxed.
• The current definition of an excise tax is that of a tax levied
on a specific article, rather than one “upon the performance,
carrying on, or the exercise of an activity.”
• “the accrual and payment of the excise tax on the goods
enumerated under Title VI of the NIRC prior to their removal at
the place of production are absolute and admit of no exception.”
o This also underscores the fact that the exemption from
payment of excise tax is conferred on international
carriers who purchased the petroleum products of
respondent.
• Philippine Acetylene: tax exemption being enjoyed by the buyer
cannot be the basis of a claim for tax exemption by the
manufacturer or seller of the goods for any tax due to it as the
manufacturer or seller
• The excise tax imposed on petroleum products under Section
148 is the direct liability of the manufacturer who cannot thus
invoke the excise tax exemption granted to its buyers who are
international carriers.
• Maceda v. Macaraig: Section 135(a) should be construed as
prohibiting the shifting of the burden of the excise tax to the
international carriers who buy petroleum products from the local
manufacturers.
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
2
Section 129 of the NIRC
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Montero - Tax Digests (Block A 2014)
o Said international carriers are thus allowed to purchase
the petroleum products without the excise tax
component which otherwise would have been added to
the cost or price fixed by the local manufacturers or
distributors/sellers.
• Excise tax on aviation fuel used for international flights is
practically nil as most countries are signatories to the 1944
Chicago Convention
• Mutual exemptions given under bilateral air service agreements
are seen as main legal obstacles to the imposition of indirect
taxes on aviation fuel. In response to present realities, the
International Civil Aviation Organization (ICAO) has adopted
policies on charges and emission–related taxes and charges.
• Section 135(a) of the NIRC and earlier amendments to the Tax
Code represent our Governments’ compliance with the Chicago
Convention, its subsequent resolutions/annexes, and the air
transport agreements entered into by the Philippine Government
with various countries.
• The rationale for exemption of fuel from national and local taxes
– to recognize the uniqueness of civil aviation and the need
to accord tax exempt status to certain aspects of the
operations of international air transport and were adopted
because multiple taxation on the aircraft, fuel, technical
supplies and the income of international air transport, as
well as taxes on its sale and use, were considered as major
obstacles to the further development of international air
transport.
• Non–observance of the principle of reciprocal exemption
envisaged in these policies was also seen as risking retaliatory
action with adverse repercussions on international air transport
which plays a major role in the development and expansion of
international trade and travel.
• President Benigno Aquino III has signed into law R.A. No. 10378
granting tax incentives to foreign carriers which include
exemption from the 12% value–added tax (VAT) and 2.5% gross
Philippine billings tax (GPBT).

!
• The exemption from excise tax of aviation fuel purchased by
international carriers for consumption outside the Philippines
fulfills a treaty obligation pursuant to which our Government
supports the promotion and expansion of international travel
through avoidance of multiple taxation and ensuring the viability
and safety of international air travel.
• Under the basic international law principle of pacta sunt
servanda, we have the duty to fulfill our treaty obligations in good
faith.
o This entails harmonization of national legislation with
treaty provisions.
! Sec. 135(a) of the NIRC embodies our
compliance with our undertakings under the
Chicago Convention and various bilateral air
service agreements not to impose excise tax on
aviation fuel purchased by international carriers
from domestic manufacturers or suppliers
• The Court maintains that Section 135 (a), in fulfillment of
international agreement and practice to exempt aviation fuel from
excise tax and other impositions, prohibits the passing of the
excise tax to international carriers who buys petroleum products
from local manufacturers/sellers such as respondent.
• However, the Court agrees that there is a need to reexamine the
effect of denying the domestic manufacturers/sellers’ claim for
refund of the excise taxes they already paid on petroleum
products sold to international carriers, and its serious
implications on our Government’s commitment to the goals and
objectives of the Chicago Convention.
• The Chicago Convention, which established the legal framework
for international civil aviation, did not deal comprehensively with
tax matters.
o Article 24 (a) of the Convention simply provides that fuel
and lubricating oils on board an aircraft of a Contracting
State, on arrival in the territory of another Contracting
State and retained on board on leaving the territory of
that State, shall be exempt from customs duty,
! 63!
Montero - Tax Digests (Block A 2014)
inspection fees or similar national or local duties and
charges. Subsequently, the exemption of airlines from
national taxes and customs duties on spare parts and
fuel has become a standard element of bilateral air
service agreements (ASAs) between individual
countries.
• The importance of exemption from aviation fuel tax – Without
any international agreement on taxing fuel, it is highly likely that
moves to impose duty on international flights, either at a
domestic or European level, would encourage ‘tankering’:
carriers filling their aircraft as full as possible whenever they
landed outside the EU to avoid paying tax.
o Clearly this would be entirely counterproductive. Aircraft
would be travelling further than necessary to fill up in
low–tax jurisdictions; in addition they would be burning
up more fuel when carrying the extra weight of a full fuel
tank.
• With the prospect of declining sales of aviation jet fuel sales to
international carriers on account of major domestic oil
companies’ unwillingness to shoulder the burden of excise tax,
or of petroleum products being sold to said carriers by local
manufacturers or sellers at still high prices, the practice of
“tankering” would not be discouraged. This scenario does not
augur well for the Philippines’ growing economy and the
booming tourism industry. Worse, our Government would be
risking retaliatory action under several bilateral agreements with
various countries. Evidently, construction of the tax exemption
provision in question should give primary consideration to its
broad implications on our commitment under international
agreements.
FINAL VERDICT:
GRANT the original and supplemental motions for reconsideration
filed by respondent Pilipinas Shell Petroleum Corporation; and

!
AFFIRM the Decision dated March 25, 2009 and Resolution dated
June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB No.
415; and DIRECT petitioner Commissioner of Internal Revenue to
refund or to issue a tax credit certificate to Pilipinas Shell Petroleum
Corporation in the amount of P95,014,283.00 representing the
excise taxes it paid on petroleum products sold to international
carriers from October 2001 to June 2002.
Notes/ Source:
In our Decision promulgated on April 25, 2012, we ruled that the
Court of Tax Appeals (CTA) erred in granting respondent’s claim for
tax refund because the latter failed to establish a tax exemption in its
favor under Section 135(a) of the National Internal Revenue Code of
1997 (NIRC). " April 2012 case cited in PM Reyes notes
So sorry for the long digest. #
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92. PAL v. CIR
Tax Exemption
REYES NOTES/ CASE:
Caltex imported fuel and sold it to PAL for the latter’s
domestic operations. Caltex filed its Excise Tax Returns for
Petroleum Products as excise taxes due but PAL received a billing
invoice from Caltex as the related excise taxes reflecting the
transaction between them. PAL sent a letter request to the
Commissioner of Internal Revenue seeking a refund of the excise
taxes passed on to it by Caltex citing as its legal basis PD 1590
which granted upon it certain tax exemption privileges on its
purchase and/or importation of aviation gas, fuel and oil including
those passed on to it. CTA’s Second Division denied the petition
saying that Letter Of Instruction No. 1483 already withdrew the tax
exemptions granted to PAL. The Supreme Court disagrees ruling
that imported aviation fuel is not within the ambit of the LOI 1483 and
thus the tax exemption still subsists. LOI 1483 was meant to divest
PAL from its tax exemption on aviation gas, fuel and oil, which are
manufactured or produced in the Philippines for domestic sales. In
this case, records show that that Caltex imported aviation fuel from
abroad and merely re-sold the same to PAL. The said petroleum
products are in the nature of “things imported” and thus, beyond the
coverage of LOI 1483. Hence, PAL is entitled for tax refund.
FACTS:
• Caltex sold 804,370 liters of imported Jet A-1 fuel to PAL for
the latter’s domestic operations.
• Consequently, Caltex electronically filed with the Bureau of
Internal Revenue (BIR) its Excise Tax Returns for Petroleum
Products in the amount of P2, 975,892.90, as excise taxes
due thereon.
• PAL received from Caltex an Aviation Billing Invoice for the
purchased aviation fuel reflecting the amount of
US$52,669.33 as the related excise taxes on the transaction.

!
• PAL, through a letter request dated October 15, 2004
addressed to respondent Commissioner of Internal Revenue
(CIR), sought a refund of the excise taxes passed on to it by
Caltex. It hinged its tax refund claim on its operating
franchise, i.e., Presidential Decree No. 1590 (PAL’s
franchise) which conferred upon it certain tax exemption
privileges on its purchase and/or importation of aviation gas,
fuel and oil, including those which are passed on to it by the
seller and/or importer thereof.
• CTA Second Division denied PAL’s petition on the ground
that only a statutory taxpayer (referring to Caltex in this case)
may seek a refund of the excise taxes it paid. PAL’s claim for
refund should be denied altogether on account of Letter of
Instruction No. 1483 (LOI 1483) which already withdrew the
tax exemption privileges previously granted to PAL.
• CTA En Banc affirmed the ruling of the CTA Second
Division.
• CIR contends that the purchase of the aviation fuel imported
by Caltex is a “purchase of domestic petroleum products”
because the same was not purchased abroad by PAL.
ISSUES:
3. Whether or not the sale of imported aviation fuel by
Caltex to PAL is covered by LOI 1483 which withdrew
the tax exemption privileges of PAL on its purchases of
domestic petroleum products for use in its domestic
operations.
HELD & RATIO:
2. NO, imported aviation fuel is not within the ambit of LOI 1483.
PAL’s tax exemption still subsists.
• Section 13 of PAL’s franchise- PAL’s tax exemption
privileges on all taxes on aviation gas, fuel and oil may
be classified into three (3) kinds, namely: (a) all taxes
due on PAL’s local purchase of aviation gas, fuel and oil;
(b) all taxes directly due from or imposable upon the
! 65!
Montero - Tax Digests (Block A 2014)
purchaser or the seller, producer, manufacturer, or
importer of aviation gas, fuel and oil but are billed or
passed on to PAL; and (c), all taxes due on all
importations by PAL of aviation gas, fuel, and oil.
• The phrase “purchase of domestic petroleum
products or use in its domestic operations” — which
characterizes the tax privilege LOI 1483 withdrew —
refers only to PAL’s tax exemptions on passed on excise
tax costs due from the seller, manufacturer/producer of
locally manufactured/ produced goods for domestic sale
and does not, in any way, pertain to any of PAL’s tax
privileges concerning imported goods, may it be (a)
PAL’s tax exemption on excise tax costs which are
merely passed on to it by the importer when it buys
imported goods from the latter (the second tax
exemption under the second kind of tax privilege); or (b)
PAL’s tax exemption on its direct excise tax liability when
it imports the goods itself.
• In other words, LOI 1483 was meant to divest PAL from
its tax exemption on aviation gas, fuel and oil, which are
manufactured or produced in the Philippines for
domestic sales.
• It cannot be gainsaid that PAL’s tax exemption privileges
concerning imported goods remain beyond the scope of
LOI 1483 and thus, continue to subsist.
• In this case, records disclose that Caltex imported
aviation fuel from abroad and merely re-sold the same to
PAL; tacking the amount of excise taxes it paid or would
be liable to pay to the government on to the purchase
price.
• The said petroleum products are in the nature of “things
imported” and thus, beyond the coverage of LOI 1483 as
previously discussed. As such, considering the
subsistence of PAL’s tax exemption privileges over the
imported goods subject of this case, PAL is allowed to
 Montero - Tax Digests (Block A 2014)
!

claim a tax refund on the excise taxes imposed and due

thereon.

