Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 195909

September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.

x-----------------------x

G.R. No. 195960

ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

CARPIO, J.:

The Case

These are consolidated 1 petitions for review on certiorari under Rule 45 of the
Rules of Court assailing the Decision of 19 November 2010 of the Court of Tax
Appeals (CTA) En Banc and its Resolution 2 of 1 March 2011 in CTA Case No. 6746.
This Court resolves this case on a pure question of law, which involves the
interpretation of Section 27(B) vis--vis Section 30(E) and (G) of the National
Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of
proprietary non-profit hospitals.

The Facts

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and
non-profit corporation. Under its articles of incorporation, among its corporate
purposes are:

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian,

benevolent, charitable and scientific hospital which shall give curative, rehabilitative
and spiritual care to the sick, diseased and disabled persons; provided that purely
medical and surgical services shall be performed by duly licensed physicians and
surgeons who may be freely and individually contracted by patients;

(b) To provide a career of health science education and provide medical services to
the community through organized clinics in such specialties as the facilities and
resources of the corporation make possible;

(c) To carry on educational activities related to the maintenance and promotion of

health as well as provide facilities for scientific and medical researches which, in the
opinion of the Board of Trustees, may be justified by the facilities, personnel, funds,
or other requirements that are available;

(d) To cooperate with organized medical societies, agencies of both government and
private sector; establish rules and regulations consistent with the highest
professional ethics;

xxxx3

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's
deficiency taxes amounting to P76,063,116.06 for 1998, comprised of deficiency
income tax, value-added tax, withholding tax on compensation and expanded
withholding tax. The BIR reduced the amount to P63,935,351.57 during trial in the
First Division of the CTA. 4

On 14 January 2003, St. Luke's filed an administrative protest with the BIR against
the deficiency tax assessments. The BIR did not act on the protest within the 180day period under Section 228 of the NIRC. Thus, St. Luke's appealed to the CTA.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10%
preferential tax rate on the income of proprietary non-profit hospitals, should be
applicable to St. Luke's. According to the BIR, Section 27(B), introduced in 1997, "is
a new provision intended to amend the exemption on non-profit hospitals that were
previously categorized as non-stock, non-profit corporations under Section 26 of the
1997 Tax Code x x x." 5 It is a specific provision which prevails over the general
exemption on income tax granted under Section 30(E) and (G) for non-stock, nonprofit charitable institutions and civic organizations promoting social welfare. 6

The BIR claimed that St. Luke's was actually operating for profit in 1998 because
only 13% of its revenues came from charitable purposes. Moreover, the hospital's
board of trustees, officers and employees directly benefit from its profits and assets.
St. Luke's had total revenues of P1,730,367,965 or approximately P1.73 billion from
patient services in 1998. 7

St. Luke's contended that the BIR should not consider its total revenues, because its
free services to patients was P218,187,498 or 65.20% of its 1998 operating income
(i.e., total revenues less operating expenses) of P334,642,615. 8 St. Luke's also
claimed that its income does not inure to the benefit of any individual.

St. Luke's maintained that it is a non-stock and non-profit institution for charitable
and social welfare purposes under Section 30(E) and (G) of the NIRC. It argued that
the making of profit per se does not destroy its income tax exemption.

The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments
before the CTA that Section 27(B) applies to St. Luke's. The petition raises the sole
issue of whether the enactment of Section 27(B) takes proprietary non-profit
hospitals out of the income tax exemption under Section 30 of the NIRC and instead,
imposes a preferential rate of 10% on their taxable income. The BIR prays that St.
Luke's be ordered to pay P57,659,981.19 as deficiency income and expanded
withholding tax for 1998 with surcharges and interest for late payment.

The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment
and withholding of a part of its income, 9 as well as the payment of surcharge and
delinquency interest. There is no ground for this Court to undertake such a factual
review. Under the Constitution 10 and the Rules of Court, 11 this Court's review
power is generally limited to "cases in which only an error or question of law is
involved." 12 This Court cannot depart from this limitation if a party fails to invoke a
recognized exception.

The Ruling of the Court of Tax Appeals

The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First
Division Decision dated 23 February 2009 which held:

WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY
GRANTED. Accordingly, the 1998 deficiency VAT assessment issued by respondent
against petitioner in the amount of P110,000.00 is hereby CANCELLED and
WITHDRAWN. However, petitioner is hereby ORDERED to PAY deficiency income tax
and deficiency expanded withholding tax for the taxable year 1998 in the respective
amounts of P5,496,963.54 and P778,406.84 or in the sum of P6,275,370.38, x x x.

xxxx

In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency

interest on the total amount of P6,275,370.38 counted from October 15, 2003 until
full payment thereof, pursuant to Section 249(C)(3) of the NIRC of 1997.

SO ORDERED. 13

The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc to be paid,
arose from the failure of St. Luke's to prove that part of its income in 1998 (declared
as "Other Income-Net") 14 came from charitable activities. The CTA cancelled the
remainder of the P63,113,952.79 deficiency assessed by the BIR based on the 10%
tax rate under Section 27(B) of the NIRC, which the CTA En Banc held was not
applicable to St. Luke's. 15

The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution
covered by Section 30(E) and (G) of the NIRC. This ruling would exempt all income
derived by St. Luke's from services to its patients, whether paying or non-paying.
The CTA reiterated its earlier decision in St. Luke's Medical Center, Inc. v.
Commissioner of Internal Revenue, 16 which examined the primary purposes of St.
Luke's under its articles of incorporation and various documents 17 identifying St.
Luke's as a charitable institution.

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18
which states that "a charitable institution does not lose its charitable character and
its consequent exemption from taxation merely because recipients of its benefits
who are able to pay are required to do so, where funds derived in this manner are
devoted to the charitable purposes of the institution x x x." 19 The generation of
income from paying patients does not per se destroy the charitable nature of St.
Luke's.

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal
Revenue, 20 which ruled that the old NIRC (Commonwealth Act No. 466, as
amended) 21 "positively exempts from taxation those corporations or associations
which, otherwise, would be subject thereto, because of the existence of x x x net
income." 22 The NIRC of 1997 substantially reproduces the provision on charitable
institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is
lost whenever there is net income, the Court in Jesus Sacred Heart College declared:
"[E]very responsible organization must be run to at least insure its existence, by
operating within the limits of its own resources, especially its regular income. In
other words, it should always strive, whenever possible, to have a surplus." 23

The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24
The CTA explained that to apply the 10% preferential rate, Section 27(B) requires a
hospital to be "non-profit." On the other hand, Congress specifically used the word
"non-stock" to qualify a charitable "corporation or association" in Section 30(E) of
the NIRC. According to the CTA, this is unique in the present tax code, indicating an
intent to exempt this type of charitable organization from income tax. Section 27(B)
does not require that the hospital be "non-stock." The CTA stated, "it is clear that
non-stock, non-profit hospitals operated exclusively for charitable purpose are
exempt from income tax on income received by them as such, applying the
provision of Section 30(E) of the NIRC of 1997, as amended." 25

The Issue

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under
Section 27(B) of the NIRC, which imposes a preferential tax rate of 10% on the
income of proprietary non-profit hospitals.

The Ruling of the Court

St. Luke's Petition in G.R. No. 195960

As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No.
195960 because the petition raises factual issues. Under Section 1, Rule 45 of the
Rules of Court, "[t]he petition shall raise only questions of law which must be
distinctly set forth." St. Luke's cites Martinez v. Court of Appeals 26 which permits
factual review "when the Court of Appeals [in this case, the CTA] manifestly
overlooked certain relevant facts not disputed by the parties and which, if properly
considered, would justify a different conclusion." 27

This Court does not see how the CTA overlooked relevant facts. St. Luke's itself
stated that the CTA "disregarded the testimony of [its] witness, Romeo B. Mary,
being allegedly self-serving, to show the nature of the 'Other Income-Net' x x x." 28
This is not a case of overlooking or failing to consider relevant evidence. The CTA
obviously considered the evidence and concluded that it is self-serving. The CTA
declared that it has "gone through the records of this case and found no other

evidence aside from the self-serving affidavit executed by [the] witnesses [of St.
Luke's] x x x." 29

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay
the 25% surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay
the deficiency tax within the time prescribed for its payment in the notice of
assessment[.]" 30 St. Luke's is also liable to pay 20% delinquency interest under
Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the amount of
P6,275,370.38 in the dispositive portion of the CTA First Division Decision includes
only deficiency interest under Section 249(A) and (B) of the NIRC and not
delinquency interest. 32

The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the
introduction of Section 27(B) in the NIRC of 1997 vis--vis Section 30(E) and (G) on
the income tax exemption of charitable and social welfare institutions. The 10%
income tax rate under Section 27(B) specifically pertains to proprietary educational
institutions and proprietary non-profit hospitals. The BIR argues that Congress
intended to remove the exemption that non-profit hospitals previously enjoyed
under Section 27(E) of the NIRC of 1977, which is now substantially reproduced in
Section 30(E) of the NIRC of 1997. 33 Section 27(B) of the present NIRC provides:

SEC. 27. Rates of Income Tax on Domestic Corporations. -

xxxx

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational

institutions and hospitals which are non-profit shall pay a tax of ten percent (10%)
on their taxable income except those covered by Subsection (D) hereof: Provided,
That if the gross income from unrelated trade, business or other activity exceeds
fifty percent (50%) of the total gross income derived by such educational
institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof
shall be imposed on the entire taxable income. For purposes of this Subsection, the
term 'unrelated trade, business or other activity' means any trade, business or other
activity, the conduct of which is not substantially related to the exercise or

performance by such educational institution or hospital of its primary purpose or

function. A 'proprietary educational institution' is any private school maintained and
administered by private individuals or groups with an issued permit to operate from
the Department of Education, Culture and Sports (DECS), or the Commission on
Higher Education (CHED), or the Technical Education and Skills Development
Authority (TESDA), as the case may be, in accordance with existing laws and
regulations. (Emphasis supplied)

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends
that it is a charitable institution and an organization promoting social welfare. The
arguments of St. Luke's focus on the wording of Section 30(E) exempting from
income tax non-stock, non-profit charitable institutions. 34 St. Luke's asserts that
the legislative intent of introducing Section 27(B) was only to remove the exemption
for "proprietary non-profit" hospitals. 35 The relevant provisions of Section 30 state:

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall
not be taxed under this Title in respect to income received by them as such:

xxxx

(E) Nonstock corporation or association organized and operated exclusively for

religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation
of veterans, no part of its net income or asset shall belong to or inure to the benefit
of any member, organizer, officer or any specific person;

xxxx

(G) Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare;

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of

whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities conducted for profit
regardless of the disposition made of such income, shall be subject to tax imposed
under this Code. (Emphasis supplied)

The Court partly grants the petition of the BIR but on a different ground. We hold
that Section 27(B) of the NIRC does not remove the income tax exemption of
proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one
hand, and Section 30(E) and (G) on the other hand, can be construed together
without the removal of such tax exemption. The effect of the introduction of Section
27(B) is to subject the taxable income of two specific institutions, namely,
proprietary non-profit educational institutions 36 and proprietary non-profit
hospitals, among the institutions covered by Section 30, to the 10% preferential
rate under Section 27(B) instead of the ordinary 30% corporate rate under the last
paragraph of Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit
hospitals. The only qualifications for hospitals are that they must be proprietary and
non-profit. "Proprietary" means private, following the definition of a "proprietary
educational institution" as "any private school maintained and administered by
private individuals or groups" with a government permit. "Non-profit" means no net
income or asset accrues to or benefits any member or specific person, with all the
net income or asset devoted to the institution's purposes and all its activities
conducted not for profit.

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue

v. Club Filipino Inc. de Cebu, 37 this Court considered as non-profit a sports club
organized for recreation and entertainment of its stockholders and members. The
club was primarily funded by membership fees and dues. If it had profits, they were
used for overhead expenses and improving its golf course. 38 The club was nonprofit because of its purpose and there was no evidence that it was engaged in a
profit-making enterprise. 39

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not
charitable. The Court defined "charity" in Lung Center of the Philippines v. Quezon
City 40 as "a gift, to be applied consistently with existing laws, for the benefit of an

indefinite number of persons, either by bringing their minds and hearts under the
influence of education or religion, by assisting them to establish themselves in life
or [by] otherwise lessening the burden of government." 41 A non-profit club for the
benefit of its members fails this test. An organization may be considered as nonprofit if it does not distribute any part of its income to stockholders or members.
However, despite its being a tax exempt institution, any income such institution
earns from activities conducted for profit is taxable, as expressly provided in the last
paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive

test of charity in Lung Center. The issue in Lung Center concerns exemption from
real property tax and not income tax. However, it provides for the test of charity in
our jurisdiction. Charity is essentially a gift to an indefinite number of persons which
lessens the burden of government. In other words, charitable institutions provide for
free goods and services to the public which would otherwise fall on the shoulders of
government. Thus, as a matter of efficiency, the government forgoes taxes which
should have been spent to address public needs, because certain private entities
already assume a part of the burden. This is the rationale for the tax exemption of
charitable institutions. The loss of taxes by the government is compensated by its
relief from doing public works which would have been funded by appropriations
from the Treasury. 42

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law granting it. The power of
Congress to tax implies the power to exempt from tax. Congress can create tax
exemptions, subject to the constitutional provision that "[n]o law granting any tax
exemption shall be passed without the concurrence of a majority of all the Members
of Congress." 43 The requirements for a tax exemption are strictly construed
against the taxpayer 44 because an exemption restricts the collection of taxes
necessary for the existence of the government.

The Court in Lung Center declared that the Lung Center of the Philippines is a
charitable institution for the purpose of exemption from real property taxes. This
ruling uses the same premise as Hospital de San Juan 45 and Jesus Sacred Heart
College 46 which says that receiving income from paying patients does not destroy
the charitable nature of a hospital.

