G.R. No. 149110. April 9, 2003.
right to exist as a corporation, by virtue of duly approved articles of incorporation, or a charter
NATIONAL POWER CORPORATION, petitioner, vs. CITY OF CABANATUAN,
respondent.
Constitutional Law; Local Governments; Local Government Code;Taxation; Words and
Phrases; “Franchise”, defined.—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.”
Same; Same; Same; Same; Same; “Business”, defined.—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.”
Same; Same; Same; Same; The theory behind the exercise of the power to tax
emanates from necessity.—Taxes are the lifeblood of the government, for without taxes, the
government can neither exist nor endure. A principal attribute of sovereignty, 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; without taxes, government cannot fulfill its
mandate of promoting the general welfare and well-being of the people.
Same; Same; Same; Same; The power to tax is no longer vested exclusively on
Congress.—In recent years, the increasing social challenges of the times expanded the scope of
state activity, and taxation has become a tool to realize social justice and the equitable
distribution of wealth, economic progress and the protection of local industries as well as public
welfare and similar objectives. Taxation assumes even greater significance with the ratification
of the 1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on
Congress; local legislative bodies are now given direct authority to levy taxes, fees and other
charges pursuant to Article X, section 5 of the 1987 Constitution.
Same; Same; Same; Same; One of the most significant provisions of the Local
Government Code is the removal of the blanket exclusion of instrumentalities and agencies of
the national government from the coverage of local taxation.—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: x x x (o) Taxes, fees,
or charges of any kind on the National Government, its agencies and instrumentalities, and local
government units.” (emphasis supplied)
Same; Same; Same; Same; Franchises; A franchise may refer to a general or primary
franchise, or to a special or secondary franchise.—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
pursuant to a special law creating the corporation. The right under a primary or general franchise
is vested in the individuals who compose the corporation and not in the corporation itself. 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.
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.
Same; Same; Same; Same; Words and Phrases; Franchise Tax; Definition; Requisites.
—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.” It is not levied on the corporation
simply for existing as a corporation, upon its property or its income, 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. 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.
Same; Same; Same; Same; The power to tax is the most effective instrument to raise
needed revenues to finance and support myriad activities of the local government units.—
Doubtless, the power to tax is the most effective instrument to raise needed revenues to finance
and support myriad activities of the local government units for the delivery of basic services
essential to the promotion of the general welfare and the enhancement of peace, progress, and
prosperity of the people. As this Court observed in the Mactan case, “the original reasons for the
withdrawal of tax exemption privileges granted to government-owned or controlled corporations
and all other units of government were that such privilege resulted in serious tax base erosion
and distortions in the tax treatment of similarly situated enterprises.” With the added burden of
devolution, it is even more imperative for government entities to share in the requirements of
development, fiscal or otherwise, by paying taxes or other charges due from them.
PUNO, J.:
This is a petition for review of the Decision and the Resolution 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. 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.” 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.
 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. Pursuant to
section 37 of Ordinance No. 165-92, 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.
Petitioner, whose capital stock was subscribed and paid wholly by the Philippine
Government, 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 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.”
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. Respondent alleged that
petitioner’s exemption from local taxes has been repealed by section 193 of Rep. Act
No. 7160, 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 Order 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. x x x 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: ‘x x x (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.’ (italics 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.”
On appeal, the Court of Appeals reversed the trial court’s Order on the ground that
section 193, in relation to sections 137 and 151 of the LGC, expressly withdrew the
exemptions granted to the petitioner. 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 P10,000.00 as
litigation expense.
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 x x x are hereby withdrawn.’ The repeal is direct and unequivocal,
not implied.
IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED.
SO ORDERED.”
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.”
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)
xxx
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.
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. 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.
Petitioner also alleges that it is an instrumentality of the National Government, and
as such, may not be taxed by the respondent city government. It cites the doctrine
in Basco vs. Philippine Amusement and Gaming Corporation where 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.”
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.”
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.”
The petition is without merit.
Taxes are the lifeblood of the government, for without taxes, the government can
neither exist nor endure. A principal attribute of sovereignty, 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; 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. Taxation assumes even
greater significance with the ratification of the 1987 Constitution. Thenceforth, the
power to tax is no longer vested exclusively on Congress; local legislative bodies are
now given direct authority to levy taxes, fees and other charges pursuant to Article X,
section 5 of the 1987 Constitution, viz.:
“Section 5.—Each Local Government unit shall have the power to create its own
sources of revenue, to levy taxes, fees and charges subject to such guidelines
and limitations as the Congress may provide, consistent with the basic policy of
local autonomy. Such taxes, fees and charges shall accrue exclusively to the
Local Governments.”
This paradigm shift results from the realization that genuine development can be
achieved only by strengthening local autonomy and promoting decentralization of
governance. For a long time, the country’s highly centralized government structure
has bred a culture of dependence among local government leaders upon the national
leadership. It has also “dampened the spirit of initiative, innovation and imaginative
resilience in matters of local development on the part of local government leaders.”
The only way to shatter this culture of dependence is to give the LGUs a wider role in
the delivery of basic services, and confer them sufficient powers to generate their own
sources for the purpose. To achieve this goal, section 3 of Article X of the 1987
Constitution mandates Congress to enact a local government code that
will, consistent with the basic policy of local autonomy, set the guidelines and
limitations to this grant of taxing powers, viz.:
“Section 3. The Congress shall enact a local government code which shall
provide for a more responsive and accountable local government structure
instituted through a system of decentralization with effective mechanisms of
recall, initiative, and referendum, allocate among the different local government
units their powers, responsibilities, and resources, and provide for the
qualifications, election, appointment and removal, term, salaries, powers and
functions and duties of local officials, and all other matters relating to the
organization and operation of the local units.”
To recall, prior to the enactment of the Rep. Act No. 7160, also known as the Local
Government Code of 1991 (LGC), various measures have been enacted to promote
local autonomy. These include the Barrio Charter of 1959, the Local Autonomy Act of
1959, the Decentralization Act of 1967 and the Local Government Code of 1983.
Despite these initiatives, however, the shackles of dependence on the national
government remained. Local government units were faced with the same problems
that hamper their capabilities to participate effectively in the national development
efforts, among which are: (a) inadequate tax base, (b) lack of fiscal control over
external sources of income, (c) limited authority to prioritize and approve development
projects, (d) heavy dependence on external sources of income, and (e) limited
supervisory control over personnel of national line agencies.
Considered as the most revolutionary piece of legislation on local autonomy, the
LGC effectively deals with the fiscal constraints faced by LGUs. It widens the tax base
of LGUs to include taxes which were prohibited by previous laws such as the
imposition of taxes on forest products, forest concessionaires, mineral products,
mining operations, and the like. The LGC likewise provides enough flexibility to
impose tax rates in accordance with their needs and capabilities. It does not prescribe
graduated fixed rates but merely specifies the minimum and maximum tax rates and
leaves the determination of the actual rates to the respective sanggunian.
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:
xxx
(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 Corporation relied upon by the petitioner to support its claim
no longer applies. To emphasize, the Basco case was decided prior to the effectivity
of the LGC, when no law empowering the local government units to tax
instrumentalities of the National Government was in effect. However, as this Court
ruled in the case of Mactan Cebu International Airport Authority (MCIAA) vs. Marcos,
nothing prevents Congress from decreeing that even instrumentalities or agencies of
the government performing governmental functions may be subject to tax. In enacting
the LGC, Congress exercised its prerogative to tax instrumentalities and agencies of
government as it sees fit. Thus, after reviewing the specific provisions of the LGC, this
Court held that MCIAA, although an instrumentality of the national government, was
subject to real property tax, 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.’ ”
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: 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. The right under a primary or
general franchise is vested in the individuals who compose the corporation and not in
the corporation itself. 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. 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.
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.” It is not levied on the corporation simply for
existing as a corporation, upon its property or its income, 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. 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. As its secondary franchise, Commonwealth Act No. 120, as amended, vests the
petitioner the following powers which are not available to ordinary corporations, viz.:
“x x x
(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, water-course, canal,
ditch, flume, street, avenue, highway or railway of private and public ownership,
as the location of said works may require x x x;
(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;
xxx
(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 x x x”
With these powers, petitioner eventually had the monopoly in the veneration and
distribution of electricity. This monopoly was strengthened with the issuance of Pres.
Decree No. 40, nationalizing the electric power industry. Although Exec. Order No.
215 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, and can exercise
all the powers of a corporation under the Corporation Code.
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. 2029 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. 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), 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.” 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.
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.:
“(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 x x x” (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. 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” 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. 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. 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. Not being a local water district, a
cooperative registered under R.A. No. 6938, or a non-stock and nonprofit 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, 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. 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) nonstock and non- Note.—While taxes are the lifeblood of the government and should be collected
profit hospitals and educational institutions, are withdrawn upon the effectivity of without unnecessary hindrance, such collection should be made in accordance with
this code, the obvious import is to limit the exemptions to the three enumerated law as any arbitrariness will negate the very reason for government itself. (Marcos II
entities. It is a basic precept of statutory construction that the express mention of
vs. Court of Appeals, 273 SCRA 47 [1997])
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
——o0o——
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.”
(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. 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.” 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.
 G.R. No. 143076. June 10, 2003. by all persons, whether natural or juridical, including government-owned and controlled
corporations, except local water districts, cooperatives duly registered under R.A. No. 6938,
non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the
PHILIPPINE RURAL ELECTRIC COOPERATIVES ASSOCIATION, INC. effectivity of this Code.
(PHILRECA); AGUSAN DEL NORTE ELECTRIC COOPERATIVE, INC. (ANECO);
ILOILO I ELECTRIC COOPERATIVE, INC. (ILECO I); and ISABELA I ELECTRIC Same; Same; Same; The intention of the law is to broaden the taxbase of local
COOPERATIVE, INC. (ISELCO I), petitioners, vs.THE SECRETARY, DEPARTMENT government units to assure them of substantial sources of revenue.—In Mactan Cebu
OF INTERIOR AND LOCAL GOVERNMENT, and THE SECRETARY, International Airport Authority v. Marcos, this Court held that the limited and restrictive nature of
DEPARTMENT OF FINANCE, respondents. the tax exemption privileges under the Local Government Code is consistent with the State
policy to ensure autonomy of local governments and the objective of the Local Government
Code to grant genuine and meaningful autonomy to enable local government units to attain their
Constitutional Law; Equal Protection Clause; Words and Phrases; The equal protection
fullest development as self-reliant communities and make them effective partners in the
clause under the Constitution means that “no person or class of person shall be deprived of the
attainment of national goals. The obvious intention of the law is to broaden the tax base of local
same protection of laws which is enjoyed by other persons or other classes in the same place
government units to assure them of substantial sources of revenue.
and in like circumstances.”—The equal protection clause under the Constitution means that “no
person or class of persons shall be deprived of the same protection of laws which is enjoyed by
Same; Same; Same; Exemptions from local taxation, including real property tax, are
other persons or other classes in the same place and in like circumstances.” Thus, the guaranty
granted to all cooperatives covered by R.A. 6938 and such exemptions exist for al long as the
of the equal protection of the laws is not violated by a law based on reasonable classification.
Local Government Code and the provisions therein on local taxation remain good law.—
Classification, to be reasonable, must (1) rest on substantial distinctions; (2) be germane to the
Sections 193 and 234 of the Local Government Code permit reasonable classification as these
purposes of the law; (3) not be limited to existing conditions only; and (4) apply equally to all
exemptions are not limited to existing conditions and apply equally to all members of the same
members of the same class.
class. Exemptions from local taxation, including real property tax, are granted to all cooperatives
covered by R.A. No. 6938 and such exemptions exist for as long as the Local Government Code
Same; Same; Local Government Code; Power of Taxation; The Court holds that there is
and the provisions therein on local taxation remain good law.
reasonable classification under the Local Government Code to justify the different tax treatment
between electric cooperatives covered by P.D. 269, as amended, and electric cooperatives
Same; Same; Constitutional Law; Non-Impairment Clause; It is ingrained in
under R.A. 6938.—We hold that there is reasonable classification under the Local Government
jurisprudence that the constitutional prohibition on the impairment of the obligation of contracts
Code to justify the different tax treatment between electric cooperatives covered by P.D. No.
does not prohibit every change in existing laws. To fall within the prohibition, the change must
269, as amended, and electric cooperatives under R.A. No. 6938. First, substantial distinctions
not only impair the obligation of the existing contract, but the impairment must be substantial.—It
exist between cooperatives under P.D. No. 269, as amended, and cooperatives under R.A. No.
is ingrained in jurisprudence that the constitutional prohibition on the impairment of the obligation
6938. These distinctions are manifest in at least two material respects which go into the nature
of contracts does not prohibit every change in existing laws. To fall within the prohibition, the
of cooperatives envisioned by R.A. No. 6938 and which characteristics are not present in the
change must not only impair the obligation of the existing contract, but the impairment must be
type of cooperative associations created under P.D. No. 269, as amended.
substantial. What constitutes substantial impairment was explained by this Court in Clemons v.
Nolting: A law which changes the terms of a legal contract between parties, either in the time or
Local Government Code; Power of Taxation; Tax Exemptions; While each government
mode of performance, or imposes new conditions, or dispenses with those expressed, or
unit is granted the power to create its own sources of revenue, Congress, in light of its broad
authorizes for its satisfaction something different from that provided in its terms, is law which
power to tax, has the discretion to determine the extent of the taxing power of local government
impairs the obligation of a contract and is therefore null and void. Moreover, to constitute
units consistent with the policy of local autonomy.—The classification of tax-exempt entities in
impairment, the law must affect a change in the rights of the parties with reference to each other
the Local Government Code is germane to the purpose of the law. The Constitutional mandate
and not with respect to non-parties.
that every local government unit shall enjoy local autonomy, does not mean that the exercise of
power by local governments is beyond regulation by Congress. Thus, while each government
Same; Same; Same; Same; The withdrawal by the Local Government Code under
unit is granted the power to create its own sources of revenue, Congress, in light of its broad
Sections 193 and 234 of the tax exemptions previously enjoyed by petitioners does not impair
power to tax, has the discretion to determine the extent of the taxing powers of local government
the obligation of the borrower, the lender or the beneficiary under loan agreements as in fact, no
units consistent with the policy of local autonomy.
taxation exemption is granted therein.—Beyond doubt, the import of the tax provision in the loan
agreements cited by petitioners is twofold: (1) the borrower is entitled to receive from and is
Same; Same; Same; Section 193 of the Local Government Code is indicative of the
obliged to pay the lender the principal amount of the loan and the interest thereon in full, without
legislative intent to vest broad taxing powers upon local government units and to limit
any deduction of the tax component thereof imposed under applicable Philippine law and any
exemptions from local taxation to entities specifically provided.—Section 193 of the Local
tax imposed shall be paid by the borrower with funds other than the loan proceeds and (2) with
Government Code is indicative of the legislative intent to vest broad taxing powers upon local
respect to payments made to any contractor, its personnel or any property or commodity,
government units and to limit exemptions from local taxation to entities specifically provided
transaction entered into pursuant to the loan agreement and with the use of the proceeds
therein. Section 193 provides: Section 193. Withdrawal of Tax Exemption Privileges.—Unless
thereof, taxes payable under the said transactions shall be paid by the borrower and/or
otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed
beneficiary with the use of funds other than the loan proceeds. The quoted provision does not
purport to grant any tax exemption in favor of any party to the contract, including the
beneficiaries thereof. The provisions simply shift the tax burden, if any, on the transactions
under the loan agreements to the borrower and/or beneficiary of the loan. Thus, the withdrawal
by the Local Government Code under Sections 193 and 234 of the tax exemptions previously
enjoyed by petitioners does not impair the obligation of the borrower, the lender or the
beneficiary under the loan agreements as in fact, no tax exemption is granted therein.
PUNO, J.:
This is a petition for Prohibition under Rule 65 of the Rules of Court with prayer for the
issuance of a temporary restraining order seeking to annul as unconstitutional
sections 193 and 234 of R.A. No. 7160 otherwise known as the Local Government
Code.
On May 23, 2000, a class suit was filed by petitioners in their own behalf and in
behalf of other electric cooperatives organized and existing under P.D. No. 269 who
are members of petitioner Philippine Rural Electric Cooperatives Association, Inc.
(PHIL-RECA). Petitioner PHILRECA is an association of 119 electric cooperatives
throughout the country. Petitioners Agusan del Norte Electric Cooperative, Inc.
(ANECO), Iloilo I Electric Cooperative, Inc. (ILECO I) and Isabela I Electric
Cooperative, Inc. (ISELCO I) are non-stock, non-profit electric cooperatives organized
and existing under P.D. No. 269, as amended, and registered with the National
Electrification Administration (NEA).
Under P.D. No. 269, as amended, or the National Electrification Administration
Decree, it is the declared policy of the State to provide “the total electrification of the
Philippines on an area coverage basis” the same “being vital to the people and the
sound development of the nation.” Pursuant to this policy, P.D. No. 269 aims to
“promote, encourage and assist all public service entities engaged in supplying
electric service, particularly electric cooperatives” by “giving every tenable support
and assistance” to the electric cooperatives coming within the purview of the law.
Accordingly, Section 39 of P.D. No. 269 provides for the following tax incentives to
electric cooperatives:
SECTION 39. Assistance to Cooperatives; Exemption from Taxes, Imposts,
Duties, Fees; Assistance from the National Power Corporation.—Pursuant to the
national policy declared in Section 2, the Congress hereby finds and declares
that the following assistance to cooperative is necessary and appropriate:
(a) Provided that it operates in conformity with the purposes and provisions
of this Decree, cooperatives (1) shall be permanently exempt from paying
income taxes, and (2) for a period ending on December 31 of the thirtieth full
calendar year after the date of a cooperative’s organization or conversion
hereunder, or until it shall become completely free of indebtedness incurred by
borrowing, whichever event first occurs, shall be exempt from the payment (a) of
all National Government, local government and municipal taxes and fees,
including franchise, filing, recordation, license or permit fees or taxes and any
fees, charges, or costs involved in any court or administrative proceeding in
which it may be a party, and (b) of all duties or imposts on foreign goods
acquired for its operations, the period of such exemption for a new cooperative
formed by consolidation, as provided for in Section 29, to begin from as of the
date of the beginning of such period for the constituent consolidating cooperative
which was most recently organized or converted under this Decree: Provided,
That the Board of Administrators shall, after consultation with the Bureau of
Internal Revenue, promulgate rules and regulations for the proper
implementation,.of the tax exemptions provided for in this Decree.
....
From 1971 to 1978, in order to finance the electrification projects envisioned by P.D.
No. 269, as amended, the Philippine Government, acting through the National
Economic Council (now National Economic Development Authority) and the NEA,
entered into six (6) loan agreements with the government of the United States of
America through the United States Agency for International Development (USAID)
with electric cooperatives, including petitioners ANECO, ILECO I and ISELCO I, as
beneficiaries. The six (6) loan agreements involved a total amount of approximately
US$86,000,000.00. These loan agreements are existing until today.
The loan agreements contain similarly worded provisions on the tax application of
the loan and any property or commodity acquired through the proceeds of the loan.
Thus, Section 6.5 of A.I.D. Loan No. 492-H-027 dated November 15, 1971 provides:
Section 6.5. Taxes and Duties.—The Borrower covenants and agrees that this
Loan Agreement and the Loan provided for herein shall be free from, and the
Principal and interest shall be paid to A.I.D. without deduction for and free from,
any taxation or fees imposed under any laws or decrees in effect within the
Republic of the Philippines or any such taxes or fees so imposed or payable shall
be reimbursed by the Borrower with funds other than those provided under the
Loan. To the extent that (a) any contractor, including any consulting firm, any
personnel of such contractor financed hereunder, and any property or
transactions relating to such contracts and (b) any commodity procurement
transactions financed hereunder, are not exempt from identifiable taxes, tariffs,
duties and other levies imposed under laws in effect in the country of the
Borrower, the Borrower and/or Beneficiary shall pay or reimburse the same with
funds other than those provided under the Loan.
Petitioners contend that pursuant to the provisions of P.D. No. 269, as amended, and
the above-mentioned provision in the loan agreements, they are exempt from
payment of local taxes, including payment of real property tax. With the passage of
the Local Government Code, however, they allege that their tax exemptions have
been invalidly withdrawn. In particular, petitioners assail Sections 193 and 234 of the
Local Government Code on the ground that the said provisions discriminate against
them, in violation of the equal protection clause. Further, they submit that the said
provisions are unconstitutional because they impair the obligation of contracts
between the Philippine Government and the United States Government.
On July 25, 2000 we issued a Temporary Restraining Order.
 We note that the instant action was filed directly to this Court, in disregard of the
rule on hierarchy of courts. However, we opt to take primary jurisdiction over the
present petition and decide the same on its merits in view of the significant
constitutional issues raised by the parties dealing with the tax treatment of
cooperatives under existing laws and in the interest of speedy justice and prompt
disposition of the matter.
I There is No Violation of the Equal Protection Clause
The pertinent parts of Sections 193 and 234 of the Local Government Code provide:
Section 193. Withdrawal of Tax Exemption Privileges.—Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical, including government-owned
and controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code.
....
Section 234. Exemptions from real property tax.—The following are
exempted from payment of the real property tax:
(d) All real property owned by duly registered cooperatives as provided for
under R.A. No. 6938; and
....
Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by, all persons whether natural or
juridical, including all government-owned and controlled corporations are hereby
withdrawn upon effectivity of this Code.
Petitioners argue that the above provisions of the Local Government Code are
unconstitutional for violating the equal protection clause. Allegedly, said provisions
unduly discriminate against petitioners who are duly-registered cooperatives under
P.D. No. 269, as amended, and not under R.A. No. 6938 or the Cooperative Code of
the Philippines. They stress that cooperatives registered under R.A. No. 6938 are
singled out for tax exemption privileges under the Local Government Code. They
maintain that electric cooperatives registered with the NEA under P.D. No. 269, as
amended, and electric cooperatives registered with the Cooperative Development
Authority (CDA) under R.A. No. 6938 are similarly situated for the following reasons:
a) petitioners are registered with the NEA which is a government agency like the
CDA; b) petitioners, like CDA-registered cooperatives, operate for service to their
member-consumers; and c) prior to the enactment of the Local Government Code,
petitioners, like CDA-registered cooperatives, were already tax-exempt. Thus,
petitioners contend that to grant tax exemptions from local government taxes,
including real property tax under Sections 193 and 234 of the Local Government
Code only to registered cooperatives under R.A. No. 6938 is a violation of the equal
protection clause.
We are not persuaded. The equal protection clause under the Constitution means
that “no person or class of persons shall be deprived of the same protection of laws
which is enjoyed by other persons or other classes in the same place and in like
circumstances.” Thus, the guaranty of the equal protection of the laws is not violated
by a law based on reasonable classification. Classification, to be reasonable, must (1)
rest on substantial distinctions; (2) be germane to the purposes of the law; (3) not be
limited to existing conditions only; and (4) apply equally to all members of the same
class.
We hold that there is reasonable classification under the Local Government Code
to justify the different tax treatment between electric cooperatives covered by P.D.
No. 269, as amended, and electric cooperatives under R.A. No. 6938.
First, substantial distinctions exist between cooperatives under P.D. No. 269, as
amended, and cooperatives under R.A. No. 6938. These distinctions are manifest in
at least two material respects which go into the nature of cooperatives envisioned by
R.A. No. 6938 and which characteristics are not present in the type of cooperative
associations created under P.D. No. 269, as amended.
a. Capital Contributions by Members
A cooperative under R.A. No. 6938 is defined as:
[A] duly registered association of persons with a common bond of interest, who
have voluntarily joined together to achieve a lawful common or social economic
end, making equitable contributions to the capital required and accepting a fair
share of the risks and benefits of the undertaking in accordance with universally
accepted cooperative principles.
The above definition provides for the following elements of a cooperative: a)
association of persons; b) common bond of interest; c) voluntary association; d) lawful
common social or economic end; e) capital contributions; f) fair share of risks and
benefits; g) adherence to cooperative values; and g) registration with the appropriate
government authority.
The importance of capital contributions by members of a cooperative under R.A.
No. 6938 was emphasized during the Senate deliberations as one of the key factors
which distinguished electric cooperatives under P.D. No. 269, as amended, from
electric cooperatives under the Cooperative Code. Thus:
Senator Osmeña. Will this Code, Mr. President, cover electric cooperatives as
they exist in the country today and are administered by the National
Electrification Administration?
Senator Aquino. That cannot be answered with a simple yes or no, Mr. President.
The answer will depend on what provisions we will eventually come up
with. Electric cooperatives as they exist today would not fall under the term
“cooperative” as used in this bill because the concept of a cooperative is that
which adheres and practices certain cooperative principles . . . .
....
Senator Aquino. To begin with, one of the most important requirements, Mr.
President, is the principle where members bind themselves to help
themselves. It is because of their collectivity that they can have some
 economic benefits. In this particular case [cooperatives under P.D. No,. 269],
the government is the one that funds these so-called electric
cooperatives. . . .
...
Senator Aquino.  . . . That is why in Article III we have the following definition:
A cooperative is an association of persons with a common bond of
interest who have voluntarily joined together to achieve a common social or
economic end, making equitable contributions to the capital required.
In this particular case [cooperatives under P.D. No. 269], Mr. President, the
members do not make substantial contribution to the capital required. It is the
government that puts in the capital, in most cases.
Senator Osmena. Under line 6, Mr. President, making equitable contributions to
the capital required would exclude electric cooperatives [under P.D. No. 269].
Because the membership does not make equitable contributions.
Senator Aquino. Yes, Mr. President. This is precisely what I mean, that electric
cooperatives [under P.D. No. 269] do not qualify in the spirit of cooperatives.
That is the reason why they should be eventually assessed whether they
intend to comply with the cooperatives or not. Because, if after giving them a
second time, they do not comply, then, they should not be classified as
cooperatives.
Senator Osmeña. Mr. President, the measure of their qualifying as a cooperative
would be the requirement that a member of the electric cooperative must
contribute a pro rata share of the capital of the cooperative in cash to be a
cooperative.
Nowhere in P.D. No. 269, as amended, does it require cooperatives to make
equitable contributions to capital. Petitioners themselves admit that to qualify as a
member of an electric cooperative under P.D. No. 269, only the payment of a P5.00
membership fee is required which is even refundable the moment the member is no
longer interested in getting electric service from the cooperative or will transfer to
another place outside the area covered by the cooperative. However, under the
Cooperative Code, the articles of cooperation of a cooperative applying for
registration must be accompanied with the bonds of the accountable officers and a
sworn statement of the treasurer elected by the subscribers showing that at least
twenty-five per cent (25%) of the authorized share capital has been subscribed and at
least twenty-five per cent (25%) of the total subscription has been paid and in no case
shall the paid-up share capital be less than Two thousand pesos (P2,000.00).
b. Extent of Government Control over Cooperatives
Another principle adhered to by the Cooperative Code is the principle of subsidiarity.
Pursuant to this principle, the government may only engage in development activities
where cooperatives do not posses the capability nor the resources to do so and only
upon the request of such cooperatives. Thus, Article 2 of the Cooperative Code
provides:
Art. 2. Declaration of Policy.—It is the declared policy of the State to foster the
creation and growth of cooperatives as a practical vehicle for prompting self-
reliance and harnessing people power towards the attainment of economic
development and social justice. The State shall encourage the private sector to
undertake the actual formation and organization to cooperatives and shall create
an atmosphere that is conducive to the growth and development of these
cooperatives.
Towards this end, the Government and all its branches, subdivisions,
instrumentalities and agencies shall ensure the provision of technical guidance,
financial assistance and other services to enable said cooperatives to develop
into viable and responsive economic enterprises and thereby bring about a
strong cooperative movement that is free from any conditions that might infringe
upon the autonomy or organizational integrity of cooperatives.
Further, the State recognizes the principle of subsidiarity under which the
cooperative sector will initiate and regulate within its own ranks the promotion
and organization, training and research, audit and support services relating to
cooperatives with government assistance where necessary.
Accordingly, under the charter of the CDA, or the primary government agency tasked
to promote and regulate the institutional development of cooperatives, it is the
declared policy of the State that:
[government assistance to cooperatives shall be free from any restriction and
conditionality that may in any manner infringe upon the objectives and character
of cooperatives as provided in this Act. The State shall, except as provided in
this Act, maintain the policy of noninterference in the management and operation
of cooperatives.
In contrast, P.D. No. 269, as amended by P.D. No. 1645, is replete with provisions
which grant the NEA, upon the happening of certain events, the power to control and
take over the management and operations of cooperatives registered under it. Thus:
a)the NEA Administrator has the power to designate, subject to the confirmation
of the Board of Administrators, an Acting General Manager and/or Project
Supervisor for a cooperative where vacancies in the said positions occur and/or
when the interest of the cooperative or the program so requires, and to prescribe
the functions of the said Acting General Manager and/or Project
Supervisor, which powers shall not be nullified, altered or diminished by any
policy or resolution of the Board of Directors of the cooperative concerned;
b)the NEA is given the power of supervision and control over electric
cooperatives and pursuant to such powers, NEA may issue orders, rules and
regulations motu propio or upon petition of third parties to conduct referenda and
other similar actions in all matters affecting electric cooperatives;
c)No cooperative shall borrow money from any source without the approval of the
Board of Administrators of the NEA; and
d)The management of a cooperative shall be vested in its Board, subject to the
supervision and control of NEA which shall have the right to be represented and
to participate in all Board meetings and deliberations and to approve all policies
and resolutions.
The extent of government control over electric cooperatives covered by P.D. No. 269,
as amended, is largely a function of the role of the NEA as a primary source of
funds of these electric cooperatives. It is crystal clear that NEA incurred loans from
various sources to finance the development and operations of the electric
cooperatives. Consequently, amendments to P.D. No. 269 were primarily geared to
expand the powers of the NEA over the electric cooperatives to ensure that loans
granted to them would be repaid to the government. In contrast, cooperatives under
R.A. No. 6938 are envisioned to be self-sufficient and independent organizations with
minimal government intervention or regulation.
To be sure, the transitory provisions of R.A. No. 6938 are indicative of the
recognition by Congress of the fundamental distinctions between electric
cooperatives organized under P.D. No. 269, as amended, and cooperatives under the
new Cooperative Code. Article 128 of the Cooperative Code provides that all
cooperatives registered under previous laws shall be deemed registered with the
CDA upon submission of certain requirements within one year. However,
cooperatives created under P.D. No. 269, as amended, are given three years within
which to qualify and register with the CDA, after which, provisions of P.D. No. 1645
which expand the powers of the NEA over electric cooperatives, would no longer
apply.
Second, the classification of tax-exempt entities in the Local Government Code is
germane to the purpose of the law. The Constitutional mandate that every local
government unit shall enjoy local autonomy, does not mean that the exercise of
power by local governments is beyond regulation by Congress. Thus, while each
government unit is granted the power to create its own sources of revenue, Congress,
in light of its broad power to tax, has the discretion to determine the extent of the
taxing powers of local government units consistent with the policy of local autonomy.
Section 193 of the Local Government Code is indicative of the legislative intent to
vest broad taxing powers upon local government units and to limit exemptions from
local taxation to entities specifically provided therein. Section 193 provides:
Section 193. Withdrawal of Tax Exemption Privileges.—Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical, including government-owned
and controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and nonprofit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code.
The above provision effectively withdraws exemptions from local taxation enjoyed by
various entities and organizations upon effectivity of the Local Government
Code except for a) local water districts; b) cooperatives duly registered under R.A.
No. 6938; and c) non-stock and nonprofit hospitals and educational institutions.
Further, with respect to real property taxes, the Local Government Code again
specifically enumerates entities which are exempt therefrom and withdraws
exemptions enjoyed by all other entities upon the effectivity of the code. Thus,
Section 234 provides:
SEC. 234. Exemptions from Real Property Tax.—The following are exempted
from payment of the real property tax:
(a)Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof had been
granted for consideration or otherwise, to a taxable person;
(b)Charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, nonprofit or religious cemeteries and all
lands, buildings and improvements actually, directly, and exclusively
used for religious, charitable or educational purposes;
(c)All machineries and equipment that are actually, directly and
exclusively used by local water districts and government-owned or
controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power;
(d)All real property owned by duly registered cooperatives as provided
for under R.A. No. 6938; and
(e)Machinery and equipment used for pollution control and
environmental protection.
Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by, all persons, whether natural or
juridical, including all government-owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code.
In Mactan Cebu International Airport Authority v. Marcos, this Court held that the
limited and restrictive nature of the tax exemption privileges under the Local
Government Code is consistent with the State policy to ensure autonomy of local
governments and the objective of the Local Government Code to grant genuine and
meaningful autonomy to enable local government units to attain their fullest
development as self-reliant communities and make them effective partners in the
attainment of national goals. The obvious intention of the law is to broaden the tax
base of local government units to assure them of substantial sources of revenue.
While we understand petitioners’ predicament brought about by the withdrawal of
their local tax exemption privileges under the Local Government Code, it is not the
province of this Court to go into the wisdom of legislative enactments. Courts can only
interpret laws. The principle of separation powers prevents them from re-inventing the
laws.
Finally, Sections 193 and 234 of the Local Government Code permit reasonable
classification as these exemptions are not limited to existing conditions and apply
equally to all members of the same class. Exemptions from local taxation, including
real property tax, are granted to all cooperatives covered by R.A. No. 6938 and such
exemptions exist for as long as the Local Government Code and the provisions
therein on local taxation remain good law.
II There is No Violation of the Non-Impairment Clause
It is ingrained in jurisprudence that the constitutional prohibition on the impairment of
the obligation of contracts does not prohibit every change in existing laws. To fall
within the prohibition, the change must not only impair the obligation of the existing
contract, but the impairment must be substantial. What constitutes substantial
impairment was explained by this Court in Clemons v. Nolting:
A law which changes the terms of a legal contract between parties, either in the
time or mode of performance, or imposes new conditions, or dispenses with
those expressed, or authorizes for its satisfaction something different from that
provided in its terms, is law which impairs the obligation of a contract and is
therefore null and void.
Moreover, to constitute impairment, the law must affect a change in the rights of the
parties with reference to each other and not with respect to non-parties.
Petitioners insist that Sections 193 and 234 of the Local Government Code impair
the obligations imposed under the six (6) loan agreements executed by the NEA as
borrower and USAID as lender. All six agreements contain similarly worded
provisions on the tax treatment of the proceeds of the loan and properties and
commodities acquired through the loan. Thus:
Section 6.5. Taxes and Duties.—The Borrower covenants and agrees that this
Loan Agreement and the Loan provided for herein shall be free from, and the
Principal and interest shall be paid to A.I.D. without deduction for and free from,
any taxation or fees imposed under any laws or decrees in effect within the
Republic of the Philippines or any such taxes or fees so imposed or payable shall
be reimbursed by the Borrower with funds other than those provided under the
Loan. To the extent that (a) any contractor, including any consulting firm, any
personnel of such contractor financed hereunder, and any property or
transactions relating to such contracts and (b) any commodity procurement
transactions financed hereunder, are not exempt from identifiable taxes, tariffs,
duties and other levies imposed under laws in effect in the country of the
Borrower, the Borrower and/or Beneficiary shall pay or reimburse the same with
funds other than those provided under the Loan.
Petitioners contend that the withdrawal by the Local Government Code of the tax
exemptions of cooperatives under P.D. No. 269, as amended, is an impairment of the
tax exemptions provided under the loan agreements. Petitioners argue that as
beneficiaries of the loan proceeds, pursuant to the above provision, “[a]ll the assets of
petitioners, such as lands, buildings, distribution lines acquired through the proceeds
of the Loan Agreements . . . are tax exempt.”
We hold otherwise.
A plain reading of the provision quoted above readily shows that it does not grant
any tax exemption in favor of the borrower or the beneficiary either on the proceeds of
the loan itself or the properties acquired through the said loan. It simply states that the
loan proceeds and the principal and interest of the loan, upon repayment by the
borrower, shall be without deduction of any tax or fee that may be payable under
Philippine law as such tax or fee will be absorbed by the borrower with funds other
than the loan proceeds. Further, the provision states that with respect to any payment
made by the borrower to (1) any contractor or any personnel of such contractor or any
property transaction and (2) any commodity transaction using the proceeds of the
loan, the tax to be paid, if any, on such transactions shall be absorbed by the
borrower and/or beneficiary through funds other than the loan proceeds.
Beyond doubt, the import of the tax provision in the loan agreements cited by
petitioners is twofold: (1) the borrower is entitled to receive from and is obliged to pay
the lender the principal amount of the loan and the interest thereon in full, without any
deduction of the tax component thereof imposed under applicable Philippine law and
any tax imposed shall be paid by the borrower with funds other than the loan
proceeds and (2) with respect to payments made to any contractor, its personnel or
any property or commodity, transaction entered into pursuant to the loan agreement
and with the use of the proceeds thereof, taxes payable under the said
transactions shall be paid by the borrower and/or beneficiary with the use of funds
other than the loan proceeds. The quoted provision does not purport to grant any tax
exemption in favor of any party to the contract, including the beneficiaries thereof.
The provisions simply shift the tax burden, if any, on the transactions under the loan
agreements to the borrower and/or beneficiary of the loan. Thus, the withdrawal by
the Local Government Code under Sections 193 and 234 of the tax exemptions
previously enjoyed by petitioners does not impair the obligation of the borrower, the
lender or the beneficiary under the loan agreements as in fact, no tax exemption is
granted therein.
III Conclusion
Petitioners lament the difficulties they face in complying with the implementing rules
and regulations issued by the CDA for the conversion of electric cooperatives under
P.D. No. 269, as amended, to cooperatives under R.A. No. 6938. They allege that
because of the cumbersome legal and technical requirements imposed by the
Omnibus Rules and Regulations on the Registration of Electric Cooperatives under
R.A. No. 6938, petitioners cannot register and convert as stock cooperatives under
the Cooperative Code.
The Court understands the plight of the petitioners. Their remedy, however, is not
judicial. Striking down Sections 193 and 234 of the Local Government Code as
unconstitutional or declaring them inapplicable to petitioners is not the proper course
of action for them to obtain their previous tax exemptions. The language of the law
and the intention of its framers are clear and unequivocal and courts have no other
duty except to uphold the law. The task to reexamine the rules and guidelines on the
conversion of electric cooperatives to cooperatives under R.A. No. 6938 and provide
every assistance available to them should be addressed by the proper authorities of
government. This is necessary to encourage the growth and viability of cooperatives
as instruments of social justice and economic development.
 WHEREFORE, the instant petition is DENIED and the temporary restraining order
heretofore issued is LIFTED.
SO ORDERED.
     
