CASES 1. Manila Memorial Park, Inc. and La Funeria Paz-Sucat, Inc. v Secretary of DSWD (GR No. 175356, December 3, 2013) Under the original law (Republic Act No. 7492) passed on April 23, 1992, the burden was shouldered solely by the government because the entire 20-percent discount was deemed a “tax credit” which the sellers (restaurants, drugstores, funeral parlors, etc.) were allowed to deduct from their taxes . However, at the initiative of the Bureau of Internal Revenue, a new law (RA 9257) was enacted on Feb. 26, 2004, that treated the 20-percent discount merely as a “tax deduction. Which means that the sellers could only deduct the amount of the discount from their “gross income from the same taxable year that the discount is granted.” Thus, the sellers were allowed to deduct the discounted sum from their taxable income, for which they no longer paid the 32-percent corporate income tax. Stripped of legalese, the sellers bore 68 percent of the discount, and the government, 32 percent. Petitioners argue that the discount given to senior citizens (under R.A. 7432 as amended by R.A. 9257) will force establishments to raise their prices in order to compensate for its impact on overall profits or income/gross sales. The general public, or those not belonging to the senior citizen class, are, thus, made to effectively shoulder the subsidy for senior citizens. This, in petitioners’ view, is unfair. Is the petitioners’ contention correct? The tax deduction scheme does not fully reimburse petitioners for the discount privilege accorded to senior citizens. This is because the discount is treated as a deduction, a tax-deductible expense that is subtracted from the gross income and results in a lower taxable income. Being a tax deduction, the discount does not reduce taxes owed on a peso for peso basis but merely offers a fractional reduction in taxes owed. Theoretically, the treatment of the discount as a deduction reduces the net income of the private establishments concerned. The discounts given would have entered the coffers and formed part of the gross sales of the private establishments, were it not for R.A. No. 9257. The permanent reduction in their total revenues

General Principles in Taxation

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1. Manila Memorial Park, Inc. and La Funeria Paz-Sucat, Inc. v Secretary of DSWD (GR No. 175356, December 3, 2013)

Under the original law (Republic Act No. 7492) passed on April 23, 1992, the burden was shouldered solely by the government because the entire 20-percent discount was deemed a “tax credit” which the sellers (restaurants, drugstores, funeral parlors, etc.) were allowed to deduct from their taxes. However, at the initiative of the Bureau of Internal Revenue, a new law (RA 9257) was enacted on Feb. 26, 2004, that treated the 20-percent discount merely as a “tax deduction.” Which means that the sellers could only deduct the amount of the discount from their “gross income from the same taxable year that the discount is granted.” Thus, the sellers were allowed to deduct the discounted sum from their taxable income, for which they no longer paid the 32-percent corporate income tax. Stripped of legalese, the sellers bore 68 percent of the discount, and the government, 32 percent.

Petitioners argue that the discount given to senior citizens (under R.A. 7432 as amended by R.A. 9257) will force establishments to raise their prices in order to compensate for its impact on overall profits or income/gross sales. The general public, or those not belonging to the senior citizen class, are, thus, made to effectively shoulder the subsidy for senior citizens. This, in petitioners’ view, is unfair. Is the petitioners’ contention correct?

The tax deduction scheme does not fully reimburse petitioners for the discount privilege accorded to senior citizens. This is because the discount is treated as a deduction, a tax-deductible expense that is subtracted from the gross income and results in a lower taxable income. Being a tax deduction, the discount does not reduce taxes owed on a peso for peso basis but merely offers a fractional reduction in taxes owed. Theoretically, the treatment of the discount as a deduction reduces the net income of the private establishments concerned. The discounts given would have entered the coffers and formed part of the gross sales of the private establishments, were it not for R.A. No. 9257. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. This constitutes compensable taking for which petitioners would ordinarily become entitled to a just compensation.

A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet the definition of just compensation. Having said that, this raises the question of whether the State, in promoting the health and welfare of a special group of citizens, can impose upon private establishments the burden of partly subsidizing a government program. The Court believes so.

The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to nation-building, and to grant benefits and privileges to them for their improvement and well-being as the State considers them an integral part of our society . The priority given to senior citizens finds its basis in the Constitution as set forth in the law itself. As a form of reimbursement, the law provides that business establishments extending the twenty percent discount to senior citizens may claim the discount as a tax deduction. The law is

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a legitimate exercise of police power which, similar to the power of eminent domain, has general welfare for its object. While the Constitution protects property rights, petitioners must accept the realities of business and the State, in the exercise of police power, can intervene in the operations of a business which may result in an impairment of property rights in the process.

When we ruled that petitioners in Carlos Superdrug Carlos v. DSWD, 553 Phil. 120 (2007) failed to prove that the 20% discount is arbitrary, oppressive or confiscatory. We noted that no evidence, such as a financial report, to establish the impact of the 20% discount on the overall profitability of petitioners was presented in order to show that they would be operating at a loss due to the subject regulation or that the continued implementation of the law would be unconscionably detrimental to the business operations of petitioners. Without sufficient proof that Section 4 (a) of R.A. No. 9257 is arbitrary, and that the continued implementation of the same would be unconscionably detrimental to petitioners, the Court will refrain from quashing a legislative act.

Thus, the 20% discount as well as the tax deduction scheme is a valid exercise of the police power of the State.

2. Bagatsing v Ramirez (74 SCRA 306, December 17, 1976)


The Municipal Board of Manila enacted Ordinance No. 7522, “An Ordinance Regulating the Operation of Public Markets and Prescribing Fees for the Rentals of Stalls and Providing Penalties for Violation thereof and for other Purposes.” Respondent were seeking the declaration of nullity of the Ordinance for the reason that a) the publication requirement under the Revised Charter of the City of Manila has not been complied with, b) the Market Committee was not given any participation in the enactment, c) Sec. 3(e) of the Anti-Graft and Corrupt Practices Act has been violated, and d) the ordinance would violate P.D. 7 prescribing the collection of fees and charges on livestock and animal products.

Aside from the issue on publication, private respondent bewails that the market stall fees imposed in the disputed City Ordinance No. 7522, which regulates public markets and prescribes fees for rentals of stalls, are diverted to the exclusive private use of the Asiatic Integrated Corporation since the collection of said fees had been let by the City of Manila to the said corporation in a "Management and Operating Contract."


(a) What law shall govern the publication of tax ordinance enacted by the Municipal Board of Manila, the Revised City Charter or the Local Tax Code.

(b) Does the delegation of the collection of taxes to a private entity invalidates a tax ordinance and defeats its public purpose?

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(a) The fact that one is a special law and the other a general law creates the presumption that the special law is to be considered an exception to the general. The Revised Charter of Manila speaks of “ordinance” in general whereas the Local Tax Code relates to “ordinances levying or imposing taxes, fees or other charges” in particular. In regard therefore, the Local Tax Code controls.

(b) No. The assumption is of course saddled on erroneous premise. The fees collected do not go direct to the private coffers of the corporation. Ordinance No. 7522 was not made for the corporation but for the purpose of raising revenues for the city. That is the object it serves. The entrusting of the collection of the fees does not destroy the public purpose of the ordinance. So long as the purpose is public, it does not matter whether the agency through which the money is dispensed is public or private. The right to tax depends upon the ultimate use, purpose and object for which the fund is raised. It is not dependent on the nature or character of the person or corporation whose intermediate agency is to be used in applying it. The people may be taxed for a public purpose, although it be under the direction of an individual or private corporation.

3. Tio v Videogram Regulatory Board (151 SCRA 208, June 18, 1987)

Facts: The case is a petition filed by petitioner on behalf of videogram operators adversely affected by Presidential Decree No. 1987, “An Act Creating the Videogram Regulatory Board" with broad powers to regulate and supervise the videogram industry.

A month after the promulgation of the said Presidential Decree, the amended the National Internal Revenue Code provided that:

"SEC. 134. Video Tapes. — There shall be collected on each processed video-tape cassette, ready for playback, regardless of length, an annual tax of five pesos; Provided, That locally manufactured or imported blank video tapes shall be subject to sales tax."

"Section 10. Tax on Sale, Lease or Disposition of Videograms. — Notwithstanding any provision of law to the contrary, the province shall collect a tax of thirty percent (30%) of the purchase price or rental rate, as the case may be, for every sale, lease or disposition of a videogram containing a reproduction of any motion picture or audiovisual program.”

“Fifty percent (50%) of the proceeds of the tax collected shall accrue to the province, and the other fifty percent (50%) shall accrue to the municipality where the tax is collected; PROVIDED, That in Metropolitan Manila, the tax shall be shared equally by the City/Municipality and the Metropolitan Manila Commission.”

The rationale behind the tax provision is to curb the proliferation and unregulated circulation of videograms including, among others, videotapes, discs, cassettes or any technical improvement or variation thereof, have greatly prejudiced the operations of movie houses and theaters. Such unregulated circulation have caused a sharp decline in theatrical attendance by at least forty percent (40%) and a tremendous drop in the collection of

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sales, contractor's specific, amusement and other taxes, thereby resulting in substantial losses estimated at P450 Million annually in government revenues.

Videogram(s) establishments collectively earn around P600 Million per annum from rentals, sales and disposition of videograms, and these earnings have not been subjected to tax, thereby depriving the Government of approximately P180 Million in taxes each year.

The unregulated activities of videogram establishments have also affected the viability of the movie industry.


(1) Whether or not tax imposed by the DECREE is a valid exercise of police power.

(2) Whether or nor the DECREE is constitutional.


Taxation has been made the implement of the state's police power. The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of pornographic video tapes. And while it was also an objective of the DECREE to protect the movie industry, the tax remains a valid imposition.

