G.R. No.

L-66838 April 15, 1988 partnerships, in accordance with the

following:
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. Twenty-five per cent upon the amount by
PROCTER & GAMBLE PHILIPPINE MANUFACTURING which the taxable net income does not
CORPORATION & THE COURT OF TAX exceed one hundred thousand pesos; and
APPEALS,respondents.
Thirty-five per cent upon the amount by
which the taxable net income exceeds one
hundred thousand pesos.
PARAS, J.:
After taxation its net profit was P36,735,216.00. Out of
This is a petition for review on certiorari filed by the herein said amount it declared a dividend in favor of its sole
petitioner, Commissioner of Internal Revenue, seeking the corporate stockholder and parent corporation PMC-U.S.A.
reversal of the decision of the Court of Tax Appeals dated in the total sum of P17,707,460.00 which latter amount
January 31, 1984 in CTA Case No. 2883 entitled "Procter was subjected to Philippine taxation of 35% or
and Gamble Philippine Manufacturing Corporation vs. P6,197,611.23 as provided for in Section 24(b) of the
Bureau of Internal Revenue," which declared petitioner Philippine Tax Code which reads in full:
therein, Procter and Gamble Philippine Manufacturing
Corporation to be entitled to the sought refund or tax SECTION 1. The first paragraph of
credit in the amount of P4,832,989.00 representing the subsection (b) of Section 24 of the
alleged overpaid withholding tax at source and ordering National Bureau Internal Revenue Code,
payment thereof. as amended, is hereby further amended to
read as follows:
The antecedent facts that precipitated the instant petition
are as follows: (b) Tax on foreign
corporations. — 41) Non-
Private respondent, Procter and Gamble Philippine resident corporation. — A
Manufacturing Corporation (hereinafter referred to as foreign corporation not
PMC-Phil.), a corporation duly organized and existing engaged in trade or
under and by virtue of the Philippine laws, is engaged in business in the
business in the Philippines and is a wholly owned Philippines, including a
subsidiary of Procter and Gamble, U.S.A. herein referred to foreign life insurance
as PMC-USA), a non-resident foreign corporation in the company not engaged in
Philippines, not engaged in trade and business therein. As the life insurance business
such PMC-U.S.A. is the sole shareholder or stockholder of in the Philippines, shall
PMC Phil., as PMC-U.S.A. owns wholly or by 100% the pay a tax equal to 35% of
voting stock of PMC Phil. and is entitled to receive income the gross income received
from PMC-Phil. in the form of dividends, if not rents or during its taxable year
royalties. In addition, PMC-Phil has a legal personality from all sources within the
separate and distinct from PMC-U.S.A. (Rollo, pp. 122- Philippines, as interest
123). (except interest on foreign
loans which shall be
For the taxable year ending June 30, 1974 PMC-Phil. subject to 15% tax),
realized a taxable net income of P56,500,332.00 and dividends, rents, royalties,
accordingly paid the corresponding income tax thereon salaries, wages,
equivalent to P25%-35% or P19,765,116.00 as provided premiums, annuities,
for under Section 24(a) of the Philippine Tax Code, the compensations,
pertinent portion of which reads: remunerations for
technical services or
otherwise, emoluments or
SEC. 24. Rates of tax on corporation. — a)
other fixed or
Tax on domestic corporations. — A tax is
determinable, annual,
hereby imposed upon the taxable net
periodical or casual gains,
income received during each taxable year
profits, and income, and
from all sources by every corporation
capital gains: Provided,
organized in, or geting under the laws of
however, That premiums
the Philippines, and partnerships, no
shall not include re-
matter how created or organized, but not
insurance premium
including general professional
Provided, further, That
 cinematograpy film
owners, lessors, or
distributors, shall pay a
tax of 15% on their gross
income from sources
within the Philippines:
Provided, still further That
on dividends received
from a domestic
corporation hable to tax
under this Chapter, the
tax shall be 15% of the
dividends received, 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: Provided,
finally That regional or
area headquarters
established in the
Philippines by
multinational corporations
and which headquarters
do not earn or derive
income from the
Philippines and which act
as supervisory,
communications and
coordinating centers for
their affiliates, subsidiaries
or branches in the Asia-
Pacific Region shall not be
subject to tax.
For the taxable year ending June 30, 1975 PMC-Phil.
realized a taxable net income of P8,735,125.00 which was
subjected to Philippine taxation at the rate of 25%-35% or
P2,952,159.00, thereafter leaving a net profit of
P5,782,966.00. As in the 2nd quarter of 1975, PMC-Phil.
again declared a dividend in favor of PMC-U.S.A. at the tax
rate of 35% or P6,457,485.00.
In July, 1977 PMC-Phil., invoking the tax-sparing credit
provision in Section 24(b) as aforequoted, as the
withholding agent of the Philippine government, with
respect to the dividend taxes paid by PMC-U.S.A., filed a
claim with the herein petitioner, Commissioner of Internal
Revenue, for the refund of the 20 percentage-point
portion of the 35 percentage-point whole tax paid, arising
allegedly from the alleged "overpaid withholding tax at
source or overpaid withholding tax in the amount of
P4,832,989.00," computed as follows:
Dividend Tax
Income withheld
PMC-U.S.A. at source
at
35%
P17,707,460 P6,196,611
6,457,485 2,260,119
P24,164,946 P8,457,731
There being no immediate action by the BIR on PMC-Phils'
letter-claim the latter sought the intervention of the CTA
when on July 13, 1977 it filed with herein respondent
court a petition for review docketed as CTA No. 2883
entitled "Procter and Gamble Philippine Manufacturing
Corporation vs. The Commissioner of Internal Revenue,"
praying that it be declared entitled to the refund or tax
credit claimed and ordering respondent therein to refund
to it the amount of P4,832,989.00, or to issue tax credit in
its favor in lieu of tax refund. (Rollo, p. 41)
On the other hand therein respondent, Commissioner of
qqqInterlaal Revenue, in his answer, prayed for the
dismissal of said Petition and for the denial of the claim for
refund. (Rollo, p. 48)
On January 31, 1974 the Court of Tax Appeals in its
decision (Rollo, p. 63) ruled in favor of the herein
petitioner, the dispositive portion of the same reading as
follows:
Accordingly, petitioner is entitled to the
sought refund or tax credit of the amount
representing the overpaid withholding tax
at source and the payment therefor by the
respondent hereby ordered. No costs.
SO ORDERED.
Hence this petition.
The Second Division of the Court without giving due
course to said petition resolved to require the respondents
to comment (Rollo, p. 74). Said comment was filed on
November 8, 1984 (Rollo, pp. 83-90). Thereupon this
Court by resolution dated December 17, 1984 resolved to
give due course to the petition and to consider
respondents' comulent on the petition as Answer. (Rollo,
p. 93)
Petitioner was required to file brief on January 21, 1985
(Rollo, p. 96). Petitioner filed his brief on May 13, 1985
(Rollo, p. 107), while private respondent PMC Phil filed its
brief on August 22, 1985.
Petitioner raised the following assignments of errors:
I
THE COURT OF TAX APPEALS ERRED IN HOLDING
WITHOUT ANY BASIS IN FACT AND IN LAW, THAT THE
HEREIN RESPONDENT PROCTER & GAMBLE PHILIPPINE
MANUFACTURING CORPORATION (PMC-PHIL. FOR
SHORT)IS ENTITLED TO THE SOUGHT REFUND OR TAX
CREDIT OF P4,832,989.00, REPRESENTING ALLEGEDLY
THE DIVIDED TAX OVER WITHHELD BY PMC-PHIL. UPON
REMITTANCE OF DIVIDEND INCOME IN THE TOTAL SUM
OF P24,164,946.00 TO PROCTER & GAMBLE, USA (PMC-
USA FOR SHORT).
II
THE COURT OF TAX APPEALS ERRED IN HOLDING,
WITHOUT ANY BASIS IN FACT AND IN LAW, THAT PMC-
USA, A NON-RESIDENT FOREIGN CORPORATION UNDER
SECTION 24(b) (1) OF THE PHILIPPINE TAX CODE AND A
DOMESTIC CORPORATION DOMICILED IN THE UNITED
STATES, IS ENTITLED UNDER THE U.S. TAX CODE
AGAINST ITS U.S. FEDERAL TAXES TO A UNITED STATES
FOREIGN TAX CREDIT EQUIVALENT TO AT LEAST THE 20
PERCENTAGE-POINT PORTION (OF THE 35 PERCENT
DIVIDEND TAX) SPARED OR WAIVED OR OTHERWISE
CONSIDERED OR DEEMED PAID BY THE PHILIPPINE
GOVERNMENT.
The sole issue in this case is whether or not private
respondent is entitled to the preferential 15% tax rate on
dividends declared and remitted to its parent corporation.
From this issue two questions are posed by the petitioner
Commissioner of Internal Revenue, and they are (1)
Whether or not PMC-Phil. is the proper party to claim the
refund and (2) Whether or not the U. S. allows as tax
credit the "deemed paid" 20% Philippine Tax on such
dividends?
The petitioner maintains that it is the PMC-U.S.A., the tax
payer and not PMC-Phil. the remitter or payor of the
dividend income, and a mere withholding agent for and in
behalf of the Philippine Government, which should be
legally entitled to receive the refund if any. (Rollo, p. 129)
It will be observed at the outset that petitioner raised this
issue for the first time in the Supreme Court. He did not
raise it at the administrative level, nor at the Court of Tax
Appeals. As clearly ruled by Us "To allow a litigant to
assume a different posture when he comes before the
court and challenges the position he had accepted at the
administrative level," would be to sanction a procedure
whereby the Court-which is supposed to review
administrative determinations would not review, but
determine and decide for the first time, a question not
raised at the administrative forum." Thus it is well settled
that under the same underlying principle of prior
exhaustion of administrative remedies, on the judicial
level, issues not raised in the lower court cannot generally
be raised for the first time on appeal. (Pampanga Sugar
Dev. Co., Inc. v. CIR, 114 SCRA 725 [1982]; Garcia v.
C.A., 102 SCRA 597 [1981]; Matialonzo v. Servidad, 107
SCRA 726 [1981]),
Nonetheless it is axiomatic that the State can never be in
estoppel, and this is particularly true in matters involving
taxation. The errors of certain administrative officers
should never be allowed to jeopardize the government's
financial position.
The submission of the Commissioner of Internal Revenue
that PMC-Phil. is but a withholding agent of the
government and therefore cannot claim reimbursement of
the alleged over paid taxes, is completely meritorious. The
real party in interest being the mother corporation in the
United States, it follows that American entity is the real
party in interest, and should have been the claimant in this
case.
Closely intertwined with the first assignment of error is the
issue of whether or not PMC-U.S.A. — a non-resident
foreign corporation under Section 24(b)(1) of the Tax
Code (the subsidiary of an American) a domestic
corporation domiciled in the United States, is entitled
under the U.S. Tax Code to a United States Foreign Tax
Credit equivalent to at least the 20 percentage paid
portion (of the 35% dividend tax) spared or waived as
otherwise considered or deemed paid by the government.
The law pertinent to the issue is Section 902 of the U.S.
Internal Revenue Code, as amended by Public Law 87-
834, the law governing tax credits granted to U.S.
corporations on dividends received from foreign
corporations, which to the extent applicable reads:
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-
(1) to the extent such
dividends are paid by
 such foreign corporation
out of accumulated profits
[as defined in subsection
(c) (1) (a)] of a year for
which such foreign
corporation is not 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 (determined
without regard to Section
78) bears to the amount
of such accumulated
profits in excess of such
income, war profits, and
excess profits taxes (other
than those deemed paid);
and
(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
purpose 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,
was 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 earnings. .. (Rollo, pp. 55-56)
To Our mind there is nothing in the aforecited provision
that would justify tax return of the disputed 15% to the
private respondent. Furthermore, as ably argued by the
petitioner, the private respondent failed to meet certain
conditions necessary in order that the dividends received
by the non-resident parent company in the United States
may be subject to the preferential 15% tax instead of
35%. Among other things, the private respondent failed:
(1) to show the actual amount credited by the U.S.
government against the income tax due from PMC-U.S.A.
on the dividends received from private respondent; (2) to
present the income tax return of its mother company for
1975 when the dividends were received; and (3) to submit
any duly authenticated document showing that the U.S.
government credited the 20% tax deemed paid in the
Philippines.