Notes.—It is inherent in the power to tax that the 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. (Commission of Internal Revenue vs. Santos, 277 SCRA
617 [1997])

The grant of taxing powers to local government units under the Constitution and
the Local Government Code (LGC) does not affect the power of Congress to grant
exemptions to certain-persons, pursuant to a declared national policy. (Philippine
Long Distance Telephone Company, Inc. vs. City of Davao, 363 SCRA 522 [2001])

——o0o——
 G.R. No. 127383. August 18, 2005.
THE CITY OF DAVAO, CITY TREASURER AND THE CITY ASSESSOR OF DAVAO
CITY, petitioners, vs. THE REGIONAL TRIAL COURT, BRANCH XII, DAVAO CITY
AND THE GOVERNMENT SERVICE INSURANCE SYSTEM (GSIS), respondents.
Taxation; Exemptions; Local Government Units (LGUs); Local Government Code; The
Court, in ruling Mactan-Cebu International Airport Authority (MCIAA) non-exempt from realty
taxes, considered that Section 133 of the Local Government Code qualified the exemption of the
National Government, its agencies and instrumentalities from local taxation with the phrase
“unless otherwise provided herein.”—The Court, in ruling MCIAA non-exempt from realty taxes,
considered that Section 133 qualified the exemption of the National Government, its agencies
and instrumentalities from local taxation with the phrase “unless otherwise provided herein.” The
Court then considered the other relevant provisions of the Local Government Code.
Same; Same; Same; Same; Section 133 was not intended to be so absolute a
prohibition on the power of LGUs to tax the National Government, its agencies and
instrumentalities.—Section 133 was not intended to be so absolute a prohibition on the power of
LGUs to tax the National Government, its agencies and instrumentalities, as evidenced by these
cited provisions which “otherwise provided.” But what was the extent of the limitation under
Section 133? This is how the Court, in a discussion of far-reaching consequence, defined the
parameters in Mactan: The foregoing sections of the LGC speak of: (a) the limitations on the
taxing powers of local government units and the exceptions to such limitations; and (b) the rule
on tax exemptions and the exceptions thereto. The use of exceptions or provisos in these
sections, as shown by the following clauses: (1) “unless otherwise provided herein” in the
opening paragraph of Section 133; (2) “Unless otherwise provided in this Code” in Section 193;
(3) “not hereafter specifically exempted” in Section 232; and (4) “Except as provided herein” in
the last paragraph of Section 234.
Same; Same; Same; Same; The exemptions from real property taxes are enumerated in
Section 234, which specifically states that only real properties owned “by the Republic of the
Philippines or any of its political subdivisions” is exempted from payment of the tax. Clearly,
instrumentalities or GOCCs do not fall within the exceptions under Section 234.—This Court,
in Mactan, acknowledged that under Section 133, instrumentalities were generally exempt from
all forms of local government taxation, unless otherwise provided in the Code. On the other
hand, Section 232 “otherwise provides” insofar as it allowed local government units to levy an ad
valorem real property tax, irrespective of who owned the property. At the same time, the
imposition of real property taxes under Section 232 is in turn qualified by the phrase “not
hereinafter specifically exempted.” The exemptions from real property taxes are enumerated in
Section 234, which specifically states that only real properties owned “by the Republic of the
Philippines or any of its political subdivisions” are exempted from the payment of the tax.
Clearly, instrumentalities or GOCCs do not fall within the exceptions under Section 234.
Same; Same; Constitutional Law; Statutes; Only the constitution may operate to
preclude or place restrictions on the amendment or repeal of laws—constitutional dicta are of
higher order than legislative statutes, and the latter should always yield to the former in cases of
irreconcilable conflict.—The second paragraph of Section 33 of P.D. No. 1146, as amended,
effectively imposes restrictions on the competency of the Congress to enact future legislation on
the taxability of the GSIS. This places an undue restraint on the plenary power of the legislature
to amend or repeal laws, especially considering that it is a lawmaker’s act that imposes such
burden. Only the Constitution may operate to preclude or place restrictions on the amendment
or repeal of laws. Constitutional dicta is of higher order than legislative statutes, and the latter
should always yield to the former in cases of irreconcilable conflict.
Same; Same; Same; Same; It is a basic precept that among the implied substantive
limitations on the legislative powers is the prohibition against the passage of irrepealable laws.—
It is a basic precept that among the implied substantive limitations on the legislative powers is
the prohibition against the passage of irrepealable laws. Irrepealable laws deprive succeeding
legislatures of the fundamental best senses carte blanche in crafting laws appropriate to the
operative milieu. Their allowance promotes an unhealthy stasis in the legislative front and
dissuades dynamic democratic impetus that may be responsive to the times. As Senior
Associate Justice Reynato S. Puno once observed, “[t]o be sure, there are no irrepealable laws
just as there are no irrepealable Constitutions. Change is the predicate of progress and we
should not fear change.”
Same; Same; The express withdrawal of all tax exemptions accorded to all persons
natural or juridical, as stated in Section 193 of the Local Government Code applies, without
impediment to the present case.—The two conditionalities of Section 33 cannot bear relevance
on whether the Local Government Code removed the tax-exempt status of the GSIS. The
express withdrawal of all tax exemptions accorded to all persons, natural or juridical, as stated in
Section 193 of the Local Government Code, applies without impediment to the present case.
Such position is bolstered by the other cited provisions of the Local Government Code, and by
the Mactanruling.
Same; Same; The State is mandated to ensure local autonomy of local governments,
and local governments are empowered to levy taxes, fees, and charges that accrue exclusively
to them, subject to congressional guidelines and limitations.—Also worthy of note is that the
Constitution itself promotes the principles of local autonomy as embodied in the Local
Government Code. The State is mandated to ensure the autonomy of local governments, and
local governments are empowered to levy taxes, fees and charges that accrue exclusively to
them, subject to congressional guidelines and limitations. The principle of local autonomy is no
mere passing dalliance but a constitutionally enshrined precept that deserves respect and
appropriate enforcement by this Court.
TINGA, J.:
A Davao City Regional Trial Court (RTC) upheld the tax-exempt status of the
Government Service Insurance System (GSIS) for the years 1992 to 1994 in
contravention of the mandate under the Local Government Code of 1992, the
precedent set by this Court in Mactan-Cebu International Airport Authority v. Hon.
Marcos, and the public policy on local autonomy enshrined in the Constitution.
The matter was elevated to this Court directly from the trial court on a pure
question of law. The facts are uncontroverted.
On 8 April 1994, the GSIS Davao City branch office received a Notice of Public
Auction scheduling the public bidding of GSIS properties located in Matina and Ulas,
Davao City for non-payment of realty taxes for the years 1992 to 1994 totaling Two
Hundred Ninety Five Thousand Seven Hundred Twenty One Pesos and Sixty One
Centavos (P295,721.61). The auction was subsequently reset by virtue of a deadline
extension allowed by Davao City for the payment of delinquent real property taxes.
On 28 July 1994, the GSIS received Warrants of Levy and Notices of Levy on
three parcels of land owned by the GSIS. Another Notice of Public Auction was
received by the GSIS on 29 August 1994, setting the date of auction sale for 20
September 1994.
On 13 September 1994, the GSIS filed a Petition for Certiorari, Prohibition,
Mandamus And/Or Declaratory Relief with the RTC of Davao City. It also sought the
issuance of a temporary restraining order. The case was raffled to Branch 12,
presided by Judge Maximo Magno Libre. On 13 September 1994, the RTC issued a
temporary restraining order for a period of twenty (20) days,7 effectively enjoining the
auction sale scheduled seven days later. Following exchange of arguments, the RTC
issued an Orderdated 3 April 1995 issuing a writ of preliminary injunction effective for
the duration of the suit.
At the pre-trial, it was agreed that the sole issue for resolution was purely a
question of law, that is, whether Sections 234 and 534 of the Local Government
Code, which have withdrawn real property tax exemptions of government owned and
controlled corporations (GOCCs), have also withdrawn from the GSIS its right to be
exempted from payment of the realty taxes sought to be levied by Davao City. The
parties submitted their respective memoranda.
On 28 May 1996, the RTC rendered the Decision now assailed before this Court.
It concluded that notwithstanding the enactment of the Local Government Code, the
GSIS retained its exemption from all taxes, including real estate taxes. The RTC cited
Section 33 of Presidential Decree (P.D.) No. 1146, the Revised Government Service
Insurance Act of 1977, as amended by P. D. No. 1981, which mandated such
exemption.
The RTC conceded that the tax exempting statute, P.D. No. 1146, was enacted
prior to the Local Government Code. However, it noted that the earlier law had
prescribed two conditions in order that the tax exemption provided therein could be
withdrawn by future enactments, namely: (1) that Section 33 be expressly and
categorically repealed by law; and (2) that a provision be enacted to substitute the
declared policy of exemption from any and all taxes as an essential factor for the
solvency of the GSIS fund. The RTC concluded that both conditions had not been
satisfied by the Local Government Code. The RTC likewise accorded weight to Legal
Opinion No. 165 of the Secretary of Justice dated 16 December 1996 concluding that
Section 33 was not repealed by the Local Government Code, and a memorandum
emanating from the Office of the President dated 14 February 1995 expressing the
same opinion.
The dispositive portion of the assailed Decision reads:
“Now then, in light of the foregoing observation, the court perceives, that
the cause of action asseverated by petitioner in its petition has been
well established by law and jurisprudence, and therefore the following
relief should be granted:
a)The tax exemption privilege of petitioner should be upheld and
continued and that the warrants of levy and notices of levy issued by the
respondent Treasurer is hereby voided and declared of no effect;
b)Let a writ of prohibition be issued restraining the City Treasurer from
proceeding with the auction sale of the subject properties, as well as the
respondents Register of Deeds from annotating the warrants/notices of
levy on the certificate of titles of petitioners real properties subject of this
suit; and
c)Compelling the City Assessor of Davao City to include the properties of
petitioner in the list of properties exempt from payment of realty tax and if
the warrants and levies issued by the City Treasurer had been annotated
in the memorandum of encumbrance on the certificates of title of
petitioner’s properties, to cancel such annotation so that the certificates of
titles of petitioners will be free from such liens and encumbrances.
SO ORDERED.”
Petitioners’ Motion for Reconsideration was denied by the RTC in an Order dated 30
October 1996, hence the present petition.
Petitioners argue that the exemption granted in Section 33 of P.D. No. 1146, as
amended, was effectively withdrawn upon the enactment of the Local Government
Code, particularly Sections 193 and 294 thereof. These provisions made the GSIS,
along with all other GOCCs, subject to realty taxes. Petitioners point out that under
Section 534(f) of the Local Government Code, even special laws, such as PD No.
1146, which are inconsistent with the Local Government Code, are repealed or
modified accordingly.
On the other hand, GSIS contends, as the RTC held, that the requisites for repeal
are laid down in Section 33 of P.D. No. 1146, as amended, namely that it be done
expressly and categorically by law, and that a provision be enacted to substitute the
declared policy of exemption from taxes as an essential factor for the solvency of the
GSIS fund. It stresses that it had been exempt from taxation as far back as 1936,
when its original charter was enacted through Commonwealth Act No. 186. It asserts
further that this Court had previously recognized the “extraordinary exemption” of
GSIS in Testate Estate of Concordia T. Lim v. City of Manila, and such exemption has
similarly been affirmed by the Secretary of Justice and the Office of the President in
the aforementioned issuances also cited by the RTC.
GSIS likewise notes that had it been the intention of the legislature to repeal
Section 33 of P.D. No. 1146 through the Local Government Code, said law would
have included the appropriate retraction in its repealing clause found in Section
534(f). However, said section, according to the GSIS, partakes the nature of a
general repealing provision which is accorded less weight in light of the rule that
implied repeals are not favored. Consequently with its position that it remains exempt
from realty taxation, the GSIS argues that the Notices of Assessment, Warrants and
Notices of Levy, Notices of Public Auction Sale and the Annotations of the Notice of
Levy are void ab initio.
A review of the relevant statutory provisions is in order.
Presidential Decree No. 1146 was enacted in 1977 by President Marcos in the
exercise of his legislative powers. Section 33, as originally enacted, read:
Sec. 33. Exemption from tax, Legal Process and Lien.—It is hereby declared to
be the policy of the State that the actuarial solvency of the funds of the System
shall be preserved and maintained at all times and that the contribution rates
necessary to sustain the benefits under this Act shall be kept as low as possible
in order not to burden the members of the system and/or their employees. . . .
Accordingly, notwithstanding any laws to the contrary, the System, its assets,
revenues including the accruals thereto, and benefits paid, shall be exempt from
all taxes. These exemptions shall continue unless expressly and specifically
revoked and any assessment against the System as of the approval of this Act
are hereby considered paid.
As it stood then, Section 33 merely provided a general rule exempting the GSIS
from all taxes. However, Section 33 of P.D. No. 1146 was amended in 1985 by
President Marcos, again in the exercise of his legislative powers, through P.D.
No. 1981. It was through this latter decree that a second paragraph was added to
Section 33 delineating the requisites for repeal of the tax exemption enjoyed by
the GSIS by incorporating the following:
...
Moreover, these exemptions shall not be affected by subsequent laws to the
contrary, such as the provisions of Presidential Decree No. 1931 and other
similar laws that have been or will be enacted, unless this section is expressly
and categorically repealed by law and a provision is enacted to substitute the
declared policy of exemption from any and all taxes as an essential factor for the
solvency of the fund.
It bears noting though, and it is perhaps key to understanding the necessity of the
addendum provided under P.D. No. 1981, that a presidential decree enacted a year
earlier, P.D. No. 1931, effectively withdrew all tax exemption privileges granted to
GOCCs. In fact, P.D. No. 1931 was specifically named in the afore-quoted addendum
as among those laws which, despite passage, would not affect the tax exempt status
of GSIS. Section 1 of P.D. No. 1931 states:
Sec. 1. The provisions of special or general law to the contrary notwithstanding,
all exemptions from the payment of duties, taxes, fees, imposts and other
charges heretofore granted in favor of government-owned or controlled
corporations including their subsidiaries, are hereby withdrawn.
There is no doubt that the GSIS which was established way back in 1937 is a GOCC,
a fact that GSIS itself admits in its petition for certiorari before the RTC. It thus clear
that Section 1 of P.D. No. 1931 expressly withdrew those exemptions granted to the
GSIS. Presidential Decree No. 1931 did allow the exemption to be restored in special
cases through an application for restoration with the Secretary of Finance, but
otherwise, the exemptions granted to the GSIS prior to the enactment of P.D. No.
1931 were withdrawn.
Notably, P.D. No. 1931 was also an exercise of legislative powers then accorded
to President Marcos by virtue of Amendment No. 6 to the 1973 Constitution. Whether
he was aware of the effect of P.D. No. 1931 on the GSIS’s tax-exempt status or the
ramifications of the decree thereon is unknown; but apparently, he immediately
reconsidered the withdrawal of the exemptions on the GSIS. Thus, P.D. No. 1981
was enacted, expressly stating that the tax-exempt status of the GSIS under Section
33 of P.D. No. 1146 remained in place, notwithstanding the passage of P.D. No.
1931.
However, P.D. No. 1981 did not stop there, serving merely as it should to restore
the previous exemptions on the GSIS. It also attempted to proscribe future attempts
to alter the tax-exempt status of the GSIS by imposing unorthodox conditions for its
future repeal. Thus, as intimated earlier, a second paragraph was added to Section
33, containing the restrictions relied upon by the RTC and presently invoked by the
GSIS before this Court.
These laws have to be weighed against the Local Government Code of 1992, a
landmark law which implemented the constitutional aspirations for a more extensive
breadth of local autonomy. The Court, in Mactan, was asked to consider the effect of
the Local Government Code on the taxability by local governments of GOCCs such
as the Mactan Cebu International Airport Authority (MCIAA). Particularly, MCIAA
invoked Section 133(o) of the Local Government Code as the basis for its claimed
exemption, the provision reading:
SECTION 133. Common Limitations on the Taxing Powers of Local Government
Units.—Unless otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend to the levy of the
following:
....
     (o) Taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities and local government units.
However, the Court, in ruling MCIAA non-exempt from realty taxes, considered that
Section 133 qualified the exemption of the National Government, its agencies and
instrumentalities from local taxation with the phrase “unless otherwise provided
herein.” The Court then considered the other relevant provisions of the Local
Government Code, particularly the following:
SECTION 193. Withdrawal of Tax Exemption Privileges.—Unless otherwise
provided in this Code, tax exemption or incentives granted to, or enjoyed by
all persons, whether natural or juridical, including government-owned and
controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals and
 educational institutions, are hereby withdrawn upon the effectivity of this
Code.
SECTION 232. Power to Levy Real Property Tax.—A province or city or a
municipality within the Metropolitan Manila area may levy an annual ad
valorem tax on real property such as land, building, machinery, and other
improvements not hereafter specifically exempted.
SECTION 234. Exemptions from Real Property Tax.—The following are
exempted from payment of the real property tax:
(a)Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person;
(b)Charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques, non-profit or religious cemeteries and all lands,
buildings, and improvements actually, directly, and exclusively used for
religious charitable or educational purposes;
(c)All machineries and equipment that are actually, directly and
exclusively used by local water districts and government-owned and
controlled corporations engaged in the distribution of water and/or
generation and transmission of electric power;
(d)All real property owned by duly registered cooperatives as provided for
under R.A. No. 6938; and
(e)Machinery and equipment used for pollution control and environmental
protection.
Except as provided herein, any exemption from payment of real property
tax previously granted to, or presently enjoyed by, all persons, whether
natural or juridical, including all government-owned or controlled
corporations are hereby withdrawn upon the effectivity of this
Code. (Emphasis supplied.)
Evidently, Section 133 was not intended to be so absolute a prohibition on the power
of LGUs to tax the National Government, its agencies and instrumentalities, as
evidenced by these cited provisions which “otherwise provided.” But what was the
extent of the limitation under Section 133? This is how the Court, in a discussion of
far-reaching consequence, defined the parameters in Mactan:
The foregoing sections of the LGC speak of: (a) the limitations on the taxing
powers of local government units and the exceptions to such limitations; and (b)
the rule on tax exemptions and the exceptions thereto. The use of exceptions or
provisos in these sections, as shown by the following clauses:
(1)“unless otherwise provided herein” in the opening paragraph of
Section 133;
(2)“Unless otherwise provided in this Code” in Section 193;
(3)“not hereafter specifically exempted” in Section 232; and
(4)“Except as provided herein” in the last paragraph of Section 234
initially hampers a ready understanding of the sections. Note, too, that the
aforementioned clause in Section 133 seems to be inaccurately worded. Instead
of the clause “unless otherwise provided herein,” with the “herein” to mean, of
course, the section, it should have used the clause “unless otherwise provided in
this Code.” The former results in absurdity since the section itself enumerates
what are beyond the taxing powers of local government units and, where
exceptions were intended, the exceptions are explicitly indicated in the next. For
instance, in item (a) which excepts income taxes “when levied on banks and
other financial institutions”; item (d) which excepts “wharfage on wharves
constructed and maintained by the local government unit concerned”; and item
(1) which excepts taxes, fees and charges for the registration and issuance of
licenses or permits for the driving of “tricycles.” It may also be observed that
within the body itself of the section, there are exceptions which can be found only
in other parts of the LGC, but the section interchangeably uses therein the
clause, “except as otherwise provided herein” as in items (c) and (i), or the
clause “except as provided in this Code” in item (j). These clauses would be
obviously unnecessary or mere surplusages if the opening clause of the section
were “Unless otherwise provided in this Code” instead of “Unless otherwise
provided herein.” In any event, even if the latter is used, since under Section 232
local government units have the power to levy real property tax, except those
exempted therefrom under Section 234, then Section 232 must be deemed to
qualify Section 133.
Thus, reading together Sections 133, 232, and 234 of the LGC, we
conclude that as a general rule, as laid down in Section 133, the taxing
powers of local government units cannot extend to the levy of, inter alia,
“taxes, fees and charges of any kind on the National Government, its
agencies and instrumentalities, and local government units”; however,
pursuant to Section 232, provinces, cities, and municipalities in the
Metropolitan Manila Area may impose the real property tax except on,inter
alia, “real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person,” as provided
in item (a) of the first paragraph of Section 234.
As to tax exemptions or incentives granted to or presently enjoyed by natural
or judicial persons, including government-owned and controlled corporations,
Section 193 of the LGC prescribes the general rule, viz., they are withdrawn
upon the effectivity of the LGC, except those granted to local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, and unless otherwise provided in the LGC.
The latter proviso could refer to Section 234 which enumerates the properties
exempt from real property tax. But the last paragraph of Section 234 further
qualifies the retention of the exemption insofar as real property taxes are
concerned by limiting the retention only to those enumerated therein; all others
not included in the enumeration lost the privilege upon the effectivity of the LGC.
Moreover, even as to real property owned by the Republic of the Philippines or
any of its political subdivisions covered by item (a) of the first paragraph of
Section 234, the exemption is withdrawn if the beneficial use of such property
has been granted to a taxable person for consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the
effectivity of the LGC, exemptions from payment of real property taxes granted to
natural or juridical persons, including government-owned or controlled
corporations, except as provided in the said section, and the petitioner is,
undoubtedly, a government-owned corporation, it necessarily follows that its
exemption from such tax granted it in Section 14 of its Charter, R.A. No. 6958,
has been withdrawn. Any claim to the contrary can only be justified if the
petitioner can seek refuge under any of the exceptions provided in Section 234,
but not under Section 133, as it now asserts, since, as shown above, the said
section is qualified by Sections 232 and 234. (Emphasis supplied.)