We find no clear violation of the Constitution which would justify us in pronouncing Presidential Decree No. 1987 as unconstitutional and void. While the underlying objective of the DECREE is to protect the moribund movie industry, there is no question that public welfare is at bottom of its enactment, considering "the unfair competition posed by rampant film piracy; the erosion of the moral fiber of the viewing public brought about by the availability of unclassified and unreviewed video tapes containing pornographic films and films with brutally violent sequences; and losses in government revenues due to the drop in theatrical attendance, not to mention the fact that the activities of video establishments are virtually untaxed since mere payment of Mayor's permit and municipal license fees are required to engage in business."

WHEREFORE, the instant Petition is hereby dismissed. No costs.

On the issue on the equal protection clause…

(1) it rests on substantial distinctions;

(2) it is germane to the purpose of the law;

(3) it applies, all things being equal, to both present and future conditions; and

(4) it applies equally to all those belonging to the same class.

4. Roxas v Court of Tax Appeals (23 SCRA 276, April 26, 1968)

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· Don Pedro Roxas and Dona Carmen Ayala, both Spanish, transmitted to their grandchildren by hereditary succession the following properties:

a. Agricultural lands with a total area of 19,000 hectares in Nasugbu, Batangas

- Tenants who have been tilling the lands expressed their desire to purchase from Roxas y Cia, the parcels which they actually occupied

- The govt, in line with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers, persuaded the Roxas brothers to part with their landholdings

- The brothers agreed to sell 13,500 hec to the govt for P2.079Mn, plus 300K survey and subdivision expenses

- Unfortunately, the govt did not have funds

- A special arrangement was made with the Rehabilitation Finance Corporation to advance to Roxas y Cia the amount of P1.5Mn as loan

- Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands for the same price but by installment, and contracted with the RFC to pay its loan from the proceeds of the yearly amortizations paid by the farmers

- In 1953 and 1955, Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and P29,500.71. 50% of said net gain was reported for income tax purposes as gain on the sale of capital asset held for more than one year pursuant to Sec. 34 of the Tax Code

b. Residential house and lot at Wright St., Malate, Manila

- After the marriage of Antonio and Eduardo, Jose lived in the house where he paid rentals of 8K/year to Roxas y Cia

c. Shares of stocks in different corporations

· To manage the properties, Antonio Roxas, Eduardo Roxas and Jose Roxas, the children, formed a partnership called Roxas y Compania

· On 1958, CIR demanded from Roxas y Cia the payment of real estate dealer's tax for 1952 amtg to P150.00 plus P10.00 compromise penalty for late payment, and P150.00 tax for dealers of securities plus P10.00 compromise penalty for late payment.

- Basis: house rentals received from Jose, pursuant to Art. 194 of the Tax Code stating that an owner of a real estate who derives a yearly rental income therefrom in the amount of P3,000.00 or more is considered a real estate dealer and is liable to pay the corresponding fixed tax

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· The Commissioner further assessed deficiency income taxes against the brothers for 1953 and 1955, resulting from the inclusion as income of Roxas y Cia of the unreported 50% of the net profits derived from the sale of the Nasugbu farm lands to the tenants, and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia and the Roxas brothers

· The brothers protested the assessment but was denied, thus appealing to the CTA

· CTA decision: sustained the assessment except the demand for the payment of the fixed tax on dealer of securities and the disallowance of the deductions for contributions to the Philippine Air Force Chapel and Hijas de Jesus' Retiro de Manresa


Should Roxas y Cia be considered a real estate dealer because it engaged in the business of selling real estate


NO, being an isolated transaction

· Real estate dealer: any person engaged in the business of buying, selling, exchanging, leasing or renting property on his own account as principal and holding himself out as a full or part-time dealer in real estate or as an owner of rental property or properties rented or offered to rent for an aggregate amount of three thousand pesos or more a year:

· Section 194 of the Tax Code, in considering as real estate dealers owners of real estate receiving rentals of at least P3,000.00 a year, does not provide any qualification as to the persons paying the rentals

· The fact that there were hundreds of vendees and them being paid for their respective holdings in installment for a period of ten years, it would nevertheless not make the vendor Roxas y Cia. a real estate dealer during the 10-year amortization period

· the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with, but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless

· It was the duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide them among the farmers at very reasonable terms and prices. But due to the lack of funds, Roxas y Cia. shouldered the Government's burden, went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself

The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly

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· Therefore, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain derived from the sale thereof is capital gain, taxable only to the extent of 50%

As to the deductions

a. P40 tickets to a banquet given in honor of Sergio Osmena and P28 San Miguel beer given as gifts to various persons – representation expenses

· Representation expenses: deductible from gross income as expenditures incurred in carrying on a trade or business

· In this case, the evidence does not show such link between the expenses and the business of Roxas y Cia

b. Contributions to the Pasay police and fire department and other police departments as Christmas funds

· Contributions to the Christmas funds are not deductible for the reason that the Christmas funds were not spent for public purposes but as Christmas gifts to the families of the members of said entities

· Under Section 39(h), a contribution to a government entity is deductible when used exclusively for public purposes

· As to the contribution to the Manila Police trust fund, such is an allowable deduction for said trust fund belongs to the Manila Police, a government entity, intended to be used exclusively for its public functions.

c. Contributions to the Philippines Herald's fund for Manila's neediest families

· The contributions were not made to the Philippines Herald but to a group of civic spirited citizens organized by the Philippines Herald solely for charitable purposes

· There is no question that the members of this group of citizens do not receive profits, for all the funds they raised were for Manila's neediest families. Such a group of citizens may be classified as an association organized exclusively for charitable purposes mentioned in Section 30(h) of the Tax Code

d. Contribution to Our Lady of Fatima chapel at the FEU

· University gives dividends to its stockholders

· Located within the premises of the university, the chapel in question has not been shown to belong to the Catholic Church or any religious organization

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· The contributions belongs to the Far Eastern University, contributions to which are not deductible under Section 30(h) of the Tax Code for the reason that the net income of said university injures to the benefit of its stockholders

No deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas and Jose Roxas. For 1955 they are liable to pay deficiency income tax in the sum of P109.00, P91.00 and P49.00, respectively.

5. Lutz v Araneta (98 Phil 148, December 22, 1955)


Commonwealth Act No. 567, otherwise known as Sugar Adjustment Act was promulgated in 1940 “to stabilize the sugar industry so as to prepare it for the eventuality of the loss of its preferential position in the United States market and the imposition of export taxes.” Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under Sec.3 of the Act, alleging that such tax is unconstitutional and void, being levied for the aid and support of the sugar industry exclusively, which in plaintiff’s opinion is not a public purpose for which a tax may be constitutionally levied. The action has been dismissed by the Court of First Instance.

Issue: Whether or not the tax imposed is constitutional.


Yes. The act is primarily an exercise of the police power. It is shown in the Act that the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry.

It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that “inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation.”

The funds raised under the Act should be exclusively spent in aid of the sugar industry, since it is that very enterprise that is being protected. It may be that other industries are also in need of similar protection; but the legislature is not required by the Constitution to adhere to a policy of “all or none.”

6. Gomez v Palomar (25 SCRA 827, October 29, 1968)


Petitioner questions the constitutionality of the statute, claiming that R.A. 1635 otherwise known as as the Anti-TB Stamp Law, is violative of the equal protection clause of the

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Constitution because it constitutes mail users into a class for the purpose of the tax while leaving untaxed the rest of the population and that even among postal patrons the statute discriminatory grant exemptions.

Moreover, petitioner contends that the statutory classification of taxpayers has no relation to the object sought by the Anti-TB law.


Whether or not the Anti-TB law violates the equal protection clause of the constitution.


No, Supreme Court reiterated that the legislature has the inherent power to select the subjects of taxation and to grant exemptions. The reason for this is that traditionally, classification has been a device for fitting tax programs to local needs and usages in order to achieve an equitable distribution of the tax burden. The legislative classifications must be reasonable is of course undenied in this case.

The classification of mail users is not without any reason. It is based on ability to pay, let alone the enjoyment of a privilege, and on administrative convenience. The classification is likewise based on considerations of administrative convenience. For it is now a settled principle of law that "consideration of practical administrative convenience and cost in the administration of tax laws afford adequate ground for imposing a tax on a well recognized and defined class. Lastly, mail users were already a class by themselves even before the enactment of the statue and all that the legislature did was merely to select their class. Legislation is essentially empiric and Republic Act 1635, as amended, no more than reflects a distinction that exists in fact. As Mr. Justice Frankfurter said, "to recognize differences that exist in fact is living law; to disregard [them] and concentrate on some abstract identities is lifeless logic."

Petitioner's assertions that statutory classification of mail users must bear some reasonable relationship to the end sought to be attained, and that absent such relationship the selection of mail users is constitutionally impermissible does not hold water. This is altogether a different proposition, since explained by the court "that while the principle that there must be a reasonable relationship between classification made by the legislation and its purpose is undoubtedly true in some contexts, it has no application to a measure whose sole purpose is to raise revenue, so long as the classification imposed is based upon some standard capable of reasonable comprehension, be that standard based upon ability to produce revenue or some other legitimate distinction, equal protection of the law has been afforded."

Benefit of PTS is incidental. The main objective is the eradication of tuberculosis which is expanded to be considered as public purpose.

7. Pascual v Secretary of Public Works (110 Phil 331, December 29, 1960)

"A law appropriating the public revenue is invalid if the public advantage or benefit, derived from such expenditure, is merely incidental in the promotion of a particular enterprise."

