2A 2014 Montero Tax Digests
!
• LIMITATIONS ON THE POWER OF
TAXATION
A. INHERENT LIMITATIONS
27. PASCUAL vs SECRETARY OF PUBLIC WORKS
G.R. No. L-10405, December 29, 1960
"Inherent limitations of the power to tax - appropriation of funds must
be for public purpose and not for private interests."
Case:
Senator Zulueta donated a parcel of land within Antonio Subdivision,
Pasig for the construction of the Pasig feeder road terminals. R.A.
Sec. 1-C, contained a provision appropriating 85,000 pesos for such
construction. Petitioner sought to nullify R.A. 920 on the ground that
the appropriation does not serve a public purpose but rather the
interests of Senator Zulueta. The SC ruled that the provision and the
appropriations are void since appropriations by the legislature,
correlative with its right to tax, must be for public purpose.
Facts:
• Senator Jose Zulueta owned parcels of land within Antonio
Subdivision, Pasig, Rizal.
• Senator Zulueta expressed his intentions to donate the said
parcels of land to the Municipality of Pasig under the condition of
construction, extension and improvement of the Pasig feeder road
terminals.
• In order to effectuate such construction of feeder roads, the
Congress enacted R.A. 920 which under its section 1-C
appropriated 85,000 pesos for the construction of feeder roads in
Pasig.
• Petitioner Wenceslao Pascual, Governor of Rizal, sought the
nullification of R.A. 920, Sec. 1-C, on the ground that such
construction was not for public purpose and meant to serve the
private interests of Zulueta.
• Petitioner alleged that the donation contained a condition which
renders it onerous consequently rendering it as a contract, and the
present Constitution prohibits any contract between the
! 1!
Government and the members of the Senate; and that such
construction would benefit Zulueta since it would entail the
increase in value of his nearby properties.
• Respondent Zulueta countered that the petition should be
dismissed since petitioners have no legal capacity to sue and the
petition does not state any cause of action.
• The lower court dismissed the petition on the ground that
Respondent Zulueta is not in anyway directly benefitted from such
construction and appropriation.
Issues:
• Whether or not the Zulueta interest is directly affected by the
construction of such feeder roads. (Stated otherwise, whether or
not R.A. 920 can be upheld on the ground that the
appropriation of php 85,000 for the construction of Pasig
feeder roads is made to serve the private interests of Senator
Zulueta.)
Held:
• No, appropriations made by the Government must be for
public purpose. This is a constitutional limitation of the taxing
power of the state that the funds so acquired must be
expended for the benefit of the public.
• It is a general rule that the legislature is without power to
appropriate public revenue for anything but a public purpose. . . It
is the essential character of the direct object of the expenditure
which must determine its validity as justifying a tax, and not the
magnitude of the interest to be affected nor the degree to which
the general advantage of the community, and thus the public
welfare, may be ultimately benefited by their promotion. Incidental
to the public or to the state, which results from the promotion
of private interest and the prosperity of private enterprises or
business, does not justify their aid by the use public money.
• Generally, under the express or implied provisions of the
constitution, public funds may be used only for public purpose. The
right of the legislature to appropriate funds is correlative with its
right to tax, and, under constitutional provisions against taxation
except for public purposes and prohibiting the collection of a tax for
one purpose and the devotion thereof to another purpose, no

appropriation of state funds can be made for other than for a public
purpose.
• As to petitioner's standing, it is well-stated that the validity of a
statute may be contested only by one who will sustain a direct
injury in consequence of its enforcement. Yet, there are many
decisions nullifying, at the instance of taxpayers, laws providing for
the disbursement of public funds, upon the theory that "the
expenditure of public funds by an officer of the State for the
purpose of administering an unconstitutional act constitutes a
misapplication of such funds," which may be enjoined at the
request of a taxpayer.
• In the determination of the degree of interest essential to give the
requisite standing to attack the constitutionality of a statute, the
general rule is that not only persons individually affected, but also
taxpayers, have sufficient interest in preventing the illegal
expenditure of moneys raised by taxation and may therefore
question the constitutionality of statutes requiring expenditure of
public moneys.
28. PEPSI-COLA BOTTLING CO. vs MUNICIPALITY OF TANUAN
G.R. No. L-31156, February 27, 1976
"Limitations of the power to tax - taxation must observe due process"
Case:
Pepsi Cola sought the nullification of R.A. 2264 for undue delegation
of taxing authority as well as Ordinance Nos. 23 and 27 for
constituting double taxation and being unjust, unfair and oppressive.
The SC held the constitutionality of R.A. 2264 since under the New
Constitution (1973), Municipal Corporation are given the power to
create their own sources of revenue and to levy taxes. However,
taxation must observe due process in its application otherwise it may
be invalidated.
Ordinances 23 and 27 do not constitute double taxation as the latter
is a repeal of the former. Although a municipal corporation has no
authority to impose percentage taxes, which in this case based on
the ratio, such ordinance is not classified as such since it not
imposed on the volume of sales, but rather on the produce. Neither
the ordinance can be classified as a specific tax since specific tax is
! 2!
2A 2014 Montero Tax Digests
!
levied on specified articles as provided by law. Soft drinks is not one
of them.
Facts:
• On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling
Company of the Philippines, Inc., commenced a complaint with
preliminary injunction before the Court of First Instance of Leyte for
that court to declare Section 2 of Republic Act No. 2264. otherwise
known as the Local Autonomy Act, unconstitutional as an undue
delegation of taxing authority as well as to declare Ordinances
Nos. 23 and 27, series of 1962, of the municipality of Tanauan,
Leyte, null and void.
• Both Ordinances Nos. 23 and 27 embrace or cover the same
subject matter and the production tax rates imposed therein are
practically the same, and second, that on January 17, 1963, the
acting Municipal Treasurer of Tanauan, Leyte, as per his letter
addressed to the Manager of the Pepsi-Cola Bottling Plant in said
municipality, sought to enforce compliance by the latter of the
provisions of said Ordinance No. 27, series of 1962.
• Municipal Ordinance No. 23, of Tanauan, Leyte, which was
approved on September 25, 1962, levies and collects "from soft
drinks producers and manufacturers a tai of one-sixteenth (1/16) of
a centavo for every bottle of soft drink corked." For the purpose of
computing the taxes due, the person, firm, company or corporation
producing soft drinks shall submit to the Municipal Treasurer a
monthly report, of the total number of bottles produced and corked
during the month.
• On the other hand, Municipal Ordinance No. 27, which was
approved on October 28, 1962, levies and collects "on soft drinks
produced or manufactured within the territorial jurisdiction of this
municipality a tax of ONE CENTAVO (P0.01) on each gallon (128
fluid ounces, U.S.) of volume capacity." For the purpose of
computing the taxes due, the person, fun company, partnership,
corporation or plant producing soft drinks shall submit to the
Municipal Treasurer a monthly report of the total number of gallons
produced or manufactured during the month.
• On October 7, 1963, the Court of First Instance of Leyte rendered
judgment "dismissing the complaint and upholding the
constitutionality of [Section 2, Republic Act No. 2264] declaring
Ordinance Nos. 23 and 27 legal and constitutional; ordering the

plaintiff to pay the taxes due under the oft the said Ordinances;
and to pay the costs."
Issues:
• Whether or not R.A. 2264 is Constitutional
• Whether or not Ordinances Nos. 23 and 27 constitute double
taxation and impose percentage or specific taxes
Held:
• Yes, taxation power is a power that is purely legislative and
which the central legislative body cannot delegate either to
the executive or judicial department 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.
• Under the New Constitution, local governments are granted the
autonomous authority to create their own sources of revenue and
to levy taxes. Section 5, Article XI provides: "Each local
government unit shall have the power to create its sources of
revenue and to levy taxes, subject to such limitations as may be
provided by law." Withal, it cannot be said that Section 2 of
Republic Act No. 2264 emanated from beyond the sphere of the
legislative power to enact and vest in local governments the power
of local taxation.
• 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.
• This is not to say though that the constitutional injunction
against deprivation of property without due process of law
may be passed over under the guise of the taxing power,
except when the taking of the property is in the lawful
exercise of the taxing power, as when:
• (1) the tax is for a public purpose;
• (2) the rule on uniformity of taxation is observed;
• (3) either the person or property taxed is within the
jurisdiction of the government levying the tax; and
• (4) in the assessment and collection of certain kinds of
taxes notice and opportunity for hearing are provided.
! 3!
2A 2014 Montero Tax Digests
!
• Due process is usually violated where the tax imposed is for a
private as distinguished from a public purpose; a tax is imposed on
property outside the State, i.e., extraterritorial taxation; and
arbitrary or oppressive methods are used in assessing and
collecting taxes.
• There is no validity to the assertion that the delegated authority
can be declared unconstitutional on the theory of double taxation.
It must be observed that the delegating authority specifies the
limitations and enumerates the taxes over which local taxation may
not be exercised. The reason is that the State has exclusively
reserved the same for its own prerogative. Moreover, double
taxation, in general, is not forbidden by our fundamental law,
since We have not adopted as part thereof the injunction against
double taxation found in the Constitution of the United States and
some states of the Union. Double taxation becomes obnoxious
only where the taxpayer is taxed twice for the benefit of the
same governmental entity or by the same jurisdiction for the
same purpose, but not in a case where one tax is imposed by
the State and the other by the city or municipality.
• No
• Ordinance No. 23, which was approved on September 25, 1962,
levies or collects from soft drinks producers or manufacturers a tax
of one-sixteen (1/16) of a centavo for .every bottle corked,
irrespective of the volume contents of the bottle used.
• Ordinance No. 27, approved on October 28, 1962, imposing a tax
of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity.
• The difference between the two ordinances clearly lies in the tax
rate of the soft drinks produced.
• The intention of the Municipal Council of Tanauan in enacting
Ordinance No. 27 is thus clear: it was intended as a plain
substitute for the prior Ordinance No. 23, and operates as a repeal
of the latter, even without words to that effect.
• Municipalities and municipal districts are prohibited to impose "any
percentage tax or other taxes in any form based thereon nor
impose taxes on articles subject to specific tax except gasoline,
under the provisions of the National Internal Revenue Code." For
purposes of this particular limitation, a municipal ordinance which
prescribes a set ratio between the amount of the tax and the

volume of sale of the taxpayer imposes a sales tax and is null and
void for being outside the power of the municipality to enact.
• But, the imposition of "a tax of one centavo (P0.01) on each gallon
(128 fluid ounces, U.S.) of volume capacity" on all soft drinks
produced or manufactured under Ordinance No. 27 does not
partake of the nature of a percentage tax on sales, or other taxes
in any form based thereon. The tax is levied on the produce
(whether sold or not) and not on the sales. The volume capacity of
the taxpayer's production of soft drinks is considered solely for
purposes of determining the tax rate on the products, but there is
not set ratio between the volume of sales and the amount of the
tax.
• Nor can the tax levied be treated as a specific tax. Specific taxes
are those imposed on specified articles, such as distilled spirits,
wines, fermented liquors, products of tobacco other than cigars
and cigarettes, matches firecrackers, manufactured oils and other
fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic films,
playing cards, saccharine, opium and other habit-forming drugs.
Soft drink is not one of those specified.
29. MIAA vs CITY OF PARANAQUE
G.R. No. 155650 July 20, 2006
REYES NOTES:
Can local governments tax the national government, its
agencies, and instrumentalities?
No. In MIAA v. CA [495 SCRA 591], the Supreme Court, in resolving
the issue on whether the lands and buildings owned by the Manila
International Airport Authority were subject to real property tax, ruled
in the negative. The Supreme Court opined that since MIAA is not a
GOCC but instead as government instrumentality vested with
corporate powers or a government corporate entity, it is exempt from
real property tax. By express provision of the Local Government
Code, local governments cannot levy taxes, fees or charges of any
kind on the National Government, its agencies and instrumentalities.
Furthermore, the said lands and buildings are property of the public
dominion and therefore owned by the State. They are devoted to
public use. Thus, they cannot be auctioned as they are outside the
! 4!
2A 2014 Montero Tax Digests
!
commerce of man. However, the portions of the property leased to
private entities are subject to real property tax.
FACTS:
• Petitioner Manila International Airport Authority operates the
Ninoy Aquino International Airport Complex in Parañaque City
under Executive Order No. 903, issued on 21 July 1983 by then
President Ferdinand E. Marcos. As operator of the international
airport, MIAA administers the land, improvements and equipment
within the NAIA Complex, including the runways and buildings.
• 21 March 1997 -The Office of the Government Corporate
Counsel (OGCC) issued Opinion No. 061. The OGCC opined
that the Local Government Code of 1991 withdrew the
exemption from real estate tax granted to MIAA under Section 21
of the MIAA Charter.
• 17 July 2001 – The City of Parañaque, through its City
Treasurer, issued notices of levy and warrants of levy on the
Airport Lands and Buildings threatened to sell at public auction
the Airport Lands and Buildings should MIAA fail to pay the real
estate tax delinquency.
• 1 October 2001 - MIAA filed with the Court of Appeals an original
petition for prohibition and also points out that Section 21 of the
MIAA Charter specifically exempts MIAA from the payment of
real estate tax. MIAA insists that it is also exempt from real
estate tax under Section 234 of the Local Government Code
because the Airport Lands and Buildings are owned by the
Republic. To justify the exemption, MIAA invokes the principle
that the government cannot tax itself. MIAA points out that the
reason for tax exemption of public property is that its taxation
would not inure to any public advantage, since in such a case
the tax debtor is also the tax creditor.
ISSUE: Whether the Airport Lands and Buildings of MIAA are
exempt from real estate tax under existing laws?
HELD & RATIO:
YES, MIAA's Airport Lands and Buildings are exempt from real
estate tax imposed by local governments.
• First, MIAA is not a government-owned or controlled corporation
but an instrumentality of the National Government and thus

exempt from local taxation. Second, the real properties of MIAA
are owned by the Republic of the Philippines and thus exempt
from real estate tax.
o Since MIAA is neither a stock nor a non-stock
corporation, MIAA does not qualify as a government-
owned or controlled corporation. MIAA is a government
instrumentality vested with corporate powers to perform
efficiently its governmental functions. MIAA is like any
other government instrumentality, the only difference is
that MIAA is vested with corporate powers.
• Another rule is that a tax exemption is strictly construed against
the taxpayer claiming the exemption. However, when Congress
grants an exemption to a national government instrumentality
from local taxation, such exemption is construed liberally in favor
of the national government instrumentality.
• There is also no reason for local governments to tax national
government instrumentalities for rendering essential public
services to inhabitants of local governments. The only exception
is when the legislature clearly intended to tax government
instrumentalities for the delivery of essential public services for
sound and compelling policy considerations. There must be
express language in the law empowering local governments to
tax national government instrumentalities. Any doubt whether
such power exists is resolved against local governments.
• The Airport Lands and Buildings are devoted to public use
because they are used by the public for international and
domestic travel and transportation. The fact that the MIAA
collects terminal fees and other charges from the public does not
remove the character of the Airport Lands and Buildings as
properties for public use. The operation by the government of a
tollway does not change the character of the road as one for
public use. Someone must pay for the maintenance of the road,
either the public indirectly through the taxes they pay the
government, or only those among the public who actually use the
road through the toll fees they pay upon using the road. The
tollway system is even a more efficient and equitable manner of
taxing the public for the maintenance of public roads.
FINAL VERDICT: Petition Granted.
! 5!
2A 2014 Montero Tax Digests
!
Source: 2011 Digest
30. SEA-LAND SERVICES INC. vs CA
GR 122605 April 30, 2001
REYES NOTES:
Note that the principle of comity entails an exchange in benefits.
Thus, in SEA-LAND SERVICE V. CA [357 SCRA 441], the Supreme
Court ruled that the hauling and transport of household goods and
personal effects of U.S. military personnel were not tax exempt under
the RP-US Military Bases Agreement as they do not directly
contribute to the defense and security of the Philippines.
FACTS:
• Petitioner Sea-Land Service Incorporated, an American
international shipping company licensed by the Securities and
Exchange Commission to do business in the Philippines entered
into a contract with the United States Government to transport
military household goods and effects of U.S. military personnel
assigned to the Subic Naval Base.
• Sea-Land paid its corresponding corporate income tax for the
taxable year 1984 at the rate of 1.5% in accordance with Section
25(a) (2) of the National Internal Revenue Code in relation to
Article 9 of the RP-US Tax Treaty.
• Subsequently, Sea-Land filed a claim for refund alleging that the
taxes it paid were made in mistake because under the RP-US
Military Base Agreement, it is exempt from the payment of taxes.
ISSUE: Does the income that petitioner derived from services in
transporting the household goods and effects of U.S. military
personnel fall within the tax exemption provided in the RP-US Military
Bases Agreement?
HELD & RATIO:
NO. The RP-US Military Bases Agreement exempts from income
taxation the income derived by its corporations or nationals and
residents from the construction, maintenance, operation and defense
of bases or any tax in nature of a license in respect of any work or
service for the US in connection with the construction, maintenance,
operation and defense of bases.

• Laws granting exemption from tax are construed strictissimi juris
against the taxpayer and liberally in favor of the taxing power.
o The law does not look with favor on tax exemptions and
that he who would seek to be thus privileged must justify
its words too plain to be mistaken and too categorical to
be misinterpreted.
o Taxation is the rule and exemption is the exception.
• The transport or shipment of household goods and effects of
U.S. military personnel is not included in the term "construction,
maintenance, operation and defense of the bases.”
• Neither could the performance of this service to the U.S.
government be interpreted as directly related to the defense and
security of the Philippine territories
FINAL VERDICT: Petition denied for lack of merit.
Source: 2015 digest
31. 31st INFANTRY POST EXCHANGE vs. POSADAS
G.R. No. 33403. September 4, 1930
CASE:
st
In the course of its duly authorized business transactions, the 31
Infantry Post Exchange made many purchases of various and
diverse commodities, goods, wares and merchandise from various
merchants in the Philippines. The Commissioner collected a sales
tax of 1 1/2 % of the gross value of the commodities, etc. from the
merchants who sold said commodities to the Exchange. A formal
protest was lodged by the Exchange. The SC held that An Army Post
Exchange, although an agency within the US Army, cannot secure
exemption from taxation for merchants who make sales to the Post
Exchange.
FACTS:
• The 31st Infantry Post Exchange is a post exchange constituted
in accordance with Army regulations and the laws of the United
States. Juan Posadas is the duly qualified and acting Collector of
Internal Revenue of the Philippine Islands.
• In the course of its duly authorized business transactions, the
Exchange made many purchases of various and diverse
! 6!
2A 2014 Montero Tax Digests
!
commodities, goods, wares and merchandise from various
merchants in the Philippines.
• The Commissioner collected a sales tax of 1 1/2 % of the gross
value of the commodities, etc. from the merchants who sold said
commodities to the Exchange. A formal protest was lodged by
the Exchange.
• Posadas now persists in demanding and collecting such taxes
and at the said rate on the sale of merchants to the Post
Exchange. The statutes relied on by Posadas in the collection
are section 1459 of Act. No. 2711 and Act No. 3243 of the public
laws enacted by the Philippine Legislature; also the Act of June
4, 1918 and the Act of March 3, 1927, enacted by the Congress
of the United States, ratifying the said two enactments of the
Philippine Legislature.
• Since the taxes are imposed on the gross sales, the effect and
demand of collection would be an increase in the price of
commodities when they are sold to the Post Exchange.
ISSUE: W/N tax may be levied by the Government of the Philippine
Islands on sales made by merchants to Post Exchange of the United
States Army in the Philippines.
HELD & RATIO:
YES, tax may be levied by merchants to Post Exchanges of the US
Army in the Philippines
• Taxes have been collected from merchants who made sales to
Army Post Exchanges since 1904 (Act 1189, Section 139).
Similar taxes are paid by those who sell merchandise to the
Philippine Government, and by those who do business with the
US Army and Navy in the Philippines.
• Herein, the merchants who effected the sales to the Post
Exchange are the ones who paid the tax; and it is the officers,
soldiers, and civilian employees and their families who are
benefited by the post exchange to whom the tax is ultimately
shifted.
• An Army Post Exchange, although an agency within the US
Army, cannot secure exemption from taxation for merchants who
make sales to the Post Exchange.
FINAL VERDICT: Petition dismissed.