PREMISES CONSIDERED, the petition is GRANTED and the
decision appealed from, is REVERSED and SET ASIDE.
SO ORDERED. equivalent to 20 percentage points which represents the
difference between the regular 35% dividend tax rate and
Yap (Chairman), Melencio-Herrera, Padilla and Sarmiento, the reduced 15% tax rate. Thus, the test is if USA “shall
JJ., concur. allow” P&G USA a tax credit for ”taxes deemed paid in the
Philippines” applicable against the US taxes of P&G USA,
and such tax credit must reach at least 20 percentage
points. Requirements were met.
NON-RESIDENT FOREIGN CORPORATION- DIVIDENDS

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax
rate will be applied to dividend remittances to non-resident
corporate stockholders of a Philippine corporation. This
rate goes down to 15% ONLY 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.
However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount
equivalent to 20 percentage points
FACTS:
NOTES: Breakdown:
a) Deemed paid requirement: US Internal Revenue Code,
Sec 902: a domestic corporation (owning 10% of remitting
foreign corporation) shall be deemed to have paid a
proportionate extent of taxes paid by such foreign
corporation upon its remittance of dividends to domestic
corporation.
b) 20 percentage points requirement: (computation is as
follows)
P 100.00 -- corporate income earned by P&G Phils
x 35% -- Philippine income tax rate
P 35.00 -- paid by P&G Phil as corporate income tax

Procter and Gamble Philippines declared dividends payable

to its parent company and sole stockholder, P&G USA. P 100.00
Such dividends amounted to Php 24.1M. P&G Phil paid a - 35.00
35% dividend withholding tax to the BIR which amounted 65. 00 -- available for remittance
to Php 8.3M It subsequently filed a claim with the
Commissioner of Internal Revenue for a refund or tax
credit, claiming that pursuant to Section 24(b)(1) of the P 65. 00
National Internal Revenue Code, as amended by x 35% -- Regular Philippine dividend tax rate
Presidential Decree No. 369, the applicable rate of P 22.75 -- regular dividend tax
withholding tax on the dividends remitted was only 15%.

P 65.0o
x 15% -- Reduced dividend tax rate
MAIN ISSUE: P 9.75 -- reduced dividend tax

Whether or not P&G Philippines is entitled to the refund or

tax credit. P 65.00 -- dividends remittable
- 9.75 -- dividend tax withheld at reduced rate
P 55.25 -- dividends actually remitted to P&G USA

HELD:
Dividends actually
remitted by P&G Phil = P 55.25
YES. P&G Philippines is entitled. ---------------------------------- ------------- x P35 = P29.75
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax Amount of accumulated P 65.00
rate will be applied to dividend remittances to non-resident profits earned
corporate stockholders of a Philippine corporation. This
rate goes down to 15% ONLY IF he country of domicile of
the foreign stockholder corporation “shall allow” such
P35 is the income tax paid.
foreign corporation a tax credit for “taxes deemed paid in
P29.75 is the tax credit allowed by Sec 902 of US Tax
the Philippines,” applicable against the tax payable to the
Code for Phil corporate income tax ‘deemed paid’ by the
domiciliary country by the foreign stockholder corporation.
parent company. Since P29.75 is much higher than P13,
However, such tax credit for “taxes deemed paid in the
Sec 902 US Tax Code complies with the requirements of
Philippines” MUST, as a minimum, reach an amount
sec 24 NIRC. (I did not understand why these were
divided and multiplied. Point is, requirements were met)
Reason behind the law:
Since the US Congress desires to avoid or reduce double
taxation of the same income stream, it allows a tax credit
of both (i) the Philippine dividend tax actually withheld,
and (ii) the tax credit for the Philippine corporate income
tax actually paid by P&G Philippines but “deemed paid” by
P&G USA.
Moreover, under the Philippines-United States Convention
“With Respect to Taxes on Income,” the Philippines, by
treaty commitment, reduced the regular rate of dividend
tax to a maximum of 20% of he gross amount of
dividends paid to US parent corporations, and 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].
Note:
The NIRC does not require that the US tax law deem the
parent corporation to have paid the 20 percentage points
of dividend tax waived by the Philippines. It only requires
that the US “shall allow” P&G-USA a “deemed paid” tax
credit in an amount equivalent to the 20 percentage points
waived by the Philippines. Section 24(b)(1) 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.
Section 24(b)(1) of the 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 by allowing the
investor additional tax credits which would be applicable
against the tax payable to such home country. Accordingly
Section 24(b)(1) of the NIRC requires the home or
domiciliary country to give the investor corporation a
“deemed paid” tax credit at least equal in amount to the
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.
G.R. No. L-68375 April 15, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
WANDER PHILIPPINES, INC. AND THE COURT OF TAX
APPEALS, respondents.
The Solicitor General for petitioner.
Felicisimo R. Quiogue and Cirilo P. Noel for respondents.
BIDIN, J.:
This is a petition for review on certiorari of the January 19,
1984 Decision of the Court of Tax Appeals * in C.T.A. Case
No.2884, entitled Wander Philippines, Inc. vs.
Commissioner of Internal Revenue, holding that Wander
Philippines, Inc. is entitled to the preferential rate of 15%
withholding tax on the dividends remitted to its foreign
parent company, the Glaro S.A. Ltd. of Switzerland, a non-
resident foreign corporation.
Herein private respondent, Wander Philippines, Inc.
(Wander, for short), is a domestic corporation organized
under Philippine laws. It is wholly-owned subsidiary of the
Glaro S.A. Ltd. (Glaro for short), a Swiss corporation not
engaged in trade or business in the Philippines.
On July 18, 1975, Wander filed its withholding tax return
for the second quarter ending June 30, 1975 and remitted
to its parent company, Glaro dividends in the amount of
P222,000.00, on which 35% withholding tax thereof in the
amount of P77,700.00 was withheld and paid to the
Bureau of Internal Revenue.
Again, on July 14, 1976, Wander filed a withholding tax
return for the second quarter ending June 30, 1976 on the
dividends it remitted to Glaro amounting to P355,200.00,
on wich 35% tax in the amount of P124,320.00 was
withheld and paid to the Bureau of Internal Revenue.
On July 5, 1977, Wander filed with the Appellate Division
of the Internal Revenue a claim for refund and/or tax
credit in the amount of P115,400.00, contending that it is
liable only to 15% withholding tax in accordance with
Section 24 (b) (1) of the Tax Code, as amended by
Presidential Decree Nos. 369 and 778, and not on the
basis of 35% which was withheld and paid to and collected
by the government.
Petitioner herein, having failed to act on the above-said
claim for refund, on July 15, 1977, Wander filed a petition
with respondent Court of Tax Appeals.
On October 6, 1977, petitioner file his Answer.
On January 19, 1984, respondent Court of Tax Appeals
rendered a Decision, the decretal portion of which reads:
 WHEREFORE, respondent is hereby
ordered to grant a refund and/or tax
credit to petitioner in the amount of
P115,440.00 representing overpaid
withholding tax on dividends remitted by it
to the Glaro S.A. Ltd. of Switzerland
during the second quarter of the years
1975 and 1976.
On March 7, 1984, petitioner filed a Motion for
Reconsideration but the same was denied in a Resolution
dated August 13, 1984. Hence, the instant petition.
Petitioner raised two (2) assignment of errors, to wit:
I In any event, the submission of petitioner that Wander is
ASSUMING THAT THE TAX REFUND IN THE CASE AT BAR
IS ALLOWABLE AT ALL, THE COURT OF TAX APPEALS
ERRED INHOLDING THAT THE HEREIN RESPONDENT
WANDER PHILIPPINES, INC. IS ENTITLED TO THE SAID
REFUND.
II
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT
SWITZERLAND, THE HOME COUNTRY OF GLARO S.A.
LTD. (THE PARENT COMPANY OF THE HEREIN
RESPONDENT WANDER PHILIPPINES, INC.), GRANTS TO
SAID GLARO S.A. LTD. AGAINST ITS SWISS INCOME TAX
LIABILITY A TAX CREDIT EQUIVALENT TO THE 20
PERCENTAGE-POINT PORTION (OF THE 35 PERCENT
PHILIPPINE DIVIDEND TAX) SPARED OR WAIVED OR
OTHERWISE DEEMED AS IF PAID IN THE PHILIPPINES
UNDER SECTION 24 (b) (1) OF THE PHILIPPINE TAX
CODE.
The sole issue in this case is whether or not private
respondent Wander is entitled to the preferential rate of
15% withholding tax on dividends declared and remitted
to its parent corporation, Glaro.
From this issue, two questions were posed by petitioner:
(1) Whether or not Wander is the proper party to claim the
refund; and (2) Whether or not Switzerland allows as tax
credit the "deemed paid" 20% Philippine Tax on such
dividends.
Petitioner maintains and argues that it is Glaro the tax
payer, and not Wander, the remitter or payor of the
dividend income and a mere withholding agent for and in
behalf of the Philippine Government, which should be
legally entitled to receive the refund if any.
It will be noted, however, that Petitioner's above-entitled
argument is being raised for the first time in this Court. It
was never raised at the administrative level, or at the
Court of Tax Appeals. To allow a litigant to assume a
different posture when he comes before the court and
challenge the position he had accepted at the
administrative level, would be to sanction a procedure
whereby the Court—which is supposed to review
administrative determinations—would not review, but
determine and decide for the first time, a question not
raised at the administrative forum. Thus, it is well settled
that under the same underlying principle of prior
exhaustion of administrative remedies, on the judicial
level, issues not raised in the lower court cannot be raised
for the first time on appeal (Aguinaldo Industries
Corporation vs. Commissioner of Internal Revenue, 112
SCRA 136; Pampanga Sugar Dev. Co., Inc. vs. CIR, 114
SCRA 725; Garcia vs. Court of Appeals, 102 SCRA 597;
Matialonzo vs. Servidad, 107 SCRA 726,
but a withholding agent of the government and therefore
cannot claim reimbursement of the alleged overpaid taxes,
is untenable. It will be recalled, that said corporation is
first and foremost a wholly owned subsidiary of Glaro. The
fact that it became a withholding agent of the government
which was not by choice but by compulsion under Section
53 (b) of the Tax Code, cannot by any stretch of the
imagination be considered as an abdication of its
responsibility to its mother company. Thus, this Court
construing Section 53 (b) of the Internal Revenue Code
held that "the obligation imposed thereunder upon the
withholding agent is compulsory." It is a device to insure
the collection by the Philippine Government of taxes on
incomes, derived from sources in the Philippines, by aliens
who are outside the taxing jurisdiction of this Court
(Commissioner of Internal Revenue vs. Malayan Insurance
Co., Inc., 21 SCRA 944). In fact, Wander may be assessed
for deficiency withholding tax at source, plus penalties
consisting of surcharge and interest (Section 54, NLRC).
Therefore, as the Philippine counterpart, Wander is the
proper entity who should for the refund or credit of
overpaid withholding tax on dividends paid or remitted by
Glaro.
Closely intertwined with the first assignment of error is the
issue of whether or not Switzerland, the foreign country
where Glaro is domiciled, grants to Glaro a tax credit
against the tax due it, equivalent to 20%, or the difference
between the regular 35% rate of the preferential 15%
rate. The dispute in this issue lies on the fact that
Switzerland does not impose any income tax on dividends
received by Swiss corporation from corporations domiciled
in foreign countries.
Section 24 (b) (1) of the Tax Code, as amended by P.D.