As a general principle, a charitable institution does not lose its character as such
and its exemption from taxes simply because it derives income from paying
patients, whether out-patient, or confined in the hospital, or receives subsidies from
the government, so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution. 47

For real property taxes, the incidental generation of income is permissible because
the test of exemption is the use of the property. The Constitution provides that
"[c]haritable institutions, churches and personages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes shall be exempt from taxation." 48 The test of exemption is
not strictly a requirement on the intrinsic nature or character of the institution. The
test requires that the institution use the property in a certain way, i.e. for a
charitable purpose. Thus, the Court held that the Lung Center of the Philippines did
not lose its charitable character when it used a portion of its lot for commercial
purposes. The effect of failing to meet the use requirement is simply to remove from
the tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the
NIRC, Congress decided to extend the exemption to income taxes. However, the
way Congress crafted Section 30(E) of the NIRC is materially different from Section
28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the
corporation or association that is exempt from income tax. On the other hand,
Section 28(3), Article VI of the Constitution does not define a charitable institution,
but requires that the institution "actually, directly and exclusively" use the property
for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be
devoted "exclusively" for charitable purposes. The organization of the institution
refers to its corporate form, as shown by its articles of incorporation, by-laws and
other constitutive documents. Section 30(E) of the NIRC specifically requires that
the corporation or association be non-stock, which is defined by the Corporation
Code as "one where no part of its income is distributable as dividends to its
members, trustees, or officers" 49 and that any profit "obtain[ed] as an incident to
its operations shall, whenever necessary or proper, be used for the furtherance of
the purpose or purposes for which the corporation was organized." 50 However,
under Lung Center, any profit by a charitable institution must not only be plowed
back "whenever necessary or proper," but must be "devoted or used altogether to
the charitable object which it is intended to achieve." 51

The operations of the charitable institution generally refer to its regular activities.
Section 30(E) of the NIRC requires that these operations be exclusive to charity.
There is also a specific requirement that "no part of [the] net income or asset shall
belong to or inure to the benefit of any member, organizer, officer or any specific
person." The use of lands, buildings and improvements of the institution is but a
part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit

charitable institution. However, this does not automatically exempt St. Luke's from
paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's
meets the test of charity, a charitable institution is not ipso facto tax exempt. To be
exempt from real property taxes, Section 28(3), Article VI of the Constitution
requires that a charitable institution use the property "actually, directly and
exclusively" for charitable purposes. To be exempt from income taxes, Section 30(E)
of the NIRC requires that a charitable institution must be "organized and operated
exclusively" for charitable purposes. Likewise, to be exempt from income taxes,
Section 30(G) of the NIRC requires that the institution be "operated exclusively" for
social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words
"organized and operated exclusively" by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of

whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities conducted for profit
regardless of the disposition made of such income, shall be subject to tax imposed
under this Code. (Emphasis supplied)

In short, the last paragraph of Section 30 provides that if a tax exempt charitable
institution conducts "any" activity for profit, such activity is not tax exempt even as
its not-for-profit activities remain tax exempt. This paragraph qualifies the
requirements in Section 30(E) that the "[n]on-stock corporation or association [must
be] organized and operated exclusively for x x x charitable x x x purposes x x x." It
likewise qualifies the requirement in Section 30(G) that the civic organization must
be "operated exclusively" for the promotion of social welfare.

Thus, even if the charitable institution must be "organized and operated

exclusively" for charitable purposes, it is nevertheless allowed to engage in
"activities conducted for profit" without losing its tax exempt status for its not-forprofit activities. The only consequence is that the "income of whatever kind and
character" of a charitable institution "from any of its activities conducted for profit,
regardless of the disposition made of such income, shall be subject to tax." Prior to
the introduction of Section 27(B), the tax rate on such income from for-profit
activities was the ordinary corporate rate under Section 27(A). With the introduction
of Section 27(B), the tax rate is now 10%.

In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying
patients. It cannot be disputed that a hospital which receives approximately P1.73
billion from paying patients is not an institution "operated exclusively" for charitable
purposes. Clearly, revenues from paying patients are income received from
"activities conducted for profit." 52 Indeed, St. Luke's admits that it derived profits
from its paying patients. St. Luke's declared P1,730,367,965 as "Revenues from
Services to Patients" in contrast to its "Free Services" expenditure of P218,187,498.
In its Comment in G.R. No. 195909, St. Luke's showed the following "calculation" to
support its claim that 65.20% of its "income after expenses was allocated to free or
charitable services" in 1998. 53

REVENUES FROM SERVICES TO PATIENTS

P1,730,367,965.00

OPERATING EXPENSES

Professional care of patients

Administrative

P1,016,608,394.00

287,319,334.00

Household and Property

91,797,622.00

P1,395,725,350.00

INCOME FROM OPERATIONS

Free Services

P334,642,615.00

-218,187,498.00

100%

-65.20%

INCOME FROM OPERATIONS, Net of FREE SERVICES P116,455,117.00

OTHER INCOME

17,482,304.00

EXCESS OF REVENUES OVER EXPENSES

P133,937,421.00

34.80%

In Lung Center, this Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others;

debarred from participation or enjoyment; and "exclusively" is defined, "in a manner
to exclude; as enjoying a privilege exclusively." x x x The words "dominant use" or
"principal use" cannot be substituted for the words "used exclusively" without doing
violence to the Constitution and the law. Solely is synonymous with exclusively. 54

The Court cannot expand the meaning of the words "operated exclusively" without
violating the NIRC. Services to paying patients are activities conducted for profit.
They cannot be considered any other way. There is a "purpose to make profit over
and above the cost" of services. 55 The P1.73 billion total revenues from paying
patients is not even incidental to St. Luke's charity expenditure of P218,187,498 for
non-paying patients.

St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its
operating income in 1998. However, if a part of the remaining 34.80% of the
operating income is reinvested in property, equipment or facilities used for services
to paying and non-paying patients, then it cannot be said that the income is
"devoted or used altogether to the charitable object which it is intended to
achieve." 56 The income is plowed back to the corporation not entirely for
charitable purposes, but for profit as well. In any case, the last paragraph of Section
30 of the NIRC expressly qualifies that income from activities for profit is taxable
"regardless of the disposition made of such income."

Jesus Sacred Heart College declared that there is no official legislative record
explaining the phrase "any activity conducted for profit." However, it quoted a
deposition of Senator Mariano Jesus Cuenco, who was a member of the Committee
of Conference for the Senate, which introduced the phrase "or from any activity
conducted for profit."

P. Cuando ha hablado de la Universidad de Santo Toms que tiene un hospital, no

cree Vd. que es una actividad esencial dicho hospital para el funcionamiento del
colegio de medicina de dicha universidad?

xxxx

R. Si el hospital se limita a recibir enformos pobres, mi contestacin seria

afirmativa; pero considerando que el hospital tiene cuartos de pago, y a los mismos
generalmente van enfermos de buena posicin social econmica, lo que se paga
por estos enfermos debe estar sujeto a 'income tax', y es una de las razones que
hemos tenido para insertar las palabras o frase 'or from any activity conducted for
profit.' 57

The question was whether having a hospital is essential to an educational institution

like the College of Medicine of the University of Santo Tomas. Senator Cuenco
answered that if the hospital has paid rooms generally occupied by people of good
economic standing, then it should be subject to income tax. He said that this was
one of the reasons Congress inserted the phrase "or any activity conducted for
profit."

The question in Jesus Sacred Heart College involves an educational institution. 58

However, it is applicable to charitable institutions because Senator Cuenco's
response shows an intent to focus on the activities of charitable institutions.
Activities for profit should not escape the reach of taxation. Being a non-stock and
non-profit corporation does not, by this reason alone, completely exempt an
institution from tax. An institution cannot use its corporate form to prevent its
profitable activities from being taxed.

The Court finds that St. Luke's is a corporation that is not "operated exclusively" for
charitable or social welfare purposes insofar as its revenues from paying patients
are concerned. This ruling is based not only on a strict interpretation of a provision
granting tax exemption, but also on the clear and plain text of Section 30(E) and
(G). Section 30(E) and (G) of the NIRC requires that an institution be "operated
exclusively" for charitable or social welfare purposes to be completely exempt from
income tax. An institution under Section 30(E) or (G) does not lose its tax exemption
if it earns income from its for-profit activities. Such income from for-profit activities,
under the last paragraph of Section 30, is merely subject to income tax, previously
at the ordinary corporate rate but now at the preferential 10% rate pursuant to
Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an

exempt institution is spared from sharing in the expenses of government and yet
benefits from them. Tax exemptions for charitable institutions should therefore be

limited to institutions beneficial to the public and those which improve social
welfare. A profit-making entity should not be allowed to exploit this subsidy to the
detriment of the government and other taxpayers.1wphi1

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to
be completely tax exempt from all its income. However, it remains a proprietary
non-profit hospital under Section 27(B) of the NIRC as long as it does not distribute
any of its profits to its members and such profits are reinvested pursuant to its
corporate purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the
preferential tax rate of 10% on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B)
of the NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June
1990 by the BIR, which opined that St. Luke's is "a corporation for purely charitable
and social welfare purposes"59 and thus exempt from income tax. 60 In Michael J.
Lhuillier, Inc. v. Commissioner of Internal Revenue, 61 the Court said that "good
faith and honest belief that one is not subject to tax on the basis of previous
interpretation of government agencies tasked to implement the tax law, are
sufficient justification to delete the imposition of surcharges and interest." 62

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No.

195909 is PARTLY GRANTED. The Decision of the Court of Tax Appeals En Banc dated
19 November 2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746 are
MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO PAY the deficiency income
tax in 1998 based on the 10% preferential income tax rate under Section 27(B) of
the National Internal Revenue Code. However, it is not liable for surcharges and
interest on such deficiency income tax under Sections 248 and 249 of the National
Internal Revenue Code. All other parts of the Decision and Resolution of the Court of
Tax Appeals are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for
violating Section 1, Rule 45 of the Rules of Court.

SO ORDERED.

GR 91649
197 SCRA 52, 65
May 14, 1991

FACTS:
Petitioners seek to annul the PAGCOR charter PD 1869 for being allegedly
contrary to morals, public policy and order, monopolistic & tends toward crony
economy, waiving the Manila City governments right to impose taxes & license
fees, and violating the equal protection clause, local autonomy and other state
policies in the Constitution.

ISSUES:
Whether PD 1869 is valid.

HELD:
Every law has in its favor the presumption of constitutionality. For a law to be
nullified, it must be shown that there is a clear & unequivocal breach of the
Constitution. The grounds for nullity must be clear and beyond reasonable doubt.
The question of wether PD 1869 is a wise legislation is up for Congress to
determine.

The power of LGUs to regulate gambling through the grant of franchises, licenses or
permits was withdrawn by PD 771, and is now vested exclusively on the National
Government. Necessarily, the power to demand/collect license fees is no longer
vested in the City of Manila.

LGUs have no power to tax Government instrumentalities. PAGCOR, being a GOCC,

is therefore exempt from local taxes. The National Government is supreme over
local governments. As such, mere creatures of the State cannot defeat national
policies using the power to tax as a tool for regulation. The power to tax cannot be
allowed to defeat an instrumentality of the very entity which has the inherent power
to wield it. The power of LGUs to impose taxes & fees is always subject to limitation
provided by Congress.

The principle of local autonomy does not make LGUs sovereign within a state, it
simply means decentralization.

A law doesnt have to operate in equal force on all persons/things. The equal
protection clause doesnt preclude classification of individuals who may be accorded
different treatment under the law as long as the classification is not unreasonable
/arbitrary. The mere fact that some gambling activities are legalized under certain
conditions, while others are prohibited, does not render the applicable laws
unconstitutional.

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs. HON.

FERDINAND J. MARCOS, in his capacity as the Presiding Judge of the Regional Trial
Court, Branch 20, Cebu City, THE CITY OF CEBU, represented by its Mayor, HON.
TOMAS R. OSMEA, and EUSTAQUIO B. CESA, respondents.
DECISION

DAVIDE, JR., J.:

For review under Rule 45 of the Rules of Court on a pure question of law are the
decision of 22 March 1995[1] of the Regional Trial Court (RTC) of Cebu City, Branch
20, dismissing the petition for declaratory relief in Civil Case No. CEB-16900,
entitled Mactan Cebu International Airport Authority vs. City of Cebu, and its order
of 4 May 1995[2]denying the motion to reconsider the decision.

We resolved to give due course to this petition for it raises issues dwelling on the
scope of the taxing power of local government units and the limits of tax exemption
privileges of government-owned and controlled corporations.

The uncontradicted factual antecedents are summarized in the instant petition as

follows:

Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by

virtue of Republic Act No. 6958, mandated to principally undertake the economical,
efficient and effective control, management and supervision of the Mactan
International Airport in the Province of Cebu and the Lahug Airport in Cebu City, x x
x and such other airports as may be established in the Province of Cebu x x x (Sec.
3, RA 6958). It is also mandated to:

a)
encourage, promote and develop international and domestic air traffic in
the Central Visayas and Mindanao regions as a means of making the regions centers
of international trade and tourism, and accelerating the development of the means
of transportation and communication in the country; and,

b)
upgrade the services and facilities of the airports and to formulate
internationally acceptable standards of airport accommodation and service.

Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption
from payment of realty taxes in accordance with Section 14 of its Charter:

Sec. 14. Tax Exemptions. -- The Authority shall be exempt from realty taxes imposed
by the National Government or any of its political subdivisions, agencies and
instrumentalities x x x.

On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of

the Treasurer of the City of Cebu, demanded payment for realty taxes on several
parcels of land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A,
989-A, 474, 109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A),
located at Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total
amount of P2,229,078.79.

Petitioner objected to such demand for payment as baseless and unjustified,

claiming in its favor the aforecited Section 14 of RA 6958 which exempts it from
payment of realty taxes. It was also asserted that it is an instrumentality of the
government performing governmental functions, citing Section 133 of the Local
Government Code of 1991 which puts limitations on the taxing powers of local
government units:

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

a)

xxx

xxx

o) Taxes, fees or charges of any kind on the National Government, its agencies
and instrumentalities, and local government units. (underscoring supplied)

Respondent City refused to cancel and set aside petitioners realty tax account,
insisting that the MCIAA is a government-controlled corporation whose tax
exemption privilege has been withdrawn by virtue of Sections 193 and 234 of the
Local Government Code that took effect on January 1, 1992:

Section 193. Withdrawal of Tax Exemption Privilege. Unless otherwise provided in

this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under RA No.
6938, non-stock and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code. (underscoring supplied)

xxx

Section 234.

(a)

xxx

xxx

Exemptions from Real Property Taxes. x x x

(e)

xxx

Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code.

As the City of Cebu was about to issue a warrant of levy against the properties of
petitioner, the latter was compelled to pay its tax account under protest and
thereafter filed a Petition for Declaratory Relief with the Regional Trial Court of Cebu,
Branch 20, on December 29, 1994. MCIAA basically contended that the taxing
powers of local government units do not extend to the levy of taxes or fees of any
kind on an instrumentality of the national government. Petitioner insisted that while
it is indeed a government-owned corporation, it nonetheless stands on the same
footing as an agency or instrumentality of the national government by the very
nature of its powers and functions.

