TAXATION CASES
" 14 In a separate opinion in Graves
1.ANTERO M. SISON, JR., petitioner, vs.RUBEN B. ANCHETA, Acting Commissioner, Bureau
of Internal Revenue; ROMULO VILLA, Deputy Commissioner, Bureau of Internal Revenue;
TOMAS TOLEDO Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA,
Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and
CESAR E. A. VIRATA, Minister of Finance, respondents.
FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on
the validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional
infirmity. The assailed provision further amends Section 21 of the National Internal Revenue Code
of 1977, which provides for rates of tax on citizens or residents on (a) taxable compensation
income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank
deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and
similar arrangements, (e) dividends and share of individual partner in the net profits of taxable
partnership, (f) adjusted gross income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof, "he
would be unduly discriminated against by the imposition of higher rates of tax upon his income
arising from the exercise of his profession vis-a-visthose which are imposed upon fixed income or
salaried individual taxpayers. 4 He characterizes the above sction as arbitrary amounting to class
legislation, oppressive and capricious in character 5 For petitioner, therefore, there is a
transgression of both the equal protection and due process clauses 6 of the Constitution as well as
of the rule requiring uniformity in taxation. 7
The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10
days from notice. Such an answer, after two extensions were granted the Office of the Solicitor
General, was filed on May 28, 1982. 8The facts as alleged were admitted but not the allegations
which to their mind are "mere arguments, opinions or conclusions on the part of the petitioner, the
truth [for them] being those stated [in their] Special and Affirmative Defenses." 9 The answer then
affirmed: "Batas Pambansa Big. 135 is a valid exercise of the State's power to tax. The authorities
and cases cited while correctly quoted or paraghraph do not support petitioner's stand." 10 The
prayer is for the dismissal of the petition for lack of merit.
This Court finds such a plea more than justified. The petition must be dismissed.
1. It is manifest that the field of state activity has assumed a much wider scope, The reason was
so clearly set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to
private enterprise and initiative and which the government was called upon to enter optionally, and
only 'because it was better equipped to administer for the public welfare than is any private
individual or group of individuals,' continue to lose their well-defined boundaries and to be
absorbed within activities that the government must undertake in its sovereign capacity if it is to
meet the increasing social challenges of the times." 11 Hence the need for more revenues. The
power to tax, an inherent prerogative, has to be availed of to assure the performance of vital state
functions. It is the source of the bulk of public funds. To praphrase a recent decision, taxes being
the lifeblood of the government, their prompt and certain availability is of the essence. 12
2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is
the strongest of all the powers of of government." 13 It is, of course, to be admitted that for all its
plenitude 'the power to tax is not unconfined. There are restrictions. The Constitution sets forth
such limits . Adversely affecting as it does properly rights, both the due process and equal
protection clauses inay properly be invoked, all petitioner does, to invalidate in appropriate cases
a revenue measure. if it were otherwise, there would -be truth to the 1803 dictum of Chief Justice
Marshall that "the power to tax involves the power to destroy.
v. New York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized
it as "a flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free use
of absolutes." 16 This is merely to emphasize that it is riot and there cannot be such a
constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun
from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The
power to tax is not the power to destroy while this Court sits." 17 So it is in the Philippines.
3. This Court then is left with no choice. The Constitution as the fundamental law overrides any
legislative or executive, act that runs counter to it. In any case therefore where it can be
demonstrated that the challenged statutory provision — as petitioner here alleges — fails to abide
by its command, then this Court must so declare and adjudge it null. The injury thus is centered on
the question of whether the imposition of a higher tax rate on taxable net income derived from
business or profession than on compensation is constitutionally infirm.
4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation,
as here. does not suffice. There must be a factual foundation of such unconstitutional taint.
Considering that petitioner here would condemn such a provision as void or its face, he has not
made out a case. This is merely to adhere to the authoritative doctrine that were the due process
and equal protection clauses are invoked, considering that they arc not fixed rules but rather broad
standards, there is a need for of such persuasive character as would lead to such a conclusion.
Absent such a showing, the presumption of validity must prevail. 18
5. It is undoubted that the due process clause may be invoked where a taxing statute is so
arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown
to amount to the confiscation of property. That would be a clear abuse of power. It then becomes
the duty of this Court to say that such an arbitrary act amounted to the exercise of an authority not
conferred. That properly calls for the application of the Holmes dictum. It has also been held that
where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public
purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on
due process grounds. 19
6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of
this constitutional mandate whether the assailed act is in the exercise of the lice power or the
power of eminent domain is to demonstrated that the governmental act assailed, far from being
inspired by the attainment of the common weal was prompted by the spirit of hostility, or at the
very least, discrimination that finds no support in reason. It suffices then that the laws operate
equally and uniformly on all persons under similar circumstances or that all persons must be
treated in the same manner, the conditions not being different, both in the privileges conferred and
the liabilities imposed. Favoritism and undue preference cannot be allowed. For the principle is
that equal protection and security shall be given to every person under circumtances which if not
Identical are analogous. If law be looked upon in terms of burden or charges, those that fall within
a class should be treated in the same fashion, whatever restrictions cast on some in the group
equally binding on the rest." 20 That same formulation applies as well to taxation measures. The
equal protection clause is, of course, inspired by the noble concept of approximating the Ideal of
the laws benefits being available to all and the affairs of men being governed by that serene and
impartial uniformity, which is of the very essence of the Idea of law. There is, however, wisdom, as
well as realism in these words of Justice Frankfurter: "The equality at which the 'equal protection'
clause aims is not a disembodied equality. The Fourteenth Amendment enjoins 'the equal
protection of the laws,' and laws are not abstract propositions. They do not relate to abstract units
A, B and C, but are expressions of policy arising out of specific difficulties, address to the
attainment of specific ends by the use of specific remedies. The Constitution does not require
things which are different in fact or opinion to be treated in law as though they were the
same." 21 Hence the constant reiteration of the view that classification if rational in character is
allowable. As a matter of fact, in a leading case of Lutz V. Araneta, 22 this Court, through Justice
J.B.L. Reyes, went so far as to hold "at any rate, it is inherent in the power to tax that a state be
free to select the subjects of taxation, and it has been repeatedly held that 'inequalities which
result from a singling out of one particular class for taxation, or exemption infringe no constitutional
limitation.'" 23
7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The
rule of taxation shag be uniform and equitable." 24 This requirement is met according to Justice
Laurel in Philippine Trust Company v. Yatco,25 decided in 1940, when the tax "operates with the
same force and effect in every place where the subject may be found. " 26 He likewise added: "The
rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly
attainable." 27 The problem of classification did not present itself in that case. It did not arise until
nine years later, when the Supreme Court held: "Equality and uniformity in taxation means that all
taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing
power has the authority to make reasonable and natural classifications for purposes of taxation, ...
. 28 As clarified by Justice Tuason, where "the differentiation" complained of "conforms to the
practical dictates of justice and equity" it "is not discriminatory within the meaning of this clause
and is therefore uniform." 29 There is quite a similarity then to the standard of equal protection for
all that is required is that the tax "applies equally to all persons, firms and corporations placed in
similar situation."30
8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration
the distinction between a tax rate and a tax base. There is no legal objection to a broader tax base
or taxable income by eliminating all deductible items and at the same time reducing the applicable
tax rate. Taxpayers may be classified into different categories. To repeat, it. is enough that the
classification must rest upon substantial distinctions that make real differences. In the case of the
gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of
classification is the susceptibility of the income to the application of generalized rules removing all
deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be
applied to all of them. Taxpayers who are recipients of compensation income are set apart as a
class. As there is practically no overhead expense, these taxpayers are e not entitled to make
deductions for income tax purposes because they are in the same situation more or less. On the
other hand, in the case of professionals in the practice of their calling and businessmen, there is
no uniformity in the costs or expenses necessary to produce their income. It would not be just then
to disregard the disparities by giving all of them zero deduction and indiscriminately impose on all
alike the same tax rates on the basis of gross income. There is ample justification then for the
Batasang Pambansa to adopt the gross system of income taxation to compensation income, while
continuing the system of net income taxation as regards professional and business income.
9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack
of factual foundation to show the arbitrary character of the assailed provision; 31 (2) the force of
controlling doctrines on due process, equal protection, and uniformity in taxation and (3) the
reasonableness of the distinction between compensation and taxable net income of professionals
and businessman certainly not a suspect classification,WHEREFORE, the petition is dismissed.
Costs against petitioner.
2. PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
CORONA, J.:
ARTICLE II
Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right to health of the people and instill health
consciousness among them.
ARTICLE XIII
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and comprehensive approach to health
development which shall endeavor to make essential goods, health and other social services
available to all the people at affordable cost. There shall be priority for the needs of the
underprivileged sick, elderly, disabled, women, and children. The State shall endeavor to provide
free medical care to paupers.1
For resolution are a motion for reconsideration and supplemental motion for reconsideration dated
July 10, 2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care Providers,
Inc.2
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct
and operate a prepaid group practice health care delivery system or a health maintenance
organization to take care of the sick and disabled persons enrolled in the health care plan and to
provide for the administrative, legal, and financial responsibilities of the organization." Individuals
enrolled in its health care programs pay an annual membership fee and are entitled to various
preventive, diagnostic and curative medical services provided by its duly licensed physicians,
specialists and other professional technical staff participating in the group practice health delivery
system at a hospital or clinic owned, operated or accredited by it.
On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal
demand letter and the corresponding assessment notices demanding the payment of deficiency
taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount
of ₱224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioner’s health
care agreement with the members of its health care program pursuant to Section 185 of the 1997
Tax Code
Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act
on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the
cancellation of the deficiency VAT and DST assessments.
On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED.
Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to ₱22,054,831.75 inclusive
of 25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT
deficiency and ₱31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20,
1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared
void and without force and effect. The 1996 and 1997 deficiency DST assessment against
petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from
collecting the said DST deficiency tax.SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the
DST assessment. He claimed that petitioner’s health care agreement was a contract of insurance
subject to DST under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held that petitioner’s health care agreement
was in the nature of a non-life insurance contract subject to DST.
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals,
insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax
assessment and ordered petitioner to desist from collecting the same is REVERSED and SET
ASIDE.
Respondent is ordered to pay the amounts of ₱55,746,352.19 and ₱68,450,258.73 as deficiency
Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment
and 20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax
Code, until the same shall have been fully paid.SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.
In a decision dated June 12, 2008, the Court denied the petition and affirmed the CA’s decision.
We held that petitioner’s health care agreement during the pertinent period was in the nature of
non-life insurance which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v.
Olivares3 and Philamcare Health Systems, Inc. v. CA.4We also ruled that petitioner’s contention
that it is a health maintenance organization (HMO) and not an insurance company is irrelevant
because contracts between companies like petitioner and the beneficiaries under their plans are
treated as insurance contracts. Moreover, DST is not a tax on the business transacted but an
excise on the privilege, opportunity or facility offered at exchanges for the transaction of the
business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration and
supplemental motion for reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on a
company engaged in the business of fidelity bonds and other insurance policies. Petitioner, as an
HMO, is a service provider, not an insurance company.
(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect the
CA’s disposition that health care services are not in the nature of an insurance business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from items subject to DST is clear,
especially in the light of the amendments made in the DST law in 2002.
(e) Assuming arguendo that petitioner’s agreements are contracts of indemnity, they are not those
contemplated under Section 185.
(f) Assuming arguendo that petitioner’s agreements are akin to health insurance, health insurance
is not covered by Section 185.
(g) The agreements do not fall under the phrase "other branch of insurance" mentioned in Section
185.
(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under RA 5 9480 for the taxable year 2005 and all
prior years. Therefore, the questioned assessments on the DST are now rendered moot and
academic.6
Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their
memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty
under RA 94807(also known as the "Tax Amnesty Act of 2007") by fully paying the amount of
₱5,127,149.08 representing 5% of its net worth as of the year ending December 31, 2005.8
We find merit in petitioner’s motion for reconsideration.
Petitioner was formally registered and incorporated with the Securities and Exchange Commission
on June 30, 1987.9 It is engaged in the dispensation of the following medical services to
individuals who enter into health care agreements with it:
Preventive medical services such as periodic monitoring of health problems, family planning
counseling, consultation and advices on diet, exercise and other healthy habits, and immunization;
Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis,
complete blood count, and the like and
Curative medical services which pertain to the performing of other remedial and therapeutic
processes in the event of an injury or sickness on the part of the enrolled member.10
Individuals enrolled in its health care program pay an annual membership fee. Membership is on a
year-to-year basis. The medical services are dispensed to enrolled members in a hospital or clinic
owned, operated or accredited by petitioner, through physicians, medical and dental practitioners
under contract with it. It negotiates with such health care practitioners regarding payment
schemes, financing and other procedures for the delivery of health services. Except in cases of
emergency, the professional services are to be provided only by petitioner's physicians, i.e. those
directly employed by it11 or whose services are contracted by it.12 Petitioner also provides hospital
services such as room and board accommodation, laboratory services, operating rooms, x-ray
facilities and general nursing care.13 If and when a member avails of the benefits under the
agreement, petitioner pays the participating physicians and other health care providers for the
services rendered, at pre-agreed rates.14
To avail of petitioner’s health care programs, the individual members are required to sign and
execute a standard health care agreement embodying the terms and conditions for the provision
of the health care services. The same agreement contains the various health care services that
can be engaged by the enrolled member, i.e., preventive, diagnostic and curative medical
services. Except for the curative aspect of the medical service offered, the enrolled member may
actually make use of the health care services being offered by petitioner at any time.
Health Maintenance Organizations Are Not Engaged In The Insurance Business
We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an
insurer because its agreements are treated as insurance contracts and the DST is not a tax on the
business but an excise on the privilege, opportunity or facility used in the transaction of the
business.15
Petitioner, however, submits that it is of critical importance to characterize the business it is
engaged in, that is, to determine whether it is an HMO or an insurance company, as this distinction
is indispensable in turn to the issue of whether or not it is liable for DST on its health care
agreements.16A second hard look at the relevant law and jurisprudence convinces the Court that
the arguments of petitioner are meritorious.
Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:
Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability
made or renewed by any person, association or company or corporation transacting the
business of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire
insurance), and all bonds, undertakings, or recognizances, conditioned for the performance of the
duties of any office or position, for the doing or not doing of anything therein specified, and on all
obligations guaranteeing the validity or legality of any bond or other obligations issued by any
province, city, municipality, or other public body or organization, and on all obligations
guaranteeing the title to any real estate, or guaranteeing any mercantile credits, which may be
made or renewed by any such person, company or corporation, there shall be collected a
documentary stamp tax of fifty centavos (₱0.50) on each four pesos (₱4.00), or fractional part
thereof, of the premium charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a
statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this
end, a construction which renders every word operative is preferred over that which makes some
words idle and nugatory.17 This principle is expressed in the maxim Ut magis valeat quam
pereat, that is, we choose the interpretation which gives effect to the whole of the statute – its
every word.18
From the language of Section 185, it is evident that two requisites must concur before the DST
can apply, namely: (1) the document must be a policy of insurance or an obligation in the
nature of indemnity and (2) the maker should be transacting the business of accident,
fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or
other branch of insurance (except life, marine, inland, and fire insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of 1995"),
an HMO is "an entity that provides, offers or arranges for coverage of designated health services
needed by plan members for a fixed prepaid premium."19 The payments do not vary with the
extent, frequency or type of services provided.
The question is: was petitioner, as an HMO, engaged in the business of insurance during the
pertinent taxable years? We rule that it was not.
Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what constitutes
"doing an insurance business" or "transacting an insurance business:"
a) making or proposing to make, as insurer, any insurance contract;
b) making or proposing to make, as surety, any contract of suretyship as a vocation and
not as merely incidental to any other legitimate business or activity of the surety;
c) doing any kind of business, including a reinsurance business, specifically recognized
as constituting the doing of an insurance business within the meaning of this Code;
d) doing or proposing to do any business in substance equivalent to any of the foregoing
in a manner designed to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that no profit is derived from the making of
insurance contracts, agreements or transactions or that no separate or direct consideration is
received therefore, shall not be deemed conclusive to show that the making thereof does not
constitute the doing or transacting of an insurance business.
Various courts in the United States, whose jurisprudence has a persuasive effect on our
decisions,21 have determined that HMOs are not in the insurance business. One test that they
have applied is whether the assumption of risk and indemnification of loss (which are elements of
an insurance business) are the principal object and purpose of the organization or whether they
are merely incidental to its business. If these are the principal objectives, the business is that of
insurance. But if they are merely incidental and service is the principal purpose, then the business
is not insurance.
Applying the "principal object and purpose test,"22 there is significant American case law
supporting the argument that a corporation (such as an HMO, whether or not organized for profit),
whose main object is to provide the members of a group with health services, is not engaged in
the insurance business.
The rule was enunciated in Jordan v. Group Health Association23 wherein the Court of Appeals of
the District of Columbia Circuit held that Group Health Association should not be considered as
engaged in insurance activities since it was created primarily for the distribution of health care
services rather than the assumption of insurance risk.
xxx Although Group Health’s activities may be considered in one aspect as creating security
against loss from illness or accident more truly they constitute the quantity purchase of well-
rounded, continuous medical service by its members. xxx The functions of such an
organization are not identical with those of insurance or indemnity companies. The latter
are concerned primarily, if not exclusively, with risk and the consequences of its descent, not with
service, or its extension in kind, quantity or distribution; with the unusual occurrence, not the daily
routine of living. Hazard is predominant. On the other hand, the cooperative is concerned
principally with getting service rendered to its members and doing so at lower prices made
possible by quantity purchasing and economies in operation. Its primary purpose is to
reduce the cost rather than the risk of medical care; to broaden the service to the individual
in kind and quantity; to enlarge the number receiving it; to regularize it as an everyday
incident of living, like purchasing food and clothing or oil and gas, rather than merely
protecting against the financial loss caused by extraordinary and unusual occurrences,
such as death, disaster at sea, fire and tornado. It is, in this instance, to take care of colds,
ordinary aches and pains, minor ills and all the temporary bodily discomforts as well as the more
serious and unusual illness. To summarize, the distinctive features of the cooperative are the
rendering of service, its extension, the bringing of physician and patient together, the
preventive features, the regularization of service as well as payment, the substantial
reduction in cost by quantity purchasing in short, getting the medical job done and paid
for; not, except incidentally to these features, the indemnification for cost after the services
is rendered. Except the last, these are not distinctive or generally characteristic of the
insurance arrangement. There is, therefore, a substantial difference between contracting in this
way for the rendering of service, even on the contingency that it be needed, and contracting
merely to stand its cost when or after it is rendered.
That an incidental element of risk distribution or assumption may be present should not outweigh
all other factors. If attention is focused only on that feature, the line between insurance or
indemnity and other types of legal arrangement and economic function becomes faint, if not
extinct. This is especially true when the contract is for the sale of goods or services on
contingency. But obviously it was not the purpose of the insurance statutes to regulate all
arrangements for assumption or distribution of risk. That view would cause them to engulf
practically all contracts, particularly conditional sales and contingent service agreements. The
fallacy is in looking only at the risk element, to the exclusion of all others present or their
subordination to it. The question turns, not on whether risk is involved or assumed, but on
whether that or something else to which it is related in the particular plan is its principal
object purpose.24 (Emphasis supplied)
In California Physicians’ Service v. Garrison,25 the California court felt that, after scrutinizing the
plan of operation as a whole of the corporation, it was service rather than indemnity which stood
as its principal purpose.
There is another and more compelling reason for holding that the service is not engaged in the
insurance business. Absence or presence of assumption of risk or peril is not the sole test to
be applied in determining its status. The question, more broadly, is whether, looking at the
plan of operation as a whole, ‘service’ rather than ‘indemnity’ is its principal object and
purpose. Certainly the objects and purposes of the corporation organized and maintained by the
California physicians have a wide scope in the field of social service. Probably there is no more
impelling need than that of adequate medical care on a voluntary, low-cost basis for
persons of small income. The medical profession unitedly is endeavoring to meet that
need. Unquestionably this is ‘service’ of a high order and not ‘indemnity.’26 (Emphasis
supplied)
American courts have pointed out that the main difference between an HMO and an insurance
company is that HMOs undertake to provide or arrange for the provision of medical services
through participating physicians while insurance companies simply undertake to indemnify the
insured for medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates,
P.A. v. Horizon Blue Cross and Blue Shield of New Jersey27 is clear on this point:
The basic distinction between medical service corporations and ordinary health and accident
insurers is that the former undertake to provide prepaid medical services through participating
physicians, thus relieving subscribers of any further financial burden, while the latter only
undertake to indemnify an insured for medical expenses up to, but not beyond, the schedule of
rates contained in the policy.