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Governor Wenceslao Pascual of Rizal instituted this action for declaratory relief, with injunction, upon the ground that RA No. 920, which apropriates funds for public works particularly for the construction and improvement of Pasig feeder road terminals. Some of the feeder roads, however, as alleged and as contained in the tracings attached to the petition, were nothing but projected and planned subdivision roads, not yet constructed within the Antonio Subdivision, belonging to private respondent Zulueta, situated at Pasig, Rizal; and which projected feeder roads do not connect any government property or any important premises to the main highway. The respondents' contention is that there is public purpose because people living in the subdivision will directly be benefitted from the construction of the roads, and the government also gains from the donation of the land supposed to be occupied by the streets, made by its owner to the government.


Should incidental gains by the public be considered "public purpose" for the purpose of justifying an expenditure of the government?


No. It is a general rule that the legislature is without power to appropriate public revenue for anything but a public purpose. It is the essential character of the direct object of the expenditure which must determine its validity as justifying a tax, and not the magnitude of the interest to be affected nor the degree to which the general advantage of the community, and thus the public welfare, may be ultimately benefited by their promotion. Incidental to the public or to the state, which results from the promotion of private interest and the prosperity of private enterprises or business, does not justify their aid by the use public money.

The test of the constitutionality of a statute requiring the use of public funds is whether the statute is designed to promote the public interest, as opposed to the furtherance of the advantage of individuals, although each advantage to individuals might incidentally serve the public.

8. Planters Products, Inc v Fertiphil Corp (GR No 166006. March 14, 2008)


Petitioner PPI and respondent Fertiphil are private corporations incorporated under Philippine laws, both engaged in the importation and distribution of fertilizers, pesticides and agricultural chemicals. Marcos issued Letter of Instruction (LOI) 1465, imposing a capital recovery component of Php10.00 per bag of fertilizer. The levy was to continue until adequate capital was raised to make PPI financially viable. Fertiphil remitted to the Fertilizer and Pesticide Authority (FPA), which was then remitted the depository bank of PPI. Fertiphil paid P6,689,144 to FPA from 1985 to 1986.After the 1986 Edsa Revolution, FPA

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voluntarily stopped the imposition of the P10 levy. Fertiphil demanded from PPI a refund of the amount it remitted, however PPI refused. Fertiphil filed a complaint for collection and damages, questioning the constitutionality of LOI 1465, claiming that it was unjust, unreasonable, oppressive, invalid and an unlawful imposition that amounted to a denial of due process. PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No. 1465 because it does not have a "personal and substantial interest in the case or will sustain direct injury as a result of its enforcement." It asserts that Fertiphil did not suffer any damage from the imposition because "incidence of the levy fell on the ultimate consumer or the farmers themselves, not on the seller fertilizer company.


Whether or not Fertiphil has locus standi to question the constitutionality of LOI No. 1465.

What is the power of taxation?


Fertiphil has locus standi because it suffered direct injury; doctrine of standing is a mere procedural technicality which may be waived. The imposition of the levy was an exercise of the taxation power of the state. While it is true that the power to tax can be used as an implement of police power, the primary purpose of the levy was revenue generation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax.

Police power and the power of taxation are inherent powers of the State. These powers are distinct and have different tests for validity. Police power is the power of the State to enact legislation that may interfere with personal liberty or property in order to promote the general welfare, while the power of taxation is the power to levy taxes to be used for public purpose. The main purpose of police power is the regulation of a behavior or conduct, while taxation is revenue generation. The "lawful subjects" and "lawful means" tests are used to determine the validity of a law enacted under the police power. The power of taxation, on the other hand, is circumscribed by inherent and constitutional limitations.

9. ABAKADA Guro Party List vs. Ermita (G.R. No. 168056 September 1, 2005)


Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for prohibition on May 27, 2005 questioning the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the National Internal Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of goods and properties, Section 5 imposes a 10% VAT on importation of goods, and Section 6 imposes a 10% VAT on sale of services and use or lease of properties. These questioned provisions contain a uniform proviso authorizing the President, upon recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after specified conditions have been satisfied. Petitioners argue that the law is unconstitutional.

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1. Whether or not there is a violation of Article VI, Section 24 of the Constitution.

2. Whether or not there is undue delegation of legislative power in violation of Article VI Sec 28(2) of the Constitution.

3. Whether or not there is a violation of the due process and equal protection under Article III Sec. 1 of the Constitution.


1. Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate was acting within its constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, and excise and franchise taxes.

2. There is no undue delegation of legislative power but only of the discretion as to the execution of a law. This is constitutionally permissible. Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority; in our complex economy that is frequently the only way in which the legislative process can go forward.

3. The power of the State to make reasonable and natural classifications for the purposes of taxation has long been established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or the amounts to be raised, the methods of assessment, valuation and collection, the State’s power is entitled to presumption of validity. As a rule, the judiciary will not interfere with such power absent a clear showing of unreasonableness, discrimination, or arbitrariness.

10. Mactan Cebu International Airport Authority v City of Lapulapu (GR No 181756, June 15, 2015)

Petitioner, Mactan-Cebu International Airport Authority (MCIAA) was created by Congress under Republic Act No. 6958. Upon its creation, petitioner enjoyed exemption from realty taxes imposed by the National Government or any of its political subdivision. However, upon the effectivity of the LGC the Supreme Court rendered a decision that the petitioner is no longer exempt from realty estate taxes.

Respondent City issued to petitioner a Statement of Real Estate Tax assessing the lots comprising the Mactan International Airport which included the airfield, runway, taxi way and the lots on which these are built. Petitioner contends that these lots, and the lots to which they are built, are utilized solely and exclusively for public purposes and are exempt from real property tax. Petitioner based its claim for exemption on DOJ Opinion No. 50.

Respondent issued notices of levy on 18 sets of real properties of petitioners. Petitioner filed a petition for Prohibition, TRO, and a writ of preliminary injunction with RTC Lapulapu which

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sought to enjoin respondent City from issuing the warrant of levy against petitioner’s properties from selling them at public auction for delinquency in realty tax obligations.

Petitioner claimed before the RTC that it had discovered that respondent City did not pass any ordinance authorizing the collection of real property tax, a tax for the special education fund (SEF), and a penalty interest for its nonpayment. Petitioner argued that without the corresponding tax ordinances, respondent City could not impose and collect real property tax, an additional tax for the SEF, and penalty interest from petitioner.

RTC granted the writ of preliminary which was later on lifted upon motion by the respondents.

(fait accompli)

RULING OF THE CA: Court of Appeals held that petitioner’s airport terminal building, airfield, runway, taxiway, and the lots on which they are situated are not exempt from real estate tax reasoning as follows: Under the Local Government Code (LGC for brevity), enacted pursuant to the constitutional mandate of local autonomy, all natural and juridical persons, including government-owned or controlled corporations (GOCCs), instrumentalities and agencies, are no longer exempt from local taxes even if previously granted an exemption. The only exemptions from local taxes are those specifically provided under the Code itself, or those enacted through subsequent legislation.

WHEREFORE, in view of the foregoing, judgment is hereby rendered by us as follows:

We DECLARE the airport terminal building, the airfield, runway, taxiway and the lots on which they are situated NOT EXEMPT from the real estate tax imposed by the respondent City of Lapu-Lapu;

We DECLARE the imposition and collection of the real estate tax, the additional levy for the Special Education Fund and the penalty interest as VALID and LEGAL. However, pursuant to Section 255 of the Local Government Code, respondent city can only collect an interest of 2% per month on the unpaid tax which total interest shall, in no case, exceed thirty-six (36) months;

We DECLARE the sale in public auction of the aforesaid properties and the eventual forfeiture and purchase of the subject property by the respondent City of Lapu-Lapu as NULL and VOID. However, petitioner MCIAA’s property is encumbered only by a limited lien possessed by the respondent City of Lapu-Lapu in accord with Section 257 of the Local Government Code.


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 (has capital stock and is authorized to distribute shares) or non-stock corporation (because it has no members) . 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

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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.

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, since they are outside the commerce of men.

Petitioner’s properties that are actually, solely, directly and exclusively used for public purpose, consisting of the airport terminal building, airfield, runway, taxiway and the lots on which they are situated, EXEMPT from real property tax imposed by the City of Lapu-Lapu. However, those properties that are leased to private taxable persons, those portions are subject to real property tax. The tax shall be paid by the lessee since the lessor, the airport authority, is exempt from tax.

VOID all the real property tax assessments, including the additional tax for the special education fund and the penalty interest, as well as the final notices of real property tax delinquencies, issued by the City of Lapu-Lapu on petitioner’s properties, except the assessment covering the portions that petitioner has leased to private parties.

NULL and VOID the sale in public auction of 27 of petitioner’s properties and the eventual forfeiture and purchase of the said properties by respondent City of Lapu-Lapu. We likewise declare VOID the corresponding Certificates of Sale of Delinquent Property issued to respondent City of Lapu-Lapu.

11. Tolentino v Secretary of Finance (235 SCRA 630, August 25, 1994)


Arturo Tolentino et al are questioning the constitutionality of RA 7716 otherwise known as the Expanded Value Added Tax (EVAT) Law. Tolentino averred that this revenue bill did not exclusively originate from the House of Representatives as required by Section 24, Article 6 of the Constitution. Even though RA 7716 originated as HB 11197 and that it passed the 3 readings in the HoR, the same did not complete the 3 readings in Senate for after the 1st reading it was referred to the Senate Ways & Means Committee thereafter Senate passed its own version known as Senate Bill 1630. Tolentino averred that what Senate could have done is amend HB 11197 by striking out its text and substituting it with the text of SB 1630 in that way “the bill remains a House Bill and the Senate version just becomes the text

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(only the text) of the HB”. (It’s ironic however to note that Tolentino and co-petitioner Raul Roco even signed the said Senate Bill.)


Whether or not the EVAT law is procedurally infirm.