This Court, in Mactan, acknowledged that under Section 133, instrumentalities were
generally exempt from all forms of local government taxation, unless otherwise
provided in the Code. On the other hand, Section 232 “otherwise provides” insofar as
it allowed local government units to levy an ad valorem real property tax, irrespective
of who owned the property. At the same time, the imposition of real property taxes
under Section 232 is in turn qualified by the phrase “not hereinafter specifically
exempted.” The exemptions from real property taxes are enumerated in Section 234,
which specifically states that only real properties owned “by the Republic of the
Philippines or any of its political subdivisions” are exempted from the payment of the
tax. Clearly, instrumentalities or GOCCs do not fall within the exceptions under
Section 234.
Worth reckoning, however, is an essential difference between the situation of the
MCIAA (and most other GOCCs, for that matter) and that of the GSIS. Unlike most
other GOCCs, there is a statutory provision—Section 33 of P.D. No. 1146, as
amended—which imposes conditions on the subsequent withdrawal of the GSIS’s tax
exemptions. The RTC justified the affirmance of the tax exemptions based on the
non-compliance by the Local Government Code with these conditionalities, and not
by reason of a general proposition that GOCCs or instrumentalities remain exempt
from local government taxation.
Absent Section 33 of P.D. No. 1146, as amended, there would be no impediment
in squarely applying the express provisions of Sections 193, 232 and 234 of the Local
Government Code, as the Court did in Mactan and recently in Philippine Rural
Electric Cooperatives Association, Inc., et al. v. Secretary of Interior And Local
Government, et al.  and in ruling that the tax exemptions of GSIS were withdrawn by
the Code. Thus, the crucial proposition is whether the GSIS tax exemptions can be
deemed as withdrawn by the Local Government Code notwithstanding Section 33 of
P.D. No. 1146 as amended.
Concededly, it does not appear that at the very least, the second conditionality of
Section 33 has been met. No provision has been enacted “to substitute the declared
policy of exemption from any and all taxes as an essential factor for the solvency of
the fund.” Yet the Court is averse to employing this framework, in the first place as
utilized by the RTC, for we recognize a fundamental flaw in Section 33, particularly
the amendatory second paragraph introduced by P.D. No. 1981.
The second paragraph of Section 33 of P.D. No. 1146, as amended, effectively
imposes restrictions on the competency of the Congress to enact future legislation on
the taxability of the GSIS. This places an undue restraint on the plenary power of the
legislature to amend or repeal laws, especially considering that it is a lawmaker’s act
that imposes such burden. Only the Constitution may operate to preclude or place
restrictions on the amendment or repeal of laws. Constitutional dicta is of higher order
than legislative statutes, and the latter should always yield to the former in cases of
irreconcilable conflict.
It is a basic precept that among the implied substantive limitations on the
legislative powers is the prohibition against the passage of irrepealable laws.
Irrepealable laws deprive succeeding legislatures of the fundamental best
senses carte blanche in crafting laws appropriate to the operative milieu. Their
allowance promotes an unhealthy stasis in the legislative front and dissuades
dynamic democratic impetus that may be responsive to the times. As Senior
Associate Justice Reynato S. Puno once observed, “[t]o be sure, there are no
irrepealable laws just as there are no irrepealable Constitutions. Change is the
predicate of progress and we should not fear change.”
Moreover, it would be noxious anathema to democratic principles for a legislative
body to have the ability to bind the actions of future legislative body, considering that
both assemblies are regarded with equal footing, exercising as they do the same
plenary powers. Perpetual infallibility is not one of the attributes desired in a
legislative body, and a legislature which attempts to forestall future amendments or
repeals of its enactments labors under delusions of omniscience.
It might be argued that Section 33 of P.D. No. 1146, as amended, does not
preclude the repeal of the tax-exempt status of GSIS, but merely imposes conditions
for such to validly occur. Yet these conditions, if honored, have the precise effect of
limiting the powers of Congress. Thus, the same rationale for prohibiting irrepealable
laws applies in prohibiting restraints on future amendatory laws. President Marcos,
who exercised his legislative powers in amending P.D. No. 1146, could not have
demanded obeisance from future legislators by imposing restrictions on their ability to
legislate amendments or repeals. The concerns that may have militated his
enactment of these restrictions need not necessarily be shared by subsequent
Congresses.
We do not mean to trivialize the need to ensure the solvency of the GSIS fund, a
concern that has seen legislative expression, even with the most recently enacted
Government Service Insurance System Act of 1997.25 Yet at the same time, we
recognize that Congress has the putative authority, through valid legislation, to
diminish such fund, or even abolish the GSIS itself if it so desires. The GSIS may
provide vital services and security to employees of the civil service, yet it is not a
sacred cow that is beyond abolition by Congress if, for example, more innovative
methods are devised to ensure stable pension funds for government employees. If
Congress has the inherent power to abrogate the GSIS itself, then it necessarily has
the ability to inflict less detrimental burdens, such as abolishing its tax-exempt status.
If there could be legal authority proscribing the Congress from enacting such
legislation, such should be sourced from the Constitution itself, and not from
antecedent statutes which were themselves enacted by legislative power.
 The Court’s position is aligned with entrenched norms of statutory construction.
In Duarte v. Dade, the Court cited with approval Lewis’ Southerland on Statutory
Construction, which states:
“A state legislature has a plenary law-making power over all subjects, whether
pertaining to persons or things, within its territorial jurisdiction, either to introduce
new laws or repeal the old, unless prohibited expressly or by implication by the
federal constitution or limited or restrained by its own. It cannot bind itself or its
successors by enacting irrepealable laws except when so restrained. Every
legislative body may modify or abolish the acts passed by itself or its
predecessors. This power of repeal may be exercised at the same session at
which the original act was passed; and even while a bill is in its progress and
before it becomes a law. This legislature cannot bind a future legislature to a
particular mode of repeal. It cannot declare in advance the intent of
subsequent legislatures or the effect of subsequent legislation upon
existing statutes.” (Emphasis supplied.)
The citation is particularly apropos to our present task, since the question for
resolution is primarily one of statutory construction, i.e., whether or not Section 33 of
P.D. No. 1146 has been repealed by the Local Government Code. It is evident that
we cannot render effective the amendatory second paragraph of Section 33 as the
RTC did, for by doing so, we would be giving sanction to a disingenuous means
employed through legislative power to bind subsequent legislators to a particular
mode of repeal.
Thus, the two conditionalities of Section 33 cannot bear relevance on whether the
Local Government Code removed the tax-exempt status of the GSIS. The express
withdrawal of all tax exemptions accorded to all persons, natural or juridical, as stated
in Section 193 of the Local Government Code, applies without impediment to the
present case. Such position is bolstered by the other cited provisions of the Local
Government Code, and by the Mactan ruling.
There are other reasons that guide us to construe the Local Government Code in
favor of the City of Davao’s position. Section 5 of the Local Government Code
provides the guidelines on how to construe the Code’s provisions in cases of doubt,
and they are self-explanatory, thus:
Section 5. Rules of Interpretation.—In the interpretation of the provisions of this
Code, the following rules shall apply:
(a)Any provision on a power of a local government unit shall be liberally
interpreted in its favor, and in case of doubt, any question thereon shall be
resolved in favor of devolution of powers and of the lower local
government unit. Any fair and reasonable doubt as to the existence of the
power shall be interpreted in favor of the local government unit concerned;
(b)In case of doubt, any tax ordinance or revenue measure shall be construed
strictly against the local government unit enacting it, and liberally in favor of the
taxpayer. Any tax exemption, incentive or relief granted by any local
government unit pursuant to the provisions of this Code shall be construed
strictly against the person claiming it; (Emphasis supplied.)
Also worthy of note is that the Constitution itself promotes the principles of local
autonomy as embodied in the Local Government Code. The State is mandated to
ensure the autonomy of local governments, and local governments are empowered to
levy taxes, fees and charges that accrue exclusively to them, subject to congressional
guidelines and limitations. The principle of local autonomy is no mere passing
dalliance but a constitutionally enshrined precept that deserves respect and
appropriate enforcement by this Court.
We are aware that this stance runs contrary to that which was adopted by the
Secretary of Justice in his Opinion dated 22 July 1993, as well as the memorandum
from the Office of the President dated 14 February 1995, expressing the same
opinion. However, statutory interpretations of these executive bodies do not hold
decisive sway upon the judiciary but are merely persuasive. These issuances cannot
derogate from the binding precept that one legislature cannot enact irrepealable
legislation or limit or restrict its own power or the power of its successors as to the
repeal of statutes. The act of one legislature is not binding upon and does not tie the
hands of future legislatures.
The GSIS’s tax-exempt status, in sum, was withdrawn in 1992 by the Local
Government Code but restored by the Government Service Insurance System Act of
1997, the operative provision of which is Section 39. The subject real property taxes
for the years 1992 to 1994 were assessed against GSIS while the Local Government
Code provisions prevailed and, thus, may be collected by the City of Davao.
WHEREFORE, premises considered, the Petition for Review is hereby
GRANTED. The appealed Decision of the Regional Trial Court of Davao City, Branch
12 is REVERSED and SET ASIDE.
Costs de oficio.
SO ORDERED.
Note.—The intention of the law is to broaden the tax base of local government
units to assure them of substantial sources of revenue. (Philippine Rural Electric
Cooperatives Association, Inc. [PHILRECA] vs. The Secretary, Department of Interior
and Local Government, 403 SCRA 558 [2003])
——o0o——
 G.R. No. 162015. March 6, 2006.
THE CITY GOVERNMENT OF QUEZON CITY, AND THE CITY TREASURER OF
QUEZON CITY, DR. VICTOR B. ENRIGA, petitioners, vs. BAYAN
TELECOMMUNICATIONS, INC., respondent.
Civil Procedure; Appeals; Prohibitions; One of the recognized exceptions to the
exhaustion-of-administrative remedies rule is when only legal issues are to be resolved.—
Petitioners argue that Bayantel had failed to avail itself of the administrative remedies provided
for under the LGC, adding that the trial court erred in giving due course to Bayantel’s petition for
prohibition. To petitioners, the appeal mechanics under the LGC constitute Bayantel’s plain and
speedy remedy in this case. The Court does not agree. With the reality that Bayantel’s real
properties were already levied upon on account of its nonpayment of real estate taxes thereon,
the Court agrees with Bayantel that an appeal to the LBAA is not a speedy and adequate
remedy within the context of the aforequoted Section 2 of Rule 65. This is not to mention of the
auction sale of said properties already scheduled on July 30, 2002. Moreover, one of the
recognized exceptions to the exhaustion-of-administrative remedies rule is when, as here, only
legal issues are to be resolved. In fact, the Court, cognizant of the nature of the questions
presently involved, gave due course to the instant petition. As the Court has said in Ty vs.
Trampe, 250 SCRA 500 (1995): x x x. Although as a rule, administrative remedies must first be
exhausted before resort to judicial action can prosper, there is a well-settled exception in cases
where the controversy does not involve questions of fact but only of law. x x x.
Taxation; Realty Tax; Franchises; Local Governments; While Section 14 of Republic Act
3259 may be validly viewed as an implied delegation of power to tax, the delegation under that
provision, as couched, is limited to impositions over properties of the franchisee which are not
actually, directly and exclusively used in the pursuit of its franchise.—The legislative intent
expressed in the phrase “exclusive of this franchise” cannot be construed other than
distinguishing between two (2) sets of properties, be they real or personal, owned by the
franchisee, namely, (a) those actually, directly and exclusively used in its radio or
telecommunications business, and (b) those properties which are not so used. It is worthy to
note that the properties subject of the present controversy are only those which are admittedly
falling under the first category. To the mind of the Court, Section 14 of Rep. Act No. 3259
effectively works to grant or delegate to local governments of Congress’ inherent power to tax
the franchisee’s properties belonging to the second group of properties indicated above, that is,
all properties which, “exclusive of this franchise,” are not actually and directly used in the pursuit
of its franchise. As may be recalled, the taxing power of local governments under both the 1935
and the 1973 Constitutions solely depended upon an enabling law. Absent such enabling law,
local government units were without authority to impose and collect taxes on real properties
within their respective territorial jurisdictions. While Section 14 of Rep. Act No. 3259 may be
validly viewed as an implied delegation of power to tax, the delegation under that provision, as
couched, is limited to impositions over properties of the franchisee which are not actually,
directly and exclusively used in the pursuit of its franchise. Necessarily, other properties of
Bayantel directly used in the pursuit of its business are beyond the pale of the delegated taxing
power of local governments. In a very real sense, therefore, real properties of Bayantel, save
those exclusive of its franchise, are subject to realty taxes. Ultimately, therefore, the inevitable
result was that all realties which are actually, directly and exclusively used in the operation of its
franchise are “exempted” from any property tax. Bayantel’s franchise being national in character,
the “exemption” thus granted under Section 14 of Rep. Act No. 3259 applies to all its real or
personal properties found anywhere within the Philippine archipelago.
Same; Same; Same; Same; The realty tax exemption heretofore enjoyed by Bayantel
under its original franchise, but subsequently withdrawn by force of Section 234 of the Local
Government Code, has been restored by Section 14 of Republic Act No. 7633.—With the LGC’s
taking effect on January 1, 1992, Bayantel’s “exemption” from real estate taxes for properties of
whatever kind located within the Metro Manila area was, by force of Section 234 of the Code,
expressly withdrawn. But, not long thereafter, however, or on July 20, 1992, Congress passed
Rep. Act No. 7633 amending Bayantel’s original franchise. Worthy of note is that Section 11 of
Rep. Act No. 7633 is a virtual reenacment of the tax provision, i.e., Section 14, of Bayantel’s
original franchise under Rep. Act No. 3259. Stated otherwise, Section 14 of Rep. Act No. 3259
which was deemed impliedly repealed by Section 234 of the LGC was expressly revived under
Section 14 of Rep. Act No. 7633. In concrete terms, the realty tax exemption heretofore enjoyed
by Bayantel under its original franchise, but subsequently withdrawn by force of Section 234 of
the LGC, has been restored by Section 14 of Rep. Act No. 7633.
Same; Same; Same; Same; The power to tax is primarily vested in the Congress;
however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely by
virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5,
Article X of the Constitution.—Bayantel’s posture is well-taken. While the system of local
government taxation has changed with the onset of the 1987 Constitution, the power of local
government units to tax is still limited. As we explained in Mactan Cebu International Airport
Authority: The power to tax is primarily vested in the Congress; however, in our jurisdiction, it
may be exercised by local legislative bodies, no longer merely by virtue of a valid
delegation as before, but pursuant to direct authority conferred by Section 5, Article X of
the Constitution. Under the latter, the exercise of the power may be subject to such guidelines
and limitations as the Congress may provide which, however, must be consistent with the basic
policy of local autonomy. (at p. 680; Emphasis supplied.)
Same; Same; Same; Same; The Supreme Court has upheld the power of Congress to
grant exemptions over the power of local government units to impose taxes.—In Philippine Long
Distance Telephone Company, Inc. (PLDT) vs. City of Davao, 363 SCRA 522 (2001), this Court
has upheld the power of Congress to grant exemptions over the power of local government units
to impose taxes. There, the Court wrote: Indeed, the grant of taxing powers to local
government units under the Constitution and the LGC does not affect the power of
Congress to grant exemptions to certain persons, pursuant to a declared national policy. The
legal effect of the constitutional grant to local governments simply means that in interpreting
statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal
corporations.
GARCIA, J.:
Before the Court, on pure questions of law, is this petition for review
on certiorari under Rule 45 of the Rules of Court to nullify and set aside the following
issuances of the Regional Trial Court (RTC) of Quezon City, Branch 227, in its Civil
Case No. Q-02-47292, to wit:
1)Decision dated June 6, 2003, declaring respondent Bayan
Telecommunications, Inc. exempt from real estate taxation on its real properties
located in Quezon City; and
 2)Order dated December 30, 2003, denying petitioners’ motion for
reconsideration.
The facts:
Respondent Bayan Telecommunications, Inc. (Bayantel) is a legislative franchise
holder under Republic Act (Rep. Act) No. 3259 to establish and operate radio stations
for domestic telecommunications, radiophone, broadcasting and telecasting.
Of relevance to this controversy is the tax provision of Rep. Act No. 3259,
embodied in Section 14 thereof, which reads:
SECTION 14. (a) The grantee shall be liable to pay the same taxes on its real
estate, buildings and personal property, exclusive of the franchise, as other
persons or corporations are now or hereafter may be required by law to pay. (b)
The grantee shall further pay to the Treasurer of the Philippines each year, within
ten days after the audit and approval of the accounts as prescribed in this Act,
one and one-half per centum of all gross receipts from the business transacted
under this franchise by the said grantee (Emphasis supplied).
On January 1, 1992, Rep. Act No. 7160, otherwise known as the “Local Government
Code of 1991” (LGC), took effect. Section 232 of the Code grants local government
units within the Metro Manila Area the power to levy tax on real properties, thus:
SEC. 232. Power to Levy Real Property Tax.—A province or city or a municipality
within the Metropolitan Manila Area may levy an annual ad valorem tax on real
property such as land, building, machinery and other improvements not
hereinafter specifically exempted.
Complementing the aforequoted provision is the second paragraph of Section
234 of the same Code which withdrew any exemption from realty tax heretofore
granted to or enjoyed by all persons, natural or juridical, to wit:
SEC. 234. Exemptions from Real Property Tax.—The following are exempted
from payment of the real property tax:
x x x      x x x      x x x
Except as provided herein, any exemption from payment of real property tax
previously granted to, or enjoyed by, all persons, whether natural or juridical,
including government-owned-or-controlled corporations is hereby withdrawn
upon effectivity of this Code (Emphasis supplied).
On July 20, 1992, barely few months after the LGC took effect, Congress enacted
Rep. Act No. 7633, amending Bayantel’s original franchise. The amendatory law
(Rep. Act No. 7633) contained the following tax provision:
SEC. 11. The grantee, its successors or assigns shall be liable to pay the same
taxes on their real estate, buildings and personal property, exclusive of this
franchise, as other persons or corporations are now or hereafter may be
required by law to pay. In addition thereto, the grantee, its successors or assigns
shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of
the telephone or other telecommunications businesses transacted under this
franchise by the grantee, its successors or assigns and the said percentage shall
be in lieu of all taxes on this franchise or earnings thereof. Provided, That the
grantee, its successors or assigns shall continue to be liable for income taxes
payable under Title II of the National Internal Revenue Code . . . . x x x.
[Emphasis supplied]
It is undisputed that within the territorial boundary of Quezon City, Bayantel owned
several real properties on which it maintained various telecommunications facilities.
These real properties, as hereunder described, are covered by the following tax
declarations:
(a)Tax Declaration Nos. D-096-04071, D-096-04074, D-096-04072 and D-096-
04073 pertaining to Bayantel’s Head Office and Operations Center in Roosevelt
St., San Francisco del Monte, Quezon City allegedly the nerve center of
petitioner’s telecommunications franchise operations, said Operation Center
housing mainly petitioner’s Network Operations Group and switching,
transmission and related equipment;
(b)Tax Declaration Nos. D-124-01013, D-124-00939, D-124-00920 and D-124-
00941 covering Bayantel’s land, building and equipment in Maginhawa St.,
Barangay East Teacher’s Village, Quezon City which houses
telecommunications facilities; and
(c)Tax Declaration Nos. D-011-10809, D-011-10810, D-011-10811, and D-011-
11540 referring to Bayantel’s Exchange Center located in Proj. 8, Brgy. Bahay
Toro, Tandang Sora, Quezon City which houses the Network Operations Group
and cover switching, transmission and other related equipment.
In 1993, the government of Quezon City, pursuant to the taxing power vested on local
government units by Section 5, Article X of the 1987 Constitution, infra, in relation to
Section 232 of the LGC, supra, enacted City Ordinance No. SP-91, S-93, otherwise
known as the Quezon City Revenue Code (QCRC), imposing, under Section 5
thereof, a real property tax on all real properties in Quezon City, and, reiterating in its
Section 6, the withdrawal of exemption from real property tax under Section 234 of
the LGC, supra. Furthermore, much like the LGC, the QCRC, under its Section 230,
withdrew tax exemption privileges in general, as follows:
SEC. 230. 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 RA 6938, non-stock and non-profit hospitals and educational institutions,
business enterprises certified by the Board of Investments (BOI) as pioneer or
non-pioneer for a period of six (6) and four (4) years, respectively, . . . are
hereby withdrawn effective upon approval of this Code (Emphasis supplied).
Conformably with the City’s Revenue Code, new tax declarations for Bayantel’s real
properties in Quezon City were issued by the City Assessor and were received by
Bayantel on August 13, 1998, except one (Tax Declaration No. 124-01013) which
was received on July 14, 1999.
Meanwhile, on March 16, 1995, Rep. Act No. 7925, otherwise known as the
“Public Telecommunications Policy Act of the Philippines,” envisaged to level the
playing field among telecommunications companies, took effect. Section 23 of the Act
provides:
 SEC. 23. Equality of Treatment in the Telecommunications Industry.—Any
advantage, favor, privilege, exemption, or immunity granted under existing
franchises, or may hereafter be granted, shall ipso facto become part of
previously granted telecommunications franchises and shall be accorded
immediately and unconditionally to the grantees of such franchises: Provided,
however, That the foregoing shall neither apply to nor affect provisions of
telecommunications franchises concerning territory covered by the franchise, the
life span of the franchise, or the type of service authorized by the franchise.
On January 7, 1999, Bayantel wrote the office of the City Assessor seeking the
exclusion of its real properties in the city from the roll of taxable real properties. With
its request having been denied, Bayantel interposed an appeal with the Local Board
of Assessment Appeals (LBAA). And, evidently on its firm belief of its exempt status,
Bayantel did not pay the real property taxes assessed against it by the Quezon City
government.
On account thereof, the Quezon City Treasurer sent out notices of delinquency
for the total amount of P43,878,208.18, followed by the issuance of several warrants
of levy against Bayantel’s properties preparatory to their sale at a public auction set
on July 30, 2002.
Threatened with the imminent loss of its properties, Bayantel immediately
withdrew its appeal with the LBAA and instead filed with the RTC of Quezon City a
petition for prohibition with an urgent application for a temporary restraining order
(TRO) and/or writ of preliminary injunction, thereat docketed as Civil Case No. Q-02-
47292, which was raffled to Branch 227 of the court.
On July 29, 2002, or in the eve of the public auction scheduled the following day,
the lower court issued a TRO, followed, after due hearing, by a writ of preliminary
injunction via its order of August 20, 2002.
And, having heard the parties on the merits, the same court came out with its
challenged Decision of June 6, 2003, the dispositive portion of which reads:
“WHEREFORE, premises considered, pursuant to the enabling franchise under
Section 11 of Republic Act No. 7633, the real estate properties and buildings of
petitioner [now, respondent Bayantel] which have been admitted to be used in
the operation of petitioner’s franchise described in the following tax declarations
are hereby DECLARED exempt from real estate taxation:
(1)Tax Declaration No. D-096-04071—
(2)Tax Declaration No. D-096-04074—
(3)Tax Declaration No. D-124-01013—
(4)Tax Declaration No. D-011-10810—
(5)Tax Declaration No. D-011-10811—
(6)Tax Declaration No. D-011-10809—
(7)Tax Declaration No. D-124-00941—
(8)Tax Declaration No. D-124-00940—
(9)Tax Declaration No. D-124-00939—
(10)Tax Declaration No. D-096-04072—
(11)Tax Declaration No. D-096-04073—
(12)Tax Declaration No. D-011-11540—
The preliminary prohibitory injunction issued in the August 20, 2002 Order of
this Court is hereby made permanent. Since this is a resolution of a purely legal
issue, there is no pronouncement as to costs.
SO ORDERED.”
Their motion for reconsideration having been denied by the court in its Order dated
December 30, 2003, petitioners elevated the case directly to this Court on pure
questions of law, ascribing to the lower court the following errors:
I.[I]n declaring the real properties of respondent exempt from real property taxes
notwithstanding the fact that the tax exemption granted to Bayantel in its original
franchise had been withdrawn by the [LGC] and that the said exemption was not
restored by the enactment of RA 7633.
II.[In] declaring the real properties of respondent exempt from real property taxes
notwithstanding the enactment of the [QCRC] which withdrew the tax exemption
which may have been granted by RA 7633.
III.[In] declaring the real properties of respondent exempt from real property taxes
notwithstanding the vague and ambiguous grant of tax exemption provided under
Section 11 of RA 7633.
IV.[In] declaring the real properties of respondent exempt from real property
taxes notwithstanding the fact that [it] had failed to exhaust administrative
remedies in its claim for real property tax exemption. (Words in bracket added.)
As we see it, the errors assigned may ultimately be reduced to two (2) basic issues,
namely:
1.Whether or not Bayantel’s real properties in Quezon City are exempt from real
property taxes under its legislative franchise; and
2.Whether or not Bayantel is required to exhaust administrative remedies before
seeking judicial relief with the trial court.
We shall first address the second issue, the same being procedural in nature.
Petitioners argue that Bayantel had failed to avail itself of the administrative
remedies provided for under the LGC, adding that the trial court erred in giving due
course to Bayantel’s petition for prohibition. To petitioners, the appeal mechanics
under the LGC constitute Bayantel’s plain and speedy remedy in this case.
The Court does not agree.
Petitions for prohibition are governed by the following provision of Rule 65 of the
Rules of Court:
SEC. 2. Petition for prohibition.—When the proceedings of any tribunal, . . . are
without or in excess of its or his jurisdiction, or with grave abuse of discretion
amounting to lack or excess of jurisdiction, and there is no appeal or any other
plain, speedy, and adequate remedy in the ordinary course of law, a person
aggrieved thereby may file a verified petition in the proper court, alleging the
facts with certainty and praying that judgment be rendered commanding the
 respondent to desist from further proceedings in the action or matter specified
therein, or otherwise, granting such incidental reliefs as law and justice may
require.
With the reality that Bayantel’s real properties were already levied upon on account of
its nonpayment of real estate taxes thereon, the Court agrees with Bayantel that an
appeal to the LBAA is not a speedy and adequate remedy within the context of the
aforequoted Section 2 of Rule 65. This is not to mention of the auction sale of said
properties already scheduled on July 30, 2002.
Moreover, one of the recognized exceptions to the exhaustion-of-administrative
remedies rule is when, as here, only legal issues are to be resolved. In fact, the
Court, cognizant of the nature of the questions presently involved, gave due course to
the instant petition. As the Court has said in Ty vs. Trampe:7
x x x. Although as a rule, administrative remedies must first be exhausted before
resort to judicial action can prosper, there is a well-settled exception in cases
where the controversy does not involve questions of fact but only of law. x x x.
Lest it be overlooked, an appeal to the LBAA, to be properly considered, required
prior payment under protest of the amount of P43,878,208.18, a figure which, in the
light of the then prevailing Asian financial crisis, may have been difficult to raise up.
Given this reality, an appeal to the LBAA may not be considered as a plain, speedy
and adequate remedy. It is thus understandable why Bayantel opted to withdraw its
earlier appeal with the LBAA and, instead, filed its petition for prohibition with urgent
application for injunctive relief in Civil Case No. Q-02-47292. The remedy availed of
by Bayantel under Section 2, Rule 65 of the Rules of Court must be upheld.
This brings the Court to the more weighty question of whether or not Bayantel’s
real properties in Quezon City are, under its franchise, exempt from real property tax.
The lower court resolved the issue in the affirmative, basically owing to the phrase
“exclusive of this franchise” found in Section 11 of Bayantel’s amended franchise,
Rep. Act No. 7633. To petitioners, however, the language of Section 11 of Rep. Act
No. 7633 is neither clear nor unequivocal. The elaborate and extensive discussion
devoted by the trial court on the meaning and import of said phrase, they add,
suggests as much. It is petitioners’ thesis that Bayantel was in no time given
any express exemption from the payment of real property tax under its amendatory
franchise.
There seems to be no issue as to Bayantel’s exemption from real estate taxes by
virtue of the term “exclusive of the franchise” qualifying the phrase “same taxes on its
real estate, buildings and personal property,” found in Section 14, supra, of its
franchise, Rep. Act No. 3259, as originally granted.
The legislative intent expressed in the phrase “exclusive of this franchise” cannot
be construed other than distinguishing between two (2) sets of properties, be they
real or personal, owned by the franchisee, namely, (a) those actually, directly and
exclusively used in its radio or telecommunications business, and (b) those properties
which are not so used. It is worthy to note that the properties subject of the present
controversy are only those which are admittedly falling under the first category.
To the mind of the Court, Section 14 of Rep. Act No. 3259 effectively works to
grant or delegate to local governments of Congress’ inherent power to tax the
franchisee’s properties belonging to the second group of properties indicated above,
that is, all properties which, “exclusive of this franchise,” are not actually and directly
used in the pursuit of its franchise. As may be recalled, the taxing power of local
governments under both the 1935 and the 1973 Constitutions solely depended upon
an enabling law. Absent such enabling law, local government units were without
authority to impose and collect taxes on real properties within their respective
territorial jurisdictions. While Section 14 of Rep. Act No. 3259 may be validly viewed
as an implied delegation of power to tax, the delegation under that provision, as
couched, is limited to impositions over properties of the franchisee which are not
actually, directly and exclusively used in the pursuit of its franchise. Necessarily, other
properties of Bayantel directly used in the pursuit of its business are beyond the pale
of the delegated taxing power of local governments. In a very real sense, therefore,
real properties of Bayantel, save those exclusive of its franchise, are subject to
realty taxes. Ultimately, therefore, the inevitable result was that all realties which are
actually, directly and exclusively used in the operation of its franchise are “exempted”
from any property tax.
Bayantel’s franchise being national in character, the “exemption” thus granted
under Section 14 of Rep. Act No. 3259 applies to all its real or personal properties
found anywhere within the Philippine archipelago.
However, with the LGC’s taking effect on January 1, 1992, Bayantel’s “exemption”
from real estate taxes for properties of whatever kind located within the Metro Manila
area was, by force of Section 234 of the Code, supra, expressly withdrawn. But, not
long thereafter, however, or on July 20, 1992, Congress passed Rep. Act No. 7633
amending Bayantel’s original franchise. Worthy of note is that Section 11 of Rep. Act
No. 7633 is a virtual reenacment of the tax provision, i.e., Section 14, supra, of
Bayantel’s original franchise under Rep. Act No. 3259. Stated otherwise, Section 14
of Rep. Act No. 3259 which was deemed impliedly repealed by Section 234 of the
LGC was expressly revived under Section 14 of Rep. Act No. 7633. In concrete
terms, the realty tax exemption heretofore enjoyed by Bayantel under its original
franchise, but subsequently withdrawn by force of Section 234 of the LGC, has been
restored by Section 14 of Rep. Act No. 7633.
The Court has taken stock of the fact that by virtue of Section 5, Article X of the
1987 Constitution, local governments are empowered to levy taxes. And pursuant to
this constitutional empowerment, juxtaposed with Section 2329 of the LGC, the
Quezon City government enacted in 1993 its local Revenue Code, imposing real
property tax on all real properties found within its territorial jurisdiction. And as earlier
stated, the City’s Revenue Code, just like the LGC, expressly withdrew, under Section
230 thereof, supra, all tax exemption privileges in general.
This thus raises the question of whether or not the City’s Revenue Code pursuant
to which the city treasurer of Quezon City levied real property taxes against
Bayantel’s real properties located within the City effectively withdrew the tax
exemption enjoyed by Bayantel under its franchise, as amended.
Bayantel answers the poser in the negative arguing that once again it
is only “liable to pay the same taxes, as any other persons or corporations on all its
real or personal properties,  exclusive of its franchise.”
Bayantel’s posture is well-taken. While the system of local government taxation
has changed with the onset of the 1987 Constitution, the power of local government
units to tax is still limited. As we explained in Mactan Cebu International Airport
Authority:
The power to tax is primarily vested in the Congress; however, in our
jurisdiction, it may be exercised by local legislative bodies, no longer merely be
virtue of a valid delegation as before, but pursuant to direct authority conferred
by Section 5, Article X of the Constitution. Under the latter, the exercise of the
power may be subject to such guidelines and limitations as the Congress may
provide which, however, must be consistent with the basic policy of local
autonomy. (at p. 680; Emphasis supplied.)
Clearly then, while a new slant on the subject of local taxation now prevails in the
sense that the former doctrine of local government units’ delegated power to tax had
been effectively modified with Article X, Section 5 of the 1987 Constitution now in
place, .the basic doctrine on local taxation remains essentially the same. For as the
Court stressed in Mac-tan, “the power to tax is [still] primarily vested in the
Congress.”
This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a
Commissioner of the 1986 Constitutional Commission which crafted the 1987
Constitution, thus:
“What is the effect of Section 5 on the fiscal position of municipal
corporations? Section 5 does not change the doctrine that municipal
corporations do not possess inherent powers of taxation. What it does is to
confer municipal corporations a general power to levy taxes and otherwise
create sources of revenue. They no longer have to wait for a statutory grant of
these powers. The power of the legislative authority relative to the fiscal powers
of local governments has been reduced to the authority to impose limitations on
municipal powers. Moreover, these limitations must be “consistent with the basic
policy of local autonomy.” The important legal effect of Section 5 is thus to
reverse the principle that doubts are resolved against municipal
corporations. Henceforth, in interpreting statutory provisions on municipal fiscal
powers, doubts will be resolved in favor of municipal corporations. It is
understood, however, that taxes imposed by local government must be for a
public purpose, uniform within a locality, must not be confiscatory, and must be
within the jurisdiction of the local unit to pass.” (Emphasis supplied.)
In net effect, the controversy presently before the Court involves, at bottom, a clash
between the inherent taxing power of the legislature, which necessarily includes the
power to exempt, and the local government’s delegated power to tax under the aegis
of the 1987 Constitution.
Now to go back to the Quezon City Revenue Code which imposed real estate
taxes on all real properties within the city’s territory and removed exemptions
theretofore “previously granted to, or presently enjoyed by all persons, whether
natural or juridical ….,” there can really be no dispute that the power of the Quezon
City Government to tax is limited by Section 232 of the LGC which expressly provides
that “a province or city or municipality within the Metropolitan Manila Area may levy
an annual ad valorem tax on real property such as land, building, machinery, and
other improvement not  hereinafter specifically exempted.” Under this law, the
Legislature highlighted its power to thereafter exempt certain realties from the taxing
power of local government units. An interpretation denying Congress such power to
exempt would reduce the phrase “not hereinafter specifically exempted” as a pure
jargon, without meaning whatsoever. Needless to state, such absurd situation is
unacceptable.
For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City
of Davao, this Court has upheld the power of Congress to grant exemptions over the
power of local government units to impose taxes. There, the Court wrote:
Indeed, the grant of taxing powers to local government units under the
Constitution and the LGC does not affect the power of Congress to grant
exemptions to certain persons, pursuant to a declared national policy. The legal effect
of the constitutional grant to local governments simply means that in interpreting
statutory provisions on municipal taxing powers, doubts must be resolved in favor of
municipal corporations. (Emphasis supplied.)
As we see it, then, the issue in this case no longer dwells on whether Congress has
the power to exempt Bayantel’s properties from realty taxes by its enactment of Rep.
Act No. 7633 which amended Bayantel’s original franchise. The more decisive
question turns on whether Congress actually did exempt Bayantel’s properties
at all by virtue of Section 11 of Rep. Act No. 7633.
Admittedly, Rep. Act No. 7633 was enacted subsequent to the LGC. Perfectly
aware that the LGC has already withdrawn Bayantel’s former exemption from realty
taxes, Congress opted to pass Rep. Act No. 7633 using, under Section 11 thereof,
exactly the same defining phrase “exclusive of this  franchise” which was the basis
for Bayantel’s exemption from realty taxes prior to the LGC. In plain language,
Section 11 of Rep. Act No. 7633 states that “the grantee, its successors or assigns
shall be liable to pay the same taxes on their real estate, buildings and personal
property, exclusive of this franchise, as other persons or corporations are now or
hereafter may be required by law to pay.” The Court views this subsequent piece of
legislation as an express and real intention on the part of Congress to once
again remove from the LGC’s delegated taxing power, all of the franchisee’s
(Bayantel’s) properties that are actually, directly and exclusively used in the pursuit of
its franchise.

WHEREFORE, the petition is DENIED.

No pronouncement as to costs.
SO ORDERED.
     
Notes.—Any exemption from the payment of a tax must be clearly stated in the language
of the law. (Commissioner of Internal Revenue vs. Court of Appeals, 329 SCRA 237 [2000]) The
power to tax is no longer vested exclusively on Congress. (National Power Corporation vs. City
of Cabanatuan, 401 SCRA 259 [2003])

Section 193 of the Local Government Code is indicative of the legislative intent to vest
broad taxing powers upon local government units and to limit exemptions from local taxation to
entities specifically provided. (Philippine Rural Electric Cooperatives Association, Inc. vs. The
Secretary, Department of Interior and Local Government, 403 SCRA 558 [2003])