369 and 778, the law involved in this case, reads:
Sec. 1. The first paragraph of subsection
(b) of Section 24 of the National Internal
Revenue Code, as amended, is hereby
further amended to read as follows:
(b) Tax on foreign
corporations. — 1) Non-
 resident corporation. A
foreign corporation not
engaged in trade or
business in the
Philippines, including a
foreign life insurance
company not engaged in
the life insurance business
in the Philippines, shall
pay a tax equal to 35% of
the gross income received
during its taxable year
from all sources within the
Philippines, as interest
(except interest on foreign
loans which shall be
subject to 15% tax),
dividends, premiums,
annuities, compensations,
remuneration for technical
services or otherwise,
emoluments or other fixed
or determinable, annual,
periodical or casual gains,
profits, and income, and
capital gains: ... 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
received, 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%) dividends as
provided in this
section: ...
From the above-quoted provision, the dividends received
from a domestic corporation liable to tax, the tax shall be
15% of the dividends received, 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%) dividends.
In the instant case, Switzerland did not impose any tax on
the dividends received by Glaro. Accordingly, Wander
claims that full credit is granted and not merely credit
equivalent to 20%. Petitioner, on the other hand, avers
the tax sparing credit is applicable only if the country of
the parent corporation allows a foreign tax credit not only
for the 15 percentage-point portion actually paid but also
for the equivalent twenty percentage point portion spared,
waived or otherwise deemed as if paid in the Philippines;
that private respondent does not cite anywhere a Swiss
law to the effect that in case where a foreign tax, such as
the Philippine 35% dividend tax, is spared waived or
otherwise considered as if paid in whole or in part by the
foreign country, a Swiss foreign-tax credit would be
allowed for the whole or for the part, as the case may be,
of the foreign tax so spared or waived or considered as if
paid by the foreign country.
While it may be true that claims for refund are construed
strictly against the claimant, nevertheless, the fact that
Switzerland did not impose any tax or the dividends
received by Glaro from the Philippines should be
considered as a full satisfaction of the given condition. For,
as aptly stated by respondent Court, to deny private
respondent the privilege to withhold only 15% tax
provided for under Presidential Decree No. 369, amending
Section 24 (b) (1) of the Tax Code, would run counter to
the very spirit and intent of said law and definitely will
adversely affect foreign corporations" interest here and
discourage them from investing capital in our country.
Besides, it is significant to note that the conclusion
reached by respondent Court is but a confirmation of the
May 19, 1977 ruling of petitioner that "since the Swiss
Government does not impose any tax on the dividends to
be received by the said parent corporation in the
Philippines, the condition imposed under the above-
mentioned section is satisfied. Accordingly, the withholding
tax rate of 15% is hereby affirmed."
Moreover, as a matter of principle, this Court will not set
aside the conclusion reached by an agency such as the
Court of Tax Appeals which is, by the very nature of its
function, dedicated exclusively to the study and
consideration of tax problems and has necessarily
developed an expertise on the subject unless there has
been an abuse or improvident exercise of authority (Reyes
vs. Commissioner of Internal Revenue, 24 SCRA 198,
which is not present in the instant case.
WHEREFORE, the petition filed is DISMISSED for lack of
merit.
SO ORDERED.
Fernan (Chairman), Gutierrez, Jr., Feliciano and Cortes,
JJ., concur.
Details
Category: Income Taxation
The dividends received from a domestic corporation is
liable to a 15% withholding tax, provided that the country
in which the foreign corporation is domiciled shall allow a
tax credit (equivalent to 20% which is the difference
between the 35% tax due on regular corporations and the
15% tax due on dividends) against the taxes due to have
been paid in the Philippines.
Facts:
Wander is a domestic corporation which is a wholly-owned
subsidiary of Glaro S.A. Ltd.,a Swiss corporation not
engaged in trade/business in the Philippines. In two
instances, Wander filed its withholding tax return and
remitted to Glaro (the parent company) dividends
(P222,000 in the first instance and P355,200 in the
second), on which 35% tax was withheld and paid to the
BIR.
Wander now files a claim for refund of the withheld tax
contending that it is liable only to 15% withholding tax
pursuant to Section 24. B.1 of the Tax Code. The BIR did
not act upon the claim filed by Wander so the corporation
filed a petition to the Court of Tax Appeals (CTA). The CTA
held that the corporation is entitled to 15% withholding
tax rate on dividends remitted to Glaro, a non-resident
foreign corporation.
Issue: Whether or not Wander is entitled to the 15%
withholding tax rate.
Held:
Yes. According to Sec. 24.B.1 of the Tax Code, the
dividends received from a domestic corporation is liable to
a 15% withholding tax, provided that the country in which
the foreign corporation is domiciled shall allow a tax credit
(equivalent to 20% which is the difference between the
35% tax due on regular corporations and the 15% tax due
on dividends) against the taxes due to have been paid in
the Philippines.
In the case, Switzerland did not impose any tax on the
dividends received by Glaro thus it should be considered
as a full satisfaction of the given condition. To deny
respondent the privilege to withhold 15% would run
counter to the spirit and intent of the law and will
adversely affect the foreign corporations’ interest and
discourage them from investing capital in our country.
*Petition dismissed for lack of merit.
G.R. No. 108067 January 20, 2000
CYANAMID PHILIPPINES, INC., petitioner,
vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS
and COMMISSIONER OF INTERNAL REVENUE,respondent.
QUISUMBING, J.:
Petitioner disputes the decision1 of the Court of Appeals
which affirmed the decision 2 of the Court of Tax Appeals,
ordering petitioner to pay respondent Commissioner of
Internal Revenue the amount of three million, seven
hundred seventy-four thousand, eight hundred sixty seven
pesos and fifty centavos (P3,774,867.50) as 25% surtax
on improper accumulation of profits for 1981, plus 10%
surcharge and 20% annual interest from January 30, 1985
to January 30, 1987, under Sec. 25 of the National
Internal Revenue Code.1âwphi1.nêt
The Court of Tax Appeals made the following factual
findings:
Petitioner, Cyanamid Philippines, Inc., a corporation
organized under Philippine laws, is a wholly owned
subsidiary of American Cyanamid Co. based in Maine, USA.
It is engaged in the manufacture of pharmaceutical
products and chemicals, a wholesaler of imported finished
goods, and an importer/indentor.
On February 7, 1985, the CIR sent an assessment letter to
petitioner and demanded the payment of deficiency
income tax of one hundred nineteen thousand eight
hundred seventeen (P119,817.00) pesos for taxable year
1981, as follows:
Net income disclosed by the
14,575,210.00
return as audited
Add:
Discrepancies:
Professional
261,877.00
fees/yr. 17018
per 110,399.37
 investigation
Total Adjustment 152,477.00
Net income per Investigation 14,727,687.00
Less: Personal and additional
exemptions
Amount subject to tax 14,727,687.00
Income tax due
thereon . . . 25% 2,385,231.50 3,237,495.00
Surtax
Less: Amount already assessed 5,161,788.00
BALANCE 75,709.00
monthly
1,389,639.00 44,108.00
interest from
Compromise penalties
TOTAL AMOUNT
3,774,867.50 119,817.003
DUE
On March 4, 1985, petitioner protested the assessments
particularly, (1) the 25% Surtax Assessment of
P3,774,867.50; (2) 1981 Deficiency Income Assessment of
P119,817.00; and 1981 Deficiency Percentage Assessment
of P8,846.72.4 Petitioner, through its external accountant,
Sycip, Gorres, Velayo & Co., claimed, among others, that
the surtax for the undue accumulation of earnings was not
proper because the said profits were retained to increase
petitioner's working capital and it would be used for
reasonable business needs of the company. Petitioner
contended that it availed of the tax amnesty under
Executive Order No. 41, hence enjoyed amnesty from civil
and criminal prosecution granted by the law.
On October 20, 1987, the CIR in a letter addressed to SGV
& Co., refused to allow the cancellation of the assessment
notices and rendered its resolution, as follows:
It appears that your client availed of Executive
Order No. 41 under File No. 32A-F-000455-41B as
certified and confirmed by our Tax Amnesty
Implementation Office on October 6, 1987.
In reply thereto, I have the honor to inform you
that the availment of the tax amnesty under
Executive Order No. 41, as amended is sufficient
basis, in appropriate cases, for the cancellation of
the assessment issued after August 21, 1986.
(Revenue Memorandum Order No. 4-87) Said
availment does not, therefore, result in
cancellation of assessments issued before August
21, 1986. as in the instant case. In other words,
the assessments in this case issued on January 30,
1985 despite your client's availment of the tax
amnesty under Executive Order No. 41, as
amended still subsist.
Such being the case, you are therefore, requested
to urge your client to pay this Office the
aforementioned deficiency income tax and surtax
on undue accumulation of surplus in the
respective amounts of P119,817.00 and
P3,774,867.50 inclusive of interest thereon for the
year 1981, within thirty (30) days from receipt
hereof, otherwise this office will be constrained to
enforce collection thereof thru summary remedies
prescribed by law.
This constitutes the final decision of this Office on
this matter.5
Petitioner appealed to the Court of Tax Appeals. During
the pendency of the case, however, both parties agreed to
compromise the 1981 deficiency income tax assessment of
P119,817.00. Petitioner paid a reduced amount — twenty-
six thousand, five hundred seventy-seven pesos
(P26,577.00) — as compromise settlement. However, the
surtax on improperly accumulated profits remained
unresolved.
Petitioner claimed that CIR's assessment representing the
25% surtax on its accumulated earnings for the year 1981
had no legal basis for the following reasons: (a) petitioner
accumulated its earnings and profits for reasonable
business requirements to meet working capital needs and
retirement of indebtedness; (b) petitioner is a wholly
owned subsidiary of American Cyanamid Company, a
corporation organized under the laws of the State of
Maine, in the United States of America, whose shares of
stock are listed and traded in New York Stock Exchange.
This being the case, no individual shareholder income
taxes by petitioner's accumulation of earnings and profits,
instead of distribution of the same.
In denying the petition, the Court of Tax Appeals made the
following pronouncements:
Petitioner contends that it did not declare
dividends for the year 1981 in order to use the
accumulated earnings as working capital reserve
to meet its "reasonable business needs". The law
permits a stock corporation to set aside a portion
of its retained earnings for specified purposes
(citing Section 43, paragraph 2 of the Corporation
Code of the Philippines). In the case at bar,
however, petitioner's purpose for accumulating its
earnings does not fall within the ambit of any of
these specified purposes.
More compelling is the finding that there was no
need for petitioner to set aside a portion of its
retained earnings as working capital reserve as it
claims since it had considerable liquid funds. A
thorough review of petitioner's financial statement
(particularly the Balance Sheet, p. 127, BIR
Records) reveals that the corporation had
considerable liquid funds consisting of cash
accounts receivable, inventory and even its sales
for the period is adequate to meet the normal
needs of the business. This can be determined by
computing the current asset to liability ratio of the
company:
current ratio = current assets/ current
liabilities
= P 47,052,535.00 / appellate court said:
P21,275,544.00
= 2.21: 1 arguments raised herein, We find no compelling
========
The significance of this ratio is to serve as a
primary test of a company's solvency to meet
current obligations from current assets as a going
concern or a measure of adequacy of working
capital.
xxx xxx xxx
We further reject petitioner's argument that "the
accumulated earnings tax does not apply to a
publicly-held corporation" citing American
jurisprudence to support its position. The
reference finds no application in the case at bar
because under Section 25 of the NIRC as
amended by Section 5 of P.D. No. 1379 [1739]
(dated September 17, 1980), the exceptions to the
accumulated earnings tax are expressly
enumerated, to wit: Bank, non-bank financial
intermediaries, corporations organized primarily,
and authorized by the Central Bank of the
Philippines to hold shares of stock of banks,
insurance companies, or personal holding
companies, whether domestic or foreign. The law
on the matter is clear and specific. Hence, there is
no need to resort to applicable cases decided by
the American Federal Courts for guidance and
enlightenment as to whether the provision of
Section 25 of the NIRC should apply to petitioner.