No. By a 9-6 vote, the Supreme Court rejected the challenge, holding that such consolidation was consistent with the power of the Senate to propose or concur with amendments to the version originated in the HoR. What the Constitution simply means, according to the 9 justices, is that the initiative must come from the HoR. Note also that there were several instances before where Senate passed its own version rather than having the HoR version as far as revenue and other such bills are concerned. This practice of amendment by substitution has always been accepted. The proposition of Tolentino concerns a mere matter of form. There is no showing that it would make a significant difference if Senate were to adopt his over what has been done.

12. Tolentino v Secretary of Finance (GR No 115455, October 30, 1995)


The value-added tax (VAT) is levied on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services. RA 7716 seeks to widen the tax base of the existing VAT system and enhance its administration by amending the National Internal Revenue Code. There are various suits challenging the constitutionality of RA 7716 on various grounds.

One contention is that RA 7716 did not originate exclusively in the House of Representatives as required by Art. VI, Sec. 24 of the Constitution, because it is in fact the result of the consolidation of 2 distinct bills, H. No. 11197 and S. No. 1630. There is also a contention that S. No. 1630 did not pass 3 readings as required by the Constitution.


Whether or not RA 7716 violates Art. VI, Secs. 24 and 26(2) of the Constitution


The argument that RA 7716 did not originate exclusively in the House of Representatives as required by Art. VI, Sec. 24 of the Constitution will not bear analysis. To begin with, it is not the law but the revenue bill which is required by the Constitution to originate exclusively in the House of Representatives. To insist that a revenue statute and not only the bill which initiated the legislative process culminating in the enactment of the law must substantially be the same as the House bill would be to deny the Senate’s power not only to concur with amendments but also to propose amendments. Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills authorizing an increase of the public

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debt, private bills and bills of local application must come from the House of Representatives on the theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems. Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation of its receipt of the bill from the House, so long as action by the Senate as a body is withheld pending receipt of the House bill.

The next argument of the petitioners was that S. No. 1630 did not pass 3 readings on separate days as required by the Constitution because the second and third readings were done on the same day. But this was because the President had certified S. No. 1630 as urgent. The presidential certification dispensed with the requirement not only of printing but also that of reading the bill on separate days. That upon the certification of a bill by the President the requirement of 3 readings on separate days and of printing and distribution can be dispensed with is supported by the weight of legislative practice.

13. British American Tobacco v Camacho (GR No 163583, August 20, 2008)

Doctrine: Classification if rational in character is allowable. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation.


• British American Tobacco is the distributor of Lucky Strike Cigarette in the Philippines

• The company is questioning the constitutionality of RA 8240, entitled "An Act Amending Sections 138, 139, 140, and 142 of the NIRC, as Amended and For Other Purposes," which took effect on January 1, 1997

• The law provided a legislative freeze on brands of cigarettes introduced between the period January 2, 1997 to December 31, 2003, such that said cigarettes shall remain in the classification under which the BIR has determined them to belong as of December 31, 2003, until revised by Congress.

• In effect: older brands or existing brands will have, in the long term, lower price and tax rate as inflation and price appreciation were not factored in.

o Their tax rate shall remain until Congress changes it

o Hence, a legislative freeze in the class of cigarettes

• New brands shall be classified according to current net retail price

• New brands are the ones registered after January 1, 1997

• In 2001, Lucky Strike was introduced in the market

• Lucky Strike was classified as premium-priced hence was imposed the Above P10 tax rate

• Lucky Strike protested the P22.77M tax assessment pegged at P25/pack

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• Lucky Strike interposes that the legislative freeze is discriminatory against new brands and poses barrier to entry in the cigarette industry

o Legislative freeze means: existing or "old" brands shall be taxed based on their net retail price as of October 1, 1996.

o Hence, the classification based on pricing is lower for older brands compared to new entrants

• Lucky Strike found it unfair that Philip Morris and Marlboro are classified only as High-priced while it is classified as Premium Priced.


1. The pertinent portions of RA 8240, as amended by RA 9334, discriminate against new cigarette brands and favors old cigarette brands?

2. The classification freeze provision unduly favors older brands over newer brands?


In applying the rational basis test, the Court found the questioned law Constitutional.

• A legislative classification that is reasonable does not offend the constitutional guaranty of the equal protection of the laws.

• The classification is considered valid and reasonable provided that:

(1) it rests on substantial distinctions;

(2) it is germane to the purpose of the law;

(3) it applies, all things being equal, to both present and future conditions; and

(4) it applies equally to all those belonging to the same class.

• classification freeze provision uniformly applies to all newly introduced brands in the market,

• Finding that the assailed law seems to derogate, to a limited extent, one of its avowed objectives (i.e. promoting fair competition among the players in the industry) would suggest that, by Congress’s own standards, the current excise tax system on sin products is imperfect. But the Court cannot declare a statute unconstitutional merely because it can be improved or that it does not tend to achieve all of its stated objectives.

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14. British American Tobacco v Camacho (GR No 163583, April 15, 2009)


To implement RA 8240, the Bureau of Internal Revenue (BIR) issued Revenue Regulations No. 1-97, which classified the existing brands of cigarettes as those duly registered or active brands prior to January 1, 1997. New brands, or those registered after January 1, 1997, shall be initially assessed at their suggested retail price until such time that the appropriate survey to determine their current net retail price is conducted. In June 2001 British American Tobacco introduced into the market Lucky Strike Filter, Lucky Strike Lights and Lucky Strike Menthol Lights cigarettes, with a suggested retail price of P9.90 per pack. Pursuant to Sec. 145 (c) quoted above, the Lucky Strike brands were initially assessed the excise tax at P8.96 per pack. On February 17, 2003, Revenue Regulations No. 9-2003, amended Revenue Regulations No. 1-97 by providing, among others, a periodic review every two years or earlier of the current net retail price of new brands and variants thereof for the purpose of establishing and updating their tax classification. Pursuant thereto, Revenue Memorandum Order No. 6-2003 was issued on March 11, 2003, prescribing the guidelines and procedures in establishing current net retail prices of new brands of cigarettes and alcohol products. Subsequently, Revenue Regulations No. 22-2003 was issued on August 8, 2003 to implement the revised tax classification of certain new brands introduced in the market after January 1, 1997, based on the survey of their current net retail price. The survey revealed that Lucky Strike Filter, Lucky Strike Lights, and Lucky Strike Menthol Lights, are sold at the current net retail price of P22.54, P22.61 and P21.23, per pack, respectively. Respondent Commissioner of the Bureau of Internal Revenue thus recommended the applicable tax rate of P13.44 per pack inasmuch as Lucky Strike's average net retail price is above P10.00 per pack. Thus filed before the Regional Trial Court (RTC) of Makati, Branch 61, a petition for injunction with prayer for the issuance of a temporary restraining order (TRO) and/or writ of preliminary injunction, docketed as Civil Case No. 03-1032. Said petition sought to enjoin the implementation of Section 145 of the NIRC, Revenue Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum Order No. 6-2003 on the ground that they discriminate against new brands of cigarettes, in violation of the equal protection and uniformity provisions of the Constitution. The trial court rendered a decisionupholding the constitutionality of Section 145 of the NIRC, Revenue Regulations Nos. 1-97, 9-2003, 22-2003 and Revenue Memorandum Order No. 6-2003

Issue/ Held:

W/N the classification freeze provision violates the equal protection and uniformity of taxation clauses of the Constitution. - NO


In the instant case, there is no question that the classification freeze provision meets the geographical uniformity requirement because the assailed law applies to all cigarette brands in the Philippines. And, for reasons already adverted to in our August 20, 2008 Decision, the four-fold test has been met in the present case. As held in the assailed Decision, the instant case neither involves a suspect classification nor impinges on a fundamental right. Consequently, the

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rational basis test was properly applied to gauge the constitutionality of the assailed law in the face of an equal protection challenge. It has been held that "in the areas of social and economic policy, a statutory classification that neither proceeds along suspect lines nor infringes constitutional rights must be upheld against equal protection challenge if there is any reasonably conceivable state of facts that could provide a rational basis for the classification." Under the rational basis test, it is sufficient that the legislative classification is rationally related to achieving some legitimate State interest. Petitioner's reliance on Ormoc Sugar Co. is misplaced. In said case, the controverted municipal ordinance specifically named and taxed only the Ormoc Sugar Company, and excluded any subsequently established sugar central from its coverage. Thus, the ordinance was found unconstitutional on equal protection grounds because its terms do not apply to future conditions as well. This is not the case here. The classification freeze provision uniformly applies to all cigarette brands whether existing or to be introduced in the market at some future time. It does not purport to exempt any brand from its operation nor single out a brand for the purpose of imposition of excise taxes

15. Sison vs Ancheta (GR No. L-59431, July 25, 1984)


Section 1 of BP Blg 135 amended the Tax Code, which provides for rates of tax on citizens or residents on (a) taxable compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual partner in the net profits of taxable partnership, (f) adjusted gross income. and petitioner Antero M. Sison, as taxpayer, alleges that "he would be unduly discriminated against by the imposition of higher rates of tax upon his income arising from the exercise of his profession vis-a-vis those which are imposed upon fixed income or salaried individual taxpayers. He characterizes said provision as arbitrary amounting to class legislation, oppressive and capricious in character. It therefore violates both the equal protection and due process clauses of the Constitution as well as of the rule requiring uniformity in taxation.


Whether or not the assailed provision violates the equal protection and due process clauses of the Constitution while also violating the rule that taxes must be uniform and equitable.


The petition is without merit. On due process - it is undoubted that it may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to amount to the confiscation of property from abuse of power. Petitioner alleges arbitrariness but his mere allegation does not suffice and there must be a factual foundation of such unconstitutional taint.