FINAL VERDICT: Petition is granted. CIR is hereby ordered to

refund or issue a tax credit certificate in favor of PAL.

Notes/ Source: Wayne Miranda

! 66!

!
• Nature, Construction, Application,
and Sources of Tax Laws
92. HILADO vs. CIR
100 SCRA 288
(Nature, Construction, Application and Sources of Tax Laws)
REYES NOTES:
Q: Do tax laws continue in force during a period of enemy
occupation?
A: NO. In Hilado v. CIR (100 SCRA 288), the Supreme Court held
that internal revenue laws are not political in nature and as such
were continued in force during the period of enemy occupation and
in effect actually enforced by the occupation government. Income tax
returns filed during such period and income tax payments effected
are considered valid and illegal.
FACTS:
• Petitioner Emilio Hilado filed his income tax return for 1951
with the treasurer of Bacolod City, claiming a deductible item
of P12,837.65 from his gross income pursuant to General
Circular V-123 issued by the Collector of Internal Revenue.
• The Secretary of Finance, through the Collector, issued
General Circular V-139 which revoked and declared void
Circular V-123; and laid down the rule[s] that losses of
property which occurred in World War II from fires, storms,
shipwreck or other casualty, or from robbery, theft, or
embezzlement are deductible in the year of actual loss or
destruction of said property.
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Montero - Tax Digests (Block A 2014)
The deductions were disallowed.
•
ISSUE: Whether or not internal revenue laws were enforced
during the war?
NO. Philippines Internal Revenue Laws are not political in nature and
as such were continued in force during the period of enemy
occupation and in effect were actually enforced by the occupation
government.
Such tax laws are deemed to be laws of the occupied territory and
not of the occupying enemy. As of the end of 1945, there was no law
which Hilado could claim for the destruction of his properties during
the battle for the liberation of the Philippines. Under the Philippine
Rehabilitation Act of 1948, the payment of claims by the War
Damage Commission depended upon its discretions non-payment of
which does not give rise to any enforceable right. Assuming that the
loss (deductible item) represents a portion of the 75% of his war
damage claim, the amount would be at most a proper deduction of
his 1950 gross income (not on his 1951 gross income) as the last
installment and notice of discontinuation of payment by the War
Damage Commission was made in 1950.
FINAL VERDICT: Petition is DISMISSED.

!
93. CIR vs CA
Nature and Application of BIR Rulings
Relevant Law (note the difference):
• BIR Ruling 473–88– excluded VAT in determining ad valorem
tax
• BIR Ruling 017–91 – reintroduced the inclusion of VAT in
determining ad valorem tax
• §246 of the Tax Code – “Non-retroactivity of the rulings of the
CIR”
Facts:
• Alhambra is a domestic corporation engaged in the manufacture
and sale of cigar and cigarette products.
• 5/7/1991 – private respondent received a letter dated 4/26/1991
from the CIR assessing it deficienty Ad Valorem Tax (AVT) in the
amount of P488,396.62 on the removals of cigarette products
from their place of production during the period 11/2/1990 to
1/22/1991.
• Alhambra filed a protest against the proposed assessment with a
request that the same be withdrawn and cancelled. Protest was
denied by CIR. Alhambra filed a motion for reconsideration.
• Pending adjudication on the motion, Alhambra filed a petition for
review with the CTA. Thereafter, Alhambra received a letter from
CIR denying the motion and declaring that its decision is final.
Alhambra paid under protest the disputed AVT in the sum of
P520,835.29 (this is the new amount after it was amended by the
CIR)
• CTA ordered CIR to refund the whole of the amount paid by
Alhambra.
o CTA explained that the subject deficiency excise tax
assessment resulted from private respondent’s use of
the computation mandated by BIR Ruling 473–88 dated
4 October 1988 as basis for computing the 15% AVT
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due on its removals of cigarettes from 2 November 1990
to 22 January 1991.
o BIR Circular 473-88 was issued by Deputy
Commissioner Eufracio D. Santos to Insular-Yebana
Tobacco Corporation allowing the latter to exclude the
VAT in the determination of the gross sellingprice for
purposes of computing the ad valorem tax of its cigar
and cigarette productsin accordance with §127of the
Tax Code as amended by Executive Order No. 273
o The computation, pursuant to the ruling, is illustrated by
way of example thus (the VAT at that time was 10%)—
! P44.00 x 10%/110% = P 4.00 VAT
! P44.00-P4.00 = P40.00 price without VAT
! P40.00 x 15% = P6.00 Ad Valorem Tax
o For the period 2 November 1990 to 22 January 1991
private respondent paid P3,905,348.85 ad valorem tax,
applying Sec. 127 (b) of the NIRC as interpreted by BIR
Ruling 473–88 by excluding the VAT in the
determination of the gross selling price.
• Thereafter, on 11 February 1991, petitioner issued BIR Ruling
017–91 to Insular- Yebana Tobacco Corporation revoking BIR
Ruling 473–88 for being violative of §142 of the Tax Code. It
included back the VAT to the gross selling price in determining
the tax base for computing the ad valorem tax on cigarettes.
• CIR sought to apply the revocation retroactively to Alhambra on
the ground that it allegedly acted in bad faith which is an
exception to the rule on non-retroactivity of BIR Rulings.
• CA affirmed the CTA ruling, which held that the retroactive
application of BIR Ruling 017–91 cannot be allowed since private
respondent did not act in bad faith; private respondent’s
computation under BIR Ruling 473–88 was not shown to be
motivated by ill will or dishonesty partaking the nature of fraud;
hence, this petition.
 Montero - Tax Digests (Block A 2014)
!

Issue: WON Alhambra’s reliance on a void BIR ruling conferred o As to CIR’s claim that Alhambra acted in bad faith, the
upon the it a vested right to apply the same in the computation of its Court found no convincing evidence that private
ad valorem tax and claim for tax refund. - YES respondent’s implementation of the computation
mandated by BIR Ruling 473–88 was ill-motivated or
Held: Petition is DENIED. CA decision is AFFIRMED. Petitioner is attended with a dishonest purpose.
ordered to refund Alhambra. o In fact, as a sign of good faith, private respondent
immediately reverted to the computation mandated by
BIR Ruling .017–91 upon knowledge of its issuance on
Ratio:
11 February 1991.
• The government is not estopped from collecting taxes legally due
• The deficiency tax assessment issued by petitioner against because of mistakes or errors of its agents. But like other
private respondent is without legal basis because of the principles of law, this admits of exceptions in the interest of
prohibition against the retroactive application of the revocation of justice and fair play, as where injustice will result to the taxpayer.
BIR rulings in the absence of bad faith on the part of private
respondent.
• The dispute arose because of the 2 incongruous rulings of the Source: 2015 Crombonds Digest
BIR. The question as to the correct computation of the excise tax
on cigarettes in the case at bar has been sufficiently addressed
by BIR Ruling 017–91 dated 11 February 1991 which revoked
BIR Ruling 473–88.
o upon knowledge of the effectivity of BIR Ruling No. 017–
91, private respondent immediately implemented the
method of computation mandated therein by restoring
the VAT in computing the tax base for purposes of the
15% ad valorem tax
• However, well-entrenched is the rule thatrulings and circulars,
rules and regulations promulgated by the Commissioner of
Internal Revenue would have no retroactive application if to
so apply them would be prejudicial to the taxpayers
o §246 of the Tax Code prohibits retroactivity of CIR
rulings. Exceptions:
! taxpayer deliberately omits/misstates facts in his
return
! facts subsequently gathered by the BIR are
materially different from the facts on which the
ruling is based; or ︎
! taxpayer acted in bad faith.

! 69!

!
94. ABS-CBN BROADCASTING CORPORATION vs. CTA
G.R. No. 126232 November 27, 1998
Nature, Construction, Application, and Sources of Tax Laws
REYES NOTES/ CASE:
NIRC provided for a tax equal to 30% of the amount received
by every FC-NETB within the Philippines. In 1961, the Commissioner
of Internal Revenue issued General Circular No. V-334 in
implementation of Section 24(b) of the NIRC. Pursuant to the
foregoing, petitioner dutifully withheld and turned over to BIR the
amount of 30% of one-half of the film rentals paid by it to FC-NETB
within the Philippines. In 1968, RA No. 5431 amended Section 24 (b)
of the Tax Code increasing the tax rate from 30% to 35% and
revising the tax basis from "such amount" referring to rents, etc. to
"gross income.” In 1971, the Commissioner of Internal Revenue
issued Revenue Memorandum Circular No. 4-71 revoking General
Circular No. V-334, and holding that the latter was “erroneous for
lack of legal basis,” because “the tax therein prescribed should be
based on gross income without deduction whatever.” On the basis of
this new Circular, Commissioner of Internal Revenue issued against
petitioner a letter of assessment requiring them to pay deficiency
withholding income tax for the years 1965-1968.
W/N respondent can apply General Circular No. 4-71
retroactively and issue a deficiency assessment against petitioner as
deficiency withholding income tax for the years 1965, 1966, 1967
and 1968.
NO, rulings or circulars promulgated by the Commissioner of
Internal Revenue have no retroactive application where to so apply
them would be prejudicial to taxpayers. The prejudice to petitioner of
the retroactive application of Memorandum Circular No. 4-71 is
beyond question.
FACTS:
• ABS-CBN was engaged in telecasting local and foreign films
acquired from foreign corporations not engaged in trade or
! 70!
Montero - Tax Digests (Block A 2014)
business within the Philippines (FC-NETB) for which
petitioner paid rentals after withholding income tax of 30%of
one-half of the film rentals.
• In so far as the income tax on non-resident corporations
(NRC) is concerned, section 24 (b) of the National Internal
Revenue Code (NIRC), as amended by Republic Act No.
2343 dated June 20, 1959, used to provide:
o (b) Tax on foreign corporations.—(1) Non-resident
corporations.— There shall be levied, collected, and
paid for each taxable year, in lieu of the tax imposed
by the preceding paragraph, upon the amount
received by every FC-NETB within the Philippines…
a tax equal to thirty per centum of such amount.
• April 12, 1961: In implementation of section 24 (b) of the
NIRC, the Commissioner of Internal Revenue issued
General Circular No. V-334 reading thus:
o xxx 4. The local distributor should withhold 30% of
one-half of the film rentals paid to the non-resident
foreign film distributor and pay the same to this office
in accordance with law... xxx
• Pursuant to the foregoing, petitioner dutifully withheld and
turned over to BIR the amount of 30% of one-half of the film
rentals paid by it to FC-NETB within the Philippines. The last
year that petitioner withheld taxes pursuant to the foregoing
Circular was in 1968.
• June 27, 1968: Republic Act No. 5431 amended Section 24
(b) of the Tax Code increasing the tax rate from 30% to 35%
and revising the tax basis from "such amount" referring to
rents, etc. to "gross income," as follows:
o (b) Tax on foreign corporations.—(1) Non-resident
corporations.—A foreign corporation not engaged in
trade or business in the Philippines… shall pay a tax
equal to thirty-five per cent of the gross income
received during each taxable year from all sources
within the Philippines...xxx