Equally clear and specific are the provisions of
E.O. 41 particularly with respect to its effectivity
and coverage . . .
. . . Said availment does not result in cancellation
of assessments issued before August 21, 1986 as
petitioner seeks to do in the case at bar.
Therefore, the assessments in this case, issued on
January 30, 1985 despite petitioner's availment of
the tax amnesty under E.O. 41 as amended, still
subsist.
xxx xxx xxx
WHEREFORE, petitioner Cyanamid Philippines,
Inc., is ordered to pay respondent Commissioner
of Internal Revenue the sum of P3,774,867.50
representing 25% surtax on improper
accumulation of profits for 1981, plus 10%
surcharge and 20% annual interest from January
30, 1985 to January 30, 1987.6
Petitioner appealed the Court of Tax Appeal's decision to
the Court of Appeals. Affirming the CTA decision, the
In reviewing the instant petition and the
reason to reverse the findings of the respondent
Court. The respondent Court's decision is
supported by evidence, such as petitioner
corporation's financial statement and balance
sheets (p. 127, BIR Records). On the other hand
the petitioner corporation could only come up with
an alternative formula lifted from a decision
rendered by a foreign court (Bardahl Mfg. Corp.
vs. Commissioner, 24 T.C.M. [CCH] 1030).
Applying said formula to its particular financial
position, the petitioner corporation attempts to
justify its accumulated surplus earnings. To Our
mind, the petitioner corporation's alternative
formula cannot overturn the persuasive findings
and conclusion of the respondent Court based, as
it is, on the applicable laws and jurisprudence, as
well as standards in the computation of taxes and
penalties practiced in this jurisdiction.
WHEREFORE, in view of the foregoing, the instant
petition is hereby DISMISSED and the decision of
the Court of Tax Appeals dated August 6, 1992 in
C.T.A. Case No. 4250 is AFFIRMED in toto.7
Hence, petitioner now comes before us and assigns as sole
issue:
WHETHER THE RESPONDENT COURT ERRED IN
HOLDING THAT THE PETITIONER IS LIABLE FOR
THE ACCUMULATED EARNINGS TAX FOR THE
YEAR 1981.8
Sec. 259 of the old National Internal Revenue Code of
1977 states:
Sec. 25. Additional tax on corporation improperly
accumulating profits or surplus —
(a) Imposition of tax. — If any corporation is
formed or availed of for the purpose of preventing
 the imposition of the tax upon its shareholders or
members or the shareholders or members of
another corporation, through the medium of
permitting its gains and profits to accumulate
instead of being divided or distributed, there is
levied and assessed against such corporation, for
each taxable year, a tax equal to twenty-five per-
centum of the undistributed portion of its
accumulated profits or surplus which shall be in
addition to the tax imposed by section twenty-
four, and shall be computed, collected and paid in
the same manner and subject to the same
provisions of law, including penalties, as that tax.
(b) Prima facie evidence. — The fact that any
corporation is mere holding company shall
be prima facieevidence of a purpose to avoid the
tax upon its shareholders or members. Similar
presumption will lie in the case of an investment
company where at any time during the taxable
year more than fifty per centum in value of its
outstanding stock is owned, directly or indirectly,
by one person.
(c) Evidence determinative of purpose. — The fact
that the earnings or profits of a corporation are
permitted to accumulate beyond the reasonable
needs of the business shall be determinative of
the purpose to avoid the tax upon its shareholders
or members unless the corporation, by clear
preponderance of evidence, shall prove the
contrary.
(d) Exception. — The provisions of this sections
shall not apply to banks, non-bank financial
intermediaries, corporation organized primarily,
and authorized by the Central Bank of the
Philippines to hold shares of stock of banks,
insurance companies, whether domestic or
foreign.
The provision discouraged tax avoidance through
corporate surplus accumulation. When corporations do not
declare dividends, income taxes are not paid on the
undeclared dividends received by the shareholders. The
tax on improper accumulation of surplus is essentially a
penalty tax designed to compel corporations to distribute
earnings so that the said earnings by shareholders could,
in turn, be taxed.
Relying on decisions of the American Federal Courts,
petitioner stresses that the accumulated earnings tax does
not apply to Cyanamid, a wholly owned subsidiary of a
publicly owned company. 10 Specifically, petitioner
citesGolconda Mining Corp. vs. Commissioner, 507 F.2d
594, whereby the U.S. Ninth Circuit Court of Appeals had
taken the position that the accumulated earnings tax could
only apply to a closely held corporation.
A review of American taxation history on accumulated
earnings tax will show that the application of the
accumulated earnings tax to publicly held corporations has
been problematic. Initially, the Tax Court and the Court of
Claims held that the accumulated earnings tax applies to
publicly held corporations. Then, the Ninth Circuit Court of
Appeals ruled in Golconda that the accumulated earnings
tax could only apply to closely held corporations.
Despite Golconda, the Internal Revenue Service asserted
that the tax could be imposed on widely held corporations
including those not controlled by a few shareholders or
groups of shareholders. The Service indicated it would not
follow the Ninth Circuit regarding publicly held
corporations.11 In 1984, American legislation nullified the
Ninth Circuit's Golconda ruling and made it clear that the
accumulated earnings tax is not limited to closely held
corporations.12 Clearly, Golconda is no longer a reliable
precedent.
The amendatory provision of Section 25 of the 1977 NIRC,
which was PD 1739, enumerated the corporations exempt
from the imposition of improperly accumulated tax: (a)
banks; (b) non-bank financial intermediaries; (c) insurance
companies; and (d) corporations organized primarily and
authorized by the Central Bank of the Philippines to hold
shares of stocks of banks. Petitioner does not fall among
those exempt classes. Besides, the rule on enumeration is
that the express mention of one person, thing, act, or
consequence is construed to exclude all others. 13 Laws
granting exemption from tax are construed strictissimi
juris against the taxpayer and liberally in favor of the
taxing power.14 Taxation is the rule and exemption is the
exception.15 The burden of proof rests upon the party
claiming exemption to prove that it is, in fact, covered by
the exemption so claimed,16 a burden which petitioner
here has failed to discharge.
Another point raised by the petitioner in objecting to the
assessment, is that increase of working capital by a
corporation justifies accumulating income. Petitioner
asserts that respondent court erred in concluding that
Cyanamid need not infuse additional working capital
reserve because it had considerable liquid funds based on
the 2.21:1 ratio of current assets to current liabilities.
Petitioner relies on the so-called "Bardahl" formula, which
allowed retention, as working capital reserve, sufficient
amounts of liquid assets to carry the company through one
operating cycle. The "Bardahl"17 formula was developed to
measure corporate liquidity. The formula requires an
examination of whether the taxpayer has sufficient liquid
assets to pay all of its current liabilities and any
extraordinary expenses reasonably anticipated, plus
enough to operate the business during one operating
cycle. Operating cycle is the period of time it takes to
convert cash into raw materials, raw materials into
inventory, and inventory into sales, including the time it
takes to collect payment for the
sales.18
Using this formula, petitioner contends, Cyanamid needed
at least P33,763,624.00 pesos as working capital. As of
1981, its liquid asset was only P25,776,991.00. Thus,
petitioner asserts that Cyanamid had a working capital
deficit of P7,986,633.00.19 Therefore, the P9,540,926.00
accumulated income as of 1981 may be validly
accumulated to increase the petitioner's working capital for
the succeeding year.
We note, however, that the companies where the
"Bardahl" formula was applied, had operating cycles much
shorter than that of petitioner. In Atlas Tool
Co., Inc, vs. CIR,20 the company's operating cycle was only
3.33 months or 27.75% of the year. In Cataphote Corp. of
Mississippi vs. United States,21 the corporation's operating
cycle was only 56.87 days, or 15.58% of the year. In the
case of Cyanamid, the operating cycle was 288.35 days, or
78.55% of a year, reflecting that petitioner will need
sufficient liquid funds, of at least three quarters of the
year, to cover the operating costs of the business. There
are variations in the application of the "Bardahl" formula,
such as average operating cycle or peak operating cycle.
In times when there is no recurrence of a business cycle,
the working capital needs cannot be predicted with
accuracy. As stressed by American authorities, although
the "Bardahl" formula is well-established and routinely
applied by the courts, it is not a precise rule. It is used
only for administrative convenience.22 Petitioner's
application of the "Bardahl" formula merely creates a false
illusion of exactitude.
Other formulas are also used, e.g. the ratio of current
assets to current liabilities and the adoption of the industry
standard.23 The ratio of current assets to current liabilities
is used to determine the sufficiency of working capital.
Ideally, the working capital should equal the current
liabilities and there must be 2 units of current assets for
every unit of current liability, hence the so-called "2 to 1"
rule.24
As of 1981 the working capital of Cyanamid was
P25,776,991.00, or more than twice its current liabilities.
That current ratio of Cyanamid, therefore, projects
adequacy in working capital. Said working capital was
expected to increase further when more funds were
generated from the succeeding year's sales. Available
income covered expenses or indebtedness for that year,
and there appeared no reason to expect an impending
"working capital deficit" which could have necessitated an
increase in working capital, as rationalized by petitioner.
In Basilan Estates, Inc. vs. Commissioner of Internal
Revenue,25 we held that:
. . . [T]here is no need to have such a large
amount at the beginning of the following year
because during the year, current assets are
converted into cash and with the income realized
from the business as the year goes, these
expenses may well be taken care of. [citation
omitted]. Thus, it is erroneous to say that the
taxpayer is entitled to retain enough liquid net
assets in amounts approximately equal to current
operating needs for the year to cover "cost of
goods sold and operating expenses:" for "it
excludes proper consideration of funds generated
by the collection of notes receivable as trade
accounts during the course of the year."26
If the CIR determined that the corporation avoided the tax
on shareholders by permitting earnings or profits to
accumulate, and the taxpayer contested such a
determination, the burden of proving the determination
wrong, together with the corresponding burden of first
going forward with evidence, is on the taxpayer. This
applies even if the corporation is not a mere holding or
investment company and does not have an unreasonable
accumulation of earnings or profits.27
In order to determine whether profits are accumulated for
the reasonable needs to avoid the surtax upon
shareholders, it must be shown that the controlling
intention of the taxpayer is manifest at the time of
accumulation, not intentions declared subsequently, which
are mere afterthoughts.28 Furthermore, the accumulated
profits must be used within a reasonable time after the
close of the taxable year. In the instant case, petitioner did
not establish, by clear and convincing evidence, that such
accumulation of profit was for the immediate needs of the
business.
In Manila Wine Merchants, Inc. vs. Commissioner of
Internal Revenue,29 we ruled:
To determine the "reasonable needs" of the
business in order to justify an accumulation of
earnings, the Courts of the United States have
invented the so-called "Immediacy Test" which
construed the words "reasonable needs of the
business" to mean the immediate needs of the
business, and it was generally held that if the
corporation did not prove an immediate need for
the accumulation of the earnings and profits, the
accumulation was not for the reasonable needs of
the business, and the penalty tax would apply.
(Mertens. Law of Federal Income Taxation, Vol. 7,
Chapter 39, p, 103).30
In the present case, the Tax Court opted to determine the
working capital sufficiency by using the ratio between
current assets to current liabilities. The working capital
needs of a business depend upon nature of the business,
its credit policies, the amount of inventories, the rate of
the turnover, the amount of accounts receivable, the
collection rate, the availability of credit to the business,
and similar factors. Petitioner, by adhering to the "Bardahl"
formula, failed to impress the tax court with the required
definiteness envisioned by the statute. We agree with the
tax court that the burden of proof to establish that the
profits accumulated were not beyond the reasonable
needs of the company, remained on the taxpayer. This
Court will not set aside lightly the conclusion reached by
the Court of Tax Appeals which, by the very nature of its
function, is dedicated exclusively to the consideration of
tax problems and has necessarily developed an expertise
on the subject, unless there has been an abuse or
improvident exercise of authority.31 Unless rebutted, all
presumptions generally are indulged in favor of the
correctness of the CIR's assessment against the taxpayer.