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On equal protection - it suffices that the laws operate equally and uniformly on all persons under similar circumstances, both in the privileges conferred and the liabilities imposed.

On the matter that the rule of taxation shall be uniform and equitable - this requirement is met when the tax operates with the same force and effect in every place where the subject may be found." Also, the rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly unattainable." When the problem of classification became of issue, the Court said: "Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation..." As provided by this Court, where "the differentiation" complained of "conforms to the practical dictates of justice and equity" it "is not discriminatory within the meaning of this clause and is therefore uniform."

16. Lung Center of the Philippines vs. Quezon City (GR No. 144104, June 29, 2004)


Lung Center of the Philippines is a non-stock and non-profit entity established by virtue of PD No. 1823. It is the registered owner of the land on which the Lung Center of the Philippines Hospital is erected. A big space in the ground floor of the hospital is being leased to private parties, for canteen and small store spaces, and to medical or professional practitioners who use the same as their private clinics. Also, a big portion on the right side of the hospital is being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center.

When the City Assessor of Quezon City assessed both its land and hospital building for real property taxes, the Lung Center of the Philippines filed a claim for exemption on its averment that it is a charitable institution with a minimum of 60% of its hospital beds exclusively used for charity patients and that the major thrust of its hospital operation is to serve charity patients. The claim for exemption was denied, prompting a petition for the reversal of the resolution of the City Assessor with the Local Board of Assessment Appeals of Quezon City, which denied the same. On appeal, the Central Board of Assessment Appeals of Quezon City affirmed the local board’s decision, finding that Lung Center of the Philippines is not a charitable institution and that its properties were not actually, directly and exclusively used for charitable purposes. Hence, the present petition for review with averments that the Lung Center of the Philippines is a charitable institution under Section 28(3), Article VI of the Constitution, notwithstanding that it accepts paying patients and rents out portions of the hospital building to private individuals and enterprises.


Is the Lung Center of the Philippines a charitable institution within the context of the Constitution, and therefore, exempt from real property tax?


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The Lung Center of the Philippines is a charitable institution. To determine whether an enterprise is a charitable institution or not, the elements which should be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the methods of administration, the nature of the actual work performed, that character of the services rendered, the indefiniteness of the beneficiaries and the use and occupation of the properties.

However, under the Constitution, in order to be entitled to exemption from real property tax, there must be clear and unequivocal proof that (1) it is a charitable institution and (2)its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. While portions of the hospital are used for treatment of patients and the dispensation of medical services to them, whether paying or non-paying, other portions thereof are being leased to private individuals and enterprises.

Exclusive is defined as possessed and enjoyed to the exclusion of others, debarred from participation or enjoyment. If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation.

17. Commissioner of Internal Revenue v Court of Appeals and YMCA (G.R. No., 124043 October 14, 1998)


Private Respondent YMCA is a non-stock, non-profit institution, which conducts various programs and activities that are beneficial to the public, especially the young people, pursuant to its religious, educational and charitable objectives.

YMCA earned income from leasing out a portion of its premises to small shop owners, like restaurants and canteen operators, and from parking fees collected from non-members. Petitioner issued an assessment to private respondent for deficiency taxes. Private respondent formally protested the assessment. In reply, the CIR denied the claims of YMCA.


Whether or not the income derived from rentals of real property owned by YMCA subject to income tax


Yes. Income of whatever kind and character of non-stock non-profit organizations from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income, shall be subject to the tax imposed under the NIRC.

Rental income derived by a tax-exempt organization from the lease of its properties, real or personal, is not exempt from income taxation, even if such income is exclusively used for the accomplishment of its objectives.

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Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in interpretation in construing tax exemptions (Commissioner of Internal Revenue v. Court of Appeals, 271 SCRA 605, 613, April 18, 1997). Furthermore, a claim of statutory exemption from taxation should be manifest and unmistakable from the language of the law on which it is based. Thus, the claimed exemption “must expressly be granted in a statute stated in a language too clear to be mistaken” (Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue and Court of Appeals, G.R. No. 117359, p. 15 July 23, 1998).

Verba legis non est recedendum. The law does not make a distinction. The rental income is taxable regardless of whence such income is derived and how it is used or disposed of. Where the law does not distinguish, neither should we.

Private respondent also invokes Article XIV, Section 4, par. 3 of the Constitution, claiming that it “is a non-stock, non-profit educational institution whose revenues and assets are used actually, directly and exclusively for educational purposes so it is exempt from taxes on its properties and income.” This is without merit since the exemption provided lies on the payment of property tax, and not on the income tax on the rentals of its property. The bare allegation alone that one is a non-stock, non-profit educational institution is insufficient to justify its exemption from the payment of income tax.

For the YMCA to be granted the exemption it claims under the above provision, it must prove with substantial evidence that (1) it falls under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes. Unfortunately for respondent, the Court noted that not a scintilla of evidence was submitted to prove that it met the said requisites.

The Court appreciates the nobility of respondent’s cause. However, the Court’s power and function are limited merely to applying the law fairly and objectively. It cannot change the law or bend it to suit its sympathies and appreciations. Otherwise, it would be overspilling its role and invading the realm of legislation. The Court regrets that, given its limited constitutional authority, it cannot rule on the wisdom or propriety of legislation. That prerogative belongs to the political departments of government.

18. Commissioner of Internal Revenue v SC Johnson and Sons, Inc (GR No 127105, June 25, 1999)


Respondent is a domestic corporation organized and operating under the Philippine Laws, entered into a licensed agreement with the SC Johnson and Son, USA, a non-resident foreign corporation based in the USA pursuant to which the respondent was granted the right to use the trademark, patents and technology owned by the later including the right to manufacture, package and distribute the products covered by the Agreement and secure assistance in management, marketing and production from SC Johnson and Son USA.

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For the use of trademark or technology, respondent was obliged to pay SC Johnson and Son, USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which respondent paid for the period covering July 1992 to May 1993 in the total amount of P1,603,443.00.

On October 29, 1993, respondent filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that, the antecedent facts attending respondents case fall squarely within the same circumstances under which said MacGeorge and Gillette rulings were issued. Since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the respondent. So, royalties paid by the respondent to SC Johnson and Son, USA is only subject to 10% withholding tax.

The Commissioner did not act on said claim for refund. Private respondent SC Johnson & Son, Inc. then filed a petition for review before the CTA, to claim a refund of the overpaid withholding tax on royalty payments from July 1992 to May 1993.

On May 7, 1996, the CTA rendered its decision in favor of SC Johnson and ordered the CIR to issue a tax credit certificate in the amount of P163,266.00 representing overpaid withholding tax on royalty payments beginning July 1992 to May 1993.

The CIR thus filed a petition for review with the CA which rendered the decision subject of this appeal on November 7, 1996 finding no merit in the petition and affirming in toto the CTA ruling.


Whether or not tax refunds are considered as tax exemptions.


It bears stress that tax refunds are in the nature of tax exemptions. As such they are registered as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law. Private respondent is claiming for a refund of the alleged overpayment of tax on royalties; however there is nothing on record to support a claim that the tax on royalties under the RP-US Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.

19. Deutsche Bank of AG Manila Branch v Commissioner of Internal Revenue (GR No 18850, August 19, 2013)

Taxation; Treaties prevail over administrative issuances. A state that has contracted valid international obligations is bound to make in its legislations those modifications that may be necessary to ensure the fulfillment of the obligations undertaken.” Thus, laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties entitled thereto. The BIR must not impose additional requirements that would negate the availment of

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the reliefs provided for under international agreements. More so, when the RP-Germany Tax Treaty does not provide for any pre-requisite for the availment of the benefits under said agreement.

Application for tax treaty relief merely confirms entitlement to the relief. [T]he period of application for the availment of tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance would impair the value of the tax treaty. At most, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief.

20. Nursery Care Corp., et al v Anthony Acevedo (GR No 180651, July 30, 2014)

The Facts:

Alleging double taxation, the petitioners filed a petition for certiorari with the RTC. In their petition, the petitioners asserted that the City of Manila assessed and collected taxes from them pursuant to Section 15 (Tax on Wholesalers, Distributors, or Dealers) and Section 17 (Tax on Retailers) of the Revenue Code of Manila. At the same time, as a precondition for renewal of their business licenses for the year, 1999, the city also imposed additional taxes upon them pursuant to Section 21 of the Revenue Code of Manila. Section 21 of the Revenue Code stated:

Section 21. Tax on Business Subject to the Excise, Value-Added or Percentage Taxes under the NIRC – On any of the following businesses and articles of commerce subject to the excise, value-added or percentage taxes under the National Internal Revenue Code, hereinafter referred to as NIRC, as amended, a tax of FIFTY PERCENT (50%) OF ONE PERCENT (1%) per annum on the gross sales or receipts of the preceding calendar year is hereby imposed:

A) On person who sells goods and services in the course of trade or businesses; x x x

PROVIDED, that all registered businesses in the City of Manila already paying the aforementioned tax shall be exempted from payment thereof.

Petitioners paid under protest and requested the Office of the City Treasurer for the tax credit or refund of the local business tax paid under protest. The City Treasurer denied the request. They moved for reconsideration, but it was denied by the City Treasurer. Upon stipulation of the facts and the issues, the RTC rendered its decision dismissing the petition for certiorari. It ruled that there was no double taxation since the taxes imposed under Sections 15 and 17 as against that imposed in Section 21 are levied against different tax subjects. Whereas Section 15 is imposed on wholesalers and Section 17 is imposed on retailers, both sections imposed a tax the business of wholesalers, distributors, dealers and retailers. Section 21 on the other hand imposed on Section 21 is not a tax on against the business of the petitioners but a tax against consumers or end-users, while the petitioners merely acted as collection or withholding agents

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of the City. It is actually not taxes on the business but on the customers. Thus there is no double taxation in the strict sense. Therefore, the assailed sections of Ordinance No. 7807 are not constitutional.