!
• February 8, 1971: The Commissioner of Internal Revenue
issued Revenue Memorandum Circular No. 4-71 revoking
General Circular No. V-334 and holding that the latter was
“erroneous for lack of legal basis,” because “the tax therein
prescribed should be based on gross income without
deduction whatever.”
o In view thereof, General Circular No. V-334, dated
April 12, 1961, is hereby revoked and henceforth,
local films distributors and exhibitors shall deduct
and withhold 35% of the entire amount payable by
them to non-resident foreign corporations, as film
rental or royalty, or whatever such payment may be
denominated, without any deduction whatever,
pursuant to Section 24 (b), and pay the withheld
taxes in accordance with Section 54 of the Tax
Code, as amended.
• On the basis of this new Circular, respondent Commissioner
of Internal Revenue issued against petitioner a letter of
assessment requiring them to pay deficiency withholding
income tax on the remitted film rentals for the years 1965
through 1968 and film royalty as of the end of 1968 in the
total amount of P525,897.06.
• Petitioner requested for a reconsideration and withdrawal of
the assessment. However, without acting thereon,
respondent, issued a warrant of distraint and levy over
petitioner's personal as well as real properties. CTA found
the assessment in accordance with law.
ISSUES: W/N respondent can apply General Circular No. 4-71
retroactively and issue a deficiency assessment against
petitioner as deficiency withholding income tax for the years
1965, 1966, 1967 and 1968.
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HELD & RATIO:
NO, rulings or circulars promulgated by the Commissioner of
Internal Revenue have no retroactive application where to so
apply them would be prejudicial to taxpayers.
• In point is Sec. 338-A (now Sec. 327) of the Tax Code. As
inserted by Republic Act No. 6110 on August 9, 1969, it
provides:
o Sec. 338-A. Non-retroactivity of rulings. — Any
revocation, modification, or reversal of and of the rules
and regulations promulgated in accordance with the
preceding section or any of the rulings or circulars
promulgated by the Commissioner of Internal Revenue
shall not be given retroactive application if the
relocation, modification, or reversal will be
prejudicial to the taxpayers, except in the following
cases: (a) where the taxpayer deliberately mis-states or
omits material facts from his return or any document
required of him by the Bureau of Internal Revenue: (b)
where the facts subsequently gathered by the BIR are
materially different from the facts on which the ruling is
based; or (c) where the taxpayer acted in bad faith.
• The prejudice to petitioner of the retroactive application of
Memorandum Circular No. 4-71 is beyond question.
o It was issued only in 1971, or three years after 1968, the
last year that petitioner had withheld taxes under
General Circular No. V-334.
o The assessment and demand on petitioner to pay
deficiency withholding income tax was also made three
years after 1968 for a period of time commencing in
1965. Petitioner was no longer in a position to withhold
taxes due from foreign corporations because it had
already remitted all film rentals and no longer had any
control over them when the new Circular was issued.

!
o And in so far as the enumerated exceptions are
concerned, admittedly, petitioner does not fall under any
of them.
FINAL VERDICT: The judgment of the Court of Tax Appeals is
hereby reversed, and the questioned assessment set aside.
FACTS:
95. PBCOM v. CIR
Nature, Construction, Application, and Sources of Tax Laws
REYES NOTES/ CASE:
Gen. Rule: BIR issuances may be given retroactive application.
Exception: Non-retroactive if prejudicial to the taxpayers.
Exception to the exception (retroactivity applies):
• Sec. 246 of the NIRC
1. Where the taxpayer deliberately misstates or omits
material facts from his return or any document required
by him by the BIR.
2. Where the facts subsequently gathered by the BIR are
materially different from the facts on which the ruling is
based.
3. Where the taxpayer acted in bad faith.
• Jurisprudence also provides for another exception (this
case): SC held that non-retroactivity of CIR rulings is
inapplicable where nullity of the issuance was declared
by the Courts and not by the CIR.
Petitioner: Philippine Bank of Communications (PBCom)
Respondents: Commissioner of Internal Revenue (CIR),
Court of Tax Appeals (CTA),
Court of Appeals (CA)
• Main issue: Revenue Memorandum Circular (RMC) issued
by Acting CIR v. NIRC
• PBCom is asking for tax refunds and tax credit but CIR
refuses on the ground of prescription. CIR asserts the
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Montero - Tax Digests (Block A 2014)
applicability of NIRC (2-year prescriptive period). On the
other hand, PBCom asserts the applicability of RMC No. 7-
85 (10-year prescriptive period).
• SC: NIRC is the applicable law.
o Non-retroactivity of CIR rulings is inapplicable
where nullity of the issuance was declared by
the Courts and not by the CIR.
• PBCom, a commercial banking corporation duly organized
under Philippine laws, filed its quarterly income tax returns
for the first and second quarters of 1985 and paid the total
income tax.
• However, PBCom suffered losses so when its Annual
Income Tax Returns for the year-ended 1985, it declared a
net loss thereby showing no income tax liability.
• For the succeeding year-ending 1986, the petitioner likewise
reported a net and thus declared no tax payable for that
year.
• But during these two years (1985-1986), PBCom earned
rental income from leased properties. The lessees withheld
and remitted to the BIR withholding creditable taxes in 1985
and 1986.
• 1987: Petitioner requested the CIR for a tax credit
representing the overpayment of taxes in the first and
second quarters of 1985.
• 1988: Petitioner filed a claim for refund of creditable taxes
withheld by their lessees from property rentals in 1985 and
1986.
• Petitioner instituted a Petition for Review on 1988 before the
CTA.
• CTA Decision (1993):
o Denied the request of petitioner for a tax refund or
credit.
o Ground: It was filed beyond the two-year
reglementary period provided for by law (NIRC).

!
• Petitioner contended that the two year period has been
changed to ten years upon a memorandum issued by the
Commissioner of Internal Revenue (RMC 7-85)
• CA affirmed CTA’s ruling.
• Hence, this petition:
ISSUES:
Whether or not the CTA erred in denying the plea for tax refund or
tax credits on the ground of prescription, despite petitioner’s reliance
on RMC No. 7-85 changing the prescriptive period of two years to
ten years.
HELD & RATIO:
NO, CTA (AND CA) PROPERLY DENIED PETITIONER’S PLEA
FOR TAX REFUND OR TAX CREDITS ON THE GROUND OF
PRESCRIPTION. RMC 7-85 IS NOT APPLICABLE AS IT
DISREGARDS THE TWO-YEAR PRESCRIPTIVE PERIOD SET BY
LAW (NIRC).
• Petitioner’s Contentions:
o Petitioner argues that its claims for refund and
tax credits are not yet barred by prescription
relying on the applicability of Revenue
Memorandum Cir. No. 7-85 (RMC No. 7-85)
o RMC No. 7-85:
! Taxpayers may claim refund or tax
credits for the excess quarterly income
tax with the BIR within ten years under
Art. 1144 of CC
• Respondent CIR’s contentions:
o NIRC must apply not the RMC.
o Since the Final Adjusted Income Tax Return of
the petitioner for the taxable year 1985 was
supposed to be filed on April 15, 1985, the latter
had only until April 15, 1988 to seek relief from
the court. Petitioner only filed the case before
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Montero - Tax Digests (Block A 2014)
the CTA on Nov. 18, 1988 which was beyond
the time fixed by law.
• SC:
o NIRC is the applicable law.
o Gen. Rule: BIR issuances may be given
retroactive application.
o Exception: Non-retroactive if prejudicial to the
taxpayers.
o Exception to the exception (retroactivity applies):
! Sec. 246 of the NIRC
i. Where the taxpayer deliberately
misstates or omits material facts from
his return or any document required by
him by the BIR.
ii. Where the facts subsequently gathered
by the BIR are materially different from
the facts on which the ruling is based.
iii. Where the taxpayer acted in bad faith.
! This case also provides for another
exception. Non-retroactivity of CIR
rulings is inapplicable where nullity of
the issuance was declared by the Courts
and not by the CIR.
o Sec 230 of NIRC of 1977 (Now Sec. 229 of
NIRC of 1997) provides for the prescriptive
period for filing a court proceeding for the
recovery of tax erroneously or illegally collected:
“no such suit or proceeding shall be begun after
the expiration of two years from the date of
payment of the tax or penalty regardless of any
supervening cause that may arise after
payment”
o The rule states that the taxpayer may file a claim
for refund or credit with the CIR within 2 years
after payment of tax, before any suit in CTA is
commenced. The two-year prescriptive period