Source: 2014 digest
32. REAGAN vs. COMMISSIONER OF INTERNAL REVENUE
G.R. No. L-26379, 27. December 27, 1969
REYES NOTES/ CASE:
The Supreme Court held that bases under lease to the US
under the Military Bases Agreement remain part of Philippine
territory. It is not foreign territory for purposes of income tax
legislation. The power to tax has been preserved except for those
matters where an appropriate exemption was provided for.
FACTS:
• Petitioner William C. Reagan is a civilian employee of an
American corporation providing technical assistance to the
US Air Force in the Philippines.
• He imported a tax free 1960 Cadillac valued at $6.4k
• 2 months after he sold it to Willie Johnson Jr., a member of
the US Marine Corps, for $6,600, which took place at the
Clark Field Air Base at Pampanga.
o He was granted permission to sell the car with the
condition that the sale should be made to a member
of the US Armed Forces or a citizen of the US
employed in the US military bases in the Philippines
• Johnson Jr. sold the car to Fred Meneses for P32k
• CIR rendered Reagan liable for P2,979 as income tax
• Reagan paid, but sought a refund from CIR claiming he was
exempt.
• Consequently he filed a case of recovery for such amount
with the Court of Tax Appeals.
• CTA Decision: dismissed, CIR legally collected the amount,
hence this petition
ISSUES:
1. Whether or not the Reagan is exempt from tax.
HELD & RATIO:
FINAL VERDICT: Petition is denied. The CTA decision is affirmed.
! 7!
2A 2014 Montero Tax Digests
!
1. NO. The sale having taken place on what indisputably is
Philippine territory, petitioner’s liability of the income tax due
as a result there was unavoidable.
A. US Military Bases are not foreign territories both in the
political and geographical sense.
• Philippines’ authority may be exercised over its entire
domain
• Concept of sovereignty as auto-limitation - when the
state may submit to a restriction of its sovereign rights
• The jurisdiction may be diminished BUT IT DID
NOT DISAPPEAR, it still has authority, and the
status as native soil.
• There is NOTHING in the Military Bases Agreement
that states Clark Air Force is foreign soil or territory for
purposes of income tax legislation
• A clause provides that a "national of the United
States serving in or employed in the Philippines in
connection with the construction, maintenance,
operation or defense of the bases and residing in
the Philippines only by reason of such
employment" is not to be taxed on his income
unless "derived from Philippine source or sources
other than the United States sources.”
• Purpose to preclude tax evasion
• People v. Acierto:
• "By the [Military Bases] Agreement, it should be
noted, the Philippine Government merely consents
that the United States exercise jurisdiction in
certain cases. The consent was given purely as a
matter of comity, courtesy, or expediency over the
bases as part of the Philippine territory or divested
itself completely of jurisdiction over offenses
committed therein.”
• “If anything, it is an emphatic recognition and
reaffirmation of Philippine sovereignty over the
bases and of the truth that all jurisdictional rights
granted to the United States and not exercised by
the latter are reserved by the Philippines for itself.”

33. COMMISSIONER OF INTERNAL REVENUE vs MITSUBISHI
METAL CORP.
G.R. No. L-54908. January 22, 1990
REYES NOTES:
What is the principle of comity in relation to the power to
tax?
In CIR v. Mitsubishi Metal Corp [181 SCRA 214], the Supreme
Court held that scrupulous care must be taken when international
comity is invoked on the representation that funds involved in the
loans are those of a foreign government as we should avoid opening
the floodgates to the violation of our tax laws.
FACTS:
• On April 17, 1970, Atlas Consolidated Mining and Development
Corporation entered into a Loan and Sales Contract with
Mitsubishi Metal Corporation for purposes of the projected
expansion of the productive capacity of the former's mines in
Toledo, Cebu.
• Under said contract, Mitsubishi agreed to extend a loan to Atlas
'in the amount of $20,000,000.00, United States currency. Atlas,
in turn undertook to sell to Mitsubishi all the copper concentrates
produced for a period of fifteen (15) years. Mitsubishi thereafter
applied for a loan with the Export-Import Bank of Japan
(Eximbank) for purposes of its obligation under said contract. Its
loan application was approved on May 26, 1970 in the equivalent
sum of $20,000,000.00 in United States currency at the then
prevailing exchange rate.
• Pursuant to the contract between Atlas and Mitsubishi, interest
payments were made by the former to the latter totaling
P13,143,966.79 for the years 1974 and 1975. The corresponding
15% tax thereon in the amount of P1,971,595.01 was withheld
pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the
National Internal Revenue Code, as amended by Presidential
Decree No. 131, and duly remitted to the Government.
ISSUE: Whether or not the interest income from the loans extended
to Atlas by Mitsubishi is excludible from gross income taxation
! 8!
2A 2014 Montero Tax Digests
!
pursuant to Section 29 of the tax code and, therefore, exempt from
withholding tax.
HELD & RATIO:
The court ruled in the negative.
• Eximbank had nothing to do with the sale of the copper
concentrates since all that Mitsubishi stated in its loan
application with the former was that the amount being procured
would be used as a loan to and in consideration for importing
copper concentrates from Atlas. Such an innocuous statement of
purpose could not have been intended for, nor could it legally
constitute, a contract of agency. The conclusion is indubitable;
MITSUBISHI, and NOT EXIMBANK, is the sole creditor of
ATLAS, the former being the owner of the $20 million upon
completion of its loan contract with EXIMBANK of Japan.
• It is settled a rule in this jurisdiction that laws granting exemption
from tax are construed strictissimi juris against the taxpayer and
liberally in favor of the taxing power. Taxation is the rule and
exemption is the exception.
34. COMMISSIONER OF INTERNAL REVENUE vs. MARUBENI
CORP.
G.R. No. 137377 December 18, 2001
REYES NOTES:
What is meant by “territoriality or situs of taxation” as a
limitation on the power of taxation?
However broad the power of taxation may be as to its character and
no matter how searching it is in its extent, such power is necessarily
limited only to persons, property or businesses within its
jurisdiction.
In CIR V. MARUBENI [204 SCRA 377], what was involved was a
contract on a turn-key basis which the CIR sought to tax as an
indivisible contract. The Supreme Court held that the contract
actually involved two taxing jurisdictions. While the construction and
installation work were completed in the Philippines, some pieces of
equipment and supplies were completely designed and engineered
 2A 2014 Montero Tax Digests
!
in Japan. These services made and completed in Japan are not availing of the said amnesties because the latter falls under the
subject to contractor’s tax as they are rendered outside the taxing exception in Section 4 (b) of E.O. No. 41.
jurisdiction of the Philippines. • A tax amnesty, much like a tax exemption, is never favored nor
presumed in law. If granted, the terms of the amnesty, like that of
FACTS: a tax exemption, must be construed strictly against the taxpayer
• Respondent Marubeni Corporation is a foreign corporation and liberally in favor of the taxing authority. For the right of
organized and existing under the laws of Japan. It is engaged in taxation is inherent in government. The State cannot strip itself of
general import and export trading, financing and the construction the most essential power of taxation by doubtful words. He who
business. It is duly registered to engage in such business in the claims an exemption (or an amnesty) from the common burden
Philippines and maintains a branch office in Manila. must justify his claim by the clearest grant of organic or state
• Sometime in November 1985, petitioner Commissioner of law. It cannot be allowed to exist upon a vague implication. If a
Internal Revenue issued a letter of authority to examine the doubt arises as to the intent of the legislature, that doubt must be
books of accounts of the Manila branch office of respondent resolved in favor of the state.
corporation for the fiscal year ending March 1985. In the course
of the examination, petitioner found respondent to have
undeclared income from two (2) contracts in the Philippines, both
of which were completed in 1984. One of the contracts was with
the National Development Company (NDC) in connection with
the construction and installation of a wharf/port complex at the
Leyte Industrial Development Estate in the municipality of Isabel,
province of Leyte. The other contract was with the Philippine
Phosphate Fertilizer Corporation (Philphos) for the construction
of an ammonia storage complex also at the Leyte Industrial
Development Estate.
• On March 1, 1986, petitioner's revenue examiners recommended
an assessment for deficiency income, branch profit remittance,
contractor's and commercial broker's taxes. Respondent
questioned this assessment in a letter dated June 5, 1986.

ISSUE: Whether or not the CIR need to assess and collect the tax
despite the tax amnesty availed of by the respondent?

RULING:
• The main controversy in this case lies in the interpretation of the
exception to the amnesty coverage of E.O. Nos. 41 and 64.
There are three (3) types of taxes involved herein — income tax,
branch profit remittance tax and contractor's tax. These taxes are
covered by the amnesties granted by E.O. Nos. 41 and 64.
Petitioner claims, however, that respondent is disqualified from

! 9!

B. CONSTITUTIONAL LIMITATIONS
(i) UNIFORMITY
35. TIU vs CA
G.R. NO. 127410. JANUARY 20, 1999
REYES NOTES:
Is there a violation of the uniformity of taxation or equal
protection when the State gives preferential tax treatment to
locators inside special economic zones?
No. As held in TIU V. CA [301 SCRA 278], there are substantial
differences between the big investors who are being lured to
establish and operate their industries in the special economic zones
and those business operators outside the zones. One of these is that
the former bring in billion-peso investments and thousands of new
jobs. The Supreme Court also stated that the equal protection
guarantee does not require territorial uniformity of laws.
FACTS:
• Congress passed into law RA 7227. Section 12 thereof created
the Subic Special Economic Zone and granted thereto special
privileges.The President issued Executive Order No. 97-A (EO
97-A), specifying the area within which the tax-and-duty-free
privilege was operative.
• October 26, 1994 -The petitioners challenged before this Court
the constitutionality of EO 97-A for allegedly being violative of
their right to equal protection of the laws. In a Resolution dated
June 27, 1995, this Court referred the matter to the Court of
Appeals, pursuant to Revised Administrative Circular No. 1-95.
• Petitioners contend that the SSEZ encompasses (1) the City of
Olongapo, (2) the Municipality of Subic in Zambales, and (3) the
area formerly occupied by the Subic Naval Base. However, EO
97-A, according to them, narrowed down the area within which
the special privileges granted to the entire zone would apply to
the present “fenced-in former Subic Naval Base” only. It has
thereby excluded the residents of the first two components of the
zone from enjoying the benefits granted by the law. It has
! 10!
2A 2014 Montero Tax Digests
!
effectively discriminated against them, without reasonable or
valid standards, in contravention of the equal protection
guarantee.
ISSUE: Whether the provisions of Executive Order No. 97-A
confining the application of R.A. 7227 granting tax and duty
incentives only to businesses and residents within the secured area
and excluding the residents of the zone outside of the secured area
is discriminatory or not.
HELD & RATIO:
NO. We rule in favor of the constitutionality and validity of the
assailed EO.
• Said Order is not violative of the equal protection clause; neither
is it discriminatory. Rather, we find real and substantive
distinctions between the circumstances obtaining inside and
those outside the Subic Naval Base, thereby justifying a valid
and reasonable classification.
• There are substantial differences between the big investors who
are being lured to establish and operate their industries in the so-
called “secured area” and the present business operators
outside the area.
o On the one hand, we are talking of billion-peso
investments and thousands of new jobs.
o On the other hand, definitely none of such magnitude. In
the first, the economic impact will be national; in the
second, only local.
• Even more important, at this time the business activities outside
the “secured area” are not likely to have any impact in achieving
the purpose of the law, which is to turn the former military base
to productive use for the benefit of the Philippine economy.
There is, then, hardly any reasonable basis to extend to them the
benefits and incentives accorded in RA 7227.
FINAL VERDICT: Petition denied for lack of merit.
Source: 2014 digest

36. JOHN HAY PEOPLES ALTERNATIVE COALITION vs. BCDA
October 24, 2003
REYES NOTES/ CASE:
Should tax incentives be uniform for all special
economic zones?
Not Necessarily. At issue was the extension of benefits given to the
Subic SEZ under RA 7227 to the John Hay SEZ via a proclamation,
the Supreme Court ruled that tax exemptions must be strictly and
expressly provided for and that the power to grant exemption is only
within Congress.
Congress passed RA 7227 to accelerate the Conversion of Military
Reservations into Productive Uses. These bases are the Clark and
Subic military reservations and their extensions including John Hay
Station. It also gave the President power to create Special Economic
Zones in the areas mentioned. The point of contention is when
President Ramos through a Presidential Proclamation made John
Hay a Special Economic Zone providing it with the same tax
incentives as the Subic SEZ. The Court held that RA 7227 only
allows Subic to have tax exemptions. Only Congress can grant tax
exemptions and it must be clearly expressed.
Background:
• This is a petition for prohibition, mandamus and declaratory
relief with prayer for a temporary restraining order (TRO)
and/or write of preliminary injunction.
• Petitioners John Hay People’s Alternative Coalition et al
(John Hay) assail the constitutionality of Presidential
Proclamation No. 420, Series of 1994, “Creating and
Designating a Portion of the Area Covered by the Former
Camp John (Hay). As the John Hay Special Economic Zone
Pursuant to Republic Act No. 7227”.
• RA 7227 An Act Accelerating the Conversion of Military
Reservations into other Productive Uses, Creating the Bases
Conversion and Development Authority for this Purpose,
Providing Funds Therefor and for other Purpose, otherwise
known as the “Bases Conversion and Development Act of
1992.”
! 11!
2A 2014 Montero Tax Digests
!
o This set out the policy of the government to
accelerate the sound and balanced conversion into
alternative productive uses of the former military
bases under the 1947 Philippines-United States of
America Military Bases Agreement, namely, the
Clark and Subic military reservations as well as their
extensions including the John Hay Station (Camp
John Hay or the Camp) in the city of Baguio.
o Created Respondent Bases Conversion and
Development Authority (BCDA),
! Vesting it with powers pertaining to the
multifarious aspects of carrying out the
ultimate objective of utilizing the base areas
in accordance with the declared government
policy.
o Granted the Subic SEZ incentives ranging from tax
and duty-free importations, exemption of businesses
therein from local and national taxes, to other
hallmarks of a liberalized financial and business
climate.
o Expressly gave authority to the President to create
through executive proclamation subject to the
concurrence of the local government units directly
affected, other Special Economic Zones (SEZ) in the
areas covered respectively by the Clark military
reservation, the Wallace Air Station in San
Fernando, La Union, and Camp John Hay.
FACTS:
• BCDA entered into a MOA and Escrow Agreement
with Tuntex and Asia World Internationale Group
Inc.
• MOA and Escrow Agreements are preparatory to the
formation of a joint venture for the development of
Poro Point in La Union and Camp John Hay (CJH)
as premier tourist destinations and recreation
centers.
• 4 months later, JVA was executed by BCDA,
TUNTEX and ASIAWORLD

o They bound themselves to put up a joint
venture company known as the Baguio
International Development and Management
Corporation which would lease areas within
Camp John Haz and Poro Point for the
purpose of turning such places into principal
tourist and recreation spots, as originally
envisioned by the parties under the MOAs.
• Resolution No, 255 seeking and supporting, subjecting to its
concurrence, the issuance by then President Ramos of a
Presidential Proclamation declaring an area of 288.1
hectares of the cap as a SEZ in accordance with the
provisions of R.A. No.7227. Together with this resolution was
submitted a draft of the proposed proclamation for
consideration by the President.
• President Ramos issued Proclamation No. 420, Series of
1994, “Creating and Designating a Portion of the Area
Covered by the Former Camp John (Hay). As the John Hay
Special Economic Zone Pursuant to Republic Act No. 7227”.
Pertinent provision of section 3 of said proclamation:
o Sec. 3. Investment Climate in John Hay Special
Economic Zone – Pursuant to Section 5(m) and
Section 15 of RA 7227, the John Haz Poro Point
Development Corporation shall implement all
necessary policies, rules, and regulations governing
the zone, including investment incentives, in
consultation with pertinent government departments.
Among others, the zone shall have all the applicable
incentives of the Special Economic Zone under
Section 12 of Republic Act No. 7227 and those
applicable incentives granted in the Export
Processing Zones, the Omnibus Investment Code of
1987, the Foreign Investment Act of 1991, and new
investment laws that may herein be enacted.
ISSUES: Whether or not Proclamation No. 420 is constitutional by
providing for national and local tax exemption within and granting
other economic incentives to the John Hay Special Economic Zone?
HELD & RATIO:
! 12!
2A 2014 Montero Tax Digests
!
NO, the second sentence of Sec 3 granting John Hay incentives
under Sec 12 of RA 7227 and applicable tax incentives is
unconstitutional.
• Section 12 of RA 7227 is only for the Subic SEZ which was
granted by Congress with tax exemption, investment
incentives and the like. There is no express extension of the
aforesaid benefits to other SEZs still to be created at the
time via presidential proclamation.
• The privileges given to Subic SEZ consist principally of
exemption from tariff or custom duties, national and local
taxes of business entities therein, free market and trade of
specified goods or properties, liberalized banking and
finance and relaxed immigration rules for foreign investors.
• While the grant of economic incentives may be essential to
the creation and success of SEZs, free trade zones and the
like , the grant thereof to the John Hay SEZ cannot be
sustained. The incentives under RA 7227 are exclusive only
to the Subic SEZ, hence, the extension of the same to the
John Haz SEZ finds no support therein.
• The claim of statutory exemption of the John Hay SEZ from
taxation should be manifest and unmistakeable from the
language of the law on which it is based; it must be
expressly granted in a statute stated in a language that is too
clear to be mistaken. Tax exemption cannot be implied as it
must be categorically and unmistakeably expressed.
• Law granting tax exemption must have the concurrence of a
majority of all the members of Convress. In the same way,
the other kinds of privileges extended to the John Hay SEZ
are by tradition and usage for Congress to legislate upon.
• This Court then declares that the grant by Proclamation No.
420 of tax exemption and other privileges to the John Hay
SEZ is void for being violative of the Constitution. It is
unnecessary to dwell on petitioner’s claim that the same
grant violates the equal protection guarantee.
• The unconstitutionality of the grant of tax immunity and
financial incentives as containted in the second sentence of
Section 3 of Proclamation No. 420 notwithstanding, the
entire assailed proclamation cannot be declared
unconstitutional, the other parts thereof not being repugnant
to law or to the constitution. The delineation of a portion of