The primary purpose of a medical service corporation, however, is an undertaking to provide
physicians who will render services to subscribers on a prepaid basis. Hence, if there are no
physicians participating in the medical service corporation’s plan, not only will the
subscribers be deprived of the protection which they might reasonably have expected
would be provided, but the corporation will, in effect, be doing business solely as a health
and accident indemnity insurer without having qualified as such and rendering itself subject to
the more stringent financial requirements of the General Insurance Laws….
A participating provider of health care services is one who agrees in writing to render health care
services to or for persons covered by a contract issued by health service corporation in return for
which the health service corporation agrees to make payment directly to the participating
provider.28 (Emphasis supplied)
Consequently, the mere presence of risk would be insufficient to override the primary purpose of
the business to provide medical services as needed, with payment made directly to the provider of
these services.29 In short, even if petitioner assumes the risk of paying the cost of these services
even if significantly more than what the member has prepaid, it nevertheless cannot be considered
as being engaged in the insurance business.
By the same token, any indemnification resulting from the payment for services rendered in case
of emergency by non-participating health providers would still be incidental to petitioner’s purpose
of providing and arranging for health care services and does not transform it into an insurer. To
fulfill its obligations to its members under the agreements, petitioner is required to set up a system
and the facilities for the delivery of such medical services. This indubitably shows that
indemnification is not its sole object.
In fact, a substantial portion of petitioner’s services covers preventive and diagnostic medical
services intended to keep members from developing medical conditions or diseases. 30 As an
HMO, it is its obligation to maintain the good health of its members. Accordingly, its health care
programs are designed to prevent or to minimize thepossibility of any assumption of risk
on its part. Thus, its undertaking under its agreements is not to indemnify its members against
any loss or damage arising from a medical condition but, on the contrary, to provide the health and
medical services needed to prevent such loss or damage.31
Overall, petitioner appears to provide insurance-type benefits to its members (with respect to
its curative medical services), but these are incidental to the principal activity of providing them
medical care. The "insurance-like" aspect of petitioner’s business is miniscule compared to its
noninsurance activities. Therefore, since it substantially provides health care services rather than
insurance services, it cannot be considered as being in the insurance business.
It is important to emphasize that, in adopting the "principal purpose test" used in the above-quoted
U.S. cases, we are not saying that petitioner’s operations are identical in every respect to those of
the HMOs or health providers which were parties to those cases. What we are stating is that, for
the purpose of determining what "doing an insurance business" means, we have to scrutinize the
operations of the business as a whole and not its mere components. This is of course only prudent
and appropriate, taking into account the burdensome and strict laws, rules and regulations
applicable to insurers and other entities engaged in the insurance business. Moreover, we are
also not unmindful that there are other American authorities who have found particular HMOs to
be actually engaged in insurance activities.32
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is
evident from the fact that it is not supervised by the Insurance Commission but by the Department
of Health.33 In fact, in a letter dated September 3, 2000, the Insurance Commissioner confirmed
that petitioner is not engaged in the insurance business. This determination of the commissioner
must be accorded great weight. It is well-settled that the interpretation of an administrative agency
which is tasked to implement a statute is accorded great respect and ordinarily controls the
interpretation of laws by the courts. The reason behind this rule was explained in Nestle
Philippines, Inc. v. Court of Appeals:34
The rationale for this rule relates not only to the emergence of the multifarious needs of a modern
or modernizing society and the establishment of diverse administrative agencies for addressing
and satisfying those needs; it also relates to the accumulation of experience and growth of
specialized capabilities by the administrative agency charged with implementing a particular
statute. In Asturias Sugar Central, Inc. vs. Commissioner of Customs,35 the Court stressed that
executive officials are presumed to have familiarized themselves with all the considerations
pertinent to the meaning and purpose of the law, and to have formed an independent,
conscientious and competent expert opinion thereon. The courts give much weight to the
government agency officials charged with the implementation of the law, their competence,
expertness, experience and informed judgment, and the fact that they frequently are the drafters
of the law they interpret.36
A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185 Of
The NIRC of 1997
Section 185 states that DST is imposed on "all policies of insurance… or obligations of the nature
of indemnity for loss, damage, or liability…." In our decision dated June 12, 2008, we ruled that
petitioner’s health care agreements are contracts of indemnity and are therefore insurance
contracts:
It is … incorrect to say that the health care agreement is not based on loss or damage because,
under the said agreement, petitioner assumes the liability and indemnifies its member for hospital,
medical and related expenses (such as professional fees of physicians). The term "loss or
damage" is broad enough to cover the monetary expense or liability a member will incur in case of
illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional services to
the member in case of sickness, injury or emergency or his availment of so-called "out-patient
services" (including physical examination, x-ray and laboratory tests, medical consultations,
vaccine administration and family planning counseling) is the contingent event which gives rise to
liability on the part of the member. In case of exposure of the member to liability, he would be
entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses
arising from the stipulated contingencies belies its claim that its services are prepaid. The
expenses to be incurred by each member cannot be predicted beforehand, if they can be
predicted at all. Petitioner assumes the risk of paying for the costs of the services even if they are
significantly and substantially more than what the member has "prepaid." Petitioner does not bear
the costs alone but distributes or spreads them out among a large group of persons bearing a
similar risk, that is, among all the other members of the health care program. This is insurance.37
We reconsider. We shall quote once again the pertinent portion of Section 185:
Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or
liability made or renewed by any person, association or company or corporation transacting the
business of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance),
xxxx (Emphasis supplied)
In construing this provision, we should be guided by the principle that tax statutes are strictly
construed against the taxing authority.38 This is because taxation is a destructive power which
interferes with the personal and property rights of the people and takes from them a portion of
their property for the support of the government.39 Hence, tax laws may not be extended by
implication beyond the clear import of their language, nor their operation enlarged so as to
embrace matters not specifically provided.40
We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care
agreement is in the nature of non-life insurance, which is primarily a contract of indemnity.
However, those cases did not involve the interpretation of a tax provision. Instead, they dealt with
the liability of a health service provider to a member under the terms of their health care
agreement. Such contracts, as contracts of adhesion, are liberally interpreted in favor of the
member and strictly against the HMO. For this reason, we reconsider our ruling that Blue
Cross and Philamcare are applicable here.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from
an unknown or contingent event. An insurance contract exists where the following elements
concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designed peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk and
5. In consideration of the insurer’s promise, the insured pays a premium.41
Do the agreements between petitioner and its members possess all these elements? They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a
contract contains all the elements of an insurance contract, if its primary purpose is the rendering
of service, it is not a contract of insurance:
It does not necessarily follow however, that a contract containing all the four elements mentioned
above would be an insurance contract. The primary purpose of the parties in making the
contract may negate the existence of an insurance contract. For example, a law firm which
enters into contracts with clients whereby in consideration of periodical payments, it promises to
represent such clients in all suits for or against them, is not engaged in the insurance business. Its
contracts are simply for the purpose of rendering personal services. On the other hand, a contract
by which a corporation, in consideration of a stipulated amount, agrees at its own expense to
defend a physician against all suits for damages for malpractice is one of insurance, and the
corporation will be deemed as engaged in the business of insurance. Unlike the lawyer’s retainer
contract, the essential purpose of such a contract is not to render personal services, but to
indemnify against loss and damage resulting from the defense of actions for
malpractice.42 (Emphasis supplied)
Second. Not all the necessary elements of a contract of insurance are present in petitioner’s
agreements. To begin with, there is no loss, damage or liability on the part of the member that
should be indemnified by petitioner as an HMO. Under the agreement, the member pays petitioner
a predetermined consideration in exchange for the hospital, medical and professional services
rendered by the petitioner’s physician or affiliated physician to him. In case of availment by a
member of the benefits under the agreement, petitioner does not reimburse or indemnify the
member as the latter does not pay any third party. Instead, it is the petitioner who pays the
participating physicians and other health care providers for the services rendered at pre-agreed
rates. The member does not make any such payment.
In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on
the part of the member to any third party-provider of medical services which might in turn
necessitate indemnification from petitioner. The terms "indemnify" or "indemnity" presuppose that
a liability or claim has already been incurred. There is no indemnity precisely because the member
merely avails of medical services to be paid or already paid in advance at a pre-agreed price
under the agreements.
Third. According to the agreement, a member can take advantage of the bulk of the benefits
anytime, e.g. laboratory services, x-ray, routine annual physical examination and consultations,
vaccine administration as well as family planning counseling, even in the absence of any peril,
loss or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care
from a non-participating physician or hospital. However, this is only a very minor part of the list of
services available. The assumption of the expense by petitioner is not confined to the happening
of a contingency but includes incidents even in the absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although the
health care contracts called for the defendant to partially reimburse a subscriber for treatment
received from a non-designated doctor, this did not make defendant an insurer. Citing Jordan, the
Court determined that "the primary activity of the defendant (was) the provision of podiatric
services to subscribers in consideration of prepayment for such services."44 Since indemnity of the
insured was not the focal point of the agreement but the extension of medical services to the
member at an affordable cost, it did not partake of the nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk
alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation always
bears a certain degree of financial risk. Consequently, there is a need to distinguish prepaid
service contracts (like those of petitioner) from the usual insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health
services: the risk that it might fail to earn a reasonable return on its investment. But it is not the risk
of the type peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is
the risk that the cost of insurance claims might be higher than the premiums paid. The amount of
premium is calculated on the basis of assumptions made relative to the insured.45
However, assuming that petitioner’s commitment to provide medical services to its members can
be construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still will
not qualify as an insurance contract because petitioner’s objective is to provide medical services at
reduced cost, not to distribute risk like an insurer.
In sum, an examination of petitioner’s agreements with its members leads us to conclude that it is
not an insurance contract within the context of our Insurance Code.
There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs
Furthermore, militating in convincing fashion against the imposition of DST on petitioner’s health
care agreements under Section 185 of the NIRC of 1997 is the provision’s legislative history. The
text of Section 185 came into U.S. law as early as 1904 when HMOs and health care agreements
were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act
No. 1189 (otherwise known as the "Internal Revenue Law of 1904")46enacted on July 2, 1904 and
became effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is
a verbatim reproduction of the pertinent portion of Section 116, to wit:
ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in respect to the several bonds,
debentures, or certificates of stock and indebtedness, and other documents, instruments, matters,
and things mentioned and described in this section, or for or in respect to the vellum, parchment,
or paper upon which such instrument, matters, or things or any of them shall be written or printed
by any person or persons who shall make, sign, or issue the same, on and after January first,
nineteen hundred and five, the several taxes following:
Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for
loss, damage, or liability made or renewed by any person, association, company, or
corporation transacting the business of accident, fidelity, employer’s liability, plate glass,
steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except
life, marine, inland, and fire insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising
and consolidating the laws relating to internal revenue. The aforecited pertinent portion of Section
116, Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III of Act No.
2339. The very detailed and exclusive enumeration of items subject to DST was thus retained.
On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section
1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10,
1917, the pertinent DST provision became Section 1449 (l) of Act No. 2711, otherwise known as
the Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939),
which codified all the internal revenue laws of the Philippines. In an amendment introduced by RA
40 on October 1, 1946, the DST rate was increased but the provision remained substantially the
same.
Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD
1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and
October 10, 1984 respectively, the DST rate was again increased.1avvphi1
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977
was renumbered as Section 198. And under Section 23 of EO47 273 dated July 25, 1987, it was
again renumbered and became Section 185.
On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect
to the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of
1997), the subject legal provision was retained as the present Section 185. In 2004, amendments
to the DST provisions were introduced by RA 924348 but Section 185 was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines with the formation of
Bancom Health Care Corporation in 1974. The same pioneer HMO was later reorganized and
renamed Integrated Health Care Services, Inc. (or Intercare). However, there are those who claim
that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the Philippines as
early as 1965 and having been formally incorporated in 1991. Afterwards, HMOs proliferated
quickly and currently, there are 36 registered HMOs with a total enrollment of more than 2
million.49
We can clearly see from these two histories (of the DST on the one hand and HMOs on the other)
that when the law imposing the DST was first passed, HMOs were yet unknown in the Philippines.
However, when the various amendments to the DST law were enacted, they were already in
existence in the Philippines and the term had in fact already been defined by RA 7875. If it had
been the intent of the legislature to impose DST on health care agreements, it could have done so
in clear and categorical terms. It had many opportunities to do so. But it did not. The fact that the
NIRC contained no specific provision on the DST liability of health care agreements of HMOs at a
time they were already known as such, belies any legislative intent to impose it on them. As a
matter of fact, petitioner was assessed its DST liability only on January 27, 2000, after more
than a decade in the business as an HMO.50
Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be
safe to say that health care agreements were never, at any time, recognized as insurance
contracts or deemed engaged in the business of insurance within the context of the provision.
The Power To Tax Is Not The Power To Destroy
As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found only in
the responsibility of the legislature which imposes the tax on the constituency who is to pay it. 51 So
potent indeed is the power that it was once opined that "the power to tax involves the power to
destroy."52
Petitioner claims that the assessed DST to date which amounts to ₱376 million 53 is way beyond its
net worth of ₱259 million.54 Respondent never disputed these assertions. Given the realities on
the ground, imposing the DST on petitioner would be highly oppressive. It is not the purpose of the
government to throttle private business. On the contrary, the government ought to encourage
private enterprise.55 Petitioner, just like any concern organized for a lawful economic activity, has a
right to maintain a legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57
The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden
egg."58
Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence.
Incurring losses because of a tax imposition may be an acceptable consequence but killing the
business of an entity is another matter and should not be allowed. It is counter-productive and
ultimately subversive of the nation’s thrust towards a better economy which will ultimately benefit
the majority of our people.59
Petitioner’s Tax Liability Was Extinguished Under The Provisions Of RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996
and 1997 became moot and academic60 when it availed of the tax amnesty under RA 9480 on
December 10, 2007. It paid ₱5,127,149.08 representing 5% of its net worth as of the year ended
December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of
RA 9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the
appurtenant civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising
from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.61
Far from disagreeing with petitioner, respondent manifested in its memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from
payment of the tax involved, including the civil, criminal, or administrative penalties provided under
the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years.
In view of petitioner’s availment of the benefits of [RA 9840], and without conceding the merits of
this case as discussed above, respondent concedes that such tax amnesty extinguishes the
tax liabilities of petitioner. This admission, however, is not meant to preclude a revocation of the
amnesty granted in case it is found to have been granted under circumstances amounting to tax
fraud under Section 10 of said amnesty law.62 (Emphasis supplied)
Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty
program under RA 9480.63 There is no other conclusion to draw than that petitioner’s liability for
DST for the taxable years 1996 and 1997 was totally extinguished by its availment of the tax
amnesty under RA 9480.
Is The Court Bound By A Minute Resolution In Another Case?
Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is
bound by the ruling of the CA64 in CIR v. Philippine National Bank65 that a health care agreement
of Philamcare Health Systems is not an insurance contract for purposes of the DST.
In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court
dismissing the appeal in Philippine National Bank (G.R. No. 148680).66 Petitioner argues that the
dismissal of G.R. No. 148680 by minute resolution was a judgment on the merits; hence, the Court
should apply the CA ruling there that a health care agreement is not an insurance contract.
It is true that, although contained in a minute resolution, our dismissal of the petition was a
disposition of the merits of the case. When we dismissed the petition, we effectively affirmed the
CA ruling being questioned. As a result, our ruling in that case has already become final. 67 When a
minute resolution denies or dismisses a petition for failure to comply with formal and substantive
requirements, the challenged decision, together with its findings of fact and legal conclusions, are
deemed sustained.68 But what is its effect on other cases?
With respect to the same subject matter and the same issues concerning the same parties, it
constitutes res judicata.69 However, if other parties or another subject matter (even with the same
parties and issues) is involved, the minute resolution is not binding precedent. Thus, in CIR v.
Baier-Nickel,70 the Court noted that a previous case, CIR v. Baier-Nickel71 involving the same
parties and the same issues, was previously disposed of by the Court thru a minute resolution
dated February 17, 2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that the
previous case "ha(d) no bearing" on the latter case because the two cases involved different
subject matters as they were concerned with the taxable income of different taxable years.72
Besides, there are substantial, not simply formal, distinctions between a minute resolution and a
decision. The constitutional requirement under the first paragraph of Section 14, Article VIII of the
Constitution that the facts and the law on which the judgment is based must be expressed clearly
and distinctly applies only to decisions, not to minute resolutions. A minute resolution is signed
only by the clerk of court by authority of the justices, unlike a decision. It does not require the
certification of the Chief Justice. Moreover, unlike decisions, minute resolutions are not published
in the Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a
decision.73Indeed, as a rule, this Court lays down doctrines or principles of law which constitute
binding precedent in a decision duly signed by the members of the Court and certified by the Chief
Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioner’s liability for
DST on its health care agreement was not the subject matter of G.R. No. 148680, petitioner
cannot successfully invoke the minute resolution in that case (which is not even binding
precedent) in its favor. Nonetheless, in view of the reasons already discussed, this does not
detract in any way from the fact that petitioner’s health care agreements are not subject to DST.
A Final Note
Taking into account that health care agreements are clearly not within the ambit of Section 185 of
the NIRC and there was never any legislative intent to impose the same on HMOs like petitioner,
the same should not be arbitrarily and unjustly included in its coverage.
It is a matter of common knowledge that there is a great social need for adequate medical services
at a cost which the average wage earner can afford. HMOs arrange, organize and manage health
care treatment in the furtherance of the goal of providing a more efficient and inexpensive health
care system made possible by quantity purchasing of services and economies of scale. They offer
advantages over the pay-for-service system (wherein individuals are charged a fee each time they
receive medical services), including the ability to control costs. They protect their members from
exposure to the high cost of hospitalization and other medical expenses brought about by a
fluctuating economy. Accordingly, they play an important role in society as partners of the State in
achieving its constitutional mandate of providing its citizens with affordable health services.
The rate of DST under Section 185 is equivalent to 12.5% of the premium charged.74 Its imposition
will elevate the cost of health care services. This will in turn necessitate an increase in the
membership fees, resulting in either placing health services beyond the reach of the ordinary
wage earner or driving the industry to the ground. At the end of the day, neither side wins,
considering the indispensability of the services offered by HMOs.
WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the
Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997
deficiency DST assessment against petitioner is hereby CANCELLED and SET
ASIDE. Respondent is ordered to desist from collecting the said tax.
No costs.SO ORDERED.
3. COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly
disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate business
expenses in its income tax returns. The corollary issue is whether or not the appeal of the private
respondent from the decision of the Collector of Internal Revenue was made on time and in
accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation
engaged in engineering, construction and other allied activities, received a letter from the
petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the
years 1958 and 1959.1 On January 18, 1965, Algue flied a letter of protest or request for
reconsideration, which letter was stamp received on the same day in the office of the
petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented to the private
respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the
ground of the pending protest. 3 A search of the protest in the dockets of the case proved fruitless.
Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who
deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR
was not taking any action on the protest and it was only then that he accepted the warrant of
distraint and levy earlier sought to be served.5 Sixteen days later, on April 23, 1965, Algue filed a
petition for review of the decision of the Commissioner of Internal Revenue with the Court of Tax
Appeals.6
The above chronology shows that the petition was filed seasonably. According to Rep. Act No.