!
provided, should be computed from the time of
filing the Adjustment Return and final payment of
the tax for the year.
o When the acting Commissioner Of Internal
Revenue issued RMC 7-85, changing the
prescriptive period of two years to ten years on
claims of excess quarterly income tax payments,
such circular created a clear inconsistency with
the provision of Sec. 230 of 1977 NIRC. In so
doing, the BIR did not simply interpret the law,
rather it legislated guidelines contrary to the
statute passed by Congress.
o RMCs are considered administrative rulings
which are issued from time to time by the CIR.
Interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is
entitled to great respect by the courts.
Nevertheless, such interpretation is not
conclusive and will be ignored if judicially found
to be erroneous.
o Fundamental is the rule that the State cannot be
put in estoppel by the mistakes or errors of its
officials or agents. The nullification of RMC
issued by the Acting CIR is an administrative
interpretation which is not in harmony with Sec.
230 of 1977 NIRC, for being contrary to the
express provision of a statute. Hence, his
interpretation could not be given weight for to do
so would, in effect, amend the statute.
o Estoppel has no application in the case at bar
because it was not the CIR who denied
petitioner’s claim of refund or tax credit. Rather it
was CTA who denied the claim.
o Moreover, the non-retroactivity of rulings by
the CIR is not applicable in this case because
! 74!
Montero - Tax Digests (Block A 2014)
the nullity of RMC was declared by
respondent courts and not by the CIR.
o A claim for refund is in the nature of a claim for
exemption and should be construed strictly
against the taxpayer.
FINAL VERDICT: Petition is dismissed.
96. BIR RULING NO. 370-2011 DATED OCTOBER 2011
REYES NOTES/ CASE:
In BIR RULING NO. 37-2011, the issue was whether RCBC is liable
to pay the final withholding tax on interest income realized from the
purchase of PEAce Bonds (Poverty Eradication and Alleviation
Certificate bond). Relying upon previous BIR Rulings in 2001, RCBC
paid no final tax upon the issuance of the bonds. However, the
rulings were all reversed by a BIR Ruling in 2004. RCBC invoked the
non-retroactivity principle of BIR Rulings. The SC in resolving this
matter stated that the non-retroactivity principle does not apply when
the ruling involved in null and void for being contrary to the law, such
as the previous rulings on the PEACe bonds.
FACTS:
• Caucus of Development NGO Networks (CODE-NGO) originally
proposed for the Department of Finance to issue Php 15 billion
worth of 10-year zero coupon treasury notes (PEACe bonds).
Under said proposal, CODE-NGO will purchase the notes and
sell them to investors the net proceeds of which would be used to
fund the anti-proverty projects of NGOs nationwide.
o BUT the original plan did not material since the Bureau of
Treasury questioned the propriety of issuing the bonds to
CODE-NGO considering that CODE-NGO was NOT a
Government Securities Eligible Dealer (GSED). Hence, the

!
Bureau of Treasury sold the PEACe bonds via auction to
eligible GSEds instead.
▪ NOTE: As to the tax treatment of the interest
income arising from the PEACe Bonds, such was
based on the 3 BIR Rulings (2001) issued shortly
before the auction. Based on such rulings, the
instrument shall NOT be classified as “public
borrowing” and hence shall NOT be classified as
“deposit substitutes”. Thus, the withholding tax
on deposit substitutes will NOT apply.
• During the auction, RCBC was declared as the winning bidder.
So the Bureau of Treasury issued the PEACe bonds to RCBCS
and latter paid Php 10.7 billion to the BoT for the bonds worth
Php 35 billion thus resulting in a discount of approx.. Php 24.3
billion. RCBC in turn sold bonds to CODE-NGO. CODE-NGO
then sold it to RCBC Capital for approximately Php 12.1 billion,
thereby realizing a gain of approximately Php 1.4 billion.
• BUT after three 3 years after the issuance of the PEACe bonds,
BIR Ruling No. 007-04 dated July 16, 2004 which reversed the
2001 ruling on which the tax treatment of the PEACe bonds was
based on.
o According to such ruling, the PEACe bonds fall within
the coverage of “deposit substitutes”, thus, since
government debt instruments and securities are NOT
exempt from tax, interest income derived therefrom
shall be subject to 20% final tax.
• Applying the provisions of DOF Department Order No. 141-95,
which requires that 20 % Final Income Tax to be withheld on
discounts valued at present value on every original sale, RCBC,
as the original purchaser of the PEACe bonds which should be
liable to pay the Final Tax due. But considering the RCBC merely
acted as a conduit or agent of CODE-NGO by virtue of the
requirement of Bureau of Treasury that CODE-NGO is not a
GSED, the beneficial owner of the PEACe bonds is CODE-NGO
which is liable to pay for the Php 4.6 billion final tax on the
discount/interest income realized.
! 75!
Montero - Tax Digests (Block A 2014)
• Now, RCBC is invoking the non-retroactivity principle of BIR
Rulings.
ISSUES: WON RCBC can invoke the principle of non-retroactivity
under Section 246 of the 1197 Tax Code to preclude BIR from
collecting the final tax on the original discount/interest income? –NO!
RATIO:
• Although Section 246 of the 1997 Tax Code explicitly provides
that “an revocation, modification or reversal of any of the rules
and regulations promulgated in accordance with the preceding
Sections or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the
revocation, modification or reversal will be prejudicial to the
taxpayers”, it also expressly provides that such principle of non-
retroactivity does NOT apply:
o “where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on
which the ruling is based”.
• But in this case, the facts gathered by the BIR from which the
2004 Ruling was made are materially different from the facts on
which the 2011 Rulings are based. Hence, BIR Ruling No. 007-
04 is applicable retroactively.
• Further, the non-retroactivity principle does not apply when
the ruling involved in null and void for being contrary to law,
such as the 2001 rulings. Well-entrenched are the principles
that:
o the Government is never estopped from collecting
taxes because of the mistakes and errors of its agents
and
o That there are no vested rights in a wrong
interpretation of the law.
FINAL VERDICT: Therefore, the Bureau of Treasury will withhold the
Final Tax due on interest income derived from the PEACe bonds
prior to is payment on the date of maturity.

!
• Certain Doctrines in Taxation
97. CIR v. Tokyo Shipping
REYES NOTES/ CASE:
FROM REYES:
ABC Shipping is a foreign corporation. XYZ chartered one of ABC’s
ships to load raw sugar in the Philippines. Upon arriving at the port,
the vessel found no sugar for loading. The ship sailed back without
carrying any sugar. Is ABC Shipping liable for gross Philippine
billings tax?
No. A resident foreign corporation engaged in the transport of cargo
is liable for taxes depending on the amount of income it derives from
sources within the Philippines. ABC derived no receipt from its
charter agreement with XYZ. The vessel arrived in the port on but
found no raw sugar to load and returned without any cargo laden on
board
FACTS:
Foreign corporation represented in the Philippines by Soriamont
Steamship Agencies, Incorporated. It owns and operates tramper
vessel M/V Gardenia
2 The private respondent proving that it derived no receipt from its
In December 1980, NASUTRA chartered M/V Gardenia to load
16,500 metric tons of raw sugar in the Philippines.
Mr. Edilberto Lising, the operations supervisor of Soriamont
4
Agency, paid the required income and common carrier's taxes in
the respective sums (P59,523.75) and (P47,619.00), or a total of
ONE (P107,142.75) based on the expected gross receipts of the
vessel.
Upon arriving, however, at Guimaras Port of Iloilo, the vessel found
no sugar for loading. On January 10, 1981, NASUTRA and private
respondent's agent mutually agreed to have the vessel sail for Japan
without any cargo.
! 76!
Montero - Tax Digests (Block A 2014)
Claiming the pre-payment of income and common carrier's taxes as
erroneous since no receipt was realized from the charter agreement,
private respondent instituted a claim for tax credit or refund of the
sum (P107,142.75) before petitioner Commissioner of Internal
Revenue
Tax Court decided in favor of the private respondent
PET:
(1) private respondent has the burden of proof to support its claim of
refund;
(2) it failed to prove that it did not realize any receipt from its charter
agreement; and
(3) it suppressed evidence when it did not present its charter
agreement.
ISSUE: Whether or not the private respondent was able to prove that
it derived no receipts from its charter agreement, and hence is
entitled to a refund of the taxes it pre-paid to the government.
HELD & RATIO:
charter agreement with NASUTRA vessel M/V "Gardenia" arrived in
Iloilo on January 10, 1981 but found no raw sugar to load and
returned to Japan without any cargo laden on board.
We cannot but bewail the unyielding stance taken by the government
in refusing to refund the sum of (P107,142.75) erroneously prepaid
by private respondent
After fifteen (15) long years and the expenses of litigation, the money
that will be finally refunded to the private respondent is just worth a
damaged nickel

!
FINAL VERDICT: Court of Tax Appeals, dated September 15, 1983,
is AFFIRMED in toto. No costs.
Notes/ Source:
Section 24 (b) (2) of the National Internal Revenue Code which at
that time provides as follows:A corporation organized, authorized, or
existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be taxable as provided in
subsection (a) of this section upon the total net income derived in the
preceding taxable year from all sources within the
Philippines:Provided, however, That international carriers shall pay a
tax of two and one-half per cent (2 1/2%) on their gross Philippine
billings: "Gross Philippine Billings" include gross revenue realized
from uplifts anywhere in the world by any international carrier doing
business in the Philippines of passage documents sold therein,
whether for passenger, excess baggage or mail, provided the cargo
or mail originates from the Philippines. The gross revenue realized
from the said cargo or mail include the gross freight charge up to
final destination. Gross revenue from chartered flights originating
from the Philippines shall likewise form part of "Gross Philippine
Billings" regardless of the place or payment of the passage
documents . . . . .
! 77!
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98. JOSE B.L. REYES and EDMUNDO REYES v. PEDRO
ALMANZOR, etc. in their capacities as appointed and acting
members of the Central Board of Assessment Appeals
Certain doctrines in taxation: power of to tax involves to power to
destroy
CASE:
Petitioners own a parcel of land which they lease to tenants
with a monthly rental not exceeding Php300.00. The case arose
when laws were passed prohibiting lessors, such as them, from
increasing the rentals, and disallowing ejectment of lessees for upon
the expiration of the usual period of lease. Later, City Assessor re-
classified and reassessed the value of the properties using the
“comparable sales approach” which increased the tax rates.
Petitioners are questioning this, saying that the “income
approach” should have been used instead, because the new taxes
were excessive and unwarranted. The Court ruled in their favor.
[Reyes Notes] 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.” And, in order to maintain the
general public’s trust and confidence in the government, this power
must be used justly and not treacherously.
FACTS:
• Petitioners Reyes are co-owners of land, leased and occupied by
tenants, paying monthly rentals not exceeding Php300.00.
• RA 6359 was enacted, providing
o prohibition against rental increase for dwelling units or
lands which do not exceed Php300.00 for a period of 1
year from effectivity; and then an increase of up to 10%
is allowable thereafter;
 Montero - Tax Digests (Block A 2014)
!