Respondent City, however, asserted that MCIAA is not an instrumentality of the

government but merely a government-owned corporation performing proprietary
functions. As such, all exemptions previously granted to it were deemed withdrawn
by operation of law, as provided under Sections 193 and 234 of the Local
Government Code when it took effect on January 1, 1992.[3]

The petition for declaratory relief was docketed as Civil Case No. CEB-16900.

In its decision of 22 March 1995,[4] the trial court dismissed the petition in light of
its findings, to wit:

A close reading of the New Local Government Code of 1991 or RA 7160 provides the
express cancellation and withdrawal of exemption of taxes by government-owned
and controlled corporation per Sections after the effectivity of said Code on January
1, 1992, to wit: [proceeds to quote Sections 193 and 234]

Petitioners claimed that its real properties assessed by respondent City Government
of Cebu are exempted from paying realty taxes in view of the exemption granted
under RA 6958 to pay the same (citing Section 14 of RA 6958).

However, RA 7160 expressly provides that All general and special laws, acts, city
charters, decrees [sic], executive orders, proclamations and administrative
regulations, or part of parts thereof which are inconsistent with any of the provisions
of this Code are hereby repealed or modified accordingly. (/f/, Section 534, RA
7160).

With that repealing clause in RA 7160, it is safe to infer and state that the tax
exemption provided for in RA 6958 creating petitioner had been expressly repealed
by the provisions of the New Local Government Code of 1991.

So that petitioner in this case has to pay the assessed realty tax of its properties
effective after January 1, 1992 until the present.

This Courts ruling finds expression to give impetus and meaning to the overall
objectives of the New Local Government Code of 1991, RA 7160. It is hereby
declared the policy of the State that the territorial and political subdivisions of the
State shall enjoy genuine and meaningful local autonomy to enable them to attain
their fullest development as self-reliant communities and make them more effective
partners in the attainment of national goals. Toward this end, the State shall
provide for a more responsive and accountable local government structure
instituted through a system of decentralization whereby local government units
shall be given more powers, authority, responsibilities, and resources. The process
of decentralization shall proceed from the national government to the local
government units. x x x[5]

Its motion for reconsideration having been denied by the trial court in its 4 May
1995 order, the petitioner filed the instant petition based on the following
assignment of errors:

I. RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE PETITIONER IS

VESTED WITH GOVERNMENT POWERS AND FUNCTIONS WHICH PLACE IT IN THE
SAME CATEGORY AS AN INSTRUMENTALITY OR AGENCY OF THE GOVERNMENT.

II. RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER IS LIABLE TO PAY REAL
PROPERTY TAXES TO THE CITY OF CEBU.

Anent the first assigned error, the petitioner asserts that although it is a
government-owned or controlled corporation, it is mandated to perform functions in
the same category as an instrumentality of Government. An instrumentality of
Government is one created to perform governmental functions primarily to promote
certain aspects of the economic life of the people.[6] Considering its task not
merely to efficiently operate and manage the Mactan-Cebu International Airport, but
more importantly, to carry out the Government policies of promoting and
developing the Central Visayas and Mindanao regions as centers of international
trade and tourism, and accelerating the development of the means of
transportation and communication in the country,[7] and that it is an attached
agency of the Department of Transportation and Communication (DOTC),[8] the
petitioner may stand in [sic] the same footing as an agency or instrumentality of
the national government. Hence, its tax exemption privilege under Section 14 of
its Charter cannot be considered withdrawn with the passage of the Local
Government Code of 1991 (hereinafter LGC) because Section 133 thereof
specifically states that the `taxing powers of local government units shall not
extend to the levy of taxes or fees or charges of any kind on the national
government, its agencies and instrumentalities.

As to the second assigned error, the petitioner contends that being an

instrumentality of the National Government, respondent City of Cebu has no power
nor authority to impose realty taxes upon it in accordance with the aforesaid
Section 133 of the LGC, as explained in Basco vs. Philippine Amusement and
Gaming Corporation:[9]

Local governments have no power to tax instrumentalities of the National

Government. PAGCOR is a government owned or controlled corporation with an
original charter, PD 1869. All of its shares of stock are owned by the National
Government. . . .

PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role
is governmental, which places it in the category of an agency or instrumentality of
the Government. Being an instrumentality of the Government, PAGCOR should be

and actually is exempt from local taxes. Otherwise, its operation might be
burdened, impeded or subjected to control by a mere Local government.

The states have no power by taxation or otherwise, to retard, impede, burden or in

any manner control the operation of constitutional laws enacted by Congress to
carry into execution the powers vested in the federal government. (McCulloch v.
Maryland, 4 Wheat 316, 4 L Ed. 579)

This doctrine emanates from the supremacy of the National Government over
local governments.

Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at least,
the instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it
can be agreed that no state or political subdivision can regulate a federal
instrumentality in such a way as to prevent it from consummating its federal
responsibilities, or even to seriously burden it in the accomplishment of them.
(Antieau, Modern Constitutional Law, Vol. 2, p. 140)

Otherwise, mere creatures of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable activities or
enterprise using the power to tax as a tool for regulation (U.S. v. Sanchez, 340 US
42). The power to tax which was called by Justice Marshall as the power to
destroy (Mc Culloch v. Maryland, supra) cannot be allowed to defeat an
instrumentality or creation of the very entity which has the inherent power to wield
it. (underscoring supplied)

It then concludes that the respondent Judge cannot therefore correctly say that the
questioned provisions of the Code do not contain any distinction between a
government corporation performing governmental functions as against one
performing merely proprietary ones such that the exemption privilege withdrawn
under the said Code would apply to all government corporations. For it is clear
from Section 133, in relation to Section 234, of the LGC that the legislature meant to
exclude instrumentalities of the national government from the taxing powers of the
local government units.

In its comment, respondent City of Cebu alleges that as a local government unit and
a political subdivision, it has the power to impose, levy, assess, and collect taxes
within its jurisdiction. Such power is guaranteed by the Constitution[10] and
enhanced further by the LGC. While it may be true that under its Charter the
petitioner was exempt from the payment of realty taxes,[11] this exemption was
withdrawn by Section 234 of the LGC. In response to the petitioners claim that
such exemption was not repealed because being an instrumentality of the National
Government, Section 133 of the LGC prohibits local government units from imposing
taxes, fees, or charges of any kind on it, respondent City of Cebu points out that the
petitioner is likewise a government-owned corporation, and Section 234 thereof
does not distinguish between government-owned or controlled corporations
performing governmental and purely proprietary functions. Respondent City of
Cebu urges this Court to apply by analogy its ruling that the Manila International
Airport Authority is a government-owned corporation,[12] and to reject the
application of Basco because it was promulgated . . . before the enactment and the
signing into law of R.A. No. 7160, and was not, therefore, decided in the light of
the spirit and intention of the framers of the said law.

As a general rule, the power to tax is an incident of sovereignty and is unlimited in

its range, acknowledging in its very nature no limits, so that security against its
abuse is to be found only in the responsibility of the legislature which imposes the
tax on the constituency who are to pay it. Nevertheless, effective limitations
thereon may be imposed by the people through their Constitutions.[13] Our
Constitution, for instance, provides that the rule of taxation shall be uniform and
equitable and Congress shall evolve a progressive system of taxation.[14] So potent
indeed is the power that it was once opined that the power to tax involves the
power to destroy.[15] Verily, taxation is a destructive power which interferes with
the personal and property rights of the people and takes from them a portion of
their property for the support of the government. Accordingly, tax statutes must be
construed strictly against the government and liberally in favor of the taxpayer.[16]
But since taxes are what we pay for civilized society,[17] or are the lifeblood of the
nation, the law frowns against exemptions from taxation and statutes granting tax
exemptions are thus construed strictissimi juris against the taxpayer and liberally in
favor of the taxing authority.[18] A claim of exemption from tax payments must be
clearly shown and based on language in the law too plain to be mistaken.[19]
Elsewise stated, taxation is the rule, exemption therefrom is the exception.[20]
However, if the grantee of the exemption is a political subdivision or
instrumentality, the rigid rule of construction does not apply because the practical
effect of the exemption is merely to reduce the amount of money that has to be
handled by the government in the course of its operations.[21]

The power to tax is primarily vested in the Congress; however, in our jurisdiction, it
may be exercised by local legislative bodies, no longer merely by virtue of a valid
delegation as before, but pursuant to direct authority conferred by Section 5, Article
X of the Constitution.[22] Under the latter, the exercise of the power may be subject
to such guidelines and limitations as the Congress may provide which, however,
must be consistent with the basic policy of local autonomy.

There can be no question that under Section 14 of R.A. No. 6958 the petitioner is
exempt from the payment of realty taxes imposed by the National Government or
any of its political subdivisions, agencies, and instrumentalities. Nevertheless, since
taxation is the rule and exemption therefrom the exception, the exemption may
thus be withdrawn at the pleasure of the taxing authority. The only exception to
this rule is where the exemption was granted to private parties based on material
consideration of a mutual nature, which then becomes contractual and is thus
covered by the non-impairment clause of the Constitution.[23]

The LGC, enacted pursuant to Section 3, Article X of the Constitution, provides for
the exercise by local government units of their power to tax, the scope thereof or its
limitations, and the exemptions from taxation.

Section 133 of the LGC prescribes the common limitations on the taxing powers of
local government units as follows:

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

(a)

Income tax, except when levied on banks and other financial institutions;

(b)

Documentary stamp tax;

(c)
Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis
causa, except as otherwise provided herein;

(d)
Customs duties, registration fees of vessel and wharfage on wharves,
tonnage dues, and all other kinds of customs fees, charges and dues except
wharfage on wharves constructed and maintained by the local government unit
concerned;

(e)
Taxes, fees and charges and other impositions upon goods carried into or
out of, or passing through, the territorial jurisdictions of local government units in
the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees
or charges in any form whatsoever upon such goods or merchandise;

(f) Taxes, fees or charges on agricultural and aquatic products when sold by
marginal farmers or fishermen;

(g)
Taxes on business enterprises certified to by the Board of Investments as
pioneer or non-pioneer for a period of six (6) and four (4) years, respectively from
the date of registration;

(h)
Excise taxes on articles enumerated under the National Internal Revenue
Code, as amended, and taxes, fees or charges on petroleum products;

(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar

transactions on goods or services except as otherwise provided herein;

(j) Taxes on the gross receipts of transportation contractors and persons engaged in
the transportation of passengers or freight by hire and common carriers by air, land
or water, except as provided in this Code;

(k)

Taxes on premiums paid by way of reinsurance or retrocession;

(l) Taxes, fees or charges for the registration of motor vehicles and for the issuance
of all kinds of licenses or permits for the driving thereof, except, tricycles;

(m)
Taxes, fees, or other charges on Philippine products actually exported,
except as otherwise provided herein;

(n)
Taxes, fees, or charges, on Countryside and Barangay Business
Enterprises and cooperatives duly registered under R.A. No. 6810 and Republic Act
Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938) otherwise known as the
Cooperatives Code of the Philippines respectively; and

(o)
TAXES, FEES OR CHARGES OF ANY KIND ON THE NATIONAL
GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES, AND LOCAL GOVERNMENT
UNITS. (emphasis supplied)

Needless to say, the last item (item o) is pertinent to this case. The taxes, fees or
charges referred to are of any kind; hence, they include all of these, unless
otherwise provided by the LGC. The term taxes is well understood so as to need
no further elaboration, especially in light of the above enumeration. The term
fees means charges fixed by law or ordinance for the regulation or inspection of
business or activity,[24] while charges are pecuniary liabilities such as rents or
fees against persons or property.[25]

Among the taxes enumerated in the LGC is real property tax, which is governed
by Section 232. It reads as follows:

SEC. 232.
Power to Levy Real Property Tax. A province or city or a municipality
within the Metropolitan Manila Area may levy an annual ad valorem tax on real
property such as land, building, machinery, and other improvements not hereafter
specifically exempted.

Section 234 of the LGC provides for the exemptions from payment of real property
taxes and withdraws previous exemptions therefrom granted to natural and juridical
persons, including government-owned and controlled corporations, except as
provided therein. It provides:

SEC. 234.
Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:

(a)
Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof had been granted, for
consideration or otherwise, to a taxable person;

(b)
Charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques, nonprofit or religious cemeteries and all lands, buildings and
improvements actually, directly, and exclusively used for religious, charitable or
educational purposes;

(c)
All machineries and equipment that are actually, directly and exclusively
used by local water districts and government-owned or controlled corporations
engaged in the supply and distribution of water and/or generation and transmission
of electric power;

(d)
All real property owned by duly registered cooperatives as provided for
under R.A. No. 6938; and

(e)
Machinery and equipment used for pollution control and environmental
protection.

Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by, all persons, whether natural or
juridical, including all government-owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code.

These exemptions are based on the ownership, character, and use of the property.
Thus:

(a)
Ownership Exemptions. Exemptions from real property taxes on the basis
of ownership are real properties owned by: (i) the Republic, (ii) a province, (iii) a city,
(iv) a municipality, (v) a barangay, and (vi) registered cooperatives.

(b)
Character Exemptions. Exempted from real property taxes on the basis of
their character are: (i) charitable institutions, (ii) houses and temples of prayer like
churches, parsonages or convents appurtenant thereto, mosques, and (iii) non-profit
or religious cemeteries.

(c)
Usage exemptions. Exempted from real property taxes on the basis of
the actual, direct and exclusive use to which they are devoted are: (i) all lands,
buildings and improvements which are actually directly and exclusively used for
religious, charitable or educational purposes; (ii) all machineries and equipment
actually, directly and exclusively used by local water districts or by governmentowned or controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power; and (iii) all machinery and
equipment used for pollution control and environmental protection.

To help provide a healthy environment in the midst of the modernization of the

country, all machinery and equipment for pollution control and environmental
protection may not be taxed by local governments.

2.
Other Exemptions Withdrawn. All other exemptions previously granted to
natural or juridical persons including government-owned or controlled corporations
are withdrawn upon the effectivity of the Code.[26]

Section 193 of the LGC is the general provision on withdrawal of tax exemption
privileges. It provides:

SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in

this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A.
6938, non-stock and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code.

On the other hand, the LGC authorizes local government units to grant tax
exemption privileges. Thus, Section 192 thereof provides:

SEC. 192. Authority to Grant Tax Exemption Privileges.-- Local government units
may, through ordinances duly approved, grant tax exemptions, incentives or reliefs
under such terms and conditions as they may deem necessary.