the area covered by Camp John Hay as a SEZ was well
within the powers of the President by means of a
proclamation. The requisite prior concurrence by the Baguio
City government to such proclamation appears to have been
given in the form of a duly enacted resolution by the
sanggunian. The other provisions of the proclamation had
been proven to be consistent with RA 7227.
FINAL VERDICT: WHEREFORE, the second sentence of Section 3
of Proclamation No. 420 is hereby declared NULL AND VOID and is
accordingly declared of no legal force and effect. Public respondents
are hereby enjoined from implementing the aforesaid void provision.
Proclamation No. 420, without the invalidated portion, remains
valid and effective.
Notes/ Source: Copied exactly from Taxation 1 Digests 2A-2015
37. COCONUT OIL REFINERS ASSOCIATION, INC. AND REALTY
DEVELOPMENT CORPORATION v. BCDA ET. AL
G.R. No. 13252, July 29, 2005
REYES NOTES/ CASE:
PM REYES Notes just stated that rationale in John Hay Case
was used in this case.
Republic Act No. 7227 was enacted providing for the
conversion of the Clark and Subic military reservations into special
economic zones. It also provided for tax incentives and duty-free
importations of raw materials, capital and equipment to the Subic
Special Economic Zone (SSEZ) (note that this incentive was not
extended to Clark Special Economic Zone (CSEZ)). However,
exportation or removal of goods from the territory of the SSEZ to the
other parts of the Philippine territory shall be subject to customs
duties and taxes.
Petitioner assails the constitutionality of 3 issuances related
to RA 7227 on the grounds that they amount to executive legislation
and violate the equal protection clause.
I. Section 5 of Executive Order No. 80 - declared that Clark shall
have all the applicable incentives granted to the Subic Special
! 13!
2A 2014 Montero Tax Digests
!
Economic and Free Port Zone under Republic Act No. 7227. The
Court held that it is void for being an invalid exercise of
executive legislation. While Section 12 of Republic Act No. 7227
expressly provides for the grant of incentives to the SSEZ, it fails
to make any similar grant in favor of other economic zones,
including the CSEZ. Tax and duty-free incentives being in the
nature of tax exemptions, the basis thereof should be
categorically and unmistakably expressed from the language of
the statute. (Similar to John Hay case)
II. Executive Order No. 97-A - provides guidelines to govern the
tax and duty-free privileges within the Secured Area of the Subic
Special Economic and Free Port Zone. Business enterprises and
individuals (Filipinos and foreigners) residing within the Secured
Area are free to import raw materials, capital goods, equipment,
and consumer items tax and duty-free. Consumption items,
however, must be consumed within the Secured Area. Removal
of raw materials, capital goods, equipment and consumer items
out of the Secured Area for sale to non-SSEFPZ registered
enterprises shall be subject to the usual taxes and duties, except
as may be provided herein.
Petitioner contends that Executive Order No. 97-A is violative of their
right to equal protection of the laws for granting incentives to private
respondents operating inside the SSEZ to the exclusion of the retail
establishments located outside. The Court held that this issue was
already resolved in the case of Tiu. There is no violation of the
right to equal protection of the laws because substantial
distinctions lie between the establishments inside and outside
the zone, justifying the difference in their treatment. Certainly, there
are substantial differences between the big investors who are being
lured to establish and operate their industries in the so-called
“secured area” and the present business operators outside the area.
FACTS:
• Republic Act No. 7227 was enacted providing for the
conversion of the Clark and Subic military reservations into
special economic zones. The Subic Special Economic Zone
shall be operated and managed as a separate customs
territory ensuring free flow or movement of goods and capital

within, into and exported out of the Subic Special Economic
Zone, as well as provide incentives such as tax and duty-free
importations of raw materials, capital and equipment.
However, exportation or removal of goods from the territory
of the Subic Special Economic Zone to the other parts of the
Philippine territory shall be subject to customs duties and
taxes under the Customs and Tariff Code and other relevant
tax laws of the Philippines
• On April 3, 1993, President Fidel V. Ramos issued
Executive Order No. 80, which declared, among others,
that Clark shall have all the applicable incentives granted to
the Subic Special Economic and Free Port Zone under
Republic Act No. 7227.
• Pursuant to the directive under Executive Order No. 80, the
BCDA passed Board Resolution No. 93-05-034 on May
18, 1993. Sec. 4 allows the tax and duty-free sale at retail of
consumer goods (duty free shopping) imported via Clark for
consumption outside the CSEZ. Sec. 5 allows for duty-free
consumer goods to be brought out of the CSEZ Main Zone
but not to exceed US$200.00 per month per CDC-registered
person, similar to the limits imposed in the Subic SEZ.
• Executive Order No. 97-A was issued provides guidelines
to govern the tax and duty-free privileges within the
Secured Area of the Subic Special Economic and Free Port
Zone. Business enterprises and individuals (Filipinos and
foreigners) residing within the Secured Area are free to
import raw materials, capital goods, equipment, and
consumer items tax and duty-free. Consumption items,
however, must be consumed within the Secured Area.
Removal of raw materials, capital goods, equipment and
consumer items out of the Secured Area for sale to non-
SSEFPZ registered enterprises shall be subject to the usual
taxes and duties, except as may be provided herein.
However, Sec. 1.2 provides that residents of the SSEFPZ
living outside the Secured Area can purchase and bring out
of the Secured Area to other parts of the Philippine territory
consumer items worth not exceeding US$100 per month per
person. Sec. 1.3 provides that Filipinos not residing within
the SSEFPZ can purchase and bring out [of] the Secured
! 14!
2A 2014 Montero Tax Digests
!
Area to other parts of the Philippine territory consumer items
worth not exceeding US$200 per year per person.
• Petitioner assails the constitutionality of these 3 issuances
related to RA 7227 on the grounds that they amount to
executive legislation and violate the equal protection clause.
ISSUE: Whether or not the assailed issuances are VOID
HELD & RATIO:
I. Topic-related
1. Section 5 of Executive Order No. 80 – void for being an
invalid exercise of executive legislation.
• (John Hay Peoples Alternative Coalition, et al. v. Victor
Lim, et al) The incentives under Republic Act No. 7227
are exclusive only to the SSEZ. The President,
therefore, had no authority to extend their application to
John Hay. The claimed statutory exemption of the John
Hay SEZ from taxation should be manifest and
unmistakable from the language of the law on which it is
based; it must be expressly granted in a statute stated in
a language too clear to be mistaken. Tax exemption
cannot be implied as it must be categorically and
unmistakably expressed.
• In the present case, while Section 12 of Republic Act No.
7227 expressly provides for the grant of incentives to the
SSEZ, it fails to make any similar grant in favor of other
economic zones, including the CSEZ. Tax and duty-free
incentives being in the nature of tax exemptions, the
basis thereof should be categorically and unmistakably
expressed from the language of the statute.
2. Executive Order No. 97-A – NOT violative of equal
protection
Petitioner contends that it is violative of their right to equal
protection of the laws for granting incentives to private
respondents operating inside the SSEZ to the exclusion of
the retail establishments located outside.
• (Tiu v. Court of Appeals) - Upholding the constitutionality
of Executive Order No. 97-A, this Court therein found

substantial differences between the retailers inside and
outside the secured area, thereby justifying a valid and
reasonable classification. There are substantial
differences between the big investors who are being
lured to establish and operate their industries in the so-
called “secured area” and the present business
operators outside the area.
o On the one hand, we are talking of billion-peso
investments and thousands of new jobs. On the
other hand, definitely none of such magnitude.
o In the first, the economic impact will be national;
in the second, only local.
o Even more important, at this time the business
activities outside the “secured area” are not
likely to have any impact in achieving the
purpose of the law, which is to turn the former
military base to productive use for the benefit of
the Philippine economy. There is, then, hardly
any reasonable basis to extend to them the
benefits and incentives accorded in R.A. 7227.
o Additionally, as the Court of Appeals pointed out,
it will be easier to manage and monitor the
activities within the “secured area,” which is
already fenced off, to prevent “fraudulent
importation of merchandise” or smuggling.
It is well-settled that the equal-protection guarantee
does not require territorial uniformity of laws. As long
as there are actual and material differences between
territories, there is no violation of the constitutional
clause.
• The classification is germane to the purpose of Republic
Act No. 7227. The classification, moreover, is not limited
to the existing conditions when the law was
promulgated, but to future conditions as well. And, lastly,
the classification applies equally to all retailers found
within the “secured area.”
II. Others
! 15!
2A 2014 Montero Tax Digests
!
1. Executive Order No. 97-A – Secs. 1.2 and 1.3 are null and
void for being contrary to Section 12 of Republic Act No. 7227.
Said Section clearly provides that “exportation or removal of
goods from the territory of the Subic Special Economic Zone to
the other parts of the Philippine territory shall be subject to
customs duties and taxes under the Customs and Tariff Code
and other relevant tax laws of the Philippines.”
2. Section 4 of BCDA Board Resolution No. 93-05-034 – Sec.
4 is VALID. While it is true that Section 12 (b) of Republic Act
No. 7227 mentions only raw materials, capital and equipment,
this does not necessarily mean that the tax and duty-free
buying privilege is limited to these types of articles to the
exclusion of consumer goods. To limit the tax-free importation
privilege of enterprises located inside the special economic
zone only to raw materials, capital and equipment clearly runs
counter to the intention of the Legislature to create a free port
where the “free flow of goods or capital within, into, and out of
the zones” is insured. The phrase “tax and duty-free
importations of raw materials, capital and equipment” was
merely cited as an example of incentives that may be given to
entities operating within the zone.
Sec. 5 is VOID similar to Secs. 1.2 and 1.3 of Executive Order
No. 97-A for being contrary to Section 12 of Republic Act No.
7227 and also in so far as it pertains to the CSEZ.
FINAL VERDICT: Petition is PARTLY GRANTED. Section 5 of
Executive Order No. 80 and Section 4 of BCDA Board Resolution
No. 93-05-034 are hereby declared NULL and VOID and are
accordingly declared of no legal force and effect. Respondents are
hereby enjoined from implementing the aforesaid void provisions. All
portions of Executive Order No. 97-A are valid and effective, except
the second sentences in paragraphs 1.2 and 1.3 of said Executive
Order, which are hereby declared INVALID.
Notes/ Source:
Original-made digest; 2015 digest overhauled.

38. ARTURO M. TOLENTINO v. SECRETARY OF FINANCE and
THE COMMISSIONER OF INTERNAL REVENUE
Uniformity
PM Reyes notes: The system of taxation should not always be
progressive. The Supreme Court in this case explained that 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 or for the promotion of the right to “quality
education.” These provisions are put in the Constitution as moral
incentives to legislation, not as judicially enforceable rights. Thus,
even if the VAT is regressive because it is an indirect tax, it is not
prohibited by the Constitution.
CASE:
These are motions seeking reconsideration of our decision
dismissing the petitions filed in these cases for the declaration of
unconstitutionality of R.A. No. 7716, otherwise known as the
Expanded Value-Added Tax Law. The motions, of which there are 10
in all, have been filed by the several petitioners in these cases.
The issue in this case is whether or not R.A. No. 7716 violates Art.
VI, Sec. 28 (1) of the Constitution which provides that “The rule of
taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.
The Court held that R.A. No. 7716 does not violate Art. VI, Sec. 28
(1) of the Constitution since it does not really prohibit the imposition
of indirect taxes which are regressive. It simply provides that
Congress shall “evolve a progressive system of taxation.”
FACTS:
• Petitioners seek to declare R.A. No. 7166 as unconstitutional as
it seeks to widen the tax base of the existing VAT system and
enhance its administration by amending the National Internal
! 16!
2A 2014 Montero Tax Digests
!
Revenue Code.
• The value-added tax (VAT) is levied on the sale, barter or
exchange of goods and properties as well as on the sale or
exchange of services.
• 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.
• CREBA asserts that R.A. No. 7716:
(1) Impairs the obligations of contracts
• It is claimed that the application of the tax to existing
contracts of the sale of real property by installment or on
deferred payment basis would result in substantial increases
in the monthly amortizations to be paid because of the 10%
VAT.
• The additional amount is something that the buyer did not
anticipate at the time he entered into the contract.
(2) Classifies transactions as covered or exempt without
reasonable basis
• It is next pointed out that while Section 4 of R.A. No. 7716
exempts such transactions as the sale of agricultural
products, food items, petroleum, and medical and veterinary
services, it grants no exemption on the sale of real property
which is equally essential.
• The sale of real property for socialized and low-cost housing
is exempted from the tax, but CREBA claims that real estate
transactions of "the less poor," i.e., the middle class, who are
equally homeless, should likewise be exempted.
(3) Violates the rule that taxes should be uniform and
equitable and that Congress shall "evolve a progressive
system of taxation."
ISSUES:
1. Whether or not R.A. No. 7716 did "originate exclusively" in the
House of Representatives as required by Art. VI Sec. 24 of the
Constitution.
2. Whether or not R.A. No. 7716 is violative of press freedom and
religious freedom under Art. III Secs. 4 and 5 of the Constitution.
3. Whether or not R.A. No. 7716 violates Art. VI, Sec. 28 (1) of

the Constitution which provides that “The rule of taxation
shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation. (Relevant issue based on PM
Reyes Notes)
HELD/RATIO:
1. While Art. VI Sec. 24 provides that all appropriation, revenue or
tariff bills, bills authorizing increase of the public debt, bills of
local application, and private bills must "originate exclusively in
the House of Representatives," it also adds, " but the Senate
may propose or concur with amendments." In the exercise of this
power, the Senate may propose an entirely new bill as a
substitute measure.
• It is noteworthy that, in the particular case of S. No. 1630,
petitioners Tolentino and Roco, as members of the Senate,
voted to approve it on second and third readings.
• On the other hand, amendment by substitution, in the manner
urged by petitioner Tolentino, concerns a mere matter of form.
• Because revenue bills are required to originate exclusively in the
HoR, the Senate cannot enact revenue measures of its own
without such bills. After a revenue bill is passed and sent over to
it by the House, however, the Senate certainly can pass its own
version on the same subject matter. This follows from the
coequality of the two chambers of Congress
• Without H. No. 11197, the Senate could not have
enacted S. No. 1630.
2. Since the law granted the press a privilege, the law could take
back the privilege anytime without offense to the Constitution.
The VAT is not a license tax. It is not a tax on the exercise of a
privilege, much less a constitutional right. It is imposed on the
sale, barter, lease or exchange of goods or properties or the sale
or exchange of services and the lease of properties purely for
revenue purposes. To subject the press to its payment is not to
burden the exercise of its right any more than to make the press
pay income tax or subject it to general regulation is not to violate
its freedom under the Constitution.
! 17!
2A 2014 Montero Tax Digests
!
3. NO. R.A. No. 7716 does not violate Art. VI, Sec. 28 (1) of the
Constitution.
• Equality and uniformity of taxation means that all taxable articles
or kinds of property of the same class be taxed at the same rate.
The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation. To satisfy this
requirement it is enough that the statute or ordinance applies
equally to all persons, forms and corporations placed in similar
situation.
• The CREBA claims that the VAT is regressive. A similar claim is
made by the Cooperative Union of the Philippines, Inc. (CUP),
while petitioner Juan T. David argues that the law contravenes
the mandate of Congress to provide for a progressive system of
taxation because the law imposes a flat rate of 10% and thus
places the tax burden on all taxpayers without regard to their
ability to pay.
• The Constitution does not really prohibit the imposition of indirect
taxes which, like the VAT, are regressive.
• What it simply provides is that Congress shall "evolve a
progressive system of taxation."
o The constitutional provision has been interpreted to
mean simply that "direct taxes are . . . to be preferred
[and] as much as possible, indirect taxes should be
minimized."
• Resort to indirect taxes should be minimized but not avoided
entirely because it is difficult, if not impossible, to avoid them by
imposing such taxes according to the taxpayers' ability to pay.
• In the case of the VAT, the law minimizes the regressive effects
of this imposition by providing for zero rating of certain
transactions (R.A. No. 7716, §3, amending §102 (b) of the
NIRC), while granting exemptions to other transactions. (R.A.
No. 7716, §4, amending §103 of the NIRC).
• Transactions which are subject to the VAT are those which
involve goods and services which are used or availed of mainly
by higher income groups.
FINAL VERDICT:
We have now come to the conclusion that the law suffers from none
of the infirmities attributed to it by petitioners and that its enactment

by the other branches of the government does not constitute a grave
abuse of discretion.
WHEREFORE, the motions for reconsideration are denied with
finality and the temporary restraining order previously issued is
hereby lifted.
39. ABAKADA GURO PARTYLIST v. ERMITA
October 30, 1995
REYES NOTES/ CASE:
This case is a consolidation of five petitions questioning the
validity of Republic Act No. 9337.
The Supreme Court ruled that the 12% VAT imposition
was equitable as it imposes safeguard and limits in the form of
vat exemption granted to gross sales below 1.5 million.
FACTS:
• R.A. No. 9337 is a consolidation of three legislative bills
namely, House Bill Nos. 3555 and 3705, and Senate Bill No.
1950. Because of the conflicting provisions of the proposed
bills the Senate agreed to the request of the House of
Representatives for a committee conference. The
Conference Committee on the Disagreeing Provisions of
House Bill recommended the approval of its report, which the
Senate and the House of the Representatives did.
• On May 24, 2005, the President signed into law the
consolidated House and Senate versions as Republic Act
9337. Before the law was to take effect on July 1, 2005, the
Court issued a temporary restraining order enjoining
government from implementing the law in response to a slew
of petitions for certiorari and prohibition questioning the
constitutionality of the new law.
• This case in a consolidation of five petitions.
o Abakada group argues that the law is
unconstitutional, as it constitutes abandonment by
Congress of its exclusive authority to fix the rate of
! 18!
2A 2014 Montero Tax Digests
!
taxes under Article VI, Section 28(2) of the 1987
Philippine Constitution.
o Pimentel group questions the “stand-by-authority” of
the president to increase the VAT rate to 12% as it
amounts to an undue delegation of legislative power.
o Association of Pilipinas Shell Dealers contends that
some provisions of RA 9337 are unconstitutional for
being arbitrary, oppressive, excessive, and
confiscatory.
o Escudero group argues undue delegation, the
authority of the bicameral conference committee in
deleting the “no pass on provisions”, and that
appropriation, revenue and tariff bills must originate
from the House of Representatives.
o Lastly, Bataan Governor Enrique T. Garcia
challenged the constitutionality of the law
contending that that allowing establishments to
pass on the tax to the consumers is inequitable,
in violation of Article VI, Section 28(1) of the
Constitution.
ISSUES:
1. Whether or not RA 9337 is unconstitutional for violating
the equitability and uniformity of taxation.
2. Whether or not the imposition of VAT violates the
constitutional mandate to evolve a progressive system
of taxation.
HELD & RATIO:
1. NO, it does not violate the uniformity and equitability of
taxation.
• Uniformity in taxation means that all taxable articles
or kinds of property of the same class shall be taxed
at the same rate. Different articles may be taxed at
different amounts provided that the rate is uniform
on the same class everywhere with all people at all
times. The tax law is uniform as it provides a
standard rate of 0% or 10% (or 12%) on all goods
and services.

