CHAPTER 1 GENERAL PRINCIPLES
5. proportionate in character;
A. Concept, Nature and Characteristics of
Taxation and Taxes
What is taxation?
Taxation is the process or means by which the sovereign, through its law-
making body, raises income to defray the necessary expenses of
government.
It is a way of apportioning the cost of government among those who in
some measure are privileged to enjoy its benefits and, therefore, must
bear its burdens.
As a power, taxation refers to the inherent power of the state to demand
enforced contributions for public purpose or purposes.
What is the purpose of taxation?
The primary purpose of taxation on the part of government is to provide
funds or property with which to promote the general welfare and
protection of its citizens. In its broadest and most general sense, taxation
includes every imposition of charge or burden by the sovereign power
upon persons, property, or property rights for the use and support of the
government and to enable it to discharge its appropriate functions.
What are taxes?
Taxes are the enforced proportional contributions from persons and
property levied by the law-making body of the state by virtue of its
sovereignty for the support of the government and all public needs.
What are the essential characteristics of tax?
A tax is: (JEL-MP3)
1. levied by the state which has jurisdiction over the person or
property;
2. an enforced contribution;
3. levied by the law-making body of the state;
4. generally payable in money;
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6. levied on persons or property; and
7. levied for public purpose or purposes.
1. Levied by the state which has jurisdiction over the person or
property
Jurisdiction over the object to be taxed is necessary in order that the tax
can be enforced. The taxing power of a state stops at the state boundary
lines. It cannot reach over into another jurisdiction to seize upon persons
or property for purposes of taxation.
2. An enforced contribution
A tax is not a voluntary payment or donation, and its imposition is not
dependent upon the will or assent of the person taxed. The principle of
representation is satisfied so long as the taxpayers are adequately
represented in the legislative body which votes the tax.
3. Levied by the law-making body
The power to tax is a legislative power, which under the Constitution, only
Congress can exercise through the enactment of tax statutes.
Accordingly, the obligation of a tax is a statutory liability.
In addition, the power to tax is also granted by the Constitution to local
governments, subject to guidelines and limitations provided by law.
4. Generally payable in money
Unless qualified by law, the term tax is understood to be a pecuniary
burden, which should be discharged alone in the form of legal tender.
5. Proportionate in character
A tax is laid by some rule of apportionment according to which persons
share the public burden. It is ordinarily based on ability to pay.
6. Levied on persons or property
A tax may also be imposed on acts, transactions, rights, or privileges. In
each case, however, it is only a person who pays the tax. The property is
resorted to for the purpose of ascertaining the amount to be paid and of
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enforcing payment in case of default of the taxpayer. But not all who pay
a tax shoulder the burden of the tax.
7. Levied for public purpose
A tax constitutes a charge or burden imposed to provide income for public
purposes – the support of the government, the administration of the law,
or the payment of public expenses. Revenues derived from taxes cannot
be used for purely private purposes or for the exclusive benefit of private
persons.
What is the basis of the power to tax?
1. The power of taxation proceeds upon the theory that the existence of
government is a necessity; that it cannot continue without means to
pay its expenses; and that for these means, it has a right to compel all its
citizens and property within its limits to contribute.
2. The Benefits-Received Principle - The basis of taxation is found in
the reciprocal duties of protection and support between the state and its
inhabitants. In return for his contribution, the taxpayer receives the
general advantages and protection which the government affords the
taxpayer and his property. This is the benefits-received principle. One
is compensation or consideration for the other: protection for support and
support for protection.
Can a person object to payment of taxes on the
ground that he receives no personal benefit from the
government?
No. Protection in the enjoyment of his rights is a duty owed by the State
to every citizen. However, from the contribution received from taxes, the
government renders no special or commensurate benefit to any particular
property or person. What the taxpayer gets is the enjoyment of the
privileges of living in an organized society. What matters in taxation is
that the tax imposition is for a public purpose. No particular benefit is
necessary.
What is the nature of the power of taxation?
The power of taxation is: (ILL)
1. inherent in sovereignty;
2. legislative in character;
3. subject to constitutional and inherent limitations.
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1. Inherent in soverignty
The power of taxation is an incident or attribute of sovereignty, being
essential to the existence of every government. It can be exercised by the
government even without an express grant by the people through the
Constitution. An express grant by the Constitution merely limits the
power.
2. Legislative in character
The power to tax is exclusively lodged in the legislature and cannot be
exercised by the other branches of the government. However, a local
legislative body may levy a tax, subject to such limitations as may be
provided by law.
3. Subject to constitutional and inherent limitations
Most of the limitations on the power to tax are specifically provided in the
Constitution or implied therefrom, while the rest are inherent and spring
from the nature of the taxing power itself.
What are the aspects of taxation?
The exercise of the power of taxation has two aspects:
1. Levying or imposition of the tax, which is a legislative act
(taxation); and
2. Collection of the tax levied, which is essentially administrative in
character (tax administration).
Taxation + tax administration = the taxation
System
What is the extent of the legislative power to tax?
Subject to constitutional and inherent restrictions, the legislature has
discretion to determine the following matters: (SPAM)
1. The subjects to be taxed;
2. The purpose or object of the tax, so long as it is a public
purpose;
3. The amount or rate of the tax; and
4. The manner, means, and agencies of collection of the tax.
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What are the non-revenue objectives of taxation?
1. Taxation can strengthen anemic enterprises or provide incentive
to greater production through the grant of tax exemptions or the
creation of condition conducive to their growth.
2. Taxes on imports may be increased to protect local industries
against foreign competition or decreased to encourage foreign
trade.
3. Taxes on imported goods may also be used as a bargaining tool
by a country by setting tariff rates first at a relatively high level
before trade negotiations are entered into with another country to
enhance its bargaining power.
4. Taxes may be increased in periods of prosperity to curb spending
power and halt inflation or lowered in periods of slump to expand
business and ward off depression.
5. Taxes may be levied to reduce inequalities in wealth and incomes
(ex: estate, donor’s and income taxes).
6. Taxes may be levied to promote science and invention or to
finance educational activities or to improve the efficiency of local
police forces in the maintenance of peace and order through grant
or subsidy.
7. Taxation may be made as an implement of the police power to
promote the general welfare.
As long as a tax is for a public purpose, its validity is not affected by
collateral purpose or motives of the legislature, or by the fact that it has a
regulatory effect, or it discourages or even deters the activities taxed. The
principle applies even though the revenue obtained from the tax appears
very negligible or the revenue purpose is only secondary.
What are the basic principles of a sound tax system?
1. Fiscal adequacy – Sources of revenue should be sufficient to
meet the demands of public expenditure. It also means that the
revenues should be capable of expanding or contracting annually
in response to variations in public expenditures.
2. Equality or theoretical justice – The tax burden should be in
proportion to the taxpayer’s ability to pay. This is the so-called
ability-to-pay principle. Taxation should be uniform as well as
equitable.
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3. Administrative feasibility – Tax laws should be capable of
convenient, just, and effective administration.
CASES
1. CIR v. Cebu Portland Cement Co.
The CTA ordered CIR to refund to CEPOC overpayments made by the latter
of ad valorem taxes on cement sold by it.
The CIR opposed the ruling, claiming that it had a right to apply the
overpayment to another tax liability of CEPOC – sales tax on a
manufactured product (the cement).
CEPOC opposed the CIR, claiming that the overpayment must be refunded
pending the determination of whether the assessed sales tax was proper.
CEPOC claims that the cement cannot be considered a manufactured
product and is instead a mineral product exempt from sales tax.
ISSUE: Whether the CIR must refund the overpayment of the ad valorem
tax.
HELD: No, the CIR has the right to apply the overpayment to CEPOC’s
sales tax deficiency.
It is well settled that cement is a manufactured product. There was some
confusion because in a previous case, it was said that cement was subject
to sales tax prior to the effectivity of RA 1299, which introduced the
definitions of “mineral” and “manufactured.” However, the decision cannot
be taken to have meant that cement was no longer a manufactured
product because such determination was not at issue.
The assessment of sales tax is enforceable despite its being contested
because of the urgency to collect the taxes as the lifeblood of the
government. If the payment of taxes could be postponed by questioning
their validity, the government would be paralyzed. The Tax Code
provides that no court shall have authority to grant an injunction
or restrain the collection of taxes, except when in the opinion of the
CTA, the collection by the BIR or the Bureau of Customs may jeopardize
the interest of the Government and/or the taxpayer. In such a case,
the Court, at any stage of the proceeding may suspend the collection and
require the taxpayer to either deposit the amount claimed or to file a
surety bond for not more than double the amount with the Court. The
exception does not apply in this case.
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To require the CIR to refund the overpayment, which he later would have
to collect anyway for application to the sales tax assessment, is an idle
ritual.
2. Commissioner of Internal Revenue v. Algue
The Phil. Sugar Estate Development Company (PSEDC) appointed Algue,
Inc., a family corporation, as its agent, authorizing it to sell its land,
factories, and oil manufacturing process. Pursuant to this authority, five
members of the family corporation formed the Vegetable Oil Investment
Corp. and induced other persons to invest in it. The newly formed
corporation then purchased the PSEDC properties. For this sale, PSEDC
gave Algue, Inc. a commission of P125,000. From this amount, Algue Inc.
paid the five family members P75,000 as promotional fees. Algue, Inc.
declared this P75,000 as a deduction from its income tax as a legitimate
business expense. The CIR questioned the deduction, claiming that it was
not an ordinary, reasonable, or necessary expense and was merely an
attempt to evade payment of taxes.
ISSUE: Whether the P75,000 is tax-deductible as a legitimate business
expense of Algue, Inc.
HELD:
Yes, the P75,000 promotional fee is tax-deductible.
Sec. 30 of the Tax Code provides that ordinary and necessary expenses
incurred during the taxable year in carrying on any trade or business,
including a reasonable allowance for salaries or other compensation for
personal services actually rendered are tax-deductible. However, the
burden in proving the validity of a claimed deduction belongs to the
taxpayer. In this case, the burden has been satisfactorily discharged by
the taxpayer Algue, Inc.
Algue, Inc. was able to prove that the promotional fees were not fictitious
and were in fact paid periodically to the five family members. Moreover,
the amount of the promotional fees was reasonable, considering that the
five payees actually performed a service for Algue, Inc. by making the sale
of the properties of PSEDC possible. As a result of this sale, Algue, Inc.
earned a net commission of P50,000.
[Favorite ni Sir] Taxes are what we pay for civilized society.
Without taxes, the government would be paralyzed for lack of the
motive power to activate and operate it. Hence, despite the
natural reluctance to surrender part of one’s hard-earned income,
every person who is able to must contribute his share in running
the government. The government, for its part, is expected to
respond in the form of tangible and intangible benefits intended to
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improve the lives of the people and enhance their moral and
material values. This symbiotic relationship is the rationale of
taxation and should dispel the erroneous notion that it is an
arbitrary exaction by those in the seat of power.
However, it should also be exercised reasonably and in accordance
with the prescribed procedure. If it is not, the taxpayer has a right
to complain to the courts. For all the awesome power of the tax
collector, he may still be stopped in his tracks if the taxpayer can
demonstrate, as it has here, that the law has not been observed.
3. C.N. Hodges v. Municipal Board of Iloilo
Iloilo enacted an ordinance imposing a tax of ½ of 1% on the sale of
second hand motor vehicles. The ordinance also provided that the
payment of the tax is a condition for the registration of the sale in the
Motor Vehicles Office.
Hodges, a car dealer, questioned the validity of the tax for having been
enacted in excess of authority.
ISSUE: Whether the tax is valid.
HELD: The tax is valid.
There is no doubt that the amount of the tax is just. Also, the Local
Autonomy Act gives municipal boards the authority to enact ordinances for
the collection of taxes on any person engages in any occupation or
business.
However, the LAA prohibits chartered cities, as Iloilo is, from imposing a
tax on the registration of motor vehicles. The question now is: “is the tax
imposed a tax on the registration of motor vehicles?” It is not; its payment
being made a requirement for the registration of the sale is simply a
coercive measure justified by the fact that taxes are the lifeblood of
government.
B. Classifications and Distinctions
How are taxes classified?
1. As to subject matter or object:
a. Personal, poll, or capitation – Tax of a fixed amount, imposed on
persons within a specified territory, whether citizens or not,
without regard to their property or the occupation or business in
which they may be engaged.
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b. Property – Tax imposed on property, whether real or personal,
in proportion either to its value, or in accordance with some
other reasonable methods of apportionment.
c. Excise – Any tax which does not fall within the classification of a
poll tax or a property tax. It is a charge imposed upon the
performance of an act, the enjoyment of a privilege, or the
engaging in an occupation, profession, or business.
b. Special or regulatory – Imposed for a special purpose, to achieve
some social or economic ends irrespective of whether revenue is
actually raised or not. (Ex: protective tariffs or customs duties on
imported goods to enable similar products manufactured locally to
compete with imported products).
5. As to scope (or authority imposing the tax)
a. National – Tax imposed by the national government