The foregoing sections of the LGC speak of: (a) the limitations on the taxing powers
of local government units and the exceptions to such limitations; and (b) the rule on
tax exemptions and the exceptions thereto. The use of exceptions or provisos in
these sections, as shown by the following clauses:

(1)
133;

unless otherwise provided herein in the opening paragraph of Section

(2)

Unless otherwise provided in this Code in Section 193;

(3)

not hereafter specifically exempted in Section 232; and

(4)

Except as provided herein in the last paragraph of Section 234

initially hampers a ready understanding of the sections. Note, too, that the
aforementioned clause in Section 133 seems to be inaccurately worded. Instead of
the clause unless otherwise provided herein, with the herein to mean, of course,
the section, it should have used the clause unless otherwise provided in this Code.
The former results in absurdity since the section itself enumerates what are beyond
the taxing powers of local government units and, where exceptions were intended,
the exceptions are explicitly indicated in the next. For instance, in item (a) which
excepts income taxes when levied on banks and other financial institutions; item
(d) which excepts wharfage on wharves constructed and maintained by the local
government unit concerned; and item (1) which excepts taxes, fees and charges
for the registration and issuance of licenses or permits for the driving of tricycles.
It may also be observed that within the body itself of the section, there are

exceptions which can be found only in other parts of the LGC, but the section
interchangeably uses therein the clause except as otherwise provided herein as in
items (c) and (i), or the clause except as provided in this Code in item (j). These
clauses would be obviously unnecessary or mere surplusages if the opening clause
of the section were Unless otherwise provided in this Code instead of Unless
otherwise provided herein. In any event, even if the latter is used, since under
Section 232 local government units have the power to levy real property tax, except
those exempted therefrom under Section 234, then Section 232 must be deemed to
qualify Section 133.

Thus, reading together Sections 133, 232, and 234 of the LGC, we conclude that as
a general rule, as laid down in Section 133, the taxing powers of local government
units cannot extend to the levy of, inter alia, taxes, fees and charges of any kind
on the National Government, its agencies and instrumentalities, and local
government units; however, pursuant to Section 232, provinces, cities, and
municipalities in the Metropolitan Manila Area may impose the real property tax
except on, inter alia, real property owned by the Republic of the Philippines or any
of its political subdivisions except when the beneficial use thereof has been granted,
for consideration or otherwise, to a taxable person, as provided in item (a) of the
first paragraph of Section 234.

As to tax exemptions or incentives granted to or presently enjoyed by natural or

juridical persons, including government-owned and controlled corporations, Section
193 of the LGC prescribes the general rule, viz., they are withdrawn upon the
effectivity of the LGC, except those granted to local water districts, cooperatives
duly registered under R.A. No. 6938, non-stock and non-profit hospitals and
educational institutions, and unless otherwise provided in the LGC. The latter
proviso could refer to Section 234 which enumerates the properties exempt from
real property tax. But the last paragraph of Section 234 further qualifies the
retention of the exemption insofar as real property taxes are concerned by limiting
the retention only to those enumerated therein; all others not included in the
enumeration lost the privilege upon the effectivity of the LGC. Moreover, even as to
real property owned by the Republic of the Philippines or any of its political
subdivisions covered by item (a) of the first paragraph of Section 234, the
exemption is withdrawn if the beneficial use of such property has been granted to a
taxable person for consideration or otherwise.

Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity
of the LGC, exemptions from payment of real property taxes granted to natural or
juridical persons, including government-owned or controlled corporations, except as

provided in the said section, and the petitioner is, undoubtedly, a governmentowned corporation, it necessarily follows that its exemption from such tax granted it
in Section 14 of its Charter, R.A. No. 6958, has been withdrawn. Any claim to the
contrary can only be justified if the petitioner can seek refuge under any of the
exceptions provided in Section 234, but not under Section 133, as it now asserts,
since, as shown above, the said section is qualified by Sections 232 and 234.

In short, the petitioner can no longer invoke the general rule in Section 133 that the
taxing powers of the local government units cannot extend to the levy of:

(o)
taxes, fees or charges of any kind on the National Government, its agencies or
instrumentalities, and local government units.

It must show that the parcels of land in question, which are real property, are any
one of those enumerated in Section 234, either by virtue of ownership, character, or
use of the property. Most likely, it could only be the first, but not under any explicit
provision of the said section, for none exists. In light of the petitioners theory that
it is an instrumentality of the Government, it could only be within the first item of
the first paragraph of the section by expanding the scope of the term Republic of
the Philippines to embrace its instrumentalities and agencies. For expediency,
we quote:

(a)
real property owned by the Republic of the Philippines, or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person.

This view does not persuade us. In the first place, the petitioners claim that it is an
instrumentality of the Government is based on Section 133(o), which expressly
mentions the word instrumentalities; and, in the second place, it fails to consider
the fact that the legislature used the phrase National Government, its agencies and
instrumentalities in Section 133(o), but only the phrase Republic of the Philippines
or any of its political subdivisions in Section 234(a).

The terms Republic of the Philippines and National Government are not
interchangeable. The former is broader and synonymous with Government of the
Republic of the Philippines which the Administrative Code of 1987 defines as the

corporate governmental entity through which the functions of government are

exercised throughout the Philippines, including, save as the contrary appears from
the context, the various arms through which political authority is made affective in
the Philippines, whether pertaining to the autonomous regions, the provincial, city,
municipal or barangay subdivisions or other forms of local government.[27] These
autonomous regions, provincial, city, municipal or barangay subdivisions are the
political subdivisions.[28]

On the other hand, National Government refers to the entire machinery of the
central government, as distinguished from the different forms of local
governments.[29] The National Government then is composed of the three great
departments: the executive, the legislative and the judicial.[30]

An agency of the Government refers to any of the various units of the

Government, including a department, bureau, office, instrumentality, or
government-owned or controlled corporation, or a local government or a distinct
unit therein;[31] while an instrumentality refers to any agency of the National
Government, not integrated within the department framework, vested with special
functions or jurisdiction by law, endowed with some if not all corporate powers,
administering special funds, and enjoying operational autonomy, usually through a
charter. This term includes regulatory agencies, chartered institutions and
government-owned and controlled corporations.[32]

If Section 234(a) intended to extend the exception therein to the withdrawal of the
exemption from payment of real property taxes under the last sentence of the said
section to the agencies and instrumentalities of the National Government
mentioned in Section 133(o), then it should have restated the wording of the latter.
Yet, it did not. Moreover, that Congress did not wish to expand the scope of the
exemption in Section 234(a) to include real property owned by other
instrumentalities or agencies of the government including government-owned and
controlled corporations is further borne out by the fact that the source of this
exemption is Section 40(a) of P.D. No. 464, otherwise known as The Real Property
Tax Code, which reads:

SEC. 40.
follows:

Exemptions from Real Property Tax. The exemption shall be as

(a)
Real property owned by the Republic of the Philippines or any of its political
subdivisions and any government-owned or controlled corporation so exempt by its
charter: Provided, however, That this exemption shall not apply to real property of
the above-mentioned entities the beneficial use of which has been granted, for
consideration or otherwise, to a taxable person.

Note that as reproduced in Section 234(a), the phrase and any government-owned
or controlled corporation so exempt by its charter was excluded. The justification
for this restricted exemption in Section 234(a) seems obvious: to limit further tax
exemption privileges, especially in light of the general provision on withdrawal of
tax exemption privileges in Section 193 and the special provision on withdrawal of
exemption from payment of real property taxes in the last paragraph of Section 234.
These policy considerations are consistent with the State policy to ensure autonomy
to local governments[33] and the objective of the LGC that they enjoy genuine and
meaningful local autonomy to enable them to attain their fullest development as
self-reliant communities and make them effective partners in the attainment of
national goals.[34] The power to tax is the most effective instrument to raise
needed revenues to finance and support myriad activities of local government units
for the delivery of basic services essential to the promotion of the general welfare
and the enhancement of peace, progress, and prosperity of the people. It may also
be relevant to recall that the original reasons for the withdrawal of tax exemption
privileges granted to government-owned and controlled corporations and all other
units of government were that such privilege resulted in serious tax base erosion
and distortions in the tax treatment of similarly situated enterprises, and there was
a need for these entities to share in the requirements of development, fiscal or
otherwise, by paying the taxes and other charges due from them.[35]

The crucial issues then to be addressed are: (a) whether the parcels of land in
question belong to the Republic of the Philippines whose beneficial use has been
granted to the petitioner, and (b) whether the petitioner is a taxable person.

Section 15 of the petitioners Charter provides:

Sec. 15. Transfer of Existing Facilities and Intangible Assets. All existing public
airport facilities, runways, lands, buildings and other properties, movable or
immovable, belonging to or presently administered by the airports, and all assets,
powers, rights, interests and privileges relating on airport works or air operations,
including all equipment which are necessary for the operations of air navigation,

aerodrome control towers, crash, fire, and rescue facilities are hereby transferred to
the Authority: Provided, however, that the operations control of all equipment
necessary for the operation of radio aids to air navigation, airways communication,
the approach control office, and the area control center shall be retained by the Air
Transportation Office. No equipment, however, shall be removed by the Air
Transportation Office from Mactan without the concurrence of the Authority. The
Authority may assist in the maintenance of the Air Transportation Office equipment.

The airports referred to are the Lahug Air Port in Cebu City and the Mactan
International Airport in the Province of Cebu,[36] which belonged to the Republic of
the Philippines, then under the Air Transportation Office (ATO).[37]

It may be reasonable to assume that the term lands refer to lands in Cebu City
then administered by the Lahug Air Port and includes the parcels of land the
respondent City of Cebu seeks to levy on for real property taxes. This section
involves a transfer of the lands, among other things, to the petitioner and not
just the transfer of the beneficial use thereof, with the ownership being retained by
the Republic of the Philippines.

This transfer is actually an absolute conveyance of the ownership thereof because

the petitioners authorized capital stock consists of, inter alia, the value of such
real estate owned and/or administered by the airports.[38] Hence, the petitioner is
now the owner of the land in question and the exception in Section 234(c) of the
LGC is inapplicable.

Moreover, the petitioner cannot claim that it was never a taxable person under its
Charter. It was only exempted from the payment of real property taxes. The grant
of the privilege only in respect of this tax is conclusive proof of the legislative intent
to make it a taxable person subject to all taxes, except real property tax.

Finally, even if the petitioner was originally not a taxable person for purposes of real
property tax, in light of the foregoing disquisitions, it had already become, even if it
be conceded to be an agency or instrumentality of the Government, a taxable
person for such purpose in view of the withdrawal in the last paragraph of Section
234 of exemptions from the payment of real property taxes, which, as earlier
adverted to, applies to the petitioner.

Accordingly, the position taken by the petitioner is untenable. Reliance on Basco vs.
Philippine Amusement and Gaming Corporation[39] is unavailing since it was
decided before the effectivity of the LGC. Besides, nothing can prevent Congress
from decreeing that even instrumentalities or agencies of the Government
performing governmental functions may be subject to tax. Where it is done
precisely to fulfill a constitutional mandate and national policy, no one can doubt its
wisdom.

WHEREFORE, the instant petition is DENIED. The challenged decision and order of
the Regional Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are
AFFIRMED.

No pronouncement as to costs.

LIGHT RAIL TRANSIT AUTHORITY, petitioner, vs. CENTRAL BOARD OF ASSESSMENT

APPEALS, BOARD OF ASSESSMENT APPEALS OF MANILA and the CITY ASSESSOR OF
MANILA, respondents.
DECISION
PANGANIBAN, J.:

The Light Rail Transit Authority and the Metro Transit Organization function as
service-oriented business entities, which provide valuable transportation facilities to
the paying public. In the absence, however, of any express grant of exemption in
their favor, they are subject to the payment of real property taxes.

The Case

In the Petition for Review before us, the Light Rail Transit Authority (LRTA)
challenges the November 15, 1996 Decision[1] of the Court of Appeals (CA) in CAGR SP No. 38137, which disposed as follows:

"WHEREFORE, premises considered, the appealed decision (dated October 15,

1994) of the Central Board of Assessment Appeals is hereby AFFIRMED, with costs
against the petitioner."[2]

The affirmed ruling of the Central Board of Assessment Appeals (CBAA) upheld the
June 26, 1992 Resolution of the Board of Assessment Appeals of Manila, which had
declared petitioner's carriageways and passenger terminals as improvements
subject to real property taxes.

The Facts

The undisputed facts are quoted by the Court of Appeals (CA) from the CBAA ruling,
as follows:[3]

"1. The LRTA is a government-owned and controlled corporation created and

organized under Executive Order No. 603, dated July 12, 1980 'x x x primarily
responsible for the construction, operation, maintenance and/or lease of light rail
transit system in the Philippines, giving due regard to the [reasonable requirements]
of the public transportation of the country' (LRTA vs. The Hon. Commission on Audit,
GR No. No. 88365);

"2. x x x [B]y reason of x x x Executive Order 603, LRTA acquired real properties x x
x constructed structural improvements, such as buildings, carriageways, passenger
terminal stations, and installed various kinds of machinery and equipment and
facilities for the purpose of its operations;

"3. x x x [F]or x x x an effective maintenance, operation and management, it

entered into a Contract of Management with the Meralco Transit Organization
(METRO) in which the latter undertook to manage, operate and maintain the Light
Rail Transit System owned by the LRTA subject to the specific stipulations contained
in said agreement, including payments of a management fee and real property
taxes (Add'l Exhibit "I", Records)

"4. That it commenced its operations in 1984, and that sometime that year,
Respondent-Appellee City Assessor of Manila assessed the real properties of
[petitioner], consisting of lands, buildings, carriageways and passenger terminal
stations, machinery and equipment which he considered real propert[y] under the
Real Property Tax Code, to commence with the year 1985;

"5. That [petitioner] paid its real property taxes on all its real property holdings,
except the carriageways and passenger terminal stations including the land where it
is constructed on the ground that the same are not real properties under the Real
Property Tax Code, and if the same are real propert[y], these x x x are for public
use/purpose, therefore, exempt from realty taxation, which claim was denied by the
Respondent-Appellee City Assessor of Manila; and

"6. x x x [Petitioner], aggrieved by the action of the Respondent-Appellee City

Assessor, filed an appeal with the Local Board of Assessment Appeals of Manila x x
x. Appellee, herein, after due hearing, in its resolution dated June 26, 1992, denied
[petitioner's] appeal, and declared that carriageways and passenger terminal
stations are improvements, therefore, are real propert[y] under the Code, and not
exempt from the payment of real property tax.

"A motion for reconsideration filed by [petitioner] was likewise denied."

