Taxation Law: Limitations on the Taxing Power

Taxation Law

Limitations on the Taxing Power

A. Constitutional Limitations on the Power to Tax

The Constitution provides for certain restrictions on the power of taxation, among them:

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due process of law; Art. III, Sec. 1
equal protection of laws; Art. III, Sec. 1
uniformity; Art. VI, Sec. 28(1)
progressive system of taxation;
non-impairment of contracts; Art. III, Sec. 10
non-imprisonment for non-payment of poll tax; Art. III, Sec. 20
appropriation, revenue and tariff bills must originate exclusively in the House of Representatives; Art . VI, Sec. 24
presidential veto; Art. VII, Sec. 27 (2)
presidential power to fix tariff rates; Art. VIII, Sec. 27 (2)
freedom of the press; Art. III, Sec. 4
freedom of religion; Art. III, Sec. 5
exemption from property tax of properties of religious, educational, charitable institutions; Art. VI, Sec. 28(3)
tax exemptions granted to non-stock, non-profit educational institutions; Art. XIV, Sec. 4(3) and Sec. 4(4)
no public money or property used for a particular sect, priest, religious minister, etc.; Art. XI, Sec. 29(2)
grant of tax exemptions; Art. VI, Sec. 28(4)
grant of power of taxation to local government units;
money collected for a special purpose shall be considered a special fund;
exclusive appellate jurisdiction of the Supreme Court over judgments of lower courts involving the legality of taxes, imports, assessment, fees, penalty.

1. Due Process of Law

Art. III, Sec. 1:

No person shall be deprived of life, liberty or property without due process of law ...

Due process mandates that no person shall be deprived of life, liberty, or property without due process.

The implication is that one may be deprived of property as long as the requirement of due process—notice and hearing—have been complied with.

Major Antonio Villegas v. Hiu Chiong Tsai -

Requiring a person before he can be employed to get a permit from the City Mayor of Manila who may withhold or refuse it at will is tantamount to denying him the basic right to engage in a means of livelihood.
While it is true that the Philippines as a state is not obliged to admit aliens within its territory, once an alien is admitted, he cannot be deprived of life without due process of law. This guarantee includes the means of livelihood.
The shelter of protection under the due process and equal protection clause is given to all persons, both aliens and citizens.

Due process is usually violated where the:

tax imposed is for a private purpose as distinguished from a public purpose;
a tax is imposed on property outside the State, i.e., extra-territorial taxation; and
arbitrary or oppressive methods are used in assessing and collecting taxes.

But, a tax does not violate the due process clause, as applied to a particular taxpayer, although the purpose of the tax will result in injury rather than a benefit to such taxpayer.
Due process does not require that the property subject to the tax or the amount to be raised should be determined by judicial inquiry, and a notice and hearing as to the amount of the tax and the manner in which it shall be apportioned are generally not necessary to due process of law.
The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution, as where it can be shown to amount to a confiscation of property.

However, to justify the nullification of a tax law, mere allegation is not enough.
There must be a clear and unequivocal breach of the Constitution; there must be proof of arbitrariness.
The law must be unreasonable and unjust, not merely hypothetical, argumentative, or of doubtful implication.

The following situations are illustrative of violations of the due process clause:

If the tax amounts to a confiscation of property;
If the subject of confiscation is outside the jurisdiction of the taxing authority;
If the law is imposed for a purpose other than a public purpose;
If the law which is applied retroactively imposes unjust and oppressive taxes;
Where the law is in violation of inherent limitations.

The Classification Freeze Provision under Republic Act No. 9334 Does Not Violate Due Process Clause

British American Tobacco v. Camacho, 562 SCRA 511, 517-518:

British American Tobacco (BAT) did not clearly demonstrate the exact extent of such impact.
It has not been shown that the net retail prices of other older brands previously classified under this classification system have already pierced their tax brackets, and, if so, how this has affected the overall competition in the market.

Further, it does not necessarily follow the newer brands cannot compete against older brands because price is not the only factor in the market as there are other factors like consumer preference, brand loyalty, etc.
In other words, even if the newer brands are priced higher due to the differential tax treatment, it does not mean that they cannot compete in the market especially since cigarette contain addictive ingredients so that a consumer may be willing to pay a higher price for a particular brand solely due to its unique formulation.
It may also be noted that in 2003, the BIR surveyed 29 new brand that were introduced in the market after the effectivity of R.A No. 240 on January 1, 1997, thus negating the weeping generalization of BAT that the classification freeze provision has become an insurmountable barrier to the entry of new brands.

Verily, where there is a claim of breach of the due process and equal protection clauses, considering that they are not fixed rules but rather broad standards, there is a need for proof of such persuasive character as would lead to such a conclusion.

Absent such a showing, the presumption of validity must prevail.

It is clear that Revenue Regulation No. 1-97, as amended b Section 2 of Revenue Regulation No. 9-2003, and Revenue Memorandum Order No. 6-2003 unjustifiably emasculate the operation of Section 145 of the NIRC because they authorize the Commissioner of Internal Revenue to update the tax classification of new brands every two years or earlier subject only to its issuance of the appropriate Revenue Regulations, when nowhere in Section 145 i such authority granted to the Bureau.

Unless expressly granted to the BIR, the power to reclassify cigarette brands remains a prerogative of the legislature which cannot be usurped by the former.

MCIT Is Not Violative of Due Process

CREBA v. Romulo, 614 SCRA 605:

CREBA contends that the Minimum Corporate Income Tax (MCIT) under Section 27(E) of RA 8424 is unconstitutional because it is highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of law.

It explains that gross income as defined under said provision only considers the cost of goods sold and other direct expenses; other major expenditures, such as administrative and interest expenses which are equally necessary to produce gross income, were not taken into account.
Thus, pegging the tax base of the MCIT to a corporation’s gross income is tantamount to a confiscation of capital because gross income, unlike net income, is not "realized gain."

The contention holds no water.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The exercise of taxing power derives its source from the very existence of the State whose social contract with its citizens obliges it to promote public interest and the common good.
Taxation is an inherent attribute of sovereignty. It is a power that is purely legislative. Essentially, this means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation.

It has the authority to prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its jurisdiction.
In other words, the legislature wields the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to its constituency who are to pay it. Nevertheless, it is circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation carries a presumption of constitutionality.
The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or property without due process of law."
In Sison, Jr. v. Ancheta, et al., the Supreme Court held that the due process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure when it amounts to a confiscation of property.

But in the same case, the Supreme Court also explained that we will not strike down a revenue measure as unconstitutional (for being violative of the due process clause) on the mere allegation of arbitrariness by the taxpayer.
There must be a factual foundation to such an unconstitutional taint.
This merely adheres to the authoritative doctrine that, where the due process clause is invoked, considering that it is not a fixed rule but rather a broad standard, there is a need for proof of such persuasive character.

CREBA is correct in saying that income is distinct from capital.

Income means all the wealth which flows into the taxpayer other than a mere return on capital.
Capital is a fund or property existing at one distinct point in time while income denotes a flow of wealth during a definite period of time.
Income is gain derived and severed from capital.
For income to be taxable, the following requisites must exist:

there must be gain;
the gain must be realized or received and
the gain must not be excluded by law or treaty from taxation.

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income.

In other words, it is income, not capital, which is subject to income tax.
However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporation’s gross income.
Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the same time reducing the applicable tax rate.

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or constitutional, unless it interferes with interstate commerce or violates the requirement as to uniformity of taxation.

Cases:

Carlos Superdrug Corp. v. DSWD 536 SCRA 130

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private property. Compelling drugstore owners and establishments to grant the discount will result in a loss of profit and capital because

drugstores impose a mark-up of only 5% to 10% on branded medicines; and
the law failed to provide a scheme whereby drugstores will be justly compensated for the discount.

Republic Act No. 9257 is constitutional.
The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general welfare for its object.

Police power is not capable of an exact definition, but has been purposely veiled in general terms to underscore its comprehensiveness to meet all exigencies and provide enough room for an efficient and flexible response to conditions and circumstances, thus assuring the greatest benefits.
Accordingly, it has been described as "the most essential, insistent and the least limitable of powers, extending as it does to all the great public needs."
It is "the power vested in the legislature by the constitution to make, ordain, and establish all manner of wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not repugnant to the constitution, as they shall judge to be for the good and welfare of the commonwealth, and of the subjects of the same."

For this reason, when the conditions so demand as determined by the legislature, property rights must bow to the primacy of police power because property rights, though sheltered by due process, must yield to general welfare.
Police power as an attribute to promote the common good would be diluted considerably if on the mere plea of petitioners that they will suffer loss of earnings and capital, the questioned provision is invalidated.

Moreover, in the absence of evidence demonstrating the alleged confiscatory effect of the provision in question, there is no basis for its nullification in view of the presumption of validity which every law has in its favor.

Given these, it is incorrect for petitioners to insist that the grant of the senior citizen discount is unduly oppressive to their business, because petitioners have not taken time to calculate correctly and come up with a financial report, so that they have not been able to show properly whether or not the tax deduction scheme really works greatly to their disadvantage.

Jose Reyes v. Pedro Almanzor, 196 SCRA 322

Petitioner questions the method of tax assessment, citing violation of the due process clause.
The Court ruled thus:

The due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution.
An obvious example is where it can be shown to amount to confiscation of property. That would be a clear abuse of power.

The taxing power has the authority to make a reasonable and natural classification for purposes of taxation but the government's act must not be prompted by a spirit of hostility, or at the very least discrimination that finds no support in reason.

It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different both in the privileges conferred and the liabilities imposed.

CIR v. Hon. CA, Hon. CTA and Fortune Tobacco Corporation, 261 SCRA 236

Prior to the effectivity of RA 7654, cigarette brands Hope Luxury, Premium More and Champion were considered local brands subjected to an ad valorem tax at the rate of 20-45%.
However, on 1 July 1993 or two (2) days before RA 7654 took effect, petitioner Commissioner of Internal Revenue issued RMC 37-93 reclassifying "Hope, More and Champion being manufactured by Fortune Tobacco Corporation . . . . (as) locally manufactured cigarettes bearing a foreign brand subject to the 55% ad valorem tax on cigarettes."
A copy of RMC 37-9 , was sent to Fortune Tobacco via telefax, but it was addressed to no one in particular.
On 15 July 1993 respondent corporation received by ordinary mail a certified machine copy of RMC 37-93.
Respondent corporation sought a review, reconsideration and recall of RMC 37-93 but was forthwith denied by the Appellate Division of the Bureau of Internal Revenue.
As a consequence, on 30 July 1993 private respondent was assessed an ad valorem tax deficiency. Respondent corporation went to the Court of Tax Appeals (CTA) on a petition for review.
The CTA held that petitioner Commissioner of Internal Revenue failed to observe due process of law in issuing RMC 37-93 as there was no prior notice and hearing.
The Supreme Court upheld the CTA, holding that when an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance for it gives no real consequence more than what the law itself has already prescribed.

When, upon the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially adds to or increases the burden of those governed, as in the case at bar, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law.

2. Equal Protection of the Law

Art III, Sec. 1:

" ... nor shall any person be denied the equal protection of the law."

Our Constitution requires uniformity, not equality, in taxation.

Equality of taxation is accomplished when the burden of the tax falls equally and impartially upon all persons and property subject to it, so that no higher rate or greater levy in proportion to value is imposed upon one person or species or property than upon others similarly situated or of like character.
Whereas, uniformity requires that all taxable property subjected to the tax, shall be alike and this requirement is violated if particular kinds, species, or items of property are selected to bear the whole burden of the tax, while others, which should be equally subject to it, are left untaxed.

Further, it is implied that each tax shall be uniform throughout the taxing district involved.

A state tax must be apportioned uniformly throughout a state, a country tax throughout the country, and a city tax throughout the city.