2. As to who bears the burden:
a. Direct – Demanded from the person who also shoulders the
burden of the tax; the taxpayer is directly or primarily liable, and 6. As to graduation or rate
he cannot shift the burden to another. (Ex: Corporate and
individual income taxes, community tax, estate tax, donor’s tax)
b. Indirect – Demanded from one person in the expectation and
intention that he shall indemnify himself at the expense of
another, falling finally upon the ultimate purchaser of consumer;
tax imposed upon goods before they reach the consumer who
ultimately pays for it not as tax but as part of the purchase price.
The one who bears the burden of the tax is other than the one on
whom it is imposed. (Ex: business taxes, VAT, customs duties)
b. Municipal or Local – Tax imposed by municipal corporations or
local government units.
a. Proportional – Tax based on a fixed percentage of the amount of
the property, receipts, or other basis to be taxed (Ex: real estate
taxes, VAT, other %age taxes)
b. Progressive or graduated – The rate increases as the tax base or
bracket increases (Ex: income tax, estate tax, donor’s tax)
c. Regressive – The rate decreases as the tax base or bracket
increases. There’s no such thing here.

3. As to determination of amount:
a. Specific – Tax of a fixed amount imposed by the head or number,
or by some standard of weight or measurement; requires no
assessment or valuation other than a listing or classification of the
objects to be taxed. (Ex: taxes on distilled spirits, wines, liquors
and cigarettes)
b. Ad valorem – Tax of a fixed proportion of the value of the
property with respect to which the tax is assessed; it requires the
intervention of assessors or appraisers to estimate the value of
such property before the amount due from each taxpayer can be
determined. The phrase ad valorem literally means “according to
value.” (Ex: real estate tax, excise taxes on automobiles, non-
essential goods, such as jewelry and perfume, customs duties)
What is the difference between a regressive tax and a
regressive system of taxation?
A regressive tax is tax, the rate of which decreases as the tax base
increases.
On the other hand, a regressive system of taxation exists when there are
more indirect taxes imposed than direct taxes.
Distinguish between a tax and a toll.
Toll has been defined as a sum of money for the use of something,
generally applied to the consideration which is paid for the use of a road,
bridge of the like, of a public nature.

4. As to purpose: TAX TOLL

A demand of sovereignty A demand of proprietorship
a. General, fiscal, or revenue – Imposed for general purposes of the Paid for the support of the Paid for the use of another’s
government, to raise revenue for governmental needs. (Ex: government property
income tax, VAT, most taxes)

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Generally no limit on the amount of Amount of toll depends upon the
tax that may be imposed cost of construction or maintenance License or permit fee is a charge imposed under the police power for
of the public improvement used purposes of regulation. A license is in the nature of a special privilege,
May be imposed only by the May be imposed by the government or a permission or authority to do what is within its terms. It makes
government or private individuals or entities lawful an act which would otherwise be unlawful. A license granted by the
State is always revocable.
The view has been expressed that the taking of tolls is only another
method of taxing the public for the cost of the construction and repair of TAX LICENSE
the improvement for the use of which the toll is charged. Enforced contribution assessed by Legal compensation or reward of an
sovereign authority to defray public officer for specific services
Distinguish between a tax and a penalty. expenses
Levied for revenue Imposed for regulation
Penalty is any sanction imposed as a punishment for violation of law Exercise of taxing power Exercise of police power
or acts deemed injurious. Generally no limit on the amount of Amount should be limited to the
tax that may be imposed necessary expenses of inspection
TAX PENALTY and regulation
Intended to raise revenue Designed to regulate conduct Imposed on persons, property, Imposed on the right to exercise a
May be imposed only by the May be imposed by the government exercise of right or privilege privilege only
government or private individuals or entities Failure to pay does not necessarily Failure to pay makes the act or
make an act or business illegal business illegal
Distinguish between a tax and a special assessment. Importance of the distinctions between tax and license:

Special assessment is an enforced proportional contribution from the 1. Some limitations apply to one and not to the other, for the reason
owners of lands especially or peculiarly benefited by public that exemption from taxes may not include exemption from
improvements. license fees.

Under the Local Government Code, a province, city, or municipality, or the 2. The power to regulate as an exercise of police power does not
National Government, may impose a special levy on lands especially include the power to impose fees for revenue purposes. The
benefited by public works or improvements financed by it. amount of tax bears no relation at all to the probable cost of
regulating the activity, occupation, or property being taxed.
TAX SPECIAL ASSESSMENT
Levied on persons, property, Levied only on land 3. An exaction may be considered BOTH a tax and a license fee. Ex:
privileges, acts, etc. car registration fees may be regarded as taxes while they also
Personal liability Not a personal liability of the person serve as an instrument of regulation. If the purpose is primarily
assessed; his liability is limited only revenue, or if it is at least one of the real and substantial
to the land involved purposes, then the exaction is a tax.
Based on necessity and benefits Based wholly on benefits
Has general application Exceptional both as to the time and 4. But a tax may have only a regulatory purpose. The general rule,
place however, is that the imposition is a tax if its primary purpose is to
generate revenue, and regulation is merely incidental. If
A charge imposed only on property-owners benefited is a special regulation is the primary purpose, the fact that incidentally
assessment rather than a tax, even if the statute calls it a tax. The rule is revenue is also obtained does not make the imposition a tax.
that an exemption from taxation does not include exemption from special
assessment. But the power to tax carries with it the power to levy a Distinguish between tax and a debt.
special assessment.
TAX DEBT
Distinguish between a tax and a license.

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Based on law
Generally cannot be assigned
Generally payable in money
Generally not subject to set-off
Imprisonment is a sanction for non-
payment of tax except poll tax
Governed by special prescriptive
periods provided for in the tax code
Does not draw interest, except
when taxpayer is delinquent
Based on contract
Assignable
May be paid in kind
May be the subject of set-off
Person cannot be imprisoned for
non-payment of debt
Governed by ordinary periods of
prescription
Draws interest when so stipulated
or when there is defaults
City and shall be expended exclusively for the repair, maintenance, and
improvement of its streets and bridges.
The Charter of Manila allows its municipal board to tax motor vehicles
operating within the City of Manila. However, this power is limited by the
Motor Vehicles Law, which provides that no fees may be exacted for the
operation of any motor vehicle other than those provided in the Motor
Vehicles Law, except property taxes imposed by a municipal corporation.
Therefore, taking these two laws together, the City of Manila can impose a
property tax on motor vehicles operating within its limits.

A tax however, like a debt, is a liability or obligation. The Association of Customs Brokers contends that the ordinance is null
and void because it actually imposes a license tax in the guise of a
Tax distinguished from other terms: property tax.

ISSUE: Whether the ordinance is valid.

1. Subsidy – A pecuniary aid directly granted by the government to
an individual or private commercial enterprise deemed beneficial HELD:
to the public. It is not a tax, though a tax may have to be
imposed in order to finance it. The ordinance is null and void for two reasons:

2. Revenue – Funds or income derived by the government, whether
from tax or from whatever source or manner. Revenue refers to
the amount collected, while tax refers to the amount imposed.
3. Internal Revenue – Taxes imposed by the legislature other than
duties on imports and exports.
4. Customs duties – Taxes imposed on goods exported from or
imported into a country.
5. Tariff – May be used in any of the following senses:
a. A book of rates containing the names of merchandise with
the corresponding duties to be paid for the same;
b. Duties payable on goods imported or exported; or
c. The system or principle of imposing duties on the importation
or exportation of goods.
CASES
4. Association of Customs Brokers Inc. v. Municipal Board
The Municipal Board of Manila passed an ordinance levying a property tax
on all motor vehicles operating within the City of Manila. The ordinance
provided that the rate of the tax would be 1% ad valorem per annum. The
proceeds of the tax shall accrue to the Streets and Bridges Funds of the
First, it imposes a license tax, which the municipal corporation may not
impose (though it is made to appear as a property tax).
As a rule, an ad valorem tax is a property tax. However, if the tax is
really imposed upon the performance of an act, enjoyment of a privilege,
or the engaging in an occupation, it will be considered an excise, even if its
amount is determined in proportion to the value of the property used in
connection with the occupation, privilege, or act which is taxed.
In this case, the tax is fixed ad valorem. BUT, the purpose is to raise
funds for the repair, maintenance, and improvement of the streets and
bridges in the city. Thus, it is actually a license fee, although under the
cloak of an ad valorem tax to circumvent the prohibition imposed by the
Motor Vehicles Law. The reason for the prohibition is that under the Motor
Vehicles Law, municipal corporations already get proceeds for the purpose
of repairing and maintaining their streets and bridges. The prohibition
aims at preventing a duplication in the imposition of fees for the same
purpose.
Second, the ordinance infringes the rule of uniformity of taxation. This is
because it exacts the tax upon all motor vehicles operating within the City
of Manila, without distinguishing between those for hire and for private
use, as well as between those registered in Manila and those registered
outside but which occasionally come to Manila. The ordinance imposes the
tax only on those vehicles registered in Manila, even if those vehicles
which are registered outside the city but which use its streets also
contribute equally to the deterioration of the roads and bridges.