1125, the appeal may be made within thirty days after receipt of the decision or ruling
challenged.7 It is true that as a rule the warrant of distraint and levy is "proof of the finality of the
assessment" 8 and renders hopeless a request for reconsideration," 9 being "tantamount to an
outright denial thereof and makes the said request deemed rejected." 10 But there is a special
circumstance in the case at bar that prevents application of this accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was apparently not taken into account before the
warrant of distraint and levy was issued; indeed, such protest could not be located in the office of
the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at
all, considered by the tax authorities. During the intervening period, the warrant was premature
and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro
forma and was based on strong legal considerations. It thus had the effect of suspending on
January 18, 1965, when it was filed, the reglementary period which started on the date the
assessment was received, viz., January 14, 1965. The period started running again only on April
7, 1965, when the private respondent was definitely informed of the implied rejection of the said
protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23,
1965, only 20 days of the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed
because it was not an ordinary reasonable or necessary business expense. The Court of Tax
Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been
legitimately paid by the private respondent for actual services rendered. The payment was in the
form of promotional fees. These were collected by the Payees for their work in the creation of the
Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional
fees to be personal holding company income 12 but later conformed to the decision of the
respondent court rejecting this assertion.13 In fact, as the said court found, the amount was earned
through the joint efforts of the persons among whom it was distributed It has been established that
the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent,
authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority,
Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez,
worked for the formation of the Vegetable Oil Investment Corporation, inducing other persons to
invest in it.14 Ultimately, after its incorporation largely through the promotion of the said persons,
this new corporation purchased the PSEDC properties.15 For this sale, Algue received as agent a
commission of P126,000.00, and it was from this commission that the P75,000.00 promotional
fees were paid to the aforenamed individuals.16
There is no dispute that the payees duly reported their respective shares of the fees in their
income tax returns and paid the corresponding taxes thereon.17 The Court of Tax Appeals also
found, after examining the evidence, that no distribution of dividends was involved.18
The petitioner claims that these payments are fictitious because most of the payees are members
of the same family in control of Algue. It is argued that no indication was made as to how such
payments were made, whether by check or in cash, and there is not enough substantiation of such
payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President,
Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not
made in one lump sum but periodically and in different amounts as each payee's need arose. 19 It
should be remembered that this was a family corporation where strict business procedures were
not applied and immediate issuance of receipts was not required. Even so, at the end of the year,
when the books were to be closed, each payee made an accounting of all of the fees received by
him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal.
This arrangement was understandable, however, in view of the close relationship among the
persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive.
The total commission paid by the Philippine Sugar Estate Development Co. to the private
respondent was P125,000.00. 21After deducting the said fees, Algue still had a balance of
P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total
commission. This was a reasonable proportion, considering that it was the payees who did
practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual
purchase by it of the Sugar Estate properties. This finding of the respondent court is in accord with
the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as
deductions —
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year
in carrying on any trade or business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid
or incurred in carrying on any trade or business may be included a reasonable allowance for
salaries or other compensation for personal services actually rendered. The test of deductibility in
the case of compensation payments is whether they are reasonable and are, in fact, payments
purely for service. This test and deductibility in the case of compensation payments is whether
they are reasonable and are, in fact, payments purely for service. This test and its practical
application may be further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price of services, is
not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend
on stock. This is likely to occur in the case of a corporation having few stockholders, Practically all
of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for
similar services, and the excessive payment correspond or bear a close relationship to the
stockholdings of the officers of employees, it would seem likely that the salaries are not paid
wholly for services rendered, but the excessive payments are a distribution of earnings upon the
stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of Algue nor
were they its controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the
validity of the claimed deduction. In the present case, however, we find that the onus has been
discharged satisfactorily. The private respondent has proved that the payment of the fees was
necessary and reasonable in the light of the efforts exerted by the payees in inducing investors
and prominent businessmen to venture in an experimental enterprise and involve themselves in a
new business requiring millions of pesos. This was no mean feat and should be, as it was,
sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the government would
be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the taxing authorities, every person
who is able to must contribute his share in the running of the government. The government for its
part, is expected to respond in the form of tangible and intangible benefits intended to improve the
lives of the people and enhance their moral and material values. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to
his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if
the taxpayer can demonstrate, as it has here, that the law has not been observed.
We hold that the appeal of the private respondent from the decision of the petitioner was filed on
time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the
claimed deduction by the private respondent was permitted under the Internal Revenue Code and
should therefore not have been disallowed by the petitioner.ACCORDINGLY, the appealed
decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.SO ORDERED.

4.NATIONAL POWER CORPORATION, petitioner,
vs.
CITY OF CABANATUAN, respondent.
PUNO, J.:
This is a petition for review1 of the Decision2 and the Resolution3 of the Court of Appeals dated
March 12, 2001 and July 10, 2001, respectively, finding petitioner National Power Corporation
(NPC) liable to pay franchise tax to respondent City of Cabanatuan.
Petitioner is a government-owned and controlled corporation created under Commonwealth Act
No. 120, as amended.4 It is tasked to undertake the "development of hydroelectric generations of
power and the production of electricity from nuclear, geothermal and other sources, as well as, the
transmission of electric power on a nationwide basis."5 Concomitant to its mandated duty,
petitioner has, among others, the power to construct, operate and maintain power plants, auxiliary
plants, power stations and substations for the purpose of developing hydraulic power and
supplying such power to the inhabitants.6
For many years now, petitioner sells electric power to the residents of Cabanatuan City, posting a
gross income of P107,814,187.96 in 1992.7 Pursuant to section 37 of Ordinance No. 165-92,8 the
respondent assessed the petitioner a franchise tax amounting to P808,606.41, representing 75%
of 1% of the latter's gross receipts for the preceding year.9
Petitioner, whose capital stock was subscribed and paid wholly by the Philippine
Government,10 refused to pay the tax assessment. It argued that the respondent has no authority
to impose tax on government entities. Petitioner also contended that as a non-profit organization,
it is exempted from the payment of all forms of taxes, charges, duties or fees 11 in accordance with
sec. 13 of Rep. Act No. 6395, as amended, viz:
"Sec.13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts
and Other Charges by Government and Governmental Instrumentalities.- The Corporation shall be
non-profit and shall devote all its return from its capital investment, as well as excess revenues
from its operation, for expansion. To enable the Corporation to pay its indebtedness and
obligations and in furtherance and effective implementation of the policy enunciated in Section one
of this Act, the Corporation is hereby exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any
court or administrative proceedings in which it may be a party, restrictions and duties to the
Republic of the Philippines, its provinces, cities, municipalities and other government agencies
and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government,
its provinces, cities, municipalities and other government agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on
import of foreign goods required for its operations and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of
the Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities, on all petroleum products used by the Corporation in the generation,
transmission, utilization, and sale of electric power."12
The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City, demanding
that petitioner pay the assessed tax due, plus a surcharge equivalent to 25% of the amount of tax,
and 2% monthly interest.13Respondent alleged that petitioner's exemption from local taxes has
been repealed by section 193 of Rep. Act No. 7160,14 which reads as follows:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or
juridical, including government owned or controlled corporations, except local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code."
On January 25, 1996, the trial court issued an Order15 dismissing the case. It ruled that the tax
exemption privileges granted to petitioner subsist despite the passage of Rep. Act No. 7160 for
the following reasons: (1) Rep. Act No. 6395 is a particular law and it may not be repealed by Rep.
Act No. 7160 which is a general law; (2) section 193 of Rep. Act No. 7160 is in the nature of an
implied repeal which is not favored; and (3) local governments have no power to tax
instrumentalities of the national government. Pertinent portion of the Order reads:
"The question of whether a particular law has been repealed or not by a subsequent law is a
matter of legislative intent. The lawmakers may expressly repeal a law by incorporating therein
repealing provisions which expressly and specifically cite(s) the particular law or laws, and
portions thereof, that are intended to be repealed. A declaration in a statute, usually in its
repealing clause, that a particular and specific law, identified by its number or title is repealed is an
express repeal; all others are implied repeal. Sec. 193 of R.A. No. 7160 is an implied repealing
clause because it fails to identify the act or acts that are intended to be repealed. It is a well-
settled rule of statutory construction that repeals of statutes by implication are not favored. The
presumption is against inconsistency and repugnancy for the legislative is presumed to know the
existing laws on the subject and not to have enacted inconsistent or conflicting statutes. It is also a
well-settled rule that, generally, general law does not repeal a special law unless it clearly appears
that the legislative has intended by the latter general act to modify or repeal the earlier special law.
Thus, despite the passage of R.A. No. 7160 from which the questioned Ordinance No. 165-92 was
based, the tax exemption privileges of defendant NPC remain.
Another point going against plaintiff in this case is the ruling of the Supreme Court in the case
of Basco vs. Philippine Amusement and Gaming Corporation, 197 SCRA 52, where it was held
that:
'Local governments have no power to tax instrumentalities of the National Government. PAGCOR
is a government owned or controlled corporation with an original charter, PD 1869. All of its shares
of stocks are owned by the National Government. xxx Being an instrumentality of the government,
PAGCOR should be and actually is exempt from local taxes. Otherwise, its operation might be
burdened, impeded or subjected to control by mere local government.'
Like PAGCOR, NPC, being a government owned and controlled corporation with an original
charter and its shares of stocks owned by the National Government, is beyond the taxing power of
the Local Government. Corollary to this, it should be noted here that in the NPC Charter's
declaration of Policy, Congress declared that: 'xxx (2) the total electrification of the Philippines
through the development of power from all services to meet the needs of industrial development
and dispersal and needs of rural electrification are primary objectives of the nations which shall be
pursued coordinately and supported by all instrumentalities and agencies of the
government, including its financial institutions.' (underscoring supplied). To allow plaintiff to subject
defendant to its tax-ordinance would be to impede the avowed goal of this government
instrumentality.
Unlike the State, a city or municipality has no inherent power of taxation. Its taxing power is limited
to that which is provided for in its charter or other statute. Any grant of taxing power is to be
construed strictly, with doubts resolved against its existence.
From the existing law and the rulings of the Supreme Court itself, it is very clear that the plaintiff
could not impose the subject tax on the defendant."16
On appeal, the Court of Appeals reversed the trial court's Order17 on the ground that section 193,
in relation to sections 137 and 151 of the LGC, expressly withdrew the exemptions granted to the
petitioner.18 It ordered the petitioner to pay the respondent city government the following: (a) the
sum of P808,606.41 representing the franchise tax due based on gross receipts for the year 1992,
(b) the tax due every year thereafter based in the gross receipts earned by NPC, (c) in all cases,
to pay a surcharge of 25% of the tax due and unpaid, and (d) the sum of P 10,000.00 as litigation
expense.19
On April 4, 2001, the petitioner filed a Motion for Reconsideration on the Court of Appeal's
Decision. This was denied by the appellate court, viz:
"The Court finds no merit in NPC's motion for reconsideration. Its arguments reiterated therein that
the taxing power of the province under Art. 137 (sic) of the Local Government Code refers merely
to private persons or corporations in which category it (NPC) does not belong, and that the LGC
(RA 7160) which is a general law may not impliedly repeal the NPC Charter which is a special
law—finds the answer in Section 193 of the LGC to the effect that 'tax exemptions or incentives
granted to, or presently enjoyed by all persons, whether natural or juridical, including government-
owned or controlled corporations except local water districts xxx are hereby withdrawn.' The
repeal is direct and unequivocal, not implied.IN VIEW WHEREOF, the motion for reconsideration
is hereby DENIED.SO ORDERED."20
In this petition for review, petitioner raises the following issues:
"A. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A PUBLIC NON-
PROFIT CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO CONSIDER
THAT SECTION 137 OF THE LOCAL GOVERNMENT CODE IN RELATION TO SECTION 131
APPLIES ONLY TO PRIVATE PERSONS OR CORPORATIONS ENJOYING A FRANCHISE.
B. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S EXEMPTION
FROM ALL FORMS OF TAXES HAS BEEN REPEALED BY THE PROVISION OF THE LOCAL
GOVERNMENT CODE AS THE ENACTMENT OF A LATER LEGISLATION, WHICH IS A
GENERAL LAW, CANNOT BE CONSTRUED TO HAVE REPEALED A SPECIAL LAW.
C. THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN EXERCISE
OF POLICE POWER THROUGH TAX EXEMPTION SHOULD PREVAIL OVER THE LOCAL
GOVERNMENT CODE."21
It is beyond dispute that the respondent city government has the authority to issue Ordinance No.
165-92 and impose an annual tax on "businesses enjoying a franchise," pursuant to section 151 in
relation to section 137 of the LGC, viz:
"Sec. 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other special
law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding
fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar
year based on the incoming receipt, or realized, within its territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one
percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the
business started to operate, the tax shall be based on the gross receipts for the preceding
calendar year, or any fraction thereof, as provided herein." (emphasis supplied)
Sec. 151. Scope of Taxing Powers.- Except as otherwise provided in this Code, the city, may levy
the taxes, fees, and charges which the province or municipality may impose: Provided, however,
That the taxes, fees and charges levied and collected by highly urbanized and independent
component cities shall accrue to them and distributed in accordance with the provisions of this
Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the province
or municipality by not more than fifty percent (50%) except the rates of professional and
amusement taxes."
Petitioner, however, submits that it is not liable to pay an annual franchise tax to the respondent
city government. It contends that sections 137 and 151 of the LGC in relation to section 131, limit
the taxing power of the respondent city government to private entities that are engaged in trade or
occupation for profit.22
Section 131 (m) of the LGC defines a "franchise" as "a right or privilege, affected with public
interest which is conferred upon private persons or corporations, under such terms and conditions
as the government and its political subdivisions may impose in the interest of the public welfare,
security and safety." From the phraseology of this provision, the petitioner claims that the word
"private" modifies the terms "persons" and "corporations." Hence, when the LGC uses the term
"franchise," petitioner submits that it should refer specifically to franchises granted to private
natural persons and to private corporations.23 Ergo, its charter should not be considered a
"franchise" for the purpose of imposing the franchise tax in question.
On the other hand, section 131 (d) of the LGC defines "business" as "trade or commercial activity
regularly engaged in as means of livelihood or with a view to profit." Petitioner claims that it is not
engaged in an activity for profit, in as much as its charter specifically provides that it is a "non-
profit organization." In any case, petitioner argues that the accumulation of profit is merely
incidental to its operation; all these profits are required by law to be channeled for expansion and
improvement of its facilities and services.24
Petitioner also alleges that it is an instrumentality of the National Government,25 and as such, may
not be taxed by the respondent city government. It cites the doctrine in Basco vs. Philippine
Amusement and Gaming Corporation26where this Court held that local governments have no
power to tax instrumentalities of the National Government, viz:
"Local governments have no power to tax instrumentalities of the National Government.
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role is
governmental, which places it in the category of an agency or instrumentality of the Government.
Being an instrumentality of the Government, PAGCOR should be and actually is exempt from local
taxes. Otherwise, its operation might be burdened, impeded or subjected to control by a mere
local government.
'The states have no power by taxation or otherwise, to retard, impede, burden or in any manner
control the operation of constitutional laws enacted by Congress to carry into execution the
powers vested in the federal government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)'
This doctrine emanates from the 'supremacy' of the National Government over local governments.
'Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of power
on the part of the States to touch, in that way (taxation) at least, the instrumentalities of the United
States (Johnson v. Maryland, 254 US 51) and it can be agreed that no state or political subdivision
can regulate a federal instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even seriously burden it from accomplishment of them.' (Antieau, Modern
Constitutional Law, Vol. 2, p. 140, italics supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of what
local authorities may perceive to be undesirable activities or enterprise using the power to tax as '
a tool regulation' (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the 'power to destroy' (Mc Culloch v.
Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very entity which
has the inherent power to wield it."27
Petitioner contends that section 193 of Rep. Act No. 7160, withdrawing the tax privileges of
government-owned or controlled corporations, is in the nature of an implied repeal. A special law,
its charter cannot be amended or modified impliedly by the local government code which is a
general law. Consequently, petitioner claims that its exemption from all taxes, fees or charges
under its charter subsists despite the passage of the LGC, viz:
"It is a well-settled rule of statutory construction that repeals of statutes by implication are not
favored and as much as possible, effect must be given to all enactments of the legislature.
Moreover, it has to be conceded that the charter of the NPC constitutes a special law. Republic
Act No. 7160, is a general law. It is a basic rule in statutory construction that the enactment of a
later legislation which is a general law cannot be construed to have repealed a special law. Where
there is a conflict between a general law and a special statute, the special statute should prevail
since it evinces the legislative intent more clearly than the general statute."28
Finally, petitioner submits that the charter of the NPC, being a valid exercise of police power,
should prevail over the LGC. It alleges that the power of the local government to impose franchise
tax is subordinate to petitioner's exemption from taxation; "police power being the most pervasive,
the least limitable and most demanding of all powers, including the power of taxation."29
The petition is without merit.
Taxes are the lifeblood of the government,30 for without taxes, the government can neither exist
nor endure. A principal attribute of sovereignty,31 the exercise of taxing power derives its source
from the very existence of the state whose social contract with its citizens obliges it to promote
public interest and common good. The theory behind the exercise of the power to tax emanates
from necessity;32 without taxes, government cannot fulfill its mandate of promoting the general
welfare and well-being of the people.
In recent years, the increasing social challenges of the times expanded the scope of state activity,
and taxation has become a tool to realize social justice and the equitable distribution of wealth,
economic progress and the protection of local industries as well as public welfare and similar
objectives.33 Taxation assumes even greater significance with the ratification of the 1987
Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local
legislative bodies are now given direct authority to levy taxes, fees and other charges 34 pursuant to
Article X, section 5 of the 1987 Constitution, viz:
"Section 5.- Each Local Government unit shall have the power to create its own sources of
revenue, to levy taxes, fees and charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and
charges shall accrue exclusively to the Local Governments."
This paradigm shift results from the realization that genuine development can be achieved only by
strengthening local autonomy and promoting decentralization of governance. For a long time, the
country's highly centralized government structure has bred a culture of dependence among local
government leaders upon the national leadership. It has also "dampened the spirit of initiative,
innovation and imaginative resilience in matters of local development on the part of local
government leaders."35 The only way to shatter this culture of dependence is to give the LGUs a
wider role in the delivery of basic services, and confer them sufficient powers to generate their
own sources for the purpose. To achieve this goal, section 3 of Article X of the 1987 Constitution
mandates Congress to enact a local government code that will, consistent with the basic policy of
local autonomy, set the guidelines and limitations to this grant of taxing powers, viz:
"Section 3. The Congress shall enact a local government code which shall provide for a more
responsive and accountable local government structure instituted through a system of
decentralization with effective mechanisms of recall, initiative, and referendum, allocate among the
different local government units their powers, responsibilities, and resources, and provide for the
qualifications, election, appointment and removal, term, salaries, powers and functions and duties
of local officials, and all other matters relating to the organization and operation of the local units."
To recall, prior to the enactment of the Rep. Act No. 7160,36 also known as the Local Government
Code of 1991 (LGC), various measures have been enacted to promote local autonomy. These
include the Barrio Charter of 1959,37 the Local Autonomy Act of 1959,38 the Decentralization Act of
196739 and the Local Government Code of 1983.40 Despite these initiatives, however, the shackles
of dependence on the national government remained. Local government units were faced with the
same problems that hamper their capabilities to participate effectively in the national development
efforts, among which are: (a) inadequate tax base, (b) lack of fiscal control over external sources
of income, (c) limited authority to prioritize and approve development projects, (d) heavy
dependence on external sources of income, and (e) limited supervisory control over personnel of
national line agencies.41
Considered as the most revolutionary piece of legislation on local autonomy,42 the LGC effectively
deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to include taxes
which were prohibited by previous laws such as the imposition of taxes on forest products, forest
concessionaires, mineral products, mining operations, and the like. The LGC likewise provides
enough flexibility to impose tax rates in accordance with their needs and capabilities. It does not
prescribe graduated fixed rates but merely specifies the minimum and maximum tax rates and
leaves the determination of the actual rates to the respective sanggunian.43
One of the most significant provisions of the LGC is the removal of the blanket exclusion of
instrumentalities and agencies of the national government from the coverage of local taxation.