o suspension of Art. 1673 of the NCC for 2 years from
effectivity, thereby disallowing ejectment of lessees for
upon the expiration of the usual period of lease.
• PD 20 amending RA 6359 was then released making absolute
the prohibition on increasing rentals and making indefinite the
suspension of Art. 1673.
• Later, City Assessor re-classified and reassessed the value of
the properties using the “comparable sales approach” which
increased the tax rates.
• Petitioners filed a Memorandum of Disagreement with the Board
of Assessment Tax Appeals because the new taxes were
“excessive, unwarranted, inequitable, confiscatory and
unconstitutional” and the assessor should have used the “income
approach.”
• Board of Assessment Tax Appeals affirmed the assessors’
assessment. Petitioners appealed to the Central Board, which
conducted ocular inspections. The assessor submitted the
valuations of neighboring properties to justify the assessment.
Central Board affirmed. Hence, this petition.
ISSUES: Should the assessor have used the “income approach” or
the “comparable sales approach”?
o Comparable Sales approach uses the market value
of neighboring properties to assess the value of the
subject property.
o Income approach is an assessment of the property
based on income derived from it.
On the “Power to Destroy” Doctrine
• The power to tax is an attribute of sovereignty, but the due
process and equal protection clauses of the Constitution may
properly be invoked to invalidate in appropriate cases a
revenue measure. If it were otherwise, there would be truth
to the 1903 dictum of Chief Justice Marshall that the power
to tax involves the power to destroy. This dictum was
brushed away by one stroke of Justice Holmes’ pen, thus:
“The power to tax is not the power to destroy while this Court
sits.”
FINAL VERDICT: The petition is granted.
Source: Pertinent portions from Taxation 1 Digests 2A-2015.

HELD & RATIO:

• Income approach. Naturally, the effects of PD 20 amending
RA 6359 would be that less income would be derived from
the properties affected. Using the assessment of the
assessor, the resulting annual real estate taxes would be
greater than the rentals paid by the tenants.
• It is no question that either method is acceptable; but the
assessor, in choosing the method, must consider all
circumstances and exercise prudent discretion.
• The comparable sales approach is unjust and inapplicable in
this case.

! 78!

!
99. PHILEX MINING v. CIR
REYES:
Legal Compensation of taxes/ Set-off of Taxes:
There can be no off-setting of taxes against the claims that the
taxpayer may have against the government. A person cannot refuse
to pay taxes on the ground that the government owes him an amount
equal or greater than the tax being collected.
FACTS:
· BIR sent a letter to Philex asking it to settle its tax liabilities
for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st
and 2nd quarter of 1992 in the total amount of
P123,821,982.52
· Philex protested the demand for payment of the tax liabilities
stating it has been pending claims for VAT input credit/refund
for the taxes it paid for the years 1989 to 1991 in the amount
of P119,977,037.02 plus interest. Therefore these claims for
tax credit/refund should be applied against the tax liabilities.
· BIR-- denied the offsetting of Philex’s claim for VAT input
credit/refund against its excise tax obligation
o Since these pending claims have not yet been
established or determined with certainty, it
follows that no legal compensation can take
place.
· CTA-- ordered Philex to pay stating:
o For legal compensation to take place, both
obligations must be liquidated and demandable.
o “Liquidated” debts are those where the exact
amount has already been determined.
o In the instant case, the claims of the Petitioner
for VAT refund is still pending litigation, and still
has to be determined by this Court.
o A fortioti, the liquidated debt of the Petitioner for
VAT refund is still pending liquidation, and still
! 79!
Montero - Tax Digests (Block A 2014)
has to be set-off against the unliquidated claim
which Petitioner conceived to exist in its favor.
o Taxes cannot be subject to set-off on
compensation since claim for taxes is not a debt
or a contract.
· CA-- affirmed CTA, ordering Philex to pay the amount of
P110,677,668.52 as excise tax liability for the period from
the 2nd quarter of 1992 plus 20% annual interest. MR was
denied.
· However, a few days after the denial of its MR, Philex was
able to obtain its VAT input credit/refund not only for the
taxable year 1989 to 1991 but also for 1992 and 1994.
· Philex’s contentions:
o That its VAT input credit/refund should, ipso jure,
off-set its excise tax liabilities since both had
already become “due and demandable, as well
as fully liquidated:
o CIR v. Itogon-Suyoc Mines Inc. --- ruled that a
pending refund may be set off against an
existing tax liability even though the refund as
not yet been approved by the Commissioner.
o That it had no obligation to pay the excise tax
liabilities within the prescribed period since, after
all, it still has pending claims for VAT input
credit/refund with BIR.
o That the BIR violated Sec. 106 (e) of the NIRC
of 1977, which requires the refund of input taxes
within 60 days, when it took five (5) years for the
latter to grant its tax claim for VAT input
credit/refund.
ISSUES: Whether or not Philex’s VAT input credit/refund may off-set
its excise tax liabilities.

!
HELD & RATIO:
NO, Taxes cannot be subject to compensation for the simple reason
that the government and the taxpayer are not creditors and debtors
of each other.
• Debts are due to the Government in its corporate capacity, while
taxes are due to the Government in its sovereign capacity.
Jurisprudence as categorically held that taxes cannot be subject
to set-off or compensation.
o A person cannot refuse to pay a tax on the ground that
the government owes him an amount equal to or greater
than the tax being collected. The collection of a tax
cannot await the results of a lawsuit against the
government. (Francia v. IAC, Caltex v. COA)
• Philex’s reliance on Commissioner of Internal Revenue v.
Itogon-Suyoc Mines Inc. cannot be sustained. This decision
was based on Sec. 51(d) of the Internal Revenue Code of
1939 which is now superseded by the National Internal
Revenue Code of 1977, which omitted the said provision.
• Tax is compulsory rather than a matter of bargain. Philex
cannot refuse the payment of its tax liabilities on the ground
that it has a pending tax claim refund or credit against the
government which has not yet been granted. A tax does not
depend upon the consent of the taxpayer. If any taxpayer
can defer the payment of taxed by raising the defense that it
still has a pending claim for refund or credit, this would
adversely affect the government revenue system. Philex’s
theory that would automatically apply its VAT input/refund
against its tax liabilities can easily give rise to confusion and
abuse, depriving the government of authority over the
manner by which taxpayers credit and offset their tax
liabilities.
• The payment of the surcharge is mandatory and the BIR is
not vested with any authority to waive the collection thereof.
The fact that Philex has pending claims for VAT input
claim/refund with the government is immaterial for the
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Montero - Tax Digests (Block A 2014)
imposition of charges and penalties prescribed under Sec,
248 and 249 of the Tax Code of 1977.
• BIR failed to refund input taxes within 60 days in violation of
the NIRC but this foes not justify Philex’s non-payment of
taxes. While there is not dispute that a claimant has the
burden of proof to establish the factual basis of his or her
claim for tax credit or refund, however, once the claimant has
submitted at the required documents it is the function of the
BIR to assess these documents with purposeful dispatch.
Had the BIR been more diligent and judicious with their duty,
it could have granted the refund earlier.
• Roxas v. CTA --- The power of taxation is sometimes called
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 collection kill the “hen that lays the golden egg”
and, in order to maintain the general public’s trust and
confidence in the Government this power must be used justly
and not treacherously. Nevertheless, the State is not bound
by the neglect of its agents and officers.
• Philex’s proper remedy should have been: If the BIR takes
time in acting upon the taxpayer’s claim for refund, the latter
can seek judicial remedy before the Court of Tax Appeals in
the manner prescribed by law. If the inaction can be
characterized as willful neglect of duty, then recourse under
the Civil Code (Art. 27) and the Tax Code (Section 269c) can
also be availed of.
FINAL VERDICT: Petition is dismissed. Decision of lower court
AFFIRMED.
Notes:
Relevant Law:
Sec. 51(d) of the National Revenue Code of 1939 -- requires the
refund of input taxes within 60 days (already omitted by the present
Tax Code)

!
Source: 2A- 2015 Digests
100. FRANCIA v. INTERMEDIATE APPELLATE COURT
162 SCRA 753
REYES NOTES/ CASE:
Can taxes be the subject of compensation between the government
and the taxpayer?
No. As held in CALTEX VS. COA, taxes cannot be the subject of
compensation because the government and taxpayer are not
mutually creditors and debtors of each other. A claim for taxes is not
such a debt, demand, contract or judgment as is allowed to be set-off
(FRANCIA V. IAC).
FACTS:
• Engracio Francia is the registered owner of a residential lot
and a two-story house in Barrio San Isidro, now District of
Sta. Clara, Pasay City, Metro Manila.
• The lot has an area of about 328 square meters.
• The 125 square meter portion of Francia's property was
expropriated by the Republic of the Philippines for the sum of
P4,116.00 representing the estimated amount equivalent to
the assessed value of the aforesaid portion.
• The remaining 203 square meter portion was sold at public
auction by the City Treasurer of Pasay City to satisfy his tax
delinquency of P2,400.00.
• Francia filed a complaint to annul the auction sale based on
the following grounds:
1. That his property was sold at public auction without
notice to him
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Montero - Tax Digests (Block A 2014)
2. The price paid for the property was shockingly
inadequate, amounting to fraud and deprivation without
due process of law.
3. That his tax delinquency of P2,400.00 has been
extinguished by legal compensation. Hence, his tax
obligation had been set-off by operation of law. He
claims that the government owed him P4,116.00 when a
portion of his land was expropriated (but the said amount
was actually deposited to his account to which he did not
withdraw).
ISSUES: Whether or not the tax owed by Francia should be set-
off by the “debt” owed him by the government.
HELD & RATIO:
1. NO.
• This principal contention of the petitioner has no
merit. We have consistently ruled that there can be
no off-setting of taxes against the claims that the
taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground that
the government owes him an amount equal to or
greater than the tax being collected. The collection
of a tax cannot await the results of a lawsuit against
the government.
• A claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the
remedy in an action or any indebtedness of the state
or municipality to one who is liable to the state or
municipality for taxes. Neither are they a proper
subject of recoupment since they do not arise out of
the contract or transaction sued on.