Equal Protection of the Law Clause Applied in Taxation

"Equal protection" does not require equal rates of taxation on different classes of property, nor prohibit unequal taxation so long as the inequality is not based upon arbitrary classification.
Legislation which, in carrying out a public purpose, is limited in its application, does not violate the provisions if, within the sphere of its operation, it affects alike all persons similarly situated. It does not prohibit special legislation or legislation that is limited either in the objects to which it is directed, or by the territory within which it is to operate.
It merely requires that all persons subjected to such legislation shall be treated alike, under like circumstances and conditions, both in the privileges conferred and in the liabilities imposed.

Absolute Equality Impossible

Inequality of taxes means substantial differences.
Practical equality is constitutional equality.

There is no imperative requirement that taxation shall be absolutely equal only that tax laws be framed with a view to apportioning the burdens of government so that each person enjoying government protection shall be required to contribute so much as is his reasonable proportion, and no more.

"Perfect equality in taxation," it has been said, "will remain an unattainable goal as long as laws and government and man are imperfect."
On the other hand, while perfect equality is impossible, yet there are cases where there are such glaring inequality, either intentional or otherwise, as to clearly violate the uniformity and equality rule.
Let it reach all of a class, either of persons or things, it matters not whether those included in it be one or many, or whether they reside in any particular locality or are scattered all over the state.
But when for any reason , it becomes discriminative between individuals of a class taxed, and selects some for an exceptional burden, the tax is deprived of the necessary element of legal equality, and becomes inadmissible.

Universal Application Is Not Required

Abakada Guro Party List v. Ermita, 469 SCRA 1 :

The equal protection clause does not require the universal application of the laws on all persons or things without distinction.
This might in fact sometimes result in unequal protection.
What the clause requires is equality among equals as determined according to a valid classification.
By classification is meant the grouping of persons or things similar to each other in certain particulars and different from all others in these same particulars.

Classification When Proper

The power to select the subjects of taxation and apportion the public burden among them includes the power to make classifications.
The inequalities which result from the singling out of one particular class for taxation or exemption infringe no constitutional limitation.
However, for classification to be valid, the following requisites must concur: SAGA

it must be based on substantial distinction;
it must apply both to present and future conditions;
it must be germane to the purposes of the law;
it must apply equally to all members of the same class.

The principle of equality admits of classification or distinction as long as they are based upon real and substantial differences between the persons, property, or privileges and those not taxed must bear some reasonable relation to the object of purpose of legislation, or to some permissible governmental policy or legitimate end of government.

Classification Freeze Provision under Republic Act No. 9334 Does Not Violate the Equal Protection and Uniformity of Taxation Clauses under the Constitution

British American Tobacco v. Camacho, 562 SCRA 511

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:

it rests on substantial distinctions;
it is germane to the purpose of the law;
it applies, all things being equal, to both present and future conditions; and
it applies equally to all those belonging to the same class.

The first, third and fourth requisites are satisfied.

The classification freeze provision was inserted in the law for reasons of practicality and expediency.
That is, since a new brand was not yet in existence at the time of the passage of RA 8240, then Congress needed a uniform mechanism to fix the tax bracket of a new brand.
The current net retail price, similar to what was used to classify the brands under Annex "D" as of October 1, 1996, was thus the logical and practical choice.
Further, with the amendments introduced by RA 9334, the freezing of the tax classifications now expressly applies not just to Annex "D" brands but to newer brands introduced after the effectivity of RA 8240 on January 1, 1997 and any new brand that will be introduced in the future.

The classification freeze provision uniformly applies to all newly introduced brands in the market, whether imported or locally manufactured.

It does not purport to single out imported cigarettes in order to unduly favor locally produced ones.
Further, BAT’s evidence was anchored on the alleged unequal tax treatment between old and new brands which involves a different frame of reference vis-à-vis local and imported products.
BAT has, therefore, failed to clearly prove its case, both factually and legally, within the parameters of the GATT.

At any rate, even assuming arguendo that BAT was able to prove that the classification freeze provision violates the GATT, the outcome would still be the same.

The GATT is a treaty duly ratified by the Philippine Senate and under Article VII, Section 21 of the Constitution, it merely acquired the status of a statute.
Applying the basic principles of statutory construction in case of irreconcilable conflict between statutes, RA 8240, as amended by RA 9334, would prevail over the GATT either as a later enactment by Congress or as a special law dealing with the taxation of sin products.

Cases:

Ferrer, Jr. v. Bautista, 760 SCRA 652

For the purpose of garbage collection, there is, in fact, no substantial distinction between an occupant of a lot, on one hand, and an occupant of a unit in a condominium, socialized housing project or apartment, on the other hand.
Most likely, garbage output produced by these types of occupants is uniform and does not vary to a large degree; thus, a similar schedule of fee is both just and equitable.

Benjamin Gomez v. Enrico Palomar, et. at, 25 SCRA 827

Petitioner questions the constitutionality of R.A. 1635 mandating the bearing of Anti-TB stamps on envelopes, as well as its implementing administrative orders, contending that it violates the equal protection clause and the rule on uniformity and equality in taxation.

It is claimed that the statute is violative of the equal protection clause of the Constitution. More specifically the claim is made that 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 discriminatorily grants exemption.

Held: RA. 1635 is valid.

It is settled that the legislature has the inherent power to select the subjects of taxation and to grant exemptions.
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.

In the allocation of the tax burden, Congress must have concluded that the contribution to the anti-TB fund can be assured by those whose who can afford the use of the mails.

Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat rate rather than a graduated tax.

A tax need not be measured by the weight of the mail or the extent of the service rendered.
We have said that considerations of administrative convenience and cost afford an adequate ground for classification.
The same considerations may induce the legislature to impose a flat tax which in effect is a charge for the transaction, operating equally on all persons within the class regardless of the amount involved

Eastern Theatrical Co. v. Victor Alfonso, 83 PHIL 852

Twelve corporation engaged in motion picture business impugn the validity of Ordinance No. 2958 of the City of Manila, said ordinance reading as follows:

An Ordinance Imposing a Fee on the Price of Every Admission Ticket Sold by Cincematographers, etc.
Appellants point out to the fact that the ordinance in question does not tax "many more kinds of amusements" than those therein specified, such as "race tracks, cockpits, cabarets, concert halls, circuses, and other places of amusement."

HELD:

The argument has absolutely no merit.
The fact that some places of amusement are not taxed while others, such as cinematographs, theaters, vaudeville companies, theatrical shows, and boxing exhibitions and other kinds of amusements or places of amusement are taxed, is no argument at all against the equality and uniformity of the tax imposition.
Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate.
The taxing power has the authority to make reasonable and natural classifications for purposes of taxation; and the appellants cannot point out what places of amusement taxed by the ordinance do not constitute a class by themselves and which can be confused with those not included in the ordinance.

Manila Race Horse Trainers Association, Inc. v. De la Fuente, 88 PHIL 60

Manila Race Horses Trainers Association, Inc., a non-stock corporation duly organized and existing under and by virtue of the laws of the Philippines, who allege that they are owners of boarding stables for race horses and that their rights as such are affected by Ordinance No. 3065 of the City of Manila.
It is maintained that the ordinance under consideration is a tax on race horses as distinct from boarding stables.
Held:

From the viewpoint of economics and public policy the taxing of boarding stables for race horses to the exclusion of boarding stables for horses dedicated to other purposes is not indefensible.
The owners of boarding stables for race horses and, for that matter, the race horse owners themselves, who in the scheme of shifting may carry the taxation burden, are a class by themselves and appropriately taxed where owners of other kinds of horses are taxed less or not at all, considering that equity in taxation is generally conceived in terms of ability to pay in relation to the benefits received by the taxpayer and by the public from the business or property taxed.
Race horses are devoted to gambling if legalized, their owners derive fat income and the public hardly any profit from horse racing, and this business demands relatively heavy police supervision.
Taking everything into account, the differentiation against which the plaintiffs complain conforms to the practical dictates of justice and equity and is not discriminatory within the meaning of the Constitution.

Silvestre Punsalan v. Municipal Board of the City of Manila, 95 PHIL 46

Municipal Occupation Tax
Plaintiffs' complaint is that while the law has authorized the City of Manila to impose the said tax, it has withheld that authority from other chartered cities, not to mention municipalities.
We do not think it is for the courts to judge what particular cities or municipalities should be empowered to impose occupation taxes in addition to those imposed by the National Government.
That matter is peculiarly within the domain of the political departments and the courts would do well not to encroach upon it.
Moreover, as the seat of the National Government and with a population and volume of trade many times that of any other Philippine city or municipality, Manila, no doubt, offers a more lucrative field for the practice of the professions, so that it is but fair that the professionals in Manila be made to pay a higher occupation tax than their brethren in the provinces.

City of Baguio v. Fortunato of Leon, 25 SCRA 938

The City of Baguio imposed a license fee on any person, firm, entity or corporation doing business in the City of Baguio is assailed by defendant-appellant Fortunato de Leon.
Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate.
All that is needed is that the statute or ordinance in question "applies equally to all persons, firms and corporations placed in similar situation."
Inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation.

Antero Sison v. Ancheta, 130 SCRA 654

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.
There is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the same time reducing the applicable tax rate. Taxpayers may be classified into different categories. To repeat, it is enough that the classification must rest upon substantial distinctions that make real differences.
In the case of the gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of classification is the susceptibility of the income to the application of generalized rules removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them.

Taxpayers who are recipients of compensation income are set apart as a class.

As there is practically no overhead expense, these taxpayers are not entitled to make deductions for income tax purposes because they are in the same situation more or less.

On the other hand, in the case of professionals in the practice of their calling and businessmen, there is no uniformity in the costs or expenses necessary to produce their income.

It would not be just then to disregard the disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the basis of gross income.
There is ample justification then for the Batasang Pambansa to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income.

Juan Luna Subdivision, Inc. v. Sarmiento, et al. al., 91 PHIL 371

The plaintiff issued to the City Treasurer of Manila, and the City Treasurer accepted checks No. 628334 for P2,210.52 drawn upon the Philippine Trust Company with which it had a credit balance of P4,940.17 on its account.
The remission of taxes due and payable to the exclusion of taxes already collected does not constitute unfair discrimination.

Each set of taxes is a class by itself, and the law would be open to attack as class legislation only if all taxpayers belonging to one class were not treated alike.
They are not.

As to the justice of the measure, the confinement of the condonation to deliquent taxes was not without good reason.

The property owners who had paid their taxes before liberation and those who had not were not on the same footing on the need of material relief.
It is true that the ravages and devastations wrought by was operations had rendered the bulk of the people destitute or impoverished and that it was this situation which prompted the passage of Commonwealth Act No. 703.
But it is also true that the taxpayers who had been in arrears in their obligation would have to satisfy their liability with genuine currency, while the taxes paid during the occupation had been satisfied in Japanese military notes, many of them at a time when those notes were well-nigh worthless.
To refund those taxes with the restored currency, even if the Government could afford to do so, would be unduly to enrich many of the payers at a greater expense to the people at large. What is more, the process of refunding would entail a tremendous amount of work and difficulties, what with the destruction of tax records and the great number of claimants who would take advantage of such grace.

It is said that the plaintiff's check was in the nature of deposit, held trust by the City Treasurer, and that for this reason, plaintiff's taxes are to be regarded as still due and payable.

This argument is well taken but only to the extent of P1,868.92. The amount of P341.60 as early as February 20, 1942, had been applied to the second half of plaintiff's 1941 tax and become part of the general funds of the city treasury.
From that date that tax was legally and actually paid and settled.

Association of Custom Brokers, Inc. v. Mun. Board, City of Manila, et. al. 93 PHIL 107

The Association of Customs Brokers, Inc., which is composed of all brokers and public service operators of motor vehicles in the City of Manila challenge the validity of Ordinance No. 3379 which confers upon the municipal board the power to tax motor and other vehicles operating within the City of Manila on the ground that said ordinance offends against the rule of uniformity of taxation.
The ordinance infringes the rule of the uniformity of taxation ordained by our Constitution.