Although as a general rule, LGUs cannot impose taxes, fees or charges of any kind on the
National Government, its agencies and instrumentalities, this rule now admits an exception, i.e.,
when specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the
aforementioned entities, viz:
"Section 133. Common Limitations on the Taxing Powers of the 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:
(o) Taxes, fees, or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units." (emphasis supplied)
In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. Philippine Amusement
and Gaming Corporation44 relied upon by the petitioner to support its claim no longer applies. To
emphasize, the Basco case was decided prior to the effectivity of the LGC, when no law
empowering the local government units to tax instrumentalities of the National Government was in
effect. However, as this Court ruled in the case of Mactan Cebu International Airport Authority
(MCIAA) vs. Marcos,45 nothing prevents Congress from decreeing that even instrumentalities or
agencies of the government performing governmental functions may be subject to tax.46 In
enacting the LGC, Congress exercised its prerogative to tax instrumentalities and agencies of
government as it sees fit. Thus, after reviewing the specific provisions of the LGC, this Court held
that MCIAA, although an instrumentality of the national government, was subject to real property
tax, viz:
"Thus, reading together sections 133, 232, and 234 of the LGC, we conclude that as a general
rule, as laid down in section 133, the taxing power of local governments cannot extend to the levy
of inter alia, 'taxes, fees and charges of any kind on the national government, its agencies and
instrumentalities, and local government units'; however, pursuant to section 232, provinces, cities
and municipalities in the Metropolitan Manila Area may impose the real property tax except
on, inter alia, 'real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted for consideration or
otherwise, to a taxable person as provided in the item (a) of the first paragraph of section 12.'" 47
In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the
respondent city government to impose on the petitioner the franchise tax in question.
In its general signification, a franchise is a privilege conferred by government authority, which does
not belong to citizens of the country generally as a matter of common right.48 In its specific sense,
a franchise may refer to a general or primary franchise, or to a special or secondary franchise. The
former relates to the right to exist as a corporation, by virtue of duly approved articles of
incorporation, or a charter pursuant to a special law creating the corporation.49 The right under a
primary or general franchise is vested in the individuals who compose the corporation and not in
the corporation itself.50 On the other hand, the latter refers to the right or privileges conferred upon
an existing corporation such as the right to use the streets of a municipality to lay pipes of tracks,
erect poles or string wires.51 The rights under a secondary or special franchise are vested in the
corporation and may ordinarily be conveyed or mortgaged under a general power granted to a
corporation to dispose of its property, except such special or secondary franchises as are charged
with a public use.52
In section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a
secondary or special franchise. This is to avoid any confusion when the word franchise is used in
the context of taxation. As commonly used, a franchise tax is "a tax on the privilege of transacting
business in the state and exercising corporate franchises granted by the state."53 It is not levied on
the corporation simply for existing as a corporation, upon its property54 or its income,55 but on its
exercise of the rights or privileges granted to it by the government. Hence, a corporation need not
pay franchise tax from the time it ceased to do business and exercise its franchise. 56 It is within
this context that the phrase "tax on businesses enjoying a franchise" in section 137 of the LGC
should be interpreted and understood. Verily, to determine whether the petitioner is covered by the
franchise tax in question, the following requisites should concur: (1) that petitioner has a
"franchise" in the sense of a secondary or special franchise; and (2) that it is exercising its rights or
privileges under this franchise within the territory of the respondent city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act No.
7395, constitutes petitioner's primary and secondary franchises. It serves as the petitioner's
charter, defining its composition, capitalization, the appointment and the specific duties of its
corporate officers, and its corporate life span.57 As its secondary franchise, Commonwealth Act
No. 120, as amended, vests the petitioner the following powers which are not available to ordinary
corporations, viz:
(e) To conduct investigations and surveys for the development of water power in any part of the
Philippines;
(f) To take water from any public stream, river, creek, lake, spring or waterfall in the Philippines, for
the purposes specified in this Act; to intercept and divert the flow of waters from lands of riparian
owners and from persons owning or interested in waters which are or may be necessary for said
purposes, upon payment of just compensation therefor; to alter, straighten, obstruct or increase
the flow of water in streams or water channels intersecting or connecting therewith or contiguous
to its works or any part thereof: Provided, That just compensation shall be paid to any person or
persons whose property is, directly or indirectly, adversely affected or damaged thereby;
(g) To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs, pipes,
mains, transmission lines, power stations and substations, and other works for the purpose of
developing hydraulic power from any river, creek, lake, spring and waterfall in the Philippines and
supplying such power to the inhabitants thereof; to acquire, construct, install, maintain, operate,
and improve gas, oil, or steam engines, and/or other prime movers, generators and machinery in
plants and/or auxiliary plants for the production of electric power; to establish, develop, operate,
maintain and administer power and lighting systems for the transmission and utilization of its
power generation; to sell electric power in bulk to (1) industrial enterprises, (2) city, municipal or
provincial systems and other government institutions, (3) electric cooperatives, (4) franchise
holders, and (5) real estate subdivisions x x x;
(h) To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber and otherwise
dispose of property incident to, or necessary, convenient or proper to carry out the purposes for
which the Corporation was created: Provided, That in case a right of way is necessary for its
transmission lines, easement of right of way shall only be sought: Provided, however, That in case
the property itself shall be acquired by purchase, the cost thereof shall be the fair market value at
the time of the taking of such property;
(i) To construct works across, or otherwise, any stream, watercourse, canal, ditch, flume, street,
avenue, highway or railway of private and public ownership, as the location of said works may
require xxx;
(j) To exercise the right of eminent domain for the purpose of this Act in the manner provided by
law for instituting condemnation proceedings by the national, provincial and municipal
governments;
(m) To cooperate with, and to coordinate its operations with those of the National Electrification
Administration and public service entities;
(n) To exercise complete jurisdiction and control over watersheds surrounding the reservoirs of
plants and/or projects constructed or proposed to be constructed by the Corporation. Upon
determination by the Corporation of the areas required for watersheds for a specific project, the
Bureau of Forestry, the Reforestation Administration and the Bureau of Lands shall, upon written
advice by the Corporation, forthwith surrender jurisdiction to the Corporation of all areas embraced
within the watersheds, subject to existing private rights, the needs of waterworks systems, and the
requirements of domestic water supply;
(o) In the prosecution and maintenance of its projects, the Corporation shall adopt measures to
prevent environmental pollution and promote the conservation, development and maximum
utilization of natural resources xxx "58
With these powers, petitioner eventually had the monopoly in the generation and distribution of
electricity. This monopoly was strengthened with the issuance of Pres. Decree No.
40,59 nationalizing the electric power industry. Although Exec. Order No. 21560 thereafter allowed
private sector participation in the generation of electricity, the transmission of electricity remains
the monopoly of the petitioner.
Petitioner also fulfills the second requisite. It is operating within the respondent city government's
territorial jurisdiction pursuant to the powers granted to it by Commonwealth Act No. 120, as
amended. From its operations in the City of Cabanatuan, petitioner realized a gross income of
P107,814,187.96 in 1992. Fulfilling both requisites, petitioner is, and ought to be, subject of the
franchise tax in question.
Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply
because its stocks are wholly owned by the National Government, and its charter characterized it
as a "non-profit" organization.
These contentions must necessarily fail.
To stress, a franchise tax is imposed based not on the ownership but on the exercise by the
corporation of a privilege to do business. The taxable entity is the corporation which exercises the
franchise, and not the individual stockholders. By virtue of its charter, petitioner was created as a
separate and distinct entity from the National Government. It can sue and be sued under its own
name,61 and can exercise all the powers of a corporation under the Corporation Code. 62
To be sure, the ownership by the National Government of its entire capital stock does not
necessarily imply that petitioner is not engaged in business. Section 2 of Pres. Decree No.
202963 classifies government-owned or controlled corporations (GOCCs) into those performing
governmental functions and those performing proprietary functions, viz:
"A government-owned or controlled corporation is a stock or a non-stock corporation, whether
performing governmental or proprietary functions, which is directly chartered by special law or if
organized under the general corporation law is owned or controlled by the government directly, or
indirectly through a parent corporation or subsidiary corporation, to the extent of at least a majority
of its outstanding voting capital stock x x x." (emphases supplied)
Governmental functions are those pertaining to the administration of government, and as such,
are treated as absolute obligation on the part of the state to perform while proprietary functions are
those that are undertaken only by way of advancing the general interest of society, and are merely
optional on the government.64 Included in the class of GOCCs performing proprietary functions are
"business-like" entities such as the National Steel Corporation (NSC), the National Development
Corporation (NDC), the Social Security System (SSS), the Government Service Insurance System
(GSIS), and the National Water Sewerage Authority (NAWASA),65 among others.
Petitioner was created to "undertake the development of hydroelectric generation of power and the
production of electricity from nuclear, geothermal and other sources, as well as the transmission of
electric power on a nationwide basis."66 Pursuant to this mandate, petitioner generates power and
sells electricity in bulk. Certainly, these activities do not partake of the sovereign functions of the
government. They are purely private and commercial undertakings, albeit imbued with public
interest. The public interest involved in its activities, however, does not distract from the true
nature of the petitioner as a commercial enterprise, in the same league with similar public utilities
like telephone and telegraph companies, railroad companies, water supply and irrigation
companies, gas, coal or light companies, power plants, ice plant among others; all of which are
declared by this Court as ministrant or proprietary functions of government aimed at advancing the
general interest of society.67
A closer reading of its charter reveals that even the legislature treats the character of the
petitioner's enterprise as a "business," although it limits petitioner's profits to twelve percent
(12%), viz:68
"(n) When essential to the proper administration of its corporate affairs or necessary for the proper
transaction of its business or to carry out the purposes for which it was organized, to contract
indebtedness and issue bonds subject to approval of the President upon recommendation of the
Secretary of Finance;
(o) To exercise such powers and do such things as may be reasonably necessary to carry out
the business and purposes for which it was organized, or which, from time to time, may be
declared by the Board to be necessary, useful, incidental or auxiliary to accomplish the said
purpose xxx."(emphases supplied)
It is worthy to note that all other private franchise holders receiving at least sixty percent (60%) of
its electricity requirement from the petitioner are likewise imposed the cap of twelve percent (12%)
on profits.69 The main difference is that the petitioner is mandated to devote "all its returns from its
capital investment, as well as excess revenues from its operation, for expansion"70 while other
franchise holders have the option to distribute their profits to its stockholders by declaring
dividends. We do not see why this fact can be a source of difference in tax treatment. In both
instances, the taxable entity is the corporation, which exercises the franchise, and not the
individual stockholders.
We also do not find merit in the petitioner's contention that its tax exemptions under its charter
subsist despite the passage of the LGC.
As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown
to exist clearly and categorically, and supported by clear legal provisions.71 In the case at bar, the
petitioner's sole refuge is section 13 of Rep. Act No. 6395 exempting from, among others, "all
income taxes, franchise taxes and realty taxes to be paid to the National Government, its
provinces, cities, municipalities and other government agencies and instrumentalities." However,
section 193 of the LGC withdrew, subject to limited exceptions, the sweeping tax privileges
previously enjoyed by private and public corporations. Contrary to the contention of petitioner,
section 193 of the LGC is an express, albeit general, repeal of all statutes granting tax exemptions
from local taxes.72 It reads:
"Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations, except local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code." (emphases
supplied)
It is a basic precept of statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio
alterius.73 Not being a local water district, a cooperative registered under R.A. No. 6938, or a non-
stock and non-profit hospital or educational institution, petitioner clearly does not belong to the
exception. It is therefore incumbent upon the petitioner to point to some provisions of the LGC that
expressly grant it exemption from local taxes.
But this would be an exercise in futility. Section 137 of the LGC clearly states that the LGUs can
impose franchise tax "notwithstanding any exemption granted by any law or other special law."
This particular provision of the LGC does not admit any exception. In City Government of San
Pablo, Laguna v. Reyes,74 MERALCO's exemption from the payment of franchise taxes was
brought as an issue before this Court. The same issue was involved in the subsequent case
of Manila Electric Company v. Province of Laguna.75 Ruling in favor of the local government in
both instances, we ruled that the franchise tax in question is imposable despite any exemption
enjoyed by MERALCO under special laws, viz:
"It is our view that petitioners correctly rely on provisions of Sections 137 and 193 of the LGC to
support their position that MERALCO's tax exemption has been withdrawn. The explicit language
of section 137 which authorizes the province to impose franchise tax 'notwithstanding any
exemption granted by any law or other special law' is all-encompassing and clear. The franchise
tax is imposable despite any exemption enjoyed under special laws.
Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that unless
otherwise provided in this Code, tax exemptions or incentives granted to or presently enjoyed by
all persons, whether natural or juridical, including government-owned or controlled corporations
except (1) local water districts, (2) cooperatives duly registered under R.A. 6938, (3) non-stock
and non-profit hospitals and educational institutions, are withdrawn upon the effectivity of this
code, the obvious import is to limit the exemptions to the three enumerated entities. It is a basic
precept of statutory construction that the express mention of one person, thing, act, or
consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio
alterius. In the absence of any provision of the Code to the contrary, and we find no other
provision in point, any existing tax exemption or incentive enjoyed by MERALCO under existing
law was clearly intended to be withdrawn.
Reading together sections 137 and 193 of the LGC, we conclude that under the LGC the local
government unit may now impose a local tax at a rate not exceeding 50% of 1% of the gross
annual receipts for the preceding calendar based on the incoming receipts realized within its
territorial jurisdiction. The legislative purpose to withdraw tax privileges enjoyed under existing law
or charter is clearly manifested by the language used on (sic) Sections 137 and 193 categorically
withdrawing such exemption subject only to the exceptions enumerated. Since it would be not only
tedious and impractical to attempt to enumerate all the existing statutes providing for special tax
exemptions or privileges, the LGC provided for an express, albeit general, withdrawal of such
exemptions or privileges. No more unequivocal language could have been used." 76(emphases
supplied).
It is worth mentioning that section 192 of the LGC empowers the LGUs, through ordinances duly
approved, to grant tax exemptions, initiatives or reliefs.77 But in enacting section 37 of Ordinance
No. 165-92 which imposes an annual franchise tax "notwithstanding any exemption granted by law
or other special law," the respondent city government clearly did not intend to exempt the
petitioner from the coverage thereof.
Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance
and support myriad activities of the local government units for the delivery of basic services
essential to the promotion of the general welfare and the enhancement of peace, progress, and
prosperity of the people. As this Court observed in the Mactan case, "the original reasons for the
withdrawal of tax exemption privileges granted to government-owned or controlled corporations
and all other units of government were that such privilege resulted in serious tax base erosion and
distortions in the tax treatment of similarly situated enterprises."78 With the added burden of
devolution, it is even more imperative for government entities to share in the requirements of
development, fiscal or otherwise, by paying taxes or other charges due from them.
IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and Resolution of
the Court of Appeals dated March 12, 2001 and July 10, 2001, respectively, are hereby
AFFIRMED.SO ORDERED.
5.PHILIPPINE AIRLINES, INC., plaintiff-appellant, vs.
ROMEO F. EDU in his capacity as Land Transportation Commissioner, and UBALDO
CARBONELL, in his capacity as National Treasurer, defendants-appellants.
Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.
GUTIERREZ, JR., J.:
What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees?
This question has been brought before this Court in the past. The parties are, in effect, asking for
a re-examination of the latest decision on this issue.
This appeal was certified to us as one involving a pure question of law by the Court of Appeals in
a case where the then Court of First Instance of Rizal dismissed the portion-about complaint for
refund of registration fees paid under protest.
The disputed registration fees were imposed by the appellee, Commissioner Romeo F. Elevate
pursuant to Section 8, Republic Act No. 4136, otherwise known as the Land Transportation and
Traffic Code.
The Philippine Airlines (PAL) is a corporation organized and existing under the laws of the
Philippines and engaged in the air transportation business under a legislative franchise, Act No.
42739, as amended by Republic Act Nos. 25). and 269.1 Under its franchise, PAL is exempt from
the payment of taxes. The pertinent provision of the franchise provides as follows:
Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to
the National Government during the life of this franchise a tax of two per cent of the gross revenue
or gross earning derived by the grantee from its operations under this franchise. Such tax shall be
due and payable quarterly and shall be in lieu of all taxes of any kind, nature or description, levied,
established or collected by any municipal, provincial or national automobiles, Provided, that if,
after the audit of the accounts of the grantee by the Commissioner of Internal Revenue, a
deficiency tax is shown to be due, the deficiency tax shall be payable within the ten days from the
receipt of the assessment. The grantee shall pay the tax on its real property in conformity with
existing law.
On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956) PAL has,
since 1956, not been paying motor vehicle registration fees.
Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a regulation
requiring all tax exempt entities, among them PAL to pay motor vehicle registration fees.
Despite PAL's protestations, the appellee refused to register the appellant's motor vehicles unless
the amounts imposed under Republic Act 4136 were paid. The appellant thus paid, under protest,
the amount of P19,529.75 as registration fees of its motor vehicles.
After paying under protest, PAL through counsel, wrote a letter dated May 19,1971, to
Commissioner Edu demanding a refund of the amounts paid, invoking the ruling in Calalang v.
Lorenzo (97 Phil. 212 [1951]) where it was held that motor vehicle registration fees are in reality
taxes from the payment of which PAL is exempt by virtue of its legislative franchise.
Appellee Edu denied the request for refund basing his action on the decision in Republic v.
Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the effect that motor vehicle
registration fees are regulatory exceptional. and not revenue measures and, therefore, do not
come within the exemption granted to PAL? under its franchise. Hence, PAL filed the complaint
against Land Transportation Commissioner Romeo F. Edu and National Treasurer Ubaldo
Carbonell with the Court of First Instance of Rizal, Branch 18 where it was docketed as Civil Case
No. Q-15862.
Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI Carbonell in his
capacity as National Treasurer, filed a motion to dismiss alleging that the complaint states no
cause of action. In support of the motion to dismiss, defendants repatriation the ruling in Republic
v. Philippine Rabbit Bus Lines, Inc., (supra) that registration fees of motor vehicles are not taxes,
but regulatory fees imposed as an incident of the exercise of the police power of the state. They
contended that while Act 4271 exempts PAL from the payment of any tax except two per cent on
its gross revenue or earnings, it does not exempt the plaintiff from paying regulatory fees, such as
motor vehicle registration fees. The resolution of the motion to dismiss was deferred by the Court
until after trial on the merits.
On April 24, 1973, the trial court rendered a decision dismissing the appellant's complaint "moved
by the later ruling laid down by the Supreme Court in the case or Republic v. Philippine Rabbit Bus
Lines, Inc., (supra)." From this judgment, PAL appealed to the Court of Appeals which certified the
case to us.
Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc. (supra) cited by PAL
and Commissioner Romeo F. Edu respectively, discuss the main points of contention in the case
at bar.
Resolving the issue in the Philippine Rabbit case, this Court held:
"The registration fee which defendant-appellee had to pay was imposed by Section 8 of the
Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its heading speaks of "registration
fees." The term is repeated four times in the body thereof. Equally so, mention is made of the "fee
for registration." (Ibid., Subsection G) A subsection starts with a categorical statement "No fees
shall be charged." (lbid.,Subsection H) The conclusion is difficult to resist therefore that the Motor
Vehicle Act requires the payment not of a tax but of a registration fee under the police power.
Hence the incipient, of the section relied upon by defendant-appellee under the Back Pay Law, It
is not held liable for a tax but for a registration fee. It therefore cannot make use of a backpay
certificate to meet such an obligation.
Any vestige of any doubt as to the correctness of the above conclusion should be dissipated
by Republic Act No. 5448. ([1968]. Section 3 thereof as to the imposition of additional tax on
privately-owned passenger automobiles, motorcycles and scooters was amended by Republic Act
No. 5470 which is (sic) approved on May 30, 1969.) A special science fund was thereby created
and its title expressly sets forth that a tax on privately-owned passenger automobiles, motorcycles
and scooters was imposed. The rates thereof were provided for in its Section 3 which clearly
specifies the" Philippine tax."(Cooley to be paid as distinguished from the registration fee under
the Motor Vehicle Act. There cannot be any clearer expression therefore of the legislative will,
even on the assumption that the earlier legislation could by subdivision the point be susceptible of
the interpretation that a tax rather than a fee was levied. What is thus most apparent is that where
the legislative body relies on its authority to tax it expressly so states, and where it is enacting a
regulatory measure, it is equally exploded (at p. 22,1969
In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court, on the other hand,
held:
The charges prescribed by the Revised Motor Vehicle Law for the registration of motor vehicles
are in section 8 of that law called "fees". But the appellation is no impediment to their being
considered taxes if taxes they really are. For not the name but the object of the charge determines
whether it is a tax or a fee. Geveia speaking, taxes are for revenue, whereas fees are exceptional.
for purposes of regulation and inspection and are for that reason limited in amount to what is
necessary to cover the cost of the services rendered in that connection. Hence, a charge fixed by
statute for the service to be person,-When by an officer, where the charge has no relation to the
value of the services performed and where the amount collected eventually finds its way into the
treasury of the branch of the government whose officer or officers collected the chauffeur, is not a
fee but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p. 110.)