!
• The general rule based on grounds of public policy is
well-settled that no set-off admissible against
demands for taxes levied for general or local
governmental purposes. The reason on which the
general rule is based, is that taxes are not in the
nature of contracts between the party and party but
grow out of duty to, and are the positive acts of the
government to the making and enforcing of which,
the personal consent of individual taxpayers is not
required."
• On legal compensation, the court ruled that:
By legal compensation, obligations of persons, who
in their own right are reciprocally debtors and
creditors of each other, are extinguished (Art. 1278,
Civil Code). The circumstances in this case do not
satisfy the requirements provided by Article 1279, to
wit:
(1) that each one of the obligors be bound
principally and that he be at the same time a
principal creditor of the other;
(3) that the two debts be due.
FINAL VERDICT: Petition for review is DISMISSED. The decision of
the respondent court is affirmed.
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101. REPUBLIC v. MAMBULAO LUMBER COMPANY, et al.
REYES NOTES:
Taxes cannot be the subject of set-off because they are not in the
nature of contracts between parties but grow out of a duty to, and are
positive acts, of the Government, to the making and enforcing of
which, the personal consent of the taxpayer is not required.
FACTS:
• Under the first cause of action, Mambulao admitted that they
have a liability of P587.37 for forest charges covering the
period from September 10, 1952 to May 24, 1953, which
liability is covered by a bond executed by defendant General
Insurance & Surety Corporation for Mambulao Lumber
Company, jointly and severally in character.
• Under the second cause of action, both defendants admitted
a joint and several liability in favor of plaintiff in the sum of
P296.70, also covered by a bond dated November 27, 1953.
• Under the third cause of action, both defendants admitted a
joint and several liability in favor of plaintiff for P3,928.30,
also covered by a bond dated July 20, 1954.
• All liabilities aggregate to P4,802.37.
• Defendants’ defense:
o Pursuant to Sec. 1 of R.A. 115, defendant
Mambulao paid to the Republic a total of P9,127.50
for reforestation charges.
o Sec. 1 provides that there shall be collected, in
addition to the regular forest charges provided under
Section 264 of Commonwealth Act 466 known as
the National Internal Revenue Code, the amount of
P0.50 on each cubic meter of timber... cut out and
removed from any public forest for commercial
purposes. The amount collected shall be expended
by the director of forestry, with the approval of the
secretary of agriculture and commerce, for

!
reforestation and afforestation of watersheds,
denuded areas ... and other public forest lands,
which upon investigation, are found needing
reforestation or afforestation.
o Contention: Since the Republic has not made use of
those reforestation charges collected from it for
reforesting the denuded area of the land covered by
its license, the Republic should refund said amount,
or, if it cannot be refunded, at least it should be
compensated with what Mambulao Lumber
Company owed the Republic for reforestation
charges.
ISSUES: Whether or not the sum of P9,127.50 paid by Mambulao
as reforestation charges may be set off or applied to the
payment of the sum of P4,802.37 as forest charges due and
owing from appellant to appellee.
HELD & RATIO:
1. NO, the amount paid by a licensee as reforestation charges
is in the nature of a tax which forms a part of the
Reforestation Fund, payable by him irrespective of whether
the area covered by his license is reforested or not.
• Based on Sec. 1 of R.A. 115, the amount collected
as reforestation charges from a timber licenses or
concessionaire shall constitute a fund to be known
as the Reforestation Fund, and that the same shall
be expended by the Director of Forestry, with the
approval of the Secretary of Agriculture and Natural
Resources for the reforestation or afforestation,
among others, of denuded areas which, upon
investigation, are found to be needing reforestation
or afforestation.
• There is nothing in the law which requires that the
amount collected as reforestation charges should be
used exclusively for the reforestation of the area
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Montero - Tax Digests (Block A 2014)
covered by the license of a licensee or
concessionaire, and that if not so used, the same
should be refunded to him.
2. NO, principle of compensation is not applicable. Appellant
and appellee are not mutually creditors and debtors of each
other.
• Under Article 1278, NCC, compensation should take
place when two persons in their own right are
creditors and debtors of each other. With respect to
the forest charges which the defendant Mambulao
Lumber Company has paid to the government, they
are in the coffers of the government as taxes
collected, and the government does not owe
anything, crystal clear that the Republic of the
Philippines and the Mambulao Lumber Company are
not creditors and debtors of each other, because
compensation refers to mutual debts.
• A claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the
remedy in an action or any indebtedness of the state
or municipality to one who is liable to the state or
municipality for taxes. Neither are they a proper
subject of recoupment since they do not arise out of
the contract or transaction sued on.
• The general rule, based on grounds of public policy
is well-settled that no set-off is admissible against
demands for taxes levied for general or local
governmental purposes. The reason on which the
general rule is based, is that taxes are not in the
nature of contracts between the party and party but
grow out of a duty to, and are the positive acts of the
government, to the making and enforcing of which,
the personal consent of individual taxpayers is not
required.

!
• If the taxpayer can properly refuse to pay his tax
when called upon by the Collector, because he has
a claim against the governmental body which is not
included in the tax levy, it is plain that some
legitimate and necessary expenditure must be
curtailed. If the taxpayer's claim is disputed, the
collection of the tax must await and abide the result
of a lawsuit, and meanwhile the financial affairs of
the government will be thrown into great confusion.
FINAL VERDICT: Judgment of the trial court appealed from is
affirmed.
102. ANTI-GRAFT LEAGUE vs SAN JUAN
CASE:
Petitioner Anti-Graft League of the Philippines, a self-confessed
“non-governmental, non-stock and non-profit organization, which was
constituted to protect the interest of the Republic and its
instrumentalities and political subdivisions and its constituents
against abuses of its public officials and employees,” claims the
instant petition for certiorari is a taxpayer’s suit which it filed
because the Provincial Board of Rizal (the Board) allegedly
illegally disbursed public funds in transactions involving four
parcels of land in Ugong Norte, Pasig which it bought from Ortigas
& Co., Ltd. in 1975, but which it also resold to the same in 1989.
Petitioner filed the instant case in 1991, claiming that the contracts of
sale executed in 1989 involved the illegal disbursement of funds.
The SC ruled that it is not a taxpayer’s suit as the first of 2
requirements are not met namely: 1) that public funds are
disbursed by a political subdivision or instrumentality and in doing
so, a law is violated or some irregularity is committed, 2) and
that the petitioner is directly affected by the alleged ultra vires act.
This is so because the sales contract in 1989 which petitioner
theorizes to involve the illegal disbursement of funds did not actually
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Montero - Tax Digests (Block A 2014)
involve any disbursement of funds at all. It was only in 1975 when
the Province first bought the four parcels of land that there was any
disbursement of funds, but which the petitioner does not at all assail.
FACTS:
• On March 20, 1975, then President Ferdinand E. Marcos issued
Presidential Decree No. 674, establishing the Technological
Colleges of Rizal.
o Among other things, it directed the Board to provide funds
for the purchase of a site and the construction of the
necessary structures thereon. Acting upon an authority
granted by the Office of the President, the Province was
able to negotiate with respondent Ortigas & Co., Ltd.
(Ortigas) for the acquisition of four parcels of land located
in Ugong Norte, Pasig.
o Three deeds of absolute sale were executed on April
22 and May 9, 1975, whereby Ortigas transferred its
ownership over a total of 192,177 square meters of
land to the Province at P110.00 per square meter.
o The projected construction, however, never materialized
because of the decimation of the Province’s resources
brought about by the creation of the Metro Manila
Commission (MMC) in 1976.
• Twelve years later, with the property lying idle and the Province
needing funds to propel its 5-year Comprehensive Development
Program, the then incumbent Board passed Resolution No. 87-
205 dated October 15, 1987 authorizing the Governor to sell the
same.
o The said property was eventually sold to Valley View
Realty Development Corporation (Valley View) for P700.00
per square meter or a total of P134,523,900.00, of which
30 million was given as downpayment.
o On May 10, 1988, after learning about the sale, Ortigas
filed before Branch 151 of the Regional Trial Court of

!
Pasig an action for rescission of contract plus damages
with preliminary injunction against the Province alleging
that the Province violated one of the terms of its contracts
with Ortigas by selling the subject lots which were intended
to be utilized solely as a site for the construction of the
Rizal Technological Colleges and the Rizal Provincial
Hospital.
• On April 21, 1988, having new provincial officials, the Board
adopted Resolution No. 88-65 which provided for the rescission
of the deed of sale between the Province and Valley View on the
ground that the sale price was exceedingly low and, thus,
prejudicial to the Province.
o Because of this, Valley View then filed a complaint
docketed as Civil Case No. 55913 against the Province for
specific performance and damages.
o The case was, however, dismissed after the parties
executed on August 12, 1988 a compromise agreement
whereby the Province returned the 30-million peso
downpayment earlier given by Valley View.
• The Civil Case filed by Ortigas was also resolved through a
compromise agreement executed by and between the Province
and Ortigas on March 20, 1989.
o Under the said compromise agreement, which was
approved by respondent Judge Eutropio Migriño in his
decision dated March 21, 1989, the Province agreed to
reconvey the four parcels of land to Ortigas at a price of
P2,250.00 per square meter, or a total of
P432,398,250.00, payable within two years at an annual
interest rate of fourteen percent.
o This amount is higher than the market values separately
determined by respondents Asian Appraisal, Inc. and the
Provincial Appraisal Committee, which respectively
pegged the price of the subject properties at P1,800.00
and P2,200.00 per square meter.
! 85!
Montero - Tax Digests (Block A 2014)
o Ortigas made its final payment on March 30, 1991.
• On April 1, 1991, petitioner filed the instant petition for certiorari
with application for preliminary injunction seeking the nullification
of the March 20, 1989 compromise agreement, and, corollarily,
the decision of respondent Judge approving the same as a
“taxpayer’s suit”.
ISSUE:
Whether or not the petition qualifies as a taxpayer’s suit? No.
HELD:
• Petitioner and respondents agree that to constitute a
taxpayer’s suit, two requisites must be met, namely:
o that public funds are disbursed by a political
subdivision or instrumentality and in doing so, a law
is violated or some irregularity is committed,
o and that the petitioner is directly affected by the
alleged ultra vires act.
• The same pronouncement was made in Kilosbayan, Inc. v.
Guingona, Jr., where the Court also reiterated its liberal
stance in entertaining so-called taxpayer’s suits, especially
when important issues are involved.
o A closer examination of the facts of this case would
readily demonstrate that petitioner’s standing should
not even be made an issue here, “since standing is a
concept in constitutional law and here no
constitutional question is actually involved.”
• In the case at bar, disbursement of public funds was only
made in 1975 when the Province bought the lands from
Ortigas at P110.00 per square meter in line with the
objectives of P.D. 674.
o Petitioner never referred to such purchase as an
illegal disbursement of public funds but focused on