The CA Ruling

The Court of Appeals held that petitioner's carriageways and passenger terminal
stations constituted real property or improvements thereon and, as such, were
taxable under the Real Property Tax Code. The appellate court emphasized that
such pieces of property did not fall under any of the exemptions listed in Section 40
of the aforementioned law. The reason was that they were not owned by the
government or any government-owned corporation which, as such, was exempt
from the payment of real property taxes. True, the government owned the real
property upon which the carriageways and terminal stations were built. However,
they were still taxable, because beneficial use had been transferred to petitioner, a
taxable entity.

The CA debunked the argument of petitioner that carriageways and terminals were
intended for public use. The former agreed, instead, with the CBAA. The CBAA had
concluded that since petitioner was not engaged in purely governmental or public
service, the latter's endeavors were proprietary. Indeed, petitioner was deemed as a
profit-oriented endeavor, serving as it did, only the paying public.

Hence, this Petition.[4]

The Issues

In its Memorandum,[5] petitioner urges the Court to resolve the following matters:

"I

The Honorable Court of Appeals erred in not holding that the carriageways and
terminal stations of petitioner are not improvements for purposes of the Real
Property Tax Code.

"II

The Honorable Court of Appeals erred in not holding that being attached to national
roads owned by the national government, subject carriageways and terminal
stations should be considered property of the national government.

"III

The Honorable Court of Appeals erred in not holding that payment of charges or
fares in the operation of the light rail transit system does not alter the nature of the
subject carriageways and terminal stations as devoted for public use.

"IV

The Honorable Court of Appeals erred in failing to consider the view advanced by
the Department of Finance, which takes charge of the overall collection of taxes,
that subject carriageways and terminal stations are not subject to realty taxes.

"V

The Honorable Court of Appeals erred in failing to consider that payment of the
realty taxes assessed is not warranted and should the legality of the questioned
assessment be upheld, the amount of the realty taxes assessed would far exceed
the annual earnings of petitioner, a government corporation."

The foregoing all point to one main issue: whether petitioner's carriageways and
passenger terminal stations are subject to real property taxes.

The Court's Ruling

The Petition has no merit.

Main Issue:
May Real Property Taxes be Assessed and Collected?

The Real Property Tax Code,[6] the law in force at the time of the assailed
assessment in 1984, mandated that "there shall be levied, assessed and collected
in all provinces, cities and municipalities an annual ad valorem tax on real property
such as lands, buildings, machinery and other improvements affixed or attached to
real property not hereinafter specifically exempted."[7]

Petitioner does not dispute that its subject carriageways and stations may be
considered real property under Article 415 of the Civil Code. However, it resolutely

argues that the same are improvements, not of its properties, but of the
government-owned national roads to which they are immovably attached. They are
thus not taxable as improvements under the Real Property Tax Code. In essence, it
contends that to impose a tax on the carriageways and terminal stations would be
to impose taxes on public roads.

The argument does not persuade. We quote with approval the solicitor general's
astute comment on this matter:

"There is no point in clarifying the concept of industrial accession to determine the

nature of the property when what is fundamentally important for purposes of tax
classification is to determine the character of the property subject [to] tax. The
character of tax as a property tax must be determined by its incidents, and form the
natural and legal effect thereof. It is irrelevant to associate the carriageways and/or
the passenger terminals as accessory improvements when the view of taxability is
focused on the character of the property. The latter situation is not a novel issue as
it has already been resolved by this Honorable Court in the case of City of Manila vs.
IAC (GR No. 71159, November 15, 1989) wherein it was held:

'The New Civil Code divides the properties into property for public and patrimonial
property (Art. 423), and further enumerates the property for public use as provincial
road, city streets, municipal streets, squares, fountains, public waters, public works
for public service paid for by said [provinces], cities or municipalities; all other
property is patrimonial without prejudice to provisions of special laws. (Art. 424,
Province of Zamboanga v. City of Zamboanga, 22 SCRA 1334 [1968])

xxx

'...while the following are corporate or proprietary property in character, viz:

'municipal water works, slaughter houses, markets, stables, bathing establishments,
wharves, ferries and fisheries.' Maintenance of parks, golf courses, cemeteries and
airports, among others, are also recognized as municipal or city activities of a
proprietary character (Dept. of Treasury v. City of Evansville; 60 NE 2nd 952)'

"The foregoing enumeration in law does not specify or include carriageway or

passenger terminals as inclusive of properties strictly for public use to exempt

petitioner's properties from taxes. Precisely, the properties of petitioner are not
exclusively considered as public roads being improvements placed upon the public
road, and this separability nature of the structure in itself physically distinguishes it
from a public road. Considering further that carriageways or passenger terminals
are elevated structures which are not freely accessible to the public, viz-a-viz roads
which are public improvements openly utilized by the public, the former are entirely
different from the latter.

"The character of petitioner's property, be it an improvements as otherwise

distinguished by petitioner, needs no further classification when the law already
classified it as patrimonial property that can be subject to tax. This is in line with the
old ruling that if the public works is not for such free public service, it is not within
the purview of the first paragraph of Art. 424 if the New Civil Code."[8]

Though the creation of the LRTA was impelled by public service -- to provide mass
transportation to alleviate the traffic and transportation situation in Metro Manila -its operation undeniably partakes of ordinary business. Petitioner is clothed with
corporate status and corporate powers in the furtherance of its proprietary
objectives.[9] Indeed, it operates much like any private corporation engaged in the
mass transport industry. Given that it is engaged in a service-oriented commercial
endeavor, its carriageways and terminal stations are patrimonial property subject to
tax, notwithstanding its claim of being a government-owned or controlled
corporation.

True, petitioner's carriageways and terminal stations are anchored, at certain points,
on public roads. However, it must be emphasized that these structures do not form
part of such roads, since the former have been constructed over the latter in such a
way that the flow of vehicular traffic would not be impeded. These carriageways and
terminal stations serve a function different from that of the public roads. The former
are part and parcel of the light rail transit (LRT) system which, unlike the latter, are
not open to use by the general public. The carriageways are accessible only to the
LRT trains, while the terminal stations have been built for the convenience of LRTA
itself and its customers who pay the required fare.

Basis of Assessment Is Actual Use of Real Property

Under the Real Property Tax Code, real property is classified for assessment
purposes on the basis of actual use,[10] which is defined as "the purpose for which
the property is principally or predominantly utilized by the person in possession of
the property."[11]

Petitioner argues that it merely operates and maintains the LRT system, and that
the actual users of the carriageways and terminal stations are the commuting
public. It adds that the public-use character of the LRT is not negated by the fact
that revenue is obtained from the latter's operations.

We do not agree. Unlike public roads which are open for use by everyone, the LRT is
accessible only to those who pay the required fare. It is thus apparent that
petitioner does not exist solely for public service, and that the LRT carriageways and
terminal stations are not exclusively for public use. Although petitioner is a public
utility, it is nonetheless profit-earning. It actually uses those carriageways and
terminal stations in its public utility business and earns money therefrom.

Petitioner Not Exempt from Payment of Real Property Taxes

In any event, there is another legal justification for upholding the assailed CA
Decision. Under the Real Property Tax Code, real property "owned by the Republic of
the Philippines or any of its political subdivisions and any government-owned or
controlled corporation so exempt by its charter, provided, however, that this
exemption shall not apply to real property of the abovenamed entities the beneficial
use of which has been granted, for consideration or otherwise, to a taxable
person."[12]

Executive Order No. 603, the charter of petitioner, does not provide for any real
estate tax exemption in its favor. Its exemption is limited to direct and indirect
taxes, duties or fees in connection with the importation of equipment not locally
available, as the following provision shows:

"ARTICLE 4

TAX AND DUTY EXEMPTIONS

Sec. 8. Equipment, Machineries, Spare Parts and Other Accessories and Materials. The importation of equipment, machineries, spare parts, accessories and other
materials, including supplies and services, used directly in the operations of the
Light Rails Transit System, not obtainable locally on favorable terms, out of any
funds of the authority including, as stated in Section 7 above, proceeds from foreign
loans credits or indebtedness, shall likewise be exempted from all direct and indirect
taxes, customs duties, fees, imposts, tariff duties, compensating taxes, wharfage
fees and other charges and restrictions, the provisions of existing laws to the
contrary notwithstanding."

Even granting that the national government indeed owns the carriageways and
terminal stations, the exemption would not apply because their beneficial use has
been granted to petitioner, a taxable entity.

Taxation is the rule and exemption is the exception. Any claim for tax exemption is
strictly construed against the claimant.[13] LRTA has not shown its eligibility for
exemption; hence, it is subject to the tax.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision of the Court
of Appeals AFFIRMED. Costs against the petitioner.

SO ORDERED.
LIGHT RAIL TRANSIT AUTHORITY, petitioner, vs. CENTRAL BOARD OF ASSESSMENT
APPEALS, BOARD OF ASSESSMENT APPEALS OF MANILA and the CITY ASSESSOR OF
MANILA, respondents.
DECISION
PANGANIBAN, J.:

The Light Rail Transit Authority and the Metro Transit Organization function as
service-oriented business entities, which provide valuable transportation facilities to
the paying public. In the absence, however, of any express grant of exemption in
their favor, they are subject to the payment of real property taxes.

The Case

In the Petition for Review before us, the Light Rail Transit Authority (LRTA)
challenges the November 15, 1996 Decision[1] of the Court of Appeals (CA) in CAGR SP No. 38137, which disposed as follows:

"WHEREFORE, premises considered, the appealed decision (dated October 15,

1994) of the Central Board of Assessment Appeals is hereby AFFIRMED, with costs
against the petitioner."[2]

The affirmed ruling of the Central Board of Assessment Appeals (CBAA) upheld the
June 26, 1992 Resolution of the Board of Assessment Appeals of Manila, which had
declared petitioner's carriageways and passenger terminals as improvements
subject to real property taxes.

The Facts

The undisputed facts are quoted by the Court of Appeals (CA) from the CBAA ruling,
as follows:[3]

"1. The LRTA is a government-owned and controlled corporation created and

organized under Executive Order No. 603, dated July 12, 1980 'x x x primarily
responsible for the construction, operation, maintenance and/or lease of light rail
transit system in the Philippines, giving due regard to the [reasonable requirements]
of the public transportation of the country' (LRTA vs. The Hon. Commission on Audit,
GR No. No. 88365);

"2. x x x [B]y reason of x x x Executive Order 603, LRTA acquired real properties x x
x constructed structural improvements, such as buildings, carriageways, passenger
terminal stations, and installed various kinds of machinery and equipment and
facilities for the purpose of its operations;

"3. x x x [F]or x x x an effective maintenance, operation and management, it

entered into a Contract of Management with the Meralco Transit Organization
(METRO) in which the latter undertook to manage, operate and maintain the Light
Rail Transit System owned by the LRTA subject to the specific stipulations contained
in said agreement, including payments of a management fee and real property
taxes (Add'l Exhibit "I", Records)

"4. That it commenced its operations in 1984, and that sometime that year,
Respondent-Appellee City Assessor of Manila assessed the real properties of
[petitioner], consisting of lands, buildings, carriageways and passenger terminal
stations, machinery and equipment which he considered real propert[y] under the
Real Property Tax Code, to commence with the year 1985;

"5. That [petitioner] paid its real property taxes on all its real property holdings,
except the carriageways and passenger terminal stations including the land where it
is constructed on the ground that the same are not real properties under the Real
Property Tax Code, and if the same are real propert[y], these x x x are for public
use/purpose, therefore, exempt from realty taxation, which claim was denied by the
Respondent-Appellee City Assessor of Manila; and

"6. x x x [Petitioner], aggrieved by the action of the Respondent-Appellee City

Assessor, filed an appeal with the Local Board of Assessment Appeals of Manila x x
x. Appellee, herein, after due hearing, in its resolution dated June 26, 1992, denied
[petitioner's] appeal, and declared that carriageways and passenger terminal
stations are improvements, therefore, are real propert[y] under the Code, and not
exempt from the payment of real property tax.

"A motion for reconsideration filed by [petitioner] was likewise denied."

The CA Ruling

The Court of Appeals held that petitioner's carriageways and passenger terminal
stations constituted real property or improvements thereon and, as such, were
taxable under the Real Property Tax Code. The appellate court emphasized that
such pieces of property did not fall under any of the exemptions listed in Section 40
of the aforementioned law. The reason was that they were not owned by the

government or any government-owned corporation which, as such, was exempt

from the payment of real property taxes. True, the government owned the real
property upon which the carriageways and terminal stations were built. However,
they were still taxable, because beneficial use had been transferred to petitioner, a
taxable entity.

The CA debunked the argument of petitioner that carriageways and terminals were
intended for public use. The former agreed, instead, with the CBAA. The CBAA had
concluded that since petitioner was not engaged in purely governmental or public
service, the latter's endeavors were proprietary. Indeed, petitioner was deemed as a
profit-oriented endeavor, serving as it did, only the paying public.

Hence, this Petition.[4]

The Issues

In its Memorandum,[5] petitioner urges the Court to resolve the following matters:

"I

The Honorable Court of Appeals erred in not holding that the carriageways and
terminal stations of petitioner are not improvements for purposes of the Real
Property Tax Code.

"II

The Honorable Court of Appeals erred in not holding that being attached to national
roads owned by the national government, subject carriageways and terminal
stations should be considered property of the national government.

"III

The Honorable Court of Appeals erred in not holding that payment of charges or
fares in the operation of the light rail transit system does not alter the nature of the
subject carriageways and terminal stations as devoted for public use.

"IV

The Honorable Court of Appeals erred in failing to consider the view advanced by
the Department of Finance, which takes charge of the overall collection of taxes,
that subject carriageways and terminal stations are not subject to realty taxes.

"V

The Honorable Court of Appeals erred in failing to consider that payment of the
realty taxes assessed is not warranted and should the legality of the questioned
assessment be upheld, the amount of the realty taxes assessed would far exceed
the annual earnings of petitioner, a government corporation."

The foregoing all point to one main issue: whether petitioner's carriageways and
passenger terminal stations are subject to real property taxes.

The Court's Ruling

The Petition has no merit.

Main Issue:
May Real Property Taxes be Assessed and Collected?

The Real Property Tax Code,[6] the law in force at the time of the assailed
assessment in 1984, mandated that "there shall be levied, assessed and collected

in all provinces, cities and municipalities an annual ad valorem tax on real property
such as lands, buildings, machinery and other improvements affixed or attached to
real property not hereinafter specifically exempted."[7]

Petitioner does not dispute that its subject carriageways and stations may be
considered real property under Article 415 of the Civil Code. However, it resolutely
argues that the same are improvements, not of its properties, but of the
government-owned national roads to which they are immovably attached. They are
thus not taxable as improvements under the Real Property Tax Code. In essence, it
contends that to impose a tax on the carriageways and terminal stations would be
to impose taxes on public roads.