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5. Esso Standard Eastern Inc. v. CIR
The Central Bank charged margin fees on Esso’s remittances to its head
office. Esso claimed that the fees it paid were deductible dint its payment
of income tax either as tax or as necessary business expense.
HELD: The margin fees were NOT deductible.
As taxes? Margin fees are NOT taxes because they are not imposed as a
revenue measure. The fee is a police measure whose proceeds are applied
to strengthen the country’s international reserves.
As a necessary business expense? MF are not necessary expenses – they
are expenses incurred not in the business but in the disposal of the profits.
Tax exemptions are a matter of legislative grace and the one claiming
them has the burden of justifying the exemption.
6. Progressive Development Corp. v. QC
The City Council of QC passed an ordinance known as the Market Code of
QC, which imposed a 5% supervision fee on gross receipts on rentals or
lease of privately-owned market spaces in QC. In case of failure of the
owners of the market spaces to pay the tax for three consecutive months,
the City shall revoke the permit of the privately-owned market to operate.
Progressive Development Corp, owner and operator of Farmer’s Market,
filed a petition for prohibition against QC on the ground that the tax
imposed by the Market Code was in reality a tax on income, which the
municipal corporation was prohibited by law to impose.
ISSUE: Whether the supervision fee is an income tax or a license fee.
HELD:
It is a license fee.
A license fee is imposed in the exercise of the police power primarily for
purposes of regulation, while a tax is imposed under the taxing power
primarily for purposes of raising revenues. If the generating of revenue is
the primary purpose and regulation is merely incidental, the imposition is a
tax; but if regulation is the primary purpose, the fact that incidentally,
revenue is also obtained does not make the imposition a tax.
To be considered a license fee, the imposition must relate to an occupation
or activity that so engages the public interest in health, morals, safety,
and development as to require regulation for the protection and promotion
of such public interest; the imposition must also bear a reasonable relation
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to the probable expenses of regulation, taking into account not only the
costs of direct regulation but also its incidental consequences.
In this case, the Farmers’ Market is a privately-owned market established
for the rendition of service to the general public. It warrants close
supervision and control by the City for the protection of the health of the
public by insuring the maintenance of sanitary and hygienic conditions,
prevention of fraud upon the buying public, etc.
Since the purpose of the ordinance is primarily regulation and not revenue
generation, the tax is a license fee. The use of the gross amount of stall
rentals as basis for determining the collectible amount of license tax does
not, by itself, convert or render the license tax into a prohibited tax on
income. Such basis actually has a reasonable relationship to the probable
costs of regulation and supervision of Progressive’s kind of business, since
ordinarily, the higher the amount of rentals, the higher the volume of
items sold; and the higher the volume of goods sold, the greater the
extent and frequency of supervision and inspection may be required in the
interest of the buying public.
7. PAL v. Edu
Under its franchise, PAL is exempt from all taxes except for the payment
of 2% of its gross revenue to the National Government.
PAL has not been previously paying for registration of its motor vehicles
until Land Transportation Commissioner Edu issued a regulation requiring
all tax exempt entities to pay registration fees.
PAL paid the fees under protest and now demands a refund.
ISSUE: Whether the registration fee is a regulatory exaction OR a tax
from which PAL is exempt.
HELD: The registration fee is a tax – PAL is exempt.
The purpose of the law in requiring payment of registration fees is mainly
to raise funds for the construction and maintenance of highways and to a
much lesser degree, pay for the operating expenses of the administering
agency.
If the purpose of an exaction is revenue or if revenue is, at least, one of
the real and substantial purposes, then the exaction is properly called a
tax.
However, the fees collected from 1968 to 1979 should not be refunded
because PAL’s franchise was repealed during that period.
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8. Villegas v. Hiu Chiong Tsai Pao Ho
The Municipal Board of Manila passed an ordinance prohibiting an alien
from being employed or engaging in any position or occupation or business
enumerated therein, whether permanent, temporary, or casual, without
first securing an employment permit from the Mayor and paying the P50
permit fee.
Hiu Chiong filed an action to restrain the enforcement of the ordinance and
to have it declared null and void for being discriminatory and violative of
the rule on uniformity in taxation.
The Mayor argues that the ordinance cannot be declared null and void on
the ground that it violates the rule on uniformity of taxation because this
rule applies only to purely tax or revenue measures and not to regulatory
measures, such as the ordinance.
ISSUE: Whether the ordinance is valid.
HELD:
The ordinance is null and void.
The first part of the ordinance requiring an alien to secure an employment
permit is regulatory in character because it involves the exercise of
discretion on the part of the Mayor in approving or disapproving the
applications. However, the second part which requires the payment of P50
as employee’s fee is not regulatory but a revenue measure. There is no
logic or justification in exacting P50 from aliens who have been cleared for
employment. The obvious purpose of the ordinance is to raise money
under the guise of regulation.
The P50 fee is unreasonable not only because it is excessive but because it
fails to consider valid substantial differences in situation among individual
aliens who are required to pay it. The same amount is being collected
from every employed alien, whether he is casual or permanent, part time
or full time, or whether he is a lowly employee or a highly paid executive.
9. Compania General de Tabacos v. City of Manila
Tabacalera paid for its liquor license and also paid sales tax on its sale of
general merchandise, including liquor. It claims that it made an
overpayment and demands a refund of the sales tax paid on the ground
that since it already paid the license fees, it was no longer bound to pay
the sales tax on the liquor.
ISSUE: Whether Tabacalera is liable for sales tax on the liquor despite
already having paid for its liquor license.
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HELD: Tabacalera is liable.
Under on ordinance, Tabacalera must pay license fees in order to continue
enjoying the privilege of selling liquor. Under another ordinance,
Tabacalera is liable for sales tax on sales of general merchandise, including
liquor.
What is collected for license to sell is a license fee and what is collected on
the sale is a sales tax. It is settled that both a license fee and a tax may
be imposed on the same business, or for selling the same article, this not
being a violation of the rule against double taxation.
Taxes are different from license fees. The former are for raising revenues
while the latter are imposed in the exercise of police power for purposes of
regulation.
10. American Mail Lines v. City of Basilan
The City Council of Basilan enacted an ordinance imposing an anchorage
fee on foreign vessels, which anchor within its territorial waters. The
anchorage fee was ½ centavo per ton of the vessel for every 24 hours or
part thereof, provided that the maximum charge shall not exceed P75 per
day.
American Mail Lines et al questioned the validity of the ordinance on the
ground that the City of Basilan had no authority to collect anchorage fees
from foreign vessels.
The City of Basilan argued that the ordinance was validly enacted in the
exercise of the city’s police power and that the fees were for purely
regulatory purposes. It claimed that since the City of Basilan was an
island with mountainous coasts and fringed by coves, bays and islets,
there was a need for funds to suppress possible smuggling activities.
ISSUE: Whether the ordinance is valid.
HELD:
The ordinance is null and void.
The Charter of the City of Basilan gives the Council the authority to fix the
charges to be paid by all watercraft landing at or using public wharves,
docks, levees, or landing places. The anchorage fees are not included in
this power, as shown by the need of the Council to enact the amendatory
ordinance.
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Contrary to the claim of the Council, the anchorage fees are not being
charged for regulatory purposes. They are actually intended for revenue
purposes.
The power to regulate as an exercise of police power does not include the
power to impose fees for revenue purposes. Fees for purely regulatory
purposes may only be of sufficient amount to include the expenses of
issuing the license and the cost of the necessary inspection or police
surveillance, taking into account not only the expense of direct regulation
but also incidental expenses.
In this case, the fees were based on the tonnage of the vessels. This basis
of fixing the fees has no reasonable relation to the cost of issuing permits
and the cost of inspection or surveillance. Moreover, the fee imposed on
foreign vessels – ½ centavo per ton for the first 24 hours, and which shall
not exceed P75 per day – exceeded even the harbor fee imposed by the
National Government, which was only P50. These circumstances point to
the conclusion that the fees were intended for revenue purposes.
11. Osmena v. Orbos
Pres. Marcos issued PD 1956 creating the Oil Price Stabilization Fund
(OPSF), which was designed to reimburse oil companies for cost increases
in crude oil and imported petroleum products resulting from exchange rate
adjustments and from increases in the world market prices of crude oil. A
portion of the OPSF was taken from collections of ad valorem taxes levied
on oil companies.
Subsequently, the OPSF was reclassified into a trust liability account and
ordered released from the National Treasury to the Ministry of Energy.
The EO authorized the investment of the fund in government securities,
with the earnings accruing to the fund.
Petitioner alleges that the creation of the trust fund violates the
Constitution since the money collected pursuant to PD 1956 is a special
fund, and under the Constitution, if a special tax is collected for a specific
purpose, the revenue generated therefrom shall be treated as a special
fund to be used only for the purpose indicated, and not channeled to
another government objective.
ISSUE:
Whether the creation of the trust fund is violative of the Constitution.
HELD: No. The creation of the trust fund was valid.
In order for the funds to fall under the prohibition, it must be shown that
they were collected as taxes – as a form of revenue. In this case, while
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the funds were referred to as taxes, they were exacted not under the
power of taxation, but in the exercise of the police power of the State.
The main objective was not revenue but to stabilize the price of oil and
petroleum products.
The OPSF is actually a special fund. It is segregated from the general
fund; and while it is placed in what the law refers to as a “trust liability
account,” the fund nonetheless remain subject to the scrutiny and review
of the COA. These measures comply with the constitutional description of
a “special fund.”
12. Republic v. Bacolod-Murcia Milling Co.
The Philippine Sugar Institute (Philsugin), a semi-public corporation, was
created for the purpose of conducting research in and advancing the sugar
industry in the country. To carry out these objectives, the charter of
Philsugin authorized the levy of ten centavos per picul of sugar for five
years to be collected from sugar cane planters in the country. The
proceeds of this levy would go to a special fund to be used exclusively by
Philsugin.
Philsugin then purchased the Insular Sugar Refinery using money from this
special fund. Several years later, Insular Sugar Refinery had accumulated
tremendous losses. Three sugar centrals refused to continue paying their
contributions to the fund on the ground that the purchase of the Insular
Sugar Refinery by Philsugin was not authorized by its charter and that the
continued operation of the refinery was inimical to their interests. They
contended that their obligation to pay their contributions subsisted only to
the limit and extent that they were benefited by the contributions, since
the levy was merely a special assessment and not a tax.
ISSUE: Whether the levy is a special assessment or a revenue measure.
HELD:
It is neither. The levy for the Philsugin Fund is not so much an exercise of
the power of taxation nor the imposition of a special assessment, but the
exercise of the police power for the general welfare of the entire country.
It is therefore an exercise of a sovereign power, which no private citizen
may lawfully resist.
The decision cited the case of Lutz v. Araneta in which the Court held that
since sugar production is one of the leading industries of our nation, its
promotion, protection, and advancement redound greatly to the general
welfare. Hence, the Legislature found it in the interest of the general
welfare to stabilize the sugar industry with the help of the power of
taxation.
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Moreover, the charter of Philsugin authorizes it to conduct research in the
sugar industry in order to find ways to reduce the cost of production and
achieve greater efficiency in the industry. This provision justifies the
acquisition of the refinery, since there is no better way to carry out this
research than to actually operate a refinery. Even if the operations of the
refinery suffered from losses, Philsugin’s experience gained from running
the refinery is a gain to the industry. Hence, the sugar centrals were still
benefited by the acquisition.
Tax compared to a Special Assessment:
The purpose of a special assessment is to finance the improvement of
particular properties, with the benefits of the improvement accruing or
inuring to the owners thereof who pay the assessment.
The purpose of an ordinary tax is to provide the Government with
revenues needed for the financing of state affairs. Refusal of a
citizen to pay taxes may not be sanctioned because it would impair
government functions. This would not hold true in the case of a refusal to
comply with a special assessment.
13. Victorias Milling v. Municipality of Victorias
The municipality enacted an ordinance for the levy of license taxes from
sugar centrals operating within the municipality. Victorias Milling was
assessed 40K (imposed on sugar centrals) + 40K (imposed on sugar
refineries).
The lower court held that the exaction was invalid because the municipality
cannot impose a tax for revenue in the guise of a police measure. Other
issues were double taxation and discrimination.
ISSUE: Whether the ordinance was valid.
HELD: The ordinance was valid.
A municipality is authorized to impose three kinds of licenses, (1) license
for regulation of useful occupations or enterprises; (2) license for
restriction or regulation of non-useful occupations or enterprises; and (3)
license for revenue.
The license fee in this case falls under #3 and is valid.
There is no double taxation because the company is being taxed for the
same object: One tax is on sugar centrals and the other is on sugar
refineries. It just so happens that the company is both. [Also, the tax was
imposed based on capacity of the sugar centrals to produce, so it was
really a license on the occupation or business of sugar centrals and sugar
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refineries and not on the sugar itself; hence there was no identity of object
of taxation].
There is no discrimination despite the fact that the company is the only
sugar producing entity in the municipality. Victorias Milling is not named in
the ordinance and should another corporation decide to produce sugar in
the area, it will be taxed accordingly.
14. Lutz v. Araneta
Commonwealth Act No. 567, known as the Sugar Adjustment Act, was
promulgated in 1940 in response to the imminent threat to the sugar
industry by the imposition of export taxes upon sugar as provided in the
Tydings-McDuffie Act and the loss of its preferential position in the US
market. In order to stabilize the sugar industry, CA 567 provided for an
increase in the existing tax on the manufacture of sugar, the proceeds of
which would accrue to the Sugar Adjustment and Stabilization Fund.
Walter Lutz, in his capacity as administrator of the Estate of Antonio
Ledesma, wanted to recover from the Collector of Internal Revenue the
amount paid by the estate as taxes, alleging that the tax imposed by CA
567 is unconstitutional, being levied for the aid and support of the sugar
industry exclusively, which is not a public purpose.
ISSUE: Whether the tax is unconstitutional because it is not devoted to a
public purpose.
HELD:
The tax is valid.
The defect in the argument of Lutz is his assumption that the tax provided
for in CA 567 is a pure exercise of the taxing power. In reality, the tax is
levied with a regulatory purpose, to provide means for the rehabilitation
and stabilization of the threatened sugar industry. It is primarily an
exercise of police power.
The Court takes judicial notice of the fact that sugar production is one of
the great industries of our nation. Its promotion, protection, and
advancement redounds greatly to the general welfare. Hence, the
legislature may determine within reasonable bounds what is necessary for
its protection and expedient for its promotion. Taxation may be made the
implement of the State’s police power.
It does not matter that the funds raised under the Sugar Stabilization Act
should be exclusively spent in aid of the sugar industry, since it is that
very enterprise that is being protected. This still does not constitute
expenditure of tax money for private purposes, since the funds will be
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used to seek increase of efficiency in sugar production, solution of its d. international comity
problems, and the improvement of living and working conditions in sugar e. levy must be for a public purpose
mills or plantations.
Due Process of Law
C. Limitations on the Power of Taxation Elements of Due Process:

Limitations on the power of taxation are either: 1. The taking of life, liberty or property must have been done under
the authority of a valid law or of the Constitution (substantive due
1. Constitutional limitations – those found in the Constitution or process); and
implied from its provisions; or 2. After compliance with fair and reasonable methods of procedure
prescribed by law (procedural due process).
2. Inherent limitations – those which restrict the power although
not embodied in the Constitution. Applied to taxation:

1. A tax imposed for a private purpose or beyond the jurisdiction of

What are the limitations on the power of taxation? the government to levy and collect offends due process of law
and is null and void.
1. Constitutional limitations 2. A tax cannot be levied under a law judicially declared invalid. An
(DECEIVE SCARE) enforcement of such will infringe due process.

a. due process of law 3. A taxpayer may not be deprived of his property for non-payment
b. equal protection of the laws of taxes without giving notice to him as required by law of his tax
c. non-impairment of the obligation of contracts liability as well as of the sale at public auction of the property to
d. exemption of religious, charitable, and educational entities, satisfy his taxes. Failure to notify will amount to a denial of due
non-profit cemeteries, and churches from property taxation process.
e. no imprisonment for non-payment of a poll tax
4. A tax law which denies a taxpayer a fair opportunity to assert his
f. power of the President to veto any particular item or items in
substantial rights before a competent tribunal is invalid as
a revenue or tariff bill;
violative of due process. Procedural due process requires an
g. exemption of non-stock, non-profit educational institutions opportunity to be heard before judgment is rendered.
from taxation;
h. non-impairment of the jurisdiction of the Supreme Court in
Equal Protection of the Laws
tax cases
i. concurrence by a majority of all the members of Congress
for the passage of a law granting tax exemption Equal protection of the laws means that all persons similarly situated shall
be treated alike both as to privileges conferred and liabilities imposed.
j. no appropriation for religious purposes
k. non-infringement of religious freedom Where the statute or ordinance in question applies alike to all persons,
l. equity and uniformity of taxation firms, or corporations placed in similar situation, or differently to persons,
firms, or corporations belonging to different classes provided all those
2. Inherent limitations belonging to one class are treated alike, there is no infringement of the
(JENI P) constitutional guarantee.

a. territorial jurisdiction Uniformity and Equity in Taxation

b. exemption from taxation of government entities
c. non-delegation of the legislative power to tax