With petitioner's failure to prove the CIR incorrect, clearly
and conclusively, this Court is constrained to uphold the
correctness of tax court's ruling as affirmed by the Court of
Appeals.
WHEREFORE, the instant petition is DENIED, and the
decision of the Court of Appeals, sustaining that of the
Court of Tax Appeals, is hereby AFFIRMED. Costs against
petitioner.1âwphi1.nêt
SO ORDERED.
Bellosillo, Mendoza, Buena and De Leon, Jr., JJ., concur.
CYANAMID PHIL., INC. vs. COURT OF APPEALS, ET
AL.G . R . N o . 108067January
20, 2000
Facts:
Petitioner, Cyanamid Philippines, Inc., is
a c o r p o r a t i o n e n g a g e d i n t h e manufacture o
f pharmaceutical products and chemicals, a wholes
aler of imported finishedgoods, and
importer/indentor. The CIR sent an assessment
letter to petitioner CyanamidPhil.,
and demanded the payment of deficiency income
tax for 1981. Petitioner
thenp r o t e s t e d t h e a s s e s s m e n t s , p a r t i c u l a r l y , (
1) the 25% Surtax Assessment; (2) the 1981
Deficiency Income Assessment; and (3) the 1
9 8 1 D e f i c i e n c y P e r c e n t a g e A s s e s s m e n t . Petitio
ner claimed that the surtax for the
undue accumulation of earnings
proper because the said profits were retained to increase
petitioner’s working capital and it would beused for
reasonable business needs of the company. The CIR,
however, refused to allow thecancellation of the
assessment notices. Petitioner appealed
CTA. During the pendencyof the case, both parties
agreed to compromise the 1981 Deficiency Income
Assessment.However, the surtax on improperly accumulated
profits remained unresolved.
Issue:
Is a manufacturing company liable for the accumulated
earnings tax, despite
itsc l a i m t h a t e a r n i n g s w e r e a c c u m u l a t e d t o i n
crease working capital and to be used for itsr
easonable needs, if it fails to present evidence to prove such
allegations?
Held:
Yes. The respondent court correctly decided that the
petitioner is liable for theaccumulated earnings tax for the year
1981 based on the following grounds:
1. The amendatory provision of Sec. 25
of the 1977 NIRC, which was PD
1 7 3 9 , enumerated the corporations exempt from the
imposition of improperly accumulated
taxs u c h a s b a n k s , n o n - b a n k f i n a n c i a l
intermediaries, insurance companies and
corporations authorized by the Central Bank of the
Phils. to hold shares of stocks of banks. The petitioner
does not fall among those exempt
classes.2. If the CIR determined that the corporation avoide
d the tax on shareholders by permittingearnings or profits
to accumulate, and the taxpayer contested such a
determination, theburden of proving is on the
taxpayer. And in order to determine whether
profits
area c c u m u l a t e d f o r t h e r e a s o n a b l e n e e d s o f t
he business to avoid the surtax uponsharehol
ders, it must be shown that the controlling in
t e n t i o n o f t h e t a x p a y e r i s manifested at the time of
accumulation, not intentions declared subsequently, which
an
aremere afterthoughts. Furthermore, the
accumulated profits must be used within
Inc.
areasonable time after the close of the taxable
years. In this case, petitioner did not establish, by clear
and convincing evidence when such accumulation of profit was for
theimmediate needs of the business.3 . L a s t l y , i n t h e
present case, the Tax Court opted to
d e t e r m i n e t h e w o r k i n g c a p i t a l sufficiency
by using the ratio between current assets to current
liabilities. The workingcapital needs of a business depend
was not
upon the nature of the business, its credit policies,the
amount of inventories, the rate of turnover, the amount of
accounts receivable, thecollection rate, the availability of credit to
the business, and similar factors. Petitioner, byadhering to the
“bardahl” formula, failed to impress the tax court
to the
with the requireddefiniteness envisioned by the
statute. We agree with the tax court that the burden
of proof to establish that the profits accumulated were
not beyond the reasonable needs of the company,
remained on the taxpayer. Hence, this Court will not set
aside lightly theconclusion reached by the CTA,
which by the very nature of its function, is
dedicatede x c l u s i v e l y t o t h e c o n s i d e r a t i o n o f t a
x p r o b l e m s a n d h a s n e c e s s a r i l y d e v e l o p e d exp
ertise on the subject unless there has been an
abuse of improvident exercise of authority.
John Hay vs Lim : 119775 : March 29, 2005 : Atty
Puno : En Banc
[G.R. No. 119775. March 29, 2005]
JOHN HAY vs. LIM
EN BANC
Quoted hereunder, for your information, is
resolution of this Court dated MAR 29 2005.
G.R. No. 119775 (JOHN HAY PEOPLES ALTERNATIVE
COALITION, MATEO CARIÑO FOUNDATION INC.,
CENTER FOR ALTERNATIVE SYSTEMS FOUNDATION
INC., REGINA VICTORIA A. BENAFIN REPRESENTED
AND JOINED BY HER MOTHER MRS. ELISA BENAFIN,
IZABEL M. LUYK REPRESENTED AND JOINED BY HER
MOTHER MRS. REBECCA MOLINA LUYK, KATHERINE
PE REPRESENTED AND JOINED BY HER MOTHER
ROSEMARIE G. PE, SOLEDAD S. CAMILO, ALICIA C.
PACALSO ALIAS "KEVAB," BETTY I. STRASSER, RUBY
C. GIRON, URSULA C. PEREZ ALIAS "BA-YAY,"
EDILBERTO T. CLARAVALL, CARMEN CAROMINA,
LILIA G. YARANON, DIANE MONDOC vs. VICTOR
LIM, PRESIDENT, BASES CONVERSION
DEVELOPMENT AUTHORITY; JOHN HAY PORO POINT
DEVELOPMENT CORPORATION, CITY OF BAGUIO,
TUNTEX (B.V.I.) CO. LTD., ASIAWORLD
INTERNATIONALE GROUP, INC., DEPARTMENT OF
ENVIRONMENT AND NATURAL RESOURCES.)
By their separate motions for reconsideration, public
respondents Bases Conversion Development
Authority (BCDA) John Hay Management Corporation
(JHMC) and Victor Lim, and respondent-in-
intervention CJH Development Corporation (CJHDC)
seek the reconsideration of this Court's Decision of
October 24, 2003` which invalidated the second
sentence of Section 3 of Proclamation No. 420
insofar as it granted tax exemptions and incentives
to the John Hay Special Economic Zone (SEZ).
It may be recalled that on March 13, 1992, Republic
Act No. 7227, otherwise known as the "Bases
Conversion and Development Act of 1992," was
enacted with the declared policy of accelerating "the
sound and balanced conversion into alternative
productive uses of the Clark and Subic military
reservations and their extensions" -including the
John Hay Station.
To this end, R.A. No. 7227 created public respondent
BCDA, the Subic SEZ and the Subic Bay Metropolitan
Authority.
R.A. No. 7227 likewise authorized the President,
a subject to the concurrence of the local government
units directly affected, to create through executive
proclamation other SEZs in the areas covered
respectively by the Clark military reservation, the
Wallace Air Station in San Fernando, La Union, and
the Camp John Hay in Baguio. And upon
recommendation by the BCDA, the law also
authorized the President to create SEZs in the
municipalities of Morong, Hermosa, Dinalupihan,
Castillejos, and San Marcelino.
On July 5, 1994, then President Ramos, on the
request of the Sangguniang Panlungsod of Baguio
City, issued Proclamation No. 420 establishing the
John Hay SEZ:
PROCLAMATION NO. 420
CREATING AND DESIGNATING A PORTION OF THE
AREA COVERED BY THE FORMER CAMP JOHN [HAY]
AS THE JOHN HAY SPECIAL ECONOMIC ZONE
PURSUANT TO REPUBLIC ACT NO. 7227
Pursuant to the powers vested in me by the law and
the resolution of concurrence by the City Council of
Baguio, I, FIDEL V. RAMOS, President of the
Philippines, do hereby create and designate a portion
of the area covered by the former John Hay
reservation as embraced, covered, and defined by
the 1947 Military Bases Agreement between the
Philippines and the United States of America, as
amended, as the John Hay Special Economic Zone,
and accordingly order:
SECTION 1. Coverage of John Hay Special Economic
Zone. - The John Hay Special Economic Zone shall
cover the area consisting of Two Hundred Eighty
Eight and one/tenth (288.1) hectares, more or less,
of the total of Six Hundred Seventy-Seven (677)
hectares of the John Hay Reservation, more or less,
which have been surveyed and verified by the
Department of Environment and Natural Resources
(DENR) as defined by the following technical
description:
A parcel of land, situated in the City of Baguio,
Province of Benguet, Island of Luzon, and
particularly described in survey plans Psd-131102-
002639 and Ccs-131102-000030 as approved on 16
August 1993 and 26 August 1993, respectively, by
the Department of Environment and Natural
Resources, in detail containing :
Lot 1, Lot 2, Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 13,
Lot 14, Lot 15, and Lot 20 of Ccs-131102-000030
- and-
Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 8, Lot 9, Lot 10,
Lot 11, Lot 14, Lot 15, Lot 16, Lot 17, and Lot 18 of
Psd-131102-002639 being portions of TCT No. T-
3812, LRC Rec. No. 87.
With a combined area of TWO HUNDRED EIGHTY
EIGHT AND ONE/TENTH HECTARES (288.1 hectares);
Provided that the area consisting of approximately
Six and two/tenth (6.2) hectares, more or less,
presently occupied by the VOA and the residence of
the Ambassador of the United States, shall be
considered as part of the SEZ only upon turnover of
the properties to the government of the Republic of
the Philippines.
Sec. 2. Governing Body of the John Hay Special
Economic Zone. - Pursuant to Section 15 of Republic
Act No. 7227, the Bases Conversion and
Development Authority is hereby established as the
governing body of the John Hay Special Economic
Zone and, as such, authorized to determine the
utilization and disposition of the lands comprising it,
subject to private rights, if any, and in consultation
and coordination with the City Government of Baguio
after consultation with its inhabitants, and to
promulgate the necessary policies, rules, and
regulations to govern and regulate the zone thru the
John Hay Poro Point Development Corporation, which
is its implementing arm for its economic
development and optimum utilization.
Sec. 3. Investment Climate in John Hay Special
Economic Zone. - Pursuant to Section 5(m) and
Section 15 of Republic Act No. 7227, the John Hay
Poro Point Development Corporation shall implement
all necessary policies, rules, and regulations
governing the zone, including investment incentives,
in consultation with pertinent government
departments. Among others, the zone shall have all
the applicable incentives of the Special Economic
Zone under Section 12 of Republic Act No. 7227 and
those applicable incentives granted in the Export
Processing Zones, the Omnibus Investment Code of
1987, the Foreign Investment Act of 1991, and new
investment laws that may hereinafter be enacted.
Sec. 4. Role of Departments, Bureaus, Offices,
Agencies and Instrumentalities. - All Heads of
departments, bureaus, offices, agencies, and
instrumentalities of the government are hereby
directed to give full support to Bases Conversion and
Development Authority and/or its implementing
subsidiary or joint venture to facilitate the necessary
approvals to expedite the implementation of various
projects of the conversion program.
Sec. 5. Local Authority. - Except as herein provided,
the affected local government units shall retain their
basic autonomy and identity.
Sec. 6. Repealing Clause. - All orders, rules, and
regulations, or parts thereof, which are inconsistent
with the provisions of this Proclamation, are hereby
repealed, amended, or modified accordingly.
Sec. 7. Effectivity. This proclamation shall take effect
immediately.