On appeal to the CA, the latter dismissed the appeal, holding that an appeal purely raising a question of law is not reviewable by the CA. Being an improper appeal, the case shall not be elevated to the court but outrightly dismissed.

The Issue:

Whether double taxation exists in the case hence entitling petitioner to tax credit or refund of the taxes paid under Section 21.

The Ruling:

The appeal is meritorious.

1.The CA did not err in dismissing the appeal; but the rules should be liberally applied for the sake of justice and equity

The Rules of Court provides three modes of appeal from the decisions and final orders of the RTC, namely: (1) ordinary appeal or appeal by writ of error under Rule 41, where the decisions and final orders were rendered in civil or criminal actions by the RTC in the exercise of original jurisdiction; (2) petition for review under Rule 42, where the decisions and final orders were rendered by the RTC in the exercise of appellate jurisdiction; and (3) petition for review on certiorari to the Supreme Court under Rule 45.1 The first mode of appeal is taken to the CA on questions of fact, or mixed questions of fact and law. The second mode of appeal is brought to the CA on questions of fact, of law, or mixed questions of fact and law.2 The third mode of appeal is elevated to the Supreme Court only on questions of law.3

The distinction between a question of law and a question of fact is well established. On the one hand, a question of law arises when there is doubt as to what the law is on a certain state of facts; on the other, there is a question of fact when the doubt arises as to the truth or falsity of the alleged facts.4 According to Leoncio v. De Vera:5

x x x For a question to be one of law, the same must not involve an examination of the probative value of the evidence presented by the litigants or any of them. The resolution of the issue must rest solely on what the law provides on the given set of circumstances. Once it is clear that the issue invites a review of the evidence presented, the question posed is one of fact. Thus, the test of whether a question is one of law or of fact is not the appellation given to such question by the party raising the same; rather, it is whether the appellate court can determine the issue raised without reviewing or evaluating the evidence, in which case, it is a question of law; otherwise it is a question of fact.6

The nature of the issues to be raised on appeal can be gleaned from the appellant’s notice of appeal filed in the trial court, and from the appellant’s brief submitted to the appellate court.7 In

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this case, the petitioners filed a notice of appeal in which they contended that the April 26, 2002 decision and the order of July 17, 2002 issued by the RTC denying their consolidated motion for reconsideration were contrary to the facts and law obtaining in the consolidated cases.8 In their consolidated memorandum filed in the CA, they essentially assailed the RTC’s ruling that the taxes imposed on and collected from the petitioners under Section 21 of the Revenue Code of Manila constituted double taxation in the strict, narrow or obnoxious sense. Considered together, therefore, the notice of appeal and consolidated memorandum evidently did not raise issues that required the re-evaluation of evidence or the relevance of surrounding circumstances.

The CA rightly concluded that the petitioners thereby raised only a question of law. The dismissal of their appeal was proper, strictly speaking, because Section 2, Rule 50 of the Rules of Court provides that an appeal from the RTC to the CA raising only questions of law shall be dismissed; and that an appeal erroneously taken to the CA shall be outrightly dismissed.9

2. Collection of taxes pursuant to Section 21 of the Revenue Code of Manila constituted double taxation

The foregoing notwithstanding, the Court, given the circumstances obtaining herein and in light of jurisprudence promulgated subsequent to the filing of the petition, deems it fitting and proper to adopt a liberal approach in order to render a just and speedy disposition of the substantive issue at hand. Hence, we resolve, bearing in mind the following pronouncement in Go v. Chaves:10

Our rules of procedure are designed to facilitate the orderly disposition of cases and permit the prompt disposition of unmeritorious cases which clog the court dockets and do little more than waste the courts’ time. These technical and procedural rules, however, are intended to ensure, rather than suppress, substantial justice. A deviation from their rigid enforcement may thus be allowed, as petitioners should be given the fullest opportunity to establish the merits of their case, rather than lose their property on mere technicalities. We held in Ong Lim Sing, Jr. v. FEB Leasing and Finance Corporation that:

Courts have the prerogative to relax procedural rules of even the most mandatory character, mindful of the duty to reconcile both the need to speedily put an end to litigation and the parties’ right to due process. In numerous cases, this Court has allowed liberal construction of the rules when to do so would serve the demands of substantial justice and equity.

The petitioners point out that although Section 21 of the Revenue Code of Manila was not itself unconstitutional or invalid, its enforcement against the petitioners constituted double taxation because the local business taxes under Section 15 and Section 17 of the Revenue Code of Manila were already being paid by them.11 They contend that the proviso in Section 21 exempted all registered businesses in the City of Manila from paying the tax imposed under Section 21;12 and that the exemption was more in accord with Section 143 of the Local

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Government Code,13 the law that vested in the municipal and city governments the power to impose business taxes.

The respondents counter, however, that double taxation did not occur from the imposition and collection of the tax pursuant to Section 21 of the Revenue Code of Manila;14 that the taxes imposed pursuant to Section 21 were in the concept of indirect taxes upon the consumers of the goods and services sold by a business establishment;15 and that the petitioners did not exhaust their administrative remedies by first appealing to the Secretary of Justice to challenge the constitutionality or legality of the tax ordinance.16

In resolving the issue of double taxation involving Section 21 of the Revenue Code of Manila, the Court is mindful of the ruling in City of Manila v. Coca-Cola Bottlers Philippines, Inc.,17 which has been reiterated in Swedish Match Philippines, Inc. v. The Treasurer of the City of Manila.18 In the latter, the Court has held:

x x x [T]he issue of double taxation is not novel, as it has already been settled by this Court in The City of Manila v. Coca-Cola Bottlers Philippines, Inc., in this wise:

Petitioners obstinately ignore the exempting proviso in Section 21 of Tax Ordinance No. 7794, to their own detriment. Said exempting proviso was precisely included in said section so as to avoid double taxation.

Double taxation means taxing the same property twice when it should be taxed only once; that is, “taxing the same person twice by the same jurisdiction for the same thing.” It is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise described as “direct duplicate taxation,” the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and the taxes must be of the same kind or character.

Using the aforementioned test, the Court finds that there is indeed double taxation if respondent is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject matter – the privilege of doing business in the City of Manila; (2) for the same purpose – to make persons conducting business within the City of Manila contribute to city revenues; (3) by the same taxing authority – petitioner City of Manila; (4) within the same taxing jurisdiction – within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods – per calendar year; and (6) of the same kind or character – a local business tax imposed on gross sales or receipts of the business.

The distinction petitioners attempt to make between the taxes under Sections 14 and 21 of Tax Ordinance No. 7794 is specious. The Court revisits Section 143 of the LGC, the very source of the power of municipalities and cities to impose a local business tax, and to which any local business tax imposed by petitioner City of Manila must conform. It is apparent from a perusal thereof that when a municipality or city has already imposed a business tax on manufacturers, etc. of liquors, distilled spirits, wines, and any other article of commerce, pursuant to Section 143(a) of the LGC, said municipality or city may no longer subject the same manufacturers, etc. to a business tax under Section 143(h) of the same Code. Section 143(h) may be imposed only

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on businesses that are subject to excise tax, VAT, or percentage tax under the NIRC, and that are “not otherwise specified in preceding paragraphs.” In the same way, businesses such as respondent’s, already subject to a local business tax under Section 14 of Tax Ordinance No. 7794 [which is based on Section 143(a) of the LGC], can no longer be made liable for local business tax under Section 21 of the same Tax Ordinance [which is based on Section 143(h) of the LGC].

Based on the foregoing reasons, petitioner should not have been subjected to taxes under Section 21 of the Manila Revenue Code for the fourth quarter of 2001, considering that it had already been paying local business tax under Section 14 of the same ordinance.

x x x x

Accordingly, respondent’s assessment under both Sections 14 and 21 had no basis. Petitioner is indeed liable to pay business taxes to the City of Manila; nevertheless, considering that the former has already paid these taxes under Section 14 of the Manila Revenue Code, it is exempt from the same payments under Section 21 of the same code. Hence, payments made under Section 21 must be refunded in favor of petitioner.

It is undisputed that petitioner paid business taxes based on Sections 14 and 21 for the fourth quarter of 2001 in the total amount of P470,932.21. Therefore, it is entitled to a refund of P164,552.04 corresponding to the payment under Section 21 of the Manila Revenue Code.

On the basis of the rulings in Coca-Cola Bottlers Philippines, Inc. and Swedish Match Philippines, Inc., the Court now holds that all the elements of double taxation concurred upon the City of Manila’s assessment on and collection from the petitioners of taxes for the first quarter of 1999 pursuant to Section 21 of the Revenue Code of Manila.

Firstly, because Section 21 of the Revenue Code of Manila imposed the tax on a person who sold goods and services in the course of trade or business based on a certain percentage of his gross sales or receipts in the preceding calendar year, while Section 15 and Section 17 likewise imposed the tax on a person who sold goods and services in the course of trade or business but only identified such person with particularity, namely, the wholesaler, distributor or dealer (Section 15), and the retailer (Section 17), all the taxes – being imposed on the privilege of doing business in the City of Manila in order to make the taxpayers contribute to the city’s revenues – were imposed on the same subject matter and for the same purpose.

Secondly, the taxes were imposed by the same taxing authority (the City of Manila) and within the same jurisdiction in the same taxing period (i.e., per calendar year).

Thirdly, the taxes were all in the nature of local business taxes.