• Neither does the law make any distinction as to the
type of industry or trade that will bear the 70%
limitation on the creditable input tax, 5-year
amortization of input tax paid on purchase of capital
goods or the 5% final withholding tax by the
government.
• R.A. No. 9337 is also equitable. The law is
equipped with a threshold margin. The VAT rate of
0% or 10% (or 12%) does not apply to sales of
goods or services with gross annual sales or
receipts not exceeding P1, 500, 000.00. Also, basic
marine and agricultural food products in their original
state are still not subject to tax, thus ensuring the
prices at the grassroots level remain accessible.
• It is admitted that R.A. No. 9337 puts a premium on
businesses with low profit margins, and unduly
favors those with high profit margins. Congress was
not oblivious to this. Thus, to equalize the weighty
burden the law entails, the law, under Section 116,
imposed a 3% percentage tax on VAT-exempt
persons under Section 109(v), i.e., transactions with
gross annual sales and/or receipts not exceeding
P1.5 Million. This acts as a equalizer because in
effect, bigger businesses that qualify for VAT
coverage and VAT-exempt taxpayers stand on
equal-footing.
• Moreover, Congress provided mitigating measures
to cushion the impact of the imposition of the tax on
those previously exempt. Excise taxes on petroleum
products and natural gas were reduced. Percentage
tax on domestic carriers was removed. Power
producers are now exempt from paying franchise
tax.
• Aside from these, Congress also increased the
income tax rates of corporations, in order to
distribute the burden of taxation. All these were
designed to ease, as well as spread out, the burden
of taxation, which would otherwise rest largely on the
consumers. It cannot therefore be gainsaid that R.A.
No. 9337 is equitable.
! 19!
2A 2014 Montero Tax Digests
!
2. NO, the Constitution does not really prohibit the
imposition of indirect taxes, like the VAT. What it simply
provides is that Congress shall "evolve a progressive
system of taxation."
• Progressive taxation is built on the principle of the
taxpayer’s ability to pay. Taxation is progressive
when its rate goes up depending on the resources of
the person affected.
• The VAT is an antithesis of progressive taxation. By
its very nature, it is regressive. The principle of
progressive taxation has no relation with the VAT
system inasmuch as the VAT paid by the consumer
or business for every goods bought or services
enjoyed is the same regardless of income. In other
words, the VAT paid eats the same portion of an
income, whether big or small.
FINAL VERDICT: Petition is denied. The CA and RTC decisions are
affirmed.
Notes/ Source:
Reference:
http://ustlawreview.com/pdf/vol.L/Cases/ABAKADA_Guro_v._Executi
ve_Secretary.pdf and 2015 digest
40. MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS,
INC. vs. DEPARTMENT OF FINANCE SECRETARY
REYES NOTES/ CASE:
Note: No Pierre Reyes notes.
The BIR issued an RMC clarifying Sec. 103 a and b of the NIRC:
copra is a non-food product and the exemption, as such, extends
only to primary producers. The SC held that there is no violation of
the EPC since there is a substantial distinction between coconut
producers and copra dealers. The latter only sell but not produce
coconut.

FACTS:
• Petitioner Misamis Oriental Association of Coco Traders, Inc.
is a domestic corporation whose members, individually or
collectively, are engaged in the buying and selling of copra in
Misamis Oriental.
• Prior to the issuance of Revenue Memorandum Circular 47-
91, petitioner claimed that copra was classified as
agricultural food product in the NIRC and, therefore, exempt
from VAT at all stages of production or distribution.
• Under §103(a), as above quoted, the sale of agricultural non-
food products in their original state is exempt from VAT only
if the sale is made by the primary producer or owner of the
land from which the same are produced. The sale made by
any other person or entity, like a trader or dealer, is not
exempt from the tax. On the other hand, under §103(b) the
sale of agricultural food products in their original state is
exempt from VAT at all stages of production or distribution
regardless of who the seller is.
• The RMC classified copra as a non-food product and hence
tax exemption extends only to the primary producer.
ISSUES:
1. Whether or not copra is an agricultural food or non-food?
NON-FOOD.
The ruling was made by the Commissioner of Internal Revenue in
the exercise of his power under § 245 of the NIRC to "make rulings
or opinions in connection with the implementation of the provisions of
internal revenue laws, including rulings on the classification of
articles for sales tax and similar purposes."
2. Whether or not there was violation of the EPC?
NO.
Petitioner claims that the is violative of the equal protection clause
because while coconut farmers and copra producers are exempt,
! 20!
2A 2014 Montero Tax Digests
!
traders and dealers are not, although both sell copra in its original
state.
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.
FINAL VERDICT: Petition is DISMISSED.
41. COMMISSIONER OF INTERNAL REVENUE v. LINGAYEN
GULF ELECTRIC POWER CO., INC.
G.R. No. L-23771 August 4, 1988
Uniformity of Taxation
REYES NOTES/ CASE:
Lingayen Gulf Electric Power Co., Inc. was granted franchise
to operate power plant in municipalities of Lingayen and Binmaley,
Pangasinan. BIR assessed and demanded from Lingayen Gulf the
sums of P19k and P3.6k representing deficiency franchise taxes and
surcharges for the years 1946-1954 and 1959-1961, respectively.
Pending the hearing of the cases, R.A. 3843 was passed granting to
Lingayen Gulf a legislative franchise for the operation of the electric
light, heat, and power system in the same municipalities of
Pangasinan. Petitioner asserts that the said law is unconstitutional
insofar as it provides for the payment by the private respondent
of a franchise tax of 2% of its gross receipts, while other
taxpayers similarly situated were subject to the 5% franchise tax
imposed in Section 259 of the Tax Code, thereby discriminatory and
violative of the rule on uniformity and equality of taxation.
W/N Section 4 of R.A. No. 3843 is unconstitutional for being
violative of the "uniformity and equality of taxation" clause of the
Constitution.
NO, a tax is uniform when it operates with the same
force and effect in every place where the subject of it is found.
Uniformity means that all property belonging to the same class

shall be taxed alike. The Legislature has the inherent power not
only to select the subjects of taxation but to grant exemptions. Tax
exemptions have never been deemed violative of the equal
protection clause.
FACTS:
• Lingayen Gulf Electric Power Co., Inc. (Lingayen Gulf)
operates an electric power plant serving the adjoining
municipalities of Lingayen and Binmaley, Pangasinan,
pursuant to the municipal franchise granted it by their
respective municipal councils in 1946
• In 1948, the President of the Philippines approved the
franchises granted to the private respondent.
• In 1955, BIR assessed and demanded from Lingayen Gulf
the total amount of P19,293.41 representing deficiency
franchise taxes and surcharges for the years 1946 to 1954
applying the franchise tax rate of 5% on gross receipts from
March 1, 1948 to December 31, 1954 as prescribed in
Section 259 of the NIRC, instead of the lower rates as
provided in the municipal franchises (1% of the gross
earnings during the first 20 years and 2% during the
remaining 15 years).
• In1962, the Commissioner, demanded from the private
respondent the payment of P3,616.86 representing
deficiency franchise tax and surcharges for the years 1959 to
1961 again applying the franchise tax rate of 5% on gross
receipts as prescribed in Section 259 of the NIRC.
• In both instances, Lingayen Gulf protested the assessment
and requested reconsideration, but the same were denied.
Thus, the appeal to CTA.
• Pending the hearing of the cases, R.A. 3843 was passed on
June 22, 1963, granting to Lingayen Gulf a legislative
franchise for the operation of the electric light, heat, and
power system in the same municipalities of Pangasinan.
• CTA ruled that the provisions of R.A. No. 3843 should apply
and accordingly dismissed the claim of the Commissioner of
Internal Revenue.
ISSUES:
! 21!
2A 2014 Montero Tax Digests
!
3. Whether or not the 5% franchise tax prescribed in Section
259 of the NIRC assessed against the private respondent on
its gross receipts realized before the effectivity of R.A- No.
3843 is collectible. (Minor tax issue)
4. Whether or not Section 4 of R.A. No. 3843 is
unconstitutional for being violative of the "uniformity
and equality of taxation" clause of the Constitution.
(Relevant tax issue)
HELD & RATIO:
3. NO, by virtue of R.A. 3843, the private respondent was liable
to pay only the 2% franchise tax, effective from the date the
original municipal franchise was granted.
• R.A. No. 3843 granted the private respondent a
legislative franchise in June, 1963, amending,
altering, or even repealing the original municipal
franchises, and providing that the private respondent
should pay only a 2% franchise tax on its gross
receipts, "in lieu of any and all taxes and/or
licenses of any kind, nature or description levied,
established, or collected by any authority
whatsoever, municipal, provincial, or national, now
or in the future ... and effective further upon the
date the original franchise was granted, no other
tax and/or licenses other than the franchise tax of
two per centum on the gross receipts ... shall be
collected, any provision of law to the contrary
notwithstanding."
4. NO, a tax is uniform when it operates with the same
force and effect in every place where the subject of it is
found.
• Petitioner’s contention:
o The said law is unconstitutional insofar as it
provides for the payment by the private
respondent of a franchise tax of 2% of its
gross receipts, while other taxpayers
similarly situated were subject to the 5%
franchise tax imposed in Section 259 of the
Tax Code, thereby discriminatory and

violative of the rule on uniformity and
equality of taxation.
• Court’s ruling:
o A tax is uniform when it operates with the
same force and effect in every place
where the subject of it is found.
o Uniformity means that all property
belonging to the same class shall be
taxed alike.
o The Legislature has the inherent power not
only to select the subjects of taxation but to
grant exemptions. Tax exemptions have
never been deemed violative of the equal
protection clause.
o It is true that the private respondents
municipal franchises were obtained under
Act No. 6672 of the Philippine Commission,
but these original franchises have been
replaced by a new legislative franchise, i.e.
R.A. No. 3843.
o As correctly held by CTA, the latter was
granted subject to the terms and conditions
established in Act No. 3636, 3 as amended
by C.A. No. 132. These conditions Identify
the private respondent's power plant as
falling within that class of power plants
created by Act No. 3636, as amended.
o The benefits of the tax reduction provided by
law (Act No. 3636 as amended by C.A. No.
132 and R.A. No. 3843) apply to the
respondent's power plant and others
circumscribed within this class. R.A-No.
3843 merely transferred the petitioner's
power plant from that class provided for in
Act No. 667, as amended, to which it
belonged until the approval of R.A- No.
3843, and placed it within the class falling
under Act No. 3636, as amended.
o Thus, it only effected the transfer of a
taxable property from one class to another.
! 22!
2A 2014 Montero Tax Digests
!
• Furthermore, the 5% franchise tax rate provided in
Section 259 of the Tax Code was never intended to
have a universal application.
o Section 259 of the Tax Code expressly
allows the payment of taxes at rates lower
than 5% when the charter granting the
franchise of a grantee, like the one granted
to the private respondent under Section 4 of
R.A. No. 3843, precludes the imposition of a
higher tax.
FINAL VERDICT: The appealed decision of CTA is AFFIRMED.
42. KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN
NG PILIPINAS, INC. v. TAN
Constitutional Limitations; Uniformity; VAT
REYES NOTES/ CASE:
EO 273 was issued by the President of the Philippines which
amended certain sections of NIRC and adopted the VAT.
Consolidated petitioners herein assail the constitutionality of EO 273
on the ground that the VAT is oppressive, discriminatory, regressive,
and violates the due process and equal protection clauses and other
provisions of the 1987 Constitution.
• SC: EO 273 is Constitutional. EO 273 satisfies all the
requirements of a valid tax.
" FIRST REQ: It is uniform.
o The sales tax adopted in EO 273 is applied
similarly on all goods and services sold to the
public, which are not exempt, at the constant
rate of 0% or 10%.
" SECOND REQ: It is also equitable.
o It is imposed only on sales of goods or services
by persons engage in business with an
aggregate gross annual sales exceeding
P200,000.00. Small corner sari-sari stores and
sales of farm and marine products are
consequently exempt from its application.
FACTS:

• This petition seeks to nullify EO 273 issued by the President
of the Philippines on 25 July 1987, to take effect on 1
January 1988, and which amended certain sections of the
National Internal Revenue Code and adopted the value-
added tax (VAT), for being unconstitutional in that its
enactment is not allegedly within the powers of the
President; that the VAT is oppressive, discriminatory,
regressive, and violates the due process and equal
protection clauses and other provisions of the 1987
Constitution.
• The VAT is a tax levied on a wide range of goods and
services. It is a tax on the value, added by every seller, with
aggregate gross annual sales of articles and/or services,
exceeding P200,00.00, to his purchase of goods and
services, unless exempt.
• VAT is computed at the rate of 0% or 10% of the gross
selling price of goods or gross receipts realized from the sale
of services.
• The VAT is said to have eliminated privilege taxes, multiple
rated sales tax on manufacturers and producers, advance
sales tax, and compensating tax on importations.
• The framers of EO 273 that it is principally aimed to
rationalize the system of taxing goods and services; simplify
tax administration; and make the tax system more equitable,
to enable the country to attain economic recovery.
• The VAT is not entirely new. It was already in force, in a
modified form, before EO 273 was issued. As pointed out by
the Solicitor General, the Philippine sales tax system, prior to
the issuance of EO 273, was essentially a single stage value
added tax system computed under the "cost subtraction
method" or "cost deduction method" and was imposed only
on original sale, barter or exchange of articles by
manufacturers, producers, or importers. Subsequent sales of
such articles were not subject to sales tax. However, with the
issuance of PD 1991 on 31 October 1985, a 3% tax was
imposed on a second sale, which was reduced to 1.5% upon
the issuance of PD 2006 on 31 December 1985, to take
effect 1 January 1986. Reduced sales taxes were imposed
not only on the second sale, but on every subsequent sale,
! 23!
2A 2014 Montero Tax Digests
!
as well. EO 273 merely increased the VAT on every sale to
10%, unless zero-rated or exempt.
ISSUES:
Whether or not EO 273 was enacted by the president with grave
abuse of discretion and whether or not such law is unconstitutional.
HELD & RATIO:
NO, EO 273 WAS NOT ENACTED WITH GRAVE ABUSE OF
DISCRETION. THE LAW IS CONSTITUTIONAL.
• Petitioners have failed to adequately show that the VAT is
oppressive, discriminatory or unjust.
o They claim that EO 273 is in violation of the
provisions of Art. VI, sec. 28(1) of the 1987
Constitution, which states: “The rule of taxation shall
be uniform and equitable. The Congress shall evolve
a progressive system of taxation.”
o Petitioners merely rely upon newspaper articles
which are actually hearsay and have evidentiary
value. To justify the nullification of a law, there must
be a clear and unequivocal breach of the
Constitution, not a doubtful and argumentative
implication.
• As the Court sees it, EO 273 satisfies all the requirements of
a valid tax. (TAX ISSUE)
" FIRST REQ: It is uniform.
o A tax is considered uniform when it operates with the
same force and effect in every place where the
subject may be found.
o 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
o To satisfy this requirement then, 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
o The sales tax adopted in EO 273 is applied
similarly on all goods and services sold to the
public, which are not exempt, at the constant
rate of 0% or 10%.
" SECOND REQ: The disputed sales tax is also equitable.
o It is imposed only on sales of goods or services by
persons engage in business with an aggregate gross
annual sales exceeding P200,000.00. Small
corner sari-sari stores are consequently exempt from
its application. Likewise exempt from the tax are
sales of farm and marine products, spared as they
are from the incidence of the VAT, are expected to
be relatively lower and within the reach of the
general public.
FINAL VERDICT: Petitions are dismissed.
Source: 2015 Digest
43. SISON vs ANCHETA
G.R. No. L-59431 July 25, 1984
REYES NOTES:
What is meant by “uniformity”?
Uniformity requires that all subjects or objects of taxation similarly
situated are to be treated alike or put on equal footing both in
privileges and liabilities (SISON V. ANCHETA [130 SCRA 654]; see
also CIR V. LINGAYEN GULF [164 SCRA 27])
FACTS:
• Petitioner assailed the validity of Section 1 of Batas Pambansa
Blg. 135 which further amends Section 21 of the National
Internal Revenue Code of 1977, which provides for rates of tax
on citizens or residents on (a) taxable compensation income, (b)
taxable net income, (c) royalties, prizes, and other winnings, (d)
interest from bank deposits and yield or any other monetary
benefit from deposit substitutes and from trust fund and similar
! 24!
2A 2014 Montero Tax Digests
!
arrangements, (e) dividends and share of individual partner in
the net profits of taxable partnership, (f) adjusted gross income.
• Petitioner as taxpayer alleges that by virtue thereof, "he would be
unduly discriminated against by the imposition of higher rates of
tax upon his income arising from the exercise of his profession
vis-a-vis those which are imposed upon fixed income or salaried
individual taxpayers.
• He characterizes the above section as arbitrary amounting to
class legislation, oppressive and capricious in character.
ISSUE: Whether BP 135 violates the due process and equal
protection clauses, and the rule on uniformity in taxation?
!
RULING: !
NO, petiton dismissed.
• There is a need for proof of such persuasive character as would
lead to a conclusion that there was a violation of the due process
and equal protection clauses. Absent such showing, the
presumption of validity must prevail.
• 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.
o The taxing power has the authority to make reasonable
and natural classifications for purposes of taxation.
o Where the differentiation conforms to the practical
dictates of justice and equity, similar to the standards of
equal protection, it is not discriminatory within the
meaning of the clause and is therefore uniform.
o Taxpayers may be classified into different categories,
such as recipients of compensation income as against
professionals.
! Recipients of compensation income are not
entitled to make deductions for income tax
purposes as there is no practically no overhead
expense, while professionals and businessmen
have no uniform costs or expenses necessary to
produce their income.
• There is ample justification 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.
FINAL VERDICT:Petition dismissed.
Source: 2012 digest
44. VILLANUEVA VS CITY OF ILOILO
December 28, 1968
REYES NOTES/ CASE:
Petitioners seek to declare Ordinance 11 series of 1960 as invalid for
violating the rule on uniformity of taxation since it imposes taxes on
tenement houses but not on other buildings in City of Iloilo City.
In determining whether the imposition of a municipal license tax on
tenement houses violates the equal protection clause as such taxes
are not imposed in other cities, the Supreme Court ruled in the
negative as the rule on uniformity does not require taxes for the
same purpose should be imposed in different territorial subdivisions
at the same time. It is enough that that tax falls equally and
impartially on all owners or operation of tenement houses similarly
classified or situated.
NOTE: Case digest based on Block A 2015 digests
FACTS:
• CFI Iloilo appealed the decision of the CFI of Iloilo which
declared illegal Ordinance 11, series of 1960 which was
entitled “An Ordinance Imposing Municipal License Tax on
persons Engaged in the Business of Operating Tenement
Houses.
• September 30 1946 (before the enactment of the local
Autonomy Act), the municipal board of Iloilo City enacted
Ordinance 86, imposing license tax fees, which was declared
by the court in 1959 as invalid as it was ultra vires, :” it not
appearing that the power to tax owners of tenement houses
is one among those clearly and expressly granted to the City
of Iloilo by its charter”
! 25!
2A 2014 Montero Tax Digests
!
• January 15, 1960-the municipal board of Iloilo City, believing
that with passage of the Local Autonomy Act, it had acquired
the authority or power to enact an ordinance similar to that
previously declare by this Court as ultra vires, enacted
Ordinance 11.
• A municipal license tax is imposed on tenement houses in
accordance with the schedule of payment:
o Tenement houses:
! Apartment house made of strong material-
P20/per door
! Apartment house made of mixed materials-
P10 per door
! Rooming house of strong materials-P10 per
door
! Rooming house of mixed materials- P5per
door
o Tenement houses partly or wholly engaged in or
dedicated to business in the ff streets: JM basa,
Iznart, Aldeguer, Guanco and Ledesma from
Plazoleto Gay to Valeria St- P30per door
o Tenement houses partly or wholly engaged in or
dedicated to business in any other street –P12 per
door
o Tenement houses at the street surrounding the
super market as soon as said place is declared
commercial- P24 per door
• By virtue of the ordinance in question, the appellant City
collected form souses Villanueva for the years 1960-1964
the sum of P5,824.30 and from appellees Pio Melliza,
Teresita Topacio, and Remedios VIlanueva for the years
1960-1964 the sum of Php 1,317.00.
• On July 11, 1962 and April 24, 1964, the plaintffs-appelless
filed a complaint and an amended complaint, against the City
of Iloilo praying that Ordinance 11, series of 1960:
o Be declared invalid for being beyond the power of
the Municipal Council of the City of Iloilo to enact
o And unconstitutional for being violative of the rule as
to the uniformity of taxation and for depriving said
plaintiffs of the equal protection clause of the
Constitution