Note that the ordinance exacts the tax upon all motor vehicles operating within the City of Manila. It does not distinguish between a motor vehicle for hire and one which is purely for private use.
Neither does it distinguish between a motor vehicle registered in the City of Manila and one registered in another place but occasionally comes to Manila and uses its streets and public highways.
The distinction is important if we note that the ordinance intends to burden with the tax only those registered in the City of Manila as may be inferred from the word "operating" used therein.
There is no pretense that the ordinance equally applies to motor vehicles who come to Manila for a temporary stay or for short errands, and it cannot be denied that they contribute in no small degree to the deterioration of the streets and public highway.
The fact that they are benefited by their use they should also be made to share the corresponding burden. And yet such is not the case.
This is an inequality which we find in the ordinance, and which renders it offensive to the Constitution.

Ormoc Sugar Company, Inc. v. The Treasurer of Ormoc City, et. al. 22 SCRA 603

Ormoc Sugar Company, Inc. alleged that Ordinance No. 4, Series of 1964, imposing "on any and all productions of centrifugal sugar milled at the Ormoc Sugar Company, Inc., in Ormoc City, a municipal tax equivalent to one per centum (1%) per export sale to the United States of America and other foreign countries" is unconstitutional for being violative of the equal protection clause and the rule of uniformity of taxation.
It is unconstitutional.
A perusal of the requisites instantly shows that the questioned ordinance does not meet reasonable classification of the subject of legislation, for it taxes only centrifugal sugar produced and exported by the Ormoc Sugar Company, Inc. and none other.
At the time of the taxing ordinance's enactment, Ormoc Sugar Company, Inc., it is true, was the only sugar central in the city of Ormoc.
Still, the classification, to be reasonable, should be in terms applicable to future conditions as well.
The taxing ordinance should not be singular and exclusive as to exclude any subsequently established sugar central, of the same class as plaintiff, for the coverage of the tax.
As it is now, even if later a similar company is set up, it cannot be subject to the tax because the ordinance expressly points only to Ormoc City Sugar Company, Inc. as the entity to be levied upon.

Jose Reyes v. Pedro Almanzor, 196 SCRA 322

Petitioners questions the method used in tax assessment of the properties.
Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of taxation must not only be uniform, but must also be equitable and progressive.
Uniformity has been defined as that principle by which all taxable articles or kinds of property of the same class shall be taxed at the same rate.

Taxation is said to beequitable when its burden falls on those better able to pay.
Taxation is progressive when its rate goes up depending on the resources of the person affected.

Mayor Antonio J. Villegas v. Hiu Chiong Tsai Pao Ho and Judge Arca 86 SCRA

Section 1 of Ordinance No. 6537 prohibits aliens from being employed or to engage or participate in any position or occupation or business enumerated therein, whether permanent, temporary or casual, without first securing an employment permit from the Mayor of Manila and paying the permit fee of P50.00.
The P50.00 fee is unreasonable not only because it is excessive but because it fails to consider valid substantial differences in situation among individual aliens who are required to pay it.
Although the equal protection clause of the Constitution does not forbid classification, it is imperative that the classification should be based on real and substantial differences having a reasonable relation to the subject of the particular legislation.
The same amount of P50.00 is being collected from every employed alien whether he is casual or permanent, part time or full time or whether he is a lowly employee or a highly paid executive.

Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary, et. al., 238 SCRA 63

Petitioner Misamis Oriental Association of Coco Traders, Inc., engaged in the buying and selling of copra in Misamis Oriental, alleges that prior to the issuance of Revenue Memorandum Circular 47-91 on June 11, 1991, which classifiedcopra as an agricultural non-food product and declared it "exempt from VAT only if the sale is made by the primary producer pursuant to Section 103(a) of the Tax Code, as amended."
Petitioner claims that RMC No. 47-91 is discriminatory and violative of the equal protection clause of the Constitution because while coconut farmers and copra producers are exempt, traders and dealers are not, although both sell copra in its original state.

The argument has no merit.
There is a material or substantial difference between coconut farmers and copra producers, on the one hand, and copra traders and dealers, on the other.
The former produce and sell copra, the latter merely sell copra.
The Constitution does not forbid the differential treatment of persons so long as there is a reasonable basis for classifying them differently.

Tolentino, et. al v. Secretary of Finance, 235 SCRA 630

PPI contends is that by withdrawing the exemption previously granted to print media transactions involving printing, publication, importation or sale of newspapers, Republic Act No. 7716 has singled out the press for discriminatory treatment and that within the class of mass media the law discriminates against print media by giving broadcast media favored treatment.

We have carefully examined this argument, but we are unable to find a differential treatment of the press by the law, much less any censorial motivation for its enactment.

If the press is now required to pay a value-added tax on its transactions, it is not because it is being singled out, much less targeted, for special treatment but only because of the removal of the exemption previously granted to it by law.
The withdrawal of exemption is all that is involved in these cases.
Other transactions, likewise previously granted exemption, have been delisted as part of the scheme to expand the base and the scope of the VAT system.
The law would perhaps be open to the charge of discriminatory treatment if the only privilege withdrawn had been that granted to the press. But that is not the case.
The situation in the case at bar is indeed a far cry from those cited by the PPI in support of its claim that Republic Act No. 7716 subjects the press to discriminatory taxation.

In Grosjean v. American Press Co., the law imposed a license tax equivalent to 2% of the gross receipts derived from advertisements only on newspapers which had a circulation of more than 20,000 copies per week. Because the tax was not based on the volume of advertisement alone but was measured by the extent of its circulation as well, the law applied only to the thirteen large newspapers in Louisiana, leaving untaxed four papers with circulation of only slightly less than 20,000 copies a week and 120 weekly newspapers which were in serious competition with the thirteen newspapers in question. It was well known that the thirteen newspapers had been critical of Senator Huey Long, and the Long-dominated legislature of Louisiana respondent by taxing what Long described as the "lying newspapers" by imposing on them "a tax on lying." The effect of the tax was to curtail both their revenue and their circulation. As the U.S. Supreme Court noted, the tax was "a deliberate and calculated device in the guise of a tax to limit the circulation of information to which the public is entitled in virtue of the constitutional guaranties." The case is a classic illustration of the warning that the power to tax is the power to destroy.
In the other case invoked by the PPI, the press was also found to have been singled out because everything was exempt from the "use tax" on ink and paper, except the press. Minnesota imposed a tax on the sales of goods in that state. To protect the sales tax, it enacted a complementary tax on the privilege of "using, storing or consuming in that state tangible personal property" by eliminating the residents' incentive to get goods from outside states where the sales tax might be lower. The Minnesota Star Tribune was exempted from both taxes from 1967 to 1971. In 1971, however, the state legislature amended the tax scheme by imposing the "use tax" on the cost of paper and ink used for publication. The law was held to have singled out the press because (1) there was no reason for imposing the "use tax" since the press was exempt from the sales tax and (2) the "use tax" was laid on an "intermediate transaction rather than the ultimate retail sale." Minnesota had a heavy burden of justifying the differential treatment and it failed to do so. In addition, the U.S. Supreme Court found the law to be discriminatory because the legislature, by again amending the law so as to exempt the first $100,000 of paper and ink used, further narrowed the coverage of the tax so that "only a handful of publishers pay any tax at all and even fewer pay any significant amount of tax." The discriminatory purpose was thus very clear.
More recently, in Arkansas Writers' Project, Inc. v. Ragland, it was held that a law which taxed general interest magazines but not newspapers and religious, professional, trade and sports journals was discriminatory because while the tax did not single out the press as a whole, it targeted a small group within the press. What is more, by differentiating on the basis of contents (i.e., between general interest and special interests such as religion or sports) the law became "entirely incompatible with the First Amendment's guarantee of freedom of the press."
These cases come down to this: that unless justified, the differential treatment of the press creates risks of suppression of expression. In contrast, in the cases at bar, the statute applies to a wide range of goods and services. The argument that, by imposing the VAT only on print media whose gross sales exceeds P480,000 but not more than P750,000, the law discriminates is without merit since it has not been shown that as a result the class subject to tax has been unreasonably narrowed. The fact is that this limitation does not apply to the press along but to all sales. Nor is impermissible motive shown by the fact that print media and broadcast media are treated differently. The press is taxed on its transactions involving printing and publication, which are different from the transactions of broadcast media. There is thus a reasonable basis for the classification.
The cases canvassed, it must be stressed, eschew any suggestion that "owners of newspapers are immune from any forms of ordinary taxation."

The license tax in the Grosjean case was declared invalid because it was "one single in kind, with a long history of hostile misuse against the freedom of the press."
On the other hand, Minneapolis Star acknowledged that "The First Amendment does not prohibit all regulation of the press [and that] the States and the Federal Government can subject newspapers to generally applicable economic regulations without creating constitutional problems."

3. Uniformity of Taxation

Art. VI, Sec. 28(1)

The rule of taxation shall be uniform and equitable.

Uniformity in taxation — says Black on Constitutional Law — means thatall taxable articles or kinds of property of the same class shall be taxed at the same rate.

It does not mean that lands, chattels, securities, occupations, franchises, privileges, necessities and luxuries shall all be taxed or assessed at the same rate.
Different articles may be taxed at different amounts provided that therate is uniform on the same class everywhere, with all people and at all times.
A tax is uniform when it operates with the same form and effect in every place where the subject of it is found.

Uniformity, Not Equality

The Constitution requires uniformity, not equality in taxation.
The reason is obvious.
The imposition of a single tax upon all persons, properties or transactions would result in inequality. It is manifestly impractical.
It was held that a system which imposes the same taxation upon every species of property, irrespective of its nature or condition or class is well said to be destructive of the principle of uniformity and equality of taxation and of a just adaptation of property to its burdens.

Equality and Uniformity Distinguished

Equality in taxation is accomplished when the burden of the tax falls equally and impartially upon all the persons and property subject to it, so that no higher rate or great levy in proportion to value is imposed upon one person or species or property than upon others similarly situated or of like character.
Uniformity requires that all taxable property shall be alike subjected to the tax, and this requirement is violated if particular kinds, species or items of property are selected to bear the whole burden of the tax, while others, which should be equally subject to it, are left untaxed.
In other words equality in taxation simply means that the tax shall be strictly proportional to the relative value of the property.

In contrast, uniformity in taxation means that uniformity in taxation means that persons or things belonging to the same class shall be taxed at the same rate.

Case for Study:

Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas v. Tan, 163 SCRA 371

Petitioners seek to nullify E.O. 273 which adopted the Value Added Tax (VAT) for being unconstitutional, claiming that it is oppressive, discriminatory, unjust and regressive, in violation of the provisions of Art. VI, Sec. 28(1) of the 1987 Constitution: "Sec. 28(1). The rule of taxation hall be uniform and equitable. The Congress shall evolve a progressively system of taxation."

EO 273 satisfies all the requirements of a valid tax. It is uniform.
Philippine Trust Company v. Yatco (69 Phil. 420): A tax is considered uniform when it operates with the same force and effect in every place where the subject may be found.
Eastern Theatrical Co. v. Alfonso (83 Phil. 852, 862): Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation;
Manila Race Horses Trainers Assn. v. de la Fuente (88 Phil. 60, 65): Taking everything into account, the differentiation against which the plaintiffs complain conforms to the practical dictates of justice and equity and is not discriminatory within the meaning of the Constitution.
Uy Matias v. City of Cebu, 93 Phil. 300: The statute or ordinance in question "applies equally to all persons, firms and corporations placed in similar situation."
Carmichael v. Southern Coal and Coke Co., 301 US 495: Inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation.

4. Progressive Taxation

Art. VI, Sec. 28(1)

Congress shall evolve a progressive system of taxation.