Done in the City of Manila, this 5th day of July, in
the year of Our Lord, nineteen hundred and ninety-
four.
On April 25, 1995, petitioners filed their Petition for
prohibition, mandamus and declaratory relief
assailing (1) the constitutionality of Proclamation No.
420 and (2) the legality of the Memorandum of
Agreement and Joint Venture Agreement previously
entered into between public respondent BCDA and
private respondents Tuntex (B.V.I.) Co., Ltd.
(TUNTEX) and Asiaworld Internationale Group, Inc.
(ASIAWORLD).
The questions regarding the validity of the
agreements between BCDA and TUNTEX and
ASIAWORLD were rendered moot and academicby
BCDA's revocation of these agreements by letter of
November 21, 1995.
On October 24, 2003, this Court promulgated its
Decision, which disposed as follows:
WHEREFORE, the second sentence of Section 3 of
Proclamation No. 420 is hereby declared NULL AND
VOID and is accordingly declared of no legal force
and effect. Public respondents are hereby enjoined
from implementing the aforesaid void provision.
Proclamation No. 420, without the invalidated
portion, remains valid and effective.
SO ORDERED.
In their Motion for Reconsideration with
Manifestation filed on December 29, 2003, public
respondents, through the Office of the Government
Corporate Counsel, submit the following grounds for
reconsideration:
I
THE HONORABLE COURT ERRED IN RULING THAT
SECTION 3 OF PROCLAMATION NO. 420 IS NULL
AND VOID AS THE JOHN HAY SPECIAL ECONOMIC
ZONE ENJOYS EXEMPTION FOR (sic) TAXES, AS
WELL AS OTHER FINANCIAL INCENTIVES GRANTED
TO THE SUBIC SPECIAL ECONOMIC ZONE, IN THAT:
A. THE LAW, CONSIDERED IN ITS ENTIRETY
SUPPORTS THE CONCLUSION THAT THE JOHN HAY
SPECIAL ECONOMIC ZONE ENJOYS THE SAME
PRIVILEGES AS THE SUBIC SPECIAL ECONOMIC
ZONE.
B. THE GRANT OF TAX EXEMPTION AND OTHER
FINANCIAL INCENTIVES IS INHERENT IN "SPECIAL
ECONOMIC ZONES."
II
ASSUMING ARGUENDO THAT REPUBLIC ACT NO.
7227 DOES NOT GRANT TAX EXEMPTIONS TO
SPECIAL ECONOMIC ZONES, THE SECOND SENTENCE
OF SECTION THREE OF PROCLAMATION NO. 420 IS
SUSCEPTIBLE OF OTHER PLAUSIBLE
INTERPRETATIONS WHICH WOULD ADDRESS THE
ALLEGED CONSTITUTIONAL INFIRMITY.
Ill
THE JOHN HAY SPECIAL ECONOMIC ZONE MAY BE
GRANTED FINANCIAL INCENTIVES UNDER OTHER
LAWS, AS IMPLEMENTED BY THE EXECUTIVE.
IV
THE HONORABLE COURT ERRED IN RULING THAT
PETITIONERS HAVE LEGAL STANDING TO SUE.
Intervenor CJHDC filed on March 5, 2004 a Motion
for Leave to Intervene alleging that it, together with
its consortium partners Fil-Estate Management Inc.
and Penta Capital Investment Corporation, entered
into a Lease Agreement dated October 19, 1996 with
respondent BCDA for the development of the John
Hay SEZ; and that it "stands to be most affected" by
this Court's Decision "invalidating the grant of tax
exemption and other financial incentives" in the John
Hay SEZ since "[i]ts financial obligations and
development and investment commitments under the
Lease Agreement were entered into upon the
premise that these incentives are valid and
subsisting."
CJHDC, proffering grounds parallel to those of public
respondents, thus prays that: (1) it be granted leave
to intervene in this case; (2) its attached Motion for
Reconsideration in Intervention be admitted; and (3)
this Court's Decision of October 24, 2003 be
reconsidered and petitioners' petition dismissed.
By Order of May 25, 2004, this Court granted
CJHDC's Motion for leave to Intervene and noted its
Motion for Reconsideration in Intervention.
At bottom, the controversy centers on whether the
tax exemptions and other financial incentives
granted to the Subic SEZ under Section 12 of R.A.
No. 7227 are applicable to the John Hay SEZ.
Section 12 of R.A. No. 7227, which provides for the
"policies" to govern and regulate the Subic SEZ,
reads as follows:
SECTION 12. Subic Special Economic Zone. —
Subject to the concurrence by resolution of the
sangguniang panlungsod of the City of Olongapo and
the sangguniang bayan of the Municipalities of
Subic, Morong and Hermosa, there is hereby created
a Special Economic and Free-port Zone consisting of
the City of Olongapo and the Municipality of Subic,
Province of Zambales, the lands occupied by the
Subic Naval Base and its contiguous extensions as
embraced, covered, and defined by the 1947 Military
Bases Agreement between the Philippines and the
United States of America as amended, and within the
territorial jurisdiction of the Municipalities of Morong
and Hermosa, Province of Bataan, hereinafter
referred to as the Subic Special Economic Zone
whose metes and bounds shall be delineated in a
proclamation to be issued by the President of the
Philippines. Within thirty (30) days after the approval
of this Act, each local government unit shall submit
its resolution of concurrence to join the Subic Special
Economic Zone to the office of the President.
Thereafter, the President of the Philippines shall
issue a proclamation defining the metes and bounds
of the Zone as provided herein.
The abovementioned zone shall be subject to the
following policies:
(a) Within the framework and subject to the
mandate and limitations of the Constitution and the
pertinent provisions of the Local Government Code,
the Subic Special Economic Zone shall be developed
into a self-sustaining, industrial, commercial,
financial and investment center to generate
employment opportunities in and around the zone
and to attract and promote productive foreign
investments;
b) The Subic Special Economic Zone shall be
operated and managed as a separate customs
territory ensuring free flow or movement of goods
and capital within, into and exported out of the
Subic Special Economic Zone, as well as provide
incentives such as tax and duty free importations of
raw materials, capital and equipment. However,
exportation or removal of goods from the territory of
the Subic Special Economic Zone to the other parts
of the Philippine territory shall be subject to customs
duties and taxes under the Customs and Tariff Code
and other relevant tax laws of the Philippines;
(c) The provisions of existing laws, rules and
regulations to the contrary notwithstanding, no
taxes, local and national, shall be imposed within the
Subic Special Economic Zone. In lieu of paying taxes,
three percent (3%) of the gross income earned by
all businesses and enterprises within the Subic
Special Economic Zone shall be remitted to the
National Government, one percent (1%) each to the
local government units affected by the declaration of
the zone in proportion to their population area, and
other factors. In addition, there is hereby
established a development fund of one percent (1%)
of the gross income earned by all businesses and
enterprises within the Subic Special Economic Zone
to be utilized for the Municipality of Subic, and other
municipalities contiguous to [the] base areas. In
case of conflict between national and local laws with
respect to tax exemption privileges in the Subic
Special Economic Zone, the same shall be resolved in
favor of the latter;
(d) No exchange control policy shall be applied and
free markets for foreign exchange, gold, securities
and futures shall be allowed and maintained in the
Subic Special Economic Zone;
(e) The Central Bank, through the Monetary Board,
shall supervise and regulate the operations of banks
and other financial institutions within the Subic
Special Economic Zone;
(f) Banking and Finance shall be liberalized with the
establishment of foreign currency depository units of
local commercial banks and offshore banking units of
foreign banks with minimum Central Bank regulation;
(g) Any investor within the Subic Special Economic
Zone whose continuing investment shall not be less
than Two Hundred fifty thousand dollars ($250,000),
his/her spouse and dependent children under
twenty-one (21) years of age, shall be granted
permanent resident status within the Subic Special
Economic Zone. They shall have freedom of ingress
and egress to and from the Subic Special Economic
Zone without any need of special authorization from
the Bureau of Immigration and Deportation. The
Subic Bay Metropolitan Authority referred to in
Section 13 of this Act may also issue working visas
renewable every two (2) years to foreign executives
and other aliens possessing highly-technical skills
which no Filipino within the Subic Special Economic
Zone possesses, as certified by the Department of
Labor and Employment. The names of aliens granted
permanent residence status and working visas by the
Subic Bay Metropolitan Authority shall be reported to
the Bureau of Immigration and Deportation within
thirty (30) days after issuance thereof;
(h) The defense of the zone and the security of its
perimeters shall be the responsibility of the National
Government in coordination with the Subic Bay
Metropolitan Authority. The Subic Bay Metropolitan
Authority shall provide and establish its own internal
security and firefighting forces; and
(i) Except as herein provided, the local government
units comprising the Subic Special Economic Zone
shall retain their basic autonomy and identity. The
cities shall be governed by their respective charters
and the municipalities shall operate and function in
accordance with Republic Act No. 7160, otherwise
known as the Local Government Code of 1991.
(Emphasis supplied)
In their first line of argument, respondents allege
that the foregoing "policies" or incentives, while
enumerated in reference to the Subic SEZ, are
nonetheless expressly made applicable to the other
SEZs subsequently created by presidential
proclamation, including the John Hay SEZ, by Section
15 of R.A. No. 7227. Thus, public respondents
argue:
That the privileges of tax exemption and other
financial incentives were expressly provided under
Section 12, constituting the SSEZ, is merely a result
of the then reality that it is (sic) was only in Subic
Bay where the precise metes and bounds of the
SSEZ, as well as other relevant information, were
then available to the Senate. But the intention of the
Senate was clearly to empower the President, who
would then have the luxury of time and further
studies, to constitute special economic zones in the
former Clark Air Base and its extensions, including
Camp John Hay. This power to proclaim the other
base areas as special economic zones, including all
privileged appurtenant thereto, was instead
delegated to the President in Section 15 of the law.
x x x
Republic Act No. 7227 authorizes the President to
delineate Special Economic Zones in the former base
areas. True, section 12 of the said law enumerating
the tax exemptions and the financial incentives of
the Subic Special Economic Zone, is expressly made
applicable to the former Subic Bay Naval Base.
However, there is no showing that the term "special
economic zones", used to denote what the President
can establish in John Hay, does not have the same
definition and characteristics as the SSEZ. (Emphasis
supplied; underscoring in the original)
A reading of Section 15 of R.A. No. 7227 does not,
however, support this proposition. There is no doubt
that under Section 15 (as in Section 12) the
President has the power to delineate, by
proclamation, the metes and bounds of SEZs which
may be created in the other former base lands.
However, there is neither an express reference to
Section 12 nor to the incentives granted to the Subic
SEZ:
SECTION 15. Clark and Other Special Economic
Zones. — Subject to the concurrence by resolution
of the local government units directly affected, the
President is hereby authorized to create by executive
proclamation a Special Economic Zone covering the
lands occupied by the Clark military reservations and
its contiguous extensions as embraced, covered and
defined by the 1947 Military Bases Agreement
between the Philippines and the United States of
America, as amended, located within the territorial
jurisdiction of Angeles City, Municipalities of
Mabalacat and Porac, Province of Pampanga, and the
Municipality of Capas, Province of Tarlac, in
accordance with the policies as herein provided
insofar as applicable to the Clark military
reservations.
The governing body of the Clark Special Economic
Zone shall likewise be established by executive
proclamation with such powers and functions
exercised by the Export Processing Zone Authority
pursuant to Presidential Decree No. 66 as amended.
The policies to govern and regulate the Clark Special
Economic Zone shall be determined upon
consultation with the inhabitants of the local
government units directly affected which shall be
conducted within six (6) months upon approval of
this Act.
Similarly, subject to the concurrence by resolution of
the local government units directly affected, the
President shall create other Special Economic Zones,
in the base areas of Wallace Air Station in San
Fernando, La Union (excluding areas designated for
communications, advance warning and radar
requirements of the Philippine Air Force to be
determined by the Conversion Authority) and Camp
John Hay in the City of Baguio.