Sheryl IID 2003 Page 12

Uniformity in taxation means that all taxable articles or properties of
the same class shall be taxed at the same rate. Different articles may be
taxed at different rates provided that the rate (not necessarily the amount)
is uniform on the same class everywhere.
The rule requires the uniform application and operation without
discrimination of the tax in every place where the subject of it is found.
For example, a tax for a national purpose must be uniform throughout the
country. A tax for a city must be uniform throughout the city, etc. It does
not mean that a person in a municipality must pay the same rate paid by
another person in an adjoining municipality.
Uniformity implies equality in burden, not equality in amount. This is
because if the same amount of tax were imposed on all persons, property,
and transactions, the result would be even more inequality since not all
persons, properties, and transactions are similarly situated.
Neither does uniformity required that taxes be in strict proportion to the
relative value or amount of the subject. Progressive taxes are allowed.
Equity in taxation requires that the apportionment of the tax burden be
more or less just, in the light of the taxpayer’s ability to shoulder the
burden (usually measured in terms of the size of wealth or property and
income, gross or net) and, if warranted, on the basis of the benefits he
receives from the government. Its cornerstone is ability to pay.
A progressive system of taxation is one whose emphasis is on direct
rather than indirect taxation, with ability to pay as the principal criterion.
Prohibition against imprisonment for non-payment of
poll tax
The Constitution provides that no person shall be imprisoned for debt or
non-payment of a poll tax.
The only penalty for delinquency in the payment of poll tax or community
tax is the payment of interest at 24% per annum. But a person may be
imprisoned for violation of the community tax law other than for non-
payment of the tax (ex: falsification of the community tax certificate) and
for non-payment of other taxes if so expressly provided by the pertinent
law.
Prohibition against impairment of obligation of
contracts
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The obligation of a contract is impaired when its terms or conditions are
changed by law or by a party without the consent of the other, thereby
weakening the position or rights of the latter.
For examples, the obligation of a contract is impaired when a tax
exemption granted contractually by the government is revoked by a later
taxing statute. But exemption from taxation provided in a franchise may
be revoked without violating the non-impairment clause, since a franchise
is always subject to amendment, alteration, or repeal by Congress.
Prohibition against infringement of religious freedom
The Constitution provides that no law shall be made respecting an
establishment of religion or prohibiting the exercise thereof. The free
exercise and enjoyment of religious profession and worship, without
discrimination or preference, shall forever be allowed.
The imposition of license fees on the distribution and sale of bibles not for
profit violates the free exercise clause. It is in the nature of a condition or
permit for the exercise of the right to disseminate religious beliefs and
information.
But the Constitution does not prohibit the imposition of a generally
applicable tax on the sale of religious materials by a religious organization.
Prohibition against appropriation for religious
purposes
This is because taxes con only be levied for a public purposes. The
exception is when the priest, etc is employed in the armed forces, any
penal institution, or government orphanage or leprosarium, they may
receive their corresponding compensations for services rendered without
violating the constitutional prohibition.
Prohibition against taxation of religious, charitable,
and educational entities
The exemption covers only property and not other taxes. The test of the
exemption is the use of the property and not the ownership. To be tax-
exempt, the property must be actually, directly, and exclusively used for
the purposes mentioned. It also extends to facilities incidental to or
reasonably necessary for the accomplishment of said purposes.
Prohibition against taxation of non-stock, non-profit
educational institutions
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Unlike the exemption granted to churches, this covers not just property
taxes but also income and donor’s taxes and customs duties.
The revenue, assets, property, or donations must be used actually,
directly, and exclusively for educational purposes.
Need for concurrence of majority of Congress to grant
exemption
This is intended to prevent indiscriminate grant of tax exemptions.
To approve a grant of tax exemption, there must be concurrence of at
least one-half plus one of all the members of Congress, voting separately.
Veto of appropriation, revenue, or tariff bills by the
President
The Constitution provides that the President shall have the power to veto
any particular item or items in an appropriation, revenue or tariff bill, but
the veto shall not affect the item or items to which he does not object.
Non-impairment of the jurisdiction of the Supreme
Court
The SC has appellate jurisdiction over all cases involving the legality of any
tax, impost, assessment, or toll, or any penalty imposed in relation
thereto. Congress cannot take away this power.
Public purpose
The term public purpose is synonymous with “governmental purpose.” It
means a purpose affecting the inhabitants of the state or taxing district as
a community and not merely as individuals.
The tax must be used:
1. for the support of the government; or
2. for any of the recognized objects of government; or
3. to promote the welfare of the community.
The reason for this rule is that a tax levied for a private purpose
constitutes taking of property without due process of law as it is beyond
the power of the government to impose. Also, since the government is
established for public purpose – the promotion of the general welfare –
public money can only be spent for the same purpose. Thus, the limitation
of public purpose is implied in the Constitution.
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The purposes to be accomplished by taxation need not be exclusively
public. Although private individuals are directly benefited, the tax would
still be valid provided such is only incidental.
Non-Delegability of Taxing Power
The power of taxation is purely legislative. Congress may not delegate it
to others. This limitation arises from the doctrine of separation of powers.
However, there are exceptions:
1. Delegation to the President: Congress may authorize the
President to impose tariff rates, import or export quotas, tonnage
and wharfage dues and other duties or imposts.
2. Delegation to local governments: This exception is universally
recognized for so long a time that its existence has not been
disputed even if there is not express grant by the constitution. It
is in line with the principle that the power to create municipal
corporations for purposes of local self-government carries with it
the power to confer the power to tax on such local governments.
3. Delegation to administrative agencies: Certain aspects of the
taxing process that are not legislative in character may be vested
in the administrative. So strictly speaking, there is really no
delegation of legislative power. These non-legislative powers
include:
a. The power to value property pursuant to fixed rules;
b. The power to assess and collect the taxes; an
c. The power to perform the details of computation,
appraisement, and adjustment, and the delegation of
such details.
Powers that cannot be delegated include the determination of the
subjects, purpose, amount or rate, manner, means, and agencies
of collection of tax.
Exemption of government agencies or
instrumentalities
Agencies and instrumentalities of the government are generally exempt
from taxation because it would mean that the government would be taxing
itself in order to raise money that it will then pay over to itself. Moreover,
this immunity rests upon fundamental principles of government being
necessary in order that the functions of government would not be unduly
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impeded. Exemption of government agencies from taxation also reduces
the amount of money to be handled by the government in the course of its
operations.
International Comity
Under international comity (courteous and friendly agreement and
interaction between nations), property of a foreign state or government
may not be taxed by another. This is based on the following grounds:
1. the sovereign equality among states by virtue of which one state
cannot exercise its sovereign powers over another;
2. the usage among states that when one enters the territory of
another, there is an implied understanding that the former does
not intend to degrade its dignity by placing itself under the
jurisdiction of the later; and
3. the rule of a international law that a foreign government may not
be sued without its consent.
Territorial Jurisdiction
A state may not tax property lying outside its borders of lay an excise or
privilege tax upon the exercise or enjoyment of a right or privilege derived
from the laws of another state and therein exercised and enjoyed. This is
because tax laws do not operate beyond a country’s territorial limits.
Property which is wholly and exclusively within the jurisdiction of another
state receives none of the protection for which a tax is supposed to be a
compensation.
Exception: A person may be taxed where there is between him and the
taxing state a privity of relationship justifying the levy. Thus, a citizen’s
income may be taxed even if he resides abroad as the personal jurisdiction
of his government over him remains. As a citizen of the state, he is
entitled, wherever he may be, to the protection of his government.
Therefore, he also has the concomitant obligation to provide it support in
the form of taxes.
CASES
15. Pascual v. Sec. Of Public Works: Public Purpose
Congress passed an RA appropriating P85K for the construction of Pasig
feeder road terminals.
The Provincial Governor of Rizal filed an action for declaratory relief and
injunction, claiming that at the time of the passage and approval of the
Act, these feeder roads had not yet been constructed and were not
Sheryl IID 2003
connected to any government property or main highway. The feeder
roads were actually within the Antonio Subdivision, which was owned by
Jose Zulueta, a member of the Senate of the Philippines. Zulueta, before
the passage of the Act, had offered to donate the property to the
municipality of Pasig, but the deed of donation was executed only several
months after the RA was passed. Hence, Congress appropriated public
funds for the construction of feeder roads that were, at the time the law
was passed, private property.
ISSUE: Whether the appropriation is valid.
HELD:
The appropriation is invalid.
The taxing power must be exercised for public purposes only and not for
the advantage of private individuals. The right of the legislature to
appropriate public funds is correlative with its right to tax. As the
Constitution prohibits taxation except for a public purpose, so also no
appropriation of state funds can be made other than for a public purpose.
The test of the constitutionality of a statute requiring the use of public
funds is whether the statute is designed to promote the public interests as
opposed to the furtherance of the advantage of individuals, although such
advantage to individuals might incidentally serve the public.
Even if subsequently, Zulueta executed the deed of donation in favor of
the municipality, making the roads public property, the appropriation is
still invalid. The validity of the statute depends upon the powers of
Congress at the time of its passage, not upon events occurring after. At
the time the bill was passed, the road was still private property.
Therefore, the appropriation sought a private purpose and was null and
void. The subsequent donation could not have cured this nullity.
16. Osmena v. Orbos – Public Purpose; Non-Delegability
Pres. Marcos issued PD 1956 creating the Oil Price Stabilization Fund
(OPSF), which was designed to reimburse oil companies for costs increases
in crude oil and imported petroleum products resulting from exchange rate
adjustments and from increases in the world market prices of crude oil. A
portion of the OPSF was taken from collections of ad valorem taxes.
Subsequently, the OPSF was reclassified into a trust liability account and
ordered released from the National Treasury to the Ministry of Energy.
The EO authorized the investment of the fund in government securities,
with the earnings accruing to the fund.
Page 15
Pres. Aquino later expanded the coverage of the PD to allow
reimbursements in favor of oil companies for cost underrecovery as a
result of the decrease in domestic fuel prices.
Petitioner alleges that the creation of the trust fund violates the
Constitution since the money collected pursuant to PD 1956 is a special
fund, and under the Constitution, if a special tax is collected for a specific
purpose, the revenue generated therefrom shall be treated as a special
fund to be used only for the purpose indicated, and not channeled to
another government objective.
He also alleges that there was undue delegation of legislative taxing power
to the ERB in the provision conferring authority upon the ERB to impose
additional amounts on petroleum products.
He also alleges that the ERB was processing unauthorized claims for
reimbursements under PD 1956, since none of these claims (inventory
losses, financing charges, sale of fuel oil to NAPOCOR) was incurred as a
result of the reduction of domestic prices of petroleum products.
ISSUES:
Whether the creation of the trust fund was unconstitutional.
Whether there was an undue delegation of power in favor of the ERB.
HELD:
1. The creation of the trust fund was valid. While the funds collected may
be referred to as taxes, they are exacted in the exercise of the police
power of the State. The OPSF is a special fund. It is segregated from the
general fund; and while it is placed in what the law refers to as a “trust
liability account,” the fund nonetheless remain subject to the scrutiny
and review of the COA. These measures comply with the constitutional
description of a “special fund.”
2. There was no undue delegation of power because the law provides a
sufficient standard by which the authority must be exercised. The
standard is the general policy of the law to protect the consumer by
stabilizing and subsidizing petroleum prices.
17. Pepsi-Cola Bottling Company v. Municipality of Tanauan:
Delegation to Municipal Corporations
Municipal Ordinance No. 23 of Tanauan, Leyte imposes on soft drink
producers and manufacturers a tax of 1/16 of a centavo for every bottle of
soft drink corked.
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Municipal Ordinance No. 27 imposes on soft drinks produced or
manufactured within the territorial jurisdiction of the municipality a tax of
one centavo on each gallon of volume capacity.
Pepsi filed an action to declare the Local Autonomy Act and the two
ordinances void. The Local Autonomy Act (RA 2264) grants municipalities
the authority to impose municipal taxes or fees upon persons engaged in
any occupation or business within their jurisdictions, provided that they
were not allowed to impose percentage tax on sales and on items already
subject to specific tax under the National Internal Revenue Code. Pepsi
claims that RA 2264 is an undue delegation of power.
ISSUES:
1. Whether RA 2264 constitutes an undue delegation of power.
2. Whether MOs 23 and 27 are valid.
HELD:
1. RA 2264 is not an undue delegation of power. The power of taxation
may be delegated to local governments in respect of matters of local
concern.
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 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.
The delegation of the taxing power to the municipal corporation cannot be
assailed either on the ground of double taxation. Double taxation is
prohibited only when the taxpayer is taxed twice for the same benefit by
the same entity for the same purpose, not where one tax is imposed by
the State and the other by a municipality.
2. The MOs are valid.
MO No. 27 is not a tax on sales but on the produce, since it is based on
volume capacity. Neither is it a specific tax because soft drinks do not fall
within the enumeration of items subject to specific tax. The rate of the tax
is also reasonable and cannot be said to be unfair or oppressive.
Page 16
Municipalities are empowered to impose, not only municipal license taxes
upon persons engaged in any business or occupation, but also to levy for
public purposes, just and uniform taxes.
18. SSS v. City of Bacolod: Exemption of Government
instrumentalities from tax
The SSS had an office building in Bacolod City. It failed to pay realty
taxes for three consecutive years. The City levied upon the property and
forfeited it in its favor. SSS protested the forfeiture on the ground that
the SSS, being a government owned and controlled corporation, is exempt
from payment of real estate taxes.
ISSUE: Whether a government-owned or controlled corporation,
performing proprietary functions like the SSS, is exempt from paying
realty taxes.
HELD:
Yes. The SSS is exempt from paying realty taxes.
The Charter of the City of Bacolod provides that lands and buildings owned
by the government are exempt from realty taxes. In ruling that the SSS is
not covered by the exemption, the CFI restricted the scope of the
exemption only to those properties owned by government agencies and
instrumentalities performing governmental or sovereign functions. It
excluded from the coverage of the exemption those performing proprietary
functions, such as the SSS. It relied on the case of NACOCO v. Bacani in
which the Court held that government agencies performing proprietary
functions are not exempt from paying legal fees.
The application of the NACOCO v. Bacani case is incorrect, since that case
was referring to legal fees and not to realty taxes. For purposes of
exemptions in the payment of realty taxes, the distinction between
government agencies performing constituent and ministrant
function is not important. What is decisive is merely that the properties
possessed by the SSS are in fact owned by the government of the
Philippines. As such, they are exempt from realty taxes.
To make such a distinction would have the effect of taking money from
one pocket and putting it in another pocket. It would not serve the main
purpose of taxation and would even tend to defeat it, because of the
paperwork, time, and expenses that it would entail.
When public property is involved, exemption is the rule and
taxation, the exception.
19. Sea-Land Services Inc. v. CA: International Comity
Sheryl IID 2003
Sea-Land, an American shipping company, entered into a contract with the
US Government for the transport of military household goods and effects
of US military personnel assigned to the Subic Naval Base.
The BIR collected 1.5% income tax on the income derived by Sea-Land,
which Sea-Land paid. Later, Sea-Land asked for a refund, claiming that it
had paid the tax by mistake. It invoked the tax exemption provided in the
RP-US Military Bases Agreement, which exempts from tax any profit
derived by a US national under a contract with the US government in
connection with the construction, maintenance, operation, and defense of
the bases.
ISSUE: Whether Sea-Land falls within the coverage of the tax exemption.
HELD:
No. The transport or shipment of household goods and effects of US
military personnel is not included in the term construction, maintenance,
operation, and defense of the bases. Neither can the activity be
interpreted as directly related to the defense and security of the Philippine