o And that the City be ordered to refund the amounts
collected form them under the said ordinance .
ISSUES:
5. WON Ordinance 11 violates the rule on uniformity of
taxation (main issue; the one indicated in Reyes)
• NO
• This court has already ruled that tenement houses constitute
a distinct class of property
• It has likewise ruled that taxes are uniform and equal when
imposed upon all property of the same class or character
within the taxing authority
• The fact therefore that the owners of other classes of
buildings in the city of Iloilo do not pay the taxes imposed by
the Ordinance in question is no argument at all against
uniformity and equity of the tax imposition
• Neither is the rule of equality and uniformity violated by the
fact that tenement taxes are not imposed in other cities, for
the same rule does not require that taxes for the same
purpose should be imposed in different territorial
subdivisions at the same time
• So long as the burden of the tax falls equally and impartially
on all owners or operators of tenement houses similarly
classified or situated, equality and uniformity of taxation is
accomplished
• The plaintiffs-appellees, as owners of tenement hoses in the
City of Iloilo have not shown that the tax burden is NOT
equally or uniformly distributed among them, to overthrow
the presumption that tax statutes are intended to operate
uniformly and equally
6. WON Ordinance 11 constitutes double taxation (included it
just in case)
• NO
• The same tax may be imposed by the national government
as well as by the local government. There is nothing
inherently obnoxious in the exaction of license fees or taxes
with respect to eh same occupation, calling or activity by
both the State and a political subdivision thereof.
! 26!
2A 2014 Montero Tax Digests
!
• It is a well-settled rule that license tax may be levied upon a
business or occupation although the land or property used in
connection therewith is subject to property tax
• The State may collect an ad valorem tax on property used in
a calling and at the same impose a license tax on the calling,
the imposition of that latter kind of tax being in no sense a
double tax
• In order to constitute double taxation in the objectionable or
prohibited sense, the same property must be:
1. Taxed twice when it should be taxed but once
2. Both taxes must be imposed on the same property or
subject-matter
3. For the same purpose
4. By the same State, Government or taxing authority
5. Within the same jurisdiction or taxing district
6. During the same taxing period
7. They must be the same kind of character of tax
• It has been shown that real estate tax and the tenement tax
imposed by the ordinance, although imposed by the same
taxing authroity are not of the same kind or character.
• There is no constitutional prohibition against double taxation
in the Philippines
• It is something not favored, but is permissible, provided
some other constitutional requirement is not thereby violated,
such as uniformity of taxation
FINAL VERDICT: The judgment a quo is reversed and the
ordinance in question being valid, the complaint is hereby
dismissed. .
45. PEPSI-COLA BOTTLING COMPANY OF THE PHIL., INC. V.
MUNICIPALITY OF TANAUAN (MR)
REYES NOTES:
A municipal ordinance was passed imposing a tax on the sale of
soft drinks or carbonated beverages by agents/consignees of

dealers doing business outside the municipality. Is there a
violation of the equal protection clause?
Yes. As held in PEPSI-COLA V. CITY OF BUTUAN [24 SCRA 789],
under the said municipal ordinance, sales of local dealers not acting
for or on behalf of merchants established outside the municipality
would be exempt from the tax while those acting as agents and
consignees of dealers outside the municipality would have to pay the
tax. The Supreme Court ruled that this was a violation of the
uniformity required by the Constitution.
CASE:
Petitioner was arguing that the Local Autonomy Act was an undue
delegation of taxing power and that Ord. 23 and Ord. 27 cover the
same subject matter (Ord. 23 - every bottle of soft drink corked, Ord.
27 - ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.)
of volume capacity) but was found out that Ord. 27 was meant to
repeal Ord. 23. There was no undue delegation of taxing power, no
double taxation, and the taxation is not oppressive.
FACTS:
• Pepsi commenced a complaint with preliminary injunction
with the CFI to declare unconstitutional
o Sec. 2 RA 2264 (Local Autonomy Act) – embodies
the power conferred upon chartered cities,
municipalities and municipal districts to impose
municipal license taxes and fees… - for being undue
delegation of taxing power
o Ord. No. 23 – levels and collects “from the soft
drinks producers and manufacturers a tax of one-
sixteenth (1/16) of a centavo for every bottle of soft
drink corked”
o Ord. No. 27 – levies and collects “on soft drinks
produces or manufactured within the territorial
jurisdiction of this municipality a tax of ONE
CENTAVO (P0.01) on each gallon (128 fluid ounces,
U.S.) of volume capacity.
• Stipulation of facts by the parties:
! 27!
2A 2014 Montero Tax Digests
!
o Ord. No. 23 and 27 embrace or cover the same
subject matter and the production tax rates imposed
therein are practically the same
o That the acting Municipal Treasurer of Tanauan,
Leyte, as per his letter addressed to the Manager of
the Pepsi-Cola Bottling Plant in said municipality,
sought to enforce compliance by the latter of the
provisions of said Ord. No. 27
o Both Ord. 23 and Ord. 27 are denominated
“municipal production taxes”
ISSUES:
1. Is the Local Autonomy Act an undue delegation of
taxing power? NO.
2. Does Ord. 23 and 27 constitute double taxation? NO.
3. Are these taxes oppressive? No.
HELD & RATIO:
5. The delegated power of taxation
• Power of taxation is an essential attribute of
sovereignty
• It’s purely legislative and may not be delegated to
the 2 other branches, EXCEPT in the case of
municipal corporations.
o Legislative powers may be delegated to
local governments in respect of matters of
local concern
o Local governments are granted the
autonomous authority to crate their sources
of revenue and to levy taxes. (Sec. 5, Art. XI
Consti)
o 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.

o Taking of the property is in the lawful
exercise of the taking as when (1) the tax if
for a public purpose (2) the rule on
uniformity of taxation is observed (3) either
the person or property taxed is within the
jurisdiction of the government levying the tax
and (4) in the assessment and collection of
certain kinds of taxes notice and opportunity
of hearing are provided
o Due process does not require that the
property subject to the tax of the amount of
tax 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
o A law is not necessarily invalid just because
there’s double taxation. Double taxation is
only forbidden when the taxpayer is made to
pay twice for the benefit of the same
governmental entity, but not when, for
example, one tax is imposed by state and
one by a municipality
6. Ord. 27 was meant to repeal Ord. 23
• Ord. 23 (see facts) is a tax on every bottle corked. It
was discovered by the municipality though that the
manufacturers could increase the volume of the
drink in the bottle and pay the same tax rate. So it
enacted Ord. 27, which is a tax on the volume of the
drink. So the intention of ordinance 27 is actually,
without saying it, to repeal ordinance 23.
• This further strengthened by the fact the municipal
treasurer only sought to enforce ordinance 27, not
23
7. Ord. 27 does not impose a percentage or specific tax.
• The power to tax is given to municipalities in the
Local Autonomy Act is so broad as to cover
anything, except those which are exempt and limited
by law
! 28!
2A 2014 Montero Tax Digests
!
• Under the NIRC, there is a prohibition against
municipalities and municipal districts to impose “any
percentage tax on sales or other taxes in any form
based thereon nor impose taxes on articles subject
to specific tax, except gasoline
• For purposes of this particular limitation, a municipal
ordinance which prescribes a set ration between the
amount of the tax and the volume of sale of the
taxpayer imposes a sales tax and is null and void for
being outside the power of the municipality to enact.
But, the imposition of tax on volume capacity on all
soft drinks produced or manufactured under Ord. 27
does not partake of the nature of a percentage tax
on sales, or other taxes in any form based thereon.
The tax is levied on the PRODUCE (whether sold of
not) and not the sales. The volume capacity of the
taxpayer’s production of soft drinks is considered
solely for purposes of determining the tax rate on the
products, but there is not set ration between the
volume of sales and the amount of the tax
• Nor can the tax levied be treated as a specific tax.
Specific taxes are those imposed on specified
articles, such as distilled spirits, wines, fermented
liqueurs… soft drinks is not one of those specified.
• It was also mentioned in passing that the validity of
ordinance 27 does not affect ordinance 54 (already
in effect) because municipalities have the power to
impose not only municipal license taxes, but also
just and uniform taxes. Ord. 27 comes under the
latter.
FINAL VERDICT: Petition is denied.
Notes/ Source: From “Taxation 1 Digests 2A-2015”

46. ORMOC SUGAR COMPANY, INC. v. TREASURER OF
ORMOC CITY and MUNICIPAL BOARD OF ORMOC CITY
REYES NOTES/ CASE:
A municipal ordinance was passed imposing a municipal tax
on productions of centrifugal sugar milled at the Ormoc Sugar
Company. Petitioner paid under protest, and insisted that the
ordinance is violative of the equal protection clause and rule on
uniformity of taxation.
[Reyes Notes] The Court held that a reasonable
classification should be in terms applicable to future conditions. The
taxing ordinance should not be singular and exclusive as to exclude
any subsequently established entity from the coverage of the tax
FACTS:
• In 1964, the Municipal Board of Ormoc City passed
Ordinance No. 4 imposing “on any and all productions of
centrifugal sugar milled at the Ormoc Sugar Company, Inc.
in Ormoc City a municipal tax equivalent to 1% per export
sale to USA and other foreign countries.”
• Payments for said tax were made, under protest, by Ormoc
Sugar Company, Inc.
• Ormoc Sugar Company, Inc. filed before the CFI of Leyte a
complaint against the City of Ormoc, its treasurer, Municipal
Board and Mayor, alleging that the ordinance is
unconstitutional for being violative of the equal protection
clause and the rule of uniformity of taxation.
• Defendants asserted that the tax ordinance was within
defendant city’s power to enact under the Local Autonomy
Act (LCA) and that the same did not violate the afore-cited
constitutional limitations.
• CFI upheld the constitutionality of the ordinance and
declared the taxing power of defendant chartered city
broadened by the LCA to include all others forms of taxes,
licenses or fees not excluded in its charter.
• Ormoc Sugar brought the case directly to the Supreme
Court.
! 29!
2A 2014 Montero Tax Digests
!
ISSUES:
7. Whether the constitutional limits on the power of taxation,
specifically the equal protection clause and rule of uniformity
of taxation were infringed
HELD & RATIO: Yes.
On Equal Protection
• The equal protection clause applies only to persons or
things identically situated and does not bar a reasonable
classification.
• A classification is reasonable where
o it is based on substantial distinctions which
make real differences;
o these are germane to the purpose of the
law;
o the classification applies not only to
present conditions but also to future
conditions which are substantially
identical to those of the present;
o the classification applies only to those who
belong to the same class.
• A perusal of the requisites instantly shows that the
questioned ordinance does not meet them, for it taxes
only centrifugal sugar produced and exported by
Ormoc Sugar Company, Inc.
• The classification, to be reasonable, should be in terms
applicable to future conditions as well.
On Uniformity of Taxation
• 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 Sugar Company as the
entity to be levied upon.
FINAL VERDICT: The decision appealed from is reversed, the
challenged ordinance is declared unconstitutional.

Notes/ Source: Taxation 1 Digests 2A-2015
47. PHILIPPINE TRUST COMPANY v. YATCO
January 23, 1940
CASE:
*Not in Reyes notes
Philippine Trust Company challenge the constitutionality of
sec. 1499 of the Revised Administrative Code for violation of the rule
against uniformity of taxes for the exemption of the National City
Bank of New York from certain tax impositions.
Sec. 1499 does NOT violate the rule against uniformity of taxes. A
tax is considered uniform when it operates with the same force and
effect in every place where the subject may be found. Sec. 1499
operates on all banks in the Philippines without distinction and
discrimination. The National City Bank of New York is exempted from
its operation because it is a federal instrumentality subject only to the
authority of Congress.
A state may impose a different rate of taxation upon a foreign
corporation for the privilege of doing business within the State than it
applies to its own corporations upon franchise, which the state grants
in creating them.
FACTS:
• Prior to the filing of these suits, and for a number of years,
the Philippine Trust Company had been paying capital and
deposit taxes without protest:
o formerly under section 111 of Act No. 1189,
o and later under section 1499 of the Revised
Administrative Code of 1917, as amended.
• Philippine Trust Company challenge the constitutionality of
the aforesaid section of the Revised Administrative Code,
principally on the grounds that it violates the rule regarding
uniformity of taxation, and that it is discriminatory, and
therefore violative of the equal protection clause of the
Constitution.
! 30!
2A 2014 Montero Tax Digests
!
• Philippine Trust Company stoutly maintain that although the
foregoing provision is of general application and operates on
all banks of the same kind doing business in the Philippines,
the exemption of the National City Bank of New York from
the impositions therein specifically provided (National City
Bank of New York v. Posadas [296 U.S. 497, 80 Law ed.
351], makes the law discriminatory and violates the rule of
uniformity in taxation
ISSUES:
1. Whether or not the said section of the Revised
Administrative Code violates the rule on uniformity of
taxation.
HELD & RATIO:
1. NO, A tax is considered uniform when it operates with the
same force and effect in every place where the subject may
be found.
• Section 1499 of the Revised Administrative Code, as
amended, applies uniformly to, and operates on, all
banks in the Philippines without distinction and
discrimination, and if the National City Bank of New
York is exempted from its operation because it is a
federal instrumentality subject only to the authority of
Congress, that alone could have the effect of
rendering it violative of the rule of uniformity.
• In every well-regulated and enlightened state or
government, certain descriptions of property and
also certain institutions are exempt from taxation, but
these exemptions have never been regarded as
disturbing the rules of taxation, even where the
fundamental law had ordained that it should be
uniform.
• The rule of uniformity does not call for perfect
uniformity or perfect equality, because it is hardly
unattainable.
• The method of assessment prescribed in section
1502, in relation to section 1499, of the Revised
Administrative Code, for domestic banks while

different from that prescribed for foreign banks is
permissible. A state may impose a different rate of
taxation upon a foreign corporation for the privilege
of doing business within the State than it applies to
its own corporations upon franchise, which the state
grants in creating them.
FINAL VERDICT: Petition is denied.
Notes/ Source: Ratio from 2A-2015 Digests
48. BRITISH AMERICAN TOBACO vs CAMACO
G.R. No. 163583 August 20, 2008
Constitutional Limits to Taxation; Uniformity
REYES NOTES:
The petition seeks to declare Sec. 145 of the NIRC, as
amended by RA 9334 as unconstitutional because it establishes a
freeze on the classification of certain cigarette brands in the 4-tier
tax-rate classification scheme—making new brands, such as
petitioner’s Lucky Strike cigarettes, subject to higher taxes, while old
brands, such as Marlboro, subject to the same tax rate despite the
raising of their retail price.
The classification freeze (on what cigarettes to tax) does not
violate the equal protection clause as it passes the rational basis test
and is meant to improve the efficiency and effectivity of the tax
administration over sin products while trying to balance the same
with state interests. It addresses the concerns of simplification of tax
administration of sin products, elimination of potential areas for
abuse and corruption in tax collection, buoyant and stable revenue
generation, and ease of project revenues.
FACTS:
• Petition for review assails the validity of the following as
VIOLATIVE OF THE EQUAL PROTECTION CLAUSE.
o (1) Section 145 of the National Internal Revenue
Code (NIRC), as recodified by Republic Act (RA)
8424;
o (2) RA 9334, which further amended Section 145 of
the NIRC on January 1, 2005;
! 31!
2A 2014 Montero Tax Digests
!
o (3) Revenue Regulations Nos. 1-97, 9-2003, and 22-
2003; and
o (4) Revenue Memorandum Order No. 6-2003
1
• Paragraph (c) of Section 145 provides for four tiers of tax
rates based on the net retail price per pack of cigarettes. To
determine the applicable tax rates of existing cigarette
brands, a survey of the net retail prices per pack of
cigarettes was conducted as of October 1, 1996. The results
of which were embodied in Annex "D" of the NIRC as the
duly registered, existing or active brands of cigarettes.
o The law further provided that as such, new brands of
cigarettes are taxed according to their current net
retail price while existing or "old" brands shall be
taxed based on their net retail price as of October
1, 1996.
A. IMPLEMENTATION: CLASSIFICATION OF CIGARETTE
BRANDS
• To implement RA 8240, the Bureau of Internal Revenue
(BIR) issued Revenue Regulations No. 1-97, which
classified the existing brands of cigarettes as those duly
registered or active brands prior to January 1, 1997.
o New brands, or those registered after January 1,
1997, shall be initially assessed at their suggested
retail price until such time that the appropriate
survey to determine their current net retail price is
conducted.
B. MATTER OF CONTENTION:
• In June 2001, petitioner British American Tobacco
introduced into the market Lucky Strike Filter, Lucky Strike
Lights and Lucky Strike Menthol Lights cigarettes, with a
suggested retail price of P9.90 per pack. Pursuant to Sec.
145 (c) quoted above, the Lucky Strike brands were initially
assessed the excise tax at P8.96 per pack (P8.96 is fixed
by law, pls see NOTES).
• On February 17, 2003, Revenue Regulations No. 9-
4
2003, amended Revenue Regulations No. 1-97 by
providing, among others, a periodic review every two