Taxation is said to be equitable when its burden falls on those better able to pay; taxation is progressive when its rate goes up depending on the resources of the person affected.
Progressive taxation is built on the principle of the taxpayer's ability to pay.
This principle has its provenance in Adam Smith's Canons of Taxation, viz:

The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.

Is Tax Law Adopting a Regressive System of Taxation Valid?

The Constitution does not really prohibit the imposition of regressive taxes.

What it simply provides is that Congress shall evolve a progressive system of taxation.
The constitutional provision should be construed to mean simply that "direct taxes are to be preferred and indirect taxes, as much as possible, should be minimized."

Indeed, the mandate to Congress is not to prescribe, but to evolve progressive tax system.

This is a mere directive upon Congress, not a justiciable right or a legally enforceable one.
We cannot avoid regressive taxes but only minimize them.

Excise tax on cigarettes which is a form of indirect tax, and thus, regressive in character.

While there was an attempt to make the imposition of the excise tax more equitable by creating a four-tiered taxation system where higher priced cigarettes are taxed at a higher rate, still, every consumer, whether rich or poor, of a cigarette brand within a specific tax bracket pays the same tax rate.
To this extent, the tax does not take into account the person's ability to pay. Nevertheless, this does not mean that the assailed law may be declared unconstitutional for being regressive in character because the Constitution does not prohibit the imposition of indirect taxes but merely provides that Congress shall evolve a progressive system of taxation.

Tolentino v. Secretary of Finance:

Regressive is not a negative standard for courts to enforce.
What Congress is required by the Constitution to do is to "evolve a progressive system of taxation."
This is a directive to Congress, just like the directive to it to give priority to the enactment of laws for the enhancement of human dignity and the reduction of social, economic and political inequalities (Art. XIII, § 1), or for the promotion of the right to "quality education" (Art. XIV, § 1).
These provisions are put in the Constitution as moral incentives to legislation, not as judicially enforceable rights.

Progressive Tax is Entirely Different from Tax Pyramiding

People v. Sandiganbayan, 467 SCRA 137:

Tax pyramiding has since 1922 been rejected by this Court, the legislature, and our tax authorities.
The intent behind the law is clearly to obviate a tax imposed upon another tax.
It has been held that a taxpayer cannot be compelled to pay a tax on the tax itself.

5. Non-Impairment Clause

Art. III, Sec. 10

No law shall be passed impairing the obligation of contracts.

A contract is the law between the contracting parties.
The obligation of a contract is the law which binds the parties to perform their agreement.
This law must govern and control the contract in every shape in which it is intended to bear upon it, whether it affects its validity, construction or discharge.
Any law which enlarges, or in any manner changes the intention of the parties discoverable in it, necessarily impairs the contract itself.

The manner or the degree in which this change is effected can in no respect influence this conclusion; for, whether the law affects the validity, the construction, the duration, the mode of discharge or the evidence of the agreement, it impairs the contract, though it may not do so to the same extent in all the supposed cases.
There is no room for any stipulation, therefore, that when the state has stipulated by contract to give exemption from taxation, or has commuted the uncertain taxes for a definite and fixed sum or sums, and afterwards undertakes to tax, in the same manner as it taxes other subjects, the persons, corporations or property which were the ubject of the exemption or commutation, the obligation of the contract is impaired.

The constitutional prohibition against the impairment of the obligation of contracts only applies, however, where it isclaimed that the obligation of a contract is impaired by a law of the state— statute or constitutional provision of the state.
It doesnot apply to mere decisions of courtsconstruing a contract.

Is a tax exemption revocable?

It depends.
If the grant of an exemption does not constitute a contract, but is merely "a spontaneous concession by the legislature, not connected with any service or duty imposed," it is revocable by the power which made the grant.

A state may, at its pleasure, withdraw an exemption which is a mere gratuity possessing no element of a contract, even though the corporation may have incurred expense on the faith thereof.
Thus, a statute passed after a corporation has been created, and exempting it wholly or partially from taxation, without the payment of any consideration or the assumption of any new burden by the corporation, is a mere gratuity on the part of the state, and the exemption may be revoked at any time.

An exemption from taxation does not confer a vested right and hence, it may be modified or repealed by the legislature unless such modification or repeal would impair the obligation of a contract.
Similarly, if the basis of the tax exemption is by virtue of a franchise granted by Congress, the exemption may be revoked. (Art. XII, Sec. 11)

On the other hand, if the tax exemption constitutes a binding contract and for valuable consideration, the government cannot unilaterally revoke the tax exemption.

The charter of a private corporation is a contract between the corporation and the state, based on a consideration and accepted by a corporation.
However, the grant of a franchise to a corporation does not imply a contract exempting the property from taxation or from increased taxation; and there is no contract created by a provision in a charter or franchise that the corporation shall pay annually a certain tax.
When the government enters into a contract, it descends to the level of an ordinary individual.
It cannot invoke state immunity.

While the Court has too infrequently, referred to tax exemptions contained in special franchises as being in the nature of contracts and a part of the inducement for carrying on the franchise, these exemptions, nevertheless, are far from being contractual in nature.

Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its governmental immunity

Truly, tax exemptions of this kind may not be revoked without impairing the obligations of contracts.

These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises.
A franchise partakes of the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution.
Indeed, Article XII, Section 11 of the 1987 Constitution, like its precursor provisions in the 1935 and 1973 Constitutions, is explicit that no franchise for the operation of a public utility shall be granted except under the condition that such privilege shall be subject to amendment, alteration or repeal by Congress as when the common good so requires.

Withdrawal of Tax Exemptions Under the Local Government.

Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667:

Section 193 of the LGC prescribes the general rule, viz., the tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons are withdrawn upon the effectivity of the LGC except with respect to those entities expressly enumerated.
In the same vein, the Court must hold that the express withdrawal upon effectivity of the LGC of all exemptions except only as provided therein, can no longer be invoked by MERALCO to disclaim liability for the local tax.

Cases:

Casanovas v. Hord, 8 PHIL 125

In January 1897, the Spanish government, pursuant to the Royal Decree of May 14, 1867, granted the plaintiff certain mining claims in Ambos, Camarines.
The Royal Decree provided that plaintiff shall pay 40 escudos (about P40.00), on each mining claim referred to in the first paragraph of Article 13 thereof, and 20 escudos (about P10.00) on claims described in the second paragraph thereof.
The grantee shall also pay an ad valorem tax equal to 8 per centum of his gross earnings.
Article 81 of said Royal Deere, however, provides that no other taxes shall be imposed on these mining claims.
Thereafter, the Internal Revenue Act (Act No. 1189) was passed and Section 134 thereof provides an annual tax of P100 on each mining claim containing an area of 60,000 square meters, and at the same rate proportionally for claims in excess of, or less than, said area.
The grantee shall further pay an ad valorem tax equal to 3 per centum of the actual market value of its gross output.
Plaintiff paid the tax demanded by defendant CIR pursuant to the Revenue Act, under protest and filed this suit for recovery.
Held:

The grant by the Spanish Government to the plaintiff constituted a contract the obligation of which declares that no other taxes be imposed on those mining claims.

Tolentino, et. al. v. Secretary of Finance, 235 SCRA 630

CREBA contends that the imposition of the VAT on the sales and leases of real estate by virtue of contracts entered into prior to the effectivity of the l aw would violate the constitutional provision that "No law impairing the obligation of contracts shall be passed."
It is enough to say that the parties to a contract cannot, through the exercise of prophetic discernment, fetter the exercise of the taxing power of the State. For not only are existing laws read into contracts in order to fix obligations as between parties, but the reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of a government which retains adequate authority to secure the peace and good order of society.
In truth, the Contract Clause has never been thought as a limitation on the exercise of the State's power of taxation save only where a tax exemption has been granted for a valid consideration.

Exception.

The Contract Clause has never been thought as a limitation on the exercise of the State's power of taxation save only where a tax exemption has been granted for a valid consideration.

Cagayan Electric Power and Light Co., Inc. v. CIR 138 SCRA 629

The non-impairment clause does not apply to public utility franchises.
Art. XII, Sec. 11 of the 1987 Constitution mandates that no public utility franchise or right shall be granted "except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires."

Phil. Power and Development Co. v. CIR CTA Case No. 1152, October 31, 1965

The Court of Tax Appeals held that the rule on non-impairment is not disregarded with the imposition of a higher tax rate on an existing franchise, it appearing that said franchise was granted with the express understanding and upon the condition that it shall be subject to amendment, alteration and repeal.

6. Non-Imprisonment for Non-Payment of Poll Tax

Art. III, Sec. 20

No person shall be imprisoned for non-payment of a debt or poll tax.

While a person may not be imprisoned for non-payment of a cedula or poll tax, he may be imprisoned for non-payment of other kinds of taxes where the law so expressly provides.
See People v. Street, 62 Phil. 646 .

7. Bills to Originate from the House of Representative

Art. VI, Sec. 24

All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments.

Both Houses of Congress may initiate bills, but only the Lower House may propose tax measures.

Case:

Arturo Tolentino, et. al. v. Secretary of Finance, 235 SCRA 630

Petitioners assail the constitutionality of R.A. 7716 imposing a value-added tax (VAT) on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services.
It is equivalent to 10% of the gross selling price or gross value in money of goods or properties sold, bartered or exchanged or of the gross receipts from the sale or exchange of services.
R.A. 7716 seeks to widen the tax base of the existing VAT system and enhance its administration by amending the National Internal Revenue Code.
The contention of petitioners is that in enacting R.A. 7116, or the Expanded Valued-Added Tax Law, Congress violated the Constitution because, although H. No. 11197 had originated in the House of Representatives, it was not passed by the Senate but was simply consolidated with the Senate version (S. No. 1630) in the Conference Committee to produce the bill which the President signed into law. In support of this theory, petitioners cited:

Art. VI, § 24: All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments.
Id., § 26(2): No bill passed by either House shall become a law unless it has passed three readings on separate days, and printed copies thereof in its final form have been distributed to its Members three days before its passage, except when the President certifies to the necessity of its immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and nays entered in the Journal.

It appears that on various dates between July 22, 1992 and August 31, 1993, several bills were introduced in the House of Representatives seeking to amend certain provisions of the National Internal Revenue Code relative to the value-added tax or VAT. These bills were referred to the House Ways and Means Committee which recommended for approval a substitute measure, H. No. 11197, entitled

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE PURPOSES SECTIONS 99, 100, 102, 103, 104, 105, 106, 107, 108 AND 110 OF TITLE IV, 112, 115 AND 116 OF TITLE V, AND 236, 237 AND 238 OF TITLE IX, AND REPEALING SECTIONS 113 AND 114 OF TITLE V, ALL OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED

The bill (H. No. 11197) was considered on second reading starting November 6, 1993 and, on November 17, 1993, it was approved by the House of Representatives after third and final reading.

It was sent to the Senate on November 23, 1993 and later referred by that body to its Committee on Ways and Means.

On February 7, 1994, the Senate Committee submitted its report recommending approval of S. No. 1630, entitled:

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE PURPOSES SECTIONS 99, 100, 102, 103, 104, 105, 107, 108, AND 110 OF TITLE IV, 112 OF TITLE V, AND 236, 237, AND 238 OF TITLE IX, AND REPEALING SECTIONS 113, 114 and 116 OF TITLE V, ALL OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES

It was stated that the bill was being submitted "in substitution of Senate Bill No. 1129, taking into consideration P.S. Res. No. 734 and H.B. No. 11197."

On February 8, 1994, the Senate began consideration of the bill (S. No. 1630). It finished debates on the bill and approved it on second reading on March 24, 1994. On the same day, it approved the bill on third reading by the affirmative votes of 13 of its members, with one abstention.
H. No. 11197 and its Senate version (S. No. 1630) were then referred to a conference committee which, after meeting four times (April 13, 19, 21 and 25, 1994), recommended that "House Bill No. 11197, in consolidation with Senate Bill No. 1630, be approved in accordance with the attached copy of the bill as reconciled and approved by the conferees."