Upon recommendation of the Conversion Authority,
the President is likewise authorized to create Special
Economic Zones covering the Municipalities of
Morong, Hermosa, Dinalupihan, Castillejos, and San
Marcelino. (Emphasis supplied)
Respondent-in-intervention CJHDC submits that by
authorizing the President to create SEZs "in
accordance with the policies as herein provided
insofar as applicable," the first paragraph of Section
15 refers to the policies enumerated in Section 12,
including exemption from local and national taxes.
This allusion to "the policies as herein provided" can
by no means be considered an explicit or
unequivocal conferment of the tax exemptions and
other incentives set forth in Section 12 on other
SEZs. Notably, the preceding portions of R.A. No.
7227 make mention of two sets of "policies:" (1) the
general "policies" that the law is intended to further,
viz:
Sec. 2. Declaration of Policies. — It is hereby
declared the policy of the Government to accelerate
the sound and balanced conversion into alternative
productive uses of the Clark and Subic military
reservations and their extensions (John Hay Station,
Wallace Air Station, O'Donnell Transmitter Station,
San Miguel Naval Communications Station and Capas
Relay Station), to raise funds by the sale of portions
of Metro Manila military camps, and to apply said
funds as provided herein for the development and
conversion to productive civilian use of the lands
covered under the 1947 Military Bases Agreement
between the Philippines and the United States of
America, as amended.
It is likewise the declared policy of the Government
to enhance the benefits to be derived from said
properties in order to promote the economic and
social development of Central Luzon in particular and
the country in general.,

and (2) the above-quoted "policies" governing the
Subic SEZ.
Considering that the subject matter of the first
paragraph of Section 15 is the authority of the
President to create other SEZs in the former base
lands, it stands to reason that the same should be
exercised "in accordance with the policies" which
provide the rationale for the law as laid down in
Section 2 of R.A. No. 7227.
In contradistinction, a provision authorizing the
President to define the metes and bounds of other
SEZs "in accordance with" the tax and financial
incentives of the Subic SEZ would be nonsensical.
These tax and financial incentives provide neither
direction nor guidance to the President in his
determination (subject to the concurrence of the
affected local government units) of the geographic
composition of the SEZs.
Moreover, the third and fourth paragraphs of Section
15 explicitly provide that the "policies to govern and
regulate" the John Hay SEZ "shall be determined
upon consultation with the inhabitants of the local
government units directly affected," thereby implying
that the governing policies of the John Hay SEZ,
unlike that of the Subic SEZ, were yet to be specified
and, thus, not provided for by R.A. No. 7227 itself.
In any event, whether it is Section 12 or Section 15
of R.A. No. 7227 which is scrutinized, the result is
the same. There is no express extension of the
incentives or benefits granted to the Subic SEZ to
the other SEZs still to be created via presidential
proclamation.
As for respondent-in-intervention CJHDC's argument
that the President's "power to create Special
Economic Zones carries with it the power to provide
for tax and financial incentives," it does not lie. It is
the legislative branch which has the inherent power
not only to select the subjects of taxation but to
grant exemptions. Paragraph 4, Section 28 of Article
VI of the Constitution is crystal clear: "[n]o law
granting any tax exemption shall be passed without
the concurrence of a majority of all the Members of
the Congress."
Hence, it is only the legislature, as limited by the
provisions of the Constitution, which has full power
to exempt any person or corporation or class of
property from taxation. The Constitution itself may
provide for specific tax exemptions or local
governments may pass ordinances providing for
exemption from local taxes, but, otherwise, it is only
the legislative branch which has the power to grant
tax exemptions, its power to exempt being as broad
as its power to tax.
Perhaps realizing that R.A. No. 7227 does not
contain an express grant of tax exemptions and
financial incentives covering the John Hay SEZ,
respondents, as a second line of argument, implore
the Court to construe the existence of such a grant
pursuant to what they claim to be the legislative
intent of the law. To this end, they posit that the
Court should not apply the deeply-entrenched rule
that tax exemptions cannot be implied but must be
categorically and unmistakably expressed in a
language too clear to be mistaken.
In this vein, respondent-in-intervention CJHDC,
although acknowledging that "the law frowns against
exemptions from taxation," nevertheless argues that
"[t]he grant of tax exemption privileges to the [John
Hay SEZ] was addressed primarily to public
respondent BCDA" in order "to achieve its mandate
for an accelerated conversion of the former
baselands into economically productive uses, at the
least cost and exposure to the government." Thus, it
contends that the Court should "apply, at least by
analogy, the principle that strict construction is not
applicable where the grantee of the exemption is a
political subdivision or instrumentality."
The Court is not persuaded.
True, it is a recognized principle that the rule on
strictissimi juris does not apply in the case of
exemptions in favor of a government political
subdivision or instrumentality, the rationale for
which has been identified as follows:
"The basis for applying the rule of strict construction
to statutory provisions granting tax exemptions or
deductions, even more obvious than with reference
to the affirmative or levying provisions of tax
statutes, is to minimize differential treatment and
foster impartiality, fairness, and equality of
treatment among tax payers.
The reason for the rule does not apply in the case of
exemptions running to the benefit of the government
itself or its agencies. In such case the practical
effect of an exemption is merely to reduce the
amount of money that has to be handled by
government in the course of its operations. For these
reasons, provisions granting exemptions to
government agencies may be construed liberally, in
favor of non tax liability of such agencies."
(Emphasis supplied; italics in the original)
However, the foregoing finds no application to the
present case.
First, there is absolutely nothing in R.A. No. 7227
which can be considered a grant of tax exemption in
favor of public respondent BCDA. Rather, the
beneficiaries of the tax exemptions and other
incentives in Section 12 (the only provision in R.A.
No. 7227 which expressly grants tax exemptions) are
clearly the business enterprises located within the
Subic SEZ.
To be sure, nowhere in any of respondents'
pleadings is it pretended that the legislature
exempted the BCDA from taxation in order to
accomplish its mandate. On the contrary, the alleged
tax exemptions and financial incentives are plainly
asserted to be in favor of private enterprises doing
business in the John Hay SEZ.
Second, as noted above, the liberal construction of
tax exemptions in favor of the government is
premised on their resulting only in a reduction in
infra-governmental fund transfers, but not
government revenue. Evidently, this rationale does
not apply, whether by analogy or otherwise, in favor
of private business enterprises, such as respondent-
in-intervention CJHDC.
Consequently, respondents' arguments for a liberal
construction of R.A. 7227 in favor of tax exemptions
and incentives to business enterprises in the John
Hay SEZ must necessarily fail. As the Court, speaking
through Mr. Justice Vicente V. Mendoza, in the
recent case of Philippine Long Distance Telephone
Company, Inc. v. City of Davao, had occasion to
stress:
. . . Along with the police power and eminent
domain, taxation is one of the three necessary
attributes of sovereignty. Consequently, statutes in
derogation of sovereignty, such as those containing
exemption from taxation, should be strictly
construed in favor of the sate. A state cannot be
stripped of this most essential power by doubtful
words and of this highest attribute of sovereignty by
ambiguous language. (Emphasis supplied)
Necessarily, respondents' other arguments,
dependent as they are on a liberal construction of
tax exemptions, also fail.
Public respondents' argument that tax exemptions
are "inherent" in the term "special economic zone"
stands the concept on its head and cannot be
accepted. The tax exempt character of an SEZ
proceeds from the statutory provisions expressly
conferring such exemptions, not vice-versa. The tail
does not wag the dog.
Moreover, a careful scrutiny of the Senate
deliberations does not disclose a clear intention on
the part of the law making power to make the tax
exemptions and financial incentives in Section 12
applicable in the other SEZs.
The adoption of a single uniform set of tax
exemptions and financial incentives for all SEZs in
the former base lands was indeed suggested by
Senator Paterno when Section 12 was under
consideration in the Senate:
x x x
Senator Paterno: Thank you Mr. President.
Now, with respect to "B," Mr. President, on items 1
to 6, what are they supposed to be? Are these
policies? Because in my reading, subparagraph,
subparagraph "1" and subparagraph "6" refer to
activities; namely, shipping and tourism-related;
while sub-paragraphs "2, 3, 4, and 5" represent
policies which shall apply within the zone.
Senator Shahani: think the intention here really
was to specify the activities which should take place
within this economic zone. But, on second reading,
yes, I think there is a mix-up here of activities and
policies.
Senator Paterno: Yes.
Senator Shahani: Maybe some of these could be
transferred to Section 13.
Senator Paterno: Now, No. "1" and No. "6", are
these authorizations to engage in these activities, or
are they mandates for the special economic zone to
engage in these activities?
Senator Shahani: Yes, this is an attempt to specify
the features, the kind of specific activities which
would be unique to the special economic zone of
Subic. This is why shipping is given.
Senator Paterno: Yes. Then I would propose, Mr.
President, that these two activities, namely "1" and
"6," be segregated as being applicable to the Subic
economic zone, because they will not be applicable,
for example, in the Clark economic zone because
there would be no shipping in Clark.
Senator Shahani: Mr. President, Section 12, refers
exclusively to Subic. There is no attempt now in this
BCDA to do anything for Clark. I think there is no
time.
Senator Paterno: Yes. Yet, Mr. President,
paragraph "C" authorizes the President of the
Philippines to proclaim, delineate and specify the
metes and bounds of other special economic zones
with particular reference to Clark. We need to set up
certain standards which the President would observe
in setting up those zones.
So I would propose that the policies applicable to all
economic zones be specified here, and those which
relate only to Subic be put in a standard for the
Subic economic zone.
Senator Shahani: Mr. President, I thought that this
was the special concern of our Colleague from
Cavite. I remember quite clearly that last night,
some concern was expressed, including from this
Representation, that there was no special attention
being given to Clark. It think it was also Senator
Enrile who said that Clark has specific features; it is
landlocked, et cetera.
Senator Paterno: Yes.
Senator Shahani: So, to show that we are still
interested in Clark and its development, and to avoid
this very long process of legislating every detail of
what a special economic zone should be, I thought it
was agreed last night that we should authorize the
President to create special economic zones with
specific reference to Clark. This is why this appears
in this form, Mr. President.
Senator Paterno: Yes. Without going into the
crafting of the text, Mr. President, it was my thought
that, perhaps, there could be a section which
specifies the policies which shall apply to all special
economic zones. Then there would be another
section which, in effect, will create the Subic
economic zone which would refer to those unique
activities in Subic. Then there would be another
section which would authorize the President to
create other special economic zones, with particular
reference to Clark, in which special economic zones,
the standards set up in the first section would apply.
Senator Shahani: I take it that, that is just a
matter of reordering this section.
Senator Paterno: Yes. In other words, I would like
to suggest that the bill contain the features of any
special economic zone, and then another section
would contain the features unique to Subic as a
special economic zone.(Emphasis supplied)
However, as respondent CJHDC itself admits,
"Senator Paterno's proposal that 'the policies
applicable to all special economic zones be specified
here (in what would eventually be Section 15) and
those which relate only to Subic be put in a standard
for the Subic economic zone' was not carried out, as
Section 15 as finally passed does not contain an
enumeration of policies specific only to non-Subic
SEZs." (Underscoring supplied)
Instead, as previously noted, Section 15 of R.A. No.
7227 provides that the "policies to govern and
regulate" the John Hay SEZ "shall be determined
upon consultation with the inhabitants of the local
government units directly affected."
Significantly, these policies need not be identical to
those implemented in the Subic SEZ since there may
be real and substantial differences in development
priorities, local conditions and other relevant
matters, as the consultations may reveal. However,
insofar as these policies may include tax exemptions,
paragraph 4, Section 28 of Article VI of the
Constitution requires that any such exemptions must
be in the form of legislation passed with the
concurrence of a majority of all the Members of the
Congress.