We note that although Coca-Cola Bottlers Philippines, Inc. and Swedish Match Philippines, Inc. involved Section 21 vis-à-vis Section 14 (Tax on Manufacturers, Assemblers and Other Processors)19 of the Revenue Code of Manila, the legal principles enunciated therein should similarly apply because Section 15 (Tax on Wholesalers, Distributors, or Dealers) and Section 17 (Tax on Retailers) of the Revenue Code of Manila imposed the same nature of tax as that

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imposed under Section 14, i.e., local business tax, albeit on a different subject matter or group of taxpayers.

In fine, the imposition of the tax under Section 21 of the Revenue Code of Manila constituted double taxation, and the taxes collected pursuant thereto must be refunded.

WHEREFORE, the Court GRANTS the petition for review on certiorari; REVERSES and SETS ASIDE the resolutions promulgated on June 18, 2007 and November 14, 2007 in CA-G.R. SP No. 72191; and DIRECTS the City of Manila to refund the payments made by the petitioners of the taxes assessed and collected for the first quarter of 1999 pursuant to Section 21 of the Revenue Code of Manila.

No pronouncement on costs of suit.

21. City of Manila v Coca-Cola Bottlers Phils (GR No 181845, August 4, 2009)


On 25 February 2000, the City Mayor of Manila approved Tax Ordinance No. 7988, otherwise known as "Revised Revenue Code of the City of Manila" which increased the tax rates applicable to certain establishments operating within the City of Manila, including that of Coca Cola. Coca Cola then filed a petition before the Department of Justice (DOJ), against the City of Manila and its Sangguniang Panlungsod, invoking Section 1874 of the Local Government Code of 1991 and at the same time questioning the constitutionality of Section 21 of Tax Ordinance No. 7988.

Section 21 of the Old Revenue Code states that all registered businesses in the City of Manila that are already paying the aforementioned tax shall be exempted from payment thereof. This was deleted in the ordinance. In effect, it now imposed additional business tax on Coca Cola which is already subject to other business tax. It is contended that the deletion is a palpable and manifest violation of the LGC 1991. Subsequently, DOJ issued a Resolution declaring Tax Ordinance No. 7988 null and void and without legal effect due to failure to comply with mandatory publication requirements as provided for in the Local Government Code of 1991 which provides:

"Section 188. Publication of Tax Ordinances and Revenue Measures. – Within ten (10) days after their approval, certified true copies of all provincial, city and municipal tax ordinances or revenue measures shall be published in full for three (3) consecutive days in a newspaper of local circulation; Provided, however, that in provinces, cities, and municipalities where there are no newspapers or local circulations the same may be posted in at least two (2) conspicuous and publicly accessible places."

Documentary evidence submitted by Coca Cola indubitably shows that subject tax ordinance was published only once, i.e., on the May 22, 2000 issue of the Philippine Post. Clearly, therefore, City of Manila failed to satisfy the requirement that said ordinance shall be published for three (3) consecutive days as required by law.

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In affirming the nullification of the ordinance as per request of another taxpayer, Singer Sewing Maching, the BLGF Executive Director issued an Indorsement on 20 November 2000 ordering the City Treasurer of Manila to "cease and desist" from enforcing Tax Ordinance No. 7988. However, despite the Resolution of the DOJ and the directive of the BLGF, they still continued to assess Coca Cola business tax for the year 2001. Thus, Coca Cola filed a Complaint with the RTC of Manila praying that the City be enjoined from implementing the tax ordinance.

During the pendency of the said case, the City Mayor of Manila approved an amendment of the same tax ordinance which was again challenged by Coca Cola before the DOJ on the grounds that (1) said tax ordinance amends a tax ordinance previously declared null and void and without legal effect by the DOJ; and (2) said tax ordinance was likewise not published upon its approval.

The amendatory ordinance was likewise declared null and void by the DOJ, it being a mere amendatory ordinance of Ordinance No. 7988. The omnibus motion of petitioners for reconsideration of the resolution of April 23, 2003 which denied the motion for an extension of time to file a petition is DENIED for lack of merit.

Meanwhile, on the basis of the enactment of Tax Ordinance No. 8011, the City of Manila filed a Motion for Reconsideration with the RTC of Manila which the court a quo granted stating that considering that Ordinance No. 7988 (Amended Revenue Code of the City of Manila) has already been amended by Ordinance No. 8011 entitled "An Ordinance Amending Certain Sections of Ordinance No. 7988" approved by the City Mayor of Manila on February 22, 2001, the case must be DISMISSED.


Whether or not Tax Ordinance No. 7988 is null and void and of no legal effect due to the City's failure to satisfy the requirement of publication for three consecutive days, regardless of the amendmentory ordinance issued.


From the foregoing, it is evident that Tax Ordinance No. 7988 is null and void as said ordinance was published only for one day in the 22 May 2000 issue of the Philippine Post in contravention of the unmistakable directive of the Local Government Code of 1991.

Despite the nullity of Tax Ordinance No. 7988, RTC went on to dismiss petitioner’s case on the force of the enactment of Tax Ordinance No. 8011, amending Tax Ordinance No. 7988. Significantly, said amending ordinance was likewise declared null and void by the DOJ Secretary in a Resolution, dated 5 July 2001, elucidating that "[I]nstead of amending Ordinance No. 7988, the City should have enacted another tax measure which strictly complies with the requirements of law, both procedural and substantive. The passage of the assailed ordinance

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did not have the effect of curing the defects of Ordinance No. 7988 which, any way, does not legally exist."

Based on the foregoing, this Court must reverse the Order of the RTC of Manila in dismissing petitioner’s case as there is no basis in law for such dismissal. The amending law, having been declared as null and void, in legal contemplation, therefore, does not exist. Furthermore, even if Tax Ordinance No. 8011 was not declared null and void, the trial court should not have dismissed the case on the reason that said tax ordinance had already amended Tax Ordinance No. 7988. As held by this Court in the case of People v. Lim, if an order or law sought to be amended is invalid, then it does not legally exist, there should be no occasion or need to amend it.

22. Commissioner of Internal Revenue v Estate of Benigno Toda (GR No 147188, September 14, 2004)


Cebiles Insurance Corporation authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not less than P90 million.

Toda purportedly sold the property for P100 million to Rafael A. Altonaga. However, Altonaga in turn, sold the same property on the same day to Royal Match Inc. for P200 million. These two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same notary public.

For the sale of the property to Royal Dutch, Altonaga paid capital gains tax [6%] in the amount of P10 million.


Whether or not the scheme employed by Cibelis Insurance Company constitutes tax evasion.


Yes! The scheme, explained the Court, resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud.

Fraud in its general sense, “is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is taken of another.”

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It is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Altonaga’s sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the consequent income tax liability.

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion.

Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated. The incidence of taxation depends upon the substance of a transaction. The tax consequences arising from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step from the commencement of negotiations to the consummation of the sale is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true nature of the transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.

To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes. The two sale transactions should be treated as a single direct sale by CIC to RMI.

23. Francia v Intermediate Appellate Court (162 SCRA 753, June 28, 1988)


Engracio Francia is the registered owner of a 328 square meter-residential lot and a two-story house built upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. A 125 square meter portion of Francia's property was expropriated by the Republic of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the aforesaid portion.

For 17 years inclusive, Francia failed to pay his real estate taxes. Thus, his property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property.

Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle ship bananas. Upon return, Francia filed a complaint to annul the auction sale.

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The lower court dismissed the complaint. This was affirmed by the Intermediate Appellate Court (IAC).


WHETHER the argument of legal compensation by Francia is valid


NO. There can be no off-setting of taxes against the claims that the taxpayer may have against the government.

Francia’s argument:

The government owed him P4,116.00 when a portion of his land was expropriated on October 15, 1977.

Hence, his tax obligation had been set-off by operation of law as of October 15, 1977.

RATIO: Following Article 1278 of the Civil Code, there is legal compensation when obligations of persons, who in their own right are reciprocally debtors and creditors of each other, are extinguished. The circumstances of the case do not satisfy the requirements provided by Article 1279, to wit:

(1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other;

xxx xxx xxx

(3) that the two debts be due.

xxx xxx xxx

A taxpayer cannot refuse to pay his tax when called upon by the collector because he has a claim against the governmental body not included in the tax levy.

A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.

As stated in the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), internal revenue taxes can not be the subject of set-off or compensation, thus:

"A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or transaction sued on. . . . . (80 C.J.S., 73-74).

24. Domingo v Garlitos (8 SCRA 443, June 29, 1963)

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In a prior case of Domingo vs. Moscoso, the Supreme Court declared as final and executor the order of the lower court for the payment of estate and inheritance taxes, charges and penalties amounting to Php 40,058.55 by the estate of the late Walter Price, which was under the administration of the latter’s wife, Simeona Price. In pursuance to such order, the fiscal then filed a petition for execution; however such petition was denied by the lower court presided by Judge Garlitos. The latter held that the execution is unjustified as the Government is indebted to the estate for Php 262,200, as payment for the cadastral survey of Leyte performed by Price. He ordered instead that the amount of inheritance taxes can be deducted from the Government’s indebtedness to the estate based on the provisions of Articles 1279 and 1290 of the Civil Code; that both the government and the estate are at the same time creditors of the other. Thus, both debts are to be extinguished to the concurrent amount in accordance with law. Hence, this petition for certiorari and mandamus against Judge Garlitos, seeking to annul certain orders of the lower court and for an order in this Court directing the respondent court below to execute the judgment in favor of the Government against the estate of Walter Scott Price for internal revenue taxes.

ISSUE: Whether or not a tax and a debt may be compensated.

RULING: The court having jurisdiction of the Estate had found that the claim of the Estate against the government has been recognized and the amount has already been appropriated by a corresponding law, Rep. Act No. 2700. Both the claim of the Government for inheritance taxes and the claim of the intestate for services rendered have already become overdue and demandable as well as fully liquidated. Compensation takes place by operation of law and both debts are extinguished to the concurrent amount. Therefore the petitioner has no clear right to execute the judgment for taxes against the estate of the deceased Walter Price.