The Conference Committee bill, entitled "AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES," was thereafter approved by the House of Representatives on April 27, 1994 and by the Senate on May 2, 1994.
The enrolled bill was then presented to the President of the Philippines who, on May 5, 1994, signed it. It became Republic Act No. 7716. On May 12, 1994, Republic Act No. 7716 was published in two newspapers of general circulation and, on May 28, 1994, it took effect, although its implementation was suspended until June 30, 1994 to allow time for the registration of business entities.
It would have been enforced on July 1, 1994 but its enforcement was stopped because the Court, by the vote of 11 to 4 of its members, granted a temporary restraining order on June 30, 1994.
Petitioners' contention is that Republic Act No. 7716 did not "originate exclusively" in the House of Representatives as required by Art. VI, §24 of the Constitution, because it is in fact the result of the consolidation of two distinct bills, H. No. 11197 and S. No. 1630.
HELD:

This argument 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. It is important to emphasize this, because a bill originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. The possibility of a third version by the conference committee will be discussed later. At this point, what is important to note is that, as a result of the Senate action, a distinct bill may be produced. 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." It would be to violate the coequality of legislative power of the two houses of Congress and in fact make the House superior to the Senate.
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff, or tax bills, bills authorizing an increase of the public 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. On the other hand, the senators, who are elected at large, are expected to approach the same problems from the national perspective. Both views are thereby made to bear on the enactment of such laws.
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.

8. Veto Power of the President

Art. VII, Sec. 27(2)

The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object.

The item or items vetoed shall be returned to the Lower House of Congress together with the objections of the President.
If after a reconsideration 2/3 of all the members of such House shall agree to pass the bill, it shall be sent, together with the objection, to the other House by which it shall likewise be reconsidered and if approved by 2/3 of all the Members of that House, it shall become a law.

9. President's Power to Tax

Art. VI, Sec. 28(2)

The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government.

The President is vested with authority by law to increase tariff rates, even for revenue purposes only.
Article VI, Section 8(2) of the Constitution expressly grants permission to Congress to authorize the President "to fix within specified limits and subject to such limitations and restrictions as it may impose, tariff rates xxx and other duties and imposts xxx."

TITO

Custom duties which are assessed at the prescribed tariff rates are very much like taxes which are imposed for both revenue raising and regulatory purpose.
However, it bears stressing that the statutory power of the President to fix tariff rates, import or export quotas, and tonnage or wharfage dues must be subject to limitations and restrictions indicated within the law itself.

Furthermore, such delegation must be in accord with the framework of the national development program of the government.

The term "flexible tariff clause" refers to the authority given to the President to adjust tariff rates under Section 1608 of the Customs Modernization and Tariff Act (R.A. No. 10863), which is the enabling law that made effective the delegation of the taxing power to the President under the Constitution.

Flexible Power Cause under the Customs Modernization and Tariff Act (RA 10863) is anchored on general welfare clause

In the interest of the general welfare and national security, the President, upon recommendation of the National Economic and Development Authority (NEDA):

increase, reduce or remove existing protective tariff rates of import duty, but in no case shall be higher than one hundred percent (100%) ad valorem;
establish import quota or ban importation of any commodity as may be necessary; and
impose additional duty on all imports not exceeding ten percent (10%) ad valorem, whenever necessary.

This is known as the Flexible Power Clause enshrined in Section 1608 of Republic Act No. 10863 otherwise known as the Customs Modernization and Tariff Act (CMTA).

10. Taxation and the Freedom of the Press

Art. III, Sec. 4

No law shall be passed abridging the freedom of speech, of expression or of the press ...

Case:

Arturo Tolentino, et. al. v. Secretary of Finance, 235 SCRA 630

The Philippine Press Institute (PPI), petitioner in G.R. No. 11544 is a nonprofit organization of newspaper publishers established for the improvement of journalism in the Philippines.
On the other hand, petitioner in G.R No. 115781, the Philippine Bible Society (PBS), is a nonprofit organization engaged in the printing and distribution of bibles and other religious articles.
Both petitioners claim violations of their rights under Sections 4 and 5 of the Bill of Rights as a result of the enactment of the VAT Law.
The PPI questions the law insofar as it has withdrawn the exemption previously granted to the press under Section 103(f) of the NIRC. Although the exemption was subsequently restored by administrative regulation with respect to the circulation income of newspapers, the PPI presses its claim because of the possibility that the exemption may still be removed by mere revocation of the regulation of the Secretary of Finance. On the other hand, the PBS goes so far as to question the Secretary's power to grant exemption for two reasons: (1) The Secretary of Finance has no power to grant tax exemption because this is vested in Congress and requires for its exercise the vote of a majority of all its members, and (2) the Secretary's duty is to execute the law.
HELD:

We find no violation of press freedom in these cases.
The PPI's claim is simply that, as applied to newspapers, the law abridges press freedom. Even with due recognition of its high estate and it importance in a democratic society, however, the press is not immune from general regulation by the State.
It has been held that the publisher of a newspaper has no immunity from the application of general laws.
He has no special privilege to invade the rights and liberties of others. He must answer for libel. He may be punished for contempt of court. Like others, he must pay equitable and nondiscriminatory taxes on his business.

11. Taxation and Freedom of Religion

Art. III, Sec. 5

No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. No religious test shall be required for the exercise of civil or political rights.

American Bible Society v. City of Manila:

The Supreme Court ruled that a municipal license tax on the sale of bibles and religious articles by a non-stock non-profit missionary organization at minimal profit constitutes a curtailment of religious freedom and worship which is guaranteed by the Constitution.
However, the income of such organizations from any activity conducted for profit or from any of their property, real or personal, regardless of the disposition made of such income, is taxable.

12. Tax Exemption of Properties Actually, Directly and Exclusively Used for Religious, Charitable, and Education Purposes

Art. VI, Sec. 28(3)

Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation.
CCP-CMC
LBI ADE

Reason for the Rule.

Cemeteries are exempt from the payment of taxes because of the difficulty of collecting a tax thereon and the obvious impropriety of selling t h e graves of the dead to defray the expenses of carrying on the government of the living.
Churches and parsonages or convents appurtenant thereto, etc., are exempt from taxation because such institutions perform work which would otherwise have to be carried on by the public at the expense of the taxpayers and that the expenses of such institutions from taxation lessens rather than increases the burden upon other taxpayers.

Meaning of Charitable Institution

To be a charitable institution, an organization must meet the substantive test of charity.
In a legal sense, a charity may be fully defined as: GB-ER-EL

a gift, to be applied consistently with existing laws,
for the benefit of an indefinite number of persons,
either by bringing their minds and hearts under the influence of education or religion,
by assisting them to establish themselves in life or otherwise lessening the burden of government.

In a sense, charity is essentially a gift to an indefinite number of persons which lessens the burden of government.
In other words, charitable institutions provide for free goods and services to the public which would otherwise fall on the shoulder of government.

Thus, as a matter of efficiency, the government forgoes taxes which should have been pent to address public needs, because certain private entities already assume a part of the burden.
This is the rationale for the tax exemption of charitable institutions.
The loss of taxes by the government is compensated by its relief from doing public works which would have been funded by appropriation from the Treasury.

Actually, Directly, and Exclusively used

It would seem, however, that to be entitled to the exemption, lands, buildings and improvements of religious and charitable institution should be "actually, directly and exclusively used" for religious and charitable purposes.
Province of Abra v. Harold Hernando and the Roman Catholic Archbishop of Bangued, Abra :

The Court ruled that it was not in accordance with the Constitution for the lower court to declare in a declaratory relief action that the properties of the Roman Catholic Church in Bangued, Abra are tax-exempt without first conducting a hearing thereon to determine whether it was actually, directly and exclusively used for religious purposes.

Abra Valley College, Inc. v. Aquino, 162 S CRA 106:

The test of exemption from taxation is the use of the property for the purposes mentioned in the Constitution.

Exclusive but not Absolute Use

The term "exclusively used" does not necessarily mean total or absolute use for religious, charitable and educational purposes.
Even if the property is incidentally used for said purposes, the tax exemption will applied.
Corollary, if a property, although actually owned by a religious, charitable and educational institution is used for a non-exempt purpose, the exemption from tax shall not attach.

Controlling Doctrine on Exemption From Taxation of Real Property of Religious, Charitable and Educational Institutions

Lung Center of the Philippines v Quezon City, 433 SCRA 119:

The prevailing rule on the application of tax exemption to properties incidentally used for religious, charitable and educational purposes, has now been abandoned.
In resolving the issue of whether or not the portions of the real property of Lung Center that are leased to private entities are exempt from real property taxes, the Supreme Court reexamined the intent of the constitutional provision granting tax exemption of properties actually, directly and exclusively used for religious, charitable and educational purposes.
Thus, the records of the Constitutional Commission reveal that what is exempted is not the institution itself; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes.

St. Louis Young Men's Christian Association v. Gehner, 47 S.W2d 776 held that 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, the Supreme Court concluded that "What is meant by actual, direct and exclusive use of the property for charitable institutions is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized.
It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes.

In sum, the Court ruled that the portions of the land leased to private entities as well as those parts of the hospital leased to private individuals are not exempt from taxes.

The University of the Philippines is exempt from real property tax as regard the land leased to Ayala Land, Inc.

University the Philippines v. City Treasurer of Quezon City, 905 SCRA 124:

The Supreme Court held that considering that the subject land and the revenue derived from the lease thereof are used by UP for educational purposes and in support of its education purposes, UP should not be assessed and should not be made liable for real property tax on the land subject of this case.
Under Republic Act No. 9500, this tax exemption, however, applies only to assets of the University of the Philippines, referring to assets owned by UP.
Under the Contract of Lease between UP and ALI, all improvement on the leased land "shall be owned by, and and shall be for the account of the LFSSEE [ALI]" during the term of the lease.
The improvements are not" assets" owned by UP; and thus, UP 's tax exemption under Republic Act No. 9500 does not extend to these improvements during the term of the lease.

Meaning of Actually, Directly and Exclusively .

Actually.

It is opposed to seemingly, pretendedly, or feignedly, as actually engaged in farming means, truly in fact.

Directly.

In a direct way without anything intervening; not by secondary, but by direct means.

Exclusively.

Apart from all others; without admission of others to participation; in a manner to exclude.

Cases:

Abra Valley College, Inc. v. Aquino, 162 SCRA 106
Rev. Fr. Casimiro Lladoc v. the CIR & the CTA 14 Phil 292
YMCA of Manila v. Commissioner of the Internal Revenue 33 Phil 217
Bishop of New Segovia v. United States Provincial Board of Ilocos 51 Phil
Herrera v. Quezon City Board of Assessment Appeals (1961) and CIR v. Bishop of the Missionary District 14 SCRA 991

13. Tax Exemptions Granted to Non-stock, Non-profit Educational Institutions

Art. XIV, Sec. 4(3) and Sec. 4(4)

(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law.
Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions, subject to the limitations provided by law, including restrictions on dividends and provisions for reinvestment.
(4) Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax.

Actually, Directly, and Exclusively used

The use of the term "actually, directly and exclusively used," referring to religious institutions cannot be applied to this above article.

The provision of Article VI, Section 28 (3) applies to three institutions:

religious
charitable
educational institutions

Article XIV applies solely to non-stock non-profit educational institutions.
In this case, we should apply its literal interpretation of the word "solely," in consonance with the principle of strictissimi juris.

The word "exclusively" is an exclusive word, which is indicative of an intent that the provision is mandatory.

Angeles University Foundation is considered as non-stock non-profit educational institution.