The argument does not persuade. We quote with approval the solicitor general's
astute comment on this matter:

"There is no point in clarifying the concept of industrial accession to determine the

nature of the property when what is fundamentally important for purposes of tax
classification is to determine the character of the property subject [to] tax. The
character of tax as a property tax must be determined by its incidents, and form the
natural and legal effect thereof. It is irrelevant to associate the carriageways and/or
the passenger terminals as accessory improvements when the view of taxability is
focused on the character of the property. The latter situation is not a novel issue as
it has already been resolved by this Honorable Court in the case of City of Manila vs.
IAC (GR No. 71159, November 15, 1989) wherein it was held:

'The New Civil Code divides the properties into property for public and patrimonial
property (Art. 423), and further enumerates the property for public use as provincial
road, city streets, municipal streets, squares, fountains, public waters, public works
for public service paid for by said [provinces], cities or municipalities; all other
property is patrimonial without prejudice to provisions of special laws. (Art. 424,
Province of Zamboanga v. City of Zamboanga, 22 SCRA 1334 [1968])

xxx

'...while the following are corporate or proprietary property in character, viz:

'municipal water works, slaughter houses, markets, stables, bathing establishments,

wharves, ferries and fisheries.' Maintenance of parks, golf courses, cemeteries and
airports, among others, are also recognized as municipal or city activities of a
proprietary character (Dept. of Treasury v. City of Evansville; 60 NE 2nd 952)'

"The foregoing enumeration in law does not specify or include carriageway or

passenger terminals as inclusive of properties strictly for public use to exempt
petitioner's properties from taxes. Precisely, the properties of petitioner are not
exclusively considered as public roads being improvements placed upon the public
road, and this separability nature of the structure in itself physically distinguishes it
from a public road. Considering further that carriageways or passenger terminals
are elevated structures which are not freely accessible to the public, viz-a-viz roads
which are public improvements openly utilized by the public, the former are entirely
different from the latter.

"The character of petitioner's property, be it an improvements as otherwise

distinguished by petitioner, needs no further classification when the law already
classified it as patrimonial property that can be subject to tax. This is in line with the
old ruling that if the public works is not for such free public service, it is not within
the purview of the first paragraph of Art. 424 if the New Civil Code."[8]

Though the creation of the LRTA was impelled by public service -- to provide mass
transportation to alleviate the traffic and transportation situation in Metro Manila -its operation undeniably partakes of ordinary business. Petitioner is clothed with
corporate status and corporate powers in the furtherance of its proprietary
objectives.[9] Indeed, it operates much like any private corporation engaged in the
mass transport industry. Given that it is engaged in a service-oriented commercial
endeavor, its carriageways and terminal stations are patrimonial property subject to
tax, notwithstanding its claim of being a government-owned or controlled
corporation.

True, petitioner's carriageways and terminal stations are anchored, at certain points,
on public roads. However, it must be emphasized that these structures do not form
part of such roads, since the former have been constructed over the latter in such a
way that the flow of vehicular traffic would not be impeded. These carriageways and
terminal stations serve a function different from that of the public roads. The former
are part and parcel of the light rail transit (LRT) system which, unlike the latter, are
not open to use by the general public. The carriageways are accessible only to the

LRT trains, while the terminal stations have been built for the convenience of LRTA
itself and its customers who pay the required fare.

Basis of Assessment Is Actual Use of Real Property

Under the Real Property Tax Code, real property is classified for assessment
purposes on the basis of actual use,[10] which is defined as "the purpose for which
the property is principally or predominantly utilized by the person in possession of
the property."[11]

Petitioner argues that it merely operates and maintains the LRT system, and that
the actual users of the carriageways and terminal stations are the commuting
public. It adds that the public-use character of the LRT is not negated by the fact
that revenue is obtained from the latter's operations.

We do not agree. Unlike public roads which are open for use by everyone, the LRT is
accessible only to those who pay the required fare. It is thus apparent that
petitioner does not exist solely for public service, and that the LRT carriageways and
terminal stations are not exclusively for public use. Although petitioner is a public
utility, it is nonetheless profit-earning. It actually uses those carriageways and
terminal stations in its public utility business and earns money therefrom.

Petitioner Not Exempt from Payment of Real Property Taxes

In any event, there is another legal justification for upholding the assailed CA
Decision. Under the Real Property Tax Code, real property "owned by the Republic of
the Philippines or any of its political subdivisions and any government-owned or
controlled corporation so exempt by its charter, provided, however, that this
exemption shall not apply to real property of the abovenamed entities the beneficial
use of which has been granted, for consideration or otherwise, to a taxable
person."[12]

Executive Order No. 603, the charter of petitioner, does not provide for any real
estate tax exemption in its favor. Its exemption is limited to direct and indirect

taxes, duties or fees in connection with the importation of equipment not locally
available, as the following provision shows:
"ARTICLE 4
TAX AND DUTY EXEMPTIONS
Sec. 8. Equipment, Machineries, Spare Parts and Other Accessories and Materials. The importation of equipment, machineries, spare parts, accessories and other
materials, including supplies and services, used directly in the operations of the
Light Rails Transit System, not obtainable locally on favorable terms, out of any
funds of the authority including, as stated in Section 7 above, proceeds from foreign
loans credits or indebtedness, shall likewise be exempted from all direct and indirect
taxes, customs duties, fees, imposts, tariff duties, compensating taxes, wharfage
fees and other charges and restrictions, the provisions of existing laws to the
contrary notwithstanding."

Even granting that the national government indeed owns the carriageways and
terminal stations, the exemption would not apply because their beneficial use has
been granted to petitioner, a taxable entity.

Taxation is the rule and exemption is the exception. Any claim for tax exemption is
strictly construed against the claimant.[13] LRTA has not shown its eligibility for
exemption; hence, it is subject to the tax.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision of the Court
of Appeals AFFIRMED. Costs against the petitioner.

SO ORDERED.

G.R. No. L-66838

December 2, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT

OF TAX APPEALS, respondents.

T.A. Tejada & C.N. Lim for private respondent.

RESOLUTION

FELICIANO, J.:p

For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975
ending 30 June 1975, private respondent Procter and Gamble Philippine
Manufacturing Corporation ("P&G-Phil.") declared dividends payable to its parent
company and sole stockholder, Procter and Gamble Co., Inc. (USA) ("P&G-USA"),
amounting to P24,164,946.30, from which dividends the amount of P8,457,731.21
representing the thirty-five percent (35%) withholding tax at source was deducted.

On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner

of Internal Revenue a claim for refund or tax credit in the amount of P4,832,989.26
claiming, among other things, that pursuant to Section 24 (b) (1) of the National
Internal Revenue Code ("NITC"), 1 as amended by Presidential Decree No. 369, the
applicable rate of withholding tax on the dividends remitted was only fifteen percent
(15%) (and not thirty-five percent [35%]) of the dividends.

There being no responsive action on the part of the Commissioner, P&G-Phil., on 13

July 1977, filed a petition for review with public respondent Court of Tax Appeals
("CTA") docketed as CTA Case No. 2883. On 31 January 1984, the CTA rendered a
decision ordering petitioner Commissioner to refund or grant the tax credit in the
amount of P4,832,989.00.

On appeal by the Commissioner, the Court through its Second Division reversed the
decision of the CTA and held that:

(a)
P&G-USA, and not private respondent P&G-Phil., was the proper party to
claim the refund or tax credit here involved;

(b)
there is nothing in Section 902 or other provisions of the US Tax Code that
allows a credit against the US tax due from P&G-USA of taxes deemed to have been
paid in the Philippines equivalent to twenty percent (20%) which represents the
difference between the regular tax of thirty-five percent (35%) on corporations and
the tax of fifteen percent (15%) on dividends; and

(c)
private respondent P&G-Phil. failed to meet certain conditions necessary in
order that "the dividends received by its non-resident parent company in the US
(P&G-USA) may be subject to the preferential tax rate of 15% instead of 35%."

These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we

will deal with them seriatim in this Resolution resolving that Motion.

1.
There are certain preliminary aspects of the question of the capacity of P&GPhil. to bring the present claim for refund or tax credit, which need to be examined.
This question was raised for the first time on appeal, i.e., in the proceedings before
this Court on the Petition for Review filed by the Commissioner of Internal Revenue.
The question was not raised by the Commissioner on the administrative level, and
neither was it raised by him before the CTA.

We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to
defeat an otherwise valid claim for refund by raising this question of alleged
incapacity for the first time on appeal before this Court. This is clearly a matter of
procedure. Petitioner does not pretend that P&G-Phil., should it succeed in the claim
for refund, is likely to run away, as it were, with the refund instead of transmitting

such refund or tax credit to its parent and sole stockholder. It is commonplace that
in the absence of explicit statutory provisions to the contrary, the government must
follow the same rules of procedure which bind private parties. It is, for instance,
clear that the government is held to compliance with the provisions of Circular No.
1-88 of this Court in exactly the same way that private litigants are held to such
compliance, save only in respect of the matter of filing fees from which the Republic
of the Philippines is exempt by the Rules of Court.

More importantly, there arises here a question of fairness should the BIR, unlike any
other litigant, be allowed to raise for the first time on appeal questions which had
not been litigated either in the lower court or on the administrative level. For, if
petitioner had at the earliest possible opportunity, i.e., at the administrative level,
demanded that P&G-Phil. produce an express authorization from its parent
corporation to bring the claim for refund, then P&G-Phil. would have been able
forthwith to secure and produce such authorization before filing the action in the
instant case. The action here was commenced just before expiration of the two (2)year prescriptive period.

2.
The question of the capacity of P&G-Phil. to bring the claim for refund has
substantive dimensions as well which, as will be seen below, also ultimately relate
to fairness.

Under Section 306 of the NIRC, a claim for refund or tax credit filed with the
Commissioner of Internal Revenue is essential for maintenance of a suit for recovery
of taxes allegedly erroneously or illegally assessed or collected:

Sec. 306.
Recovery of tax erroneously or illegally collected. No suit or
proceeding shall be maintained in any court for the recovery of any national internal
revenue tax hereafter alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without authority, or of
any sum alleged to have been excessive or in any manner wrongfully collected, until
a claim for refund or credit has been duly filed with the Commissioner of Internal
Revenue; but such suit or proceeding may be maintained, whether or not such tax,
penalty, or sum has been paid under protest or duress. In any case, no such suit or
proceeding shall be begun after the expiration of two years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise
after payment: . . . (Emphasis supplied)

Section 309 (3) of the NIRC, in turn, provides:

Sec. 309.
Authority of Commissioner to Take Compromises and to Refund Taxes.
The Commissioner may:

xxx

xxx

xxx

(3)
credit or refund taxes erroneously or illegally received, . . . No credit or refund
of taxes or penalties shall be allowed unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within two (2) years after the payment of
the tax or penalty. (As amended by P.D. No. 69) (Emphasis supplied)

Since the claim for refund was filed by P&G-Phil., the question which arises is: is
P&G-Phil. a "taxpayer" under Section 309 (3) of the NIRC? The term "taxpayer" is
defined in our NIRC as referring to "any person subject to tax imposed by the Title
[on Tax on Income]." 2 It thus becomes important to note that under Section 53 (c)
of the NIRC, the withholding agent who is "required to deduct and withhold any tax"
is made " personally liable for such tax" and indeed is indemnified against any
claims and demands which the stockholder might wish to make in questioning the
amount of payments effected by the withholding agent in accordance with the
provisions of the NIRC. The withholding agent, P&G-Phil., is directly and
independently liable 3 for the correct amount of the tax that should be withheld
from the dividend remittances. The withholding agent is, moreover, subject to and
liable for deficiency assessments, surcharges and penalties should the amount of
the tax withheld be finally found to be less than the amount that should have been
withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly
considered a "taxpayer." 4 The terms liable for tax" and "subject to tax" both
connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually
impossible, to consider a person who is statutorily made "liable for tax" as not
"subject to tax." By any reasonable standard, such a person should be regarded as a
party in interest, or as a person having sufficient legal interest, to bring a suit for
refund of taxes he believes were illegally collected from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this

Court pointed out that a withholding agent is in fact the agent both of the
government and of the taxpayer, and that the withholding agent is not an ordinary
government agent:

The law sets no condition for the personal liability of the withholding agent to
attach. The reason is to compel the withholding agent to withhold the tax under all
circumstances. In effect, the responsibility for the collection of the tax as well as the
payment thereof is concentrated upon the person over whom the Government has
jurisdiction. Thus, the withholding agent is constituted the agent of both the
Government and the taxpayer. With respect to the collection and/or withholding of
the tax, he is the Government's agent. In regard to the filing of the necessary
income tax return and the payment of the tax to the Government, he is the agent of
the taxpayer. The withholding agent, therefore, is no ordinary government agent
especially because under Section 53 (c) he is held personally liable for the tax he is
duty bound to withhold; whereas the Commissioner and his deputies are not made
liable by law. 6 (Emphasis supplied)

If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of
the beneficial owner of the dividends with respect to the filing of the necessary
income tax return and with respect to actual payment of the tax to the government,
such authority may reasonably be held to include the authority to file a claim for
refund and to bring an action for recovery of such claim. This implied authority is
especially warranted where, is in the instant case, the withholding agent is the
wholly owned subsidiary of the parent-stockholder and therefore, at all times, under
the effective control of such parent-stockholder. In the circumstances of this case, it
seems particularly unreal to deny the implied authority of P&G-Phil. to claim a
refund and to commence an action for such refund.

We believe that, even now, there is nothing to preclude the BIR from requiring P&GPhil. to show some written or telexed confirmation by P&G-USA of the subsidiary's
authority to claim the refund or tax credit and to remit the proceeds of the refund.,
or to apply the tax credit to some Philippine tax obligation of, P&G-USA, before
actual payment of the refund or issuance of a tax credit certificate. What appears to
be vitiated by basic unfairness is petitioner's position that, although P&G-Phil. is
directly and personally liable to the Government for the taxes and any deficiency
assessments to be collected, the Government is not legally liable for a refund simply
because it did not demand a written confirmation of P&G-Phil.'s implied authority
from the very beginning. A sovereign government should act honorably and fairly at
all times, even vis-a-vis taxpayers.