territories. It is therefore not covered by the exemption.
20. CIR v. Mitsubishi Metal Corp.: International Comity
Atlas Consolidated Mining entered into a Loan and Sales Contract with
Mitsubishi. Under the Contract, Mitsubishi would lend Atlas $20M for the
installation of a new concentrator for copper production, and in turn, Atlas
would sell to Mitsubishi all the copper concentrates produced from the
machine for the next 15 years.
Thereafter, Mitsubishi applied for a loan with Eximbank of Japan so that it
could comply with its obligations under the contract. Mitsubishi also
applied for a loan with a consortium of Japanese banks. The total amount
of both loans was $20M.
Atlas made interest payments in favor of Mitsubishi totaling P13M. The
corresponding 15% tax on the interest in the amount of P1.9M was
withheld and remitted to the Government. Subsequently, Mitsubishi and
Atlas filed a claim for tax credit, requesting that the P1.9M be applied
against their existing tax liabilities on the ground that the interest earned
by Mitsubishi on the loan was exempt from tax.
ISSUE: Whether the interest is tax-exempt.
HELD:
No, the interest is not exempt from tax.
Page 17
The National Internal Revenue Code provides that income received from
loans in the Philippines extended by financing institutions owned,
controlled, or financed by foreign governments are exempt from tax.
Mitsubishi and Atlas claim that the interest earned from the loan falls
under the above exemption because Mitsubishi was merely acting as an
agent of Eximbank, which is a financing institution owned, controlled, and
financed by the Japanese Government. They allege that Mitsubishi was
merely the conduit between Atlas and Eximbank, and that the ultimate
creditor was really Eximbank.
The SC held that Mitsubishi was not a mere agent of Eximbank. It entered
into the agreement with Atlas in its own independent capacity. The
transaction between Mitsubishi and Atlas on the one hand, and between
Mitsubishi and Eximbank on the other, were separate and distinct. No
agency relationship was established between Eximbank and Mitsubishi.
Since the transaction was between Mitsubishi and Atlas, the exemption
that would have been applicable to Eximbank, does not apply. The
interest is therefore not exempt from tax.
21. Thirty-First Infantry Post Exchange v. Posadas: International
Comity
The Thirty-First Infantry Post Exchange was an agency under the control of
the US Army, operating in the Philippines. The Exchange bought goods,
such as soap and toiletries, and resold them to officers, soldiers, and
civilian employees of the US Army and their families. The proceeds
derived from the sales were then used for the betterment of the condition
of the personnel of the Army.
In the course of its business, the Exchange purchased goods from
merchants in the Philippines. The Collector of Internal Revenue collected
from these merchants taxes at the rate of 1.5% of the gross value sold by
them to the Exchange.
The Exchange filed an action for prohibition against the CIR for him to
desist from collecting the taxes from the merchants. The Exchange claims
that the taxes imposed on the merchants were driving up the prices of
goods sold to it by the merchants. The Exchange claims that the
merchants should be exempt from taxes since the revenue law provides
that no specific tax shall be collected on any goods sold and delivered
directly to the US Army of Navy for their actual use or issue.
ISSUE: Whether the merchants selling goods to the Exchange are exempt
from sales tax.
HELD:
Sheryl IID 2003
No. The tax exemption covers those goods that are sold directly to the US
Army or Navy for their actual use or issue. In this case, the goods are
sold to the Exchange for resale to individuals belonging to the Army or
Navy, and not to the Army or Navy itself. Hence, they do not fall within
the exemption.
The rule is that without Congressional consent, no Federal agency or
instrumentality can be taxed by state authority. However, only those
agencies through which the Federal Government immediately and
directly exercises its sovereign powers are immune from the taxing
power of the states. The reason upon which the rule rests must be the
guiding principle to control its operation. The limitations upon the taxing
power of the state must receive a practical construction which does not
seriously impair the taxing power of the Government imposing the tax.
The effect of the tax upon the functions of the Government and the nature
of the governmental agency determine finally the extent of the exemption.
In this case, the tax laid upon Philippine merchants who sell to the
Exchange does not interfere with the supremacy of the US Government or
with the operations of its instrumentality the US Army, to such an extent
or in such a manner as to render the tax illegal. The tax does not deprive
the Army of the power to serve the Government or hinder the efficient
exercise of its power.
22. CIR v. Marubeni: Territorial Jurisdiction
Marubeni was a Japanese corporation engaged in the import and export,
trading, and construction business. It completed two contracts in 1984,
the income from which it did not declare. One of the contracts was with
the National Development Company (NDC) in connection with the
construction of a wharf in Leyte. The other contract was with the
Philippine Phosphate Fertilizer Corp (Philfos) for the construction of an
ammonia storage complex in Leyte.
The projects were completed on a “turnkey” basis (a job in which the
contractor agrees to complete the work of building and installation to the
point of readiness or occupancy; in other words, the products are brought
to the client complete and ready for use). The two contracts were divided
into two parts – the offshore portion and the onshore portion. All
materials and equipment in the contract under the offshore portion were
manufactured and completed in Japan. After manufacture, these were
transported to Leyte and installed to the pier with the use of bolts.
Marubeni claims that the income derived from the offshore portion should
be exempt from tax since it was derived outside of the Philippine
jurisdiction.
ISSUE: Whether the income of Marubeni is taxable even if it claims that it
was earned outside of the Philippines.
Page 18
HELD:
No. Marubeni is not liable for the contractor’s tax.
A contractor’s tax is in the nature of an excise tax on the exercise of a
privilege of selling services or labor. Like property taxes, it cannot be
imposed on an occupation or privilege outside the taxing district.
In this case, the materials, machines, and equipment used in the
construction projects were all designed, engineered and fabricated in
Japan. They were merely shipped to Leyte and assembled there. While
the construction and installation work were completed within the
Philippines, some pieces of equipment and supplies were completely
designed and engineered in Japan. Since these services were rendered
outside the taxing jurisdiction of the Philippines, they are therefore not
subject to the contractor’s tax.
23. Reagan v. CIR: Territorial Jurisdiction
William Reagan was an employee of an American corporation providing
technical assistance to the US Air Force in the Philippines. He sold his
Cadillac to a member of the US Marine Corps at the Clark Air Base in
Pampanga. The CIR assessed him and he paid the income tax on the
amount realized from the sale. Reagan later protested on the ground that
the sale was made outside Philippine territory, beyond its jurisdictional
power to tax.
ISSUE: Whether the sale is exempt from income tax.
HELD:
No. The sale is not exempt from income tax because it took place within
Philippine territory.
The Philippines, being independent and sovereign, its authority may be
exercised over its entire domain. However, any state may submit to a
restriction of its sovereign rights. Under certain conditions, its laws may
as to some persons found within its territory no longer control. It may
also allow another power to participate in the exercise of jurisdictional
rights over certain portions of its territory. If it does, it does not follow
that such areas become impressed with an alien character. They retain
their status as native soil. They are still subject to its authority. It
jurisdiction may be diminished but it does not disappear. Hence, the Clark
Air Base is still within the jurisdiction of the Philippines for purposes of
income tax legislation.
24. Tiu v. CA: Equal Protection of the Laws
Sheryl IID 2003
Congress passed RA 7227 which created the Subic Special Economic Zone,
granting tax and duty incentives to businesses and residents within the
area encompassed by the zone. The law provides that no local and
national taxes shall be imposed within the zone. In lieu of taxes, 3% of
the gross income of enterprises operating within the zone shall be remitted
to the National Government, 1% to the local government units, and 1% to
a development fund to be utilized for the development of municipalities
outside Olangapo and Subic.
Pres. Ramos later issued an EO specifying a “secured area” area within the
zone in which the privileges were operative.
Petitioners outside the “secured area” challenged the constitutionality of
this EO for allegedly being violative of their right to equal protection of the
laws.
ISSUE: Whether the EO confining the application of the privileges under
RA 7227 within the secured area and excluding the residents of the zone
outside the secured area violates the equal protection clause.
HELD:
No. There are real and substantive distinctions between the circumstances
obtaining inside and outside the Subic Naval base, thereby justifying a
valid and reasonable classification.
For a valid classification, the following requisites must be present:
1. it must rest on substantial differences;
2. must be germane to the purpose of the law;
3. must not be limited to existing conditions only; and
4. must apply equally to all members of the same class.
In this case, the purpose of the law is to accelerate the conversion of
military reservations into productive areas. Thus, the lands covered under
the Military Bases Agreement are its object. It was thus reasonable for the
President to have delimited the application of some incentives to the
confines of the former Subic military base, since it is this specific area
which the government intends to transform and develop into a self-
sustaining industrial and economic zone, particularly for the use of big
foreign and local investors. These big investors possess the capital
necessary to spur economic growth and generate employment
opportunities.
25. Province of Abra v. Hernando: Due Process, Exemption of
Religious Institutions
Page 19
The Roman Catholic Bishop of Bangued wanted to be exempted from
payment of real estate tax. He filed an action for declaratory relief in the
CFI of Abra. The CFI rendered a summary judgment granting the
exemption. The Province of Abra filed an action for certiorari against the
CFI on the ground that it granted the action for declaratory relief filed by
the Roman Catholic Bishop without allowing the Province to answer and
without hearing, in violation of its right to due process.
ISSUE: Whether the judgment of the court granting the exemption to the
Roman Catholic Bishop of Bangued is valid.
HELD:
The judgment is not valid.
In order to exempt religious institutions from the payment of real estate
taxes, the property must be used exclusively, actually, and directly
for religious purposes. To be exempted from realty tax, there must be
proof of actual and direct use of the property for religious or charitable
purposes.
In this case, the right of the Province of Abra to procedural due process
was violated by the summary judgment granting the exemption. Instead
of accepting the bare allegation of the bishop that the property was being
used exclusively, directly, and actually for public purposes, the judge
should have first required proof of these allegations.
26. Tolentino v. Sec. of Finance: Religious freedom, Equal
Protection, Non-Impairment of Contracts
Several parties filed complaints in the Supreme Court questioning the
legality of the Expanded VAT (EVAT) Law:
1. The Philippine Press Institute contends that by removing the
exemption of the press from the VAT while maintaining those
granted to others, the EVAT Law discriminates against the press. It
also contends that it is unconstitutional to tax a constitutionally
guaranteed freedom (freedom of the press).
HELD: Since the law granted the press a privilege, the law could
take back the privilege anytime without offense to the Constitution.
By granting exemptions, the State does not forever waive the
exercise of its sovereign prerogative. In withdrawing the
exemption, the law merely subjects the press to the same tax
burden to which other businesses have already been subject. The
case of Grosjean v. American Press Co. cited by the PPI is different
because in that case, the tax was found to be discriminatory
because it was imposed only on newspapers whose weekly
Sheryl IID 2003
circulation was over 20,000. These papers were critical of a certain
senator who controlled the state legislature. The censorial
motivation of the law was thus evident. In this case, the motivation
was not to censor but merely to raise revenues. What the
legislature cannot impose upon the press is a license tax, which is
mainly for regulation. It is unconstitutional because it lays a prior
restraint on the exercise of a right. In this case, the VAT is not a
license tax because it is not a tax on the exercise of a privilege or
of a constitutional right. It is imposed on the sale of goods purely
for revenue purposes.
2. The Philippine Bible Society claims that the imposition of VAT on the
sales of its bibles constitutes an infringement of its religious
freedom because the tax increases the price of the bibles, while
reducing the volume of sale. It also claims exemption from the
registration fee of P1000.
HELD: The resulting burden on the exercise of religious freedom is
so incidental as to make it difficult to differentiate it from any other
economic imposition that might make the right to disseminate
religious doctrines costly. Otherwise, to follow petitioner’s
argument, to increase the tax on the sale of vestments would be to
lay an impermissible burden on the right of the preacher to make a
sermon. The registration fee is really just to pay for the expenses
of registration and enforcement of the provisions of the law. Even
if PBS is excused from paying taxes on those bibles that it
distributes for free, it still has to pay the registration fee since it
also engages in the sale of bibles.
3. CREBA claims that the law impairs the obligations of contracts
because the application of the tax to existing contracts of the sale
of real property by installment would result in substantial increases
in monthly amortizations, which the buyer did not anticipate at the
time he entered into the contract. It also claims that the law
violates equal protection since the law exempts low-cost housing
from VAT but not middle-class housing. It also claims that VAT,
being an indirect, regressive tax, violates the constitutional
mandate to provide a progressive system of taxation.
HELD: A tax on a new subject or an increased tax on an old one
does not interfere with a contract or impair its obligation. The
essential attributes of sovereignty, such as the power to tax, are
read into contracts. The obligation of contracts cannot defeat the
rightful authority of the government to tax by virtue of its
sovereignty.
As to the violation of equal protection, the Court held that there
was a substantial distinction between the homeless poor and the
Page 20
 middle class because the latter can afford to rent houses in the
meantime that they cannot yet buy their own. Hence, there was a
valid classification.
As to VAT being a regressive tax, the Constitution does not prohibit
regressive taxes. What it simply provides is that Congress shall
evolve a progressive system of taxation, which means that direct
taxes are to be preferred and indirect taxes minimized. VAT
provides exemptions in favor of basic goods utilized by the lower
income brackets and its burden actually falls more on those goods
that consumers from the higher income bracket buy. Therefore,
the tax is not repugnant to the Constitution.
27. Misamis Oriental Association of Coco Traders v. Dept. of
Finance Secretary: Equal Protection
The NIRC exempts from VAT the sale of agricultural non-food products in
their original state 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. A
revenue memorandum circular was issued, reclassifying copra into an
agricultural non-food product. Petitioner is engaged in the buying and
selling of copra. It claims that the memorandum circular is discriminatory
and violative of the equal protection clause of the Constitution because
while coconut farmers and copra producers are exempt, traders and
dealers are not, although both sell copra in its original estate.
ISSUE: Whether there was a violation of equal protection.
HELD: No, there was no violation. 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.
28. CIR v. CA: Non-delegation, Uniformity in taxation
Fortune Tobacco Corp. is engaged in the manufacture of different brands
of cigarettes. The Philippine Patent Office issued to the corporation
certificates of trademark registration over “Champion,” “Hope,” and “More”
cigarettes.
Initially, the CIR classified the brands as foreign brands since they were
listed in the World Tobacco Directory as belonging to foreign companies.
However, Fortune Tobacco changed the names as follows: “Hope” to “Hope
Luxury” and “More” to “Premium More,” thereby removing them from the
foreign brand category. A certification was presented to show that
Sheryl IID 2003
“Champion” was an original Fortune Tobacco brand. The three brands
were therefore taxed ad valorem as local brands.
Subsequently, RA 7654 was passed, imposing a 55% tax on locally
manufactured cigarettes bearing a foreign brand. The rate for cigarettes
bearing a local brand was set at 45%.
After the enactment of RA 7654 but before its effectivity, the BIR issued a
circular reclassifying the three brands as foreign brands.
Pursuant to RA 7654, the CIR assessed Fortune Tobacco for ad valorem
tax deficiency amounting to P9.5M. Fortune filed a petition for review with
the CTA. The CTA upheld the stand of Fortune, stating that at the time of
the enactment of RA 7654, the three brands were still classified as local
brands. Therefore, they should not be assessed the 55% tax, but only the
45% tax.
ISSUE: Whether the three brands should be taxed as local or as foreign
brands.
HELD:
They are local brands.
The BIR may issue rules in the exercise of its quasi-legislative powers, but
these rules must be merely interpretative in nature. It cannot go beyond
providing for the means that can facilitate the implementation of the law.
In this case, the circular issued by the BIR reclassifying the three brands
as foreign brands was aimed precisely at placing them within the scope of
RA 7654 and subjecting them to a new tax rate. In issuing the circular,
the BIR did not simply interpret the law; it legislated under its quasi-
legislative authority. The due requirements of notice, hearing, and
publication should not have been then ignored.
The circular might have also infringed on uniformity of taxation. The
Constitution requires taxation to be uniform and equitable. 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.
Thus, all taxable articles or kinds of property of the same class must be
taxed at the same rate, and the tax must operate with the same force and
effect in every place where the subject may be found.
In this case, other cigarettes bearing foreign brands were not included
within the scope of the circular. According to Commissioner Chato, the
reason for leaving out the other brands was because there was not enough
time to include them. The SC ruled that the circular was hastily
promulgated, in violation of the rule on uniformity of taxation.
Page 21