Republic Act No. 6055 granted tax exemptions to medical institutions like Angeles University Foundation which converted to a non-stock, non-profit educational foundation.
Section 8 of said law provides: The Foundation shall be exempt from the payment of all taxes, import duties, assessments, and other charges imposed by the Government on all income derived from or property, real or personal, used exclusively for the educational activities of the Foundation.

"Exclusive" is defined as

possessed and enjoyed to the exclusion of others;
debarred from participation or enjoyment;
in a manner to exclude, as enjoying a privilege exclusively.

However, "other charges imposed by the National Government — in the tax exemption clause of Republic Act No. 6055, do not cover building permit fees. It bears stressing that the "other charges mentioned in Section 8 of Republic Act No. 6055 is qualified by the words "imposed by the Government on all x x x property used exclusively for the educational activities of the Foundation."
Building permit fees are not impositions on property but on activity subject of government regulation.

Article XIV and Article VI compared

Grantee

Art. XIV, Sec. 4(3)

non-stock, non profit educational institutions

Art. VI, Sec. 28(3)

religious
educational
charitable institution

Taxes Covered

Art. XIV, Sec. 4(3)

income tax
custom duties
Property tax (DECS Order No. 137-87)

Art. VI, Sec. 28(3)

property tax

DECS Order No. 137-87

The implementing regulations of DECS Order No. 137-87 dated December 16, 1987 underscored the following:

The exemption granted refers to internal revenue taxes and custom duties imposed by the National Government on all revenue and assets of non stock, non-profit educational institutions.
The exemption is not only limited to revenues and assets derived from strictly school operations like income from tuition and other miscellaneous fees such a matriculation, library, ROTC, etc., but also extends to incidental income derived from canteen, bookstore, and dormitory facilities.
In the case, however, of incidental income, the facilities mentioned must not only be owned and operated by the school itself but such facilities must be located inside the school campus. Canteens operated by mere concessionaires are taxable.
Income which is unrelated to school operations like income from money market placements, time and other bank deposits are taxable.
The use of the school's income or assets must be in consonance with the purposes for which the school is created; in short, the use must be school-related like the grant of scholarships, faculty equipment, establishment of professorial chairs, etc.

Under the Old Tax Code, educational institutions were not considered among tax-exempt corporations.

Under Section 30(h) of Republic Act No. 8424, non-stock, non profit educational institutions are now included among tax exempt corporations.
A careful analysis of the last paragraph of Section 30 of the NIRC, as amended by Republic Act No. 8424, would reveal that the income of whatever kind or character derived by non-stock and non-profit educational institutions from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition thereof shall be subject to tax.

However, under Article XIV, Section 4(3) of the Constitution, revenues and assets actually, directly and exclusively used for educational purposes shall be exempt from taxes and duties.

Last paragraph of Section 30 of the N I RC disregarded this requisite of use and instead used the phrase: "regardless of the disposition."

Ergo, Section 30(h) in relation to the last paragraph of the NIRC appears to be unconstitutional.

Republic Act No. 8424 (NIRC) must yield to the provision of the 1987 Constitution granting tax exemption to non-stock, non profit educational institutions.
The Constitution is the basic and paramount law to which all other laws must conform.

The foregoing view has been accorded judicial imprimatur in the recent case of CIR v. De La Salle University, Inc., 808 SCRA 156, wherein the Supreme Court declared the last paragraph of Section 30 of the Tax Code without force and effect for being contrary to the Constitution insofar as it subjects to tax the income and revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purpose.

This is in the exercise of and consistent with the duty of the Court to uphold the primacy of the Constitution.

Donor's Tax

Article XIV, Section 4(4) provides:

Subject to conditions prescribed by law, all grants, endowments, donations or contributions used actually, directly and exclusively for educational purposes shall be exempt from tax.
The foregoing Constitutional provision is not self-executing as it requires a legislative enactment providing certain conditions for exemption.
However, Section 101(a)(3) of Republic Act No. 8424, has declared these donations tax exempt.

Estate Tax

Non-stock, non-profit educational institutions are not included under the coverage of Section 87 of Republic Act No. 8424; hence, they are not tax exempt.
Only transfers to social welfare, cultural and charitable institutions are exempt from estate tax.

Value-Added Tax

Under Revenue Regulations No. 6-97, once non stock, non-profit educational institutions engage in business, they are subject to value added tax.
Pursuant to Section 109(m) of the Tax Code of 1987, private educational institutions shall be exempt from value-added tax provided they are accredited as such either by the Department of Education, Culture and Sports or by the Commission on Higher Education.
However, this exemption does not extend to their other activities involving the sale of goods and services.

However, they shall be subject to internal revenue taxes on income from trade, business or other activity, the conduct of which i not related to the exercise or performance by such educational institutions of their educational purposes or functions (Sec. 2, Finance Department Order No. 137 87 as amended by Finance Department Order No. 92 8 8) i.e., rental payment from their building/premises.

Unlike non-stock, non-profit corporations, their interest income from currency bank deposits and yield from deposit substitute instruments used actually, directly and exclusively in pursuance of their purposes as an educational institution, are exempt from the 20% final tax and 7 ½% tax on interest income under the expanded foreign currency deposit system imposed under Section 27(D)(1) of the Tax Code of 1997, subject to compliance with the conditions that as a tax-exempt educational institution, they shall on an annual basis submit to the Revenue District Office concerned an annual information return and duly audited financial statement together with the following:

Certification from their depository banks as to the amount of interest income earned from passive investment not subject to the 20% final withholding tax and 7 ½% tax on interest income under the expanded foreign currency deposit system imposed by Section 27(D)(1) of the Tax Code of 1997;
Certification of actual utilization of the said income; and
Board Resolution by the school administration on proposed projects (i.e., construction and/or improvement of school buildings and facilities, acquisition of equipment, books and the like) to be funded out of the money deposited in banks or placed in money markets, on or before the 14th day of the fourth month following the end of its taxable year (Sec. 3, Finance Department Order No. 137-87).

Finally, the exemption does not cover withholding taxes. As an educational institution, they are constituted as withholding agents for the government required to withhold the tax on compensation income of their employees, or the withholding tax on income payments to persons subject to tax pursuant to Section 57 of the Tax Code of 1997.
In both cases, in order to monitor the activities being conducted by these institutions, it is mandatory that they should maintain their respective set of books of accounts as prescribed in Section 235 of the Tax Code of 1997.
Furthermore, both institutions are subject to the payment of the annual registration fee of P500.00 as prescribed in Section 236(B) of the Tax Code of 1997.

They are also required under Section 6(C) in relation to Section 237 of the same Code to issue duly registered receipts or sales or commercial invoices for each sale or transfer of merchandise or for services rendered which are not directly related to the activities for which they are registered.

14. Appropriation of Public Money

Art. XI, Sec. 29(2)

(2) No public money or property shall be appropriated, applied, paid, or employed, directly or indirectly, for the use, benefit, or support of any sect, church, denomination, sectarian institution, or system of religion, or of any priest, preacher, minister, or other religious teacher, or dignitary as such, except when such priest, preacher, minister, or dignitary is assigned to the armed forces, or to any penal institution, or government orphanage or leprosarium.

This is in consonance with the inviolable principle of separation of the Church and State.
The rule is subject to an exception.

A particular money may be set aside for a particular sect, priest or religious minister or dignitaries if they are assigned to the following institutions: LOPT

leprosy
orphanage
penal institution and
the armed forces.

15. Grant of Tax Exemptions

The inherent power of the state to impose taxes naturally carries with it the power to grant tax exemptions.

The power to exempt from taxation as well as the power to tax, is an essential attribute of sovereignty, and may be exercised in the constitution, or in a statute, unless the Constitution expressly or by implication prohibits action by the legislature on the subject.
Exemptions from taxation may be created directly by the Constitution, e.g.:

Article VI, Section 28 (3) of the Constitution granting tax exemptions to properties actually, directly and exclusively used for religious, charitable and educational purposes, or
by an act of the legislature, subject to the limitations as the constitution may place, expressly or by implication, upon the power of the legislature.

Legal Basis of the Grant of Exemptions

Art. VI, Sec. 28(4)

No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress.

Note that in granting tax exemptions, an absolute majority vote of the Members of Congress is required, while in cases of withdrawal of such tax exemption, a relative majority vote is sufficient.

In the nature of tax exemptions: ACR

tax amnesties
tax condonations, and
tax refunds

Such being the case, a law granting tax amnesties, tax condonations, and tax refunds requires the vote of an absolute majority of the Members of Congress.

General Rule: No Exemption

A constitutional grant of exemption may be self executing or may require an act of Congress for its operation.

Where a constitutional provision granting tax exemption is self-executing, the legislature can neither add nor detract from it;
it may, however, prescribe a procedure to determine whether a claimant is entitled to the constitutional exemption.

The intent to grant tax exemption must be clear, otherwise the rule of construction applies that exemption from taxation are to be strictly construed against exemption and in favor of the right to tax.

Statutory Exemptions, When Valid

Where the Constitution confers upon the legislature authority to grant exemptions within certain limits, statutes granting such exemptions shall be valid if they do not exceed the constitutional limits, and void if they do.

The Rule on Construction of Exemptions

The intention of the legislature to grant tax exemptions must be expressed in clear and unmistakable terms, it can never be implied from language that will admit of any other reasonable construction.
Exemptions are never presumed, the burden is upon the claimant to establish his right to exemption beyond reasonable doubt.

Since taxation is the rule and exemption the exception, the intention to make an exception ought to be expressed in clear and unambiguous terms;

it cannot be taken to have been intended when the language of the statute on which it depends is doubtful or uncertain; and the burden of establishing it is upon him who claims it.

Moreover, if an exemption is found to exist it must not be enlarged by the construction, since the reasonable presumption is that the state has granted in express terms all it intended to grant at all, and that unless the privilege is limited to the very terms of the statute, the favor would be extended beyond dispute in ordinary cases.
It applies not only to the power to grant exemptions, which must be strictly but also:

to the exemption's construction as irrevocable,
to the period of duration of the exemption,
to the amount of the exemption,
to the scope of the exemption,
to charter or contract exemptions as well as other exemptions,
and to a statute exempting property from retroactive assessments.

Since an exemption will never be presumed, the fact that the charter of a corporation contains no provision at all for taxation, and that there is no reservation of the power to alter, amend or repeal the same, does not prevent the state from afterwards taxing the corporation.

However, there are exceptions to the strict construction rule, to wit: LSP-TGC

The rule of strict construction does not apply where the statute granting the exemption expressly provides for a liberal interpretation;
The rule of strict construction does not apply to special taxes relating to special cases and affecting only special classes of persons;
While in some cases it is held that the strict construction rule applies equally well to alleged exemptions of municipal property, the better rule is that strict construction of exemption statutes applies to exemptions of property held in private ownership but not to exemptions of public property.

In case of property owned by the state or the city or other public corporation, an express exemption should not be construed with the same degree of strictness that applies to exemptions contrary to the policy of the state, since as to such property "exemption is the rule and taxation the exemption"

Exemptions to traditional exemptees, such as those in favor of religious and charitable institutions.
Exemptions in favor of the government, its political subdivisions or instrumentalities.

Maceda v. Macaraig, Jr., 197 SCRA 771 , the Supreme Court held:

It is a recognized principle that the rule on strict interpretation does not apply in the case of exemptions in favor of a governmental political subdivision or instrumentality.
The basis for applying the rule of strict construction granting exemption or deductions, even more obvious than with reference to the affirmative or levying provision of tax statutes, is to minimize differential treatment and foster impartiality, fairness, and equality of treatment among taxpayers.
The reason for the rule does not apply in the case of exemption running to the benefit of the government itself or its agencies.
In such the practical effect of an exemption is merely to reduce the amount of money that has to be handled by government in the course of its operations;

If the taxpayer falls within the purview of exemption by clear legislative intent. (CIR v. Arnoldus Carpentry Shop, 159 SCRA 199)

Meaning of Strict Construction Rule

When it is said that exemptions must be strictly construed in favor of the taxing power, this does not mean that if there is a possibility of a doubt it is to be at once resolved against the exemption.
It simply means that if, after the application of all rules of interpretation for the purpose of ascertaining the intention of the legislature, a well-founded doubt exists, then the ambiguity occurs which may be settled by the rule of strict construction.