——o0o——
 G.R. No. 155650. July 20, 2006.
MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs. COURT OF
APPEALS, CITY OF PARAÑAQUE, CITY MAYOR OF PARAÑAQUE,
SANGGUNIANG PANGLUNGSOD NG PARAÑAQUE, CITY ASSESSOR OF
PARAÑAQUE, and CITY TREASURER OF PARAÑAQUE, respondents.
Manila International Airport Authority; Taxation; MIAA’s Airport Lands and Buildings are
exempt from real estate tax imposed by local governments.—We rule that MIAA’s Airport Lands
and Buildings are exempt from real estate tax imposed by local governments. First, MIAA is not
a government-owned or controlled corporation but an instrumentalityof the National
Government and thus exempt from local taxation. Second, the real properties of MIAA
are owned by the Republic of the Philippines and thus exempt from real estate tax.
Same; Same; While there is no dispute that a government-owned or controlled
corporation is not exempt from real estate tax, MIAA is not a government-owned or controlled
corporation; A government-owned or controlled corporation must be “organized as a stock or
non-stock corporation,” of which MIAA is neither; MIAA is not a stock corporation because it has
no capital stock divided into shares.—There is no dispute that a government-owned or controlled
corporation is not exempt from real estate tax. However, MIAA is not a government-owned or
controlled corporation. Section 2(13) of the Introductory Provisions of the Administrative Code of
1987 defines a government-owned or controlled corporation as follows: SEC. 2. General Terms
Defined.—x x x x (13) Government-owned or controlled corporation refers to any
agency organized as a stock or non-stock corporation, vested with functions relating to
public needs whether governmental or proprietary in nature, and owned by the Government
directly or through its instrumentalities either wholly, or, where applicable as in the case of stock
corporations, to the extent of at least fifty-one (51) percent of its capital stock: x x x. (Emphasis
supplied) A government-owned or controlled corporation must be “organized as a stock or non-
stock corporation.” MIAA is not organized as a stock or non-stock corporation. MIAA is not a
stock corporation because it has no capital stock divided into shares.
Same; Same; Manila International Airport Authority (MIAA) is not a non-stock corporation
because it has no members; Section 11 of the MIAA Charter which mandates MIAA to remit
20% of its annual gross operating income to the National Treasury prevents it from qualifying as
a non-stock corporation.—MIAA is also not a non-stock corporation because it has no members.
Section 87 of the Corporation Code defines a non-stock corporation as “one where no part of its
income is distributable as dividends to its members, trustees or officers.” A non-stock
corporation must have members. Even if we assume that the Government is considered as the
sole member of MIAA, this will not make MIAA a non-stock corporation. Non-stock corporations
cannot distribute any part of their income to their members. Section 11 of the MIAA Charter
mandates MIAA to remit 20% of its annual gross operating income to the National Treasury.
This prevents MIAA from qualifying as a non-stock corporation.
Administrative Law; Manila International Airport Authority (MIAA) is a government
instrumentality vested with corporate powers to perform efficiently its governmental functions.—
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. What then is the legal status of MIAA within the
National Government? MIAA is a government instrumentality vested with corporate powers to
perform efficiently its governmental functions. MIAA is like any other government instrumentality,
the only difference is that MIAA is vested with corporate powers. Section 2(10) of the
Introductory Provisions of the Administrative Code defines a government “instrumentality” as
follows: SEC. 2. General Terms Defined.––x x x x (10) Instrumentality refers to any agency of
the National Government, not integrated within the department framework, vested with special
functions or jurisdiction by law, endowed with some if not all corporate powers, administering
special funds, and enjoying operational autonomy, usually through a charter. x x x (Emphasis
supplied)
Same; When the law vests in a government instrumentality corporate powers, the
instrumentality does not become a corporation—unless the government instrumentality is
organized as a stock or non-stock corporation, it remains a government instrumentality
exercising not only governmental but also corporate powers.—When the law vests in a
government instrumentality corporate powers, the instrumentality does not become a
corporation. Unless the government instrumentality is organized as a stock or non-stock
corporation, it remains a government instrumentality exercising not only governmental but also
corporate powers. Thus, MIAA exercises the governmental powers of eminent domain, police
authority and the levying of fees and charges. At the same time, MIAA exercises “all the powers
of a corporation under the Corporation Law, insofar as these powers are not inconsistent with
the provisions of this Executive Order.”
Same; When the law makes a government instrumentality operationally autonomous, the
instrumentality remains part of the National Government machinery although not integrated with
the department framework.—Likewise, when the law makes a government
instrumentality operationally autonomous, the instrumentality remains part of the National
Government machinery although not integrated with the department framework. The MIAA
Charter expressly states that transforming MIAA into a “separate and autonomous body” will
make its operation more “financially viable.”
Same; Manila International Airport Authority; Taxation; Local Government Code; A
government instrumentality like MIAA falls under Section 133(o) of the Local Government Code,
which provision recognizes the basic principle that local governments cannot tax the national
government.—A government instrumentality like MIAA falls under Section 133(o) of the Local
Government Code, which states: SEC. 133. Common Limitations on the Taxing Powers of Local
Government Units.—Unless otherwise provided herein, the exercise of the taxing powers
of provinces, cities, municipalities, and barangays shall not extend to the levy of the
following: x x x x (o) Taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities and local government units. (Emphasis and italics supplied)
Section 133(o) recognizes the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax. While
the 1987 Constitution now includes taxation as one of the powers of local governments, local
governments may only exercise such power “subject to such guidelines and limitations as the
Congress may provide.”
Taxation; Local Government Code; Statutory Construction; When local governments
invoke the power to tax on national government instrumentalities, such power is construed
strictly against local governments, and when Congress grants an exemption to a national
government instrumentality from local taxation, such exemption is construed liberally in favor of
the national government instrumentality.—Section 133(o) recognizes the basic principle that
local governments cannot tax the national government, which historically merely delegated to
local governments the power to tax. While the 1987 Constitution now includes taxation as one of
the powers of local governments, local governments may only exercise such power “subject to
such guidelines and limitations as the Congress may provide.” When local governments invoke
the power to tax on national government instrumentalities, such power is construed strictly
against local governments. The rule is that a tax is never presumed and there must be clear
language in the law imposing the tax. Any doubt whether a person, article or activity is taxable is
resolved against taxation. This rule applies with greater force when local governments seek to
tax national government instrumentalities. Another rule is that a tax exemption is strictly
construed against the taxpayer claiming the exemption. However, when Congress grants an
exemption to a national government instrumentality from local taxation, such exemption is
construed liberally in favor of the national government instrumentality. As this Court declared
in Maceda v. Macaraig, Jr.: The reason for the rule does not apply in the case of exemptions
running to the benefit of the government itself or its agencies. In such case the practical effect of
an exemption is merely to reduce the amount of money that has to be handled by government in
the course of its operations. For these reasons, provisions granting exemptions to government
agencies may be construed liberally, in favor of non tax-liability of such agencies. There is,
moreover, no point in national and local governments taxing each other, unless a sound and
compelling policy requires such transfer of public funds from one government pocket to another.
Same; Same; Taxation; Local Government Code; There is also no reason for local
governments to tax national government instrumentalities for rendering essential public services
to inhabitants of local governments, the only exception being when the legislature clearly
intended to tax government instrumentalities for the delivery of essential services for sound and
compelling policy considerations.—There is also no reason for local governments to tax national
government instrumentalities for rendering essential public services to inhabitants of local
governments. The only exception is when the legislature clearly intended to tax government
instrumentalities for the delivery of essential public services for sound and compelling policy
considerations. There must be express language in the law empowering local governments to
tax national government instrumentalities. Any doubt whether such power exists is resolved
against local governments.
Manila International Airport Authority; The Airport Lands and Buildings of the MIAA are
property of public dominion and therefore owned by the State or the Republic of the Philippines.
—The Airport Lands and Buildings of MIAA are property of public dominion and therefore
owned by the State or the Republic of the Philippines. The Civil Code provides: ARTICLE
419. Property is either of public dominion or of private ownership. ARTICLE 420. The following
things are property of public dominion: (1) Those intended for public use, such as roads,
canals, rivers, torrents, portsand bridges constructed by the State, banks, shores, roadsteads,
and others of similar character; (2) Those which belong to the State, without being for public
use, and are intended for some public service or for the development of the national wealth.
(Emphasis supplied) ARTICLE 421. All other property of the State, which is not of the character
stated in the preceding article, is patrimonial property. ARTICLE 422. Property of public
dominion, when no longer intended for public use or for public service, shall form part of the
patrimonial property of the State.
Same; Words and Phrases; The term “ports” in Article 420 (1) of the Civil Code includes
seaports and airports—the MIAA Airport Lands and Buildings constitute a “port” constructed by
the State.—No one can dispute that properties of public dominion mentioned in Article 420 of the
Civil Code, like “roads, canals, rivers, torrents, ports and bridges constructed by the
State,” are owned by the State. The term “ports” includes seaports and airports. The MIAA
Airport Lands and Buildings constitute a “port” constructed by the State. Under Article 420 of the
Civil Code, the MIAA Airport Lands and Buildings are properties of public dominion and thus
owned by the State or the Republic of the Philippines.
Same; Same; The Airport Lands and Buildings are devoted to public use because they
are used by the public for international and domestic travel and transportation; The charging of
fees to the public does not determine the character of the property whether it is of public
dominion or not.—The Airport Lands and Buildings are devoted to public use because they
are used by the public for international and domestic travel and transportation. The fact that the
MIAA collects terminal fees and other charges from the public does not remove the character of
the Airport Lands and Buildings as properties for public use. The operation by the government of
a tollway does not change the character of the road as one for public use. Someone must pay
for the maintenance of the road, either the public indirectly through the taxes they pay the
government, or only those among the public who actually use the road through the toll fees they
pay upon using the road. The tollway system is even a more efficient and equitable manner of
taxing the public for the maintenance of public roads. The charging of fees to the public does not
determine the character of the property whether it is of public dominion or not. Article 420 of the
Civil Code defines property of public dominion as one “intended for public use.” Even if the
government collects toll fees, the road is still “intended for public use” if anyone can use the road
under the same terms and conditions as the rest of the public. The charging of fees, the
limitation on the kind of vehicles that can use the road, the speed restrictions and other
conditions for the use of the road do not affect the public character of the road.
Same; Taxation; User’s Tax; Words and Phrases; The terminal fees MIAA charges
passengers, as well as the landing fees MIAA charges airlines, are often termed user’s tax; A
user’s tax is more equitable—a principle of taxation mandated by the 1987 Constitution.—The
terminal fees MIAA charges to passengers, as well as the landing fees MIAA charges to airlines,
constitute the bulk of the income that maintains the operations of MIAA. The collection of such
fees does not change the character of MIAA as an airport for public use. Such fees are often
termed user’s tax. This means taxing those among the public who actually use a public facility
instead of taxing all the public including those who never use the particular public facility. A
user’s tax is more equitable—a principle of taxation mandated in the 1987 Constitution.
Same; The Airport Lands and Buildings of MIAA, as properties of public dominion, are
outside the commerce of man.—The Airport Lands and Buildings of MIAA are devoted to public
use and thus are properties of public dominion. As properties of public dominion, the Airport
Lands and Buildings are outside the commerce of man. The Court has ruled repeatedly that
properties of public dominion are outside the commerce of man. As early as 1915, this Court
already ruled in Municipality of Cavite v. Rojas that properties devoted to public use are outside
the commerce of man, thus: According to article 344 of the Civil Code: “Property for public use in
provinces and in towns comprises the provincial and town roads, the squares, streets, fountains,
and public waters, the promenades, and public works of general service supported by said
towns or provinces.”
Same; Public Auctions; Property of public dominion, being outside the commerce of man,
cannot be the subject of an auction sale; Any encumbrance, levy on execution or auction sale of
any property of public dominion is void for being contrary to public policy.—Again in Espiritu v.
Municipal Council, the Court declared that properties of public dominion are outside the
commerce of man: x x x Town plazas are properties of public dominion, to be devoted to
public use and to be made available to the public in general. They are outside the commerce
of man and cannot be disposed of or even leased by the municipality to private parties. While in
case of war or during an emergency, town plazas may be occupied temporarily by private
individuals, as was done and as was tolerated by the Municipality of Pozorrubio, when the
emergency has ceased, said temporary occupation or use must also cease, and the town
officials should see to it that the town plazas should ever be kept open to the public and free
from encumbrances or illegal private constructions. (Emphasis supplied) The Court has also
ruled that property of public dominion, being outside the commerce of man, cannot be the
subject of an auction sale. Properties of public dominion, being for public use, are not subject to
levy, encumbrance or disposition through public or private sale. Any encumbrance, levy on
execution or auction sale of any property of public dominion is void for being contrary to public
policy. Essential public services will stop if properties of public dominion are subject to
encumbrances, foreclosures and auction sale. This will happen if the City of Parañaque can
foreclose and compel the auction sale of the 600-hectare runway of the MIAA for non-payment
of real estate tax.
Same; Unless the President issues a proclamation withdrawing the Airport Lands and
Buildings from public use, these properties remain properties of public dominion and are
inalienable.—Before MIAA can encumber the Airport Lands and Buildings, the President must
first withdraw from public use the Airport Lands and Buildings. Sections 83 and 88 of the Public
Land Law or Commonwealth Act No. 141, which “remains to this day the existing general law
governing the classification and disposition of lands of the public domain other than timber and
mineral lands,” provide: x x x Thus, unless the President issues a proclamation withdrawing the
Airport Lands and Buildings from public use, these properties remain properties of public
dominion and are inalienable. Since the Airport Lands and Buildings are inalienable in their
present status as properties of public dominion, they are not subject to levy on execution or
foreclosure sale. As long as the Airport Lands and Buildings are reserved for public use, their
ownership remains with the State or the Republic of the Philippines.
Same; Trusts; MIAA is merely holding title to the Airport Lands and Buildings in trust for
the Republic.—MIAA is merely holding title to the Airport Lands and Buildings in trust for the
Republic. Section 48, Chapter 12, Book I of the Administrative Code allows instrumentalities like
MIAA to hold title to real properties owned by the Republic.
Same; The transfer of the Airport Lands and Buildings from the Bureau of Air
Transportation to MIAA was not meant to transfer beneficial ownership of these assets from the
Republic to MIAA—the Republic remains the beneficial owner of the Airport Lands and
Buildings.—The transfer of the Airport Lands and Buildings from the Bureau of Air
Transportation to MIAA was not meant to transfer beneficial ownership of these assets from the
Republic to MIAA. The purpose was merely to reorganize a division in the Bureau of Air
Transportation into a separate and autonomous body. The Republic remains the beneficial
owner of the Airport Lands and Buildings. MIAA itself is owned solely by the Republic. No party
claims any ownership rights over MIAA’s assets adverse to the Republic. The MIAA Charter
expressly provides that the Airport Lands and Buildings “shall not be disposed through sale or
through any other mode unless specifically approved by the President of the Philippines.” This
only means that the Republic retained the beneficial ownership of the Airport Lands and
Buildings because under Article 428 of the Civil Code, only the “owner has the right to x x x
dispose of a thing.” Since MIAA cannot dispose of the Airport Lands and Buildings, MIAA does
not own the Airport Lands and Buildings. At any time, the President can transfer back to the
Republic title to the Airport Lands and Buildings without the Republic paying MIAA any
consideration. Under Section 3 of the MIAA Charter, the President is the only one who can
authorize the sale or disposition of the Airport Lands and Buildings. This only confirms that the
Airport Lands and Buildings belong to the Republic.
Taxation; Local Government Code; Section 234(a) of the Local Government Code
exempts from real estate tax any “real property owned by the Republic of the Philippines.”—
Section 234(a) of the Local Government Code exempts from real estate tax any “[r]eal property
owned by the Republic of the Philippines.” Section 234(a) provides: SEC. 234. Exemptions from
Real Property Tax.—The following are exempted from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for consideration or
otherwise, to a taxable person; x x x. (Emphasis supplied) This exemption should be read in
relation with Section 133(o) of the same Code, which prohibits local governments from imposing
“[t]axes, fees or charges of any kind on the National Government, its agencies
and instrumentalities x x x.” The real properties owned by the Republic are titled either in the
name of the Republic itself or in the name of agencies or instrumentalities of the National
Government. The Administrative Code allows real property owned by the Republic to be titled in
the name of agencies or instrumentalities of the national government. Such real properties
remain owned by the Republic and continue to be exempt from real estate tax.
Manila International Airport Authority; Local Government Code; The Republic may grant
the beneficial use of its real property to an agency or instrumentality of the national government,
an arrangement which does not result in the loss of the tax exemption; MIAA, as a government
instrumentality, is not a taxable person under Section 133(o) of the Local Government Code.—
The Republic may grant the beneficial use of its real property to an agency or instrumentality of
the national government. This happens when title of the real property is transferred to an agency
or instrumentality even as the Republic remains the owner of the real property. Such
arrangement does not result in the loss of the tax exemption. Section 234(a) of the Local
Government Code states that real property owned by the Republic loses its tax exemption only if
the “beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person.” MIAA, as a government instrumentality, is not a taxable person under Section 133(o) of
the Local Government Code. Thus, even if we assume that the Republic has granted to MIAA
the beneficial use of the Airport Lands and Buildings, such fact does not make these real
properties subject to real estate tax.
Same; Same; Taxation; Portions of the Airport Lands and Buildings that MIAA leases to
private entities are not exempt from real estate tax.—Portions of the Airport Lands and Buildings
that MIAA leases to private entities are not exempt from real estate tax. For example, the land
area occupied by hangars that MIAA leases to private corporations is subject to real estate tax.
In such a case, MIAA has granted the beneficial use of such land area for a consideration to
a taxable person and therefore such land area is subject to real estate tax. In Lung Center of
the Philippines v. Quezon City, 433 SCRA 119, 138 (2004), the Court ruled: Accordingly, we
hold that the portions of the land leased to private entities as well as those parts of the hospital
leased to private individuals are not exempt from such taxes. On the other hand, the portions of
the land occupied by the hospital and portions of the hospital used for its patients, whether
paying or non-paying, are exempt from real property taxes.
Same; Taxation; By express mandate of the Local Government Code, local governments
cannot impose any kind of tax on national government instrumentalities like the MIAA.—By
express mandate of the Local Government Code, local governments cannot impose any kind of
tax on national government instrumentalities like the MIAA. Local governments are devoid of
power to tax the national government, its agencies and instrumentalities. The taxing powers of
local governments do not extend to the national government, its agencies and instrumentalities,
“[u]nless otherwise provided in this Code” as stated in the saving clause of Section 133. The
saving clause refers to Section 234(a) on the exception to the exemption from real estate tax of
real property owned by the Republic.
 Same; Same; The determinative test whether MIAA is exempt from local taxation is not
whether MIAA is a juridical person, but whether it is a national government instrumentality under
Section 133(o) of the Local Government Code.—The minority’s theory violates Section 133(o) of
the Local Government Code which expressly prohibits local governments from imposing any
kind of tax on national government instrumentalities. Section 133(o) does not distinguish
between national government instrumentalities with or without juridical personalities. Where the
law does not distinguish, courts should not distinguish. Thus, Section 133(o) applies to all
national government instrumentalities, with or without juridical personalities. The determinative
test whether MIAA is exempt from local taxation is not whether MIAA is a juridical person,
but whether it is a national government instrumentality under Section 133(o) of the Local
Government Code. Section 133(o) is the specific provision of law prohibiting local governments
from imposing any kind of tax on the national government, its agencies and instrumentalities.
Taxation; The saving clause in Section 133 of the Local Government Code refers to the
exception to the exemption in Section 234(a) of the Code, which makes the national government
subject to real estate tax when it gives the beneficial use of its real properties to a taxable entity;
The exception to the exemption in Section 234(a) is the only instance when the national
government, its agencies and instrumentalities are subject to any kind of tax by local
governments.—The saving clause in Section 133 refers to the exception to the exemption in
Section 234(a) of the Code, which makes the national government subject to real estate
tax when it gives the beneficial use of its real properties to a taxable entity. Section 234(a)
of the Local Government Code provides: SEC. 234. Exemptions from Real Property Tax.—The
following are exempted from payment of the real property tax: (a) Real property owned by
the Republic of the Philippines or any of its political subdivisions except when the beneficial
use thereof has been granted, for consideration or otherwise, to a taxable person. x x x.
(Emphasis supplied) Under Section 234(a), real property owned by the Republic is exempt from
real estate tax. The exception to this exemption is when the government gives the beneficial use
of the real property to a taxable entity. The exception to the exemption in Section 234(a) is
the only instance when the national government, its agencies and instrumentalities are subject
to any kind of tax by local governments. The exception to the exemption applies only to real
estate tax and not to any other tax. The justification for the exception to the exemption is that the
real property, although owned by the Republic, is not devoted to public use or public service but
devoted to the private gain of a taxable person.
Same; Statutory Construction; When a provision of law grants a power but withholds
such power on certain matters, there is no conflict between the grant of power and the
withholding of power.—There is no conflict whatsoever between Sections 133 and 193
because Section 193 expressly admits its subordination to other provisions of the Code when
Section 193 states “[u]nless otherwise provided in this Code.” By its own words, Section 193
admits the superiority of other provisions of the Local Government Code that limit the exercise of
the taxing power in Section 193. When a provision of law grants a power but withholds such
power on certain matters, there is no conflict between the grant of power and the withholding of
power. The grantee of the power simply cannot exercise the power on matters withheld from its
power.
Same; Words and Phrases; By their very meaning and purpose, the “common
limitations” on the taxing power prevail over the grant or exercise of the taxing power.—Since
Section 133 prescribes the “common limitations” on the taxing powers of local governments,
Section 133 logically prevails over Section 193 which grants local governments such taxing
powers. By their very meaning and purpose, the “common limitations” on the taxing power
prevail over the grant or exercise of the taxing power. If the taxing power of local governments in
Section 193 prevails over the limitations on such taxing power in Section 133, then local
governments can impose any kind of tax on the national government, its agencies and
instrumentalities—a gross absurdity.
Administrative Law; The Administrative Law is the governing law defining the status and
relationship of government departments, bureaus, offices, agencies and instrumentalities.—The
third whereas clause of the Administrative Code states that the Code “incorporates in a unified
document the major structural, functional and procedural principles and rules of governance.”
Thus, the Administrative Code is the governing lawdefining the status and relationship of
government departments, bureaus, offices, agencies and instrumentalities. Unless a statute
expressly provides for a different status and relationship for a specific government unit or entity,
the provisions of the Administrative Code prevail.
Same; The government-owned or controlled corporations created through special
charters are those that meet the two conditions prescribed in Section 16, Article XII of the
Constitution, regarding their creation in the interest of common good and their being subject to
the test of economic viability.—The government-owned or controlled corporations created
through special charters are those that meet the two conditions prescribed in Section 16, Article
XII of the Constitution. The first condition is that the government-owned or controlled corporation
must be established for the common good. The second condition is that the government-owned
or controlled corporation must meet the test of economic viability. Section 16, Article XII of the
1987 Constitution provides: SEC. 16. The Congress shall not, except by general law, provide for
the formation, organization, or regulation of private corporations. Government-owned or
controlled corporations may be created or established by special charters in the interest
of the common good and subject to the test of economic viability.
Same; The test of economic viability applies only to government-owned or controlled
corporations that perform economic or commercial activities and need to compete in the market
place—government instrumentalities vested with corporate powers and performing
governmental or public functions need not meet the test of economic viability.—The Constitution
expressly authorizes the legislature to create “government-owned or controlled corporations”
through special charters only if these entities are required to meet the twin conditions of
common good and economic viability. In other words, Congress has no power to create
government-owned or controlled corporations with special charters unless they are made to
comply with the two conditions of common good and economic viability. The test of economic
viability applies only to government-owned or controlled corporations that perform economic or
commercial activities and need to compete in the market place. Being essentially economic
vehicles of the State for the common good—meaning for economic development purposes—
these government-owned or controlled corporations with special charters are usually organized
as stock corporations just like ordinary private corporations. In contrast, government
instrumentalities vested with corporate powers and performing governmental or public functions
need not meet the test of economic viability. These instrumentalities perform essential public
services for the common good, services that every modern State must provide its citizens.
These instrumentalities need not be economically viable since the government may even
subsidize their entire operations. These instrumentalities are not the “government-owned or
controlled corporations” referred to in Section 16, Article XII of the 1987 Constitution.
Manila International Airport Authority; Administrative Law; The MIAA need not meet the
test of economic viability because the legislature did not create MIAA to compete in the market
place.—The MIAA need not meet the test of economic viability because the legislature did not
create MIAA to compete in the market place. MIAA does not compete in the market place
because there is no competing international airport operated by the private sector. MIAA On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion
performs an essential public service as the primary domestic and international airport of the No. 061. The OGCC pointed out that Section 206 of the Local Government Code
Philippines. requires persons exempt from real estate tax to show proof of exemption. The OGCC
opined that Section 21 of the MIAA Charter is the proof that MIAA is exempt from real
Same; Words and Phrases; The terminal fees that MIAA charges every passenger are
regulatory or administrative fees and not income from commercial transactions.—MIAA performs
estate tax.
an essential public service that every modern State must provide its citizens. MIAA derives its
revenues principally from the mandatory fees and charges MIAA imposes on passengers and On 1 October 2001, MIAA filed with the Court of Appeals an original petition for
airlines. The terminal fees that MIAA charges every passenger are regulatory or administrative prohibition and injunction, with prayer for preliminary injunction or temporary
fees and not income from commercial transactions. restraining order. The petition sought to restrain the City of Parañaque from imposing
real estate tax on, levying against, and auctioning for public sale the Airport Lands
and Buildings. The petition was docketed as CA-G.R. SP No. 66878. On 5 October
2001, the Court of Appeals dismissed the petition because MIAA filed it beyond the
CARPIO, J.: 60-day reglementary period. The Court of Appeals also denied on 27 September
The Antecedents 2002 MIAA’s motion for reconsideration and supplemental motion for reconsideration.
Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino Hence, MIAA filed on 5 December 2002 the present petition for review.
International Airport (NAIA) Complex in Parañaque City under Executive Order No.
903, otherwise known as the Revised Charter of the Manila International Airport
Meanwhile, in January 2003, the City of Parañaque posted notices of auction sale
Authority(“MIAA Charter”). Executive Order No. 903 was issued on 21 July 1983 by
at the Barangay Halls of Barangays Vitalez, Sto. Niño, and Tambo, Parañaque City;
then President Ferdinand E. Marcos. Subsequently, Executive Order Nos. 909 and
in the public market of Barangay La Huerta; and in the main lobby of the Parañaque
298 amended the MIAA Charter.
City Hall. The City of Parañaque published the notices in the 3 and 10 January 2003
issues of the Philippine Daily Inquirer, a newspaper of general circulation in the
As operator of the international airport, MIAA administers the land, improvements
Philippines. The notices announced the public auction sale of the Airport Lands and
and equipment within the NAIA Complex. The MIAA Charter transferred to MIAA
Buildings to the highest bidder on 7 February 2003, 10:00 a.m., at the Legislative
approximately 600 hectares of land, including the runways and buildings (“Airport
Session Hall Building of Parañaque City.
Lands and Buildings”) then under the Bureau of Air Transportation. The MIAA Charter
further provides that no portion of the land transferred to MIAA shall be disposed of
A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed
through sale or any other mode unless specifically approved by the President of the
before this Court an Urgent Ex-Parte and Reiteratory Motion for the Issuance of a
Philippines.
Temporary Restraining Order. The motion sought to restrain respondents—the City of
Parañaque, City Mayor of Parañaque, Sangguniang Panglungsod ng Parañaque, City
On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued
Treasurer of Parañaque, and the City Assessor of Parañaque (“respondents”)—from
Opinion No. 061. The OGCC opined that the Local Government Code of 1991
auctioning the Airport Lands and Buildings.
withdrew the exemption from real estate tax granted to MIAA under Section 21 of the
MIAA Charter. Thus, MIAA negotiated with respondent City of Parañaque to pay the
On 7 February 2003, this Court issued a temporary restraining order (TRO)
real estate tax imposed by the City. MIAA then paid some of the real estate tax
effective immediately. The Court ordered respondents to cease and desist from
already due.
selling at public auction the Airport Lands and Buildings. Respondents received the
TRO on the same day that the Court issued it. However, respondents received the
On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency
TRO only at 1:25 p.m. or three hours after the conclusion of the public auction.
from the City of Parañaque for the taxable years 1992 to 2001.

On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc the

On 17 July 2001, the City of Parañaque, through its City Treasurer, issued notices
TRO.
of levy and warrants of levy on the Airport Lands and Buildings. The Mayor of the City
of Parañaque threatened to sell at public auction the Airport Lands and Buildings
On 29 March 2005, the Court heard the parties in oral arguments. In compliance
should MIAA fail to pay the real estate tax delinquency. MIAA thus sought a
with the directive issued during the hearing, MIAA, respondent City of Parañaque,
clarification of OGCC Opinion No. 061.
and the Solicitor General subsequently submitted their respective Memoranda.
 MIAA admits that the MIAA Charter has placed the title to the Airport Lands and
Buildings in the name of MIAA. However, MIAA points out that it cannot claim
ownership over these properties since the real owner of the Airport Lands and
Buildings is the Republic of the Philippines. The MIAA Charter mandates MIAA to
devote the Airport Lands and Buildings for the benefit of the general public. Since the
Airport Lands and Buildings are devoted to public use and public service, the
ownership of these properties remains with the State. The Airport Lands and
Buildings are thus inalienable and are not subject to real estate tax by local
governments.
MIAA also points out that Section 21 of the MIAA Charter specifically exempts
MIAA from the payment of real estate tax. MIAA insists that it is also exempt from real
estate tax under Section 234 of the Local Government Code because the Airport
Lands and Buildings are owned by the Republic. To justify the exemption, MIAA
invokes the principle that the government cannot tax itself. MIAA points out that the
reason for tax exemption of public property is that its taxation would not inure to any
public advantage, since in such a case the tax debtor is also the tax creditor.
Respondents invoke Section 193 of the Local Government Code, which expressly
withdrew the tax exemption privileges of “govern-ment-owned and-controlled
corporations” upon the effectivity of the Local Government Code. Respondents also
argue that a basic rule of statutory construction is that the express mention of one
person, thing, or act excludes all others. An international airport is not among the
exceptions mentioned in Section 193 of the Local Government Code. Thus,
respondents assert that MIAA cannot claim that the Airport Lands and Buildings are
exempt from real estate tax.
Respondents also cite the ruling of this Court in Mactan International Airport v.
Marcoswhere we held that the Local Government Code has withdrawn the exemption
from real estate tax granted to international airports. Respondents further argue that
since MIAA has already paid some of the real estate tax assessments, it is now
estopped from claiming that the Airport Lands and Buildings are exempt from real
estate tax.
The Issue
This petition raises the threshold issue of whether the Airport Lands and Buildings of
MIAA are exempt from real estate tax under existing laws. If so exempt, then the real
estate tax assessments issued by the City of Parañaque, and all proceedings taken
pursuant to such assessments, are void. In such event, the other issues raised in this
petition become moot.
The Court’s Ruling
We rule that MIAA’s Airport Lands and Buildings are exempt from real estate tax
imposed by local governments.
First, MIAA is not a government-owned or controlled corporation but
an instrumentality of the National Government and thus exempt from local taxation.
Second, the real properties of MIAA are owned by the Republic of the Philippines
and thus exempt from real estate tax.
1.MIAA is Not a Government-Owned or Controlled Corporation
Respondents argue that MIAA, being a government-owned or controlled corporation,
is not exempt from real estate tax. Respondents claim that the deletion of the phrase
“any government-owned or controlled so exempt by its charter” in Section 234(e) of
the Local Government Code withdrew the real estate tax exemption of government-
owned or controlled corporations. The deleted phrase appeared in Section 40(a) of
the 1974 Real Property Tax Code enumerating the entities exempt from real estate
tax.
There is no dispute that a government-owned or controlled corporation is not
exempt from real estate tax. However, MIAA is not a government-owned or controlled
corporation. Section 2(13) of the Introductory Provisions of the Administrative Code of
1987 defines a government-owned or controlled corporation as follows:
SEC. 2. General Terms Defined.—x x x x
(13) Government-owned or controlled corporation refers to any
agency organized as a stock or non-stock corporation, vested with functions
relating to public needs whether governmental or proprietary in nature, and
owned by the Government directly or through its instrumentalities either wholly,
or, where applicable as in the case of stock corporations, to the extent of at least
fifty-one (51) percent of its capital stock: x x x. (Emphasis supplied)
A government-owned or controlled corporation must be “organized as a stock or non-
stock corporation.” MIAA is not organized as a stock or non-stock corporation. MIAA
is not a stock corporation because it has no capital stock divided into shares. MIAA
has no stockholders or voting shares. Section 10 of the MIAA Charter9provides:
SECTION 10. Capital.—The capital of the Authority to be contributed by the
National Government shall be increased from Two and One-half Billion
(P2,500,000,000.00) Pesos to Ten Billion (P10,000,000,000.00) Pesos to consist
of:
(a)The value of fixed assets including airport facilities, runways and
equipment and such other properties, movable and immovable[,] which
may be contributed by the National Government or transferred by it from
any of its agencies, the valuation of which shall be determined jointly with
the Department of Budget and Management and the Commission on
Audit on the date of such contribution or transfer after making due
allowances for depreciation and other deductions taking into account the
loans and other liabilities of the Authority at the time of the takeover of the
assets and other properties;
(b)That the amount of P605 million as of December 31, 1986
representing about seventy per centum (70%) of the unremitted share of
the National Government from 1983 to 1986 to be remitted to the
National Treasury as provided for in Section 11 of E. O. No. 903 as
 amended, shall be converted into the equity of the National Government
in the Authority. Thereafter, the Government contribution to the capital of
the Authority shall be provided in the General Appropriations Act.
Clearly, under its Charter, MIAA does not have capital stock that is divided into
shares.
Section 3 of the Corporation Code defines a stock corporation as one whose
“capital stock is divided into shares and x x x authorized to distribute to the
holders of such shares dividends x x x.” MIAA has capital but it is not divided into
shares of stock. MIAA has no stockholders or voting shares. Hence, MIAA is not
a stock corporation.
MIAA is also not a non-stock corporation because it has no members. Section 87
of the Corporation Code defines a non-stock corporation as “one where no part of its
income is distributable as dividends to its members, trustees or officers.” A non-stock
corporation must have members. Even if we assume that the Government is
considered as the sole member of MIAA, this will not make MIAA a non-stock
corporation. Non-stock corporations cannot distribute any part of their income to their
members. Section 11 of the MIAA Charter mandates MIAA to remit 20% of its annual
gross operating income to the National Treasury. This prevents MIAA from qualifying
as a non-stock corporation.
Section 88 of the Corporation Code provides that non-stock corporations are
“organized for charitable, religious, educational, professional, cultural, recreational,
fraternal, literary, scientific, social, civil service, or similar purposes, like trade,
industry, agriculture and like chambers.” MIAA is not organized for any of these
purposes. MIAA, a public utility, is organized to operate an international and domestic
airport for public use.
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify
as a government-owned or controlled corporation. What then is the legal status of
MIAA within the National Government?
MIAA is a government instrumentality vested with corporate powers to perform
efficiently its governmental functions. MIAA is like any other government
instrumentality, the only difference is that MIAA is vested with corporate powers.
Section 2(10) of the Introductory Provisions of the Administrative Code defines a
government “instrumentality” as follows:
SEC. 2. General Terms Defined.––x x x x
(10) Instrumentality refers to any agency of the National Government, not
integrated within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate powers,
administering special funds, and enjoying operational autonomy, usually
through a charter. x x x (Emphasis supplied)
When the law vests in a government instrumentality corporate powers, the
instrumentality does not become a corporation. Unless the government
instrumentality is organized as a stock or non-stock corporation, it remains a
government instrumentality exercising not only governmental but also corporate
powers. Thus, MIAA exercises the governmental powers of eminent domain, police
authority and the levying of fees and charges. At the same time, MIAA exercises “all
the powers of a corporation under the Corporation Law, insofar as these powers are
not inconsistent with the provisions of this Executive Order.”
Likewise, when the law makes a government instrumentality operationally
autonomous, the instrumentality remains part of the National Government machinery
although not integrated with the department framework. The MIAA Charter expressly
states that transforming MIAA into a “separate and autonomous body” will make its
operation more “financially viable.”
Many government instrumentalities are vested with corporate powers but they do
not become stock or non-stock corporations, which is a necessary condition before an
agency or instrumentality is deemed a government-owned or controlled corporation.
Examples are the Mactan International Airport Authority, the Philippine Ports
Authority, the University of the Philippines and Bangko Sentral ng Pilipinas. All these
government instrumentalities exercise corporate powers but they are not organized
as stock or non-stock corporations as required by Section 2(13) of the Introductory
Provisions of the Administrative Code. These government instrumentalities are
sometimes loosely called government corporate entities. However, they are not
government-owned or controlled corporations in the strict sense as understood under
the Administrative Code, which is the governing law defining the legal relationship
and status of government entities.
A government instrumentality like MIAA falls under Section 133(o) of the Local
Government Code, which states:
SEC. 133. Common Limitations on the Taxing Powers of Local Government
Units.—Unless otherwise provided herein, the exercise of the taxing powers
of provinces, cities, municipalities, and barangays shall not extend to the
levy of the following:
xxxx
(o) Taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities and local government units. (Emphasis and
italics supplied)
Section 133(o) recognizes the basic principle that local governments cannot tax the
national government, which historically merely delegated to local governments the
power to tax. While the 1987 Constitution now includes taxation as one of the powers
of local governments, local governments may only exercise such power “subject to
such guidelines and limitations as the Congress may provide.”
When local governments invoke the power to tax on national government
instrumentalities, such power is construed strictly against local governments. The rule
is that a tax is never presumed and there must be clear language in the law imposing
the tax. Any doubt whether a person, article or activity is taxable is resolved against
taxation. This rule applies with greater force when local governments seek to tax
national government instrumentalities.
Another rule is that a tax exemption is strictly construed against the taxpayer
claiming the exemption. However, when Congress grants an exemption to a national
government instrumentality from local taxation, such exemption is construed liberally
in favor of the national government instrumentality. As this Court declared in Maceda
v. Macaraig, Jr.:
The reason for the rule does not apply in the case of exemptions running to the
benefit of the government itself or its agencies. In such case the practical effect
of an exemption is merely to reduce the amount of money that has to be handled
by government in the course of its operations. For these reasons, provisions
granting exemptions to government agencies may be construed liberally, in favor
of non tax-liability of such agencies.
There is, moreover, no point in national and local governments taxing each other,
unless a sound and compelling policy requires such transfer of public funds from one
government pocket to another.
There is also no reason for local governments to tax national government
instrumentalities for rendering essential public services to inhabitants of local
governments. The only exception is when the legislature clearly intended to tax
government instrumentalities for the delivery of essential public services for sound
and compelling policy considerations. There must be express language in the law
empowering local governments to tax national government instrumentalities. Any
doubt whether such power exists is resolved against local governments.
Thus, Section 133 of the Local Government Code states that “unless otherwise
provided” in the Code, local governments cannot tax national government
instrumentalities. As this Court held in Basco v. Philippine Amusements and Gaming
Corporation:
The states have no power by taxation or otherwise, to retard, impede, burden or
in any manner control the operation of constitutional laws enacted by Congress
to carry into execution the powers vested in the federal government. (Mc Culloch
v. Maryland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the “supremacy” of the National Government over
local governments.
“Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at
least, the instrumentalities of the United States (Johnson v. Maryland, 254 US
51) and it can be agreed that no state or political subdivision can regulate a
federal instrumentality in such a way as to prevent it from consummating its
federal responsibilities, or even to seriously burden it in the accomplishment of
them.” (Antieau, Modern Constitutional Law, Vol. 2, p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable activities
or enterprise using the power to tax as “a tool for regulation” (U.S. v.
Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the “power to
destroy” (Mc Culloch v. Maryland, supra) cannot be allowed to defeat an
instrumentality or creation of the very entity which has the inherent power to
wield it.
2.Airport Lands and Buildings of MIAA are Owned by the Republic
a.Airport Lands and Buildings are of Public Dominion
The Airport Lands and Buildings of MIAA are property of public dominion and
therefore owned by the State or the Republic of the Philippines. The Civil Code
provides:
ARTICLE 419. Property is either of public dominion or of private ownership.
ARTICLE 420. The following things are property of public dominion:
(1)Those intended for public use, such as roads, canals, rivers,
torrents, ports and bridges constructed by the State, banks, shores,
roadsteads, and others of similar character;
(2)Those which belong to the State, without being for public use, and are
intended for some public service or for the development of the national wealth.
(Emphasis supplied)
ARTICLE 421. All other property of the State, which is not of the character
stated in the preceding article, is patrimonial property.
ARTICLE 422. Property of public dominion, when no longer intended for
public use or for public service, shall form part of the patrimonial property of the
State.
No one can dispute that properties of public dominion mentioned in Article 420 of the
Civil Code, like “roads, canals, rivers, torrents, ports  and bridges constructed by the
State,” are owned by the State. The term “ports” includes seaports and airports. The
MIAA Airport Lands and Buildings constitute a “port” constructed by the State. Under
Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are properties of
public dominion and thus owned by the State or the Republic of the Philippines.
The Airport Lands and Buildings are devoted to public use because they are used
by the public for international and domestic travel and transportation. The fact that the
MIAA collects terminal fees and other charges from the public does not remove the
character of the Airport Lands and Buildings as properties for public use. The
operation by the government of a tollway does not change the character of the road
as one for public use. Someone must pay for the maintenance of the road, either the
public indirectly through the taxes they pay the government, or only those among the
public who actually use the road through the toll fees they pay upon using the road.
The tollway system is even a more efficient and equitable manner of taxing the public
for the maintenance of public roads.