years or earlier of the current net retail price of new brands
and variants thereof for the purpose of establishing and
updating their tax classification, thus:
o For the purpose of establishing or updating the tax
classification of new brands and variant(s) thereof,
their current net retail price shall be reviewed
periodically through the conduct of survey or any
other appropriate activity, as mentioned above,
every two (2) years unless earlier ordered by the
Commissioner. However, notwithstanding any
increase in the current net retail price, the tax
classification of such new brands shall remain in
force until the same is altered or changed through
the issuance of an appropriate Revenue
Regulations.
o Pursuant thereto, Revenue Memorandum Order
No. 6-2003 was issued on March 11, 2003,
prescribing the guidelines and procedures in
establishing current net retail prices of new brands of
cigarettes and alcohol products.
• Subsequently, Revenue Regulations No. 22-2003 was
issued on August 8, 2003 to implement the revised tax
classification of certain new brands introduced in the market
after January 1, 1997, based on the survey of their current
net retail price. The survey revealed that Lucky Strike Filter,
Lucky Strike Lights, and Lucky Strike Menthol Lights, are
sold at the current net retail price of P22.54, P22.61 and
P21.23, per pack, respectively.
o Respondent Commissioner of the Bureau of Internal
Revenue thus recommended the applicable tax rate
of P13.44 per pack inasmuch as Lucky Strike’s
average net retail price is above P10.00 per pack.
B.1 T.R.O.:
• Thus, on September 1, 2003, petitioner filed before the
Regional Trial Court (RTC) of Makati, Branch 61, a petition
for injunction with prayer for the issuance of a temporary
restraining order (TRO) and/or writ of preliminary injunction,
! 32!
2A 2014 Montero Tax Digests
!
docketed as Civil Case No. 03-1032. Said petition sought to
enjoin the implementation of Section 145 of the NIRC,
Revenue Regulations Nos. 1-97, 9-2003, 22-2003 and
Revenue Memorandum Order No. 6-2003 on the ground
that they discriminate against new brands of cigarettes,
in violation of the equal protection and uniformity
provisions of the Constitution.
B.2 RA 9334, FURTHER AMENDMENTS TO SEC. 145 OF THE
NIRC:
• While the petition was pending, RA 9334 (An Act Increasing
The Excise Tax Rates Imposed on Alcohol And Tobacco
Products, Amending For The Purpose Sections 131, 141,
143, 144, 145 and 288 of the NIRC of 1997, As Amended),
took effect on January 1, 2005. The statute, among others,–
(1) increased the excise tax rates provided in paragraph
(c) of Section 145;
(2) mandated that new brands of cigarettes shall initially be
classified according to their suggested net retail price,
until such time that their correct tax bracket is finally
determined under a specified period and, after which,
their classification shall remain in force until revised by
Congress;
(3) retained Annex "D" as tax base of those surveyed as
of October 1, 1996 including the classification of brands
for the same products which, although not set forth in
said Annex "D," were registered on or before January 1,
1997 and were being commercially produced and
marketed on or after October 1, 1996, and which
continue to be commercially produced and marketed
after the effectivity of this Act. Said classification shall
remain in force until revised by Congress; and
(4) provided a legislative freeze on brands of cigarettes
introduced between the period January 2, 1997 to
December 31, 2003, such that said cigarettes shall
remain in the classification under which the BIR has

determined them to belong as of December 31, 2003,
until revised by Congress.
• Hence, petitioner filed a Motion to Admit Attached
Supplement and a Supplement to the petition for review,
assailing the constitutionality of RA 9334 insofar as it
retained Annex "D" and praying for a downward classification
of Lucky Strike products at the bracket taxable at P8.96 per
pack.
o (CONTENTION AS TO THE VIOLATION OF
EQUAL PROTECTION) Petitioner contended that
the continued use of Annex "D" as the tax base of
existing brands of cigarettes gives undue protection
to said brands which are still taxed based on their
price as of October 1996 notwithstanding that they
are now sold at the same or even at a higher price
than new brands like Lucky Strike. Thus, old brands
of cigarettes such as Marlboro and Philip Morris
which, like Lucky Strike, are sold at or more than
P22.00 per pack, are taxed at the rate of P10.88 per
pack, while Lucky Strike products are taxed at
P26.06 per pack.
ISSUE:
Whether or not the tax classification freeze violates the Equal
Protection Clause? (or the limitation of Uniformity of Taxation) No.
RULING:
o EFFECT OF CLASSIFICATION SCHEME:
! When a brand is introduced in the market, the
current net retail price is determined through the
aforequoted specified procedure.
• The current net retail price is then used
to classify under which tax bracket the
brand belongs in order to finally
determine the corresponding excise tax
rate on a per pack basis.
• The assailed feature of this law pertains
to the mechanism where, after a brand
! 33!
2A 2014 Montero Tax Digests
!
is classified based on its current net
retail price, the classification is frozen
and only Congress can thereafter
reclassify the same.
! Due to this legislative classification scheme, it
is possible that over time the net retail price of a
previously classified brand, whether it be a
brand under Annex "D" or a new brand classified
after the effectivity of RA 8240 on January 1,
1997, would increase (due to inflation, increase
of production costs, manufacturer’s decision to
increase its prices, etc.) to a point that its net
retail price pierces the tax bracket to which it
was previously classified. Consequently, even
if its present day net retail price would make
it fall under a higher tax bracket, the
previously classified brand would continue
to be subject to the excise tax rate under the
lower tax bracket by virtue of the legislative
classification freeze.
o DOES THIS VIOLATE THE E.P.C./UNIFORMITY OF
TAXATION? NO.
! Within the present context of tax legislation on
sin products which neither contains a suspect
classification nor impinges on a fundamental
right, the rational-basis test thus finds
application. Under this test, a legislative
classification, to survive an equal protection
challenge, must be shown to rationally further a
legitimate state interest.
! A legislative classification that is reasonable
does not offend the constitutional guaranty of the
equal protection of the laws. The classification is
considered valid and reasonable provided that:
(1) it rests on substantial distinctions;
(2) it is germane to the purpose of the
law;

(3) it applies, all things being equal, to
both present and future conditions; and
(4) it applies equally to all those
belonging to the same class.
• 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
! In Sison, Jr. v. Ancheta, the Court explained
the applicable standard in deciding equal
protection and uniformity of taxation challenges:
• The Constitution does not require things which
are different in fact or opinion to be treated in
law as though they were the same.
o Hence the constant reiteration of the view that
classification if rational in character is allowable.
As a matter of fact, in a leading case of Lutz v.
Araneta, this Court, through Justice J.B.L. Reyes,
went so far as to hold "at any rate, it is inherent in
the power to tax that a state be free to select the
subjects of taxation, and it has been repeatedly held
that 'inequalities which result from a singling out of
one particular class for taxation, or exemption
infringe no constitutional limitation.
! 34!
2A 2014 Montero Tax Digests
!
• "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.
o As clarified by Justice Tuason, where "the
differentiation" complained of "conforms to the
practical dictates of justice and equity" it "is not
discriminatory within the meaning of this clause and
is therefore uniform." There is quite a similarity then
to the standard of equal protection for all that is
required is that the tax "applies equally to all
persons, firms and corporations placed in similar
situation
! THE CLASSIFICATION FREEZE PROVISION HAS
SUFFICIENT RATIONAL BASIS
• Administrative concerns-the classification freeze
provision was in the main the result of Congress’s
earnest efforts to improve the efficiency and
effectivity of the tax administration over sin products
while trying to balance the same with other state
interests.
o In particular, the questioned provision addressed
Congress’s administrative concerns regarding
delegating too much authority to the DOF and BIR
as this will open the tax system to potential areas for
abuse and corruption.
o Congress may have reasonably conceived that a tax
system which would give the least amount of
discretion to the tax implementers would address the
problems of tax avoidance and tax evasion.
• Discourages culture of Corruption-Congress
could have reasonably foreseen that, under the
DOF proposal and the Senate Version, the
periodic reclassification of brands would tempt the
cigarette manufacturers to manipulate their price
levels or bribe the tax implementers in order to
allow their brands to be classified at a lower tax

bracket even if their net retail prices have already
migrated to a higher tax bracket after the
adjustment of the tax brackets to the increase in
the consumer price index. Presumably, this could
be done when a resurvey and reclassification is
forthcoming.
• Stable Revenues- Aside from the major concern
regarding the elimination of potential areas for
abuse and corruption from the tax administration
of sin products, the legislative deliberations also
show that the classification freeze provision was
intended to generate buoyant and stable revenues
for government. With the frozen tax classifications,
the revenue inflow would remain stable and the
government would be able to predict with a greater
degree of certainty the amount of taxes that a
cigarette manufacturer would pay given the trend
in its sales volume over time.
! All in all, the classification freeze provision
addressed Congress’s administrative concerns in
the simplification of tax administration of sin
products, elimination of potential areas for abuse
and corruption in tax collection, buoyant and stable
revenue generation, and ease of projection of
revenues. Consequently, there can be no denial
of the equal protection of the laws since the
rational-basis test is amply satisfied.
FINAL VERDICT:
WHEREFORE, the petition is PARTIALLY GRANTED and the
decision of the Regional Trial Court of Makati, Branch 61, in Civil
Case No. 03-1032, is AFFIRMED with MODIFICATION. As modified,
this Court declares that:
(1) Section 145 of the NIRC, as amended by Republic Act No. 9334,
is CONSTITUTIONAL; and that
! 35!
2A 2014 Montero Tax Digests
!
nd
(2) Section 4(B)(e)(c), 2 paragraph of Revenue Regulations No. 1-
97, as amended by Section 2 of Revenue Regulations 9-2003, and
Sections II(1)(b), II(4)(b), II(6), II(7), III (Large Tax Payers Assistance
Division II) II(b) of Revenue Memorandum Order No. 6-2003, insofar
as pertinent to cigarettes packed by machine, are INVALID insofar
as they grant the BIR the power to reclassify or update the
classification of new brands every two years or earlier.
NOTES:
1
o Paragraph (c) of Section 145, states –
SEC. 145. Cigars and cigarettes. –
xxxx
(c) Cigarettes packed by machine. – There shall be levied,
assessed and collected on cigarettes packed by machine a
tax at the rates prescribed below:
(1) If the net retail price (excluding the excise tax and the
value-added tax) is above Ten pesos (P10.00) per pack,
the tax shall be Thirteen pesos and forty-four centavos
(P13.44) per pack;
(2) If the net retail price (excluding the excise tax and the
value-added tax) exceeds Six pesos and fifty centavos
(P6.50) but does not exceed Ten pesos (10.00) per
pack, the tax shall be Eight pesos and ninety-six
centavos (P8.96) per pack;
(3) If the net retail price (excluding the excise tax and the
value-added tax) is Five pesos (P5.00) but does not
exceed Six pesos and fifty centavos (P6.50) per pack,
the tax shall be Five pesos and sixty centavos (P5.60)
per pack;
(4) If the net retail price (excluding the excise tax and the
value-added tax) is below Five pesos (P5.00) per pack,
the tax shall be One peso and twelve centavos (P1.12)
per pack.

Variants of existing brands of cigarettes which are introduced
in the domestic market after the effectivity of this Act shall be
taxed under the highest classification of any variant of that
brand.
xxxx
New brands shall be classified according to their current
net retail price.
For the above purpose, net retail price shall mean the price
at which the cigarette is sold on retail in 20 major
supermarkets in Metro Manila (for brands of cigarettes
marketed nationally), excluding the amount intended to cover
the applicable excise tax and the value-added tax. For
brands which are marketed only outside Metro Manila, the
net retail price shall mean the price at which the cigarette is
sold in five major supermarkets in the region excluding the
amount intended to cover the applicable excise tax and the
value-added tax.
The classification of each brand of cigarettes based on
its average net retail price as of October 1, 1996, as set
forth in Annex "D" of this Act, shall remain in force until
revised by Congress.
*(MOTION FOR RECONSIDERATION)*
BRITISH AMERICAN TOBACCO vs. CAMACHO
RULING:
A.Petitioner argues that the classification freeze provision violates
the equal protection and uniformity of taxation clauses because
Annex “D” brands are taxed based on their 1996 net retail
prices while new brands are taxed based on their present day
net retail prices. Citing Ormoc Sugar Co. v. Treasurer of Ormoc
City,1[2] petitioner asserts that the assailed provisions accord a
special or privileged status to Annex “D” brands while at the
same time discriminate against other brands
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!
! 36!
2A 2014 Montero Tax Digests
!
o These contentions are without merit and a rehash of
petitioner’s previous arguments before this Court. As
held in the assailed Decision, the instant case neither
involves a suspect classification nor impinges on a
fundamental right. Consequently, the rational basis test
was properly applied to gauge the constitutionality of the
assailed law in the face of an equal protection challenge.
It has been held that “in the areas of social and
economic policy, a statutory classification that neither
proceeds along suspect lines nor infringes constitutional
rights must be upheld against equal protection challenge
if there is any reasonably conceivable state of facts that
could provide a rational basis for the classification.
B. Petitioner argues that the classification freeze provision is a form
of regressive and inequitable tax system which is proscribed under
Article VI, Section 28(1) of the Constitution. It claims that people in
equal positions should be treated alike. The use of different tax
bases for brands under Annex “D” vis-à-vis new brands is
discriminatory, and thus, iniquitous. Petitioner further posits that the
classification freeze provision is regressive in character. It asserts
that the harmonization of revenue flow projections and ease of tax
administration cannot override this constitutional command.
o As stated earlier, the assailed provisions do not infringe
the equal protection clause because the four-fold test is
satisfied. In particular, the classification freeze provision
has been found to rationally further legitimate State
interests consistent with rationality review. Petitioner’s
repackaged argument has, therefore, no merit.
o Anent the issue of regressivity, it may be conceded that
the assailed law imposes an 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.
! in Tolentino v. Secretary of Finance:
[R]egressivity 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, Section 1] or for the promotion of the right to
"quality education" [Art. XIV, Section 1]. These
provisions are put in the Constitution as moral
incentives to legislation, not as judicially
enforceable rights.
49. ABAKADA GROUP vs PURISIMA
REYES NOTES/ CASE:
Attrition Law which gives incentives to BORT employees does not
violate equal protection clause. Equal protection clause recognizes a
valid classification, that is, classification that has reasonable
foundation or rational basis and not arbitrary. The subject of the
Attrition Law was revenue generation and collection if BIR and BOC,
thus the incentives and sanctions should logically pertain to them
and not to other government agencies. Moreover, the law concerns
only the BIR and the BOC because they have the common distinct
primary function of generating revenues for the national government
through the collection of taxes, customs duties, fees and charges
FACTS:
! 37!
2A 2014 Montero Tax Digests
!
• So This a petition for prohibition which seeks to prevent the
respondents from implementing and enforcing RA
9335(Attrition Act of 2005).
• RA 9335 was enacted to optimize the revenue generation
capability and collection of BIR and BOC. The law
encourage the said agencies’ officials and employee to
exceed their revenue targets by providing a system of
reward and sanctions through the creation of a Rewards and
Incentives Fund (the Fund) and a Revenue Performance and
Evaluation (the Board). It covers all officials and employees
with at least six months of service regardless of status.
• The Fund is sourced from the collection of the BIR and BoC
in excess of their revenue targets for the year as determined
by the Development Budget and Coordinating Committee
(DBCC).
• The Board is composed of the Sec and Usec. of DOF, Sec.
and Usec. of DBM and Director General and Deputy Director
General of NEDA, the BIR and BoC Commissioners, the
representatives from the rank and file employees and a
representative from the officials nominated by the non-
recognized organization.
• The Board prescribes the allocation, distribution and release
of the Fund, criteria and procedures for removing officials
and employees falling short of the collection target, terminate
the said personnel, issue rules and regulations and report
annually to Congress.
• The Petitioners contend that: this system transforms the
officials and employees of BIR and BoC into mercenaries
and bounty hunters for the rewards. This invites corruption of
the constitutional duty of the personnel.
• Limiting the scope of the system of rewards and incentives
only to officials and employees of the BIR and BoC violates
equal protection.
• The President lacks sufficient standard to fix the revenue
targets and may impose unrealistic and unattainable target in
order to dismiss BIR and BoC personnel.
• The creation of the Congressional Oversight Committee
violates the doctrine of separation of powers. The committee
permits legislative participation in the implementation and
enforcement of the law.

• The Solicitor General commented on the Petition and stated
that there is no actual case or controversy yet. The assertion
of the personnel becoming mercenaries and bounty hunters
is mere speculation and does not suffice to invalidate the
law. There is also sufficient standard that will guide the
executive in the implementation of its standard. The
Committee does not violate separation of powers but
enhances it to check any over accumulation of power.
ISSUES:
1. Is the case already ripe for adjudication?
2. Is the equal protection clause violated? (RELEVANT)
3. Is there undue delegation of powers?
4. Is the existence of the Joint Congressional Oversight
Committee constitutional?
HELD & RATIO:
1. NO, case is not ripe for adjudication. A constitutional
question must be ripe for adjudication when the
governmental act being challenged has direct adverse effect
on the individual challenging it. The petitioners fail to assert
any specific and concrete legal term or to demonstrate any
adverse effect of the law on them. The grave nature of their
allegations tends to cast a cloud on the presumption of
constitutionality in favor the law.
Public office is a public trust. It must be discharged by its
holder for not for his own personal gain but for the benefit of
the public whom he holds it in trust. The presumption cannot
be overturned by mere conjecture or denied in advance
specially in this case where it is an underlying principle to
advance a declared public policy. Public service is its own
reward.
2. NO, Equal protection clause is not violated. (RELEVANT)
! 38!
2A 2014 Montero Tax Digests
!
Equality guaranteed under the equal protection clause is
equality under the same conditions and among persons
similarly situated; it is equality among equals, not similarity of
treatment of persons who are classified based on substantial
differences in relation to the object to be accomplished.
The Constitution does not require that things which are
different in fact be treated in law as though they were the
same. The equal protection clause does not forbid
discrimination as to things that are different. It does not
prohibit legislation which is limited either in the object to
which it is directed
A law is not invalid because of simple inequality. The very
idea of classification is that of inequality, so that it goes
without saying that the mere fact of inequality in no manner
determines the matter of constitutionality. All that is required
of a valid classification is that it be reasonable, which means
that the classification should be based on substantial
distinctions which make for real differences, that it must be
germane to the purpose of the law; that it must not be limited
to existing conditions only; and that it must apply equally to
each member of the class. This Court has held that the
standard is satisfied if the classification or distinction is
based on a reasonable foundation or rational basis and is
not palpably arbitrary.
In the exercise of its power to make classifications for the
purpose of enacting laws over matters within its jurisdiction,
the state is recognized as enjoying a wide range of
discretion.
The equal protection clause recognizes a valid
classification, that is, a classification that has a
reasonable foundation or rational basis and not
arbitrary.
With respect to RA 9335, its expressed public policy is
the optimization of the revenue-generation capability
and collection of the BIR and the BOC.23 Since the