From the data submitted in the court below, it appears that the expenditures of the Motor Vehicle
Office are but a small portion—about 5 per centum—of the total collections from motor vehicle
registration fees. And as proof that the money collected is not intended for the expenditures of that
office, the law itself provides that all such money shall accrue to the funds for the construction and
maintenance of public roads, streets and bridges. It is thus obvious that the fees are not collected
for regulatory purposes, that is to say, as an incident to the enforcement of regulations governing
the operation of motor vehicles on public highways, for their express object is to provide revenue
with which the Government is to discharge one of its principal functions—the construction and
maintenance of public highways for everybody's use. They are veritable taxes, not merely fees.
As a matter of fact, the Revised Motor Vehicle Law itself now regards those fees as taxes, for it
provides that "no other taxes or fees than those prescribed in this Act shall be imposed," thus
implying that the charges therein imposed—though called fees—are of the category of taxes. The
provision is contained in section 70, of subsection (b), of the law, as amended by section 17 of
Republic Act 587, which reads:
Sec. 70(b) No other taxes or fees than those prescribed in this Act shall be imposed for the
registration or operation or on the ownership of any motor vehicle, or for the exercise of the
profession of chauffeur, by any municipal corporation, the provisions of any city charter to the
contrary notwithstanding: Provided, however, That any provincial board, city or municipal council
or board, or other competent authority may exact and collect such reasonable and equitable toll
fees for the use of such bridges and ferries, within their respective jurisdiction, as may be
authorized and approved by the Secretary of Public Works and Communications, and also for the
use of such public roads, as may be authorized by the President of the Philippines upon the
recommendation of the Secretary of Public Works and Communications, but in none of these
cases, shall any toll fee." be charged or collected until and unless the approved schedule of tolls
shall have been posted levied, in a conspicuous place at such toll station. (at pp. 213-214)
Motor vehicle registration fees were matters originally governed by the Revised Motor Vehicle Law
(Act 3992 [19511) as amended by Commonwealth Act 123 and Republic Acts Nos. 587 and 1621.
Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the Land
Transportation Code, (as amended by Rep. Acts Nos. 5715 and 64-67, P.D. Nos. 382, 843, 896,
110.) and BP Blg. 43, 74 and 398).
Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and remained
unsegregated, by Rep. Act Nos. 587 and 1603) states:
Section 73. Disposal of moneys collected.—Twenty per centum of the money collected under
the provisions of this Act shall accrue to the road and bridge funds of the different provinces and
chartered cities in proportion to the centum shall during the next previous year and the remaining
eighty per centum shall be deposited in the Philippine Treasury to create a special fund for the
construction and maintenance of national and provincial roads and bridges. as well as the streets
and bridges in the chartered cities to be alloted by the Secretary of Public Works and
Communications for projects recommended by the Director of Public Works in the different
provinces and chartered cities. ....
Presently, Sec. 61 of the Land Transportation and Traffic Code provides:
Sec. 61. Disposal of Mortgage. Collected—Monies collected under the provisions of this Act
shall be deposited in a special trust account in the National Treasury to constitute the Highway
Special Fund, which shall be apportioned and expended in accordance with the provisions of the"
Philippine Highway Act of 1935. "Provided, however, That the amount necessary to maintain and
equip the Land Transportation Commission but not to exceed twenty per cent of the total collection
during one year, shall be set aside for the purpose. (As amended by RA 64-67, approved August
6, 1971).
It appears clear from the above provisions that the legislative intent and purpose behind the law
requiring owners of vehicles to pay for their registration is mainly to raise funds for the construction
and maintenance of highways and to a much lesser degree, pay for the operating expenses of the
administering agency. On the other hand, the Philippine Rabbit case mentions a presumption
arising from the use of the term "fees," which appears to have been favored by the legislature to
distinguish fees from other taxes such as those mentioned in Section 13 of Rep. Act 4136 which
reads:
Sec. 13. Payment of taxes upon registration.—No original registration of motor vehicles subject to
payment of taxes, customs s duties or other charges shall be accepted unless proof of payment of
the taxes due thereon has been presented to the Commission.
referring to taxes other than those imposed on the registration, operation or ownership of a motor
vehicle (Sec. 59, b, Rep. Act 4136, as amended).
Fees may be properly regarded as taxes even though they also serve as an instrument of
regulation, As stated by a former presiding judge of the Court of Tax Appeals and writer on various
aspects of taxpayers
It is possible for an exaction to be both tax arose. regulation. License fees are changes. looked to
as a source of revenue as well as a means of regulation (Sonzinky v. U.S., 300 U.S. 506) This is
true, for example, of automobile license fees. Isabela such case, the fees may properly be
regarded as taxes even though they also serve as an instrument of regulation. If the purpose is
primarily revenue, or if revenue is at least one of the real and substantial purposes, then the
exaction is properly called a tax. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley on Taxation
(2nd Ed.) 592, 593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta 98 Phil. 198.) These
exactions are sometimes called regulatory taxes. (See Secs. 4701, 4711, 4741, 4801, 4811, 4851,
and 4881, U.S. Internal Revenue Code of 1954, which classify taxes on tobacco and alcohol as
regulatory taxes.) (Umali, Reviewer in Taxation, 1980, pp. 12-13, citing Cooley on Taxation, 2nd
Edition, 591-593).
Indeed, taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil.
148).If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax (Umali, Id.) Such is the case of motor vehicle
registration fees. The conclusions become inescapable in view of Section 70(b) of Rep. Act 587
quoted in the Calalang case. The same provision appears as Section 591-593). in the Land
Transportation code. It is patent therefrom that the legislators had in mind a regulatory tax as the
law refers to the imposition on the registration, operation or ownership of a motor vehicle as a "tax
or fee." Though nowhere in Rep. Act 4136 does the law specifically state that the imposition is a
tax, Section 591-593). speaks of "taxes." or fees ... for the registration or operation or on the
ownership of any motor vehicle, or for the exercise of the profession of chauffeur ..." making the
intent to impose a tax more apparent. Thus, even Rep. Act 5448 cited by the respondents, speak
of an "additional" tax," where the law could have referred to an original tax and not one in
addition to the tax already imposed on the registration, operation, or ownership of a motor vehicle
under Rep. Act 41383. Simply put, if the exaction under Rep. Act 4136 were merely a regulatory
fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks of
other "fees," such as the special permit fees for certain types of motor vehicles (Sec. 10) and
additional fees for change of registration (Sec. 11). These are not to be understood as taxes
because such fees are very minimal to be revenue-raising. Thus, they are not mentioned by Sec.
591-593). of the Code as taxes like the motor vehicle registration fee and chauffers' license fee.
Such fees are to go into the expenditures of the Land Transportation Commission as provided for
in the last proviso of see. 61, aforequoted.
It is quite apparent that vehicle registration fees were originally simple exceptional. intended only
for rigidly purposes in the exercise of the State's police powers. Over the years, however, as
vehicular traffic exploded in number and motor vehicles became absolute necessities without
which modem life as we know it would stand still, Congress found the registration of vehicles a
very convenient way of raising much needed revenues. Without changing the earlier deputy. of
registration payments as "fees," their nature has become that of "taxes."
In view of the foregoing, we rule that motor vehicle registration fees as at present exacted
pursuant to the Land Transportation and Traffic Code are actually taxes intended for additional
revenues. of government even if one fifth or less of the amount collected is set aside for the
operating expenses of the agency administering the program.
May the respondent administrative agency be required to refund the amounts stated in the
complaint of PAL?
The answer is NO.
The claim for refund is made for payments given in 1971. It is not clear from the records as to what
payments were made in succeeding years. We have ruled that Section 24 of Rep. Act No. 5448
dated June 27, 1968, repealed all earlier tax exemptions Of corporate taxpayers found in
legislative franchises similar to that invoked by PAL in this case.
In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al. (G.R. No. 615)."
July 11, 1985), this Court ruled:
Under its original franchise, Republic Act No. 21); enacted in 1957, petitioner Radio
Communications of the Philippines, Inc., was subject to both the franchise tax and income tax. In
1964, however, petitioner's franchise was amended by Republic Act No. 41-42). to the effect that
its franchise tax of one and one-half percentum (1-1/2%) of all gross receipts was provided as "in
lieu of any and all taxes of any kind, nature, or description levied, established, or collected by any
authority whatsoever, municipal, provincial, or national from which taxes the grantee is hereby
expressly exempted." The issue raised to this Court now is the validity of the respondent court's
decision which ruled that the exemption under Republic Act No. 41-42). was repealed by Section
24 of Republic Act No. 5448 dated June 27, 1968 which reads:
"(d) The provisions of existing special or general laws to the contrary notwithstanding, all corporate
taxpayers not specifically exempt under Sections 24 (c) (1) of this Code shall pay the rates
provided in this section. All corporations, agencies, or instrumentalities owned or controlled by the
government, including the Government Service Insurance System and the Social Security System
but excluding educational institutions, shall pay such rate of tax upon their taxable net income as
are imposed by this section upon associations or corporations engaged in a similar business or
industry. "
An examination of Section 24 of the Tax Code as amended shows clearly that the law intended all
corporate taxpayers to pay income tax as provided by the statute. There can be no doubt as to the
power of Congress to repeal the earlier exemption it granted. Article XIV, Section 8 of the 1935
Constitution and Article XIV, Section 5 of the Constitution as amended in 1973 expressly provide
that no franchise shall be granted to any individual, firm, or corporation except under the condition
that it shall be subject to amendment, alteration, or repeal by the legislature when the public
interest so requires. There is no question as to the public interest involved. The country needs
increased revenues. The repealing clause is clear and unambiguous. There is a listing of entities
entitled to tax exemption. The petitioner is not covered by the provision. Considering the
foregoing, the Court Resolved to DENY the petition for lack of merit. The decision of the
respondent court is affirmed.
Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly imposed
because the tax exemption in the franchise of PAL was repealed during the period. However, an
amended franchise was given to PAL in 1979. Section 13 of Presidential Decree No. 1590, now
provides:
In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine
Government during the lifetime of this franchise whichever ofsubsections (a) and (b) hereunder will
result in a lower taxes.)
(a) The basic corporate income tax based on the grantee's annual net taxable income computed in
accordance with the provisions of the Internal Revenue Code; or
(b) A franchise tax of two per cent (2%) of the gross revenues. derived by the grantees from all
specific. without distinction as to transport or nontransport corporations; provided that with respect
to international airtransport service, only the gross passengers, mail, and freight revenues. from its
outgoing flights shall be subject to this law.
The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes,
duties, royalties, registration, license and other fees and charges of any kind, nature or description
imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national
authority or government, agency, now or in the future, including but not limited to the following:
(5) All taxes, fees and other charges on the registration, license, acquisition, and transfer of
airtransport equipment, motor vehicles, and all other personal or real property of the gravitates
(Pres. Decree 1590, 75 OG No. 15, 3259, April 9, 1979).
PAL's current franchise is clear and specific. It has removed the ambiguity found in the earlier law.
PAL is now exempt from the payment of any tax, fee, or other charge on the registration and
licensing of motor vehicles. Such payments are already included in the basic tax or franchise tax
provided in Subsections (a) and (b) of Section 13, P.D. 1590, and may no longer be exacted.
WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of registration
fees paid in 1971 is DENIED. The Land Transportation Franchising and Regulatory Board
(LTFRB) is enjoined functions-the collecting any tax, fee, or other charge on the registration and
licensing of the petitioner's motor vehicles from April 9, 1979 as provided in Presidential Decree
No. 1590. SO ORDERED.
6.VALENTIN TIO doing business under the name and style of OMI
ENTERPRISES, petitioner, vs.
VIDEOGRAM REGULATORY BOARD, MINISTER OF FINANCE, METRO MANILA
COMMISSION, CITY MAYOR and CITY TREASURER OF MANILA, respondents.
Nelson Y. Ng for petitioner.
The City Legal Officer for respondents City Mayor and City Treasurer.
MELENCIO-HERRERA, J.:
This petition was filed on September 1, 1986 by petitioner on his own behalf and purportedly on
behalf of other videogram operators adversely affected. It assails the constitutionality of
Presidential Decree No. 1987 entitled "An Act Creating the Videogram Regulatory Board" with
broad powers to regulate and supervise the videogram industry (hereinafter briefly referred to as
the BOARD). The Decree was promulgated on October 5, 1985 and took effect on April 10, 1986,
fifteen (15) days after completion of its publication in the Official Gazette.
On November 5, 1985, a month after the promulgation of the abovementioned decree,
Presidential Decree No. 1994 amended the National Internal Revenue Code providing, inter alia:
SEC. 134. Video Tapes. — There shall be collected on each processed video-tape cassette,
ready for playback, regardless of length, an annual tax of five pesos; Provided, That locally
manufactured or imported blank video tapes shall be subject to sales tax.
On October 23, 1986, the Greater Manila Theaters Association, Integrated Movie Producers,
Importers and Distributors Association of the Philippines, and Philippine Motion Pictures
Producers Association, hereinafter collectively referred to as the Intervenors, were permitted by
the Court to intervene in the case, over petitioner's opposition, upon the allegations that
intervention was necessary for the complete protection of their rights and that their "survival and
very existence is threatened by the unregulated proliferation of film piracy." The Intervenors were
thereafter allowed to file their Comment in Intervention.
The rationale behind the enactment of the DECREE, is set out in its preambular clauses as
follows:
1. WHEREAS, the proliferation and unregulated circulation of videograms including, among
others, videotapes, discs, cassettes or any technical improvement or variation thereof, have
greatly prejudiced the operations of moviehouses and theaters, and have caused a sharp decline
in theatrical attendance by at least forty percent (40%) and a tremendous drop in the collection of
sales, contractor's specific, amusement and other taxes, thereby resulting in substantial losses
estimated at P450 Million annually in government revenues;
2. WHEREAS, videogram(s) establishments collectively earn around P600 Million per annum from
rentals, sales and disposition of videograms, and such earnings have not been subjected to tax,
thereby depriving the Government of approximately P180 Million in taxes each year;
3. WHEREAS, the unregulated activities of videogram establishments have also affected the
viability of the movie industry, particularly the more than 1,200 movie houses and theaters
throughout the country, and occasioned industry-wide displacement and unemployment due to the
shutdown of numerous moviehouses and theaters;
4. "WHEREAS, in order to ensure national economic recovery, it is imperative for the Government
to create an environment conducive to growth and development of all business industries,
including the movie industry which has an accumulated investment of about P3 Billion;
5. WHEREAS, proper taxation of the activities of videogram establishments will not only alleviate
the dire financial condition of the movie industry upon which more than 75,000 families and
500,000 workers depend for their livelihood, but also provide an additional source of revenue for
the Government, and at the same time rationalize the heretofore uncontrolled distribution of
videograms;
6. WHEREAS, the rampant and unregulated showing of obscene videogram features constitutes a
clear and present danger to the moral and spiritual well-being of the youth, and impairs the
mandate of the Constitution for the State to support the rearing of the youth for civic efficiency and
the development of moral character and promote their physical, intellectual, and social well-being;
7. WHEREAS, civic-minded citizens and groups have called for remedial measures to curb these
blatant malpractices which have flaunted our censorship and copyright laws;
8. WHEREAS, in the face of these grave emergencies corroding the moral values of the people
and betraying the national economic recovery program, bold emergency measures must be
adopted with dispatch; ... (Numbering of paragraphs supplied).
Petitioner's attack on the constitutionality of the DECREE rests on the following grounds:
1. Section 10 thereof, which imposes a tax of 30% on the gross receipts payable to the local
government is a RIDER and the same is not germane to the subject matter thereof;
2. The tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint of trade in
violation of the due process clause of the Constitution;
3. There is no factual nor legal basis for the exercise by the President of the vast powers conferred
upon him by Amendment No. 6;
4. There is undue delegation of power and authority;
5. The Decree is an ex-post facto law; and
6. There is over regulation of the video industry as if it were a nuisance, which it is not.
We shall consider the foregoing objections in seriatim.
1. The Constitutional requirement that "every bill shall embrace only one subject which shall be
expressed in the title thereof" 1 is sufficiently complied with if the title be comprehensive enough to
include the general purpose which a statute seeks to achieve. It is not necessary that the title
express each and every end that the statute wishes to accomplish. The requirement is satisfied if
all the parts of the statute are related, and are germane to the subject matter expressed in the title,
or as long as they are not inconsistent with or foreign to the general subject and title. 2An act
having a single general subject, indicated in the title, may contain any number of provisions, no
matter how diverse they may be, so long as they are not inconsistent with or foreign to the general
subject, and may be considered in furtherance of such subject by providing for the method and
means of carrying out the general object." 3 The rule also is that the constitutional requirement as
to the title of a bill should not be so narrowly construed as to cripple or impede the power of
legislation. 4 It should be given practical rather than technical construction. 5
Tested by the foregoing criteria, petitioner's contention that the tax provision of the DECREE is a
rider is without merit. That section reads, inter alia:
Section 10. Tax on Sale, Lease or Disposition of Videograms. — Notwithstanding any provision of
law to the contrary, the province shall collect a tax of thirty percent (30%) of the purchase price or
rental rate, as the case may be, for every sale, lease or disposition of a videogram containing a
reproduction of any motion picture or audiovisual program. Fifty percent (50%) of the proceeds of
the tax collected shall accrue to the province, and the other fifty percent (50%) shall acrrue to the
municipality where the tax is collected; PROVIDED, That in Metropolitan Manila, the tax shall be
shared equally by the City/Municipality and the Metropolitan Manila Commission.
The foregoing provision is allied and germane to, and is reasonably necessary for the
accomplishment of, the general object of the DECREE, which is the regulation of the video
industry through the Videogram Regulatory Board as expressed in its title. The tax provision is not
inconsistent with, nor foreign to that general subject and title. As a tool for regulation 6 it is simply
one of the regulatory and control mechanisms scattered throughout the DECREE. The express
purpose of the DECREE to include taxation of the video industry in order to regulate and
rationalize the heretofore uncontrolled distribution of videograms is evident from Preambles 2 and
5, supra. Those preambles explain the motives of the lawmaker in presenting the measure. The
title of the DECREE, which is the creation of the Videogram Regulatory Board, is comprehensive
enough to include the purposes expressed in its Preamble and reasonably covers all its
provisions. It is unnecessary to express all those objectives in the title or that the latter be an index
to the body of the DECREE. 7
2. Petitioner also submits that the thirty percent (30%) tax imposed is harsh and oppressive,
confiscatory, and in restraint of trade. However, it is beyond serious question that a tax does not
cease to be valid merely because it regulates, discourages, or even definitely deters the activities
taxed. 8 The power to impose taxes is one so unlimited in force and so searching in extent, that
the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as
rest in the discretion of the authority which exercises it. 9 In imposing a tax, the legislature acts
upon its constituents. This is, in general, a sufficient security against erroneous and oppressive
taxation. 10
The tax imposed by the DECREE is not only a regulatory but also a revenue measure prompted
by the realization that earnings of videogram establishments of around P600 million per annum
have not been subjected to tax, thereby depriving the Government of an additional source of
revenue. It is an end-user tax, imposed on retailers for every videogram they make available for
public viewing. It is similar to the 30% amusement tax imposed or borne by the movie industry
which the theater-owners pay to the government, but which is passed on to the entire cost of the
admission ticket, thus shifting the tax burden on the buying or the viewing public. It is a tax that is
imposed uniformly on all videogram operators.
The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for
regulating the video industry, particularly because of the rampant film piracy, the flagrant violation
of intellectual property rights, and the proliferation of pornographic video tapes. And while it was
also an objective of the DECREE to protect the movie industry, the tax remains a valid imposition.
The public purpose of a tax may legally exist even if the motive which impelled the legislature to
impose the tax was to favor one industry over another. 11
It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has
been repeatedly held that "inequities which result from a singling out of one particular class for
taxation or exemption infringe no constitutional limitation". 12 Taxation has been made the
implement of the state's police power.13
At bottom, the rate of tax is a matter better addressed to the taxing legislature.