The charging of fees to the public does not determine the character of the
property whether it is of public dominion or not. Article 420 of the Civil Code defines
property of public dominion as one “intended for public use.” Even if the government
collects toll fees, the road is still “intended for public use” if anyone can use the road
under the same terms and conditions as the rest of the public. The charging of fees,
the limitation on the kind of vehicles that can use the road, the speed restrictions and
other conditions for the use of the road do not affect the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA
charges to airlines, constitute the bulk of the income that maintains the operations of
MIAA. The collection of such fees does not change the character of MIAA as an
airport for public use. Such fees are often termed user’s tax. This means taxing those
among the public who actually use a public facility instead of taxing all the public
including those who never use the particular public facility. A user’s tax is more
equitable—a principle of taxation mandated in the 1987 Constitution.
The Airport Lands and Buildings of MIAA, which its Charter calls the “principal
airport of the Philippines for both international and domestic air traffic,” are properties
of public dominion because they are intended for public use. As properties of public
dominion, they indisputably belong to the State or the Republic of the Philippines.
b.Airport Lands and Buildings are Outside the Commerceof Man
The Airport Lands and Buildings of MIAA are devoted to public use and thus are
properties of public dominion. As properties of public dominion, the Airport Lands and
Buildings are outside the commerce of man. The Court has ruled repeatedly that
properties of public dominion are outside the commerce of man. As early as 1915,
this Court already ruled in Municipality of Cavite v. Rojas that properties devoted to
public use are outside the commerce of man, thus:
“According to article 344 of the Civil Code: “Property for public use in provinces
and in towns comprises the provincial and town roads, the squares, streets,
fountains, and public waters, the promenades, and public works of general
service supported by said towns or provinces.”
The said Plaza Soledad being a promenade for public use, the municipal
council of Cavite could not in 1907 withdraw or exclude from public use a portion
thereof in order to lease it for the sole benefit of the defendant Hilaria Rojas. In
leasing a portion of said plaza or public place to the defendant for private use the
plaintiff municipality exceeded its authority in the exercise of its powers by
executing a contract over a thing of which it could not dispose, nor is it
empowered so to do.
The Civil Code, article 1271, prescribes that everything which is not outside
the commerce of man may be the object of a contract, and plazas and streets
are outside of this commerce, as was decided by the supreme court of Spain in
its decision of February 12, 1895, which says: “Communal things that cannot
be sold because they are by their very nature outside of commerce are
those for public use, such as the plazas, streets, common lands, rivers,
fountains, etc.” (Emphasis supplied)
Again in Espiritu v. Municipal Council, the Court declared that properties of public
dominion are outside the commerce of man:
“x x x Town plazas are properties of public dominion, to be devoted to public
use and to be made available to the public in general. They are outside the
commerce of man and cannot be disposed of or even leased by the municipality
to private parties. While in case of war or during an emergency, town plazas may
be occupied temporarily by private individuals, as was done and as was tolerated
by the Municipality of Pozorrubio, when the emergency has ceased, said
temporary occupation or use must also cease, and the town officials should see
to it that the town plazas should ever be kept open to the public and free from
encumbrances or illegal private constructions.” (Emphasis supplied)
The Court has also ruled that property of public dominion, being outside the
commerce of man, cannot be the subject of an auction sale.
Properties of public dominion, being for public use, are not subject to levy,
encumbrance or disposition through public or private sale. Any encumbrance, levy on
execution or auction sale of any property of public dominion is void for being contrary
to public policy. Essential public services will stop if properties of public dominion are
subject to encumbrances, foreclosures and auction sale. This will happen if the City of
Parañaque can foreclose and compel the auction sale of the 600-hectare runway of
the MIAA for non-payment of real estate tax.
Before MIAA can encumber the Airport Lands and Buildings, the President must
first withdraw from public use the Airport Lands and Buildings. Sections 83 and 88 of
the Public Land Law or Commonwealth Act No. 141, which “remains to this day the
existing general law governing the classification and disposition of lands of the public
domain other than timber and mineral lands,” provide:
SECTION 83. Upon the recommendation of the Secretary of Agriculture and
Natural Resources, the President may designate by proclamation any tract or
tracts of land of the public domain as reservations for the use of the Republic of
the Philippines or of any of its branches, or of the inhabitants thereof, in
accordance with regulations prescribed for this purposes, or for quasi-public uses
or purposes when the public interest requires it, including reservations for
highways, rights of way for railroads, hydraulic power sites, irrigation systems,
communal pastures or lequas communales, public parks, public quarries, public
fishponds, working men’s village and other improvements for the public benefit.
SECTION 88. The tract or tracts of land reserved under the provisions
of Section eighty-three shall be non-alienable and shall not be subject to
occupation, entry, sale, lease, or other disposition until again declared
alienable under the provisions of this Act or by proclamation of the
President. (Emphasis and italics supplied)
Thus, unless the President issues a proclamation withdrawing the Airport Lands and
Buildings from public use, these properties remain properties of public dominion and
are inalienable. Since the Airport Lands and Buildings are inalienable in their present
status as properties of public dominion, they are not subject to levy on execution or
foreclosure sale. As long as the Airport Lands and Buildings are reserved for public
use, their ownership remains with the State or the Republic of the Philippines.
The authority of the President to reserve lands of the public domain for public use,
and to withdraw such public use, is reiterated in Section 14, Chapter 4, Title I, Book III
of the Administrative Code of 1987, which states:
SEC. 14. Power to Reserve Lands of the Public and Private Domain of the
Government.—(1) The President shall have the power to reserve for
settlement or public use, and for specific public purposes, any of the lands
of the public domain, the use of which is not otherwise directed by law. The
reserved land shall thereafter remain subject to the specific public purpose
indicated until otherwise provided by law or proclamation;
x x x x. (Emphasis supplied)
There is no question, therefore, that unless the Airport Lands and Buildings are
withdrawn by law or presidential proclamation from public use, they are properties of
public dominion, owned by the Republic and outside the commerce of man.
c.MIAA is a Mere Trustee of the Republic
MIAA is merely holding title to the Airport Lands and Buildings in trust for the
Republic. Section 48, Chapter 12, Book I of the Administrative Code allows
instrumentalities like MIAA to hold title to real properties owned by the Republic, thus:
SEC. 48. Official Authorized to Convey Real Property.—Whenever real property
of the Government is authorized by law to be conveyed, the deed of conveyance
shall be executed in behalf of the government by the following:
(1)For property belonging to and titled in the name of the Republic of the
Philippines, by the President, unless the authority therefor is expressly
vested by law in another officer.
(2)For property belonging to the Republic of the Philippines but
titled in the name of any political subdivision or of any corporate
agency or instrumentality, by the executive head of the agency or
instrumentality. (Emphasis supplied)
In MIAA’s case, its status as a mere trustee of the Airport Lands and Buildings is
clearer because even its executive head cannot sign the deed of conveyance on
behalf of the Republic. Only the President of the Republic can sign such deed of
conveyance.
d.Transfer to MIAA was Meant to Implement a Reorganization
The MIAA Charter, which is a law, transferred to MIAA the title to the Airport Lands
and Buildings from the Bureau of Air Transportation of the Department of
Transportation and Communications. The MIAA Charter provides:
SECTION 3. Creation of the Manila International Airport Author-ity.—x x x x
The land where the Airport is presently located as well as the
surrounding land area of approximately six hundred hectares, are hereby
transferred, conveyed and assigned to the ownership and administration of
the Authority, subject to existing rights, if any. The Bureau of Lands and
other appropriate government agencies shall undertake an actual survey of the
area transferred within one year from the promulgation of this Executive Order
and the corresponding title to be issued in the name of the Authority.  Any
portion thereof shall not be disposed through sale or through any other
mode unless specifically approved by the President of the
Philippines. (Emphasis supplied)
SECTION 22. Transfer of Existing Facilities and Intangible Assets.—All
existing public airport facilities, runways, lands, buildings and other
property, movable or immovable, belonging to the Airport, and all assets,
powers, rights, interests and privileges belonging to the Bureau of Air
Transportation relating to airport works or air operations, including all equipment
which are necessary for the operation of crash fire and rescue facilities, are
hereby transferred to the Authority. (Emphasis supplied)
SECTION 25. Abolition of the Manila International Airport as a Division in the
Bureau of Air Transportation and Transitory Provisions.—The Manila
International Airport including the Manila Domestic Airport as a division under the
Bureau of Air Transportation is hereby abolished.
x x x x.
The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the
Republic receiving cash, promissory notes or even stock since MIAA is not a stock
corporation.
The whereas clauses of the MIAA Charter explain the rationale for the transfer of the
Airport Lands and Buildings to MIAA, thus:
WHEREAS, the Manila International Airport as the principal airport of the
Philippines for both international and domestic air traffic, is required to provide
standards of airport accommodation and service comparable with the best
airports in the world;
WHEREAS, domestic and other terminals, general aviation and other
facilities, have to be upgraded to meet the current and future air traffic and other
demands of aviation in Metro Manila;
WHEREAS, a management and organization study has indicated that the
objectives of providing high standards of accommodation and service
within the context of a financially viable operation, will best be achieved by
a separate and autonomous body; and
WHEREAS, under Presidential Decree No. 1416, as amended by
Presidential Decree No. 1772, the President of the Philippines is given continuing
authority to reorganize the National Government, which authority includes
the creation of new entities, agencies and instrumentalities of the
Government[.] (Emphasis supplied)
The transfer of the Airport Lands and Buildings from the Bureau of Air Transportation
to MIAA was not meant to transfer beneficial ownership of these assets from the
Republic to MIAA. The purpose was merely to reorganize a division in the Bureau of
Air Transportation into a separate and autonomous body. The Republic remains the
beneficial owner of the Airport Lands and Buildings. MIAA itself is owned solely by the
Republic. No party claims any ownership rights over MIAA’s assets adverse to the
Republic.
The MIAA Charter expressly provides that the Airport Lands and Buildings “shall
not be disposed through sale or through any other mode unless specifically approved
by the President of the Philippines.” This only means that the Republic retained the
beneficial ownership of the Airport Lands and Buildings because under Article 428 of
the Civil Code, only the “owner has the right to x x x dispose of a thing.” Since MIAA
cannot dispose of the Airport Lands and Buildings, MIAA does not own the Airport
Lands and Buildings.
At any time, the President can transfer back to the Republic title to the Airport
Lands and Buildings without the Republic paying MIAA any consideration. Under
Section 3 of the MIAA Charter, the President is the only one who can authorize the
sale or disposition of the Airport Lands and Buildings. This only confirms that the
Airport Lands and Buildings belong to the Republic.
e.Real Property Owned by the Republic is Not Taxable
Section 234(a) of the Local Government Code exempts from real estate tax any
“[r]eal property owned by the Republic of the Philippines.” Section 234(a) provides:
SEC. 234. Exemptions from Real Property Tax.—The following are exempted
from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person;
x x x. (Emphasis supplied)
This exemption should be read in relation with Section 133(o) of the same Code,
which prohibits local governments from imposing “[t]axes, fees or charges of any kind
on the National Government, its agencies and instrumentalities x x x.” The real
properties owned by the Republic are titled either in the name of the Republic itself or
in the name of agencies or instrumentalities of the National Government. The
Administrative Code allows real property owned by the Republic to be titled in the
name of agencies or instrumentalities of the national government. Such real
properties remain owned by the Republic and continue to be exempt from real estate
tax.
The Republic may grant the beneficial use of its real property to an agency or
instrumentality of the national government. This happens when title of the real
property is transferred to an agency or instrumentality even as the Republic remains
the owner of the real property. Such arrangement does not result in the loss of the tax
exemption. Section 234(a) of the Local Government Code states that real property
owned by the Republic loses its tax exemption only if the “beneficial use thereof has
been granted, for consideration or otherwise, to a taxable person.” MIAA, as a
government instrumentality, is not a taxable person under Section 133(o) of the Local
Government Code. Thus, even if we assume that the Republic has granted to MIAA
the beneficial use of the Airport Lands and Buildings, such fact does not make these
real properties subject to real estate tax.
However, portions of the Airport Lands and Buildings that MIAA leases to private
entities are not exempt from real estate tax. For example, the land area occupied by
hangars that MIAA leases to private corporations is subject to real estate tax. In such
a case, MIAA has granted the beneficial use of such land area for a consideration to
a taxable person and therefore such land area is subject to real estate tax. In Lung
Center of the Philippines v. Quezon City, the Court ruled:
"Accordingly, we hold that the portions of the land leased to private entities as
well as those parts of the hospital leased to private individuals are not exempt
from such taxes. On the other hand, the portions of the land occupied by the
hospital and portions of the hospital used for its patients, whether paying or non-
paying, are exempt from real property taxes.”
3.Refutation of Arguments of Minority
The minority asserts that the MIAA is not exempt from real estate tax because
Section 193 of the Local Government Code of 1991 withdrew the tax exemption of
“all persons, whether natural or juridical” upon the effectivity of the Code. Section 193
provides:
SEC. 193. Withdrawal of Tax Exemption Privileges.—Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical, including government-
owned or controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions are hereby withdrawn upon effectivity of this Code.
(Emphasis supplied)
The minority states that MIAA is indisputably a juridical person. The minority argues
that since the Local Government Code withdrew the tax exemption of all juridical
persons, then MIAA is not exempt from real estate tax. Thus, the minority declares:
It is evident from the quoted provisions of the Local Government Code that
the withdrawn exemptions from realty tax cover not just GOCCs, but all
persons. To repeat, the provisions lay down the explicit proposition that the
withdrawal of realty tax exemption applies to all persons. The reference to or the
inclusion of GOCCs is only clarificatory or illustrative of the explicit provision.
The term “All persons” encompasses the two classes of persons
recognized under our laws, natural and juridical persons. Obviously, MIAA
is not a natural person. Thus, the determinative test is not just whether
MIAA is a GOCC, but whether MIAA is a juridical person at all. (Emphasis
and underscoring in the original)
The minority posits that the “determinative test” whether MIAA is exempt from
local taxation is its status—whether MIAA is a juridical person or not. The minority
also insists that “Sections 193 and 234 may be examined in isolation from Section
133(o) to ascertain MIAA’s claim of exemption.”
The argument of the minority is fatally flawed. Section 193 of the Local
Government Code expressly withdrew the tax exemption of all juridical persons
“[u]nless otherwise provided in this Code.”Now, Section 133(o) of the Local
Government Code expressly provides otherwise, specifically prohibiting local
governments from imposing any kind of tax on national government instrumentalities.
Section 133(o) states:
SEC. 133. Common Limitations on the Taxing Powers of LocalGovernment
Units.—Unless otherwise provided herein, the exercise of the taxing powers
of provinces, cities, municipalities, and barangays shall not extend to the
levy of the following:
xxxx
(o) Taxes, fees or charges of any kinds on the National Government, its
agencies and instrumentalities, and local government units. (Emphasis and
italics supplied)
By express mandate of the Local Government Code, local governments cannot
impose any kind of tax on national government instrumentalities like the MIAA. Local
governments are devoid of power to tax the national government, its agencies and
instrumentalities. The taxing powers of local governments do not extend to the
national government, its agencies and instrumentalities, “[u]nless otherwise provided
in this Code” as stated in the saving clause of Section 133. The saving clause refers
to Section 234(a) on the exception to the exemption from real estate tax of real
property owned by the Republic.
The minority, however, theorizes that unless exempted in Section 193 itself, all
juridical persons are subject to tax by local governments. The minority insists that the
juridical persons exempt from local taxation are limited to the three classes of entities
specifically enumerated as exempt in Section 193. Thus, the minority states:
x x x Under Section 193, the exemption is limited to (a) local water districts;
(b) cooperatives duly registered under Republic Act No. 6938; and (c) non-
stock and non-profit hospitals and educational institutions.It would be
belaboring the obvious why the MIAA does not fall within any of the exempt
entities under Section 193. (Emphasis supplied)
The minority’s theory directly contradicts and completely negates Section 133(o) of
the Local Government Code. This theory will result in gross absurdities. It will make
the national government, which itself is a juridical person, subject to tax by local
governments since the national government is not included in the enumeration of
exempt entities in Section 193. Under this theory, local governments can impose any
kind of local tax, and not only real estate tax, on the national government.
Under the minority’s theory, many national government instrumentalities with
juridical personalities will also be subject to any kind of local tax, and not only real
estate tax. Some of the national government instrumentalities vested by law with
juridical personalities are: Bangko Sentral ng Pilipinas, Philippine Rice Research
Institute, Laguna Lake Development Authority, Fisheries Development Authority,
Bases Conversion Development Authority, Philippine Ports Authority, Cagayan de Oro
Port Authority, San Fernando Port Authority, Cebu Port Authority, and Philippine
National Railways.
The minority’s theory violates Section 133(o) of the Local Government Code
which expressly prohibits local governments from imposing any kind of tax on national
government instrumentalities. Section 133(o) does not distinguish between national
government instrumentalities with or without juridical personalities. Where the law
does not distinguish, courts should not distinguish. Thus, Section 133(o) applies to all
national government instrumentalities, with or without juridical personalities.
The determinative test whether MIAA is exempt from local taxation is not whether
MIAA is a juridical person, but whether it is a national government
instrumentality under Section 133(o) of the Local Government Code. Section 133(o)
is the specific provision of law prohibiting local governments from imposing any kind
of tax on the national government, its agencies and instrumentalities.
Section 133 of the Local Government Code starts with the saving clause “[u]nless
otherwise provided in this Code.” This means that unless the Local Government Code
grants an express authorization, local governments have no power to tax the national
government, its agencies and instrumentalities. Clearly, the rule is local governments
have no power to tax the national government, its agencies and instrumentalities. As
an exception to this rule, local governments may tax the national government, its
agencies and instrumentalities only if the Local Government Code expressly so
provides.
The saving clause in Section 133 refers to the exception to the exemption in Section
234(a) of the Code, which makes the national government subject to real estate
tax when it gives the beneficial use of its real properties to a taxable entity. Section
234(a) of the Local Government Code provides:
SEC. 234. Exemptions from Real Property Tax.—The following are exempted
from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person.
x x x. (Emphasis supplied)
Under Section 234(a), real property owned by the Republic is exempt from real estate
tax. The exception to this exemption is when the government gives the beneficial use
of the real property to a taxable entity.
The exception to the exemption in Section 234(a) is the  only instance  when the
national government, its agencies and instrumentalities are subject to any kind of tax
by local governments. The exception to the exemption applies only to real estate tax
and not to any other tax. The justification for the exception to the exemption is that the
real property, although owned by the Republic, is not devoted to public use or public
service but devoted to the private gain of a taxable person.
The minority also argues that since Section 133 precedesSections 193 and 234 of
the Local Government Code, the later provisions prevail over Section 133. Thus, the
minority asserts:
“x x x Moreover, sequentially Section 133 antecedes Section 193 and 234.
Following an accepted rule of construction, in case of conflict the subsequent
provisions should prevail. Therefore, MIAA, as a juridical person, is subject to
real property taxes, the general exemptions attaching to instrumentalities under
Section 133(o) of the Local Government Code being qualified by Sections 193
and 234 of the same law.” (Emphasis supplied)
The minority assumes that there is an irreconcilable conflict between Section 133 on
one hand, and Sections 193 and 234 on the other. No one has urged that there is
such a conflict, much less has any one presented a persuasive argument that there is
such a conflict. The minority’s assumption of an irreconcilable conflict in the statutory
provisions is an egregious error for two reasons.
First, there is no conflict whatsoever between Sections 133 and 193
because Section 193 expressly admits its subordination to other provisions of the
Code when Section 193 states “[u]nless otherwise provided in this Code.” By its own
words, Section 193 admits the superiority of other provisions of the Local Government
Code that limit the exercise of the taxing power in Section 193. When a provision of
law grants a power but withholds such power on certain matters, there is no conflict
between the grant of power and the withholding of power. The grantee of the power
simply cannot exercise the power on matters withheld from its power.
Second, Section 133 is entitled “Common Limitations on the Taxing Powers of
Local Government Units.” Section 133 limits the grant to local governments of the
power to tax, and not merely the exercise of a delegated power to tax. Section 133
states that the taxing powers of local governments “shall not extend to the levy” of
any kind of tax on the national government, its agencies and instrumentalities. There
is no clearer limitation on the taxing power than this.
Since Section 133 prescribes the “common limitations” on the taxing powers of
local governments, Section 133 logically prevails over Section 193 which grants local
governments such taxing powers. By their very meaning and purpose, the “common
limitations” on the taxing power prevail over the grant or exercise of the taxing power.
If the taxing power of local governments in Section 193 prevails over the limitations
on such taxing power in Section 133, then local governments can impose any kind of
tax on the national government, its agencies and instrumentalities—a gross absurdity.
Local governments have no power to tax the national government, its agencies
and instrumentalities, except as otherwise provided in the Local Government Code
pursuant to the saving clause in Section 133 stating “[u]nless otherwise provided in
this Code.” This exception—which is an exception to the exemption of the Republic
from real estate tax imposed by local governments—refers to Section 234(a) of the
Code. The exception to the exemption in Section 234(a) subjects real property owned
by the Republic, whether titled in the name of the national government, its agencies
or instrumentalities, to real estate tax if the beneficial use of such property is given to
a taxable entity.
The minority also claims that the definition in the Administrative Code of the
phrase “government-owned or controlled corporation” is not controlling. The minority
points out that Section 2 of the Introductory Provisions of the Administrative Code
admits that its definitions are not controlling when it provides:
SEC. 2. General Terms Defined.—Unless the specific words of the text, or the
context as a whole, or a particular statute, shall require a different meaning:
xxxx
The minority then concludes that reliance on the Administrative Code definition is
“flawed.”
The minority’s argument is a non sequitur. True, Section 2 of the Administrative
Code recognizes that a statute may require a different meaning than that defined in
the Administrative Code. However, this does not automatically mean that the
definition in the Administrative Code does not apply to the Local Government Code.
Section 2 of the Administrative Code clearly states that “unless the specific words x x
x of a particular statute shall require a different meaning,” the definition in Section 2 of
the Administrative Code shall apply. Thus, unless there is specific language in the
Local Government Code defining the phrase “government-owned or controlled
corporation” differently from the definition in the Administrative Code, the definition in
the Administrative Code prevails.
The minority does not point to any provision in the Local Government Code
defining the phrase “government-owned or controlled corporation” differently from the
definition in the Administrative Code. Indeed, there is none. The Local Government
Code is silent on the definition of the phrase “government-owned or controlled
corporation.” The Administrative Code, however, expressly defines the phrase
“government-owned or controlled corporation.” The inescapable conclusion is that the
Administrative Code definition of the phrase “government-owned or controlled
corporation” applies to the Local Government Code.
The third whereas clause of the Administrative Code states that the Code
“incorporates in a unified document the major structural, functional and procedural
principles and rules of governance.” Thus, the Administrative Code is the governing
law defining the status and relationship of government departments, bureaus, offices,
agencies and instrumentalities. Unless a statute expressly provides for a different
status and relationship for a specific government unit or entity, the provisions of the
Administrative Code prevail.
The minority also contends that the phrase “government-owned or controlled
corporation” should apply only to corporations organized under the Corporation Code,
the general incorporation law, and not to corporations created by special charters.
The minority sees no reason why government corporations with special charters
should have a capital stock. Thus, the minority declares:
“I submit that the definition of “government-owned or controlled corporations”
under the Administrative Code refer to those corporations owned by the
government or its instrumentalities which are created not by legislative
enactment, but formed and organized under the Corporation Code through
registration with the Securities and Exchange Commission. In short, these are
GOCCs without original charters.
xxxx
It might as well be worth pointing out that there is no point in requiring a
capital structure for GOCCs whose full ownership is limited by its charter to the
State or Republic. Such GOCCs are not empowered to declare dividends or
alienate their capital shares.”
The contention of the minority is seriously flawed. It is not in accord with the
Constitution and existing legislations. It will also result in gross absurdities.
First, the Administrative Code definition of the phrase “government-owned or
controlled corporation” does not distinguish between one incorporated under the
Corporation Code or under a special charter. Where the law does not distinguish,
courts should not distinguish.
Second, Congress has created through special charters several government-
owned corporations organized as stock corporations. Prime examples are the Land
Bank of the Philippines and the Development Bank of the Philippines. The special
charter of the Land Bank of the Philippines provides:
SECTION 81. Capital.—The authorized capital stock of the Bank shall be
nine billion pesos, divided into seven hundred and eighty million common
shares with a par value of ten pesos each, which shall be fully subscribed by
the Government, and one hundred and twenty million preferred shares with a par
value of ten pesos each, which shall be issued in accordance with the provisions
of Sections seventy-seven and eighty-three of this Code. (Emphasis supplied)
Likewise, the special charter of the Development Bank of the Philippines provides:
SECTION 7. Authorized Capital Stock—Par value.—The capital stock of the
Bank shall be Five Billion Pesos to be divided into Fifty Million common
shares with par value of P100 per share. These shares are available for
subscription by the National Government. Upon the effectivity of this Charter, the
National Government shall subscribe to Twenty-Five Million common shares of
stock worth Two Billion Five Hundred Million which shall be deemed paid for by
the Government with the net asset values of the Bank remaining after the
transfer of assets and liabilities as provided in Section 30 hereof. (Emphasis
supplied)
Other government-owned corporations organized as stock corporations under their
special charters are the Philippine Crop Insurance Corporation, Philippine
International Trading Corporation, and the Philippine National Bank before it was
reorganized as a stock corporation under the Corporation Code. All these
government-owned corporations organized under special charters as stock
corporations are subject to real estate tax on real properties owned by them. To rule
that they are not government-owned or controlled corporations because they are not
registered with the Securities and Exchange Commission would remove them from
the reach of Section 234 of the Local Government Code, thus exempting them from
real estate tax.
Third, the government-owned or controlled corporations created through special
charters are those that meet the two conditions prescribed in Section 16, Article XII of
the Constitution. The first condition is that the government-owned or controlled
corporation must be established for the common good. The second condition is that
the government-owned or controlled corporation must meet the test of economic
viability. Section 16, Article XII of the 1987 Constitution provides:
SEC. 16. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations. Government-
owned or controlled corporations may be created or established by special
charters in the interest of the common good and subject to the test of
economic viability. (Emphasis and italics supplied)
The Constitution expressly authorizes the legislature to create “government-owned or
controlled corporations” through special charters only if these entities are required to
meet the twin conditions of common good and economic viability. In other words,
Congress has no power to create government-owned or controlled corporations with
special charters unless they are made to comply with the two conditions of common
good and economic viability. The test of economic viability applies only to
government-owned or controlled corporations that perform economic or commercial
activities and need to compete in the market place. Being essentially economic
vehicles of the State for the common good—meaning for economic development
purposes—these government-owned or controlled corporations with special charters
are usually organized as stock corporations just like ordinary private corporations.
In contrast, government instrumentalities vested with corporate powers and
performing governmental or public functions need not meet the test of economic
viability. These instrumentalities perform essential public services for the common
good, services that every modern State must provide its citizens. These
instrumentalities need not be economically viable since the government may even
subsidize their entire operations. These instrumentalities are not the “government-
owned or controlled corporations” referred to in Section 16, Article XII of the 1987
Constitution.

Thus, the Constitution imposes no limitation when the legislature creates
government instrumentalities vested with corporate powers but performing essential
governmental or public functions. Congress has plenary authority to create
government instrumentalities vested with corporate powers provided these
instrumentalities perform essential government functions or public services. However,
when the legislature creates through special charters corporations that perform
economic or commercial activities, such entities—known as “government-owned or
controlled corporations”—must meet the test of economic viability because they
compete in the market place.
This is the situation of the Land Bank of the Philippines and the Development
Bank of the Philippines and similar government-owned or controlled corporations,
which derive their income to meet operating expenses solely from commercial
transactions in competition with the private sector. The intent of the Constitution is to
prevent the creation of government-owned or controlled corporations that cannot
survive on their own in the market place and thus merely drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability, explained
to the Constitutional Commission the purpose of this test, as follows:
MR. OPLE: Madam President, the reason for this concern is really that when the
government creates a corporation, there is a sense in which this corporation
becomes exempt from the test of economic performance. We know what
happened in the past. If a government corporation loses, then it makes its claim
upon the taxpayers’ money through new equity infusions from the government
and what is always invoked is the common good. That is the reason why this
year, out of a budget of P115 billion for the entire government, about P28 billion
of this will go into equity infusions to support a few government financial
institutions. And this is all taxpayers’ money which could have been relocated to
agrarian reform, to social services like health and education, to augment the
salaries of grossly underpaid public employees. And yet this is all going down the
drain.
Therefore, when we insert the phrase “ECONOMIC VIABILITY” together with
the “common good,” this becomes a restraint on future enthusiasts for state
capitalism to excuse themselves from the responsibility of meeting the market
test so that they become viable. And so, Madam President, I reiterate, for the
committee’s consideration and I am glad that I am joined in this proposal by
Commissioner Foz, the insertion of the standard of “ECONOMIC VIABILITY OR
THE ECONOMIC TEST,” together with the common good.
Father Joaquin G. Bernas, a leading member of the Constitutional Commission,
explains in his textbook The 1987 Constitution of the Republic of the Philippines: A
Commentary:
The second sentence was added by the 1986 Constitutional Commission. The
significant addition, however, is the phrase “in the interest of the common
good and subject to the test of economic viability.” The addition includes the
ideas that they must show capacity to function efficiently in business and
that they should not go into activities which the private sector can do
better. Moreover, economic viability is more than financial viability but also
includes capability to make profit and generate benefits not quantifiable in
financial terms. (Emphasis supplied)
Clearly, the test of economic viability does not apply to government entities vested
with corporate powers and performing essential public services. The State is
obligated to render essential public services regardless of the economic viability of
providing such service. The non-economic viability of rendering such essential public
service does not excuse the State from withholding such essential services from the
public.
However, government-owned or controlled corporations with special charters,
organized essentially for economic or commercial objectives, must meet the test of
economic viability. These are the government-owned or controlled corporations that
are usually organized under their special charters as stock corporations, like the Land
Bank of the Philippines and the Development Bank of the Philippines. These are the
government-owned or controlled corporations, along with government-owned or
controlled corporations organized under the Corporation Code, that fall under the
definition of “governmentowned or controlled corporations” in Section 2(10) of the
Administrative Code.
The MIAA need not meet the test of economic viability because the legislature did
not create MIAA to compete in the market place. MIAA does not compete in the
market place because there is no competing international airport operated by the
private sector. MIAA performs an essential public service as the primary domestic
and international airport of the Philippines. The operation of an international airport
requires the presence of personnel from the following government agencies:
1.The Bureau of Immigration and Deportation, to document the arrival and
departure of passengers, screening out those without visas or travel documents,
or those with hold departure orders;
2.The Bureau of Customs, to collect import duties or enforce the ban on
prohibited importations;
3.The quarantine office of the Department of Health, to enforce health measures
against the spread of infectious diseases into the country;
4.The Department of Agriculture, to enforce measures against the spread of plant
and animal diseases into the country;
5.The Aviation Security Command of the Philippine National Police, to prevent
the entry of terrorists and the escape of criminals, as well as to secure the airport
premises from terrorist attack or seizure;
6.The Air Traffic Office of the Department of Transportation and
Communications, to authorize aircraft to enter or leave Philippine airspace, as
well as to land on, or take off from, the airport; and
7.The MIAA, to provide the proper premises—such as runway and buildings—for
the government personnel, passengers, and airlines, and to manage the airport
operations.
All these agencies of government perform government functions essential to the
operation of an international airport.
MIAA performs an essential public service that every modern State must provide
its citizens. MIAA derives its revenues principally from the mandatory fees and
charges MIAA imposes on passengers and airlines. The terminal fees that MIAA
charges every passenger are regulatory or administrative fees and not income from
commercial transactions.
MIAA falls under the definition of a government instrumentalityunder Section
2(10) of the Introductory Provisions of the Administrative Code, which provides:
SEC. 2. General Terms Defined.—x x x x
(10) Instrumentality refers to any agency of the National Government, not
integrated within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate
powers, administering special funds, and enjoying operational
autonomy,usually through a charter. x x x (Emphasis supplied)
The fact alone that MIAA is endowed with corporate powers does not make MIAA a
government-owned or controlled corporation. Without a change in its capital structure,
MIAA remains a government instrumentality under Section 2(10) of the Introductory
Provisions of the Administrative Code. More importantly, as long as MIAA renders
essential public services, it need not comply with the test of economic viability. Thus,
MIAA is outside the scope of the phrase “governmentowned or controlled
corporations” under Section 16, Article XII of the 1987 Constitution.
The minority belittles the use in the Local Government Code of the phrase
“government-owned or controlled corporation” as merely “clarificatory or illustrative.”
This is fatal. The 1987 Constitution prescribes explicit conditions for the creation of
“government-owned or controlled corporations.” The Administrative Code defines
what constitutes a “government-owned or controlled corporation.” To belittle this
phrase as “clarificatory or illustrative” is grave error.
To summarize, MIAA is not a government-owned or controlled corporation under
Section 2(13) of the Introductory Provisions of the Administrative Code because it is
not organized as a stock or non-stock corporation. Neither is MIAA a government-
owned or controlled corporation under Section 16, Article XII of the 1987 Constitution
because MIAA is not required to meet the test of economic viability. MIAA is a
government instrumentality vested with corporate powers and performing essential
public services pursuant to Section 2(10) of the Introductory Provisions of the
Administrative Code. As a government instrumentality, MIAA is not subject to any
kind of tax by local governments under Section 133(o) of the Local Government
Code. The exception to the exemption in Section 234(a) does not apply to MIAA
because MIAA is not a taxable entity under the Local Government Code. Such
exception applies only if the beneficial use of real property owned by the Republic is
given to a taxable entity.
Finally, the Airport Lands and Buildings of MIAA are properties devoted to public
use and thus are properties of public dominion. Properties of public dominion are
owned by the State or the Republic. Article 420 of the Civil Code provides:
Art. 420. The following things are property of public dominion:
(1)Those intended for public use, such as roads, canals, rivers,
torrents, ports and bridges constructed by the State, banks, shores,
roadsteads, and others of similar character;
(2)Those which belong to the State, without being for public use, and
are intended for some public service or for the development of the national
wealth. (Emphasis supplied)
The term “ports x x x constructed by the State” includes airportsand seaports. The
Airport Lands and Buildings of MIAA are intended for public use, and at the very least
intended for public service. Whether intended for public use or public service, the
Airport Lands and Buildings are properties of public dominion. As properties of public
dominion, the Airport Lands and Buildings are owned by the Republic and thus
exempt from real estate tax under Section 234(a) of the Local Government Code.
4.Conclusion
Under Section 2(10) and (13) of the Introductory Provisions of the Administrative
Code, which governs the legal relation and status of government units, agencies and
offices within the entire government machinery, MIAA is a
government instrumentality and not a government-owned or controlled corporation.
Under Section 133(o) of the Local Government Code, MIAA as a
government instrumentality is not a taxable person because it is not subject to
“[t]axes, fees or charges of any kind” by local governments. The only exception is
when MIAA leases its real property to a “taxable person” as provided in Section
234(a) of the Local Government Code, in which case the specific real property leased
becomes subject to real estate tax. Thus, only portions of the Airport Lands and
Buildings leased to taxable persons like private parties are subject to real estate tax
by the City of Parañaque.
Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA,
being devoted to public use, are properties of public dominion and thus owned by the
State or the Republic of the Philippines. Article 420 specifically mentions “ports x x x
constructed by the State,” which includes public airports and seaports, as properties
of public dominion and owned by the Republic. As properties of public dominion
owned by the Republic, there is no doubt whatsoever that the Airport Lands and
Buildings are expressly exempt from real estate tax under Section 234(a) of the Local
Government Code. This Court has also repeatedly ruled that properties of public
dominion are not subject to execution or foreclosure sale.
WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions
of the Court of Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP
No. 66878. We DECLARE the Airport Lands and Buildings of the Manila International
Airport Authority EXEMPT from the real estate tax imposed by the City of Parañaque.
We declare VOID all the real estate tax assessments, including the final notices of
real estate tax delinquencies, issued by the City of Parañaque on the Airport Lands
and Buildings of the Manila International Airport Authority, except for the portions that
the Manila International Airport Authority has leased to private parties. We also
declare VOID the assailed auction sale, and all its effects, of the Airport Lands and
Buildings of the Manila International Airport Authority.
No costs.
SO ORDERED.
     