subject of the law is the revenue- generation capability
and collection of the BIR and the BOC, the incentives
and/or sanctions provided in the law should logically
pertain to the said agencies. Moreover, the law concerns
only the BIR and the BOC because they have the
common distinct primary function of generating
revenues for the national government through the
collection of taxes, customs duties, fees and charges.
Both the BIR and the BOC are bureaus under the DOF. They
principally perform the special function of being the
instrumentalities through which the State exercises one of its
great inherent functions – taxation. Indubitably, such
substantial distinction is germane and intimately related to
the purpose of the law. Hence, the classification and
treatment accorded to the BIR and the BOC under RA 9335
fully satisfy the demands of equal protection.
3. NO, there is no undue delegation of power. Two tests
determine the validity of delegation of legislative power: (1)
the completeness test and (2) the sufficient standard test. A
law is complete when it sets forth therein the policy to be
executed, carried out or implemented by the delegate. It lays
down a sufficient standard when it provides adequate
guidelines or limitations in the law to map out the boundaries
of the delegate’s authority and prevent the delegation from
running riot. To be sufficient, the standard must specify the
limits of the delegate’s authority, announce the legislative
policy and identify the conditions under which it is to be
implemented.
RA 9335 adequately states the policy and standards to guide
the President in fixing revenue targets and the implementing
agencies in carrying out the provisions of the law.
Clearly, RA 9335 in no way violates the security of tenure of
officials and employees of the BIR and the BOC. In the case
of RA 9335, it lays down a reasonable yardstick for removal
(when the revenue collection falls short of the target by at
least 7.5%) with due consideration of all relevant factors
! 39!
2A 2014 Montero Tax Digests
!
affecting the level of collection. This standard is analogous to
inefficiency and incompetence in the performance of official
duties, a ground for disciplinary action under civil service
laws.
4. The issue of its alleged encroachment on the executive
function of implementing and enforcing the law may be
considered moot and academic.
• Broadly defined, the power of oversight embraces all
activities undertaken by Congress to enhance its
understanding of and influence over the implementation of
legislation it has enacted. Clearly, oversight concerns post
enactment measures undertaken by Congress: (a) to monitor
bureaucratic compliance with program objectives, (b) to
determine whether agencies are properly administered, (c) to
eliminate executive waste and dishonesty, (d) to prevent
executive usurpation of legislative authority, and (d) to
assess executive conformity with the congressional
perception of public interest. It is intrinsic in the grant of
legislative power itself and integral to the checks and
balances inherent in a democratic system of government.
The acts done by Congress purportedly in the exercise of its
oversight powers may be divided into three categories,
namely: scrutiny, investigation and supervision.
a. Scrutiny Congressional scrutiny implies a lesser intensity
and continuity of attention to administrative operations. Its
primary purpose is to determine economy and efficiency of
the operation of government activities. In the exercise of
legislative scrutiny, Congress may request information and
report from the other branches of government. It can give
recommendations or pass resolutions for consideration of
the agency involved.
b. Congressional investigation
While congressional scrutiny is regarded as a passive
process of looking at the facts that are readily available,

congressional investigation involves a more intense digging
of facts.
c. Legislative supervision
The third and most encompassing form by which Congress
exercises its oversight power is thru legislative supervision.
Supervision connotes a continuing and informed awareness
on the part of a congressional committee regarding
executive operations in a given administrative area. While
both congressional scrutiny and investigation involve inquiry
into past executive branch actions in order to influence future
executive branch performance, congressional supervision
allows Congress to scrutinize the exercise of delegated law
making authority, and permits Congress to retain part of that
delegated authority.
Congress exercises supervision over the executive agencies
through its veto power. It typically utilizes veto provisions
when granting the President or an executive agency the
power to promulgate regulations with the force of law. These
provisions require the President or an agency to present the
proposed regulations to Congress, which retains a right to
approve or disapprove any regulation before it takes effect.
Such legislative veto provisions usually provide that a
proposed regulation will become a law after the expiration of
a certain period of time, only if Congress does not
affirmatively disapprove of the regulation in the meantime.
Less frequently, the statute provides that a proposed
regulation will become law if Congress affirmatively approves
it.
However any post enactment congressional measure should
be limited to scrutiny and investigation.
A.) Scrutiny based primarily on Congress’ power of
appropriation and the budget hearings conducted in
connection with it, its power to ask heads of departments to
appear before and be heard by either of its Houses on any
matter pertaining to their departments and its power of
! 40!
2A 2014 Montero Tax Digests
!
confirmation
B.) Investigation and monitoring of the implementation of
laws pursuant to the power of Congress to conduct inquiries
in aid of legislation.
Legislative veto is a statutory provision requiring the
President or an administrative agency to present the
proposed implementing rules and regulations of a law to
Congress which, by itself or through a committee formed by
it, retains a right or power to approve or disapprove such
regulations before they take effect. As such, a legislative
veto in the form of a congressional oversight committee is in
the form of an inward turning delegation designed to attach a
congressional leash (other than through scrutiny and
investigation) to an agency to which Congress has by law
initially delegated broad powers. It radically changes the
design or structure of the Constitution’s diagram of power as
it entrusts to Congress a direct role in enforcing, applying or
implementing its own laws.
Congress has two options when enacting legislation to
define national policy within the broad horizons of its
legislative competence. It can itself formulate the details or it
can assign to the executive branch the responsibility for
making necessary managerial decisions in conformity with
those standards. In the latter case, the law must be complete
in all its essential terms and conditions when it leaves the
hands of the legislature. Thus, what is left for the executive
branch or the concerned administrative agency when it
formulates rules and regulations implementing the law is to
fill up details (supplementary rule-making) or ascertain facts
necessary to bring the law into actual operation (contingent
rule-making). Administrative regulations enacted by
administrative agencies to implement and interpret the law
which they are entrusted to enforce have the force of law
and are entitled to respect. Such rules and regulations
partake of the nature of a statute and are just as binding as if
they have been written in the statute itself. As such, they
have the force and effect of law and enjoy the presumption

of constitutionality and legality until they are set aside with
finality in an appropriate case by a competent court.
Congress, in the guise of assuming the role of an overseer,
may not pass upon their legality by subjecting them to its
stamp of approval without disturbing the calculated balance
of powers established by the Constitution. In exercising
discretion to approve or disapprove the IRR based on a
determination of whether or not they conformed with the
provisions of RA 9335, Congress arrogated judicial power
unto itself, a power exclusively vested in this Court by the
Constitution.
(The case further discusses the process of how a bill is
passed but it is not directly related to our tax subject)
Source:
2015 Digests (with some additions)
ADDITIONAL NOTES:
The general rule is that where part of a statute is void as repugnant
to the Constitution, while another part is valid, the valid portion, if
separable from the invalid, may stand and be enforced. The
presence of a separability clause in a statute creates the
presumption that the legislature intended separability, rather than
complete nullity of the statute. The exception to the general rule is
that when the parts of a statute are so mutually dependent and
connected, as conditions, considerations, inducements, or
compensations for each other, as to warrant a belief that the
legislature intended them as a whole, the nullity of one part will vitiate
the rest.
The separability clause of RA 9335 reveals the intention of the
legislature to isolate and detach any invalid provision from the other
provisions so that the latter may continue in force and effect. The
valid portions can stand independently of the invalid section. Without
Section 12, the remaining provisions still constitute a complete,
intelligible and valid law which carries out the legislative intent to
optimize the revenue-generation capability and collection of the BIR
! 41!
2A 2014 Montero Tax Digests
!
and the BOC by providing for a system of rewards and sanctions
through the Rewards and Incentives Fund and a Revenue
Performance Evaluation Board.
50. COMMISSIONER OF INTERNAL REVENUE V. FORTUNE
TOBACCO CORPORATION
G.R. 180006; September 28, 2011
Uniformity
PM REYES NOTES:
The court ruled that the higher tax rule only applies on the
transition period. To implement the higher tax rule on the January 1,
2000 increase would violate the rule of uniformity since brands
belonging to the same category would be imposed with different tax
rates.
CASE:
Under the Philippine Tax Laws, manufacturers of
cigarettes are subject to pay excise taxes on their products. Prior to
January 1, 1997, the excises taxes on these products were in the
form of ad valorem taxes, pursuant to Section 142 of the 1977 Tax
Code. But, beginning January 1, 1997, Republic Act No. (RA)
8240 took effect and a shift from ad valorem to specific taxes was
made. To implement the 12% increase in specific taxes mandated
under Section 145 of the 1997 Tax Code and pursuant to its rule-
making powers, the CIR issued Revenue Regulation No. (RR) 17-
99. It included a proviso which states that “Provided, however, that
the new specific tax rate for any existing brand of cigars [and]
cigarettes packed by machine, distilled spirits, wines and fermented
liquors shall not be lower than the excise tax that is actually being
paid prior to January 1, 2000.” Pursuant to the abovementioned
laws, Fortune Tobacco paid in advance excise taxes for the year
2003 in the amount of P11.15 billion, and for the period covering
January 1 to May 31, 2004 in the amount of P4.90 billion. Fortune
Tobacco’s claim for refund of overpaid excise taxes is based
primarily on what it considers as an “unauthorized
administrative legislation” on the part of the CIR.

The relevant issue in this case is whether or not the rule of
uniformity of taxation is violated by the proviso in Sec 1 of RR
17-99 (in applying the higher tax rule on the January 1, 2000
increase). The court ruled that yes, the proviso in Sec 1 of RR
17-99 is violative of the rule of uniformity of taxation. The court
ruled that the higher tax rule only applies on the transition
period. To implement the higher tax rule on the January 1, 2000
increase would violate the rule of uniformity since brands
belonging to the same category would be imposed with different
tax rates.
FACTS:
• Under Philippine Tax Laws, manufacturers of cigarettes are
subject to pay excise taxes on their products.
o Prior to January 1, 1997, the excises taxes on these
products were in the form of ad valorem taxes, pursuant
to Section 142 of the 1977 Tax Code.
o Beginning January 1, 1997, Republic Act No. (RA)
8240 took effect and a shift from ad valorem to specific
taxes was made.
• According to Sec 145 of The National Internal Revenue Code of
1997 (Tax Code of 1997):!
“The specific tax from any brand of cigarettes within the next
three (3) years of effectivity of this Act shall not be lower than the
tax [which] is due from each brand on October 1, 1996 xxxx The
rates of specific tax on cigars and cigarettes under paragraphs
(1), (2), (3) and (4) hereof, shall be increased by twelve percent
(12%) on January 1, 2000.”
• To implement the 12% increase in specific taxes mandated
under Section 145 of the 1997 Tax Code and pursuant to its rule-
making powers, the CIR issued Revenue Regulation No. (RR)
17-99.
o It included a proviso which states that “Provided,
however, that the new specific tax rate for any existing
brand of cigars [and] cigarettes packed by machine,
distilled spirits, wines and fermented liquors shall not be
lower than the excise tax that is actually being paid prior
to January 1, 2000.”
• Pursuant to the abovementioned laws, Fortune Tobacco paid in
advance excise taxes for the year 2003 in the amount of P11.15
! 42!
2A 2014 Montero Tax Digests
!
billion, and for the period covering January 1 to May 31, 2004 in
the amount of P4.90 billion.
• In June 2004, Fortune Tobacco filed an administrative claim for
tax refund with the CIR for erroneously and/or illegally collected
taxes in the amount of P491 million.
o Fortune Tobacco’s claim for refund of overpaid
excise taxes is based primarily on what it considers
as an “unauthorized administrative legislation” on
the part of the CIR.
" Fortune Tobacco assails the proviso in Section 1 of
RR 17-99. It claimed that by including the proviso,
the CIR went beyond the language of the law and
usurped Congress’ power.
ISSUES:
1. Whether or not the proviso of Sec 1 of RR 17-99 is an
“unauthorized administrative legislation” on the part of CIR.
2. Whether or not the rule of uniformity of taxation is violated
by the proviso in Sec 1 of RR 17-99
RULING:
1. Yes, the proviso in Section 1 of RR 17-99 clearly went
beyond the terms of the law it was supposed to implement,
and therefore entitles Fortune Tobacco to claim a refund of
the overpaid excise taxes collected pursuant to this
provision.
• The said proviso clearly went beyond the terms of the law it
was supposed to implement.
Section 145 states that during the transition period, i.e.,
within the next three (3) years from the effectivity of the Tax
Code, the excise tax from any brand of cigarettes shall not
be lower than the tax due from each brand on 1 October
1996.This qualification, however, is conspicuously absent as
regards the 12% increase which is to be applied on cigars
and cigarettes packed by machine, among others, effective
on 1 January 2000. Clearly and unmistakably, Section 145
mandates a new rate of excise tax for cigarettes packed by
machine due to the 12% increase effective on 1 January
2000 without regard to whether the revenue collection
starting from this period may turn out to be lower than that

collected prior to this date. By adding the proviso in RR 17-
99, it effectively imposes a situation not supported by the
wordings of Sec 145 of the Tax Code of 1997. [As ruled in
CIR v. Fortune Tobacco Corporation (2008)]
2. Yes, the Rule of uniformity of taxation is violated by the
proviso in Section 1, RR 17-99.
• The Constitution requires that taxation should be uniform
and equitable. Uniformity in taxation requires that all subjects
or objects of taxation, similarly situated, are to be treated
alike both in privileges and liabilities.
o This requirement, however, is unwittingly violated when
the proviso in Section 1 of RR 17-99 is applied in certain
cases.
o In the process, the CIR also perpetuated the unequal tax
treatment of similar goods that was supposed to be
cured by the shift from ad valorem to specific taxes.
NOTE: An illustration is provided for in the original case, please refer
to it for better understanding of the uniformity issue. THANKS!
51. BUREAU OF CUSTOMS EMPLOYEES’ ASSOCIATION V.
TEVES
REYES NOTES/ CASE:
The equal protection clause recognizes a valid classification,
that is, a classification that has a reasonable foundation or rational
basis and not arbitrary. The subject of Attrition Law was revenue
generation and collection of the BIR and COB, thus, the incentives
and sanctions should logically pertain to them an not to other
government agencies.
FACTS:
• On January 25, 2005, former President Gloria Macapagal-
Arroyo signed into law R.A. No. 9335 (Attrition Act of 2005).
• Bureau of Customs Employees Association (BOCEA),
association of rank-and-file employees of Bureau of Customs
(BOC) assail the constitutionality of the law and its IRR and
! 43!
2A 2014 Montero Tax Digests
!
directly filed against Margarito Teves in his capacity as Sec
of Dept of Finance (DOF).
• Pursuant to the mandate of law, the high-ranking officials of
BOC started disseminating Performance Contracts for lower
ranking officials and rank-and-file employees to sign.
• Performance Contract provides stipulation which sets a
criteria and procedures for removing from service Officials
and Employees whose revenue collection fall short of the
target (must not be 7.5% of the target).
• BOCEA alleged that they were coerced to sign the contract
and opined it was impossible to meet the revenue target due
to Government’s own policies on reduced tariff rates and tax
breaks to big businesses, the occurrence of natural
calamities and because of other economic factors.
Furthermore, it is unduly oppressive of BIR and BOC
employees as it shifts the extreme burden upon their
shoulders which is ultimately discriminatory to them
ISSUES:
8. Whether or not RA 9335 and IRR violates the right’s of
the BOCEA members to a. equal protection b. security of
tenure c. due process?
HELD & RATIO:
• NO. Equal protection simply provides that all persons or things
similarly situated should be treated in a similar manner, both as
to rights conferred and responsibilities imposed. Classification
was founded on reasonableness and not arbitrariness as the law
concerns only the BIR and the BOC because they have the
common distinct primary function of generating revenues for the
national government through the collection of taxes, customs
duties, fees and charges.
• NO. It does not violate security of tenure, as guarantee of
security of tenure only means that an employee cannot be
dismissed from the service for causes other than those provided
by law and only after due process is accorded the employee, the
law gives a reasonable yardstick for removal (falls short of at
least 7.5%) with due consideration of all relevant factors affecting
the level of collection. This standard is analogous to inefficiency
 2A 2014 Montero Tax Digests
!
and incompetence in the performance of official duties, a ground
for disciplinary action under civil service laws.
• NO. It does not violate due process or right to be heard. Clearly
give due consideration to all relevant factors that may affect the
level of collection and exemptions were also made and is given
the right to appeal.

FINAL VERDICT: Petition is denied. This was directly filed with the
SC.

Notes/ Source:

The constitutionality of this law was already challenged in Abakada

Guro Party List v. Purisima, wherein declared Section 12 of R.A. No.
9335 creating a Joint Congressional Oversight Committee to approve
the IRR as unconstitutional and violative of the principle of
separation of powers. However, the constitutionality of the remaining
provisions were upheld
1
Enacted to optimize the revenue-generation capability and
collection of the Bureau of Internal Revenue (BIR) and the Bureau of
Customs (BOC). The law intends to encourage BIR and BOC
officials and employees to exceed their revenue targets by providing
a system of rewards and sanctions

! 44!

(ii) NON-IMPAIRMENT
52. PEOPLE v. CAGUIOA
Tax Exemption; Non-impairment
REYES NOTES/CASE:
Is a tax exemption a vested right?
No. The Supreme Court in REPUBLIC V. CAGUIOA [536 SCRA 194]
held that there is no vested right in a tax exemption and more so
when the latest expression of legislative intent renders it continuance
doubtful. In the said case, RA 7227 granted private domestic
corporations doing business in the Subic SEZ tax exemptions on
importations of general merchandise. However, RA 9334 withdrew
the tax exemption on the importations of cigars, cigarettes, distilled
spirits, fermented liquors and wines.
Text
FACTS:
• In 1992, Congress enacted Republic Act (R.A) No. 7227 or
the Bases Conversion and Development Act of 1992 which,
among other things, created the Subic Special Economic
and Freeport Zone (SBF) and the Subic Bay Metropolitan
Authority (SBMA)
• R.A. No. 7227 envisioned the SBF to be developed into a
"self-sustaining, industrial, commercial, financial and
investment center to generate employment opportunities in
and around the zone and to attract and promote productive
foreign investments.”
Section 12 of the law provided:
The provisions of existing laws, rules and regulations to the
contrary notwithstanding, no taxes, local and national, shall
be imposed within the Subic Special Economic Zone.
• Subsequently, RA 9334 was passed. It withdrew the tax
exemption on the importations of cigars, cigarettes, distilled
spirits, fermented liquors and wines.
! 45!
2A 2014 Montero Tax Digests
!
On the basis of R.A. No. 9334, SBMA issued a
•
Memorandum declaring that effective January 1, 2005, all
importations of cigars, cigarettes, distilled spirits, fermented
liquors and wines into the SBF, including those intended to
be transshipped to other free ports in the Philippines, shall
be treated as ordinary importations subject to all applicable
taxes, duties and charges, including excise taxes.
• Meanwhile, on February 3, 2005, former Bureau of Internal
Revenue (BIR) Commissioner Guillermo L. Parayno, Jr.
requested then Customs Commissioner George M. Jereos to
immediately collect the excise tax due on imported alcohol
and tobacco products brought to the Duty Free Philippines
(DFP) and Freeport zones.
• Accordingly, the Collector of Customs of the port of Subic
directed the SBMA Administrator to require payment of all
appropriate duties and taxes on all importations of cigars and
cigarettes, distilled spirits, fermented liquors and wines; and
for all transactions involving the said items to be covered
from then on by a consumption entry and no longer by a
warehousing entry.
• Respondents herein question the validity or constitutionality
of RA 9334 which withdrew tax exemption on the
importations of cigars, cigarettes, distilled spirits, fermented
liquors and wines arguing the following, That:
(3) the assailed law violates the one bill-one subject rule
embodied in Section 26(1), Article VI of the Constitution as
well as the constitutional proscription against the impairment
of the obligation of contracts.
ISSUES:
1. Whether or not Tax exemption is a vested right.
2. Whether or not the assailed law (RA 9334) violates the
constitutional proscription against the impairment of the
obligation of contracts.
HELD & RATIO:
1. NO.
• There is no vested right in a tax exemption, more
so when the latest expression of legislative
intent renders its continuance doubtful. Being a

mere statutory privilege, a tax exemption may be
modified or withdrawn at will by the granting
authority.
To state otherwise is to limit the taxing power of the
State, which is unlimited, plenary, comprehensive
and supreme. The power to impose taxes is one so
unlimited in force and so searching in extent, it is
subject only to restrictions which rest on the
discretion of the authority exercising it.
• Whatever right may have been acquired on the basis
of the Certificates of Registration and Tax Exemption
must yield to the State’s valid exercise of police
power. It is well to remember that taxes may be
made the implement of the police power.
It is not difficult to recognize that public welfare and
necessity underlie the enactment of R.A. No. 9334.
As petitioners point out, the now assailed provision
was passed to curb the pernicious practice of some
unscrupulous business enterprises inside the SBF of
using their tax exemption privileges for smuggling
purposes. Smuggling in whatever form is bad
enough; it is worse when the same is allegedly
perpetrated, condoned or facilitated by enterprises
hiding behind the cloak of their tax exemption
privileges.
2. NO.
• While the tax exemption contained in the
Certificates of Registration of private
respondents may have been part of the
inducement for carrying on their businesses in
the SBF, this exemption, nevertheless, is far
from being contractual in nature in the sense
that the non-impairment clause of the
Constitution can rightly be invoked.
! 46!
2A 2014 Montero Tax Digests
!
• The rights granted under the Certificates of
Registration and Tax Exemption of private
respondents are not absolute and unconditional as
to constitute rights in esse – those clearly founded
on or granted by law or is enforceable as a matter of
law.
• These certificates granting private respondents a
"permit to operate" their respective businesses are in
the nature of licenses, which the bulk of
jurisprudence considers as neither a property nor a
property right. The licensee takes his license subject
to such conditions as the grantor sees fit to impose,
including its revocation at pleasure. A license can
thus be revoked at any time since it does not confer
an absolute right.
53. MERALCO v. PROVINCE OF LAGUNA and BALAZO
May 5, 1999
REYES NOTES/ CASE:
Meralco was granted a franchise to operate an electric light
and power service in Calamba, Laguna. In 1991, the Local
Government Code was enacted to enjoin LGUs to create their own
source of revenue and to levy taxes, fees and charges, as consistent
with local autonomy. Pursuant to this, a provincial ordinance was
enacted imposing a franchise tax, which is why the Provincial
Treasurer demanded Meralco to pay its corresponding tax. Meralco
reluctantly paid and subsequently filed a claim for refund, which was
denied. The issue is whether or not the imposition of a franchise tax
under the challenged provincial ordinance is violative of the non-
impairment clause of the Constitution and Sec. 1 of PD No. 551
which provided for a different franchise tax that Meralco is paying.
The Court held the negative and explained that the LGC effectively
withdrew the tax exemption privilege through its Secs. 193 and 534.
Also, the non-impairment clause does not apply to tax exemptions
granted under franchises.