Construction of Tax Exemption Should Give Primary Consideration to its Broad Implications on our Commitment Under International Agreement

CIR v. Pilipinas Shell Petroleum Corporation, 783 SCRA 490:

The Chicago Convention, which established the legal framework for international civil aviation, did not deal comprehensively with tax matters.

Article 24 (a) of the Convention simply provides that fuel and lubricating oils on board an aircraft of a Contracting State, on arrival in the territory of another Contracting State and retained on board on leaving the territory of that State, shall be exempt from customs duty, inspection fees or similar national or local duties and charges.
Subsequently, the exemption of airlines from national taxes and customs duties on spare parts and fuel has become a standard element of bilateral air service agreements (ASAs) between individual countries.

With the prospect of declining sales of aviation jet fuel sales to international carriers on account of major domestic oil companies' unwillingness to shoulder the burden of excise tax, or of petroleum products being sold to said carriers by local manufacturers or sellers at still high prices, the practice of "tankering" would not be discouraged.

This scenario does not augur well for the Philippines' growing economy and the booming tourism industry.
Worse, our Government would be risking retaliatory action under several bilateral agreements with various countries.
Evidently, construction of the tax exemption provision in question should give primary consideration to its broad implications on our commitment under international agreements.

The phrase "in lieu of all other taxes" does not cover total exemption

CIR v. PAL, C.R. Nos. 215705-07, February 22, 2017:

The Philippine Airlines, Inc. (PAL) may pay the basic corporate income tax or a franchise tax of two percent (2%) of the gross revenues derived from all sources in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national authority or government agency, now or in the future. However, PAL shall pay the tax on its real property, it being not covered by the exempting clause.

Tax Exemption and Tax Amnesty Distinguished

Tax amnesty is an immunity from all criminal and civil obligations arising from non-payment of taxes.

It is a general pardon given to all taxpayers.
It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate.
It applies only to past tax periods, hence of retroactive application.

On the other hand, tax exemption is an immunity from the civil liability only.

It is an immunity or privilege, a freedom from a charge or burden of which others are subjected.
It is generally prospective in application.

Cases for Study

ESSO Standard Eastern, Inc. v. Acting Commissioner of Customs 18 SCRA 388

Exemption from taxation is not favored and exemptions in tax statute are never presumed. Exemptions from taxation are construed in strictissimi juris against the taxpayer and liberally in favor of the t a x i n g authority.
Where the State has granted in e pre s t e r m s certain exemptions, those are the exemptions to be considered, and no more.
Since the law (R.A. No. 1394) states that, to be tax exempt,, equipment and spare parts should be "for the use of industries," the coverage herein should not be enlarged to include equipment and spare part for use in dispensing gasoline at retail. In comparable factual backdrop, this Court has held that tax exemption in connection with the manufacture of asbestos roof does not extend to the installation thereof.

Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary 238 SCRA 63:

Petitioner contends that the Bureau of Food and Drug of the Department of Health and not the BIR is the competent government agency to determine the proper classification of food products.
On the other h a n d, the respondents argue that the opinion of the BIR,. as the government agency charged with the implementation and interpretation of the tax laws, is entitled to great respect.
Held:

The SC agreed with respondents. In interpreting Section 103(a) and (b) of the NIRC, the Commissioner of Internal Revenue gave it a strict construction consistent with the rule that tax exemptions must be strictly construed against the taxpayer and liberally in favor of the state. Moreover, as the government agency charged with the enforcement of the law, the opinion of the Commissioner of Internal Revenue, in t he absence of any showing that it is plainly wrong, is entitled to great weight. Indeed, the ruling was made by the Commissioner of Internal Revenue in the exercise of his power under Section 245 of the NIRC to "make rulings or opinions in connection with the implementation of the provisions of internal revenue laws, including ruling on the clarification of articles for sales tax and similar purpose."

16. Local Taxation

Art. X, Sec. 5

Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments.

Pelizloy Realty Corporation v. Province of Benguet, 695 SCRA 491:

The power to tax "is an attribute of sovereignty," and as such, inheres in the State. Such, however, is not true for provinces, cities, municipalities and barangays as they are not the sovereign; rather, they are mere "territorial and political subdivisions of the Republic of the Philippines."
A municipal corporation unlike a sovereign state is clothed with no inherent power of taxation.

The charter or statute must plainly show an intent to confer that power or the municipality, cannot assume it.
And the power when granted is to be construed in strictissimi juris.
Any doubt or ambiguity arising out of the term used in granting that power must be resolved against the municipality.
Inferences, implications, deductions — all these — have no place in the interpretation of the taxing power of a municipal corporation.

Pepsi-Cola Bottling Co. of the Phil., Inc. v. City of Butuan, 24 SCRA 789 :

The general principle against the delegation of legislative powers as a consequence of the principle of separation of powers is subject to one well-established exception: legislative powers may be delegated to local government unit.
Included in this grant of legislative power is the grant of local taxing power.

Pepsi-Cola Bottling Co. of the Philippines, Inc. v. Municipality of Tanauan, Leyte, 69 SCRA 460:

Delegation of legislative taxing power to local governments is justified by the necessary implication that the power to create political corporations for purposes of local self-government carries with it the power to confer on such local government agencies the authority to tax.

Villanueva v. City of Iloilo, 26 SCRA 578 :

However, despite the grant of taxing power to local governments, judicial admonition is given to the effect that the tax so levied must be for a public purpose, uniform, and must not transgress any constitutional provision nor repugnant to a controlling statute.

Nevertheless, Congress cannot abolish the local government's power to tax as it cannot abrogate what is expressly granted by the fundamental law.
The only authority conferred to Congress is to provide the guidelines and limitations on the local government's exercise of the power to tax.
Republic Act No. 7160 (Local Government Code) gives flesh to the guidelines and limitations mentioned in the aforesaid constitutional provision as follows:

Section 130. Fundamental Principles. — The following fundamental principles shall govern the exercise of the taxing and other revenue-raising powers of local government units:

Taxation shall be uniform in each local government unit;

Taxes, fees, charges and other impositions shall:

be equitable and based as far as practicable on the taxpayer's ability to pay;
be levied and collected only for public purposes;
not be unjust, excessive, oppressive, or confiscatory;
not be contrary to law, public policy, national economic policy, or in the restraint of trade;

The collection of local taxes, fees, charges and other impositions shall in no case be let to any private person;
The revenue collected pursuant to the provisions of this Code shall inure solely to the benefit of, and be subject to the disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and,
Each local government unit shall, as far as practicable, evolve a progressive system of taxation.

Section 133. Common Limitations on the Taxing Powers of Local Government Units. — Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following:

Income tax, except when levied on banks and other financial institutions;
Documentary stamp tax;
Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided herein;
Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other kinds of customs fees, charges and dues except wharfage on wharves constructed and maintained by the local government unit concerned;
Taxes, fees, and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees, or charges in any form whatsoever upon such goods or merchandise;
Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen;
Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively from the date of registration;
Excise taxes on articles enumerated under the national Internal Revenue Code, as amended, and taxes, fees or charges on petroleum products;
Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein;
Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in this Code;
Taxes on premiums paid by way or reinsurance or retrocession;
Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving thereof, except tricycles;
Taxes, fees, or other charges on Philippine products actually exported, except as otherwise provided herein;
Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938) otherwise known as the "Cooperative Code of the Philippines" respectively; and
Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local government units.

Section 198. Fundamental Principles. — The appraisal, assessment, levy and collection of real property tax shall be guided by the following fundamental principles:

Real property shall be appraised at its current and fair market value;
Real property shall be classified for assessment purposes on the basis of its actual use;
Real property shall be assessed on the basis of a uniform classification within each local government unit;
The appraisal, assessment, levy and collection of real property tax shall not be left to any private person; and
The appraisal and assessment of real property shall be equitable.

The Local Government's Power to Tax Is the Most Effective Instrument to Raise the Needed Revenues

National Power Corporation v. Central Board of Assessment Appeal, 577 SCR A 418

The right of local government units to collect taxes due must always be upheld to avoid severe tax erosion. This consideration is consistent with the State policy to guarantee the autonomy of local governments and the objective of the Local Government Code that they enjoy genuine and meaningful local autonomy to empower them to achieve their fullest development as self-reliant communities and make them effective partners in the attainment of national goals.
The power to tax is the most potent instrument to raise the needed revenues to finance and support myriad activities of the local government units for the delivery of basic services essential to the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people.

Doctrine of Preemption in Local Taxation

Victorias Milling v. Municipality of Victorias, 25 SCRA 192

Preemption in the matter of taxation simply refers to an instance where the national government elects to tax a particular area, impliedly withholding from the local government the delegated power to tax the same field.
This doctrine primarily rests upon the intention of Congress.
Conversely, should Congress allow municipal corporations to cover fields of taxation it already occupies, then the doctrine of preemption will not apply.

Section 284 of the LGC deviates from the plain language of Section 6 of Article X of the 1987 Constitution

Mandanas, et al., v. Executive Secretary, et al, 869 SCRA 440
Section 6, Article X of the 1987 Constitution textually commands the allocation to the LGUs of a just share in the national taxes, viz.:

SECTION 6. Local government units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them.

Section 6, when parsed, embodies three mandates, namely:

the LGUs shall have a just share in the national taxes;
the just share shall be determined by law; and
the just share shall be automatically released to the LGUs.

Congress has sought to carry out the second mandate of Section 6 by enacting Section 284, Title Ill (Share of Local Government Units in the Proceeds of National Taxes), of the LGC, which is again quoted for ready reference:

Section 284. Allotment of Internal Revenue Taxes — Local government units shall have a share in the national taxes based on the collection of the third fiscal year preceding the current fiscal year as follows:
1. On the first year of the effectivity of this Code, thirty percent (30%);
2. On the second year, thirty-five percent (35%); and
3. On the third year and thereafter, forty percent (40%).
Provided, That in the event that the national government incurs an unmanageable public sector deficit, the President of the Philippines is hereby authorized, upon the recommendation of Secretary of Finance, Secretary of Interior and Local Government and Secretary of Budget and Management, and subject to consultation with the presiding officers of both Houses of Congress and the presidents of the "liga," to make the necessary adjustments in the allotment of local government units but in no case shall the allotment be less than thirty percent (30%) of the collection of national taxes of the third fiscal year preceding the current fiscal year; Provided, further, That in the first year of the effectivity of this Code, the local government units shall, in addition to the thirty percent (30%) allotment which shall include the cost of devolved functions for essential public services, be entitled to receive the amount equivalent to the cost of devolved personal services.

There is no issue as to what constitutes the LGUs' just share expressed in percentages of the national taxes (i.e., 30 % 35% and 40% stipulated in subparagraphs (a), (b), (c), o f Section 284).

Yet, Section 6, supra, mentions national taxes a s the source of the just share of the LGUs while Section 284 ordains that the share of the LGUs be taken from national internal revenue instead.

Although the power of Congress to make laws is plenary in nature, congressional lawmaking remains subject t o the limitations stated in the 1987 Constitution.

The phrase national internal revenue taxes engrafted in Section 284 is undoubtedly more restrictive than the term national taxes written in Section 6. As such, Congress has actually departed from the letter of the 1987 Constitution stating that national tax s should be the base from which the just share of the LGU comes. Such departure is impermissible.
Verba legis non est recedendum (from the words of a statute there should be no departure).
Equally impermissible is that Congress has also thereby curtailed the guarantee of fiscal autonomy i n favor of the LGUs under the 1987 Constitution.