We believe and so hold that, under the circumstances of this case, P&G-Phil. is
properly regarded as a "taxpayer" within the meaning of Section 309, NIRC, and as
impliedly authorized to file the claim for refund and the suit to recover such claim.

II

1.
We turn to the principal substantive question before us: the applicability to
the dividend remittances by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax
rate provided for in the following portion of Section 24 (b) (1) of the NIRC:

(b)

Tax on foreign corporations.

(1)
Non-resident corporation. A foreign corporation not engaged in trade and
business in the Philippines, . . ., shall pay a tax equal to 35% of the gross income
receipt during its taxable year from all sources within the Philippines, as . . .
dividends . . . Provided, still further, that on dividends received from a domestic
corporation liable to tax under this Chapter, the tax shall be 15% of the dividends,
which shall be collected and paid as provided in Section 53 (d) of this Code, subject
to the condition that the country in which the non-resident foreign corporation, is
domiciled shall allow a credit against the tax due from the non-resident foreign
corporation, taxes deemed to have been paid in the Philippines equivalent to 20%
which represents the difference between the regular tax (35%) on corporations and
the tax (15%) on dividends as provided in this Section . . .

The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to
non-resident corporate stockholders of a Philippine corporation, goes down to
fifteen percent (15%) if the country of domicile of the foreign stockholder
corporation "shall allow" such foreign corporation a tax credit for "taxes deemed
paid in the Philippines," applicable against the tax payable to the domiciliary
country by the foreign stockholder corporation. In other words, in the instant case,
the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall
allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines" applicable
against the US taxes of P&G-USA. The NIRC specifies that such tax credit for "taxes
deemed paid in the Philippines" must, as a minimum, reach an amount equivalent
to twenty (20) percentage points which represents the difference between the

regular thirty-five percent (35%) dividend tax rate and the preferred fifteen percent
(15%) dividend tax rate.

It is important to note that Section 24 (b) (1), NIRC, does not require that the US
must give a "deemed paid" tax credit for the dividend tax (20 percentage points)
waived by the Philippines in making applicable the preferred divided tax rate of
fifteen percent (15%). In other words, our NIRC does not require that the US tax law
deem the parent-corporation to have paid the twenty (20) percentage points of
dividend tax waived by the Philippines. The NIRC only requires that the US "shall
allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty
(20) percentage points waived by the Philippines.

2.
The question arises: Did the US law comply with the above requirement? The
relevant provisions of the US Intemal Revenue Code ("Tax Code") are the following:

Sec. 901 Taxes of foreign countries and possessions of United States.

(a)
Allowance of credit. If the taxpayer chooses to have the benefits of this
subpart, the tax imposed by this chapter shall, subject to the applicable limitation of
section 904, be credited with the amounts provided in the applicable paragraph of
subsection (b) plus, in the case of a corporation, the taxes deemed to have been
paid under sections 902 and 960. Such choice for any taxable year may be made or
changed at any time before the expiration of the period prescribed for making a
claim for credit or refund of the tax imposed by this chapter for such taxable year.
The credit shall not be allowed against the tax imposed by section 531 (relating to
the tax on accumulated earnings), against the additional tax imposed for the
taxable year under section 1333 (relating to war loss recoveries) or under section
1351 (relating to recoveries of foreign expropriation losses), or against the personal
holding company tax imposed by section 541.

(b)
Amount allowed. Subject to the applicable limitation of section 904, the
following amounts shall be allowed as the credit under subsection (a):

(a)
Citizens and domestic corporations. In the case of a citizen of the United
States and of a domestic corporation, the amount of any income, war profits, and

excess profits taxes paid or accrued during the taxable year to any foreign country
or to any possession of the United States; and

xxx

xxx

xxx

Sec.

902. Credit for corporate stockholders in foreign corporation.

(A)
Treatment of Taxes Paid by Foreign Corporation. For purposes of this
subject, a domestic corporation which owns at least 10 percent of the voting stock
of a foreign corporation from which it receives dividends in any taxable year shall

xxx

xxx

xxx

(2)
to the extent such dividends are paid by such foreign corporation out of
accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such
foreign corporation is a less developed country corporation, be deemed to have paid
the same proportion of any income, war profits, or excess profits taxes paid or
deemed to be paid by such foreign corporation to any foreign country or to any
possession of the United States on or with respect to such accumulated profits,
which the amount of such dividends bears to the amount of such accumulated
profits.

xxx

xxx

xxx

(c)

Applicable Rules

(1)
Accumulated profits defined. For purposes of this section, the term
"accumulated profits" means with respect to any foreign corporation,

(A)
for purposes of subsections (a) (1) and (b) (1), the amount of its gains,
profits, or income computed without reduction by the amount of the income, war

profits, and excess profits taxes imposed on or with respect to such profits or
income by any foreign country. . . .; and

(B)
for purposes of subsections (a) (2) and (b) (2), the amount of its gains,
profits, or income in excess of the income, war profits, and excess profits taxes
imposed on or with respect to such profits or income.

The Secretary or his delegate shall have full power to determine from the
accumulated profits of what year or years such dividends were paid, treating
dividends paid in the first 20 days of any year as having been paid from the
accumulated profits of the preceding year or years (unless to his satisfaction shows
otherwise), and in other respects treating dividends as having been paid from the
most recently accumulated gains, profits, or earning. . . . (Emphasis supplied)

Close examination of the above quoted provisions of the US Tax Code 7 shows the
following:

a.
US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of
the dividend tax actually paid (i.e., withheld) from the dividend remittances to P&GUSA;

b.
US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax
credit 8 for a proportionate part of the corporate income tax actually paid to the
Philippines by P&G-Phil.

The parent-corporation P&G-USA is "deemed to have paid" a portion of the

Philippine corporate income tax although that tax was actually paid by its Philippine
subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid" concept merely reflects
economic reality, since the Philippine corporate income tax was in fact paid and
deducted from revenues earned in the Philippines, thus reducing the amount
remittable as dividends to P&G-USA. In other words, US tax law treats the Philippine
corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a
part of the economic cost of carrying on business operations in the Philippines
through the medium of P&G-Phil. and here earning profits. What is, under US law,
deemed paid by P&G- USA are not "phantom taxes" but instead Philippine corporate
income taxes actually paid here by P&G-Phil., which are very real indeed.

It is also useful to note that both (i) the tax credit for the Philippine dividend tax
actually withheld, and (ii) the tax credit for the Philippine corporate income tax
actually paid by P&G Phil. but "deemed paid" by P&G-USA, are tax credits available
or applicable against the US corporate income tax of P&G-USA. These tax credits are
allowed because of the US congressional desire to avoid or reduce double taxation
of the same income stream. 9

In order to determine whether US tax law complies with the requirements for
applicability of the reduced or preferential fifteen percent (15%) dividend tax rate
under Section 24 (b) (1), NIRC, it is necessary:

a.
to determine the amount of the 20 percentage points dividend tax waived by
the Philippine government under Section 24 (b) (1), NIRC, and which hence goes to
P&G-USA;

b.
to determine the amount of the "deemed paid" tax credit which US tax law
must allow to P&G-USA; and

c.
to ascertain that the amount of the "deemed paid" tax credit allowed by US
law is at least equal to the amount of the dividend tax waived by the Philippine
Government.

Amount (a), i.e., the amount of the dividend tax waived by the Philippine
government is arithmetically determined in the following manner:

P100.00 Pretax net corporate income earned by P&G-Phil.

x 35% Regular Philippine corporate income tax rate

P35.00 Paid to the BIR by P&G-Phil. as Philippine

corporate income tax.

P100.00
-35.00

P65.00 Available for remittance as dividends to P&G-USA

P65.00 Dividends remittable to P&G-USA

x 35% Regular Philippine dividend tax rate under Section 24
(b) (1), NIRC
P22.75 Regular dividend tax

P65.00 Dividends remittable to P&G-USA

x 15% Reduced dividend tax rate under Section 24 (b) (1), NIRC

P9.75 Reduced dividend tax

P22.75 Regular dividend tax under Section 24 (b) (1), NIRC

-9.75 Reduced dividend tax under Section 24 (b) (1), NIRC

P13.00 Amount of dividend tax waived by Philippine

=====

government under Section 24 (b) (1), NIRC.

Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned
by P&G-Phil. Amount (a) is also the minimum amount of the "deemed paid" tax
credit that US tax law shall allow if P&G-USA is to qualify for the reduced or
preferential dividend tax rate under Section 24 (b) (1), NIRC.

Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax
law allows under Section 902, Tax Code, may be computed arithmetically as follows:

P65.00 Dividends remittable to P&G-USA

- 9.75 Dividend tax withheld at the reduced (15%) rate

P55.25 Dividends actually remitted to P&G-USA

P35.00 Philippine corporate income tax paid by P&G-Phil.

to the BIR

Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
=

x P35.00

Amount of accumulated

P65.00

= P29.75 10
======

profits earned by
P&G-Phil. in excess
of income tax

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate
of 15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by
Section 902 US Tax Code for Philippine corporate income tax "deemed paid" by the
parent but actually paid by the wholly-owned subsidiary.

Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the
Philippine government), Section 902, US Tax Code, specifically and clearly complies
with the requirements of Section 24 (b) (1), NIRC.

3.
It is important to note also that the foregoing reading of Sections 901 and
902 of the US Tax Code is identical with the reading of the BIR of Sections 901 and
902 of the US Tax Code is identical with the reading of the BIR of Sections 901 and
902 as shown by administrative rulings issued by the BIR.

The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then
Acting Commissioner of Intemal Revenue Efren I. Plana, later Associate Justice of
this Court, the relevant portion of which stated:

However, after a restudy of the decision in the American Chicle Company case and
the provisions of Section 901 and 902 of the U.S. Internal Revenue Code, we find
merit in your contention that our computation of the credit which the U.S. tax law
allows in such cases is erroneous as the amount of tax "deemed paid" to the
Philippine government for purposes of credit against the U.S. tax by the recipient of
dividends includes a portion of the amount of income tax paid by the corporation
declaring the dividend in addition to the tax withheld from the dividend remitted. In
other words, the U.S. government will allow a credit to the U.S. corporation or
recipient of the dividend, in addition to the amount of tax actually withheld, a
portion of the income tax paid by the corporation declaring the dividend. Thus, if a
Philippine corporation wholly owned by a U.S. corporation has a net income of
P100,000, it will pay P25,000 Philippine income tax thereon in accordance with
Section 24(a) of the Tax Code. The net income, after income tax, which is P75,000,
will then be declared as dividend to the U.S. corporation at 15% tax, or P11,250, will
be withheld therefrom. Under the aforementioned sections of the U.S. Internal
Revenue Code, U.S. corporation receiving the dividend can utilize as credit against
its U.S. tax payable on said dividends the amount of P30,000 composed of:

(1)

The tax "deemed paid" or indirectly paid on the dividend arrived at as follows:

P75,000 x P25,000 =

P18,750

100,000 **

(2)

The amount of 15% of

P75,000 withheld

11,250


P30,000

The amount of P18,750 deemed paid and to be credited against the U.S. tax on the
dividends received by the U.S. corporation from a Philippine subsidiary is clearly
more than 20% requirement of Presidential Decree No. 369 as 20% of P75,000.00
the dividends to be remitted under the above example, amounts to P15,000.00 only.

In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is
hereby amended in the sense that the dividends to be remitted by your client to its
parent company shall be subject to the withholding tax at the rate of 15% only.

This ruling shall have force and effect only for as long as the present pertinent
provisions of the U.S. Federal Tax Code, which are the bases of the ruling, are not
revoked, amended and modified, the effect of which will reduce the percentage of
tax deemed paid and creditable against the U.S. tax on dividends remitted by a
foreign corporation to a U.S. corporation. (Emphasis supplied)

The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to
Basic Foods Corporation and BIR Ruling dated 20 October 1987 addressed to
Castillo, Laman, Tan and Associates. In other words, the 1976 Ruling of Hon. Efren I.
Plana was reiterated by the BIR even as the case at bar was pending before the CTA
and this Court.

4.
We should not overlook the fact that the concept of "deemed paid" tax credit,
which is embodied in Section 902, US Tax Code, is exactly the same "deemed paid"
tax credit found in our NIRC and which Philippine tax law allows to Philippine
corporations which have operations abroad (say, in the United States) and which,
therefore, pay income taxes to the US government.

Section 30 (c) (3) and (8), NIRC, provides:

(d)
Sec. 30.
Deductions from Gross Income.In computing net income, there
shall be allowed as deductions . . .

(c)

Taxes. . . .

xxx

xxx

xxx

(3)
Credits against tax for taxes of foreign countries. If the taxpayer signifies in
his return his desire to have the benefits of this paragraphs, the tax imposed by this
Title shall be credited with . . .

(a)
Citizen and Domestic Corporation. In the case of a citizen of the Philippines
and of domestic corporation, the amount of net income, war profits or excess
profits, taxes paid or accrued during the taxable year to any foreign country.
(Emphasis supplied)

Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a
Philippine corporation for taxes actually paid by it to the US governmente.g., for
taxes collected by the US government on dividend remittances to the Philippine
corporation. This Section of the NIRC is the equivalent of Section 901 of the US Tax
Code.

Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code,
and provides as follows:

(8)
Taxes of foreign subsidiary. For the purposes of this subsection a domestic
corporation which owns a majority of the voting stock of a foreign corporation from
which it receives dividends in any taxable year shall be deemed to have paid the
same proportion of any income, war-profits, or excess-profits taxes paid by such
foreign corporation to any foreign country, upon or with respect to the accumulated
profits of such foreign corporation from which such dividends were paid, which the
amount of such dividends bears to the amount of such accumulated profits:
Provided, That the amount of tax deemed to have been paid under this subsection
shall in no case exceed the same proportion of the tax against which credit is taken
which the amount of such dividends bears to the amount of the entire net income of
the domestic corporation in which such dividends are included. The term
"accumulated profits" when used in this subsection reference to a foreign

corporation, means the amount of its gains, profits, or income in excess of the
income, war-profits, and excess-profits taxes imposed upon or with respect to such
profits or income; and the Commissioner of Internal Revenue shall have full power
to determine from the accumulated profits of what year or years such dividends
were paid; treating dividends paid in the first sixty days of any year as having been
paid from the accumulated profits of the preceding year or years (unless to his
satisfaction shown otherwise), and in other respects treating dividends as having
been paid from the most recently accumulated gains, profits, or earnings. In the
case of a foreign corporation, the income, war-profits, and excess-profits taxes of
which are determined on the basis of an accounting period of less than one year,
the word "year" as used in this subsection shall be construed to mean such
accounting period. (Emphasis supplied)

Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a
Philippine parent corporation for taxes "deemed paid" by it, that is, e.g., for taxes
paid to the US by the US subsidiary of a Philippine-parent corporation. The
Philippine parent or corporate stockholder is "deemed" under our NIRC to have paid
a proportionate part of the US corporate income tax paid by its US subsidiary,
although such US tax was actually paid by the subsidiary and not by the Philippine
parent.

Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be
allowed by US law to P&G-USA, is the same "deemed paid" tax credit that Philippine
law allows to a Philippine corporation with a wholly- or majority-owned subsidiary in
(for instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax
Code, is no more a credit for "phantom taxes" than is the "deemed paid" tax credit
granted in Section 30 (c) (8), NIRC.

III

1.
The Second Division of the Court, in holding that the applicable dividend tax
rate in the instant case was the regular thirty-five percent (35%) rate rather than
the reduced rate of fifteen percent (15%), held that P&G-Phil. had failed to prove
that its parent, P&G-USA, had in fact been given by the US tax authorities a
"deemed paid" tax credit in the amount required by Section 24 (b) (1), NIRC.

We believe, in the first place, that we must distinguish between the legal question
before this Court from questions of administrative implementation arising after the
legal question has been answered. The basic legal issue is of course, this: which is
the applicable dividend tax rate in the instant case: the regular thirty-five percent
(35%) rate or the reduced fifteen percent (15%) rate? The question of whether or
not P&G-USA is in fact given by the US tax authorities a "deemed paid" tax credit in
the required amount, relates to the administrative implementation of the applicable
reduced tax rate.

In the second place, Section 24 (b) (1), NIRC, does not in fact require that the
"deemed paid" tax credit shall have actually been granted before the applicable
dividend tax rate goes down from thirty-five percent (35%) to fifteen percent (15%).
As noted several times earlier, Section 24 (b) (1), NIRC, merely requires, in the case
at bar, that the USA "shall allow a credit against the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ."
There is neither statutory provision nor revenue regulation issued by the Secretary
of Finance requiring the actual grant of the "deemed paid" tax credit by the US
Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%)
dividend rate becomes applicable. Section 24 (b) (1), NIRC, does not create a tax
exemption nor does it provide a tax credit; it is a provision which specifies when a
particular (reduced) tax rate is legally applicable.

In the third place, the position originally taken by the Second Division results in a
severe practical problem of administrative circularity. The Second Division in effect
held that the reduced dividend tax rate is not applicable until the US tax credit for
"deemed paid" taxes is actually given in the required minimum amount by the US
Internal Revenue Service to P&G-USA. But, the US "deemed paid" tax credit cannot
be given by the US tax authorities unless dividends have actually been remitted to
the US, which means that the Philippine dividend tax, at the rate here applicable,
was actually imposed and collected. 11 It is this practical or operating circularity
that is in fact avoided by our BIR when it issues rulings that the tax laws of
particular foreign jurisdictions (e.g., Republic of Vanuatu 12 Hongkong, 13 Denmark,
14 etc.) comply with the requirements set out in Section 24 (b) (1), NIRC, for
applicability of the fifteen percent (15%) tax rate. Once such a ruling is rendered,
the Philippine subsidiary begins to withhold at the reduced dividend tax rate.

A requirement relating to administrative implementation is not properly imposed as

a condition for the applicability, as a matter of law, of a particular tax rate. Upon the
other hand, upon the determination or recognition of the applicability of the reduced

tax rate, there is nothing to prevent the BIR from issuing implementing regulations
that would require P&G Phil., or any Philippine corporation similarly situated, to
certify to the BIR the amount of the "deemed paid" tax credit actually subsequently
granted by the US tax authorities to P&G-USA or a US parent corporation for the
taxable year involved. Since the US tax laws can and do change, such implementing
regulations could also provide that failure of P&G-Phil. to submit such certification
within a certain period of time, would result in the imposition of a deficiency
assessment for the twenty (20) percentage points differential. The task of this Court
is to settle which tax rate is applicable, considering the state of US law at a given
time. We should leave details relating to administrative implementation where they
properly belong with the BIR.

2.
An interpretation of a tax statute that produces a revenue flow for the
government is not, for that reason alone, necessarily the correct reading of the
statute. There are many tax statutes or provisions which are designed, not to trigger
off an instant surge of revenues, but rather to achieve longer-term and broadergauge fiscal and economic objectives. The task of our Court is to give effect to the
legislative design and objectives as they are written into the statute even if, as in
the case at bar, some revenues have to be foregone in that process.

The economic objectives sought to be achieved by the Philippine Government by

reducing the thirty-five percent (35%) dividend rate to fifteen percent (15%) are set
out in the preambular clauses of P.D. No. 369 which amended Section 24 (b) (1),
NIRC, into its present form:

WHEREAS, it is imperative to adopt measures responsive to the requirements of a

developing economy foremost of which is the financing of economic development
programs;

WHEREAS, nonresident foreign corporations with investments in the Philippines are

taxed on their earnings from dividends at the rate of 35%;

WHEREAS, in order to encourage more capital investment for large projects an

appropriate tax need be imposed on dividends received by non-resident foreign
corporations in the same manner as the tax imposed on interest on foreign loans;

xxx

xxx

xxx

(Emphasis supplied)

More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign
equity investment in the Philippines by reducing the tax cost of earning profits here
and thereby increasing the net dividends remittable to the investor. The foreign
investor, however, would not benefit from the reduction of the Philippine dividend
tax rate unless its home country gives it some relief from double taxation (i.e.,
second-tier taxation) (the home country would simply have more "post-R.P. tax"
income to subject to its own taxing power) by allowing the investor additional tax
credits which would be applicable against the tax payable to such home country.
Accordingly, Section 24 (b) (1), NIRC, requires the home or domiciliary country to
give the investor corporation a "deemed paid" tax credit at least equal in amount to
the twenty (20) percentage points of dividend tax foregone by the Philippines, in the
assumption that a positive incentive effect would thereby be felt by the investor.

The net effect upon the foreign investor may be shown arithmetically in the
following manner:

P65.00 Dividends remittable to P&G-USA (please

see page 392 above
- 9.75 Reduced R.P. dividend tax withheld by P&G-Phil.

P55.25 Dividends actually remitted to P&G-USA

P55.25
x 46% Maximum US corporate income tax rate

P25.415US corporate tax payable by P&G-USA

without tax credits

P25.415
- 9.75 US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)

P15.66 US corporate income tax payable after Section 901

tax credit.

P55.25
- 15.66

P39.59 Amount received by P&G-USA net of R.P. and U.S.

=====

taxes without "deemed paid" tax credit.

P25.415
- 29.75 "Deemed paid" tax credit under Section 902 US
Tax Code (please see page 18 above)

-0-

US corporate income tax payable on dividends

======

remitted by P&G-Phil. to P&G-USA after

Section 902 tax credit.

P55.25 Amount received by P&G-USA net of RP and US

======

taxes after Section 902 tax credit.

It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax
Code, could offset the US corporate income tax payable on the dividends remitted

by P&G-Phil. The result, in fine, could be that P&G-USA would after US tax credits,
still wind up with P55.25, the full amount of the dividends remitted to P&G-USA net
of Philippine taxes. In the calculation of the Philippine Government, this should
encourage additional investment or re-investment in the Philippines by P&G-USA.

3.
It remains only to note that under the Philippines-United States Convention
"With Respect to Taxes on Income," 15 the Philippines, by a treaty commitment,
reduced the regular rate of dividend tax to a maximum of twenty percent (20%) of
the gross amount of dividends paid to US parent corporations:

Art 11. Dividends

xxx

xxx

xxx

(2)
The rate of tax imposed by one of the Contracting States on dividends
derived from sources within that Contracting State by a resident of the other
Contracting State shall not exceed

(a)

25 percent of the gross amount of the dividend; or

(b)
When the recipient is a corporation, 20 percent of the gross amount of the
dividend if during the part of the paying corporation's taxable year which precedes
the date of payment of the dividend and during the whole of its prior taxable year (if
any), at least 10 percent of the outstanding shares of the voting stock of the paying
corporation was owned by the recipient corporation.

xxx

xxx

xxx

(Emphasis supplied)

The Tax Convention, at the same time, established a treaty obligation on the part of
the United States that it "shall allow" to a US parent corporation receiving dividends
from its Philippine subsidiary "a [tax] credit for the appropriate amount of taxes paid
or accrued to the Philippines by the Philippine [subsidiary] .16 This is, of course,
precisely the "deemed paid" tax credit provided for in Section 902, US Tax Code,
discussed above. Clearly, there is here on the part of the Philippines a deliberate
undertaking to reduce the regular dividend tax rate of twenty percent (20%) is a
maximum rate, there is still a differential or additional reduction of five (5)
percentage points which compliance of US law (Section 902) with the requirements
of Section 24 (b) (1), NIRC, makes available in respect of dividends from a Philippine
subsidiary.

We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax
credit which it seeks.

WHEREFORE, for all the foregoing, the Court Resolved to GRANT private
respondent's Motion for Reconsideration dated 11 May 1988, to SET ASIDE the
Decision of the and Division of the Court promulgated on 15 April 1988, and in lieu
thereof, to REINSTATE and AFFIRM the Decision of the Court of Tax Appeals in CTA
Case No. 2883 dated 31 January 1984 and to DENY the Petition for Review for lack
of merit. No pronouncement as to costs.

Narvasa, Gutierrez, Jr., Grio-Aquino, Medialdea and Romero, JJ., concur.

Fernan, C.J., is on leave.

CIR vs. Marubeni

Facts:

CIR assails the CA decision which affirmed CTA, ordering CIR to desist from
collecting the 1985 deficiency income, branch profit remittance and contractors
taxes from Marubeni Corp after finding the latter to have properly availed of the tax
amnesty under EO 41 & 64, as amended.

Marubeni, a Japanese corporation, engaged in general import and export trading,

financing and construction, is duly registered in the Philippines with Manila branch
office. CIR examined the Manila branchs books of accounts for fiscal year ending
March 1985, and found that respondent had undeclared income from contracts with
NDC and Philphos for construction of a wharf/port complex and ammonia storage
complex respectively.

On August 27, 1986, Marubeni received a letter from CIR assessing it for several
deficiency taxes. CIR claims that the income respondent derived were income from
Philippine sources, hence subject to internal revenue taxes. On Sept 1986,
respondent filed 2 petitions for review with CTA: the first, questioned the deficiency
income, branch profit remittance and contractors tax assessments and second
questioned the deficiency commercial brokers assessment.

On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 198185, and that taxpayers who wished to avail this should on or before Oct 31, 1986.
Marubeni filed its tax amnesty return on Oct 30, 1986.

On Nov 17, 1986, EO 64 expanded EO 41s scope to include estate and donors
taxes under Title 3 and business tax under Chap 2, Title 5 of NIRC, extended the
period of availment to Dec 15, 1986 and stated those who already availed amnesty
under EO 41 should file an amended return to avail of the new benefits. Marubeni
filed a supplemental tax amnesty return on Dec 15, 1986.

CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled
the deficiency taxes. CA affirmed on appeal.

Issue:

W/N Marubeni is exempted from paying tax

Held:

Yes.

1. On date of effectivity

CIR claims Marubeni is disqualified from the tax amnesty because it falls under the
exception in Sec 4b of EO 41:

Sec. 4. Exceptions.The following taxpayers may not avail themselves of the

amnesty herein granted: xxx b) Those with income tax cases already filed in Court
as of the effectivity hereof;

Petitioner argues that at the time respondent filed for income tax amnesty on Oct
30, 1986, a case had already been filed and was pending before the CTA and
Marubeni therefore fell under the exception. However, the point of reference is the
date of effectivity of EO 41 and that the filing of income tax cases must have been
made before and as of its effectivity.

EO 41 took effect on Aug 22, 1986. The case questioning the 1985 deficiency was
filed with CTA on Sept 26, 1986. When EO 41 became effective, the case had not
yet been filed. Marubeni does not fall in the exception and is thus, not disqualified

from availing of the amnesty under EO 41 for taxes on income and branch profit
remittance.

The difficulty herein is with respect to the contractors tax assessment (business
tax) and respondents availment of the amnesty under EO 64, which expanded EO
41s coverage. When EO 64 took effect on Nov 17, 1986, it did not provide for
exceptions to the coverage of the amnesty for business, estate and donors taxes.
Instead, Section 8 said EO provided that:

Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not
contrary to or inconsistent with this amendatory Executive Order shall remain in full
force and effect.

Due to the EO 64 amendment, Sec 4b cannot be construed to refer to EO 41 and its

date of effectivity. The general rule is that an amendatory act operates
prospectively. It may not be given a retroactive effect unless it is so provided
expressly or by necessary implication and no vested right or obligations of contract
are thereby impaired.

2. On situs of taxation

Marubeni contends that assuming it did not validly avail of the amnesty, it is still not
liable for the deficiency tax because the income from the projects came from the
Offshore Portion as opposed to Onshore Portion. It claims all materials and
equipment in the contract under the Offshore Portion were manufactured and
completed in Japan, not in the Philippines, and are therefore not subject to
Philippine taxes.

(BG: Marubeni won in the public bidding for projects with government corporations
NDC and Philphos. In the contracts, the prices were broken down into a Japanese
Yen Portion (I and II) and Philippine Pesos Portion and financed either by OECF or by
suppliers credit. The Japanese Yen Portion I corresponds to the Foreign Offshore
Portion, while Japanese Yen Portion II and the Philippine Pesos Portion correspond to
the Philippine Onshore Portion. Marubeni has already paid the Onshore Portion, a
fact that CIR does not deny.)

CIR argues that since the two agreements are turn-key, they call for the supply of
both materials and services to the client, they are contracts for a piece of work and
are indivisible. The situs of the two projects is in the Philippines, and the materials
provided and services rendered were all done and completed within the territorial
jurisdiction of the Philippines. Accordingly, respondents entire receipts from the
contracts, including its receipts from the Offshore Portion, constitute income from
Philippine sources. The total gross receipts covering both labor and materials should
be subjected to contractors tax (a tax on the exercise of a privilege of selling
services or labor rather than a sale on products).

Marubeni, however, was able to sufficiently prove in trial that not all its work was
performed in the Philippines because some of them were completed in Japan (and in
fact subcontracted) in accordance with the provisions of the contracts. All services
for the design, fabrication, engineering and manufacture of the materials and
equipment under Japanese Yen Portion I were made and completed in Japan. These
services were rendered outside Philippines taxing jurisdiction and are therefore not
subject to contractors tax. Petition denied.