Note.—A local government unit (LGU), seeking relief in order to protect or vindicate an
interest of its own, and of the other LGUs, pertaining to their interest in their share in the national
taxes or the Internal Revenue Allotment (IRA), has the requisite standing to bring suit. (Province
of Batangas vs. Romulo, 429 SCRA 736[2004])

——o0o——
 G.R. No. 183137. April 10, 2013. otherwise specifically provided by the LGC. 5. Each LGU shall, as far as practicable, evolve a
progressive system of taxation.

Same; Percentage Tax; National Internal Revenue Code (R.A. No. 8424); Words and
PELIZLOY REALTY CORPORATION, represented herein by its President, Phrases; In Commissioner of Internal Revenue v. Citytrust Investment Phils. Inc., 503 SCRA
GREGORY K. LOY, petitioner, vs. THE PROVINCE OF BENGUET, respondent. 398 (2006), the Supreme Court defined percentage tax as a “tax measured by a certain
percentage of the gross selling price or gross value in money of goods sold, bartered or
imported; or of the gross receipts or earnings derived by any person engaged in the sale of
Taxation; The power to tax “is an attribute of sovereignty,” and as such, inheres in the
services.”—In Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc., 503 SCRA
State. Such, however, is not true for provinces, cities, municipalities and barangays as they are
398 (2006), the Supreme Court defined percentage tax as a “tax measured by a certain
not the sovereign; rather, they are mere “territorial and political subdivisions of the Republic of
percentage of the gross selling price or gross value in money of goods sold, bartered or
the Philippines.”—The power to tax “is an attribute of sovereignty,” and as such, inheres in the
imported; or of the gross receipts or earnings derived by any person engaged in the sale of
State. Such, however, is not true for provinces, cities, municipalities and barangays as they are
services.” Also, Republic Act No. 8424, otherwise known as the National Internal Revenue Code
not the sovereign; rather, they are mere “territorial and political subdivisions of the Republic of
(NIRC), in Section 125, Title V, lists amusement taxes as among the (other) percentage taxes
the Philippines.” The rule governing the taxing power of provinces, cities, municipalities and
which are levied regardless of whether or not a taxpayer is already liable to pay value-added tax
barangays is summarized in Icard v. City Council of Baguio: It is settled that a municipal
(VAT).
corporation unlike a sovereign state is clothed with no inherent power of taxation. The charter or
statute must plainly show an intent to confer that power or the municipality, cannot assume it.
Same; Same; Amusement Tax; Local Government Units; Provinces are not barred from
And the power when granted is to be construed in strictissimi juris. Any doubt or ambiguity
levying amusement taxes even if amusement taxes are a form of percentage taxes.—
arising out of the term used in granting that power must be resolved against the municipality.
Amusement taxes are fixed at a certain percentage of the gross receipts incurred by certain
Inferences, implications, deductions—all these—have no place in the interpretation of the taxing
specified establishments. Thus, applying the definition in CIR v. Citytrust and drawing from the
power of a municipal corporation.
treatment of amusement taxes by the NIRC, amusement taxes are percentage taxes as
correctly argued by Pelizloy. However, provinces are not barred from levying amusement taxes
Same; The power of a province to tax is limited to the extent that such power is delegated
even if amusement taxes are a form of percentage taxes. Section 133 (i) of the LGC prohibits
to it either by the Constitution or by statute.—The power of a province to tax is limited to the
the levy of percentage taxes “except as otherwise provided” by the LGC.
extent that such power is delegated to it either by the Constitution or by statute. Section 5,
Article X of the 1987 Constitution is clear on this point: Section 5. Each local government unit
Same; Same; Same; Same; Section 140, Local Government Code (R.A. No. 7160)
shall have the power to create its own sources of revenues and to levy taxes, fees and
expressly allows for the imposition by provinces of amusement taxes on “the proprietors,
charges subject to such guidelines and limitations as the Congress may provide, consistent with
lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other
the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the
places of amusement.” However, resorts, swimming pools, bath houses, hot springs, and tourist
local governments.
spots are not among those places expressly mentioned by Section 140 of the Local Government
Code as being subject to amusement taxes.—Evidently, Section 140 of the LGC carves a clear
Same; Constitutional Law; Per Section 5, Article X of the 1987 Constitution, “the power to
exception to the general rule in Section 133 (i). Section 140 expressly allows for the imposition
tax is no longer vested exclusively on Congress; local legislative bodies are now given direct
by provinces of amusement taxes on “the proprietors, lessees, or operators of theaters,
authority to levy taxes, fees and other charges.”—Per Section 5, Article X of the 1987
cinemas, concert halls, circuses, boxing stadia, and other places of amusement.” However,
Constitution, “the power to tax is no longer vested exclusively on Congress; local legislative
resorts, swimming pools, bath houses, hot springs, and tourist spots are not among those places
bodies are now given direct authority to levy taxes, fees and other charges.” Nevertheless, such
expressly mentioned by Section 140 of the LGC as being subject to amusement taxes. Thus, the
authority is “subject to such guidelines and limitations as the Congress may provide.” In
determination of whether amusement taxes may be levied on admissions to resorts, swimming
conformity with Section 3, Article X of the 1987 Constitution, Congress enacted Republic Act No.
pools, bath houses, hot springs, and tourist spots hinges on whether the phrase ‘other places of
7160, otherwise known as the Local Government Code of 1991. Book II of the LGC governs
amusement’ encompasses resorts, swimming pools, bath houses, hot springs, and tourist spots.
local taxation and fiscal matters. Relevant provisions of Book II of the LGC establish the
parameters of the taxing powers of LGUS found below. First, Section 130 provides for the
Same; Same; Same; In Philippine Basketball Association v. Court of Appeals, 337 SCRA
following fundamental principles governing the taxing powers of LGUs: 1. Taxation shall be
358 (2000), the Supreme Court had an opportunity to interpret a starkly similar provision or the
uniform in each LGU. 2. Taxes, fees, charges and other impositions shall: a. be equitable and
counterpart provision of Section 140 of the Local Government Code in the Local Tax Code then
based as far as practicable on the taxpayer’s ability to pay; b. be levied and collected only for
in effect.—In Philippine Basketball Association v. Court of Appeals, 337 SCRA 358 (2000), the
public purposes; c. not be unjust, excessive, oppressive, or confiscatory; d. not be contrary to
Supreme Court had an opportunity to interpret a starkly similar provision or the counterpart
law, public policy, national economic policy, or in the restraint of trade. 3. The collection of local
provision of Section 140 of the LGC in the Local Tax Code then in effect. Petitioner Philippine
taxes, fees, charges and other impositions shall in no case be let to any private person. 4. The
Basketball Association (PBA) contended that it was subject to the imposition by LGUs of
revenue collected pursuant to the provisions of the LGC shall inure solely to the benefit of, and
amusement taxes (as opposed to amusement taxes imposed by the national government). In
be subject to the disposition by, the LGU levying the tax, fee, charge or other imposition unless
support of its contentions, it cited Section 13 of Presidential Decree No. 231, otherwise known
as the Local Tax Code of 1973, (which is analogous to Section 140 of the LGC).

Same; Same; Same; Resorts, swimming pools, bath houses, hot springs and tourist
spots do not belong to the same category or class as theaters, cinemas, concert halls, circuses,
and boxing stadia. It follows that they cannot be considered as among the ‘other places of
amusement’ contemplated by Section 140 of the Local Government Code and which may
properly be subject to amusement taxes.—As defined in The New Oxford American Dictionary,
‘show’ means “a spectacle or display of something, typically an impressive one”; while
‘performance’ means “an act of staging or presenting a play, a concert, or other form of
entertainment.” As such, the ordinary definitions of the words ‘show’ and ‘performance’ denote
not only visual engagement (i.e., the seeing or viewing of things) but also active doing (e.g.,
displaying, staging or presenting) such that actions are manifested to, and (correspondingly)
perceived by an audience. Considering these, it is clear that resorts, swimming pools, bath
houses, hot springs and tourist spots cannot be considered venues primarily “where one seeks
admission to entertain oneself by seeing or viewing the show or performances”. While it is true
that they may be venues where people are visually engaged, they are not primarily venues for
their proprietors or operators to actively display, stage or present shows and/or performances.
Thus, resorts, swimming pools, bath houses, hot springs and tourist spots do not belong to the
same category or class as theaters, cinemas, concert halls, circuses, and boxing stadia. It
follows that they cannot be considered as among the ‘other places of amusement’ contemplated
by Section 140 of the LGC and which may properly be subject to amusement taxes.
LEONEN, J.:
The principal issue in this case is the scope of authority of a province to impose
an amusement tax.
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
praying that the December 10, 2007 decision of the Regional Trial Court Branch 62,
La Trinidad, Benguet in Civil Case No. 06-CV-2232 be reversed and set aside and a
new one issued in which: (1) respondent Province of Benguet is declared as having
no authority to levy amusement taxes on admission fees for resorts, swimming pools,
bath houses, hot springs, tourist spots, and other places for recreation; (2) Section
59, Article X of the Benguet Provincial Revenue Code of 2005 is declared null and
void; and (3) the respondent Province of Benguet is permanently enjoined from
enforcing Section 59, Article X of the Benguet Provincial Revenue Code of 2005.
Petitioner Pelizloy Realty Corporation (“Pelizloy”) owns Palm Grove Resort, which
is designed for recreation and which has facilities like swimming pools, a spa and
function halls. It is located at Asin, Angalisan, Municipality of Tuba, Province of
Benguet.
On December 8, 2005, the Provincial Board of the Province of Benguet approved
Provincial Tax Ordinance No. 05-107, otherwise known as the Benguet Revenue
Code of 2005 (“Tax Ordinance”). Section 59, Article X of the Tax Ordinance levied a
ten percent (10%) amusement tax on gross receipts from admissions to “resorts,
swimming pools, bath houses, hot springs and tourist spots.” Specifically, it provides
the following:
Article Ten: Amusement Tax on Admission
Section 59. Imposition of Tax.—There is hereby levied a tax to be
collected from the proprietors, lessees, or operators of theaters, cinemas, concert
halls, circuses, cockpits, dancing halls, dancing schools, night or day clubs, and
other places of amusement at the rate of thirty percent (30%) of the gross
receipts from admission fees; and
A tax of ten percent (10%) of gross receipts from admission fees for
boxing, resorts, swimming pools, bath houses, hot springs, and tourist
spots is likewise levied. [Emphasis and underscoring supplied]
Section 162 of the Tax Ordinance provided that the Tax Ordinance shall take
effect on January 1, 2006.
It was Pelizloy’s position that the Tax Ordinance’s imposition of a 10%
amusement tax on gross receipts from admission fees for resorts, swimming pools,
bath houses, hot springs, and tourist spots is an ultra vires act on the part of the
Province of Benguet. Thus, it filed an appeal/petition before the Secretary of Justice
on January 27, 2006.
The appeal/petition was filed within the thirty (30)-day period from the effectivity of
a tax ordinance allowed by Section 187 of Republic Act No. 7160, otherwise known
as the Local Government Code (LGC). The appeal/petition was docketed as MSO-
OSJ Case No. 03-2006.
Under Section 187 of the LGC, the Secretary of Justice has sixty (60) days from
receipt of the appeal to render a decision. After the lapse of which, the aggrieved
party may file appropriate proceedings with a court of competent jurisdiction.
Treating the Secretary of Justice’s failure to decide on its appeal/petition within
the sixty (60) days provided by Section 187 of the LGC as an implied denial of such
appeal/petition, Pelizloy filed a Petition for Declaratory Relief and Injunction before
the Regional Trial Court, Branch 62, La Trinidad, Benguet. The petition was docketed
as Civil Case No. 06-CV-2232.
Pelizloy argued that Section 59, Article X of the Tax Ordinance imposed a
percentage tax in violation of the limitation on the taxing powers of local government
units (LGUs) under Section 133 (i) of the LGC. Thus, it was null and void ab initio.
Section 133 (i) of the LGC provides:
Section 133. Common Limitations on the Taxing Powers of Local
Government Units.—Unless otherwise provided herein, the exercise of the taxing
powers of provinces, cities, municipalities, and barangays shall not extend to the
levy of the following:
x x x
(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or
similar transactions on goods or services except as otherwise provided herein.
 The Province of Benguet assailed the Petition for Declaratory Relief and
Injunction as an improper remedy. It alleged that once a tax liability has attached, the
only remedy of a taxpayer is to pay the tax and to sue for recovery after exhausting
administrative remedies.
On substantive grounds, the Province of Benguet argued that the phrase ‘other
places of amusement’ in Section 140 (a) of the LGC encompasses resorts, swimming
pools, bath houses, hot springs, and tourist spots since “Article 220 (b) (sic)” of the
LGC defines “amusement” as “pleasurable diversion and entertainment x x x
synonymous to relaxation, avocation, pastime, or fun.” However, the Province of
Benguet erroneously cited Section 220 (b) of the LGC. Section 220 of the LGC refers
to valuation of real property for real estate tax purposes. Section 131 (b) of the LGC,
the provision which actually defines “amusement”, states:
Section 131. Definition of Terms.—When used in this Title, the term:
x x x
(b) “Amusement” is a pleasurable diversion and entertainment. It is
synonymous to relaxation, avocation, pastime, or fun.
On December 10, 2007, the RTC rendered the assailed Decision dismissing the
Petition for Declaratory Relief and Injunction for lack of merit.
Procedurally, the RTC ruled that Declaratory Relief was a proper remedy. On the
validity of Section 59, Article X of the Tax Ordinance, the RTC noted that, while
Section 59, Article X imposes a percentage tax, Section 133 (i) of the LGC itself
allowed for exceptions. It noted that what the LGC prohibits is not the imposition by
LGUs of percentage taxes in general but the “imposition and levy of percentage tax
on sales, barters, etc., on goods and services only.” It further gave credence to the
Province of Benguet’s assertion that resorts, swimming pools, bath houses, hot
springs, and tourist spots are encompassed by the phrase ‘other places of
amusement’ in Section 140 of the LGC.
On May 21, 2008, the RTC denied Pelizloy’s Motion for Reconsideration.
Aggrieved, Pelizloy filed the present petition on June 10, 2008 on pure questions
of law. It assailed the legality of Section 59, Article X of the Tax Ordinance as being a
(supposedly) prohibited percentage tax per Section 133 (i) of the LGC.
In its Comment, the Province of Benguet, erroneously citing Section 40 of the
LGC, argued that Section 59, Article X of the Tax Ordinance does not levy a
percentage tax “because the imposition is not based on the total gross receipts of
services of the petitioner but solely and actually limited on the gross receipts of the
admission fees collected.” In addition, it argued that provinces can validly impose
amusement taxes on resorts, swimming pools, bath houses, hot springs, and tourist
spots, these being ‘amusement places’.
For resolution in this petition are the following issues:
1. Whether or not Section 59, Article X of Provincial Tax Ordinance No.
05-107, otherwise known as the Benguet Revenue Code of 2005, levies a
percentage tax.
2. Whether or not provinces are authorized to impose amusement taxes
on admission fees to resorts, swimming pools, bath houses, hot springs, and
tourist spots for being “amusement places” under the Local Government Code.
The power to tax “is an attribute of sovereignty,” and as such, inheres in the
State. Such, however, is not true for provinces, cities, municipalities and barangays
as they are not the sovereign; rather, they are mere “territorial and political
subdivisions of the Republic of the Philippines”.
The rule governing the taxing power of provinces, cities, municipalities and
barangays is summarized in Icard v. City Council of Baguio:
It is settled that a municipal corporation unlike a sovereign state is clothed
with no inherent power of taxation. The charter or statute must plainly show an
intent to confer that power or the municipality, cannot assume it. And the power
when granted is to be construed in strictissimi juris. Any doubt or ambiguity
arising out of the term used in granting that power must be resolved against the
municipality. Inferences, implications, deductions—all these—have no place in
the interpretation of the taxing power of a municipal corporation. [Underscoring
supplied]
Therefore, the power of a province to tax is limited to the extent that such power
is delegated to it either by the Constitution or by statute. Section 5, Article X of the
1987 Constitution is clear on this point:
Section 5. Each local government unit shall have the power to create its
own sources of revenues and to levy taxes, fees and charges subject to such
guidelines and limitations as the Congress may provide, consistent with the basic
policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively
to the local governments. [Underscoring supplied]
Per Section 5, Article X of the 1987 Constitution, “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.” Nevertheless, such authority is “subject to
such guidelines and limitations as the Congress may provide.”
In conformity with Section 3, Article X of the 1987 Constitution, Congress enacted
Republic Act No. 7160, otherwise known as the Local Government Code of 1991.
Book II of the LGC governs local taxation and fiscal matters.
Relevant provisions of Book II of the LGC establish the parameters of the taxing
powers of LGUS found below.
 First, Section 130 provides for the following fundamental principles governing the
taxing powers of LGUs: Section 140 of the LGC provides:
1. Taxation shall be uniform in each LGU. SECTION 140. Amusement Tax.—(a) The province may levy an
2. Taxes, fees, charges and other impositions shall: amusement tax to be collected from the proprietors, lessees, or operators of
a. be equitable and based as far as practicable on the taxpayer’s ability theaters, cinemas, concert halls, circuses, boxing stadia, and other places of
to pay; amusement at a rate of not more than thirty percent (30%) of the gross receipts
b. be levied and collected only for public purposes; from admission fees.
c. not be unjust, excessive, oppressive, or confiscatory; (b) In the case of theaters of cinemas, the tax shall first be deducted and
d. not be contrary to law, public policy, national economic policy, or in withheld by their proprietors, lessees, or operators and paid to the provincial
the restraint of trade. treasurer before the gross receipts are divided between said proprietors, lessees,
3. The collection of local taxes, fees, charges and other impositions shall in or operators and the distributors of the cinematographic films.
no case be let to any private person. (c) The holding of operas, concerts, dramas, recitals, painting and art
4. The revenue collected pursuant to the provisions of the LGC shall inure exhibitions, flower shows, musical programs, literary and oratorical presentations,
solely to the benefit of, and be subject to the disposition by, the LGU levying the except pop, rock, or similar concerts shall be exempt from the payment of the tax
tax, fee, charge or other imposition unless otherwise specifically provided by the herein imposed.
LGC. (d) The Sangguniang Panlalawigan may prescribe the time, manner, terms
5. Each LGU shall, as far as practicable, evolve a progressive system of and conditions for the payment of tax. In case of fraud or failure to pay the tax,
taxation. the Sangguniang Panlalawigan may impose such surcharges, interests and
penalties.
Second, Section 133 provides for the common limitations on the taxing powers of (e) The proceeds from the amusement tax shall be shared equally by the
LGUs. Specifically, Section 133 (i) prohibits the levy by LGUs of percentage or value- province and the municipality where such amusement places are located.
[Underscoring supplied]
added tax (VAT) on sales, barters or exchanges or similar transactions on goods or
services except as otherwise provided by the LGC.
Evidently, Section 140 of the LGC carves a clear exception to the general rule in
Section 133 (i). Section 140 expressly allows for the imposition by provinces of
As it is Pelizloy’s contention that Section 59, Article X of the Tax Ordinance levies
amusement taxes on “the proprietors, lessees, or operators of theaters, cinemas,
a prohibited percentage tax, it is crucial to understand first the concept of a
concert halls, circuses, boxing stadia, and other places of amusement.”
percentage tax.

However, resorts, swimming pools, bath houses, hot springs, and tourist spots
In Commissioner of Internal Revenue v. Citytrust Investment Phils., Inc., the
are not among those places expressly mentioned by Section 140 of the LGC as being
Supreme Court defined percentage tax as a “tax measured by a certain percentage of
subject to amusement taxes. Thus, the determination of whether amusement taxes
the gross selling price or gross value in money of goods sold, bartered or imported; or
may be levied on admissions to resorts, swimming pools, bath houses, hot springs,
of the gross receipts or earnings derived by any person engaged in the sale of
and tourist spots hinges on whether the phrase ‘other places of amusement’
services.” Also, Republic Act No. 8424, otherwise known as the National Internal
encompasses resorts, swimming pools, bath houses, hot springs, and tourist spots.
Revenue Code (NIRC), in Section 125, Title V, lists amusement taxes as among the
(other) percentage taxes which are levied regardless of whether or not a taxpayer is
Under the principle of ejusdem generis, “where a general word or phrase follows
already liable to pay value-added tax (VAT).
an enumeration of particular and specific words of the same class or where the latter
follow the former, the general word or phrase is to be construed to include, or to be
Amusement taxes are fixed at a certain percentage of the gross receipts incurred
restricted to persons, things or cases akin to, resembling, or of the same kind or class
by certain specified establishments.
as those specifically mentioned.”
Thus, applying the definition in CIR v. Citytrust and drawing from the treatment of
amusement taxes by the NIRC, amusement taxes are percentage taxes as correctly The purpose and rationale of the principle was explained by the Court in National
argued by Pelizloy. Power Corporation v. Angas as follows:
The purpose of the rule on ejusdem generis is to give effect to both the
However, provinces are not barred from levying amusement taxes even if particular and general words, by treating the particular words as indicating the
class and the general words as including all that is embraced in said class,
amusement taxes are a form of percentage taxes. Section 133 (i) of the LGC prohibits
although not specifically named by the particular words. This is justified on the
the levy of percentage taxes “except as otherwise provided” by the LGC.
 ground that if the lawmaking body intended the general terms to be used in their
unrestricted sense, it would have not made an enumeration of particular subjects
but would have used only general terms. [2 Sutherland, Statutory Construction,
3rd ed., pp. 395-400].
In Philippine Basketball Association v. Court of Appeals, the Supreme Court had
an opportunity to interpret a starkly similar provision or the counterpart provision of
Section 140 of the LGC in the Local Tax Code then in effect. Petitioner Philippine
Basketball Association (PBA) contended that it was subject to the imposition by LGUs
of amusement taxes (as opposed to amusement taxes imposed by the national
government). In support of its contentions, it cited Section 13 of Presidential Decree
No. 231, otherwise known as the Local Tax Code of 1973, (which is analogous to
Section 140 of the LGC) providing the following:
Section 13. Amusement tax on admission.—The province shall impose a tax
on admission to be collected from the proprietors, lessees, or operators of
theaters, cinematographs, concert halls, circuses and other places of amusement
x x x.
Applying the principle of ejusdem generis, the Supreme Court rejected PBA’s
assertions and noted that:
[I]n determining the meaning of the phrase ‘other places of amusement’, one
must refer to the prior enumeration of theaters, cinematographs, concert halls
and circuses with artistic expression as their common characteristic. Professional
basketball games do not fall under the same category as theaters,
cinematographs, concert halls and circuses as the latter basically belong to
artistic forms of entertainment while the former caters to sports and gaming.
[Underscoring supplied]
However, even as the phrase ‘other places of amusement’ was already clarified
in Philippine Basketball Association, Section 140 of the LGC adds to the enumeration
of ‘places of amusement’ which may properly be subject to amusement tax. Section
140 specifically mentions ‘boxing stadia’ in addition to “theaters, cinematographs,
concert halls [and] circuses” which were already mentioned in PD No. 231. Also,
‘artistic expression’ as a characteristic does not pertain to ‘boxing stadia’.
In the present case, the Court need not embark on a laborious effort at statutory
construction. Section 131 (c) of the LGC already provides a clear definition of
‘amusement places’:
Section 131. Definition of Terms.—When used in this Title, the term:
x x x
(c) “Amusement Places” include theaters, cinemas, concert halls, circuses and
other places of amusement where one seeks admission to entertain oneself by
seeing or viewing the show or performances[Underscoring supplied]
Indeed, theaters, cinemas, concert halls, circuses, and boxing stadia are bound
by a common typifying characteristic in that they are all venues primarily for the
staging of spectacles or the holding of public shows, exhibitions, performances, and
other events meant to be viewed by an audience. Accordingly, ‘other places of
amusement’ must be interpreted in light of the typifying characteristic of being venues
“where one seeks admission to entertain oneself by seeing or viewing the show or
performances” or being venues primarily used to stage spectacles or hold public
shows, exhibitions, performances, and other events meant to be viewed by an
audience.
As defined in The New Oxford American Dictionary, ‘show’ means “a spectacle
or display of something, typically an impressive one”; while ‘performance’ means “an
act of staging or presenting a play, a concert, or other form of entertainment.” As
such, the ordinary definitions of the words ‘show’ and ‘performance’ denote not only
visual engagement (i.e., the seeing or viewing of things) but also active doing (e.g.,
displaying, staging or presenting) such that actions are manifested to, and
(correspondingly) perceived by an audience.
Considering these, it is clear that resorts, swimming pools, bath houses, hot
springs and tourist spots cannot be considered venues primarily “where one seeks
admission to entertain oneself by seeing or viewing the show or performances”. While
it is true that they may be venues where people are visually engaged, they are not
primarily venues for their proprietors or operators to actively display, stage or present
shows and/or performances.
Thus, resorts, swimming pools, bath houses, hot springs and tourist spots do not
belong to the same category or class as theaters, cinemas, concert halls, circuses,
and boxing stadia. It follows that they cannot be considered as among the ‘other
places of amusement’ contemplated by Section 140 of the LGC and which may
properly be subject to amusement taxes.
At this juncture, it is helpful to recall this Court’s pronouncements in Icard:
[T]he power [to tax] when granted [to a province] is to be construed in strictissimi
juris. Any doubt or ambiguity arising out of the term used in granting that power
must be resolved against the [province]. Inferences, implications, deductions—all
these—have no place in the interpretation of the taxing power of a [province].
In this case, the definition of ‘amusement places’ in Section 131 (c) of the LGC is
a clear basis for determining what constitutes the ‘other places of amusement’ which
may properly be subject to amusement tax impositions by provinces. There is no
reason for going beyond such basis. To do otherwise would be to countenance an
arbitrary interpretation/application of a tax law and to inflict an injustice on
unassuming taxpayers.
The previous pronouncements notwithstanding, it will be noted that it is only the
second paragraph of Section 59, Article X of the Tax Ordinance which imposes
amusement taxes on “resorts, swimming pools, bath houses, hot springs, and tourist
spots.” The first paragraph of Section 59, Article X of the Tax Ordinance refers to
“theaters, cinemas, concert halls, circuses, cockpits, dancing halls, dancing schools,
night or day clubs, and other places of amusement.” In any case, the issues raised by
Pelizloy are pertinent only with respect to the second paragraph of Section 59, Article
X of the Tax Ordinance. Thus, there is no reason to invalidate the first paragraph of
Section 59, Article X of the Tax Ordinance. Any declaration as to the Province of
Benguet’s lack of authority to levy amusement taxes must be limited to admission
fees to resorts, swimming pools, bath houses, hot springs and tourist spots.

Moreover, the second paragraph of Section 59, Article X of the Tax Ordinance is
not limited to resorts, swimming pools, bath houses, hot springs, and tourist spots but
also covers admission fees for boxing. As Section 140 of the LGC allows for the
imposition of amusement taxes on gross receipts from admission fees to boxing
stadia, Section 59, Article X of the Tax Ordinance must be sustained with respect to
admission fees from boxing stadia.

WHEREFORE, the petition for review on certiorari is GRANTED. The second

paragraph of Section 59, Article X of the Benguet Provincial Revenue Code of 2005,
in so far as it imposes amusement taxes on admission fees to resorts, swimming
pools, bath houses, hot springs and tourist spots, is declared null and void.
Respondent Province of Benguet is permanently enjoined from enforcing the second
paragraph of Section 59, Article X of the Benguet Provincial Revenue Code of 2005
with respect to resorts, swimming pools, bath houses, hot springs and tourist spots.
SO ORDERED.

Note.—Historically, the activity of showing motion pictures, films or movies by

cinema/theater operators or proprietors has always been considered as a form of entertainment
subject to amusement tax; Only lessors or distributors of cinematographic films are included in
the coverage of Value-Added Tax (VAT). (Commissioner of Internal Revenue vs. SM Prime
Holdings, Inc., 613 SCRA 774 [2010])

——o0o——
 LOCAL TAXATION
G.R. No. 203754. June 16, 2015.*
 
FILM DEVELOPMENT COUNCIL OF THE PHILIPPINES, petitioner, vs. COLON
HERITAGE REALTY CORPORATION, operator of Oriente Group Theaters,
represented by ISIDORO A. CANIZARES, respondent.
G.R. No. 204418. June 16, 2015.*
 