!
the alleged fraudulent reconveyance of said property
to Ortigas because the price paid was lower than the
prevailing market value of neighboring lots. The first
requirement, therefore, which would make this
petition a taxpayer’s suit is absent.
103. JOYA VS PCGG
Taxpayer’s suit must have allegations on misapplications of
disbursement of public funds
RECIT-READY/ REYES NOTES:
PCGG Chairman requested President Aquino to authorize a
compromise agreement between Republic and Christie Inc regarding
auctions of 82 piees of art, as well as other silverware alleged to be
from ill-gotten wealth of Marcoses. President Aquino agreed and
authorized such, and a compromise agreement was signed. COA
Chairman then advised Aquino on issues regarding the Compromise
Agreement. Petitioners Joya, et al then filed a petition in SC to enjoin
such auction sale. The court denied such petition. It ruled that the
petitioners have no legal standing to petition for prohibition of the
auction by the government. It was not a taxpayer’s suit because
the case did not involve misapplication of public funds. In fact,
the paintings and antique ware alleged to have been public
properties were acquired from public sources and not with
public money.
FACTS:
• On 9 August 1990, Mateo A.T. Caparas, then Chairman of
PCGG, requested the President Corazon Aquino to sign the
proposed Consignment Agreement between the Republic
(through PCGG) and Christie, Manson and Woods
International, Inc. concerning the scheduled sale of 82 Old
Masters Paintings and antique silverware seized from
Malacañang and the Metropolitan Museum alleged to be part
! 86!
Montero - Tax Digests (Block A 2014)
of Marcos’s ill-gotten wealth.
• President Aquino then authorized such, and on August 15,
1990, Chairman Caparas signed such Compromise
Agreement with Christie Inc.
• 26 October 1990, the Commission on Audit (COA) Chairman
Domingo, according to audit findings, submitted to President
Aquino
o the authority of former PCGG Chairman Caparas to
enter into the Consignment Agreement was of
doubtful legality;
o the contract was highly disadvantageous to the
government;
o PCGG had a poor track record in asset disposal by
auction in the U.S.; and,
o the assets subject of auction were historical relics
and had cultural significance, hence, their disposal
was prohibited by law.
• On 15 November 1990, PCGG through its new Chairman
David M. Castro, wrote President Aquino defending the
Consignment Agreement and refuting the allegations of COA
Chairman Doming
• On the same date, Director of National Museum Gabriel S.
Casal issued a certification that the items subject of the
Consignment Agreement did not fall within the classification
of protected cultural properties and did not specifically qualify
as part of the Filipino cultural heritage.
• Hence, this petition originally filed on 7 January 1991 by
petitioners Dean Jose Joya, Carmen Guerrero Nakpil, etc
Special Civil Action for Prohibition and Mandamus with
Prayer for Preliminary Injunction and/or Restraining Order
seek to enjoin the Presidential Commission on Good
Government (PCGG) from proceeding with the auction sale
• Supreme Court denied applications for preliminary
injunction to restrain the sale on the ground that
petitioners had not presented a clear legal right to a
restraining order and that proper parties had not been

!
impleaded. As such, the sale proceeded as scheduled
and proceeds were turned over to National Bureau of
Treasury.
ISSUES: Whether or not the petitioners have legal standing to file
the petition for preliminary injunction and restraining order from
proceeding with the auction sale
HELD + RATIO: NO, the petitioners have no legal standing to
restrain such sale.
• The rule is settled that no question involving the
constitutionality or validity of a law or governmental act may
be heard and decided by the court unless there is
compliance with the legal requisites for judicial inquiry,
namely:
o that the question must be raised by the proper party;
o that there must be an actual case or controversy;
o that the question must be raised at the earliest
possible opportunity; and, that the decision on the
constitutional or legal question must be necessary to
the determination of the case itself
• On the first requisite, we have held that one having no right
or interest to protect cannot invoke the jurisdiction of the
court as party-plaintiff in an action. This is premised on Sec.
2, Rule 3, of the Rules of Court which provides that every
action must be prosecuted and defended in the name of the
real party-in-interest, and that all persons having interest in
the subject of the action and in obtaining the relief demanded
shall be joined as plaintiffs. The Court will exercise its power
of judicial review only if the case is brought before it by a
party who has the legal standing to raise the constitutional or
legal question.
• "Legal standing" means a personal and substantial interest
in the case such that the party has sustained or will sustain
direct injury as a result of the governmental act that is being
! 87!
Montero - Tax Digests (Block A 2014)
challenged. The term "interest" is material interest, an
interest in issue and to be affected by the decree, as
distinguished from mere interest in the question involved, or
a mere incidental interest. Moreover, the interest of the
party plaintiff must be personal and not one based on a
desire to vindicate the constitutional right of some third
and related party.
• There are certain instances however when this Court has
allowed exceptions to the rule on legal standing, as when a
citizen brings a case for mandamus to procure the
enforcement of a public duty for the fulfillment of a public
right recognized by the Constitution, and when a taxpayer
questions the validity of a governmental act authorizing
the disbursement of public funds.
• Petitioners claim that as Filipino citizens, taxpayers and
artists deeply concerned with the preservation and protection
of the country's artistic wealth, they have the legal
personality to restrain respondents Executive Secretary and
PCGG from acting contrary to their public duty to conserve
the artistic creations as mandated by the 1987 Constitution.
• Neither can this petition be allowed as a taxpayer's suit. Not
every action filed by a taxpayer can qualify to challenge the
legality of official acts done by the government. A taxpayer's
suit can prosper only if the governmental acts being
questioned involve disbursement of public funds upon
the theory that the expenditure of public funds by an
officer of the state for the purpose of administering an
unconstitutional act constitutes a misapplication of
such funds, which may be enjoined at the request of a
taxpayer.
• Obviously, petitioners are not challenging any expenditure
involving public funds but the disposition of what they allege
to be public properties. It is worthy to note that petitioners
admit that the paintings and antique silverware were
acquired from private sources and not with public money.

!
SOURCE: ORIGINAL DIGEST
FACTS:
104. LOZADA V. COMELEC
G.R. No. L-59068; January 27, 1983
Taxpayer’s Suit
REYES NOTES:
In Lozada v. COMELEC, it was held that the petitioner ‘s
action for mandamus to compel the COMELEC to hold a special
election is not considered as taxpayer’s suit because it does not
involve public expenditure. Further there is no allegation that tax
money is spent illegaly.
CASE:
A petition for mandamus was filed by Lozada and Igot as
representative suit for and in behalf of those who wish to participate
in the election irrespective of party affiliation, to compel the
respondent COMELEC to call a special election to fill up existing
vacancies numbering 12 in the Interim Batasan Pambansa. Both
Lozada and Igot claims that as taxpayers, they have standing to
petition by mandamus the calling of a special election as mandated
by the 1973 Constitution.
The relevant issue in this case is whether or not Lozada and
Igot lack standing to file the instant petition for they are not the
proper parties to institute the action. SC ruled in the affirmative
stating that as taxpayers, Lozada and Igot may not file the instant
petition, for nowhere therein is it alleged that tax money is being
illegally spent. The act complained of is the inaction of the
COMELEC to call a special election, as is allegedly its
ministerial duty under the constitutional provision above cited,
and therefore, involves no expenditure of public funds. It is only
when an act complained of, which may include a legislative
enactment or statute, involves the illegal expenditure of public
money that the so-called taxpayer suit may be allowed.
! 88!
Montero - Tax Digests (Block A 2014)
• This is a petition for mandamus filed by Jose Mari Eulalio C.
Lozada (Lozada) and Romeo B. Igot (Igot) as a
representative suit for and in behalf of those who wish to
participate in the election irrespective of party affiliation, to
compel the respondent COMELEC to call a special election
to fill up existing vacancies numbering 12 in the Interim
Batasan Pambansa.
• The petition is based on Section 5(2), Article VIII of the 1973
Constitution which states:
“(2) In case a vacancy arises in the Batasang Pambansa
eighteen months or more before a regular election, the
Commission on Election shall call a special election to be
held within sixty (60) days after the vacancy occurs to elect
the Member to serve the unexpired term.”
• Petitioner’s Contention:
o Lozada claims that he is a taxpayer and a
bonafide elector of Cebu City and a transient
voter of Quezon City, Metro Manila, who desires
to run for the position in the Batasan Pambansa;
o Igot alleges that, as a taxpayer, he has standing
to petition by mandamus the calling of a special
election as mandated by the 1973 Constitution.
o Lozada and Igot alleges that they are “xxx deeply
concerned about their duties as citizens and
desirous to uphold the constitutional mandate and
rule of law ...; that they have filed the instant petition
on their own and in behalf of all other Filipinos since
the subject matters are of profound and general
interest. "
• Respondent’s Contention:
o COMELEC alleges that 1) petitioners lack
standing to file the instant petition for they are
not the proper parties to institute the action; 2)
this Court has no jurisdiction to entertain this

!
petition; and 3) Section 5(2), Article VIII of the 1973
Constitution does not apply to the Interim Batasan
Pambansa.
ISSUE: Whether or not Lozada and Igot lack standing to file the
instant petition for they are not the proper parties to institute the
action.
RATIO:
1. Yes, Lozada and Igot lack standing to file the instant petition for
they are not the proper parties to institute the action.
• It is only when an act complained of, which may include
a legislative enactment or statute, involves the illegal
expenditure of public money that the so-called taxpayer
suit may be allowed.
• As taxpayers, Lozada and Igot may not file the instant
petition, for nowhere therein is it alleged that tax money
is being illegally spent. The act complained of is the
inaction of the COMELEC to call a special election, as is
allegedly its ministerial duty under the constitutional
provision above cited, and therefore, involves no
expenditure of public funds.
• According to the SC, what the case at bar seeks is one that
entails expenditure of public funds which may be illegal
because it would be spent for a purpose that of calling a
special election which, as will be shown, has no authority
either in the Constitution or a statute.
FINAL VERDICT: the petition is hereby DISMISSED.
NOTE: Many issues were discussed in this case with regard to
jurisdiction and standing but I only included in this digest the one
relevant in this topic, i.e taxpayer’s suit.
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105. PLARIDEL ABAYA, COMMODORE PLARIDEL GARCIA, and
PMA ’59 FOUNDATION v. SECRETARY HERMOGENES EBDANE
of DPWH, etc.
Taxpayer’s Suit
CASE:
Petitioners, who are all taxpayers, are questioning the
validity of the contract and agreement entered into by DPWH and
private respondent China Road & Bridge Corporation. The principal
contention was that China Road’s bid exceeded the Approved
Budget for the Contract (ABC) set at Php738,719,560.67, and as
provided by the Government Procurement Reform Act, any bid that
exceeds this ceiling shall be disqualified outright from further
participating in the bidding. And yet, the project was awarded to
private respondent.
The main issue in this case is whether or not petitioners
have standing to question the validity of the contract.
The Supreme Court ruled in favor of the petitioners, and said
that prevailing doctrine in a taxpayer’s suit is to allow taxpayers to
question contracts entered into by the national government or
GOCCs allegedly in contravention of the law. A taxpayer need not be
a party to the contract to challenge its validity [Reyes Notes].
In this case, the petitioners have sufficiently demonstrated
that the taxpayers’ money would be spent on the project considering
that the Philippine government is required to allocate a peso-
counterpart for the loan granted by Japan (the loan was originally in
yen). The peso-counterpart fund is to be used for the implementation
of the project.
FACTS:
• Governments of Japan and Philippines entered into an
understanding regarding loans to be extended by Japan to the
Philippines as shown their Exchange of Notes.