FACTS:
• January 19, 1983: Meralco was granted a franchise by the
National Electrification Administration to operate an electric
light and power service in Calamba, Laguna.
• September 12, 1991: The Local Government Code of 1991
(LGC) was enacted to take effect on January 1, 1992
enjoining local government units to create their own sources
of revenue and to levy taxes, fees and charges, subject to
the limitations expressed therein, consistent with the basic
policy of local autonomy.
• Pursuant to the provisions of the Code, respondent province
enacted Laguna Provincial Ordinance No. 01-92, effective 01
January 1993, providing, in part, as follows:
o Sec. 2.09. Franchise Tax. — There is hereby
imposed a tax on businesses enjoying a franchise,
at a rate of fifty percent (50%) of one percent (1%) of
the gross annual receipts, which shall include both
cash sales and sales on account realized during the
preceding calendar year within this province,
including the territorial limits on any city located in
the province.
• On the basis of that ordinance, respondent Provincial
Treasurer (Balazo) sent a demand letter to Meralco for the
corresponding tax payment.
• Meralco paid the tax which amounted to P19,520,628.42
under protest.
• Meralco sent a formal claim for refund to Balazo claiming
that the franchise tax it had paid and continued to pay to the
National Government pursuant to P.D. 551 already included
the franchise tax imposed by the Provincial Tax Ordinance. It
averred that the imposition of a franchise tax under the
ordinance, with regard to Meralco, contravened the
provisions of Sec. 1 of PD 551.
o Any provision of law or local ordinance to the
contrary notwithstanding, the franchise tax payable
by all grantees of franchises to generate, distribute
and sell electric current for light, heat and power
shall be two per cent (2%) of their gross receipts
received from the sale of electric current and from
! 47!
2A 2014 Montero Tax Digests
!
transactions incident to the generation, distribution
and sale of electric current.
o Such franchise tax shall be payable to the
Commissioner of Internal Revenue or his duly
authorized representative on or before the twentieth
day of the month following the end of each calendar
quarter or month, as may be provided in the
respective franchise or pertinent municipal regulation
and shall, any provision of the Local Tax Code or
any other law to the contrary notwithstanding, be in
lieu of all taxes and assessments of whatever nature
imposed by any national or local authority on
earnings, receipts, income and privilege of
generation, distribution and sale of electric current.
• August 28, 1995: The claim for refund was denied by the
governor, relying on the LGC as a more recent law than the
old decree invoked by Meralco.
ISSUES:
1. Whether or not the imposition of a franchise tax under Sec.
2.09 of Laguna Provincial Ordinance No. 01-92, insofar as
Meralco is concerned, is violative of the non-impairment clause
of the Constitution and Sec. 1 of P.D. No. 551.
HELD & RATIO:
1. NO, the tax exemption granted under franchise is deemed
repealed under the LGC. Also, such tax exemption partakes the
nature of a grant which is beyond the purview of the non-impairment
clause of the Constitution.
• Under the now prevailing Constitution, where there is neither a
grant nor a prohibition by statute, the tax power must be deemed
to exist although Congress may provide statutory limitations and
guidelines. Nevertheless, the fundamental law did not intend the
delegation to be absolute and unconditional; the constitutional
objective obviously is to ensure that, while the local government
units are being strengthened and made more autonomous, the
legislature must still see to it that
o (a) the taxpayer will not be over-burdened or saddled
with multiple and unreasonable impositions;

o (b) each local government unit will have its fair share of
available resources;
o (c) the resources of the national government will not be
unduly disturbed; and
o (d) local taxation will be fair, uniform, and just.
• Indicative of the legislative intent to carry out the Constitutional
mandate of vesting broad tax powers to local government units,
the Local Government Code has effectively withdrawn tax
exemptions or incentives theretofore enjoyed by certain entities.
o Sec. 193. Withdrawal of Tax Exemption Privileges —
Unless otherwise provided in this Code, tax exemptions
or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including
government-owned or controlled corporations, except
local water districts, cooperatives duly registered under
R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the
effectivity of this Code.
• The LGC also contains a repealing clause.
o Sec. 534. Repealing Clause. — . . .(f) All general
and special laws, acts, city charters, decrees, executive
orders, proclamations and administrative regulations, or
part or parts thereof which are inconsistent with any of
the provisions of this Code are hereby repealed or
modified accordingly.
• Contractual tax exemptions, in the real sense of the term and
where the non-impairment clause of the Constitution can rightly
be invoked, are those agreed to by the taxing authority in
contracts, such as those contained in government bonds or
debentures, lawfully entered into by them under enabling laws in
which the government, acting in its private capacity, sheds its
cloak of authority and waives its governmental immunity. Truly,
tax exemptions of this kind may not be revoked without impairing
the obligations of contracts. These contractual tax exemptions,
however, are not to be confused with tax exemptions granted
under franchises. A franchise partakes the nature of a grant
which is beyond the purview of the non-impairment clause of the
Constitution.
• Article XII, Section 11, of the 1987 Constitution, like its precursor
provisions in the 1935 and the 1973 Constitutions, is explicit that
! 48!
2A 2014 Montero Tax Digests
!
no franchise for the operation of a public utility shall be granted
except under the condition that such privilege shall be subject to
amendment, alteration or repeal by Congress as and when the
common good so requires.
FINAL VERDICT: Petition is dismissed
54. MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS,
INC. vs. DEPARTMENT OF FINANCE SECRETARY
REYES NOTES/ CASE:
Note: No Pierre Reyes notes.
The BIR issued an RMC clarifying Sec. 103 a and b of the NIRC:
copra is a non-food product and the exemption, as such, extends
only to primary producers. The SC held that there is no violation of
the EPC since there is a substantial distinction between coconut
producers and copra dealers. The latter only sell but not produce
coconut.
FACTS:
• Petitioner Misamis Oriental Association of Coco Traders, Inc.
is a domestic corporation whose members, individually or
collectively, are engaged in the buying and selling of copra in
Misamis Oriental.
• Prior to the issuance of Revenue Memorandum Circular 47-
91, petitioner claimed that copra was classified as
agricultural food product in the NIRC and, therefore, exempt
from VAT at all stages of production or distribution.
• Under §103(a), as above quoted, the sale of agricultural non-
food products in their original state is exempt from VAT only
if the sale is made by the primary producer or owner of the
land from which the same are produced. The sale made by
any other person or entity, like a trader or dealer, is not
exempt from the tax. On the other hand, under §103(b) the
sale of agricultural food products in their original state is
exempt from VAT at all stages of production or distribution
regardless of who the seller is.

• The RMC classified copra as a non-food product and hence
tax exemption extends only to the primary producer.
ISSUES:
3. Whether or not copra is an agricultural food or non-
food?
NON-FOOD.
The ruling was made by the Commissioner of Internal Revenue in
the exercise of his power under § 245 of the NIRC to "make rulings
or opinions in connection with the implementation of the provisions of
internal revenue laws, including rulings on the classification of
articles for sales tax and similar purposes."
4. Whether or not there was violation of the EPC?
NO.
Petitioner claims that the is violative of the equal protection clause
because while coconut farmers and copra producers are exempt,
traders and dealers are not, although both sell copra in its original
state.
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.
FINAL VERDICT: Petition is DISMISSED.
55. CAGAYAN ELECTRIC POWER & LIGHT CO. vs
COMMISSIONER OF INTERNAL REVENUE
REYES NOTES/ CASE:
! 49!
2A 2014 Montero Tax Digests
!
A tax exemption embodied in a legislative franchise is not a
contractual tax exemption. A franchise does not take the nature of a
contractual tax exemption, which cannot be revoked without
impairing the obligations of contracts. A legislative franchise can be
withdrawn through amendment or repeal.
FACTS:
• This is about the liability of petitioner Cagayan Electric
Power & Light Co., Inc. for income tax amounting to
P75,149.73 for the more than seven-month period of the
year 1969 in addition to franchise tax.
• CEPL is the holder of a legislative franchise, R.A. 3247,
under which its payment of 3% tax on its gross earnings from
the sale of electric current is "in lieu of all taxes and
assessments of whatever authority upon privileges,
earnings, income, franchise, and poles, wires,
transformers, and insulators of the grantee, from which
taxes and assessments the grantee is hereby expressly
exempted" (Sec. 3).
• R.A. 5431 amended section 24 of the Tax Code by making
liable for income tax all corporate taxpayers not
specifically exempt under paragraph (c) (1) of said section
and section 27 of the Tax Code notwithstanding the
"provisions of existing special or general laws to the
contrary".
• Thus, franchise companies were subjected to income tax in
addition to franchise tax. CEPL’s franchise was amended by
R.A. 6020, effective 1969, by authorizing CEPL to furnish
electricity to the municipalities of Villanueva and
Jasaan, Misamis Oriental in addition to Cagayan de Oro
City and the municipalities of Tagoloan and Opol.
• The amendment reenacted the tax exemption in its original
charter. Due to the amendment made to section 24 of the
Tax Code, the CIR required CEPL in 1973 to pay deficiency
income taxes for 1968-to 1971. CIR cancelled the
assessments for 1970 and 1971 but insisted on those for
1968 and 1969. CEPL filed a petition for review with the Tax
Court Tax court - CEPL liable only for the income tax for the

period from January 1 to August 3, 1969 or before the
passage of Republic Act No. 6020 which reiterated its tax
exemption. The petitioner appealed to this Court.
ISSUES:
Whether or not the petitioner's franchise is a contract that can be
impaired by such implied repeal
HELD & RATIO:
YES, such franchise can be impaired by the implied repeal. A tax
exemption embodied in a legislative franchise is not a contractual tax
exemption. A franchise does not take the nature of a contractual tax
exemption, which cannot be revoked without impairing the
obligations of contracts.
• Congress could impair CEPL’s legislative franchise by
making it liable for income tax from which before it was
exempted by virtue of the exemption provided for in section 3
of its franchise. (R.A. 3247)
• The Constitution provides that a franchise is subject to
amendment, alteration or repeal by the Congress when the
public interest so requires (Sec. 8, Art. XIV, 1935
Constitution; Sec. 5, Art. XIV, 1973 Constitution),
• Sec 1 R.A. 3247 provides that the grantee is subject to the
provisions of the Constitution and to the terms and
conditions established in Act No. 3636 whose section 12
provides that the franchise is subject to amendment,
alteration or repeal by Congress.
Source: 2015 Digests
56. J. CASANOVAS V. HORD
G.R. No. 34733; March 22, 1907
CASE:
! 50!
2A 2014 Montero Tax Digests
!
The Spanish Government, in accordance with the provisions of the
royal decree of the 14th of May, 1867, granted to J. Casanovas
certain mines in the said Province of Ambos Camarines, of which
mines the Casanovas is now the owner. The Royal Decree states
that aside from the tax imposed therein, J. Casanovas shall be
exempt from all other taxes. Later on, in accordance with Act No.
1189 (INternal Revenue Act), Hord, the collector of Revenue
imposed additional taxes, apart from those imposed in the Royal
Decree to J. Casanovas in the amount of 9600 php. Casanovas, paid
under protest such tax. Casanovas challenged Sec 134 of the
Internal Revenue Act stating that it is void since it comes within the
provision of section 5 of the act of Congress of July 1, 1902 which
provides "that no law impairing the obligation of contracts shall be
enacted”.
SC, after affirming that the deed between the Spanish Government
and J. Casanovas is a contract, ruled that since Sec 134 of the
Internal Revenue Act imposes additional taxes, aside from those
imposed in the Royal Decree, it impairs the contract between
Casanovas and the Spanish Government, the said law is void as to
him. SC further stated that the fact that this concession was made by
the Government of Spain, and not by the Government of the United
States, is not important (note that the case was decided when the
Philippines was under the American Regime).
FACTS:
• In January, 1897, the Spanish Government, in accordance with
the provisions of the royal decree of the 14th of May, 1867,
granted to J. Casanovas certain mines in the said Province of
Ambos Camarines, of which mines the Casanovas is now the
owner.
o Hord, the collector of internal revenue conceded that
there were valid perfected mining concessions granted
prior to the 11th of April, 1899.
• The Royal Decree states that each mining claim of 60,000 sam
there shall be paid an annual fixed that of about 20 pesos and a
10 peso fixed tax for 150,000 sqm. It is further provided in this
Decree that the pertencia of iron mines and mines of
combustible minerals shall be exempt from the said annual tax

for a period of 30 years from the date of publication of this
decree. Most importantly, Art. 81 of this Decree states that “No
other taxes than those herein mentioned shall be imposed upon
mining and metallurgical industries.”
o Simply put, aside from the tax imposed by this Royal
Decree, J. Casanovas is exempt from all other taxes.
• The deed granted to J. Casanovas by the Spanish Gov’t
indicated that he shall pay taxes on the mine and its output as
prescribed in the royal decree. It also stated that he shall comply
with all the requirements contained in the royal decree and in the
regulations for concessions of the same nature as the present.
• Act. No. 1189 (Internal Revenue Act) was passed and Sec 134
of such states that:
“SEC. 134. On all valid perfected mining concessions
granted prior to April eleventh, eighteen hundred and ninety-
nine, there shall be levied and collected on the after January
first, nineteen hundred and five, the following taxes:
2. (a) On each claim containing an area of sixty thousand
square meters, an annual tax of one hundred pesos; (b) and
at the same rate proportionately on each claim containing an
area in excess of, or less than, sixty thousand square
meters.
3. On the gross output of each an ad valorem tax equal to
three per centum of the actual market value of such output.
• Hord, as the collector of the internal revenue, accordingly
imposed upon J. Casanovas the tax mentioned in section 134
(totalling to Php 9,600), which tax, as has before been stated, J.
Casanovas paid under protest.
• J. Casanovas brought this action against the Hord to recover the
sum of P9,600, paid by him under protest as taxes on certain
mining claims owned by him in the Province of Ambos
Camarines.
ISSUE:
1. Whether or not Sec 134 of Act No. 1189 violated the non-
impairment of contracts clause indicated in Sec 5 of the Act of
Congress of July 1, 1902.
RATIO:
! 51!
2A 2014 Montero Tax Digests
!
1. Yes, Sec 134 of Act No. 1189 violated the non-impairment of
contracts clause indicated in Sec 5 of the Act of Congress
of July 1, 1902.
• Petitioner’s Contention:
" Sec 134 of Act No. 1189 is void because it comes within
the provision of section 5 of the act of Congress of July
1, 1902 which provides "that no law impairing the
obligation of contracts shall be enacted.”
• SC Ruling:
" The court ruled that it seems clear that the deed
granted by the Spanish Government to J. Casanovas
constituted a contract between the Spanish
Government and Casanovas the obligation of which
contract was impaired by the enactment of section
134 of the Internal Revenue Law, thereby infringing
the provisions above quoted from section 5 of the
act of Congress of July 1, 1902 as it imposed
additional taxes to J. Casanovas, aside from those
stated in the royal decree.
o The fact that this concession was made by the
Government of Spain, and not by the
Government of the United States, is not
important.
" According to SC, Sec 134 of Act No. 1189 is also void
because it is in conflict with section 60 of the act of
Congress of July 1, 1902. Sec 60 of such seems to
indicate that concessions, like those in question, can be
canceled only by reason of illegality in the procedure by
which they were obtained, or for failure to comply with
the conditions prescribed as requisite for their retention
in the laws under which they were granted. There is
nothing in the section which indicates that they can be
canceled for failure to comply with the conditions
prescribed by subsequent legislation. In fact, the real
intention of the act seems to be that such concession
should be subject to the former legislation and not to any
subsequent legislation.
o There is no claim in this case that there was any
illegality in the procedure by which these
concessions were obtained, nor is there any
 2A 2014 Montero Tax Digests
!
claim that J. Casanovas has not complied with
the conditions prescribed in the said royal
decree of 1867.
" SC further stated that it from the above ruling of the
court it is not necessary anymore to consider the further
claim of J. Casanovas that the taxes imposed by article
134, are in violation of the part of section 5 of the act of
July 1, 1902, which declares "that the rule of taxation in
said Islands shall be uniform.”
" (According to the 2A 2015 Digest: own words nung
gumawa) Â state can grant tax exemptions. If they grant
one, we must determine first if the grant is a contract or
not. If it is a contract between the state and the grantee,
then the tax exemption can’t just be removed by the
state through a subsequent legislation at will.
" As in the case at bar, the state granted a tax exemption
through a contract and IT CANNOT BE IMPAIRED
UNLESS FOR A VALID REASON. A subsequent law
cannot be passed infringing such contract.

FINAL VERDICT: The judgment of the court below is reversed, and

judgment is ordered in favor of the plaintiff and against the defendant
for P9,600, with interest thereon, at 6 per cent, from the 21st day of
February, 1906, and the costs of the Court of First Instance. No costs
will be allowed to either party in this court.

Source: I lifted a specific portion from 2A 2015 Digest.

Note: I did not include the other jurirsprudence cited in the case.

! 52!