29. CIR v. Lingayen Gulf Electric Power Co. Inc: Uniformity and
Equality of Taxation
Lingayen Gulf was the grantee of a municipal franchise to supply electricity
in Pangasinan. It was subject to a 2% franchise tax under the municipal
franchise. The CIR assessed it deficiency franchise tax, computed at 5%,
based on the rate prescribed by the NIRC for franchises like Lingayen.
Subsequently, a law was passed granting Lingayen Gulf a legislative
franchise to supply electric current to the public, subject to 2% franchise
tax. The CIR claimed that the law was unconstitutional for being violative
of the uniformity and equality of taxation clause of the Constitution since
other similar franchises were subject to a 5% franchise tax imposed by the
Tax Code.
ISSUE: Whether the law violates the rule on uniformity and equality of
taxation.
HELD: 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. The law merely
transferred Lingayen’s power plant from its former class to which it
belonged. All power plants belonging to this particular class were subject
to the same 2% tax. Therefore, the rule on uniformity was not violated.
30. Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas v.
Tan: Uniformity and Equitability, Equal Protection
President Aquino issued EO 273, adopting the value-added tax (VAT).
Petiitoners contend that EO 273 is unconstitutional on the grounds that the
president had no authority to issue it; that it is oppressive, discriminatory,
unjust, and regressive.
ISSUE: Whether the EO 273, adopting VAT, is valid.
HELD:
The EO is valid.
The President had the authority to issue EOs under both the Provisional
and 1987 Constitutions until a legislature was convened. In this case, the
EO was enacted 2 days before Congress convened. Therefore, the EO was
still within the President’s power to issue.
Sheryl IID 2003
EO 273 is not oppressive, discriminatory, unjust, or regressive. It satisfies
all the requirements of a valid tax: it is uniform and equitable.
A tax is considered uniform when it operates with the same force and
effect in every place where the subject may be found. In this case, the
tax is applied similarly on all goods and services sold to the public, which
are not exempt, at the constant rate of 0% or 10%.
The tax is also equitable because it is imposed only on sales of goods or
services by persons engaged in business with an aggregate gross annual
sales exceeding 200K. Small corner sari-sari stores, sales of marine and
farm products and basic food and necessities are not covered by VAT.
Customs brokers contend that the EO is also discriminatory because it
exempts from VAT services performed in the exercise of one’s profession
except customs brokers. The distinction is based on material differences
in that the activities of customs brokers partake more of a business rather
than a profession.
31. Sison v. Ancheta: Uniformity
BP 135 amended Section 21 of the National Internal Revenue Code. The
amendment provided a different schedule of rates for taxable
compensation income and for taxable net income. It provided that the tax
base for those earning compensation income at fixed rates would be gross
income, while the base for the income of businesses and professionals
would be net income.
Petitioner challenges the validity of the amendment on the ground that he
would be unduly discriminated against by the imposition of higher rates of
tax upon his income arising from the exercise of his profession as
compared to those which are imposed upon fixed income or salaried
individual taxpayers. He claims that it amounts to class legislation, in
violation of both the equal protection and due process clauses and the rule
on uniformity in taxation.
ISSUE: Whether the provision violates the rule on uniformity on taxation.
HELD:
No. The rule of uniformity does not call for perfect uniformity or perfect
equality. It merely means that all taxable articles of 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.
In this case, there is a discernible basis of classification, which is the
susceptibility of the income to the application of generalized rules
Page 22
removing all deductible items for all taxpayers within the class and fixing a
set of reduced tax rates to be applied to all of them. Taxpayers who are
recipients of compensation income are set apart as a class. As there is
practically no overhead expense, these taxpayers are not entitled to make
deductions for income tax purposes because they are in the same situation
more or less. On the other hand, in the case of professionals in the
practice of their calling and businessmen, there is no uniformity in the
costs or expenses necessary to produce their income. It would not be just
to disregard the disparities by giving all of them zero deduction and
indiscriminately impose on all alike the same tax rates on the basis of
gross income. There is ample justification for the law to adopt gross
system of income taxation to compensation income, while continuing the
system of net income taxation as regards the professional and business
income.
32. Villegas v. Hiu Chiong Tsai Pao Ho: Uniformity
The Municipal Board of Manila passed an ordinance prohibiting an alien
from being employed or engaging in any position or occupation or business
enumerated therein, whether permanent, temporary, or casual, without
first securing an employment permit from the Mayor and paying the P50
permit fee.
Hiu Chiong filed an action to restrain the enforcement of the ordinance and
to have it declared null and void for being discriminatory and violative of
the rule on uniformity in taxation.
The Mayor argues that the ordinance cannot be declared null and void on
the ground that it violates the rule on uniformity of taxation because this
rule applies only to purely tax or revenue measures and not to regulatory
measures, such as the ordinance.
ISSUE: Whether the ordinance is valid.
HELD:
The ordinance is null and void.
The first part of the ordinance requiring an alien to secure an employment
permit is regulatory in character because it involves the exercise of
discretion on the part of the Mayor in approving or disapproving the
applications. However, the second part which requires the payment of P50
as employee’s fee is not regulatory but a revenue measure. There is no
logic or justification in exacting P50 from aliens who have been cleared for
employment. The obvious purpose of the ordinance is to raise money
under the guise of regulation.
Sheryl IID 2003
The P50 fee is unreasonable not only because it is excessive but because it
fails to consider valid substantial differences in situation among individual
aliens who are required to pay it. The same amount is being collected
from every employed alien, whether he is casual or permanent, part time
or full time, or whether he is a lowly employee or a highly paid executive.
33. Villanueva v. City of Iloilo: Uniformity
The municipal board of Iloilo enacted an ordinance imposing license tax
fees on persons engaged in the business of operating tenement houses.
Several owners of tenement houses filed a complaint to declare the
ordinance invalid because only the taxpayers of the City of Iloilo are
singled out to pay taxes on their tenement houses, while citizens of other
cities, where their councils do not enact a similar tax ordinance are
permitted to escape such imposition.
ISSUE: Whether the ordinance violates the rule on equality and uniformity
in taxation.
HELD: No. This argument is without merit. The rule on equality and
uniformity 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.
34. Pepsi-Cola Bottling Co. of the Phil. v. City of Butuan: Uniformity
The City of Butuan enacted an ordinance imposing on any agent and/or
consignee of any entity engaged in selling soft drinks a tax of 10 cents per
case of 24 bottles. The tax shall be based on any record showing the
number of cases received within the month.
Pepsi filed an action to nullify the ordinance on the ground that it partakes
of the nature of an import tax and is highly unjust and discriminatory.
ISSUE: Whether the ordinance is valid.
HELD: The ordinance is null and void.
The tax is levied only on those persons who are agents or consignees of
another dealer, who must be one engaged in business outside the city. A
seller without an agent engaged within the city would not be subject to the
tax. Moreover, the tax shall be based on the number of bottles received,
not sold, by the taxpayer. These circumstances show that the ordinance is
limited in application to those soft drinks brought into the City from
Page 23
outside thereof. The tax thus partakes of the nature of an import duty,
which is beyond the authority of the city to impose.
Moreover, the tax is discriminatory, and hence, violative of the uniformity
required by the Constitution, since only sales by agents or consignees of
outside dealers would be subject to the tax, while those by local dealers
not acting for or on behalf of other merchants would be exempt from the
tax. There is no valid classification here because if the purpose of the law
were merely to levy a burden upon the sale of soft drinks, there is no
reason why sales thereof by dealers other than agents or consignees of
producers or merchants outside the city should be exempt from the tax.
35. Ormoc Sugar Co. v. Treasurer of Ormoc City: Uniformity and
Equal Protection
The Municipal Board of Ormoc City passed an ordinance imposing a
municipal tax of 1% per export sale of sugar milled at the Ormoc Sugar
Company. Ormoc questioned the validity of the ordinance on the ground
that it violated the equal protection clause and the rule of uniformity in
taxation.
ISSUE: Whether the ordinance is valid.
HELD: The ordinance is unconstitutional.
It is violative of the equal protection clause. When the taxing ordinance
was enacted, Ormoc Sugar was the only sugar central in the city. A
reasonable classification should be in terms applicable to future conditions
as well. The taxing power should not be singular and exclusive as to
exclude any subsequent established sugar central from the coverage of the
tax. A subsequently established sugar central cannot be subject to tax
because the ordinance expressly points to Ormoc Sugar Company Inc as
the entity to be levied upon.
36. Lutz v. Araneta: Uniformity
For facts, supra, case #14.
HELD: It is inherent in the power to tax that a state be free to select the
subjects of taxation. Inequalities which result from a singling out of one
particular class for taxation or exemption infringe no constitutional
limitation.
37. Association of Customs Brokers v. Municipal Board: Uniformity
supra, case #4.
Sheryl IID 2003
HELD: The ordinance infringes the rule of uniformity of taxation. This is
because it exacts the tax upon all motor vehicles operating within the City
of Manila, without distinguishing between those for hire and for private
use, as well as between those registered in Manila and those registered
outside but which occasionally come to Manila. The ordinance imposes the
tax only on those vehicles registered in Manila, even if those vehicles
which are registered outside the city but which use its streets also
contribute equally to the deterioration of the roads and bridges.
38. Eastern Theatrical Co. Inc v. Alfonso: Equality and Uniformity
The City of Manila enacted an ordinance imposing a fee on the price of
every admission ticket sold by theaters. The plaintiffs argue that the
ordinance violated the principle of equality and uniformity of taxation
because it did not tax other places of amusement, such as racetracks,
cabarets, circuses, etc.
ISSUE: Whether the ordinance violates the rule on equality and uniformity
of taxation.
HELD: No. The fact that some places of amusement are not taxed while
others are taxed is no argument against the equality and uniformity of the
tax imposition. Equality and uniformity in taxation means that all taxable
articles or kinds of property of the same class shall be taxed at the same
rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation.
39. Phil. Trust Co. v. Yatco: Uniformity
Several banks doing business in the Philippines assail the validity of a law
imposing a tax on capital, deposits, and circulation, while exempting the
National City Bank of New York. They argue that the law is discriminatory
and violates the rule of uniformity in taxation.
ISSUE: Whether the law violates the rule of uniformity in taxation.
HELD: No. The exemption of an instrumentality of the Federal
Government (NCBNY) does not deprive the Commonwealth of the
Philippines of the power to tax the competitors of NCBNY. And the lack of
uniformity in the result furnishes no ground for complaint.
A tax is considered uniform when it operates with the same force and
effect in every place where the subject may be found. The questioned
statute applies uniformly to all banks in the Philippines without distinction
and discrimination. If the NCBNY is exempted from its operation because
it is a federal instrumentality subject only to the authority of Congress,
that alone could not have the effect of rendering it violative of the rule of
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uniformity. The rule of uniformity does not call for perfect uniformity or
perfect equality, because this is hardly attainable.
40. Churchill v. Concepcion: Uniformity
A law was passed imposing an annual tax of P2 per square meter upon
electric signs, billboards, and spaces used for posting or displaying
temporary signs and all signs displayed on premises not occupied by
buildings. Petitioners were owners of a billboard constructed on private
property in Manila. They were taxed P104. They paid under protest.
Subsequently, they assailed the validity of the tax for lack of uniformity
because it was not graded according to value and was classified arbitrarily
without reasonable ground.
ISSUE: Whether the law violates the rule on uniformity.
HELD: No. Uniformity in taxation means that all taxable articles or kinds
of property of the same class shall be taxed at the same rate. A tax is
uniforms when it operates with the same force and effect in every place
where the subject is found. Uniformity does not signify an intrinsic, but
simply a geographical uniformity. In this case, the P2/sq. meter tax is
imposed on every electric sign or billboard wherever found in the
Philippines. The rule of uniformity does not require taxes to be graded
according to the value of the subject upon which they are imposed,
especially those levied as privilege or occupation taxes.
41. Meralco v. Province of Laguna: Delegation to LGUs, Impairment
clause
Pursuant to the Local Government Code of 1991, the province of Laguna
enacted an ordinance imposing on businesses enjoying a franchise a
franchise tax of 50% of 1% of gross annual receipts. Meralco protested
payment on the ground that the franchise tax that it was paying to the
National Government already included the franchise tax imposed by the
province.
ISSUE: Whether the province of Laguna had the power to levy the
franchise tax.
HELD: Yes.
Local governments do not have the inherent power to tax except to the
extent that such power might be delegated to them. Under the
Constitution, there has been a general delegation of that power in favor of
LGUs. Under the now prevailing Constitution, where there is neither a
grant nor a prohibition by statute, the tax power must be deemed to exist
although Congress may provide statutory limitations and guidelines. The
basic rationale for the current rule is to safeguard the viability and self-
Sheryl IID 2003
sufficiency of LGUs by directly granting them general and broad tax
powers.
Contractual tax exemptions should not be confused with tax exemptions
granted under franchises. Contractual tax exemptions are 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. Tax
exemptions of this kind may not be revoked without impairing the
obligations of contracts. On the other hand, a franchise partakes of the
nature of a grant which is always subject to amendment, alteration, or
repeal by Congress when the common good so requires.
42. Province of Misamis Oriental v. Cagayan Electric Power and
Light Company
CEPALCO was granted a franchise to operate an electric, light, heat, and
power system in Cagayan de Oro. The franchise imposed a 3% franchise
tax which shall be in lieu of all taxes and assessments of whatever
authority upon the privileges, earnings, income, etc, from which CEPALCO
was expressly exempted. Subsequently the Local Tax Code was
promulgated allowing provinces to impose a tax of ½ of 1% on businesses
enjoying franchises. Pursuant to this, the Province of Misamis Oriental
enacted an ordinance levying the ½ of 1% tax on the gross annual
receipts of CEPALCO realized within the province of Misamis Oriental.
CEPALCO refused to pay the additional tax, claiming the exemption
granted to it under its franchise.
ISSUE: Whether CEPALCO is exempt from paying the provincial franchise
tax.
HELD: Yes. The franchise of CEPALCO expressly exempts it from payment
of all taxes of whatever authority, except the 3% tax on its earning. The
franchise granting the exemption is a special law applicable only to
CEPALCO, while the Local Tax Code is a general tax law. The presumption
is that special statutes are exceptions to the general law because they
pertain to a special charter granted to meet a particular set of conditions
and circumstances. The franchise tax imposed under the local tax
ordinance pursuant to the Local Tax Code shall be imposed on businesses
holding a franchise, but not from those whose franchises contain the “in-
lieu-of-all-taxes” proviso.
43. CEPALCO v. CIR
CEPALCO was the holder of a legislative franchise under which the 3%
franchise tax on its gross earning was “in lieu of all taxes and assessments
of whatever authority upon privileges, earnings, income, etc.” from which
the CEPALCO was expressly exempted.
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In June 1968, a law was passed amending the Tax Code, making liable for
income tax all corporate taxpayers not specifically exempted under the tax
code. Thus, franchise companies were subjected to income tax.
In August 1969, the franchise of CEPALCO was amended, reenacting the
tax exemption of CEPALCO.
The CIR assessed CEPALCO deficiency income tax for the period June
1968-August 1969.
ISSUE: Whether CEPALCO enjoyed a tax exemption during the period of
June 1968 to August 1969.
HELD: No. Congress could impair CEPALCO’s legislative franchise by
making it liable for income tax from which it was originally exempted. The
constitution provides that a franchise is subject to amendment, alteration,
or repeal by Congress when the public interest so requires. The law
passed in June 1968 had the effect of withdrawing CEPALCO’s exemption
from income tax, while the exemption was restored by the subsequent
amendment of CEPALCO’s franchise. Hence, CEPALCO is liable for tax for
the period in which there was no exemption.
44. Lealda Electric Co. v. CIR
In 1915, Julian Anson was granted a franchise to operate an electric light
and power plant in Legaspi and Daraga Albay. The franchise was
transferred to several parties until it was finally sold to Lealda Electric Co.
Anson and his successors-in-interest regularly paid the 2% franchise tax
imposed on all franchises. In 1946, the NIRC was amended, increasing
the franchise tax to 5%. Lealda paid at first, but later filed a petition for
refund contending that under its charter, it was liable to pay only 2%
franchise tax. It argues that the franchise was a private contract between
its predecessor-in-interest on one hand and the Government, on the other,
and as such, cannot be amended by the Tax Code.
ISSUE: Whether Lealda should pay 5% franchise tax.
HELD: Yes. The franchise of Lealda contains an express provision to the
effect that the same may be altered or repealed by Congress.
Differentiate this from the two other previous cases: In the CEPALCO
cases, the franchises were deemed exempt because the contained the
phrase “in lieu of all taxes of any kind levied now or in the future…” There
was an express exemption in these cases. Lealda’s franchise does not
contain the same exemption.
45. Cassanovas v. Hord: Impairment Clause
Sheryl IID 2003
In 1897, Cassanovas was granted by the Spanish Government certain
mines in Camarines. The Internal Revenue Act imposes on all mining
concessions granted prior to 1899 a property tax of 100 pesos plus an ad
valorem tax of 3% of the actual market value of the output of the mines.
Cassanovas assails the validity of this provision on the ground that it
impairs the obligations of contracts. Under the decree of the Spanish
Government, the mining claim was subject only to at 20 peso property tax
and an ad valorem tax of 3%. The decree provided that no other taxes
except those mentioned shall be imposed upon mining industries.
ISSUE: Whether there was a violation of the impairment clause.
HELD: Yes. Therefore, the provision is void. There was a contract
between the Spanish Government and the plaintiff, the obligation of which
contract was impaired by the Internal Revenue Law.
A State may by contract based on consideration exempt the property of an
individual or corporation from taxation either for a specified period or
permanently. And it is equally well settled that the exemption is presumed
to be on sufficient consideration, and binds the State if the charter
containing it is accepted. Such contract can be enforced against the State
at the instance of the corporation.
[The important distinction in this case is that there was consideration
between both parties for entering into the contract. From the provisions
of the deed, it was not a unilateral grant of a privilege by the Spanish
Government. Cassanovas undertook to perform some things with respect
to the mining claim in consideration of the privilege. Hence, there was a
binding contract with reciprocal obligations, which the State cannot
abrogate].
46. American Bible Society v. City of Manila: Free exercise of
Religion
The American Bible Society was a missionary society engaged in the
distribution and sale of bibles in the Philippines. The City Treasurer of
Manila informed the Society that it was conducting the business of general
merchandising without a Mayor’s permit and municipal license, in violation
of Ordinances 3000 and 2529. The Society paid the fees in protest,
claiming that it never received any profit from the sale of the materials. It
then filed a complaint to declare the municipal ordinances in question
unconstitutional for violating the non-establishment and free exercise
clause of the Constitution.
ISSUE: Whether the Society is required to pay the fees under the two
ordinances.
HELD:
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No, the Society is NOT required to pay.
Ordinance 3000 requires one to obtain a Mayor’s permit before engaging
in any business, trade, or occupation, except those on which the city is not
allowed to impose a license or tax. Ordinance 2529 requires the quarterly
payment of license fees based on gross sales from, among others, retail
dealers in new merchandise, such as those engaged in the sale of books.
The constitutional guaranty of the free exercise and enjoyment of religious
profession and worship carries with it the right to disseminate religious
information. Any restraint of such right can only be justified on the
grounds that there is a clear and present danger of a substantive evil
which the State has the right to prevent. The power to tax the exercise of
a privilege is the power to control or suppress its enjoyment. Those who
can tax the exercise of a religious practice can make its exercise so costly
as to deprive it of the resources necessary for its maintenance.
HELD: No. Abra Valley College is not exempt because the property was
also being used for commercial purposes.
The test of exemption from taxation is the use of the property for
purposes mentioned in the Constitution. While the Court allows a more
liberal and non-restrictive interpretation of the phrase “exclusively used for
educational purposes,” reasonable emphasis has always been made that
exemption extends to facilities which are incidental to and reasonably
necessary for the accomplishment of the main purposes. While the use
of the second floor for residential purposes of the Director and his family
may find justification under the concept of incidental use, which is
complimentary to the main or primary purpose, the lease of the first floor
to Northern Marketing cannot be considered incidental to the purpose of
education.