Taxes are enforced proportional contributions exacted by the State from persons and properties pursuant to its sovereignty in order to support the Government and to defray all the public needs. Every tax has three elements, namely:

it is an enforced proportional contribution from persons and properties;
it is imposed by the State by virtue of its sovereignty; and
it is levied for the support of the Government. Taxes are classified into national and local. National taxes are those levied by the National Government, while local taxes are those levied by the LGUs.

What the phrase national internal revenue taxes as used in Section 284 included are all the taxes enumerated in Section 21 of the National Internal Revenue Code (NIRC), as amended by R.A. No. 8424, viz.:

Section 21. Sources of Revenue. — The following taxes, fees and charges are deemed to be national internal revenue taxes:

Income tax;
Estate and donor's taxes;
Value-added tax;
Other percentage taxes;
Excise taxes;
Documentary stan1p taxes; and
Such other taxes as arc or hereafter may be imposed and collected by the Bureau of Internal Revenue.

In view of the foregoing enumeration of what are the national internal revenue taxes, Section 284 has effectively deprived the LGUs from deriving their just share from other national taxes, like the customs duties.

Strictly speaking, customs duties are also taxes because they are exactions whose proceeds become public funds.
According to Garcia v. Executive Secretary, customs duties is the nomenclature given to taxes imposed on the importation and exportation of commodities and merchandise to or from a foreign country. Although customs duties have either or both the generation of revenue and the regulation of economic or social activity as their moving purposes, it is often difficult to say which of the two is the principal objective in a particular instance, for, verily, customs duties, much like internal revenue taxes, are rarely designed to achieve only one policy objective.
We further note that Section 102(00) of R.A. No. 10863 (Customs Modernization and Tariff Act) expressly includes all fees and charges imposed under the Act under the blanket term of taxes.

It is clear from the foregoing clarification that the exclusion of other national taxes like customs duties from the base for determining the just share of the LG Us contravened the express constitutional edict in Section 6, Article X the 1987 Constitution.

Cases for Study:

Ferrer, Jr. v. Bautista 760 SCRA 652

The enactment by the Quezon City Council of the assailed ordinances was done in the exercise of its legislative, not judicial or quasi-judicial, function. Under Republic Act (R.A.) No.7160, or the Local Government Code of 1991 (LGC), local legislative power shall be exercised by the Sangguniang Panlungsod for the city.
Said law likewise is specific in providing that the power to impose a tax, fee, or charge , or to generate revenue shall be exercised by the sanggunian of the local government unit concerned through an appropriate ordinance.

Eusebio Villanueva, et al. v. City of Iloilo 26 SCRA

Section 2 of Local Autonomy Act confer on local governments broad taxing authority which extends to almost "everything, excepting those which are mentioned therein," provided that the tax so levied is "for public purposes, just and uniform," and does not transgress any constitutional provision or is not repugnant to a controlling statute.
Thus, when a tax, levied under the authority of a city or municipal ordinance, is not within the aforementioned exceptions and limitations, the same comes within the ambit of the general rule, pursuant to the rules of expressio unius est exclusio alterius, and exceptio firm rules in casibus non excepti.

Pepsi-Cola Bottling Co. of the Phils. v. City of Butuan⭐

Pepsi-Cola challenges the power of taxation delegated to municipalities under the Local Autonomy Act.
Held:

The power of taxation granted to municipalities under the Local Autonomy Act is constitutional. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent government, without being expressly conferred by the people.
It is a power that is purely legislative and which the central legislative body cannot delegate either to the executive or judicial power of the government without infringing upon the theory of separation of powers.
The exception, however, lies in the case of municipal corporations, to which said theory does not apply. Legislative powers may be delegated to local governments in respect of matters of local concern. (Pepsi-Cola Bottling Co. of the Phils., Inc. v. City of Butuan, 24 SCRA 793)
This is sanctioned by immemorial practice. By necessary implication, the legislative power to create political corporations for purposes of self-government carries with it the power to confer on such local government agencies the power to tax.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would not suffice to invalidate the said law as confiscatory and oppressive.
In delegating the authority, the State is not limited to the exact measure of that which is exercised by itself. When it is said that the taxing power may be delegated to municipalities and the like, it is meant that there may be delegated such measure of power to impose and collect taxes as the legislature may deem expedient.
Thus, municipalities may be permitted to tax subjects which for reasons of public policy the State has not deemed wise to tax for more general purposes.

Pepsi-Cola Bottling Co. of the Phils. v. City of Butuan ⭐

Petitioners assail the constitutionality of Municipal Ordinance No. 110, as amended by Mun. Ord. No. 122, on the ground that Sec. 2 of RA 2264, upon the authority of which it is delegated, is an unconstitutional delegation of legislative powers.
Held:

Independently of whether or not the tax in question, when considered in relation to the sales tax prescribed by Acts of Congress, amounts to double taxation, on which we need not and do not express any opinion — double taxation, in general, is not forbidden by our fundamental law. We have not adopted, as part thereof, the injunction against double taxation found in the Constitution of the United States and of some States of the Union.
Then, again, the general principle against delegation of legislative powers, in consequence of the theory of separation of powers is subject to one well-established exception, namely: legislative powers may be delegated to local governments — to which said theory does not apply — in respect of matters of local concern.

17. Special Fund

Art. VI, Sec. 29(3)

All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government.

Section 2 of Presidential Decree No. 755 clearly states: To enable the coconut farmers to comply with their contractual obligations under the aforesaid Agreement, the Philippine Coconut Authority is hereby directed to draw and utilize the collections under the Coconut Consumers' Stabilization Fund authorized to be levied by Presidential Decree No. 232, as amended, to pay for the financial commitments of the coconut farmers under the said agreement and, except for the budgetary requirements of the Philippine Coconut Authority as approved by its Governing Board, all collections under the Coconut Consumers' Stabilization Fund Levy and fifty percent (50%) of the collections under the Coconut Industry Development Fund shall be deposited, interest free, with the said bank of the coconut farmers and such deposits shall not be withdrawn until the Board of Directors of the said Bank and the Governing Board of the Philippine Coconut Authority shall have jointly ascertained that the bank has sufficient equity capital to be in a financial position to service in full the credit requirements of the coconut farmers; and since the operations, and activities of the Philippine Coconut Authority are all in accord with the present social economic plans and programs of the Government, all collections and levies which the Philippine Coconut Authority is authorized to levy and collect such as but not limited to the Coconut Consumers' Stabilization Levy, and the Coconut Industry Development Fund as prescribed by Presidential Decree No. 582 shall not be considered or construed, under any law or regulation, special and/or fiduciary funds and do not form part of the general funds of the national government within the contemplation of Presidential Decree No. 711.

Case for Study:

John H. Osmeña v. Oscar Orbos 220 SCRA 703

On October 10, 1984, President Ferdinand Marcos issued P.D. 1956 creating a Special Account in the General Fund, designated as the Oil Price Stabilization Fund (OPSF). The OPSF was designed to reimburse oil companies for cost increases in crude oil and imported petroleum products resulting from exchange rate adjustments and from increases in the world market prices of crude oil.
Subsequently, the OPSF was reclassified into a "trust liability account," in virtue of E.O. 1024,7 and ordered released from the National Treasury to the Ministry of Energy. The same Executive Order also authorized the investment of the fund in government securities, with the earnings from such placements accruing to the fund.
The petition further avers that the creation of the trust fund violates §29(3), Article VI of the Constitution.
The petitioner argues that "the monies collected pursuant to . . P.D. 1956, as amended, must be treated as a 'SPECIAL FUND,' not as a 'trust account' or a 'trust fund,' and that "if a special tax is collected for a specific purpose, the revenue generated therefrom shall 'be treated as a special fund' to be used only for the purpose indicated, and not channeled to another government objective." Petitioner further points out that since "a 'special fund' consists of monies collected through the taxing power of a State, such amounts belong to the State, although the use thereof is limited to the special purpose/objective for which it was created."
He also contends that the "delegation of legislative authority" to the ERB violates § 28 (2). Article VI of the Constitution, and, inasmuch as the delegation relates to the exercise of the power of taxation, "the limits, limitations and restrictions must be quantitative, that is, the law must not only specify how to tax, who (shall) be taxed (and) what the tax is for, but also impose a specific limit on how much to tax."
The petitioner does not suggest that a "trust account" is illegal per se, but maintains that the monies collected, which form part of the OPSF, should be maintained in a special account of the general fund for the reason that the Constitution so provides, and because they are, supposedly, taxes levied for a special purpose. He assumes that the Fund is formed from a tax undoubtedly because a portion thereof is taken from collections of ad valorem taxes and the increases thereon.
Held:

The petitioner's perceptions are, in the Court's view, not quite correct.
The OPSF is a "Trust Account" which was established "for the purpose of minimizing the frequent price changes brought about by exchange rate adjustment and/or changes in world market prices of crude oil and imported petroleum products."
It was established precisely to protect local consumers from the adverse consequences that such frequent oil price adjustments may have upon the economy. Thus, the OPSF serves as a pocket, as it were, into which a portion of the purchase price of oil and petroleum products paid by consumers as well as some tax revenues are inputted and from which amounts are drawn from time to time to reimburse oil companies, when appropriate situations arise, for increases in, as well as underrecovery of, costs of crude importation. The OPSF is thus a buffer mechanism through which the domestic consumer prices of oil and petroleum products are stabilized, instead of fluctuating every so often, and oil companies are allowed to recover those portions of their costs which they would not otherwise recover given the level of domestic prices existing at any given time. To the extent that some tax revenues are also put into it, the OPSF is in effect a device through which the domestic prices of petroleum products are subsidized in part.
It appears to the Court that the establishment and maintenance of the OPSF is well within that pervasive and non-waivable power and responsibility of the government to secure the physical and economic survival and well-being of the community, that comprehensive sovereign authority we designate as the police power of the State. The stabilization, and subsidy of domestic prices of petroleum products and fuel oil — clearly critical in importance considering, among other things, the continuing high level of dependence of the country on imported crude oil — are appropriately regarded as public purposes.
Hence, while the funds collected may be referred to as taxes, they are exacted in the exercise of the police power of the State. Moreover, that the OPSF is a special fund is plain from the special treatment given it by E.O. 137. It is segregated from the general fund; and while it is placed in what the law refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny and review of the COA. The Court is satisfied that these measures comply with the constitutional description of a "special fund." Indeed, the practice is not without precedent.

18. Supreme Courts Jurisdiction over Tax Case

Art. VIII, Sec. 2

The Congress shall have the power to define, prescribe, and apportion the jurisdiction of various courts but may not deprive the Supreme Court of its jurisdiction over cases enumerated in Section 5 hereof.

Art. VIII, Sec. 5

The Supreme Court shall have the following powers: xxx (2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may provide, final judgments and orders of lower courts in: xxx (a) All cases in which the constitutionality or validity of any treaty, international or executive agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation is in question.

The Supreme Court exercises exclusive appellate jurisdiction over certain judgments or orders of the lower courts involving the legality of a tax, impost, assessment, fee, or penalty imposed in relation thereto.

Pursuant to Republic Act No. 9282, the CTA has exclusive appellate jurisdiction over decisions of the Commissioner of Internal Revenue and Regional Trial Courts in local tax cases.
A party adversely affected by a decision or ruling of the CTA en banc may file with the Supreme Court a verified petition for review on certiorari pursuant to Rule 45 of the 1997 Rules of Civil Procedure.
Congress may not pass a law declaring that decisions of the Court of Tax Appeals on tax cases shall be final and executory.
In other words, Congress cannot deprive the Supreme Court of its power to review, revise, modify or affirm the decisions of the lower courts.

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Taxation Law: Limitations on the Taxing Power — Constitutional Limitations

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