FILM DEVELOPMENT COUNCIL OF THE PHILIPPINES, petitioner, vs. CITY OF
CEBU and SM PRIME HOLDINGS, INC., respondents.
Taxation; Local Taxation; Delegation of Powers; The power of taxation can be delegated
to municipal corporations, consistent with the principle that legislative powers may be delegated
to local governments in respect of matters of local concern.—The power of taxation, being an
essential and inherent attribute of sovereignty, belongs, as a matter of right, to every
independent government, and needs no express conferment by the people before it can be
exercised.
It is purely legislative and, thus, cannot be delegated to the executive and judicial
branches of government without running afoul to the theory of separation of powers. It, however,
can be delegated to municipal corporations, consistent with the principle that legislative powers
may be delegated to local governments in respect of matters of local concern. The authority of
provinces, cities, and municipalities to create their own sources of revenue and to levy taxes,
therefore, is not inherent and may be exercised only to the extent that such power might be
delegated to them either by the basic law or by statute.
Same; Same; Fiscal Autonomy; Words and Phrases; In Pimentel v. Aguirre, 336 SCRA
201 (2000), fiscal autonomy was defined as “the power [of Local Government Units (LGUs)] to
create their own sources of revenue in addition to their equitable share in the national taxes
released by the national government, as well as the power to allocate their resources in
accordance with their own priorities. It extends to the preparation of their budgets, and local
officials in turn have to work within the constraints thereof.”—Material to the case at bar is the
concept and scope of local fiscal autonomy. In Pimentel v. Aguirre, 336 SCRA 201 (2000), fiscal
autonomy was defined as “the power [of LGUs] to create their own sources of revenue in
addition to their equitable share in the national taxes released by the national government, as
well as the power to allocate their resources in accordance with their own priorities. It extends to
the preparation of their budgets, and local officials in turn have to work within the constraints
thereof.” With the adoption of the 1973 Constitution, and later the 1987 Constitution, municipal
corporations were granted fiscal autonomy via a general delegation of the power to tax. Section
5, Article XI of the 1973 Constitution gave LGUs the “power to create its own sources of revenue
and to levy taxes, subject to such limitations as may be provided by law.” This authority was
further strengthened in the 1987 Constitution, through the inclusion in Section 5, Article X
thereof of the condition that “[s]uch taxes, fees, and charges shall accrue exclusively to local
governments.”
Same; Same; Same; Under the present Constitution, where there is neither a grant nor a
prohibition by statute, the tax power of municipal corporations must be deemed to exist although
Congress may provide statutory limitations and guidelines.—Accordingly, under the present
Constitution, where there is neither a grant nor a prohibition by statute, the tax power of
municipal corporations must be deemed to exist although Congress may provide statutory
limitations and guidelines. The basic rationale for the current rule on local fiscal autonomy is the
strengthening of LGUs and the safeguarding of their viability and self-sufficiency through a direct
grant of general and broad tax powers. Nevertheless, the fundamental law did not intend the
delegation to be absolute and unconditional. The legislature must still see to it that (a) the
taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions; (b)
each LGU will have its fair share of available resources; (c) the resources of the national
government will not be unduly disturbed; and (d) local taxation will be fair, uniform, and just.
Same; Same; Same; In conformity to the dictate of the fundamental law for the legislature
to “enact a local government code (LGC) which shall provide for a more responsive and
accountable local government structure instituted through a system of
decentralization,” consistent with the basic policy of local autonomy, Congress enacted the
LGC, Book II of which governs local taxation and fiscal matters and sets forth the guidelines and
limitations for the exercise of this power.—In conformity to the dictate of the fundamental law for
the legislature to “enact a local government code which shall provide for a more responsive and
accountable local government structure instituted through a system of decentralization,”
consistent with the basic policy of local autonomy, Congress enacted the LGC, Book II of which
governs local taxation and fiscal matters and sets forth the guidelines and limitations for the
exercise of this power. In Pelizloy Realty Corporation v. The Province of Benguet, 695 SCRA
491 (2013), the Court alluded to the fundamental principles governing the taxing powers of
LGUs as laid out in Section 130 of the LGC, to wit: 1. Taxation shall be uniform in each LGU. 2.
Taxes, fees, charges and other impositions shall: a. be equitable and based as far as practicable
on the taxpayer’s ability to pay; b. be levied and collected only for public purposes; c. not be
unjust, excessive, oppressive, or confiscatory; d. not be contrary to law, public policy, national
economic policy, or in the restraint of trade. 3. The collection of local taxes, fees, charges and
other impositions shall in no case be let to any private person. 4. The revenue collected
pursuant to the provisions of the LGC shall inure solely to the benefit of, and be subject to the
disposition by, the LGU levying the tax, fee, charge or other imposition unless otherwise
specifically provided by the LGC. 5. Each LGU shall, as far as practicable, evolve a progressive
system of taxation.
Same; Same; Same; Amusement Taxes; Through the application and enforcement of
Sec. 14 of Republic Act (RA) No. 9167, the income from the amusement taxes levied by local
government units (LGUs) did not and will under no circumstance accrue to them, not even
partially, despite being the taxing authority therefor. Congress, therefore, clearly overstepped its
plenary legislative power, the amendment being violative of the fundamental law’s guarantee on
local autonomy, as echoed in Sec. 130(d) of the Local Government Code (LGC).—It is a basic
precept that the inherent legislative powers of Congress, broad as they may be, are limited and
confined within the four walls of the Constitution. Accordingly, whenever the legislature
exercises its power to enact, amend, and repeal laws, it should do so without going beyond the
parameters wrought by the organic law. In the case at bar, through the application and
enforcement of Sec. 14 of RA 9167, the income from the amusement taxes levied by the
covered LGUs did not and will under no circumstance accrue to them, not even partially, despite
being the taxing authority therefor. Congress, therefore, clearly overstepped its plenary
legislative power, the amendment being violative of the fundamental law’s guarantee on local
autonomy, as echoed in Sec. 130(d) of the LGC.
 Same; Amusement Taxes; Tax Exemptions; Exempting a person or entity from tax is to
relieve or to excuse that person or entity from the burden of the imposition.—It was argued that
subject Sec. 13 is a grant by Congress of an exemption from amusement taxes in favor of
producers of graded films. Without question, this Court has previously upheld the power of
Congress to grant exemptions over the power of LGUs to impose taxes. This amusement tax
reward, however, is not, as the lower court posited, a tax exemption. Exempting a person or
entity from tax is to relieve or to excuse that person or entity from the burden of the imposition.
Here, however, it cannot be said that an exemption from amusement taxes was granted by
Congress to the producers of graded films. Take note that the burden of paying the amusement
tax in question is on the proprietors, lessors, and operators of the theaters and cinemas that
showed the graded films.
Statutes; Separability Clauses; Words and Phrases; A separability clause is a legislative
expression of intent that the nullity of one (1) provision shall not invalidate the other provisions of
the act.—In this regard, it is well to emphasize that if it appears that the rest of the law is free
from the taint of unconstitutionality, then it should remain in force and effect if said law contains
a separability clause. A separability clause is a legislative expression of intent that the nullity of
one provision shall not invalidate the other provisions of the act. Such a clause is not, however,
controlling and the courts, in spite of it, may invalidate the whole statute where what is left, after
the void part, is not complete and workable. In this case, not only does RA 9167 have a
separability clause, contained in Section 23 thereof which reads: Section 23. Separability
Clause.—If, for any reason, any provision of this Act, or any part thereof, is declared invalid or
unconstitutional, all other sections or provisions not affected thereby shall remain in force and
effect. It is also true that the constitutionality of the entire law was not put in question in any of
the said cases. Moreover, a perusal of RA 9167 easily reveals that even with the removal of
Secs. 13 and 14 of the law, the remaining provisions can survive as they mandate other matters
like a cinema evaluation system, an incentive and reward system, and local and international
film festivals and activities that “will promote the growth and development of the local film
industry and promote its participation in both domestic and foreign markets,” and to “enhance
the skills and expertise of Filipino talents.”
Same; Same; Where a part of a statute is void as repugnant to the Constitution, while
another part is valid, the valid portion, if separable from the invalid, may stand and be enforced.
—Where a part of a statute is void as repugnant to the Constitution, while another part is valid,
the valid portion, if separable from the invalid, may stand and be enforced. The exception to this
is when the parts of a statute are so mutually dependent and connected, as conditions,
considerations, inducements, or compensations for each other, as to warrant a belief that the
legislature intended them as a whole, in which case, the nullity of one part will vitiate the rest.
Here, the constitutionality of the rest of the provisions of RA 9167 was never put in question.
Too, nowhere in the assailed judgment of the RTC was it explicated why the entire law was
being declared as unconstitutional. It is a basic tenet that courts cannot go beyond the issues in
a case, which the RTC, Branch 5 did when it declared RA 9167 unconstitutional. This being the
case, and in view of the elementary rule that every statute is presumed valid, the declaration by
the RTC, Branch 5 of the entirety of RA 9167 as unconstitutional, is improper.
Constitutional Law; Unconstitutional Act; It is a well-settled rule that an unconstitutional
act is not a law; it confers no rights; it imposes no duties; it affords no protection; it creates no
office; it is inoperative as if it has not been passed at all; An exception to the above rule,
however, is the doctrine of operative fact, which applies as a matter of equity and fair play.—It is
a well-settled rule that an unconstitutional act is not a law; it confers no rights; it imposes no
duties; it affords no protection; it creates no office; it is inoperative as if it has not been passed at
all. Applying this principle, the logical conclusion would be to order the return of all the amounts
remitted to FDCP and given to the producers of graded films, by all of the covered cities, which
actually amounts to hundreds of millions, if not billions. In fact, just for Cebu City, the aggregate
deficiency claimed by FDCP is ONE HUNDRED FIFTY-NINE MILLION THREE HUNDRED
SEVENTY-SEVEN THOUSAND NINE HUNDRED EIGHTY-EIGHT PESOS AND FIFTY-FOUR
CENTAVOS (P159,377,988.54). Again, this amount represents the unpaid amounts to FDCP
by eight cinema operators or proprietors in only one covered city. An exception to the above
rule, however, is the doctrine of operative fact, which applies as a matter of equity and fair play.
This doctrine nullifies the effects of an unconstitutional law or an executive act by recognizing
that the existence of a statute prior to a determination of unconstitutionality is an operative fact
and may have consequences that cannot always be ignored. It applies when a declaration of
unconstitutionality will impose an undue burden on those who have relied on the invalid law.
VELASCO, JR., J.:
The Constitution is the basic law to which all laws must conform; no act shall be
valid if it conflicts with the Constitution. In the discharge of their defined functions, the
three departments of government have no choice but to yield obedience to the
commands of the Constitution. Whatever limits it imposes must be observed.
The Case
Once again, We are called upon to resolve a clash between the inherent taxing
power of the legislature and the constitutionally-delegated power to tax of local
governments in these consolidated Petitions for Review on Certiorari under Rule 45
of the Rules of Court seeking the reversal of the Decision dated September 25, 2012
of the Regional Trial Court (RTC), Branch 5 in Cebu City, in Civil Case No. CEB-
35601, entitled Colon Heritage Realty Corp., represented by Isidoro Canizares v. Film
Development Council of the Philippines, and Decision dated October 24, 2012 of the
RTC, Branch 14 in Cebu City, in Civil Case No. CEB-35529, entitled City of Cebu v.
Film Development Council of the Philippines, collectively declaring Sections 13 and
14 of Republic Act No. (RA) 9167 invalid and unconstitutional.
 
The Facts
 
The facts are simple and undisputed.
Sometime in 1993, respondent City of Cebu, in its exercise of its power to impose
amusement taxes under Section 140 of the Local Government Code (LGC) anchored
on the constitutional policy on local autonomy, passed City Ordinance No. LXIX
otherwise known as the “Revised Omnibus Tax Ordinance of the City of Cebu (tax
ordinance).” Central to the case at bar are Sections 42 and 43, Chapter XI thereof
which require proprietors, lessees or operators of theatres, cinemas, concert halls,
circuses, boxing stadia, and other places of amusement, to pay an amusement tax
equivalent to thirty percent (30%) of the gross receipts of admission fees to the Office
of the City Treasurer of Cebu City. Said provisions read:
CHAPTER XI – Amusement Tax
Section 42. Rate of Tax.—There shall be paid to the Office of the City
Treasurer by the proprietors, lessees, or operators of theaters, cinemas, concert
halls, circuses, boxing stadia and other places of amusement, an amusement tax
at the rate of thirty percent (30%) of the gross receipts from admission fees.
Section 43. Manner of Payment.—In the case of theaters or cinemas, the
tax shall first be deducted and withheld by their proprietors, lessees, or operators
and paid to the city treasurer before the gross receipts are divided between said
proprietor, lessees, operators, and the distributors of the cinematographic films.
 
Almost a decade later, or on June 7, 2002, Congress passed RA 9167, creating
the Film Development Council of the Philippines (FDCP) and abolishing the Film
Development Foundation of the Philippines, Inc. and the Film Rating Board. Secs. 13
and 14 of RA 9167 provided for the tax treatment of certain graded films as follows:
Section 13. Privileges of Graded Films.—Films which have obtained an
“A” or “B” grading from the Council pursuant to Sections 11 and 12 of this Act
shall be entitled to the following privileges:
a. Amusement tax reward.—A grade “A” or “B” film shall entitle its producer
to an incentive equivalent to the amusement tax imposed and collected on
the graded films by cities and municipalities in Metro Manila and other highly
urbanized and independent component cities in the Philippines pursuant to
Sections 140 to 151 of Republic Act No. 7160 at the following rates:
1. For grade “A” films – 100% of the amusement tax collected on such film;
and
2. For grade “B” films – 65% of the amusement tax collected on such films.
The remaining thirty-five (35%) shall accrue to the funds of the Council.
Section 14. Amusement Tax Deduction and Remittance.—All revenue
from the amusement tax on the graded film which may otherwise accrue to
the cities and municipalities in Metropolitan Manila and highly urbanized and
independent component cities in the Philippines pursuant to Section 140 of
Republic Act No. 7160 during the period the graded film is exhibited, shall be
deducted and withheld by the proprietors, operators or lessees of theaters
or cinemas and remitted within thirty (30) days from the termination of the
exhibition to the Council which shall reward the corresponding amusement
tax to the producers of the graded film within fifteen (15) days from receipt
thereof.
Proprietors, operators and lessees of theaters or cinemas who fail to remit
the amusement tax proceeds within the prescribed period shall be liable to a
surcharge equivalent to five percent (5%) of the amount due for each month of
delinquency which shall be paid to the Council. (emphasis added)
 
According to petitioner, from the time RA 9167 took effect up to the present, all
the cities and municipalities in Metro Manila, as well as urbanized and independent
component cities, with the sole exception of Cebu City, have complied with the
mandate of said law.
Accordingly, petitioner, through the Office of the Solicitor General, sent on
January 2009 demand letters for unpaid amusement tax reward (with 5% surcharge
for each month of delinquency) due to the producers of the Grade “A” or “B” films to
the following cinema proprietors and operators in Cebu City:
In said letters, the proprietors and cinema operators, including private respondent
Colon Heritage Realty Corp. (Colon Heritage), operator of the Oriente theater, were
given ten (10) days from receipt thereof to pay the aforestated amounts to FDCP. The
demand, however, fell on deaf ears.
Meanwhile, on March 25, 2009, petitioner received a letter from Regal
Entertainment, Inc., inquiring on the status of its receivables for tax rebates in Cebu
cinemas for all their A and B rate films along with those which it coproduced with
GMA films. This was followed by a letter from Star Cinema ABS-CBN Film
Productions, Inc., requesting the immediate remittance of its amusement tax rewards
for its graded films for the years 2004-2008.
Because of the persistent refusal of the proprietors and cinema operators to remit
the said amounts as FDCP demanded, on one hand, and Cebu City’s assertion of a
claim on the amounts in question, the city finally filed on May 18, 2009 before the
RTC, Branch 14 a petition for declaratory relief with application for a writ of
preliminary injunction, docketed as Civil Case No. CEB-35529 (City of Cebu v.
FDCP). In said petition, Cebu City sought the declaration of Secs. 13 and 14 of RA
9167 as invalid and unconstitutional.
Similarly, Colon Heritage filed before the RTC, Branch 5 Civil Case No. CEB-
35601 (Colon Heritage v. FDCP), seeking to declare Sec. 14 of RA 9167 as
unconstitutional.
On May 25, 2010, the RTC, Branch 14 issued a temporary restraining order
(TRO) restraining and enjoining FDCP, et al. from, inter alia:
(a) Collecting amusement tax incentive award in the City of Cebu and from
imposing surcharges thereon;
(b) Demanding from the owners, proprietors, and lessees of theaters and
cinemas located and operated within Cebu City, payment of said amusement tax
incentive award which should have been deducted, withheld, and remitted to
FDCP, etc. by the owners, etc., or being operated within Cebu City and imposing
surcharges on the unpaid amount; and
(c) Filing any suit due to or arising from the failure of the owners,  etc., of
theaters or cinemas within Cebu City, to deduct, withhold, and remit the incentive
to FDCP.
Meanwhile, on August 13, 2010, SM Prime Holdings, Inc. moved for leave to file
and admit attached comment-in-intervention and was later granted.
Rulings of the Trial Courts
  
In City of Cebu v. FDCP, the RTC, Branch 14 issued the challenged Decision
declaring Secs. 13 and 14 of RA 9167 unconstitutional, disposing as follows:
WHEREFORE, in view of all the disquisitions, judgment is rendered in favor
of petitioner City of Cebu against respondent Film Development Council of the
Philippines, as follows:
1. Declaring Sections 13 and 14 of the (sic) Republic Act No. 9167 otherwise
known as an Act Creating the Film Development Council of the Philippines,
Defining its Powers and Functions, Appropriating Funds Therefor and for other
purposes, as violative of Section 5 Article X of the 1997 (sic) Philippine
Constitution; Consequently
2. Declaring that defendant Film Development Council of the Philippines
(FDCP) cannot collect under Sections 13 and 14 of R.A. 9167 as of the finality of
the decision in G.R. Nos. 203754 and 204418;
3. Declaring that Intervenor SM Cinema Corporation has the obligation to
remit the amusement taxes, withheld on graded cinema films to respondent
FDCP under Sections 13 and 14 of R.A. 9167 for taxes due prior to the finality of
the decision in G.R. Nos. 203754 and 204418;
4. Declaring that after the finality of the decision in G.R. Nos. 203754 and
204418, all amusement taxes withheld and those which may be collected by
Intervenor SM on graded films shown in SM Cinemas in Cebu City shall be
remitted to petitioner Cebu City pursuant to City Ordinance LXIX, Chapter XI,
Section 42.
As to the sum of Php76,836,807.08 remitted by the Intervenor SM to
petitioner City of Cebu, said amount shall be remitted by the City of Cebu to
petitioner FDCP within thirty (30) days from finality of this decision in G.R. Nos.
203754 and 204418 without interests and surcharges.
SO ORDERED.
 
According to the court, what RA 9167 seeks to accomplish is the segregation of
the amusement taxes raised and collected by Cebu City and its subsequent transfer
to FDCP. The court concluded that this arrangement cannot be classified as a tax
exemption but is a confiscatory measure where the national government extracts
money from the local government’s coffers and transfers it to FDCP, a private
agency, which in turn, will award the money to private persons, the film producers, for
having produced graded films.
The court further held that Secs. 13 and 14 of RA 9167 are contrary to the basic
policy in local autonomy that all taxes, fees, and charges imposed by the LGUs shall
accrue exclusively to them, as articulated in Article X, Sec. 5 of the 1987 Constitution.
This edict, according to the court, is a limitation upon the rule-making power of
Congress when it provides guidelines and limitations on the local government unit’s
(LGU’s) power of taxation. Therefore, when Congress passed this “limitation,” it went
beyond its legislative authority, rendering the questioned provisions unconstitutional.
By the same token, in Colon Heritage v. FDCP, the RTC, Branch 5, in its
Decision of September 25, 2012, also ruled against the constitutionality of said Secs.
13 and 14 of RA 9167 for the following reasons: (a) while Congress, through the
enactment of RA 9167, may have amended Secs. 140(a) and 151 of the LGC, in the
exercise of its plenary power to amend laws, such power must be exercised within
constitutional parameters; (b) the assailed provision violates the constitutional
directive that taxes should accrue exclusively to the LGU concerned; (c) the
Constitution, through its Art. X, Sec. 5, directly conferred LGUs with authority to levy
taxes — the power is no longer delegated by the legislature; (d) in CIR v. SM Prime
Holdings,11 the Court ruled that amusement tax on cinema/theater operators or
proprietors remain with the LGU, amusement tax, being, by nature, a local tax.
The fallo  of the questioned judgment reads:
WHEREFORE, in view of all the foregoing, Judgment is hereby rendered in
favor of petitioner, as follows:
(1) Declaring Republic Act No. 9167 as invalid and unconstitutional;
(2) The obligation to remit amusement taxes for the graded films to
respondent is ordered extinguished;
(3) Directing respondent to refund all the amounts paid by petitioner, by way
of amusement tax, plus the legal rate of interest thereof, until the whole amount
is paid in full.
Notify parties and counsels of this order.
SO ORDERED.
The Issue
 
Undeterred by two defeats, petitioner has come directly to this Court, presenting
the singular issue: whether or not the RTC (Branches 5 and 14) gravely erred in
declaring Secs. 13 and 14 of RA 9167 invalid for being unconstitutional.
Anent Sec. 13, FDCP concedes that the amusement taxes assessed in RA 9167
are to be given to the producers of graded films who are private persons.
Nevertheless, according to FDCP, this particular tax arrangement is not a violation of
the rule on the use of public funds for RA 9167 was enacted for a public purpose, that
is, the promotion and support of the “development and growth of the local film
industry as a medium for the upliftment of aesthetic, cultural, and social values for the
better understanding and appreciation of the Filipino identity” as well as the
“encouragement of the production of quality films that will promote the growth and
development of the local film industry.” Moreover, FDCP suggests that “even if the
resultant effect would be a certain loss of revenue, [LGUs] do not feel deprived nor
bitter for they realize that the benefits for the film industry, the fortification of our
values system, and the cultural boost for the nation as a whole, far outweigh the
pecuniary cost they would shoulder by backing this law.” Finally, in support of its
stance, FDCP invites attention to the following words of former Associate Justice
Isagani A. Cruz: “[t]he mere fact that the tax will be directly enjoyed by a private
individual does not make it invalid so long as some link to the public welfare is
established.”
As regards Sec. 14 of RA 9167, FDCP is of the position that Sec. 5, Article X of
the Constitution does not change the doctrine that municipal corporations only
possess delegated, not inherent, powers of taxation and that the power to tax is still
primarily vested in the Congress. Thus, wielding its power to impose limitations on
this delegated power, Congress further restricted the LGU’s power to impose
amusement taxes via Secs. 13 and 14 of RA 9167 –– an express and real intention of
Congress to further contain the LGU’s delegated taxing power. It, therefore, cannot
be construed as an undue limitation since it is well within the power of Congress to
make such restriction. Furthermore, the LGC is a mere statute which Congress can
amend, which it in fact did when it enacted RA 916417and, later, the questioned law,
RA 9167.
This, according to FDCP, evinces the overriding intent of Congress to remove
from the LGU’s delegated taxing power all revenues from amusement taxes on grade
“A” or “B” films which would otherwise accrue to the cities and municipalities in
Metropolitan Manila and highly urbanized and independent component cities in the
Philippines pursuant to Secs. 140 and 151 of the LGC.
In fine, it is petitioner’s posture that the inclusion in RA 9167 of the questioned
provisions was a valid exercise of the
SEC. 140. Amusement Tax.—(a) The province may levy an amusement
tax to be collected from the proprietors, lessees, or operators of theaters,
cinemas, concert halls, circuses, boxing stadia, and other places of amusement
at a rate of not more than ten percent (10%) of the gross receipts from the
admissions fees.
(b)  In the case of theaters or cinemas, the tax shall first be deducted and
withheld by their proprietors, lessees, or operators and paid to the provincial
treasurer before the gross receipts are divided between said proprietors, lessees,
or operators and the distributors of the cinematographic films.
(c) The holding of operas, concerts, dramas, recitals, paintings, and art
exhibitions, flower shows, musical programs, literary and oratorical presentations,
except pop, rock, or similar concerts shall be exempt from the payment of the tax
herein imposed.
(d) The sangguniang panlalawigan may prescribe the time, manner, terms
and conditions for the payment of tax. In case of fraud or failure to pay the tax,
the sangguniang panlalawigan may impose such surcharges, interest and
penalties as it may deem appropriate.
(e)  The proceeds from the amusement tax shall be shared equally by the
province and the municipality where such amusement places are located.
18  Section 22. Repealing Clause.—Executive Order No. 811 is hereby
repealed. Executive Order 1051 and Section 140 of Republic Act No. 7160,
otherwise known as the Local Government Code of 1991, are hereby amended
accordingly.
All other laws, decrees, orders issuances, rules and regulations which are
inconsistent with the provisions of this Act are hereby repealed, amended or
modified accordingly.
legislature’s power to amend laws and an assertion of its constitutional authority
to set limitations on the LGU’s authority to tax.
 
The Court’s Ruling
 
We find no reason to disturb the assailed rulings.
 
Local fiscal autonomy and the constitutionally-delegated power to tax
 
The power of taxation, being an essential and inherent attribute of sovereignty,
belongs, as a matter of right, to every independent government, and needs no
express conferment by the people before it can be exercised. It is purely legislative
and, thus, cannot be delegated to the executive and judicial branches of government
without running afoul to the theory of separation of powers. It, however, can be
delegated to municipal corporations, consistent with the principle that legislative
powers may be delegated to local governments in respect of matters of local concern.
The authority of provinces, cities, and municipalities to create their own sources of
revenue and to levy taxes, therefore, is not inherent and may be exercised only to the
extent that such power might be delegated to them either by the basic law or by
statute.
Under the regime of the 1935 Constitution, there was no constitutional provision
on the delegation of the power to tax to municipal corporations. They only derived
such under a limited statutory authority, outside of which, it was deemed withheld.
Local governments, thus, had very restricted taxing powers which they derive from
numerous tax laws. This highly-centralized government structure was later seen to
have arrested the growth and efficient operations of LGUs, paving the way for the
adoption of a more decentralized system which granted LGUs local autonomy, both
administrative and fiscal autonomy.
Material to the case at bar is the concept and scope of local fiscal autonomy.
In Pimentel v. Aguirre, fiscal autonomy was defined as “the power [of LGUs] to create
their own sources of revenue in addition to their equitable share in the national taxes
released by the national government, as well as the power to allocate their resources
in accordance with their own priorities. It extends to the preparation of their budgets,
and local officials in turn have to work within the constraints thereof.”
With the adoption of the 1973 Constitution, and later the 1987 Constitution,
municipal corporations were granted fiscal autonomy via a general delegation of the
power to tax. Section 5, Article XI of the 1973 Constitution gave LGUs the “power to
create its own sources of revenue and to levy taxes, subject to such limitations as
may be provided by law.” This authority was further strengthened in the 1987
Constitution, condition that “[s]uch taxes, fees, and charges shall accrue exclusively
to local governments.”
Accordingly, under the present Constitution, where there is neither a grant nor a
prohibition by statute, the tax power of municipal corporations must be deemed to
exist although Congress may provide statutory limitations and guidelines.
 The basic rationale for the current rule on local fiscal autonomy is the
strengthening of LGUs and the safeguarding of their viability and self-sufficiency
through a direct grant of general and broad tax powers. Nevertheless, the
fundamental law did not intend the delegation to be absolute and unconditional. The
legislature must still see to it that (a) the taxpayer will not be over-burdened or
saddled with multiple and unreasonable impositions; (b) each LGU will have its fair
share of available resources; (c) the resources of the national government will not be
unduly disturbed; and (d) local taxation will be fair, uniform, and just.
In conformity to the dictate of the fundamental law for the legislature to “enact a
local government code which shall provide for a more responsive and accountable
local government structure instituted through a system of decentralization,” consistent
with the basic policy of local autonomy, Congress enacted the LGC, Book II of which
governs local taxation and fiscal matters and sets forth the guidelines and limitations
for the exercise of this power. In Pelizloy Realty Corporation v. The Province of
Benguet, the Court alluded to the fundamental principles governing the taxing powers
of LGUs as laid out in Section 130 of the LGC, to wit:
1. Taxation shall be uniform in each LGU.
2. Taxes, fees, charges and other impositions shall:
a. be equitable and based as far as practicable on the taxpayer’s ability to
pay;
b. be levied and collected only for public purposes;
c. not be unjust, excessive, oppressive, or confiscatory;
d. not be contrary to law, public policy, national economic policy, or in the
restraint of trade.
3. The collection of local taxes, fees, charges and other impositions shall in
no case be let to any private person.
4. The revenue collected pursuant to the provisions of the LGC shall inure
solely to the benefit of, and be subject to the disposition by, the LGU levying the
tax, fee, charge or other imposition unless otherwise specifically provided by the
LGC.
5. Each LGU shall, as far as practicable, evolve a progressive system of
taxation.
It is in the application of the adverted fourth rule, that is — all revenue collected
pursuant to the provisions of the LGC shall inure solely to the benefit of, and be
subject to the disposition by, the LGU levying the tax, fee, charge or other imposition
unless otherwise specifically provided by the LGC — upon which the present
controversy grew.
 
RA 9167 violates local fiscal autonomy
It is beyond cavil that the City of Cebu had the authority to issue its City
Ordinance No. LXIX and impose an amusement tax on cinemas pursuant to Sec. 140
in relation to Sec. 151 of the LGC. Sec. 140 states, among other things, that a
“province may levy an amusement tax to be collected from the proprietors, lessees, or
operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other
places of amusement at a rate of not more than thirty percent (30%) of the gross
receipts from admission fees.” By operation of said Sec. 151, extending to them the
authority of provinces and municipalities to levy certain taxes, fees, and charges,
cities, such as respondent city government, may therefore validly levy amusement
taxes subject to the parameters set forth under the law. Based on this authority, the
City of Cebu passed, in 1993, its Revised Omnibus Tax Ordinance, Chapter XI, Secs.
42 and 43 of which reads:
CHAPTER XI – Amusement Tax
Section 42. Rate of Tax.—There shall be paid to the Office of the City
Treasurer by the proprietors, lessees, or operators of theaters, cinemas, concert
halls, circuses, boxing stadia and other places of amusement, an amusement tax
at the rate of thirty percent (30%) of the gross receipts from admission fees. 33
Section 43. Manner of Payment.—In the case of theaters or cinemas, the
tax shall first be deducted and withheld by their proprietors, lessees, or operators
and paid to the city treasurer before the gross receipts are divided between said
proprietor, lessees, operators, and the distributors of the cinematographic films.
 
Then, after almost a decade of cities reaping benefits from this imposition,
Congress, through RA 9167, amending Section 140 of the LGC, among others,
transferred this income from the cities and municipalities in Metropolitan Manila and
highly urbanized and independent component cities, such as respondent City of
Cebu, to petitioner FDCP, which proceeds will ultimately be rewarded to the
producers of graded films. We reproduce anew Secs. 13 and 14 of RA 9167, thus:
Section 13. Privileges of Graded Films.—Films which have obtained an
“A” or “B” grading from the Council pursuant to Sections 11 and 12 of this Act
shall be entitled to the following privileges:
a. Amusement tax reward.—A grade “A” or “B” film shall entitle its producer
to an incentive equivalent to the amusement tax imposed and collected on the
graded films by cities and municipalities in Metro Manila and other highly
urbanized and independent component cities in the Philippines pursuant to
Sections 140 to 151 of Republic Act No. 7160 at the following rates:
1. For grade “A” films – 100% of the amusement tax collected on such film;
and
2. For grade “B” films – 65% of the amusement tax collected on such films.
The remaining thirty-five (35%) shall accrue to the funds of the Council.
Section 14. Amusement Tax Deduction and Remittance.—All revenue
from the amusement tax on the graded film which may otherwise accrue to the
cities and municipalities in Metropolitan Manila and highly urbanized and
independent component cities in the Philippines pursuant to Section 140 of
Republic Act No. 7160 during the period the graded film is exhibited, shall be
deducted and withheld by the proprietors, operators or lessees of theaters or
cinemas and remitted within thirty (30) days from the termination of the exhibition
to the Council which shall reward the corresponding amusement tax to the
producers of the graded film within fifteen (15) days from receipt thereof.
Proprietors, operators and lessees of theaters or cinemas who fail to remit
the amusement tax proceeds within the prescribed period shall be liable to a
surcharge equivalent to five percent (5%) of the amount due for each month of
delinquency which shall be paid to the Council.
 
 Considering the amendment, the present rule is that ALL amusement taxes (d) Customs duties, registration fees of vessel and wharfage on wharves,
levied by covered cities and municipalities shall be given by proprietors, tonnage dues, and all other kinds of customs fees, charges and dues except
operators or lessees of theatres and cinemas to FDCP, which shall then reward wharfage on wharves constructed and maintained by the local government unit
concerned;
said amount to the producers of graded films in this wise:
(e) Taxes, fees, and charges and other impositions upon goods carried into
1. For grade “A” films, ALL amusement taxes collected by ALL covered
or out of, or passing through, the territorial jurisdictions of local government units
LGUs on said films shall be given to the producer thereof. The LGU, therefore, is
in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes,
entitled to NOTHING from its own imposition.
fees, or charges in any form whatsoever upon such goods or merchandise;
2. For grade “B” films, SIXTY-FIVE PERCENT (65%) of ALL amusement
(f) Taxes, fees or charges on agricultural and aquatic products when sold
taxes derived by ALL covered LGUs on said film shall be given to the producer
by marginal farmers or fishermen;
thereof. In this case, however, the LGU is still NOT entitled to any portion of the
(g) Taxes on business enterprises certified to by the Board of Investments
imposition, in view of Sec. 16 of RA 9167 which provides that the remaining 35%
as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively
may be expended for the Council’s operational expenses. Thus:
from the date of registration;
Section 16. Funding.—The Executive Secretary shall immediately include
(h) Excise taxes on articles enumerated under the National Internal
in the Office of the President’s program the implementation of this Act, the
Revenue Code, as amended, and taxes, fees or charges on petroleum products;
funding of which shall be included in the annual General Appropriations Act.
(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or
To augment the operational expenses of the Council, the Council may:
similar transactions on goods or services except as otherwise provided herein;
a. Utilize the remaining thirty-five (35%) percent of the amusement tax
(j) Taxes on the gross receipts of transportation contractors and persons
collected during the period of grade “B” film is exhibited, as provided
engaged in the transportation of passengers or freight by hire and common
under Sections 13 and 14 hereof x x x.
carriers by air, land or water, except as provided in this Code;
For petitioner, the amendment is a valid legislative manifestation of the
(k) Taxes on premiums paid by way or reinsurance or retrocession;
intention to remove from the grasp of the taxing power of the covered LGUs all
(l) Taxes, fees or charges for the registration of motor vehicles and for the
revenues from amusement taxes on grade “A” or “B” films which would otherwise
issuance of all kinds of licenses or permits for the driving thereof, except
accrue to them. An evaluation of the provisions in question, however, compels
tricycles;
Us to disagree.
(m) Taxes, fees, or other charges on Philippine products actually exported,
RA 9167, Sec. 14 states:
except as otherwise provided herein;
Section 14. Amusement Tax Deduction and Remittance.—All revenue
(n) Taxes, fees, or charges, on Countryside and Barangay Business
from the amusement tax on the graded film which may otherwise accrue to
Enterprises and cooperatives duly registered under R.A. No. 6810 and Republic
the cities and municipalities in Metropolitan Manila and highly urbanized and
Act Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938) otherwise known
independent component cities in the Philippines pursuant to Section 140 of
as the “Cooperative Code of the Philippines” respectively; and
Republic Act. No. 7160 during the period the graded film is exhibited, shall be
(o) Taxes, fees or charges of any kind on the National Government, its
deducted and withheld by the proprietors, operators or lessees of theaters
agencies and instrumentalities, and local government units. (emphasis ours)
or cinemas and remitted within thirty (30) days from the termination of the
exhibition to the Council which shall reward the corresponding amusement
 
tax to the producers of the graded film within fifteen (15) days from receipt From the above, the difference between Sec. 133 and the questioned amendment
thereof. of Sec. 140 of the LGC by RA 9167 is readily revealed. In Sec. 133, what Congress
  did was to prohibit the levy by LGUs of the enumerated taxes. For RA 9167,
A reading of the challenged provision reveals that the power to impose however, the covered LGUs were deprived of the income which they will otherwise
amusement taxes was NOT removed from the covered LGUs, unlike what be collecting should they impose amusement taxes, or, in petitioner’s own words,
Congress did for the taxes enumerated in Sec. 133, Article X of the LGC, which lays “Section 14 of [RA 9167] can be viewed as an express and real intention on the part
down the common limitations on the taxing powers of LGUs. Thus: of Congress to remove from the LGU’s delegated taxing power,
Section 133. Common Limitations on the Taxing Powers of Local all revenues from the amusement taxes on graded films which would otherwise
Government Units.—Unless otherwise provided herein, the exercise of the accrue to [them] pursuant to Section 140 of the [LGC].”
taxing powers of provinces, cities, municipalities, and barangays shall not
extend to the levy of the following: In other words, per RA 9167, covered LGUs still have the power to levy
(a) Income tax, except when levied on banks and other financial
amusement taxes, albeit at the end of the day, they will derive no revenue therefrom.
institutions;
(b) Documentary stamp tax;
The same, however, cannot be said for FDCP and the producers of graded films
(c) Taxes on estates, inheritance, gifts, legacies and other since the amounts thus levied by the LGUs –– which should rightfully accrue to them,
acquisitions mortis causa, except as otherwise provided herein; they being the taxing authority –– will be going to their coffers. As a matter of fact, it
is only through the exercise by the LGU of said power that the funds to be used
for the amusement tax reward can be raised. Without said imposition, the
producers of graded films will receive nothing from the owners, proprietors and
lessees of cinemas operating within the territory of the covered LGU.
Taking the resulting scheme into consideration, it is apparent that what Congress
did in this instance was not to exclude the authority to levy amusement taxes from the
taxing power of the covered LGUs, but to earmark, if not altogether confiscate, the
income to be received by the LGU from the taxpayers in favor of and for transmittal to
FDCP, instead of the taxing authority. This, to Our mind, is in clear contravention of
the constitutional command that taxes levied by LGUs shall accrue exclusively to said
LGU and is repugnant to the power of LGUs to apportion their resources in line with
their priorities.
It is a basic precept that the inherent legislative powers of Congress, broad as
they may be, are limited and confined within the four walls of the Constitution.
Accordingly, whenever the legislature exercises its power to enact, amend, and
repeal laws, it should do so without going beyond the parameters wrought by the
organic law.
In the case at bar, through the application and enforcement of Sec. 14 of RA
9167, the income from the amusement taxes levied by the covered LGUs did not and
will under no circumstance accrue to them, not even partially, despite being the taxing
authority therefor. Congress, therefore, clearly overstepped its plenary legislative
power, the amendment being violative of the fundamental law’s guarantee on local
autonomy, as echoed in Sec. 130(d) of the LGC, thus:
Section 130. Fundamental Principles.—The following fundamental
principles shall govern the exercise of the taxing and other revenue-raising
powers of local government units:
x x x x
(d) The revenue collected pursuant to the provisions of this Code shall
inure solely to the benefit of, and be subject to the disposition by, the local
government unit levying the tax, fee, charge or other imposition unless otherwise
specifically provided herein x x x.
Moreover, in Pimentel, the Court elucidated that local fiscal autonomy includes the
power of LGUs to allocate their resources in accordance with their own priorities. By
earmarking the income on amusement taxes imposed by the LGUs in favor of FDCP
and the producers of graded films, the legislature appropriated and distributed the
LGUs’ funds –– as though it were legally within its control –– under the guise of
setting a limitation on the LGUs’ exercise of their delegated taxing power. This,
undoubtedly, is a usurpation of the latter’s exclusive prerogative to apportion their
funds, an impermissible intrusion into the LGUs’ constitutionally-protected domain
which puts to naught the guarantee of fiscal autonomy to municipal corporations
enshrined in our basic law.
Grant of amusement tax reward incentive:not a tax exemption
 
It was argued that subject Sec. 13 is a grant by Congress of an exemption from
amusement taxes in favor of producers of graded films. Without question, this Court
has previously upheld the power of Congress to grant exemptions over the power of
LGUs to impose taxes. This amusement tax reward, however, is not, as the lower
court posited, a tax exemption.
Exempting a person or entity from tax is to relieve or to excuse that person or
entity from the burden of the imposition. Here, however, it cannot be said that an
exemption from amusement taxes was granted by Congress to the producers of
graded films. Take note that the burden of paying the amusement tax in question is
on the proprietors, lessors, and operators of the theaters and cinemas that showed
the graded films. Thus, per City Ordinance No. LXIX:
CHAPTER XI – Amusement Tax
Section 42. Rate of Tax.—There shall be paid to the Office of the City
Treasurer by the proprietors, lessees, or operators of theaters, cinemas,
concert halls, circuses, boxing stadia and other places of amusement, an
amusement tax at the rate of thirty percent (30%) of the gross receipts from
admission fees.
Section 43. Manner of Payment.—In the case of theaters or cinemas, the
tax shall first be deducted and withheld by their proprietors, lessees, or operators
and paid to the city treasurer before the gross receipts are divided between said
proprietor, lessees, operators, and the distributors of the cinematographic films.
Similarly, the LGC provides as follows:
Section 140. Amusement Tax.—
(a) The province may levy an amusement tax to be collected from the
proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses,
boxing stadia, and other places of amusement at a rate of not more than thirty
percent (30%) of the gross receipts from admission fees.
(b) In the case of theaters or cinemas, the tax shall first be deducted and
withheld by their proprietors, lessees, or operators and paid to the provincial
treasurer before the gross receipts are divided between said proprietors, lessees,
or operators and the distributors of the cinematographic films.
Simply put, both the burden and incidence of the amusement tax are borne by the
proprietors, lessors, and operators, not by the producers of the graded films. The
transfer of the amount to the film producers is actually a monetary reward given to
them for having produced a graded film, the funding for which was taken by the
national government from the coffers of the covered LGUs. Without a doubt, this is
not an exemption from payment of tax.
 