In this case, the act of selling bibles is purely religious and does not fall
under the provisions of the city ordinances. Even if the price asked for the
bibles and other religious pamphlets was sometimes a little bit higher than
their actual cost, it cannot mean that the Society was engaged in the
business or occupation of selling merchandise for profit. For this reason,
Ordinance 2529, which imposes a license tax on the exercise of the right
to sell religious materials, cannot be applied to the Society, for in doing so,
it would impair its free exercise and enjoyment of its religious profession
and worship as well as its rights of dissemination of religious beliefs.

On the other hand, Ordinance 3000, which does not impose any charge
upon the enjoyment of a right granted by the Constitution nor tax the
exercise of religious practices, cannot be considered unconstitutional even
if applied to the Society. However, since Ordinance 2529 is not applicable
to the Society, the City of Manila is powerless to license or tax the
business of the Society. Hence, Ordinance 3000 is also inapplicable to the
business of the Society.

47. Abra Valley College v. Aquino: Exemptions in favor of

educational institutions

The premises of Abra Valley College were being used for the educational
purposes of the college (as classrooms of its high school and college
students). In addition, its second floor was the permanent residence of
the President and Director of the College and his family. The ground floor
was being rented to a commercial establishment, the Northern Marketing
Corporation.

ISSUE: Whether the property was used exclusively for educational

purposes, thereby exempting Abra Valley College from payment of tax.

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