!
• The Philippines obtained a loan from the Japan Bank for
International Cooperation (JBIC), Japan’s banking agency,
through Loan Agreement PH-P204.
• The loan was principally to be used for the Arterial Road Links
Development Project that includes the Catanduanes
Circumferential Road.
• DPWH, the head agency, caused the publication of invitations to
qualify for bidding for the project. Seven bidders were left to
participate.
• Prior to the opening of the respective bid proposals, it was
announced that the Approved Budget for the Contract (ABC) was
in the amount of Php738,719,560.67.
• Private respondent, China Road & Bridge Corporation’s bid was
Php952,564.71.
• Eventually, the project was awarded to private respondent, and
by virtue of DPWH’s resolution, a contract was entered into by
China Road and Bridge Corp. and DPWH.
• Petitioners question the validity of the loan agreement and
contract on the ground that they violate RA 9184 (Government
Procurement Reform Act), specifically Section 31 thereof, which
states that ABC shall be the upper limit or ceiling for bid prices,
and any bid that exceeds this ceiling shall be disqualified outright
from further participating in the bidding.
• Petitioners also posit that, as taxpayers, they are qualified or
they have the locus standi to question the contract.
o Petitioner Abaya claims that he filed this petition as
taxpayer, former lawmaker and as a Filipino citizen;
o Petitioner Garcia as taxpayer, former military officer, and
as a Filipino citizen; and
o Petitioner PMA ’59 Foundation Inc., represented by its
president, as non-stock, non-profit corporation organized
under Philippine laws, claiming that its members all
taxpayers and alumni of the Philippine Military Academy.
ISSUES: Do the petitioners have locus standi? [I only included the
most relevant issue in this case]
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Montero - Tax Digests (Block A 2014)
HELD & RATIO:
• YES, the petitioners have standing as taxpayers.
o Locus standi is merely a matter of procedure and it
has been recognized that in some cases, suits are
not brought by parties who have been personally
injured by the operation of a law or any government
act but by concerned citizens, taxpayers or voters
who actually sue in the interest of the public.
o The prevailing doctrine in a taxpayer’s suit is to allow
taxpayers to question contracts entered into by the
national government or GOCCs allegedly in
contravention of the law. A taxpayer is allowed to
sue where there is a claim that public funds are
illegally disbursed or that public money is being
deflected to any improper purpose, or that there is
wastage of public funds through the enforcement of
an invalid or unconstitutional law. A taxpayer need
not be a party to the contract to challenge its validity.
o The petitioners have sufficiently demonstrated that
the taxpayers’ money would be spent on the project
considering that the Philippine government is
required to allocate a peso-counterpart for the loan
granted by Japan (the loan was originally in yen).
The peso-counterpart fund is to be used for the
implementation of the project.
FINAL VERDICT: The petition is dismissed; the contracts are valid.
Source: Pertinent portions from Taxation 1 Digests 2A-2015; some
notes were added.

!
106. LBP vs CACAYURAN
G.R. No. 191667, April 17, 2013
CASE:
Mayor Eriguel obtained two loans from the Land Bank of the Phils.
(LBP) to finance the construction of the Agoo plaza.! To serve as
additional security, the Municipality further authorized the
assignment of a portion of its internal revenue allotment (IRA) and
the monthly income from the proposed project in favor of Land Bank.
Cacayuran vehemently opposed the Construction of such plazas
contending that as a taxpayer he has the right to sue and that the
proposed construction!were “highly irregular, violative of the law, and
detrimental to public interests, and will result to wanton desecration
of the said historical and public park.” Ther LBP opposed Cacayuran
and stated that he has no standing to sue since he is not a privy to
the loan and mortgage contract.
The SC ruled that Cacayuran has the requisite standing to sue. As a
taxpayer he is is allowed to sue where there is a claim that public
funds are illegally disbursed, or that public money is being deflected
to any improper purpose, or that there is wastage of public funds
through the enforcement of an invalid or unconstitutional law.
FACTS:
• From 2005 to 2006, the Municipality’s Sangguniang Bayan (SB)
passed certain resolutions to implement a multi-phased plan
(Redevelopment Plan) to redevelop the Agoo Public Plaza (Agoo
Plaza) where the Imelda Garden and Jose Rizal Monument were
situated.
• To finance phase 1 of the said plan, the SB initially passed
Resolution No. 68-20054on April 19, 2005, authorizing then
Mayor Eufranio Eriguel (Mayor Eriguel) to obtain a loan from
Land Bank and incidental thereto, mortgage a 2,323.75 square
meter lot situated at the southeastern portion of the Agoo Plaza
(Plaza Lot) as collateral.
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Montero - Tax Digests (Block A 2014)
• To serve as additional security, it further authorized the
assignment of a portion of its internal revenue allotment
(IRA) and the monthly income from the proposed project in
favor of Land Bank.
• Consequently, on November 21, 2005, Land Bank extended a
P4,000,000.00 loan in favor of the Municipality (First Loan), the
proceeds of which were used to construct ten (10) kiosks at the
northern and southern portions of the Imelda Garden.
• On March 7, 2006, the SB passed Resolution No. 58-2006,
approving the construction of a commercial center on the Plaza
Lot as part of phase II of the Redevelopment Plan. To finance
the project, Mayor Eriguel was again authorized to obtain a loan
from Land Bank, posting as well the same securities as that of
the First Loan.
• All previous representations and warranties of Mayor Eriguel
related to the negotiation and obtention of the new loan were
ratified on September 5, 2006 through Resolution No. 128-2006.
In consequence, Land Bank granted a second loan in favor of
the Municipality on October 20, 2006 in the principal amount of
P28,000,000.00 (Second Loan).
• Unlike phase 1 of the Redevelopment Plan, the construction of
the commercial center at the Agoo Plaza was vehemently
objected to by some residents of the Municipality.
• Led by respondent Eduardo Cacayuran (Cacayuran), these
residents claimed that the conversion of the Agoo Plaza into a
commercial center, as funded by the proceeds from the First and
Second Loans (Subject Loans), were “highly irregular, violative
of the law, and detrimental to public interests, and will result to
wanton desecration of the said historical and public park.”
• Cacayuran, invoking his right as a taxpayer, filed a Complaint
against the Implicated Officers and Land Bank, assailing, among
others, the validity of the Subject Loans on the ground that the
Plaza Lot used as collateral thereof is property of public
dominion and therefore, beyond the commerce of man.

!
• During the pendency of the proceedings, the construction of the
commercial center was completed and the said structure later
became known as the Agoo’s People Center (APC).
• On May 8, 2007, the SB passed Municipal Ordinance No. 02-
2007, declaring the area where the APC stood as patrimonial
property of the Municipality.
• In its Decision dated April 10, 2007,21 the RTC ruled in favor of
Cacayuran. the CA affirmed with modification the RTC’s ruling,
excluding Vice Mayor Eslao from any personal liability arising
from the Subject Loans.
• Dissatisfied, Land Bank filed the instant petition.
ISSUE: Whether or not as a taxpayer, Cacayuran has standing
to sue (Taxpayer’s suit)
HELD:
Yes
• Land Bank claims that Cacayuran did not have any standing to
contest the construction of the APC as it was funded through the
proceeds coming from the Subject Loans and not from public
funds. Besides, Cacayuran was not even a party to any of the
Subject Loans and is thus, precluded from questioning the same.
The argument is untenable.
• It is hornbook principle that a taxpayer is allowed to sue
where there is a claim that public funds are illegally
disbursed, or that public money is being deflected to any
improper purpose, or that there is wastage of public funds
through the enforcement of an invalid or unconstitutional
law.
• A person suing as a taxpayer, however, must show that the act
complained of directly involves the illegal disbursement of public
funds derived from taxation.
• In other words, for a taxpayer’s suit to prosper, two requisites
must be met namely:
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Montero - Tax Digests (Block A 2014)
1. Public funds derived from taxation are disbursed by
a political subdivision or instrumentality and in
doing so, a law is violated or some irregularity is
committed;
2. The petitioner is directly affected by the alleged act.
• The foregoing requisites are present in the instant case.
• First, although the construction of the APC would be primarily
sourced from the proceeds of the Subject Loans, which Land
Bank insists are not taxpayer’s money, there is no denying that
public funds derived from taxation are bound to be expended as
the Municipality assigned a portion of its IRA as a security for the
foregoing loans.
• Needless to state, the Municipality’s IRA, which serves as the
local government unit’s just share in the national taxes is in the
nature of public funds derived from taxation.
• In any event, it is observed that the proceeds from the Subject
Loans had already been converted into public funds by the
Municipality’s receipt
• Second, as a resident-taxpayer of the Municipality, Cacayuran is
directly affected by the conversion of the Agoo Plaza which was
funded by the proceeds of the Subject Loans. It is well-settled
that public plazas are properties for public use34 and therefore,
belongs to the public dominion.
• As such, it can be used by anybody and no one can exercise
over it the rights of a private owner thereof. Funds coming from
private sources become impressed with the characteristics of
public funds when they are under official custody.
• Therefore, as the above-stated requisites obtain in this case,
Cacayuran has standing to file the instant suit.
Final Verdict:! ! WHEREFORE, the petition is DENIED.
Accordingly, the March 26, 2010 Decision ofthe Court of
Appeals in CA-G.R. CV. No. 89732 is hereby
AFFIRMED.