3. Petitioner argues that there was no legal nor factual basis for the promulgation of the DECREE
by the former President under Amendment No. 6 of the 1973 Constitution providing that
"whenever in the judgment of the President ... , there exists a grave emergency or a threat or
imminence thereof, or whenever the interim Batasang Pambansa or the regular National Assembly
fails or is unable to act adequately on any matter for any reason that in his judgment requires
immediate action, he may, in order to meet the exigency, issue the necessary decrees, orders, or
letters of instructions, which shall form part of the law of the land."
In refutation, the Intervenors and the Solicitor General's Office aver that the 8th "whereas" clause
sufficiently summarizes the justification in that grave emergencies corroding the moral values of
the people and betraying the national economic recovery program necessitated bold emergency
measures to be adopted with dispatch. Whatever the reasons "in the judgment" of the then
President, considering that the issue of the validity of the exercise of legislative power under the
said Amendment still pends resolution in several other cases, we reserve resolution of the
question raised at the proper time.
4. Neither can it be successfully argued that the DECREE contains an undue delegation of
legislative power. The grant in Section 11 of the DECREE of authority to the BOARD to "solicit the
direct assistance of other agencies and units of the government and deputize, for a fixed and
limited period, the heads or personnel of such agencies and units to perform enforcement
functions for the Board" is not a delegation of the power to legislate but merely a conferment of
authority or discretion as to its execution, enforcement, and implementation. "The true distinction
is between the delegation of power to make the law, which necessarily involves a discretion as to
what it shall be, and conferring authority or discretion as to its execution to be exercised under and
in pursuance of the law. The first cannot be done; to the latter, no valid objection can be
made." 14 Besides, in the very language of the decree, the authority of the BOARD to solicit such
assistance is for a "fixed and limited period" with the deputized agencies concerned being "subject
to the direction and control of the BOARD." That the grant of such authority might be the source of
graft and corruption would not stigmatize the DECREE as unconstitutional. Should the eventuality
occur, the aggrieved parties will not be without adequate remedy in law.
5. The DECREE is not violative of the ex post facto principle. An ex post facto law is, among other
categories, one which "alters the legal rules of evidence, and authorizes conviction upon less or
different testimony than the law required at the time of the commission of the offense." It is
petitioner's position that Section 15 of the DECREE in providing that:
All videogram establishments in the Philippines are hereby given a period of forty-five (45) days
after the effectivity of this Decree within which to register with and secure a permit from the
BOARD to engage in the videogram business and to register with the BOARD all their inventories
of videograms, including videotapes, discs, cassettes or other technical improvements or
variations thereof, before they could be sold, leased, or otherwise disposed of. Thereafter any
videogram found in the possession of any person engaged in the videogram business without the
required proof of registration by the BOARD, shall be prima facie evidence of violation of the
Decree, whether the possession of such videogram be for private showing and/or public
exhibition.
raises immediately a prima facie evidence of violation of the DECREE when the required proof of
registration of any videogram cannot be presented and thus partakes of the nature of an ex post
facto law.
The argument is untenable. As this Court held in the recent case of Vallarta vs. Court of Appeals,
et al. 15
... it is now well settled that "there is no constitutional objection to the passage of a law providing
that the presumption of innocence may be overcome by a contrary presumption founded upon the
experience of human conduct, and enacting what evidence shall be sufficient to overcome such
presumption of innocence" (People vs. Mingoa 92 Phil. 856 [1953] at 858-59, citing 1 COOLEY, A
TREATISE ON THE CONSTITUTIONAL LIMITATIONS, 639-641). And the "legislature may enact
that when certain facts have been proved that they shall be prima facie evidence of the existence
of the guilt of the accused and shift the burden of proof provided there be a rational connection
between the facts proved and the ultimate facts presumed so that the inference of the one from
proof of the others is not unreasonable and arbitrary because of lack of connection between the
two in common experience". 16
Applied to the challenged provision, there is no question that there is a rational connection
between the fact proved, which is non-registration, and the ultimate fact presumed which is
violation of the DECREE, besides the fact that the prima facie presumption of violation of the
DECREE attaches only after a forty-five-day period counted from its effectivity and is, therefore,
neither retrospective in character.
6. We do not share petitioner's fears that the video industry is being over-regulated and being
eased out of existence as if it were a nuisance. Being a relatively new industry, the need for its
regulation was apparent. While the underlying objective of the DECREE is to protect the moribund
movie industry, there is no question that public welfare is at bottom of its enactment, considering
"the unfair competition posed by rampant film piracy; the erosion of the moral fiber of the viewing
public brought about by the availability of unclassified and unreviewed video tapes containing
pornographic films and films with brutally violent sequences; and losses in government revenues
due to the drop in theatrical attendance, not to mention the fact that the activities of video
establishments are virtually untaxed since mere payment of Mayor's permit and municipal license
fees are required to engage in business. 17
The enactment of the Decree since April 10, 1986 has not brought about the "demise" of the video
industry. On the contrary, video establishments are seen to have proliferated in many places
notwithstanding the 30% tax imposed.
In the last analysis, what petitioner basically questions is the necessity, wisdom and expediency of
the DECREE. These considerations, however, are primarily and exclusively a matter of legislative
concern.
Only congressional power or competence, not the wisdom of the action taken, may be the basis
for declaring a statute invalid. This is as it ought to be. The principle of separation of powers has in
the main wisely allocated the respective authority of each department and confined its jurisdiction
to such a sphere. There would then be intrusion not allowable under the Constitution if on a matter
left to the discretion of a coordinate branch, the judiciary would substitute its own. If there be
adherence to the rule of law, as there ought to be, the last offender should be courts of justice, to
which rightly litigants submit their controversy precisely to maintain unimpaired the supremacy of
legal norms and prescriptions. The attack on the validity of the challenged provision likewise
insofar as there may be objections, even if valid and cogent on its wisdom cannot be sustained. 18
In fine, petitioner has not overcome the presumption of validity which attaches to a challenged
statute. We find no clear violation of the Constitution which would justify us in pronouncing
Presidential Decree No. 1987 as unconstitutional and void.
WHEREFORE, the instant Petition is hereby dismissed.
G.R. No. L-7859 December 22, 1955
WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio
Jayme Ledesma,plaintiff-appellant, vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee.
REYES, J.B L., J.:
This case was initiated in the CFI of Negros Occidental to test the legality of the taxes imposed by
Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.
Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due
to the threat to our industry by the imminent imposition of export taxes upon sugar as provided in
the Tydings-McDuffe Act, and the "eventual loss of its preferential position in the United States
market"; wherefore, the national policy was expressed "to obtain a readjustment of the benefits
derived from the sugar industry by the component elements thereof" and "to stabilize the sugar
industry so as to prepare it for the eventuality of the loss of its preferential position in the United
States market and the imposition of the export taxes."
In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the
manufacture of sugar, on a graduated basis, on each picul of sugar manufactured; while section 3
levies on owners or persons in control of lands devoted to the cultivation of sugar cane and ceded
to others for a consideration, on lease or otherwise —
-a tax equivalent to the difference between the money value of the rental or consideration
collected and the amount representing 12 per centum of the assessed value of such land.
According to section 6 of the law —
SEC. 6. All collections made under this Act shall accrue to a special fund in the Philippine
Treasury, to be known as the 'Sugar Adjustment and Stabilization Fund,' and shall be paid out only
for any or all of the following purposes or to attain any or all of the following objectives, as may be
provided by law.
First, to place the sugar industry in a position to maintain itself, despite the gradual loss of the
preferntial position of the Philippine sugar in the United States market, and ultimately to insure its
continued existence notwithstanding the loss of that market and the consequent necessity of
meeting competition in the free markets of the world;
Second, to readjust the benefits derived from the sugar industry by all of the component elements
thereof — the mill, the landowner, the planter of the sugar cane, and the laborers in the factory
and in the field — so that all might continue profitably to engage therein;lawphi1.net
Third, to limit the production of sugar to areas more economically suited to the production thereof;
and
Fourth, to afford labor employed in the industry a living wage and to improve their living and
working conditions: Provided, That the President of the Philippines may, until the adjourment of
the next regular session of the National Assembly, make the necessary disbursements from the
fund herein created (1) for the establishment and operation of sugar experiment station or stations
and the undertaking of researchers (a) to increase the recoveries of the centrifugal sugar factories
with the view of reducing manufacturing costs, (b) to produce and propagate higher yielding
varieties of sugar cane more adaptable to different district conditions in the Philippines, (c) to lower
the costs of raising sugar cane, (d) to improve the buying quality of denatured alcohol from
molasses for motor fuel, (e) to determine the possibility of utilizing the other by-products of the
industry, (f) to determine what crop or crops are suitable for rotation and for the utilization of
excess cane lands, and (g) on other problems the solution of which would help rehabilitate and
stabilize the industry, and (2) for the improvement of living and working conditions in sugar mills
and sugar plantations, authorizing him to organize the necessary agency or agencies to take
charge of the expenditure and allocation of said funds to carry out the purpose hereinbefore
enumerated, and, likewise, authorizing the disbursement from the fund herein created of the
necessary amount or amounts needed for salaries, wages, travelling expenses, equipment, and
other sundry expenses of said agency or agencies.
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio
Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40
paid by the estate as taxes, under section 3 of the Act, for the crop years 1948-1949 and 1949-
1950; alleging that such tax is unconstitutional and void, being levied for the aid and support of the
sugar industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax may
be constitutioally levied. The action having been dismissed by the Court of First Instance, the
plaintifs appealed the case directly to this Court (Judiciary Act, section 17).
The basic defect in the plaintiff's position is his assumption that the tax provided for in
Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act, and
particularly of section 6 (heretofore quoted in full), will show that the tax is levied with a regulatory
purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry.
In other words, the act is primarily an exercise of the police power.
This Court can take judicial notice of the fact that sugar production is one of the great industries of
our nation, sugar occupying a leading position among its export products; that it gives employment
to thousands of laborers in fields and factories; that it is a great source of the state's wealth, is one
of the important sources of foreign exchange needed by our government, and is thus pivotal in the
plans of a regime committed to a policy of currency stability. Its promotion, protection and
advancement, therefore redounds greatly to the general welfare. Hence it was competent for the
legislature to find that the general welfare demanded that the sugar industry should be stabilized
in turn; and in the wide field of its police power, the lawmaking body could provide that the
distribution of benefits therefrom be readjusted among its components to enable it to resist the
added strain of the increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237 U. S. 52, 59 L.
Ed. 835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs. Mayo, 103
Fla. 552, 139 So. 121).
As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida —
The protection of a large industry constituting one of the great sources of the state's wealth and
therefore directly or indirectly affecting the welfare of so great a portion of the population of the
State is affected to such an extent by public interests as to be within the police power of the
sovereign. (128 Sp. 857).
Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter
of public concern, it follows that the Legislature may determine within reasonable bounds what is
necessary for its protection and expedient for its promotion. Here, the legislative discretion must
be allowed fully play, subject only to the test of reasonableness; and it is not contended that the
means provided in section 6 of the law (above quoted) bear no relation to the objective pursued or
are oppressive in character. If objective and methods are alike constitutionally valid, no reason is
seen why the state may not levy taxes to raise funds for their prosecution and attainment.
Taxation may be made the implement of the state's police power (Great Atl. & Pac. Tea Co. vs.
Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs.
Maryland, 4 Wheat. 316, 4 L. Ed. 579).
That the tax to be levied should burden the sugar producers themselves can hardly be a ground of
complaint; indeed, it appears rational that the tax be obtained precisely from those who are to be
benefited from the expenditure of the funds derived from it. At any rate, it is inherent in the power
to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that
"inequalities which result from a singling out of one particular class for taxation, or exemption
infringe no constitutional limitation" (Carmichael vs. Southern Coal & Coke Co., 301 U. S. 495, 81
L. Ed. 1245, citing numerous authorities, at p. 1251).
From the point of view we have taken it appears of no moment that the funds raised under the
Sugar Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry,
since it is that very enterprise that is being protected. It may be that other industries are also in
need of similar protection; that the legislature is not required by the Constitution to adhere to a
policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84
L. Ed. 744, "if the law presumably hits the evil where it is most felt, it is not to be overthrown
because there are other instances to which it might have been applied;" and that "the legislative
authority, exerted within its proper field, need not embrace all the evils within its reach" (N. L. R. B.
vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).
Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of
tax money to experimental stations to seek increase of efficiency in sugar production, utilization of
by-products and solution of allied problems, as well as to the improvements of living and working
conditions in sugar mills or plantations, without any part of such money being channeled directly to
private persons, constitutes expenditure of tax money for private purposes, (compare Everson vs.
Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400).
The decision appealed from is affirmed, with costs against appellant. So ordered.
8.COMMISSIONER OF INTERNAL G.R. No. 159647
REVENUE,Petitioner,
- versus - CENTRAL LUZON DRUG Promulgated:CORPORATION,Respondent. April 15,
2005
DECISION
PANGANIBAN, J.:
The 20 percent discount required by the law to be given to senior citizens is a tax credit, not
merely a tax deduction from the gross income or gross sale of the establishment concerned. A tax
credit is used by a private establishment only after the tax has been computed; a tax deduction,
before the tax is computed. RA 7432 unconditionally grants a tax credit to all covered entities.
Thus, the provisions of the revenue regulation that withdraw or modify such grant are void. Basic
is the rule that administrative regulations cannot amend or revoke the law.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set aside the
August 29, 2002 Decision[2] and the August 11, 2003 Resolution[3] of the Court of Appeals (CA) in
CA-GR SP No. 67439. The assailed Decision reads as follows:
WHEREFORE, premises considered, the Resolution appealed from is AFFIRMED in toto. No
costs. The assailed Resolution denied petitioners Motion for Reconsideration.
The Facts
The CA narrated the antecedent facts as follows:
Respondent is a domestic corporation primarily engaged in retailing of medicines and other
pharmaceutical products. In 1996, it operated six (6) drugstores under the business name and
style Mercury Drug.
From January to December 1996, respondent granted twenty (20%) percent sales discount to
qualified senior citizens on their purchases of medicines pursuant to Republic Act No. [R.A.] 7432
and its Implementing Rules and Regulations. For the said period, the amount allegedly
representing the 20% sales discount granted by respondent to qualified senior citizens
totaled P904,769.00. On April 15, 1997, respondent filed its Annual Income Tax Return for taxable
year 1996 declaring therein that it incurred net losses from its operations.On January 16, 1998,
respondent filed with petitioner a claim for tax refund/credit in the amount of P904,769.00 allegedly
arising from the 20% sales discount granted by respondent to qualified senior citizens in
compliance with [R.A.] 7432. Unable to obtain affirmative response from petitioner, respondent
elevated its claim to the Court of Tax Appeals [(CTA or Tax Court)] via a Petition for Review.
On February 12, 2001, the Tax Court rendered a Decision[5] dismissing respondents Petition for
lack of merit. In said decision, the [CTA] justified its ruling with the following ratiocination:
x x x, if no tax has been paid to the government, erroneously or illegally, or if no amount is due
and collectible from the taxpayer, tax refund or tax credit is unavailing. Moreover, whether the
recovery of the tax is made by means of a claim for refund or tax credit, before recovery is
allowed[,] it must be first established that there was an actual collection and receipt by the
government of the tax sought to be recovered. x x x.
Prescinding from the above, it could logically be deduced that tax credit is premised on the
existence of tax liability on the part of taxpayer. In other words, if there is no tax liability, tax credit
is not available.
Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed resolution,[6] granted
respondents motion for reconsideration and ordered herein petitioner to issue a Tax Credit
Certificate in favor of respondent citing the decision of the then Special Fourth Division of [the CA]
in CA G.R. SP No. 60057 entitled Central [Luzon] Drug Corporation vs. Commissioner of Internal
Revenue promulgated on May 31, 2001, to wit:
However, Sec. 229 clearly does not apply in the instant case because the tax sought to be
refunded or credited by petitioner was not erroneously paid or illegally collected. We take
exception to the CTAs sweeping but unfounded statement that both tax refund and tax credit are
modes of recovering taxes which are either erroneously or illegally paid to the government. Tax
refunds or credits do not exclusively pertain to illegally collected or erroneously paid taxes as they
may be other circumstances where a refund is warranted. The tax refund provided under Section
229 deals exclusively with illegally collected or erroneously paid taxes but there are other possible
situations, such as the refund of excess estimated corporate quarterly income tax paid, or that of
excess input tax paid by a VAT-registered person, or that of excise tax paid on goods locally
produced or manufactured but actually exported. The standards and mechanics for the grant of a
refund or credit under these situations are different from that under Sec. 229. Sec. 4[.a)] of R.A.
7432, is yet another instance of a tax credit and it does not in any way refer to illegally collected or
erroneously paid taxes, x x x.[7]
Ruling of the Court of Appeals
 The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering
petitioner to issue a tax credit certificate in favor of respondent in the reduced amount
of P903,038.39. It reasoned that Republic Act No. (RA) 7432 required neither a tax liability nor a
payment of taxes by private establishments prior to the availment of a tax credit. Moreover, such
credit is not tantamount to an unintended benefit from the law, but rather a just compensation for
the taking of private property for public use.
Hence this Petition.[8]
The Issues: Petitioner raises the following issues for our consideration:
Whether the Court of Appeals erred in holding that respondent may claim the 20% sales discount
as a tax credit instead of as a deduction from gross income or gross sales.
Whether the Court of Appeals erred in holding that respondent is entitled to a refund.[9]
These two issues may be summed up in only one: whether respondent, despite incurring a net
loss, may still claim the 20 percent sales discount as a tax credit.
The Courts Ruling
The Petition is not meritorious.
Sole Issue:
Claim of 20 Percent Sales Discount as Tax Credit Despite Net Loss
Section 4a) of RA 7432[10] grants to senior citizens the privilege of obtaining a 20 percent discount
on their purchase of medicine from any private establishment in the country.[11] The latter may then
claim the cost of the discount as a tax credit.[12] But can such credit be claimed, even though an
establishment operates at a loss?
We answer in the affirmative.
Tax Credit versus Tax Deduction
Although the term is not specifically defined in our Tax Code,[13] tax credit generally refers to an
amount that is subtracted directly from ones total tax liability.[14]It is an allowance against the tax
itself[15] or a deduction from what is owed[16] by a taxpayer to the government. Examples of tax
credits are withheld taxes, payments of estimated tax, and investment tax credits.[17]
Tax credit should be understood in relation to other tax concepts. One of these is tax deduction --
defined as a subtraction from income for tax purposes,[18] or an amount that is allowed by law to
reduce income prior to [the] application of the tax rate to compute the amount of tax which is
due.[19] An example of a tax deduction is any of the allowable deductions enumerated in Section
34[20] of the Tax Code.
A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due,
including -- whenever applicable -- the income tax that is determined after applying the
corresponding tax rates to taxable income.[21] A tax deduction, on the other, reduces the income
that is subject to tax[22] in order to arrive at taxable income.[23] To think of the former as the latter is
to avoid, if not entirely confuse, the issue. A tax credit is used only after the tax has been
computed; a tax deduction, before.
Tax Liability Required for Tax Credit
Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax
liability before the tax credit can be applied. Without that liability, any tax creditapplication will be
useless. There will be no reason for deducting the latter when there is, to begin with, no existing
obligation to the government. However, as will be presented shortly, the existence of a tax credit
or its grant by law is not the same as the availment or use of such credit. While the grant is
mandatory, the availment or use is not.
If a net loss is reported by, and no other taxes are currently due from, a business establishment,
there will obviously be no tax liability against which any tax creditcan be applied.[24] For the
establishment to choose the immediate availment of a tax credit will be premature and
impracticable. Nevertheless, the irrefutable fact remains that, under RA 7432, Congress has
granted without conditions a tax credit benefit to all covered establishments.
Although this tax credit benefit is available, it need not be used by losing ventures, since there is
no tax liability that calls for its application. Neither can it be reduced to nil by the quick yet callow
stroke of an administrative pen, simply because no reduction of taxes can instantly be effected. By
its nature, the tax creditmay still be deducted from a future, not a present, tax liability, without
which it does not have any use. In the meantime, it need not move. But it breathes.
Prior Tax Payments Not
Required for Tax Credit
While a tax liability is essential to the availment or use of any tax credit, prior tax payments are
not. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a
prior tax payment is needed. The Tax Code is in fact replete with provisions granting or
allowing tax credits, even though no taxes have been previously paid.