Declaration by the RTC, Branch 5 of the entire RA 9167 as unconstitutional
 
Noticeably, the RTC, Branch 5, in its September 25, 2012 Decision in Colon
Heritage v. FDCP, ruled against the constitutionality of the entire law, not just the
assailed Sec. 14. The fallo  of the judgment reads:
 WHEREFORE, in view of all the foregoing, Judgment is hereby rendered in
favor of petitioner, as follows:
(1) Declaring Republic Act No. 9167 as invalid and unconstitutional;
(2) The obligation to remit amusement taxes for the graded films to
respondent is ordered extinguished;
(3) Directing respondent to refund all the amounts paid by petitioner, by way
of amusement tax, plus the legal rate of interest thereof, until the whole amount
is paid in full.
 
In this regard, it is well to emphasize that if it appears that the rest of the law is
free from the taint of unconstitutionality, then it should remain in force and effect if
said law contains a separability clause. A separability clause is a legislative
expression of intent that the nullity of one provision shall not invalidate the other
provisions of the act. Such a clause is not, however, controlling and the courts, in
spite of it, may invalidate the whole statute where what is left, after the void part, is
not complete and workable.
In this case, not only does RA 9167 have a separability clause, contained in
Section 23 thereof which reads:
Section 23. Separability Clause.—If, for any reason, any provision of this
Act, or any part thereof, is declared invalid or unconstitutional, all other sections
or provisions not affected thereby shall remain in force and effect.
It is also true that the constitutionality of the entire law was not put in
question in any of the said cases.
Moreover, a perusal of RA 9167 easily reveals that even with the removal of
Secs. 13 and 14 of the law, the remaining provisions can survive as they
mandate other matters like a cinema evaluation system, an incentive and reward
system, and local and international film festivals and activities that “will promote
the growth and development of the local film industry and promote its
participation in both domestic and foreign markets,” and to “enhance the skills
and expertise of Filipino talents.”
Where a part of a statute is void as repugnant to the Constitution, while another
part is valid, the valid portion, if separable from the invalid, may stand and be
enforced. The exception to this is when the parts of a statute are so mutually
dependent and connected, as conditions, considerations, inducements, or
compensations for each other, as to warrant a belief that the legislature intended
them as a whole, in which case, the nullity of one part will vitiate the rest.
Here, the constitutionality of the rest of the provisions of RA 9167 was never put
in question. Too, nowhere in the assailed judgment of the RTC was it explicated why
the entire law was being declared as unconstitutional.
It is a basic tenet that courts cannot go beyond the issues in a case,43 which the
RTC, Branch 5 did when it declared RA 9167 unconstitutional. This being the case,
and in view of the elementary rule that every statute is presumed valid, the declaration
by the RTC, Branch 5 of the entirety of RA 9167 as unconstitutional, is improper.
 
Amounts paid by Colon Heritage need not be returned
 
Having ruled that the questioned provisions are unconstitutional, the RTC, Branch
5, in Colon Heritage v. FDCP, ordered the return of all amounts paid by respondent
Colon Heritage to FDCP by way of amusement tax. Thus:
WHEREFORE, in view of all the foregoing, Judgment is hereby rendered in
favor of petitioner, as follows:
(1) Declaring Republic Act No. 9167 as invalid and unconstitutional;
(2) The obligation to remit amusement taxes for the graded films to
respondent is ordered extinguished;
(3) Directing respondent to refund all the amounts paid by petitioner, by way
of amusement tax, plus the legal rate of interest thereof, until the whole amount
is paid in full.
 
As regards the refund, the Court cannot subscribe to this position.
It is a well-settled rule that an unconstitutional act is not a law; it confers no rights;
it imposes no duties; it affords no protection; it creates no office; it is inoperative as if
it has not been passed at all. Applying this principle, the logical conclusion would be
to order the return of all the amounts remitted to FDCP and given to the producers of
graded films, by all of the covered cities, which actually amounts to hundreds of
millions, if not billions. In fact, just for Cebu City, the aggregate deficiency claimed by
FDCP is ONE HUNDRED FIFTY-NINE MILLION THREE HUNDRED SEVENTY-
SEVEN THOUSAND NINE HUNDRED EIGHTY-EIGHT PESOS AND FIFTY-FOUR
CENTAVOS (P159,377,988.54). Again, this amount represents the unpaid amounts
to FDCP by eight cinema operators or proprietors in only one covered city.
An exception to the above rule, however, is the doctrine of operative fact, which
applies as a matter of equity and fair play. This doctrine nullifies the effects of an
unconstitutional law or an executive act by recognizing that the existence of a statute
prior to a determination of unconstitutionality is an operative fact and may have
consequences that cannot always be ignored. It applies when a declaration of
unconstitutionality will impose an undue burden on those who have relied on the
invalid law.
In Hacienda Luisita v. PARC, the Court elucidated the meaning and scope of the
operative fact doctrine, viz.:
The “operative fact” doctrine is embodied in De Agbayani v. Court of
Appeals, wherein it is stated that a legislative or executive act, prior to its being
declared as unconstitutional by the courts, is valid and must be complied with,
thus:
x x x  x x x  x x x
This doctrine was reiterated in the more recent case of City of Makati v. Civil
Service Commission, wherein we ruled that:
Moreover, we certainly cannot nullify the City Government’s order of
suspension, as we have no reason to do so, much less retroactively apply such
nullification to deprive private respondent of a compelling and valid reason for not
filing the leave application.
For as we have held, a void act though in law a mere scrap of paper
nonetheless confers legitimacy upon past acts or omissions done in
reliance thereof. Consequently, the existence of a statute or executive
order prior to its being adjudged void is an operative fact to which legal
consequences are attached. It would indeed be ghastly unfair to prevent private
respondent from relying upon the order of suspension in lieu of a formal leave
application.
The applicability of the operative fact doctrine to executive acts was further
explicated by this Court in Rieta v. People, thus:
Petitioner contends that his arrest by virtue of Arrest Search and Seizure
Order (ASSO) No. 4754 was invalid, as the law upon which it was predicated —
General Order No. 60, issued by then President Ferdinand E. Marcos — was
subsequently declared by the Court, in Tañada v. Tuvera, to have no force and
effect. Thus, he asserts, any evidence obtained pursuant thereto is inadmissible
in evidence.
We do not agree. In Tañada, the Court addressed the possible effects of its
declaration of the invalidity of various presidential issuances. Discussing therein
how such a declaration might affect acts done on a presumption of their validity,
the Court said:
. . . In similar situations in the past this Court had taken the pragmatic and
realistic course set forth in Chicot County Drainage District v. Baxter Bank to wit:
‘The courts below have proceeded on the theory that the Act of Congress,
having been found to be unconstitutional, was not a law; that it was inoperative,
conferring no rights and imposing no duties, and hence affording no basis for the
challenged decree. . . . It is quite clear, however, that such broad statements as
to the effect of a determination of unconstitutionality must be taken with
qualifications. The actual existence of a statute, prior to [the determination of its
invalidity], is an operative fact and may have consequences which cannot justly
be ignored. The past cannot always be erased by a new judicial declaration. The
effect of the subsequent ruling as to invalidity may have to be considered in
various aspects — with respect to particular conduct, private and official.
Questions of rights claimed to have become vested, of status, of prior
determinations deemed to have finality and acted upon accordingly, of public
policy in the light of the nature both of the statute and of its previous application,
demand examination. These questions are among the most difficult of those
which have engaged the attention of courts, state and federal, and it is manifest
from numerous decisions that an all-inclusive statement of a principle of absolute
retroactive invalidity cannot be justified.’
x x x  x x x  x x x
 “Similarly, the implementation/ enforcement of presidential decrees prior to
their publication in the Official Gazette is ‘an operative fact which may have
consequences which cannot be justly ignored. The past cannot always be erased
by a new judicial declaration . . . that an all-inclusive statement of a principle of
absolute retroactive invalidity cannot be justified.’”
The Chicot doctrine cited in Tañada advocates that, prior to the nullification
of a statute, there is an imperative necessity of taking into account its actual
existence as an operative fact negating the acceptance of “a principle of absolute
retroactive invalidity.” Whatever was done while the legislative or the executive
act was in operation should be duly recognized and presumed to be valid in all
respects. The ASSO that was issued in 1979 under General Order No. 60 —
long before our Decision in Tañada and the arrest of petitioner — is an
operative fact that can no longer be disturbed or simply ignored. (citations
omitted; emphasis in the original)
Bearing in mind that PARC Resolution No. 89-12-2 –– an executive act ––
was declared invalid in the instant case, the operative fact doctrine is clearly
applicable.
 
Here, to order FDCP and the producers of graded films which may have already
received the amusement tax incentive reward pursuant to the questioned provisions
of RA 9167, to return the amounts received to the respective taxing authorities would
certainly impose a heavy, and possibly crippling, financial burden upon them who
merely, and presumably in good faith, complied with the legislative fiat subject of this
case. For these reasons, We are of the considered view that the application of the
doctrine of operative facts in the case at bar is proper so as not to penalize FDCP for
having complied with the legislative command in RA 9167, and the producers of
graded films who have already received their tax cut prior to this Decision for having
produced top-quality films.
With respect to the amounts retained by the cinema proprietors due to petitioner
FDCP, said proprietors are required under the law to remit the same to petitioner.
Obeisance to the rule of law must always be protected and preserved at all times and
the unjustified refusal of said proprietors cannot be tolerated. The operative fact
doctrine equally applies to the non-remittance by said proprietors since the law
produced legal effects prior to the declaration of the nullity of Secs. 13 and 14 in
these instant petitions. It can be surmised, however, that the proprietors were at a
loss whether or not to remit said amounts to FDCP considering the position of the City
of Cebu for them to remit the amusement taxes directly to the local government. For
this reason, the proprietors shall not be liable for surcharges.
In view of the declaration of nullity of unconstitutionality of Secs. 13 and 14 of RA
9167, all amusement taxes remitted to petitioner FDCP prior to the date of the finality
of this decision shall remain legal and valid under the operative fact doctrine.
Amusement taxes due to petitioner but unremitted up to the finality of this decision
shall be remitted to petitioner within thirty (30) days from date of finality. Thereafter,
amusement taxes previously covered by RA 9167 shall be remitted to the local
governments.
WHEREFORE, premises considered, the consolidated petitions are
hereby PARTIALLY GRANTED. The questioned Decision of the RTC, Branch 5 of
Cebu City in Civil Case No. CEB-35601 dated September 25, 2012 and that of the
RTC, Branch 14, Cebu City in Civil Case No. CEB-35529 dated October 24, 2012,
collectively declaring Sections 13 and 14 of Republic Act No. 9167 invalid and
unconstitutional, are hereby AFFIRMED with MODIFICATION.
As modified, the decisions of the lower courts shall read:
 1. Civil Case No. CEB-35601 entitled Colon Heritage Realty Corp. v. Film
Development Council of the Philippines:
WHEREFORE, in view of all the foregoing, Judgment is hereby rendered in favor
of Colon Heritage Realty Corp. and against the Film Development Council of the
Philippines, as follows:
1. Declaring Sections 13 and 14 of Republic Act No. 9167 otherwise known as an
Act Creating the Film Development Council of the Philippines, Defining its Powers
and Functions, Appropriating Funds therefor and for other purposes, as invalid and
unconstitutional;
2. Declaring that the Film Development Council of the Philippines cannot collect
under Sections 13 and 14 of R.A. 9167 as of the finality of the decision in G.R. Nos.
203754 and 204418;
3. Declaring that Colon Heritage Realty Corp. has the obligation to remit the
amusement taxes withheld on graded cinema films to FDCP under Sections 13 and
14 of R.A. 9167 for taxes due prior to the finality of this Decision, without surcharges;
4. Declaring that upon the finality of this decision, all amusement taxes withheld
and those which may be collected by Colon Heritage Realty Corp. on graded films
shown in its cinemas in Cebu City shall be remitted to Cebu City pursuant to City
Ordinance LXIX, Chapter XI, Section 42.
and 14 of said law prior to the date of finality of this Decision shall remain valid and
legal. Cinema proprietors who failed to remit said amusement taxes to petitioner
FDCP prior to the date of finality of this Decision are obliged to remit the same,
without surcharges, to petitioner FDCP under the doctrine of operative fact.
SO ORDERED.
Notes.—Provinces are not barred from levying amusement taxes even if amusement taxes
are a form of percentage taxes. (Pelizloy Realty Corporation vs. Province of Benguet, 695
SCRA 491 [2013])
It is already well-settled that although the power to tax is inherent in the State, the same is
not true for the Local Government Units (LGUs) to whom the power must be delegated by
Congress and must be exercised within the guidelines and limitations that Congress may
provide. (City of Manila vs. Colet, 744 SCRA 265 [2014])
——o0o——

2. Civil Case No. CEB-35529 entitled City of Cebu v. Film Development Council

of the Philippines:
WHEREFORE, in view of all the disquisitions, judgment is rendered in favor of the
City of Cebu against the Film Development Council of the Philippines, as follows:
1. Declaring Sections 13 and 14 of Republic Act No. 9167 otherwise known as
an Act Creating the Film Development Council of the Philippines, Defining its Powers
and Functions, Appropriating Funds therefor and for other purposes, void and
unconstitutional;
2. Declaring that the Film Development Council of the Philippines cannot collect
under Sections 13 and 14 of R.A. 9167 as of the finality of this Decision;
3. Declaring that Intervenor SM Cinema Corporation has the obligation to remit
the amusement taxes, withheld on graded cinema films to respondent FDCP under
Sections 13 and 14 of R.A. 9167 for taxes due prior to the finality of this Decision,
without surcharges;
4. Declaring that after the finality of this Decision, all amusement taxes withheld
and those which may be collected by Intervenor SM on graded films shown in SM
Cinemas in Cebu City shall be remitted to petitioner Cebu City pursuant to City
Ordinance LXIX, Chapter XI, Section 42.
As to the sum of Php76,836,807.08 remitted by the Intervenor SM to petitioner
City of Cebu, said amount shall be remitted by the City of Cebu to petitioner FDCP
within thirty (30) days from finality of this decision in G.R. Nos. 203754 and 204418
without interests and surcharges.
 
Since Sections 13 and 14 of Republic Act No. 9167 were declared void and
unconstitutional, all remittances of amusement taxes pursuant to said Sections 13
 G.R. No. 131359. May 5, 1999.
MANILA ELECTRIC COMPANY, petitioner, vs. PROVINCE OF LAGUNA and
BENITO R. BALAZO, in his capacity as Provincial Treasurer of Laguna, respondents.
Taxation; Municipal Corporations; Local Governments; Local governments do not have
the inherent power to tax except to the extent that such power might be delegated to them either
by the basic law or by statute.—Prefatorily, it might be well to recall that local governments do
not have the inherent power to tax except to the extent that such power might be delegated to
them either by the basic law or by statute. Presently, under Article X of the 1987 Constitution, a
general delegation of that power has been given in favor of local government units.
Same; Same; Same; Under the regime of the 1935 Constitution local government units
derived their tax powers under a limited statutory authority.—Under the regime of the 1935
Constitution no similar delegation of tax powers was provided, and local government units
instead derived their tax powers under a limited statutory authority. Whereas, then, the
delegation of tax powers granted at that time by statute to local governments was confined and
defined (outside of which the power was deemed withheld), the present constitutional rule
(starting with the 1973 Constitution), however, would broadly confer such tax powers subject
only to specific exceptions that the law might prescribe.
Same; Same; Same; Limitations on the Exercise of Taxing Power by Local Government
Units; Under the now prevailing Constitution, where there is neither a grant nor a prohibition by
statute, the tax power must be deemed to exist although Congress may provide statutory
limitations and guidelines.—Under the now prevailing Constitution, where there is neither a grant
nor a prohibition by statute, the tax power must be deemed to exist although Congress may
provide statutory limitations and guidelines. The basic rationale for the current rule is to
safeguard the viability and self-sufficiency of local government units by directly granting them
general and broad tax powers. Nevertheless, the fundamental law did not intend the delegation
to be absolute and unconditional; the constitutional objective obviously is to ensure that, while
the local government units are being strengthened and made more autonomous, the legislature
must still see to it that (a) the taxpayer will not be over-burdened or saddled with multiple and
unreasonable impositions; (b) each local government unit will have its fair share of available
resources; (c) the resources of the national government will not be unduly disturbed; and (d)
local taxation will be fair, uniform, and just.
Same; Same; Same; Indicative of the legislative intent to carry out the Constitutional
mandate of vesting broad tax powers to local government units, the Local Government Code
has effectively withdrawn tax exemptions or incentives theretofore enjoyed by certain entities.—
Indicative of the legislative intent to carry out the Constitutional mandate of vesting broad tax
powers to local government units, the Local Government Code has effectively withdrawn, under
Section 193 thereof, tax exemptions or incentives theretofore enjoyed by certain entities. This
law states: “Section 193. Withdrawal of Tax Exemption Privileges.—Unless otherwise provided
in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled corporations, except local
water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon the effectivity of this
Code. (Italics supplied for emphasis)
Same; Same; Same; The Supreme Court has viewed its previous rulings as laying stress
more on the legislative intent of the amendatory law—whether the tax exemption privilege is to
be withdrawn or not—rather than on whether the law can withdraw, without violating the
Constitution, the tax exemption or not.—In the recent case of the City Government of San Pablo,
etc., et al. vs. Hon. Bienvenido V. Reyes, et al., the Court has held that the phrase in lieu of all
taxes “have to give way to the peremptory language of the Local Government Code specifically
providing for the withdrawal of such exemptions, privileges,” and that “upon the effectivity of the
Local Government Code all exemptions except only as provided therein can no longer be
invoked by MERALCO to disclaim liability for the local tax.” In fine, the Court has viewed its
previous rulings as laying stress more on the legislative intent of the amendatory law—whether
the tax exemption privilege is to be withdrawn or not—rather than on whether the law can
withdraw, without violating the Constitution, the tax exemption or not.
Same; Same; Same; Non-Impairment Clause; Contractual tax exemptions, in the real
sense of the term and where the non-impairment clause of the Constitution can rightly be
invoked, are those agreed to by the taxing authority in contracts, such as those contained in
government bonds or debentures, lawfully entered into by them under enabling laws in which
the government, acting in its private capacity, sheds its cloak of authority and waives its
governmental immunity, which contractual tax exemptions, however, are not to be confused with
tax exemptions granted under franchises.—While the Court has not too infrequently, referred to
tax exemptions contained in special franchises as being in the nature of contracts and a part of
the inducement for carrying on the franchise, these exemptions, nevertheless, are far from being
strictly contractual in nature. Contractual tax exemptions, in the real sense of the term and
where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to
by the taxing authority in contracts, such as those contained in government bonds or
debentures, lawfully entered into by them under enabling laws in which the government, acting
in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly,
tax exemptions of this kind may not be revoked without impairing the obligations of contracts.
These contractual tax exemptions, however, are not to be confused with tax exemptions granted
under franchises. A franchise partakes the nature of a grant which is beyond the purview of the
non-impairment clause of the Constitution. Indeed, Article XII, Section 11, of the 1987
Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit that
no franchise for the operation of a public utility shall be granted except under the condition that
such privilege shall be subject to amendment, alteration or repeal by Congress as and when the
common good so requires.
VITUG, J.:
On various dates, certain municipalities of the Province of Laguna, including, Biñan,
Sta. Rosa, San Pedro, Luisiana, Calauan and Cabuyao, by virtue of existing laws
then in effect, issued resolutions through their respective municipal councils granting
franchise in favor of petitioner Manila Electric Company (“MERALCO”) for the supply
of electric light, heat and power within their concerned areas. On 19 January 1983,
MERALCO was likewise granted a franchise by the National Electrification
Administration to operate an electric light and power service in the Municipality of
Calamba, Laguna.
 On 12 September 1991, Republic Act No. 7160, otherwise known as the “Local
Government Code of 1991,” was enacted to take effect on 01 January 1992 enjoining
local government units to create their own sources of revenue and to levy taxes, fees
and charges, subject to the limitations expressed therein, consistent with the basic
policy of local autonomy. Pursuant to the provisions of the Code, respondent province
enacted Laguna Provincial Ordinance No. 01-92, effective 01 January 1993,
providing, in part, as follows:
“Sec. 2.09. Franchise Tax.—There is hereby imposed a tax on businesses
enjoying a franchise, at a rate of fifty percent (50%) of one percent (1%) of the
gross annual receipts, which shall include both cash sales and sales on account
realized during the preceding calendar year within this province, including the
territorial limits on any city located in the province.”
On the basis of the above ordinance, respondent Provincial Treasurer sent a demand
letter to MERALCO for the corresponding tax payment. Petitioner MERALCO paid the
tax, which then amounted to P19,520,628.42, under protest. A formal claim for refund
was thereafter sent by MERALCO to the Provincial Treasurer of Laguna claiming that
the franchise tax it had paid and continued to pay to the National Government
pursuant to P.D. 551 already included the franchise tax imposed by the Provincial Tax
Ordinance. MERALCO contended that the imposition of a franchise tax under Section
2.09 of Laguna Provincial Ordinance No. 01-92, insofar as it concerned MERALCO,
contravened the provisions of Section 1 of P.D. 551 which read:
“Any provision of law or local ordinance to the contrary notwithstanding, the
franchise tax payable by all grantees of franchises to generate, distribute and sell
electric current for light, heat and power shall be two percent (2%) of their gross
receipts received from the sale of electric current and from transactions incident
to the generation, distribution and sale of electric current.
“Such franchise tax shall be payable to the Commissioner of Internal
Revenue or his duly authorized representative on or before the twentieth day of
the month following the end of each calendar quarter or month, as may be
provided in the respective franchise or pertinent municipal regulation and shall,
any provision of the Local Tax Code or any other law to the contrary
notwithstanding, be in lieu of all taxes and assessments of whatever nature
imposed by any national or local authority on earnings, receipts, income and
privilege of generation, distribution and sale of electric current.”
On 28 August 1995, the claim for refund of petitioner was denied in a letter signed by
Governor Jose D. Lina. In denying the claim, respondents relied on a more recent
law, i.e., Republic Act No. 7160 or the Local Government Code of 1991, than the old
decree invoked by petitioner.
On 14 February 1996, petitioner MERALCO filed with the Regional Trial Court of
Sta. Cruz, Laguna, a complaint for refund, with a prayer for the issuance of a writ of
preliminary injunction and/or temporary restraining order, against the Province of
Laguna and also Benito R. Balazo in his capacity as the Provincial Treasurer of
Laguna. Aside from the amount of P19,520,628.42 for which petitioner MERALCO
had priorly made a formal request for refund, petitioner thereafter likewise made
additional payments under protest on various dates totaling P27,669,566.91.
The trial court, in its assailed decision of 30 September 1997, dismissed the
complaint and concluded:
“WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING CONSIDERATIONS,
JUDGMENT is hereby rendered in favor of the defendants and against the
plaintiff, by:
“1.Ordering the dismissal of the Complaint; and
“2.Declaring Laguna Provincial Tax Ordinance No. 01-92 as valid, binding,
reasonable and enforceable.”
In the instant petition, MERALCO assails the above ruling and brings up the following
issues; viz.:
“1.Whether the imposition of a franchise tax under Section 2.09 of Laguna
Provincial Ordinance No. 01-92, insofar as petitioner is concerned, is violative of
the non-impairment clause of the Constitution and Section 1 of Presidential
Decree No. 551.
“2.Whether Republic Act No. 7160, otherwise known as the Local Government
Code of 1991, has repealed, amended or modified Presidential Decree No. 551.
“3.Whether the doctrine of exhaustion of administrative remedies is applicable in
this case.”
The petition lacks merit.
Prefatorily, it might be well to recall that local governments do not have
the inherent power to tax except to the extent that such power might be delegated to
them either by the basic law or by statute. Presently, under Article X of the 1987
Constitution, a general delegation of that power has been given in favor of local
government units. Thus:
“Sec. 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.
“x x x     x x x     x x x
“Sec. 5. Each local government unit shall have the power to create its own
sources of revenues and to levy taxes, fees, and charges subject to such
guidelines and limitations as the Congress may provide, consistent with the basic
policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively
to the local governments.”
The 1987 Constitution has a counterpart provision in the 1973 Constitution which did
come out with a similar delegation of revenue making powers to local governments.
 Under the regime of the 1935 Constitution no similar delegation of tax powers
was provided, and local government units instead derived their tax powers under a
limited statutory authority. Whereas, then, the delegation of tax powers granted at that
time by statute to local governments was confined and defined (outside of which the
power was deemed withheld), the present constitutional rule (starting with the 1973
Constitution), however, would broadly confer such tax powers subject only to specific
exceptions that the law might prescribe.
Under the now prevailing Constitution, where there is neither a grant nor a
prohibition by statute, the tax power must be deemed to exist although Congress may
provide statutory limitations and guidelines. The basic rationale for the current rule is
to safeguard the viability and self-sufficiency of local government units by directly
granting them general and broad tax powers. Nevertheless, the fundamental law did
not intend the delegation to be absolute and unconditional; the constitutional objective
obviously is to ensure that, while the local government units are being strengthened
and made more autonomous,6 the legislature must still see to it that (a) the taxpayer
will not be over-burdened or saddled with multiple and unreasonable impositions; (b)
each local government unit will have its fair share of available resources; (c) the
resources of the national government will not be unduly disturbed; and (d) local
taxation will be fair, uniform, and just.
The Local Government Code of 1991 has incorporated and adopted, by and
large, the provisions of the now repealed Local Tax Code, which had been in effect
since 01 July 1973, promulgated into law by Presidential Decree No. 2317 pursuant to
the then provisions of Section 2, Article XI, of the 1973 Constitution. The 1991 Code
explicitly authorizes provincial governments, notwithstanding “any exemption granted
by any law or other special law, x x x (to) impose a tax on businesses enjoying a
franchise. Section 137 thereof provides:
“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
(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.” (Italics supplied for emphasis)
Indicative of the legislative intent to carry out the Constitutional mandate of vesting
broad tax powers to local government units, the Local Government Code has
effectively withdrawn, under Section 193 thereof, tax exemptions or incentives
theretofore enjoyed by certain entities. This law states:
“Section 193. Withdrawal of Tax Exemption Privileges.—Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical, including government-owned
or controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code.”
(Italics supplied for emphasis)
The Code, in addition, contains a general repealing clause in its Section 534; thus:
“Section 534. Repealing Clause.—x x x.
“(f) All general and special laws, acts, city charters, decrees, executive
orders, proclamations and administrative regulations, or part or parts thereof
which are inconsistent with any of the provisions of this Code are hereby
repealed or modified accordingly.” (Italics supplied for emphasis)
To exemplify, in Mactan Cebu International Airport Authority vs. Marcos,9 the Court
upheld the withdrawal of the real estate tax exemption previously enjoyed by Mactan
Cebu International Airport Authority. The Court ratiocinated:
“x x x These policy considerations are consistent with the State policy to ensure
autonomy to local governments and the objective of the LGC that they enjoy
genuine and meaningful local autonomy to enable them to attain their fullest
development as self-reliant communities and make them effective partners in the
attainment of national goals. The power to tax is the most effective instrument to
raise needed revenues to finance and support myriad activities of 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. It may also be relevant to recall that the original reasons for the
withdrawal of tax exemption privileges granted to government-owned and
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, and there was a need for these entities to share in
the requirements of development, fiscal or otherwise, by paying the taxes and
other charges due from them.”
Petitioner in its complaint before the Regional Trial Court cited the ruling of this Court
in Province of Misamis Oriental vs. Cagayan Electric Power and Light Company, Inc.;
thus:
“In an earlier case, the phrase ‘shall be in lieu of all taxes and at any time levied,
established by, or collected by any authority’ found in the franchise of the
Visayan Electric Company was held to exempt the company from payment of the
5% tax on corporate franchise provided in Section 259 of the Internal Revenue
Code (Visayan Electric Co. vs. David, 49 O.G. [No. 4] 1385).
“Similarly, we ruled that the provision: ‘shall be in lieu of all taxes of every
name and nature’ in the franchise of the Manila Railroad (Subsection 12, Section
1, Act No. 1510) exempts the Manila Railroad from payment of internal revenue
tax for its importations of coal and oil under Act No. 2432 and the Amendatory
Acts of the Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).
“The same phrase found in the franchise of the Philippine Railway Co. (Sec.
13, Act No. 1497) justified the exemption of the Philippine Railway Company
from payment of the tax on its corporate franchise under Section 259 of the
Internal Revenue Code, as amended by R.A. No. 39 (Philippine Railway Co. vs.
Collector of Internal Revenue, 91 Phil. 35).
“Those magic words, ‘shall be in lieu of all taxes’ also excused the Cotabato
Light and Ice Plant Company from the payment of the tax imposed by Ordinance
 No. 7 of the City of Cotabato (Cotabato Light and Power Co. vs. City of covered by the non-impairment clause of the Constitution. (Mactan Cebu
Cotabato, 32 SCRA 231). International Airport Authority vs. Marcos, 261 SCRA 667 [1996])
“So was the exemption upheld in favor of the Carcar Electric and Ice Plant
Company when it was required to pay the corporate franchise tax under Section
The constitutional guarantee of non-impairment of contracts is subject to the
259 of the Internal Revenue Code, as amended by R.A. No. 39 (Carcar Electric &
Ice Plant vs. Collector of Internal Revenue, 53 O.G. [No. 4] 1068). This Court
police power of the state and to reasonable legislative regulations promoting public
pointed out that such exemption is part of the inducement for the acceptance of health, morals, safety and welfare; Not all quitclaims are per se invalid or against
the franchise and the rendition of public service by the grantee.” public policy, except (1) where there is clear proof that the waiver was wangled from
an unsuspecting or gullible person, or (2) where the terms of settlement are
In the recent case of the City Government of San Pablo, etc., et al. vs. Hon. unconscionable on their face. (Bogo-Medellin Sugarcane Planters Association, Inc.
Bienvenido V. Reyes, et al., the Court has held that the phrase in lieu of all vs. National Labor Relations Commission, 296 SCRA 108 [1998])
taxes “have to give way to the peremptory language of the Local Government Code
specifically providing for the withdrawal of such exemptions, privileges,” and that
——o0o——
“upon the effectivity of the Local Government Code all exemptions except only as
provided therein can no longer be invoked by MERALCO to disclaim liability for the
local tax.” In fine, the Court has viewed its previous rulings as laying stress more on
the legislative intent of the amendatory law—whether the tax exemption privilege is to
be withdrawn or not—rather than on whether the law can withdraw, without violating
the Constitution, the tax exemption or not.

While the Court has not too infrequently, referred to tax exemptions contained in
special franchises as being in the nature of contracts and a part of the inducement for
carrying on the franchise, these exemptions, nevertheless, are far from being strictly
contractual in nature. Contractual tax exemptions, in the real sense of the term and
where the non-impairment clause of the Constitution can rightly be invoked, are those
agreed to by the taxing authority in contracts, such as those contained in government
bonds or debentures, lawfully entered into by them under enabling laws in which the
government, acting in its private capacity, sheds its cloak of authority and waives its
governmental immunity. Truly, tax exemptions of this kind may not be revoked without
impairing the obligations of contracts. These contractual tax exemptions, however, are
not to be confused with tax exemptions granted under franchises. A franchise
partakes the nature of a grant which is beyond the purview of the non-impairment
clause of the Constitution. Indeed, Article XII, Section 11, of the 1987 Constitution,
like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no
franchise for the operation of a public utility shall be granted except under the
condition that such privilege shall be subject to amendment, alteration or repeal by
Congress as and when the common good so requires.

WHEREFORE, the instant petition is hereby DISMISSED. No costs.

SO ORDERED.

Notes.—Since taxation is the rule and exemption therefrom the exception, the
exemption may be withdrawn at the pleasure of the taxing authority, the only
exception being where the exemption was granted to private parties based on
material consideration of a mutual nature, which then becomes contractual and thus