25. Diaz vs. Secretary of Finance (GR No 193007, July 19, 2011)

Facts: Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory relief assailing the validity of the impending imposition of value-added tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections of toll way operators. Court treated the case as one of prohibition.

Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees within the meaning of "sale of services" that are subject to VAT; that a toll fee is a "user's tax," not a sale of services; that to impose VAT on toll fees would amount to a tax on public service; and that, since VAT was never factored into the formula for computing toll fees, its imposition would violate the non-impairment clause of the constitution.

The government avers that the NIRC imposes VAT on all kinds of services of franchise grantees, including toll way operations; that the Court should seek the meaning and intent of the

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law from the words used in the statute; and that the imposition of VAT on toll way operations has been the subject as early as 2003 of several BIR rulings and circulars. The government also argues that petitioners have no right to invoke the non-impairment of contracts clause since they clearly have no personal interest in existing toll operating agreements (TOAs) between the government and tollway operators. At any rate, the non-impairment clause cannot limitthe State's sovereign taxing power which is generally read into contracts.

Issue: May toll fees collected by tollway operators be subjected to VAT (Are tollway operations a franchise and/or a service that is subject to VAT)?

Ruling: When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter's use of the tollway facilities over which the operator enjoys private proprietary rights that its contract and the law recognize. In this sense, the tollway operator is no different from the service providers under Section108 who allow others to use their properties or facilities for a fee. Tollway operators are franchise grantees and they do not belong to exceptions that Section 119 spares from the payment of VAT. The word "franchise" broadly covers government grants of a special right to do an act or series of acts of public concern. Tollway operators are, owing to the nature and object of their business, "franchise grantees." The construction, operation, and maintenance of toll facilities on public improvements are activities of public consequence that necessarily require a special grant of authority from the state. A tax is imposed under the taxing power of the government principally for the purpose of raising revenues to fund public expenditures. Toll fees, on the other hand, are collected by private tollway operators as reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the tollways, as well as to assure them a reasonable margin of income. Although toll fees are charged for the use of public facilities, therefore, they are not government exactions that can be properly treated as a tax. Taxes may be imposed only by the government under its sovereign authority, toll fees may be demanded by either the government or private individuals or entities, as an attribute of ownership.

26. Abaya v Ebdane (515 SCRA 720, GR No. 167919, February 14, 2007)

"A taxpayer need not be a party to the contract to challenge its validity."


The petitioners, Plaridel M. Abaya who claims that he filed the instant petition as a taxpayer, former lawmaker, and a Filipino citizen, and Plaridel C. Garcia likewise claiming that he filed the suit as a taxpayer, former military officer, and a Filipino citizen, mainly seek to nullify a DPWH resolution which recommended the award to private respondent China Road & Bridge Corporation of the contract for the implementation of the civil works known as Contract Package No. I (CP I). They also seek to annul the contract of agreement subsequently entered into by and between the DPWH and private respondent China Road & Bridge Corporation pursuant to the said resolution.


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Has petitioners the legal standing to file the instant case against the government?


Petitioners, as taxpayers, possess locus standi to file the present suit. Briefly stated, locus standi is a right of appearance in a court of justice on a given question. More particularly, it is a party’s personal and substantial interest in a case such that he has sustained or will sustain direct injury as a result of the governmental act being challenged. Locus standi, however, is merely a matter of procedure and it has been recognized that in some cases, suits are not brought by parties who have been personally injured by the operation of a law or any other government act but by concerned citizens, taxpayers or voters who actually sue in the public interest. Consequently, the Court, in a catena of cases, has invariably adopted a liberal stance on locus standi, including those cases involving taxpayers.

The prevailing doctrine in taxpayer’s suits is to allow taxpayers to question contracts entered into by the national government or government- owned or controlled corporations allegedly in contravention of law. A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public money is being deflected to any improper purpose, or that there is a wastage of public funds through the enforcement of an invalid or unconstitutional law. Significantly, a taxpayer need not be a party to the contract to challenge its validity.

27. Gonzales v Marcos (65 SCRA 624, GR No. L-31685 July 31, 1975)

"With the absence of any pecuniary or monetary interest owing from the public, a taxpayer may not have the right to question the legality of an issuance creating a trust for the benefit of the people but purely funded by charity."

FACTS: The petitioner questioned the validity of EO No. 30 creating the Cultural Center of the Philippines, having as its estate the real and personal property vested in it as well as donations received, financial commitments that could thereafter be collected, and gifts that may be forthcoming in the future. It was likewise alleged that the Board of Trustees did accept donations from the private sector and did secure from the Chemical Bank of New York a loan of $5 million guaranteed by the National Investment & Development Corporation as well as $3.5 Million received from President Johnson of the United States in the concept of war damage funds, all intended for the construction of the Cultural Center building estimated to cost P48 million. The petition was denied by the trial court arguing that with not a single centavo raised by taxation, and the absence of any pecuniary or monetary interest of petitioner that could in any wise be prejudiced distinct from those of the general public.

ISSUE: Has a taxpayer the capacity to question the validity of the issuance in this case?

HELD: No. It was therein pointed out as "one more valid reason" why such an outcome was unavoidable that "the funds administered by the President of the Philippines came from donations [and] contributions [not] by taxation." Accordingly, there was that absence of the "requisite pecuniary or monetary interest." The stand of the lower court finds support in judicial precedents. This is not to retreat from the liberal approach followed in Pascual v. Secretary of Public Works, foreshadowed by People v. Vera, where the doctrine of standing was first fully

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discussed. It is only to make clear that petitioner, judged by orthodox legal learning, has not satisfied the elemental requisite for a taxpayer's suit. Moreover, even on the assumption that public funds raised by taxation were involved, it does not necessarily follow that such kind of an action to assail the validity of a legislative or executive act has to be passed upon. This Court, as held in the recent case of Tan v. Macapagal, "is not devoid of discretion as to whether or not it should be entertained." The lower court thus did not err in so viewing the situation.

28. Vinzons-Chato v Fortune Tobacco Corp (GR No 141309, December 23, 2008)


This is a case for damages under Article 32 of the Civil Code filed by Fortune against Liwayway as CIR.

On June 10, 1993, the legislature enacted RA 7654, which provided that locally manufactured cigarettes which are currently classified and taxed at 55% shall be charged an ad valorem tax of “55% provided that the maximum tax shall not be less than Five Pesos per pack.” Prior to effectivity of RA 7654, Liwayway issued a rule, reclassifying “Champion,” “Hope,” and “More” (all manufactured by Fortune) as locally manufactured cigarettes bearing foreign brand subject to the 55% ad valorem tax. Thus, when RA 7654 was passed, these cigarette brands were already covered.

In a case filed against Liwayway with the RTC, Fortune contended that the issuance of the rule violated its constitutional right against deprivation of property without due process of law and the right to equal protection of the laws.

For her part, Liwayway contended in her motion to dismiss that respondent has no cause of action against her because she issued RMC 37-93 in the performance of her official function and within the scope of her authority. She claimed that she acted merely as an agent of the Republic and therefore the latter is the one responsible for her acts. She also contended that the complaint states no cause of action for lack of allegation of malice or bad faith.

The order denying the motion to dismiss was elevated to the CA, who dismissed the case on the ground that under Article 32, liability may arise even if the defendant did not act with malice or bad faith.

Hence this appeal.


Whether or not a public officer may be validly sued in his/her private capacity for acts done in connection with the discharge of the functions of his/her office

Whether or not Article 32, NCC, should be applied instead of Sec. 38, Book I, Administrative Code

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On the first issue, the general rule is that a public officer is not liable for damages which a person may suffer arising from the just performance of his official duties and within the scope of his assigned tasks. An officer who acts within his authority to administer the affairs of the office which he/she heads is not liable for damages that may have been caused to another, as it would virtually be a charge against the Republic, which is not amenable to judgment for monetary claims without its consent. However, a public officer is by law not immune from damages in his/her personal capacity for acts done in bad faith which, being outside the scope of his authority, are no longer protected by the mantle of immunity for official actions.

Specifically, under Sec. 38, Book I, Administrative Code, civil liability may arise where there is bad faith, malice, or gross negligence on the part of a superior public officer. And, under Sec. 39 of the same Book, civil liability may arise where the subordinate public officer’s act is characterized by willfulness or negligence. In Cojuangco, Jr. V. CA, a public officer who directly or indirectly violates the constitutional rights of another, may be validly sued for damages under Article 32 of the Civil Code even if his acts were not so tainted with malice or bad faith.

Thus, the rule in this jurisdiction is that a public officer may be validly sued in his/her private capacity for acts done in the course of the performance of the functions of the office, where said public officer: (1) acted with malice, bad faith, or negligence; or (2) where the public officer violated a constitutional right of the plaintiff.

On the second issue, SC ruled that the decisive provision is Article 32, it being a special law, which prevails over a general law (the Administrative Code).

Article 32 was patterned after the “tort” in American law. A tort is a wrong, a tortious act which has been defined as the commission or omission of an act by one, without right, whereby another receives some injury, directly or indirectly, in person, property or reputation. There are cases in which it has been stated that civil liability in tort is determined by the conduct and not by the mental state of the tortfeasor, and there are circumstances under which the motive of the defendant has been rendered immaterial. The reason sometimes given for the rule is that otherwise, the mental attitude of the alleged wrongdoer, and not the act itself, would determine whether the act was wrongful. Presence of good motive, or rather, the absence of an evil motive, does not render lawful an act which is otherwise an invasion of another’s legal right; that is, liability in tort in not precluded by the fact that defendant acted without evil intent.