For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to
certain limitations -- for estate taxes paid to a foreign country. Also found in Section 101(C) is a
similar provision for donors taxes -- again when paid to a foreign country -- in computing for
the donors tax due. The tax credits in both instances allude to the prior payment of taxes, even if
not made to our government.
Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions --
whether or not subject to the VAT -- is also allowed a tax credit that includes a ratable portion of
any input tax not directly attributable to either activity. This input tax may either be the VAT on the
purchase or importation of goods or services that is merely due from -- not necessarily paid by --
such VAT-registered person in the course of trade or business; or the transitional input tax
determined in accordance with Section 111(A). The latter type may in fact be an amount
equivalent to only eight percent of the value of a VAT-registered persons beginning inventory of
goods, materials and supplies, when such amount -- as computed -- is higher than the actual VAT
paid on the said items.[25] Clearly from this provision, the tax credit refers to an input tax that is
either due only or given a value by mere comparison with the VAT actually paid -- then later
prorated. No tax is actually paid prior to the availment of such credit.
In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed.
For the purchase of primary agricultural products used as inputs -- either in the processing of
sardines, mackerel and milk, or in the manufacture of refined sugar and cooking oil -- and for the
contract price of public work contracts entered into with the government, again, no prior tax
payments are needed for the use of the tax credit.

More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated
may, under Section 112(A), apply for the issuance of a tax creditcertificate for the amount of
creditable input taxes merely due -- again not necessarily paid to -- the government and
attributable to such sales, to the extent that the input taxes have not been applied against output
taxes.[26] Where a taxpayer
is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales, the
amount of creditable input taxes due that are not directly and entirely attributable to any one of
these transactions shall be proportionately allocated on the basis of the volume of sales. Indeed,
in availing of such tax credit for VAT purposes, this provision -- as well as the one earlier
mentioned -- shows that the prior payment of taxes is not a requisite.
It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax
credit allowed, even though no prior tax payments are not required. Specifically, in this provision,
the imposition of a final withholding tax rate on cash and/or property dividends received by a
nonresident foreign corporation from a domestic corporation is subjected to the condition that a
foreign tax credit will be given by the domiciliary country in an amount equivalent to taxes that are
merely deemed paid.[27] Although true, this provision actually refers to the tax credit as
a condition only for the imposition of a lower tax rate, not as a deduction from the corresponding
tax liability. Besides, it is not our government but the domiciliary country that credits against the
income tax payable to the latter by the foreign corporation, the tax to be foregone or spared.[28]
In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits,
against the income tax imposable under Title II, the amount of income taxes merely incurred -- not
necessarily paid -- by a domestic corporation during a taxable year in any foreign country.
Moreover, Section 34(C)(5) provides that for such taxes incurred but not paid, a tax credit may be
allowed, subject to the condition precedent that the taxpayer shall simply give a bond with sureties
satisfactory to and approved by petitioner, in such sum as may be required; and further
conditioned upon payment by the taxpayer of any tax found due, upon petitioners redetermination
of it.
In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special
laws that grant or allow tax credits, even though no prior tax payments have been made.
Under the treaties in which the tax credit method is used as a relief to avoid double
taxation, income that is taxed in the state of source is also taxable in the state of residence, but
the tax paid in the former is merely allowed as a credit against the tax levied in the
latter.[29] Apparently, payment is made to the state of source, not the state of residence. No tax,
therefore, has been previously paid to the latter.
Under special laws that particularly affect businesses, there can also be tax credit incentives. To
illustrate, the incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as
amended by Batas Pambansa Blg. (BP) 391, include tax credits equivalent to either five percent of
the net value earned, or five or ten percent of the net local content of exports.[30] In order to avail of
such credits under the said law and still achieve its objectives, no prior tax payments are
necessary.
From all the foregoing instances, it is evident that prior tax payments are not indispensable to the
availment of a tax credit. Thus, the CA correctly held that the availment under RA 7432 did not
require prior tax payments by private establishments concerned.[31] However, we do not agree with
its finding[32] that the carry-over of tax credits under the said special law to succeeding taxable
periods, and even their application against internal revenue taxes, did not necessitate the
existence of a tax liability.
The examples above show that a tax liability is certainly important in the availment or use, not
the existence or grant, of a tax credit. Regarding this matter, a private establishment reporting
a net loss in its financial statements is no different from another that presents a net income. Both
are entitled to the tax credit provided for under RA 7432, since the law itself accords that
unconditional benefit. However, for the losing establishment to immediately apply such credit,
where no tax is due, will be an improvident usance.
Sections 2.i and 4 of Revenue
Regulations No. 2-94 Erroneous
RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts
they grant.[33] In turn, the Implementing Rules and Regulations, issued pursuant thereto, provide
the procedures for its availment.[34] To deny such credit, despite the plain mandate of the law and
the regulations carrying out that mandate, is indefensible.
First, the definition given by petitioner is erroneous. It refers to tax credit as the amount
representing the 20 percent discount that shall be deducted by the said establishments from
their gross income for income tax purposes and from their gross sales for value-added tax or other
percentage tax purposes.[35] In ordinary business language, the tax credit represents the amount
of such discount. However, the manner by which the discount shall be credited against taxes has
not been clarified by the revenue regulations.
By ordinary acceptation, a discount is an abatement or reduction made from the gross amount or
value of anything.[36] To be more precise, it is in business parlance a deduction or lowering of an
amount of money;[37] or a reduction from the full amount or value of something, especially a
price.[38] In business there are many kinds of discount, the most common of which is that affecting
the income statement[39] or financial report upon which the income tax is based.
Business Discounts
Deducted from Gross Sales
A cash discount, for example, is one granted by business establishments to credit customers for
their prompt payment.[40] It is a reduction in price offered to the purchaser if payment is made
within a shorter period of time than the maximum time specified.[41] Also referred to as a sales
discount on the part of the seller and a purchase discount on the part of the buyer, it may be
expressed in such
terms as 5/10, n/30.[42]
A quantity discount, however, is a reduction in price allowed for purchases made in large
quantities, justified by savings in packaging, shipping, and handling.[43] It is also called
a volume or bulk discount.[44]
A percentage reduction from the list price x x x allowed by manufacturers to wholesalers and by
wholesalers to retailers[45] is known as a trade discount. No entry for it need be made in the
manual or computerized books of accounts, since the purchase or sale is already valued at the net
price actually charged the buyer.[46] The purpose for the discount is to encourage trading or
increase sales, and the prices at which the purchased goods may be resold are also
suggested.[47] Even a chain discount -- a series of discounts from one list price -- is recorded at
net.[48]
Finally, akin to a trade discount is a functional discount. It is a suppliers price discount given to a
purchaser based on the [latters] role in the [formers] distribution system.[49] This role usually
involves warehousing or advertising.
Based on this discussion, we find that the nature of a sales discount is peculiar. Applying generally
accepted accounting principles (GAAP) in the country, this type of discount is reflected in
the income statement[50] as a line item deducted -- along with returns, allowances, rebates and
other similar expenses -- from gross sales to arrive at net sales.[51] This type of presentation is
resorted to, because the accounts receivable and sales figures that arise from sales discounts, --
as well as from quantity, volume or bulk discounts -- are recorded in the manual and
computerized books of accounts and reflected in the financial statements at the gross amounts of
the invoices.[52] This manner of recording credit sales -- known as the gross method -- is most
widely used, because it is simple, more convenient to apply than the net method, and produces no
material errors over time.[53]
However, under the net method used in recording trade, chain or functional discounts, only the net
amounts of the invoices -- after the discounts have been deducted -- are recorded in the books of
accounts[54] and reflected in the financial statements. A separate line item cannot be
shown,[55] because the transactions themselves involving both accounts receivable and sales have
already been entered into, net of the said discounts.
The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to
amounts whose sum -- along with sales returns, allowances and cost of goods sold[56] -- is
deducted from gross sales to come up with the gross income, profit or margin[57] derived from
business.[58] In another provision therein, sales discountsthat are granted and indicated in the
invoices at the time of sale -- and that do not depend upon the happening of any future event --
may be excluded from the gross sales within the same quarter they were given.[59] While
determinative only of the VAT, the latter provision also appears as a suitable reference point for
income tax purposes already embraced in the former. After all, these two provisions affirm
that sales discounts are amounts that are always deductible from gross sales.
Reason for the Senior Citizen Discount:
The Law, Not Prompt Payment
A distinguishing feature of the implementing rules of RA 7432 is the private establishments
outright deduction of the discount from the invoice price of the medicine sold to the senior
citizen.[60] It is, therefore, expected that for each retail sale made under this law, the discount
period lasts no more than a day, because such discount is given -- and the net amount thereof
collected -- immediately upon perfection of the sale.[61] Although prompt payment is made for an
arms-length transaction by the senior citizen, the real and compelling reason for the private
establishment giving the discount is that the law itself makes it mandatory.
What RA 7432 grants the senior citizen is a mere discount privilege, not a sales discount or any of
the above discounts in particular. Prompt payment is not the reason for (although a necessary
consequence of) such grant. To be sure, the privilege enjoyed by the senior citizen must be
equivalent to the tax credit benefit enjoyed by the private establishment granting the discount. Yet,
under the revenue regulations promulgated by our tax authorities, this benefit has been
erroneously likened and confined to a sales discount.
To a senior citizen, the monetary effect of the privilege may be the same as that resulting from
a sales discount. However, to a private establishment, the effect is different from a simple
reduction in price that results from such discount. In other words, the tax credit benefit is not the
same as a sales discount. To repeat from our earlier discourse, this benefit cannot and should not
be treated as a tax deduction.
To stress, the effect of a sales discount on the income statement and income tax return of an
establishment covered by RA 7432 is different from that resulting from the availment or use of
its tax credit benefit. While the former is a deduction before, the latter is a deduction after,
the income tax is computed. As mentioned earlier, a discount is not necessarily a sales discount,
and a tax credit for a simple discount privilege should not be automatically treated like a sales
discount. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish,
we ought not to distinguish.
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent
discount deductible from gross income for income tax purposes, or from gross sales for VAT or
other percentage tax purposes. In effect, the tax credit benefit under RA 7432 is related to a sales
discount. This contrived definition is improper, considering that the latter has to be deducted
from gross sales in order to compute the gross income in the income statement and cannot be
deducted again, even for purposes of computing the income tax.
When the law says that the cost of the discount may be claimed as a tax credit, it means that the
amount -- when claimed -- shall be treated as a reduction from any tax liability, plain and simple.
The option to avail of the tax credit benefit depends upon the existence of a tax liability, but to limit
the benefit to a sales discount -- which is not even identical to the discount privilege that is granted
by law -- does not define it at all and serves no useful purpose. The definition must, therefore, be
stricken down.
Laws Not Amended by Regulations
Second, the law cannot be amended by a mere regulation. In fact, a regulation that operates to
create a rule out of harmony with
the statute is a mere nullity;[62] it cannot prevail.
It is a cardinal rule that courts will and should respect the contemporaneous construction placed
upon a statute by the executive officers whose duty it is to enforce it x x x.[63] In the scheme of
judicial tax administration, the need for certainty and predictability in the implementation of tax
laws is crucial.[64] Our tax authorities fill in the details that Congress may not have the opportunity
or competence to provide.[65] The regulations these authorities issue are relied upon by taxpayers,
who are certain that these will be followed by the courts.[66] Courts, however, will not uphold these
authorities interpretations when clearly absurd, erroneous or improper.
In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR
2-94 a meaning utterly in contrast to what RA 7432 provides. Their interpretation has muddled up
the intent of Congress in granting a mere discount privilege, not a sales discount. The
administrative agency issuing these regulations may not enlarge, alter or restrict the provisions of
the law it administers; it cannot engraft additional requirements not contemplated by the
legislature.[67]
In case of conflict, the law must prevail.[68] A regulation adopted pursuant to law is
law.[69] Conversely, a regulation or any portion thereof not adopted pursuant to law is no law and
has neither the force nor the effect of law.[70]
Availment of Tax
Credit Voluntary
Third, the word may in the text of the statute[71] implies that the
availability of the tax credit benefit is neither unrestricted nor mandatory.[72] There is no absolute
right conferred upon respondent, or any similar taxpayer, to avail itself of the tax credit remedy
whenever it chooses; neither does it impose a duty on the part of the government to sit back and
allow an important facet of tax collection to be at the sole control and discretion of the
taxpayer.[73] For the tax authorities to compel respondent to deduct the 20 percent discount from
either its gross income or its gross sales[74] is, therefore, not only to make an imposition without
basis in law, but also to blatantly contravene the law itself.
What Section 4.a of RA 7432 means is that the tax credit benefit is merely permissive, not
imperative. Respondent is given two options -- either to claim or not to claim the cost of the
discounts as a tax credit. In fact, it may even ignore the credit and simply consider the gesture as
an act of beneficence, an expression of its social conscience.
Granting that there is a tax liability and respondent claims such cost as a tax credit, then the tax
credit can easily be applied. If there is none, the credit cannot be used and will just have to be
carried over and revalidated[75] accordingly. If, however, the business continues to operate at a
loss and no other taxes are due, thus compelling it to close shop, the credit can never be applied
and will be lost altogether.
In other words, it is the existence or the lack of a tax liability that determines whether the cost of
the discounts can be used as a tax credit. RA 7432 does not give respondent the unfettered right
to avail itself of the credit whenever it pleases. Neither does it allow our tax administrators to
expand or contract the legislative mandate. The plain meaning rule or verba legis in statutory
construction is thus applicable x x x. Where the words of a statute are clear, plain and free from
ambiguity, it must be given its literal meaning and applied without attempted interpretation. [76]
Tax Credit Benefit
Deemed Just Compensation
Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent
domain. Be it stressed that the privilege enjoyed by senior citizens does not come directly from the
State, but rather from the private establishments concerned. Accordingly, the tax credit benefit
granted to these establishments can be deemed as their just compensation for private property
taken by the State for public use.[77]
The concept of public use is no longer confined to the traditional notion of use by the public, but
held synonymous with public interest, public benefit, public welfare, and public
convenience.[78] The discount privilege to which our senior citizens are entitled is actually a benefit
enjoyed by the general public to which these citizens belong. The discounts given would have
entered the coffers and formed part of the gross sales of the private establishments concerned,
were it not for RA 7432. The permanent reduction in their total revenues is a forced subsidy
corresponding to the taking of private property for public use or benefit.
As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just
compensation. This term refers not only to the issuance of a tax credit certificate indicating the
correct amount of the discounts given, but also to the promptness in its release. Equivalent to the
payment of property taken by the State, such issuance -- when not done within a reasonable
time from the grant of the discounts -- cannot be considered as just compensation. In effect,
respondent is made to suffer the consequences of being immediately deprived of its revenues
while awaiting actual receipt, through the certificate, of the equivalent amount it needs to cope with
the reduction in its revenues.[79]
Besides, the taxation power can also be used as an implement for the exercise of the power of
eminent domain.[80] Tax measures are but enforced contributions exacted on pain of penal
sanctions[81] and clearly imposed for a public purpose.[82] In recent years, the power to tax has
indeed become a most effective tool to realize social justice, public welfare, and the equitable
distribution of wealth.[83]
While it is a declared commitment under Section 1 of RA 7432, social justice cannot be invoked to
trample on the rights of property owners who under our Constitution and laws are also entitled to
protection. The social justice consecrated in our [C]onstitution [is] not intended to take away rights
from a person and give them to another who is not entitled thereto.[84] For this reason, a just
compensation for income that is taken away from respondent becomes necessary. It is in the tax
credit that our legislators find support to realize social justice, and no administrative body can alter
that fact.
To put it differently, a private establishment that merely breaks even[85] -- without the discounts yet
-- will surely start to incur losses because of such discounts. The same effect is expected if its
mark-up is less than 20 percent, and if all its sales come from retail purchases by senior citizens.
Aside from the observation we have already raised earlier, it will also be grossly unfair to an
establishment if the discounts will be treated merely as deductions from either its gross income or
its gross sales. Operating at a loss through no fault of its own, it will realize that the tax
credit limitation under RR 2-94 is inutile, if not improper. Worse, profit-generating businesses will
be put in a better position if they avail themselves of tax credits denied those that are losing,
because no taxes are due from the latter.
Grant of Tax Credit
Intended by the Legislature
Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the
community as a whole and to establish a program beneficial to them.[86]These objectives are
consonant with the constitutional policy of making health x x x services available to all the people
at affordable cost[87] and of giving priority for the needs of the x x x elderly.[88] Sections 2.i and 4 of
RR 2-94, however, contradict these constitutional policies and statutory objectives.
Furthermore, Congress has allowed all private establishments a simple tax credit, not a deduction.
In fact, no cash outlay is required from the government for the availment or use of such credit. The
deliberations on February 5, 1992 of the Bicameral Conference Committee Meeting on Social
Justice, which finalized RA 7432, disclose the true intent of our legislators to treat the sales
discounts as a tax credit, rather than as a deduction from gross income. We quote from those
deliberations as follows:
"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions from taxable
income. I think we incorporated there a provision na - on the responsibility of the private hospitals
and drugstores, hindi ba?
SEN. ANGARA. Oo.
THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision here about the
deductions from taxable income of that private hospitals, di ba ganon 'yan?
MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting government and public
institutions, so, puwede na po nating hindi isama yung mga less deductions ng taxable income.
THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals. Yung isiningit
natin?
MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the microphone).
SEN. ANGARA. Hindi pa, hindi pa.
THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin?
SEN. ANGARA. Oo. You want to insert that?
THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e.
SEN. ANGARA. In the case of private hospitals they got the grant of 15% discount, provided that,
the private hospitals can claim the expense as a tax credit.
REP. AQUINO. Yah could be allowed as deductions in the perpetrations of (inaudible) income.
SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano?
REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng establishments na covered.
THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang.
REP. AQUINO. Ano ba yung establishments na covered?
SEN. ANGARA. Restaurant lodging houses, recreation centers.
REP. AQUINO. All establishments covered siguro?
SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung ganon. Can we go
back to Section 4 ha?
REP. AQUINO. Oho.
SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20% discount from all
establishments et cetera, et cetera, provided that said establishments - provided that private
establishments may claim the cost as a tax credit. Ganon ba 'yon?
REP. AQUINO. Yah.
SEN. ANGARA. Dahil kung government, they don't need to claim it.
THE CHAIRMAN. (Rep. Unico). Tax credit.
SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay.
REP. AQUINO Okay.
SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A".[89]
Special Law Over General Law
Sixth and last, RA 7432 is a special law that should prevail over the Tax Code -- a general law. x x
x [T]he rule is that on a specific matter the special law shall prevail over the general law, which
shall
be resorted to only to supply deficiencies in the former.[90] In addition, [w]here there are two
statutes, the earlier special and the later general -- the terms of the general broad enough to
include the matter provided for in the special -- the fact that one is special and the other is general
creates a presumption that the special is to be considered as remaining an exception to the
general,[91] one as a general law of the land, the other as the law of a particular case.[92] It is a
canon of statutory construction that a later statute, general in its terms and not expressly repealing
a prior special statute, will ordinarily not affect the special provisions of such earlier statute. [93]
RA 7432 is an earlier law not expressly repealed by, and therefore remains an exception to, the
Tax Code -- a later law. When the former states that a tax credit may be claimed, then the
requirement of prior tax payments under certain provisions of the latter, as discussed above,
cannot be made to apply. Neither can the instances of or references to a tax deduction under the
Tax Code[94] be made to restrict RA 7432. No provision of any revenue regulation can supplant or
modify the acts of Congress.
WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of the Court
of Appeals AFFIRMED. No pronouncement as to costs.SO ORDERED.
9. RENATO V. DIAZ and G.R. No. 193007AURORA MA. F. TIMBOL,Petitioners, - versus - THE
SECRETARY OF FINANCEand THE COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondents. July 19, 2011
ABAD, J.:
May toll fees collected by tollway operators be subjected to value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory
relief[1] assailing the validity of the impending imposition of value-added tax (VAT) by the Bureau of
Internal Revenue (BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an interest
as regular users of tollways in stopping the BIR action. Additionally, Diaz claims that he sponsored
the approval of Republic Act 7716 (the 1994 Expanded VAT Law or EVAT Law) and Republic Act
8424 (the 1997 National Internal Revenue Code or the NIRC) at the House of
Representatives. Timbol, on the other hand, claims that she served as Assistant Secretary of the
Department of Trade and Industry and consultant of the Toll Regulatory Board (TRB) in the past
administration.
Petitioners allege that the BIR attempted during the administration of President Gloria Macapagal-
Arroyo to impose VAT on toll fees. The imposition was deferred, however, in view of the consistent
opposition of Diaz and other sectors to such move. But, upon President Benigno C. Aquino IIIs
assumption of office in 2010, the BIR revived the idea and would impose the challenged tax on toll
fees beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll
fees within the meaning of sale of services that are subject to VAT; that a toll fee is a users tax,
not a sale of services; that to impose VAT on toll fees would amount to a tax on public service;
and that, since VAT was never factored into the formula for computing toll fees, its imposition
would violate the non-impairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the
implementation of the VAT. The Court required the government, represented by respondents
Cesar V. Purisima, Secretary of the Department of Finance, and Kim S. Jacinto-Henares,
Commissioner of Internal Revenue, to comment on the petition within 10 days from notice.[2] Later,
the Court issued another resolution treating the petition as one for prohibition.[3]
On August 23, 2010 the Office of the Solicitor General filed the governments comment.[4] The
government avers that the NIRC imposes VAT on all kinds of services of franchise grantees,
including tollway operations, except where the law provides otherwise; that the Court should seek
the meaning and intent of the law from the words used in the statute; and that the imposition of
VAT on tollway operations has been the subject as early as 2003 of several BIR rulings and
circulars.[5]
The government also argues that petitioners have no right to invoke the non-impairment of
contracts clause since they clearly have no personal interest in existing toll operating agreements
(TOAs) between the government and tollway operators. At any rate, the non-impairment clause
cannot limit the States sovereign taxing power which is generally read into contracts.
Finally, the government contends that the non-inclusion of VAT in the parametric formula for
computing toll rates cannot exempt tollway operators from VAT. In any event, it cannot be claimed
that the rights of tollway operators to a reasonable rate of return will be impaired by the VAT since
this is imposed on top of the toll rate. Further, the imposition of VAT on toll fees would have very
minimal effect on motorists using the tollways.
In their reply[6] to the governments comment, petitioners point out that tollway operators cannot be
regarded as franchise grantees under the NIRC since they do not hold legislative
franchises. Further, the BIR intends to collect the VAT by rounding off the toll rate and putting any
excess collection in an escrow account. But this would be illegal since only the Congress can
modify VAT rates and authorize its disbursement. Finally, BIR Revenue Memorandum Circular 63-
2010 (BIR RMC 63-2010), which directs toll companies to record an accumulated input VAT of
zero balance in their books as of August 16, 2010, contravenes Section 111 of the NIRC which
grants entities that first become liable to VAT a transitional input tax credit of 2% on beginning
inventory. For this reason, the VAT on toll fees cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for declaratory relief as one for prohibition; and
2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully expanding VAT coverage by including tollway
operators and tollway operations in the terms franchise grantees and sale of services under
Section 108 of the Code; and
2. Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and not a
tax on services; b) will impair the tollway operators right to a reasonable return of investment
under their TOAs; and c) is not administratively feasible and cannot be implemented.
The Courts Rulings
A. On the Procedural Issues:
On August 24, 2010 the Court issued a resolution, treating the petition as one for prohibition rather
than one for declaratory relief, the characterization that petitioners Diaz and Timbol gave their
action. The government has sought reconsideration of the Courts resolution,[7] however, arguing
that petitioners allegations clearly made out a case for declaratory relief, an action over which the
Court has no original jurisdiction. The government adds, moreover, that the petition does not meet
the requirements of Rule 65 for actions for prohibition since the BIR did not exercise judicial,
quasi-judicial, or ministerial functions when it sought to impose VAT on toll fees. Besides,
petitioners Diaz and Timbol has a plain, speedy, and adequate remedy in the ordinary course of
law against the BIR action in the form of an appeal to the Secretary of Finance.
But there are precedents for treating a petition for declaratory relief as one for prohibition if the
case has far-reaching implications and raises questions that need to be resolved for the public
good.[8] The Court has also held that a petition for prohibition is a proper remedy to prohibit or
nullify acts of executive officials that amount to usurpation of legislative authority. [9]
Here, the imposition of VAT on toll fees has far-reaching implications. Its imposition would impact,
not only on the more than half a million motorists who use the tollways everyday, but more so on
the governments effort to raise revenue for funding various projects and for reducing budgetary
deficits.
To dismiss the petition and resolve the issues later, after the challenged VAT has been imposed,
could cause more mischief both to the tax-paying public and the government.A belated declaration
of nullity of the BIR action would make any attempt to refund to the motorists what they paid an
administrative nightmare with no solution. Consequently, it is not only the right, but the duty of the
Court to take cognizance of and resolve the issues that the petition raises.
Although the petition does not strictly comply with the requirements of Rule 65, the Court has
ample power to waive such technical requirements when the legal questions to be resolved are of
great importance to the public. The same may be said of the requirement of locus standi which is a
mere procedural requisite.[10]
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of the NIRC, as amended. VAT is levied,
assessed, and collected, according to Section 108, on the gross receipts derived from the sale or
exchange of services as well as from the use or lease of properties. The third paragraph of
Section 108 defines sale or exchange of services as follows:
The phrase sale or exchange of services means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or
rendered by construction and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real; warehousing services; lessors
or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or
repacking goods for others; proprietors, operators or keepers of hotels, motels, resthouses,
pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes
and other eating places, including clubs and caterers; dealers in securities; lending investors;
transportation contractors on their transport of goods or cargoes, including persons who transport
goods or cargoes for hire and other domestic common carriers by land relative to their transport of
goods or cargoes; common carriers by air and sea relative to their transport of passengers, goods
or cargoes from one place in the Philippines to another place in the Philippines; sales of electricity
by generation companies, transmission, and distribution companies; services of franchise
grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all
other franchise grantees except those under Section 119 of this Code and non-life insurance
companies (except their crop insurances), including surety, fidelity, indemnity and bonding
companies; and similar services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on all kinds of services rendered in
the Philippines for a fee, including those specified in the list. The enumeration of affected services
is not exclusive.[11] By qualifying services with the words all kinds, Congress has given the term
services an all-encompassing meaning. The listing of specific services are intended to illustrate
how pervasive and broad is the VATs reach rather than establish concrete limits to its
application. Thus, every activity that can be imagined as a form of service rendered for a fee
should be deemed included unless some provision of law especially excludes it.
Now, do tollway operators render services for a fee? Presidential Decree (P.D.) 1112 or the Toll
Operation Decree establishes the legal basis for the services that tollway operators
render. Essentially, tollway operators construct, maintain, and operate expressways, also called
tollways, at the operators expense. Tollways serve as alternatives to regular public highways that
meander through populated areas and branch out to local roads. Traffic in the regular public
highways is for this reason slow-moving. In consideration for constructing tollways at their
expense, the operators are allowed to collect government-approved fees from motorists using the
tollways until such operators could fully recover their expenses and earn reasonable returns from
their investments.
When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latters use of
the tollway facilities over which the operator enjoys private proprietary rights [12]that its contract and
the law recognize. In this sense, the tollway operator is no different from the following service
providers under Section 108 who allow others to use their properties or facilities for a fee:
1. Lessors of property, whether personal or real;
2. Warehousing service operators;
3. Lessors or distributors of cinematographic films;
4. Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
5. Lending investors (for use of money);
6. Transportation contractors on their transport of goods or cargoes, including persons who
transport goods or cargoes for hire and other domestic common carriers by land relative to their
transport of goods or cargoes; and
7. Common carriers by air and sea relative to their transport of passengers, goods or cargoes from
one place in the Philippines to another place in the Philippines.
It does not help petitioners cause that Section 108 subjects to VAT all kinds of services rendered
for a fee regardless of whether or not the performance thereof calls for the exercise or use of the
physical or mental faculties. This means that services to be subject to VAT need not fall under the
traditional concept of services, the personal or professional kinds that require the use of human
knowledge and skills.
And not only do tollway operators come under the broad term all kinds of services, they also come
under the specific class described in Section 108 as all other franchise grantees who are subject
to VAT, except those under Section 119 of this Code.
Tollway operators are franchise grantees and they do not belong to exceptions (the low-income
radio and/or television broadcasting companies with gross annual incomes of less than P10 million
and gas and water utilities) that Section 119[13] spares from the payment of VAT. The word
franchise broadly covers government grants of a special right to do an act or series of acts of
public concern.[14]
Petitioners of course contend that tollway operators cannot be considered franchise grantees
under Section 108 since they do not hold legislative franchises. But nothing in Section 108
indicates that the franchise grantees it speaks of are those who hold legislative
franchises. Petitioners give no reason, and the Court cannot surmise any, for making a distinction
between franchises granted by Congress and franchises granted by some other government
agency. The latter, properly constituted, may grant franchises. Indeed, franchises conferred or
granted by local authorities, as agents of the state, constitute as much a legislative franchise as
though the grant had been made by Congress itself.[15] The term franchise has been broadly
construed as referring, not only to authorizations that Congress directly issues in the form of a
special law, but also to those granted by administrative agencies to which the power to grant
franchises has been delegated by Congress.[16]
Tollway operators are, owing to the nature and object of their business, franchise grantees. The
construction, operation, and maintenance of toll facilities on public improvements are activities of
public consequence that necessarily require a special grant of authority from the state. Indeed,
Congress granted special franchise for the operation of tollways to the Philippine National
Construction Company, the former tollway concessionaire for the North and South Luzon
Expressways. Apart from Congress, tollway franchises may also be granted by the TRB, pursuant
to the exercise of its delegated powers under P.D. 1112.[17] The franchise in this case is evidenced
by a Toll Operation Certificate.[18]
Petitioners contend that the public nature of the services rendered by tollway operators excludes
such services from the term sale of services under Section 108 of the Code.But, again, nothing in
Section 108 supports this contention. The reverse is true. In specifically including by way of
example electric utilities, telephone, telegraph, and broadcasting companies in its list of VAT-
covered businesses, Section 108 opens other companies rendering public service for a fee to the
imposition of VAT. Businesses of a public nature such as public utilities and the collection of tolls
or charges for its use or service is a franchise.[19]
Nor can petitioners cite as binding on the Court statements made by certain lawmakers in the
course of congressional deliberations of the would-be law. As the Court said in South African
Airways v. Commissioner of Internal Revenue,[20] statements made by individual members of
Congress in the consideration of a bill do not necessarily reflect the sense of that body and are,
consequently, not controlling in the interpretation of law. The congressional will is ultimately
determined by the language of the law that the lawmakers voted on. Consequently, the meaning
and intention of the law must first be sought in the words of the statute itself, read and considered
in their natural, ordinary, commonly accepted and most obvious significations, according to good
and approved usage and without resorting to forced or subtle construction.
Two. Petitioners argue that a toll fee is a users tax and to impose VAT on toll fees is tantamount to
taxing a tax.[21] Actually, petitioners base this argument on the following discussion in Manila
International Airport Authority (MIAA) v. Court of Appeals:[22]
No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code,
like roads, canals, rivers, torrents, ports and bridges constructed by the State,are owned by the
State. The term ports includes seaports and airports. The MIAA Airport Lands and Buildings
constitute a port constructed by the State. Under Article 420 of the Civil Code,
the MIAA Airport Lands and Buildings are properties of public dominion and thus owned by the
State or the Republic of the Philippines.
x x x The operation by the government of a tollway does not change the character of the road as
one for public use. Someone must pay for the maintenance of the road, either the public indirectly
through the taxes they pay the government, or only those among the public who actually use the
road through the toll fees they pay upon using the road. The tollway system is even a more
efficient and equitable manner of taxing the public for the maintenance of public roads.
The charging of fees to the public does not determine the character of the property whether it is for
public dominion or not. Article 420 of the Civil Code defines property of public dominion as one
intended for public use. Even if the government collects toll fees, the road is still intended for
public use if anyone can use the road under the same terms and conditions as the rest of the
public. The charging of fees, the limitation on the kind of vehicles that can use the road, the speed
restrictions and other conditions for the use of the road do not affect the public character of the
road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to
airlines, constitute the bulk of the income that maintains the operations of MIAA. The collection of
such fees does not change the character of MIAA as an airport for public use. Such fees are often
termed users tax. This means taxing those among the public who actually use a public facility
instead of taxing all the public including those who never use the particular public facility. A users
tax is more equitable a principle of taxation mandated in the 1987 Constitution.[23] (Underscoring
supplied)
Petitioners assume that what the Court said above, equating terminal fees to a users tax must also
pertain to tollway fees. But the main issue in the MIAA case was whether or
not Paraaque City could sell airport lands and buildings under MIAA administration at public
auction to satisfy unpaid real estate taxes. Since local governments have no power to tax the
national government, the Court held that the City could not proceed with the auction sale. MIAA
forms part of the national government although not integrated in the department
framework.[24] Thus, its airport lands and buildings are properties of public dominion beyond the
commerce of man under Article 420(1)[25] of the Civil Code and could not be sold at public auction.
As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to
establish a rule that tollway fees are users tax, but to make the point that airport lands and
buildings are properties of public dominion and that the collection of terminal fees for their use
does not make them private properties. Tollway fees are not taxes.Indeed, they are not assessed
and collected by the BIR and do not go to the general coffers of the government.
It would of course be another matter if Congress enacts a law imposing a users tax, collectible
from motorists, for the construction and maintenance of certain roadways.The tax in such a case
goes directly to the government for the replenishment of resources it spends for the
roadways. This is not the case here. What the government seeks to tax here are fees collected
from tollways that are constructed, maintained, and operated by private tollway operators at their
own expense under the build, operate, and transfer scheme that the government has adopted for
expressways.[26] Except for a fraction given to the government, the toll fees essentially end up as
earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any
sense. A tax is imposed under the taxing power of the government principally for the purpose of
raising revenues to fund public expenditures.[27] Toll fees, on the other hand, are collected by
private tollway operators as reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, as well as to assure them a reasonable
margin of income. Although toll fees are charged for the use of public facilities, therefore, they are
not government exactions that can be properly treated as a tax. Taxes may be imposed only by
the government under its sovereign authority, toll fees may be demanded by either the
government or private individuals or entities, as an attribute of ownership.[28]
Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of
VAT as an indirect tax. In indirect taxation, a distinction is made between the liability for the tax
and burden of the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT
it paid on goods, properties or services to the buyer. In such a case, what is transferred is not the
sellers liability but merely the burden of the VAT.[29]
Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its
burden since the amount of VAT paid by the former is added to the selling price. Once shifted, the
VAT ceases to be a tax[30] and simply becomes part of the cost that the buyer must pay in order to
purchase the good, property or service.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway
operator. Under Section 105 of the Code, [31] VAT is imposed on any person who, in the course of
trade or business, sells or renders services for a fee. In other words, the seller of services, who in
this case is the tollway operator, is the person liable for VAT. The latter merely shifts the burden of
VAT to the tollway user as part of the toll fees.
For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed
as a users tax. VAT is assessed against the tollway operators gross receipts and not necessarily
on the toll fees. Although the tollway operator may shift the VAT burden to the tollway user, it will
not make the latter directly liable for the VAT. The shifted VAT burden simply becomes part of the
toll fees that one has to pay in order to use the tollways.[32]
Three. Petitioner Timbol has no personality to invoke the non-impairment of contract clause on
behalf of private investors in the tollway projects. She will neither be prejudiced by nor be affected
by the alleged diminution in return of investments that may result from the VAT imposition. She
has no interest at all in the profits to be earned under the TOAs. The interest in and right to
recover investments solely belongs to the private tollway investors.
Besides, her allegation that the private investors rate of recovery will be adversely affected by
imposing VAT on tollway operations is purely speculative. Equally presumptuous is her assertion
that a stipulation in the TOAs known as the Material Adverse Grantor Action will be activated if
VAT is thus imposed. The Court cannot rule on matters that are manifestly conjectural. Neither
can it prohibit the State from exercising its sovereign taxing power based on uncertain, prophetic
grounds.
Four. Finally, petitioners assert that the substantiation requirements for claiming input VAT make
the VAT on tollway operations impractical and incapable of implementation. They cite the fact that,
in order to claim input VAT, the name, address and tax identification number of the tollway user
must be indicated in the VAT receipt or invoice. The manner by which the BIR intends to
implement the VAT by rounding off the toll rate and putting any excess collection in an escrow
account is also illegal, while the alternative of giving change to thousands of motorists in order to
meet the exact toll rate would be a logistical nightmare. Thus, according to them, the VAT on
tollway operations is not administratively feasible.[33]
Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax
system should be capable of being effectively administered and enforced with the least
inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax
imposition invalid except to the extent that specific constitutional or statutory limitations are
impaired.[34] Thus, even if the imposition of VAT on tollway operations may seem burdensome to
implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or the
Constitution.
Here, it remains to be seen how the taxing authority will actually implement the VAT on tollway
operations. Any declaration by the Court that the manner of its implementation is illegal or
unconstitutional would be premature. Although the transcript of the August 12, 2010 Senate
hearing provides some clue as to how the BIR intends to go about it,[35] the facts pertaining to the
matter are not sufficiently established for the Court to pass judgment on. Besides, any concern
about how the VAT on tollway operations will be enforced must first be addressed to the BIR on
whom the task of implementing tax laws primarily and exclusively rests. The Court cannot preempt
the BIRs discretion on the matter, absent any clear violation of law or the Constitution.
For the same reason, the Court cannot prematurely declare as illegal, BIR RMC 63-2010 which
directs toll companies to record an accumulated input VAT of zero balance in their books as of
August 16, 2010, the date when the VAT imposition was supposed to take effect. The issuance
allegedly violates Section 111(A)[36] of the Code which grants first time VAT payers a transitional
input VAT of 2% on beginning inventory.
The VAT on franchise grantees has been in the statute books since 1994 when R.A. 7716 or the
Expanded Value-Added Tax law was passed. It is only now, however, that the executive has
earnestly pursued the VAT imposition against tollway operators. The executive exercises
exclusive discretion in matters pertaining to the implementation and execution of tax
laws. Consequently, the executive is more properly suited to deal with the immediate and practical
consequences of the VAT imposition.
WHEREFORE, the Court DENIES respondents Secretary of Finance and Commissioner of
Internal Revenues motion for reconsideration of its August 24, 2010 resolution, DISMISSES the
petitioners Renato V. Diaz and Aurora Ma. F. Timbols petition for lack of merit, and SETS
ASIDE the Courts temporary restraining order dated August 13, 2010.
Constitution of the Philippines, Article 6, Section 28: Tax Exemption for Religious Organizations
SECTION 28. [...] (3) Charitable institutions, churches and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational purposes shall be exempt
from taxation.

In this connection, the BIR explained that BIR RMC 63-2010 is actually the product of negotiations
with tollway operators who have been assessed VAT as early as 2005, but failed to charge VAT-
inclusive toll fees which by now can no longer be collected. The tollway operators agreed to waive
the 2% transitional input VAT, in exchange for cancellation of their past due VAT liabilities.
Notably, the right to claim the 2% transitional input VAT belongs to the tollway operators who have
not questioned the circulars validity. They are thus the ones who have a right to challenge the
circular in a direct and proper action brought for the purpose.

Conclusion

In fine, the Commissioner of Internal Revenue did not usurp legislative prerogative or expand the
VAT laws coverage when she sought to impose VAT on tollway operations. Section 108(A) of the
Code clearly states that services of all other franchise grantees are subject to VAT, except as may
be provided under Section 119 of the Code.Tollway operators are not among the franchise
grantees subject to franchise tax under the latter provision. Neither are their services among the
VAT-exempt transactions under Section 109 of the Code.

If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly
allege, then it would have been well for the law to clearly say so. Tax exemptions must be justified
by clear statutory grant and based on language in the law too plain to be mistaken.[37] But as the
law is written, no such exemption obtains for tollway operators. The Court is thus duty-bound to
simply apply the law as it is found.

Lastly, the grant of tax exemption is a matter of legislative policy that is within the exclusive
prerogative of Congress. The Courts role is to merely uphold this legislative policy, as reflected
first and foremost in the language of the tax statute. Thus, any unwarranted burden that may be
perceived to result from enforcing such policy must be properly referred to Congress. The Court
has no discretion on the matter but simply applies the law.