Finally, contrary to public respondents'
interpretation, the Decision of October 24, 2003
does not "tie the hands" of executive or
administrative agencies from implementing any
present or future legislation which affords tax or
other financial incentives to qualified persons doing
business in the John Hay SEZ or elsewhere. The
second sentence of Section 3 of Proclamation No.
420 was declared null and void only insofar as it
purported to grant, by executive proclamation and
without statutory basis, tax exemptions and other
financial incentives to business enterprises located in
John Hay SEZ. However, where there is statutory
basis for exemptions or incentives, there is nothing
to prevent qualified persons from applying for and
availing thereof. As stated in the dispositive portion
of the decision, Proclamation No. 420, without the
invalidated portion, remains valid and effective.
WHEREFORE, the motions for reconsideration are
hereby DENIED with FINALITY.
Very truly yours.
(Sgd.) LUZVIMINDA D. PUNO
132527 : July 29, 2005 : J. Azcuna : En Banc :
Decision
EN BANC
[G.R. No. 132527. July 29, 2005]
COCONUT OIL REFINERS ASSOCIATION, INC.
represented by its President, JESUS L. ARRANZA,
PHILIPPINE ASSOCIATION OF MEAT PROCESSORS,
INC. (PAMPI), represented by its Secretary, ROMEO
G. HIDALGO, FEDERATION OF FREE FARMERS (FFF),
represented by its President, JEREMIAS U.
MONTEMAYOR, and BUKLURAN NG MANGGAGAWANG
PILIPINO (BMP), represented by its Chairperson,
FELIMON C. LAGMAN, petitioners, vs. HON. RUBEN
TORRES, in his capacity as Executive Secretary;
BASES CONVERSION AND DEVELOPMENT
AUTHORITY, CLARK DEVELOPMENT CORPORATION,
SUBIC BAY METROPOLITAN AUTHORITY, 88 MART
DUTY FREE, FREEPORT TRADERS, PX CLUB,
AMERICAN HARDWARE, ROYAL DUTY FREE SHOPS,
INC., DFS SPORTS, ASIA PACIFIC, MCI DUTY FREE
DISTRIBUTOR CORP. (formerly MCI RESOURCES,
CORP.), PARK & SHOP, DUTY FREE COMMODITIES,
L. FURNISHING, SHAMBURGH, SUBIC DFS, ARGAN
TRADING CORP., ASIPINE CORP., BEST BUY, INC.,
PX CLUB, CLARK TRADING, DEMAGUS TRADING
CORP., D.F.S. SPORTS UNLIMITED, INC., DUTY FREE
FIRST SUPERSTORE, INC., FREEPORT, JC MALL
DUTY FREE INC. (formerly 88 Mart [Clark] Duty Free
Corp.), LILLY HILL CORP., MARSHALL, PUREGOLD
DUTY FREE, INC., ROYAL DFS and ZAXXON
PHILIPPINES, INC., respondents.
D E C I S I O N
AZCUNA, J.:
This is a Petition for Prohibition and Injunction
seeking to enjoin and prohibit the Executive Branch,
through the public respondents Ruben Torres in his
capacity as Executive Secretary, the Bases
Conversion Development Authority (BCDA), the Clark
Development Corporation (CDC) and the Subic Bay
Metropolitan Authority (SBMA), from allowing, and
the private respondents from continuing with, the
operation of tax and duty-free shops located at the
Subic Special Economic Zone (SSEZ) and the Clark
Special Economic Zone (CSEZ), and to declare the
following issuances as unconstitutional, illegal, and
void:
1. Section 5 of Executive Order No. 80, dated April
3, 1993, regarding the CSEZ.
2. Executive Order No. 97-A, dated June 19, 1993,
pertaining to the SSEZ.
3. Section 4 of BCDA Board Resolution No. 93-05-
034, dated May 18, 1993, pertaining to the CSEZ.
Petitioners contend that the aforecited issuances are
unconstitutional and void as they constitute
executive lawmaking, and that they are contrary to
Republic Act No. 7227 and in violation of the
Constitution, particularly Section 1, Article III (equal
protection clause), Section 19, Article XII
(prohibition of unfair competition and combinations
in restraint of trade), and Section 12, Article XII
(preferential use of Filipino labor, domestic materials
and locally produced goods).
The facts are as follows:
On March 13, 1992, Republic Act No. 7227 was
enacted, providing for, among other things, the
sound and balanced conversion of the Clark and
Subic military reservations and their extensions into
alternative productive uses in the form of special
economic zones in order to promote the economic
and social development of Central Luzon in particular
and the country in general. Among the salient
provisions are as follows:
SECTION 12. Subic Special Economic Zone. —
. . .
The abovementioned zone shall be subject to the
following policies:
(a) Within the framework and subject to the
mandate and limitations of the Constitution and the
pertinent provisions of the Local Government Code,
the Subic Special Economic Zone shall be developed
into a self-sustaining, industrial, commercial,
financial and investment center to generate
employment opportunities in and around the zone
and to attract and promote productive foreign
investments;
(b) The Subic Special Economic Zone shall be
operated and managed as a separate customs
territory ensuring free flow or movement of goods
and capital within, into and exported out of the
Subic Special Economic Zone, as well as provide
incentives such as tax and duty-free importations of
raw materials, capital and equipment. However,
exportation or removal of goods from the territory of
the Subic Special Economic Zone to the other parts
of the Philippine territory shall be subject to customs
duties and taxes under the Customs and Tariff Code
and other relevant tax laws of the Philippines;
(c) The provision of existing laws, rules and
regulations to the contrary notwithstanding, no
taxes, local and national, shall be imposed within the
Subic Special Economic Zone. In lieu of paying
taxes, three percent (3%) of the gross income
earned by all businesses and enterprises within the
Subic Special Ecoomic Zone shall be remitted to the
National Government, one percent (1%) each to the
local government units affected by the declaration of
the zone in proportion to their population area, and
other factors. In addition, there is hereby
established a development fund of one percent (1%)
of the gross income earned by all businesses and
enterprises within the Subic Special Economic Zone
to be utilized for the development of municipalities
outside the City of Olangapo and the Municipality of
Subic, and other municipalities contiguous to the
base areas.
. . .
SECTION 15. Clark and Other Special
Economic Zones. — Subject to the concurrence by
resolution of the local government units directly
affected, the President is hereby authorized to
create by executive proclamation a Special Economic
Zone covering the lands occupied by the Clark
military reservations and its contiguous extensions
as embraced, covered and defined by the 1947
Military Bases Agreement between the Philippines
and the United States of America, as amended,
located within the territorial jurisdiction of Angeles
City, Municipalities of Mabalacat and Porac, Province
of Pampanga and the Municipality of Capas, Province
of Tarlac, in accordance with the policies as herein
provided insofar as applicable to the Clark military
reservations.
The governing body of the Clark Special Economic
Zone shall likewise be established by executive
proclamation with such powers and functions
exercised by the Export Processing Zone Authority
pursuant to Presidential Decree No. 66 as amended.
The policies to govern and regulate the Clark Special
Economic Zone shall be determined upon
consultation with the inhabitants of the local
government units directly affected which shall be
conducted within six (6) months upon approval of
this Act.
Similarly, subject to the concurrence by resolution of
the local government units directly affected, the
President shall create other Special Economic Zones,
in the base areas of Wallace Air Station in San
Fernando, La Union (excluding areas designated for
communications, advance warning and radar
requirements of the Philippine Air Force to be
determined by the Conversion Authority) and Camp
John Hay in the City of Baguio.
Upon recommendation of the Conversion Authority,
the President is likewise authorized to create Special
Economic Zones covering the Municipalities of
Morong, Hermosa, Dinalupihan, Castillejos and San
Marcelino.
On April 3, 1993, President Fidel V. Ramos issued
Executive Order No. 80, which declared, among
others, that Clark shall have all the applicable
incentives granted to the Subic Special Economic and
Free Port Zone under Republic Act No. 7227. The
pertinent provision assailed therein is as follows:
SECTION 5. Investments Climate in the CSEZ. —
Pursuant to Section 5(m) and Section 15 of RA 7227,
the BCDA shall promulgate all necessary policies,
rules and regulations governing the CSEZ, including
investment incentives, in consultation with the local
government units and pertinent government
departments for implementation by the CDC.
Among others, the CSEZ shall have all the applicable
incentives in the Subic Special Economic and Free
Port Zone under RA 7227 and those applicable
incentives granted in the Export Processing Zones,
the Omnibus Investments Code of 1987, the Foreign
Investments Act of 1991 and new investments laws
which may hereinafter be enacted.
The CSEZ Main Zone covering the Clark Air Base
proper shall have all the aforecited investment
incentives, while the CSEZ Sub-Zone covering the
rest of the CSEZ shall have limited incentives. The
full incentives in the Clark SEZ Main Zone and the
limited incentives in the Clark SEZ Sub-Zone shall be
determined by the BCDA.
Pursuant to the directive under Executive Order No.
80, the BCDA passed Board Resolution No. 93-05-
034 on May 18, 1993, allowing the tax and duty-free
sale at retail of consumer goods imported via Clark
for consumption outside the CSEZ. The assailed
provisions of said resolution read, as follows:
Section 4. SPECIFIC INCENTIVES IN THE CSEZ MAIN
ZONE. – The CSEZ-registered enterprises/businesses
shall be entitled to all the incentives available under
R.A. No. 7227, E.O. No. 226 and R.A. No. 7042
which shall include, but not limited to, the following:
I. As in Subic Economic and Free Port Zone:
A. Customs:
. . .
4. Tax and duty-free purchase and consumption of
goods/articles (duty free shopping) within the CSEZ
Main Zone.
5. For individuals, duty-free consumer goods may
be brought out of the CSEZ Main Zone into the
Philippine Customs territory but not to exceed
US$200.00 per month per CDC-registered person,
similar to the limits imposed in the Subic SEZ. This
privilege shall be enjoyed only once a month. Any
excess shall be levied taxes and duties by the Bureau
of Customs.
On June 10, 1993, the President issued Executive
Order No. 97, “Clarifying the Tax and Duty Free
Incentive Within the Subic Special Economic Zone
Pursuant to R.A. No. 7227.” Said issuance in part
states, thus:
SECTION 1. On Import Taxes and Duties – Tax and
duty-free importations shall apply only to raw
materials, capital goods and equipment brought in
by business enterprises into the SSEZ. Except for
these items, importations of other goods into the
SSEZ, whether by business enterprises or resident
individuals, are subject to taxes and duties under
relevant Philippine laws.
The exportation or removal of tax and duty-free
goods from the territory of the SSEZ to other parts
of the Philippine territory shall be subject to duties
and taxes under relevant Philippine laws.
Nine days after, on June 19, 1993, Executive Order
No. 97-A was issued, “Further Clarifying the Tax and
Duty-Free Privilege Within the Subic Special
Economic and Free Port Zone.” The relevant
provisions read, as follows:
SECTION 1. The following guidelines shall govern
the tax and duty-free privilege within the Secured
Area of the Subic Special Economic and Free Port
Zone:
1.1 The Secured Area consisting of the
presently fenced-in former Subic Naval Base shall be
the only completely tax and duty-free area in the
SSEFPZ. Business enterprises and individuals
(Filipinos and foreigners) residing within the Secured
Area are free to import raw materials, capital goods,
equipment, and consumer items tax and duty-free.
Consumption items, however, must be consumed
within the Secured Area. Removal of raw materials,
capital goods, equipment and consumer items out of
the Secured Area for sale to non-SSEFPZ registered
enterprises shall be subject to the usual taxes and
duties, except as may be provided herein.
1.2. Residents of the SSEFPZ living outside the
Secured Area can enter the Secured Area and
consume any quantity of consumption items in hotels
and restaurants within the Secured Area. However,
these residents can purchase and bring out of the
Secured Area to other parts of the Philippine
territory consumer items worth not exceeding
US$100 per month per person. Only residents age 15
and over are entitled to this privilege.
1.3. Filipinos not residing within the SSEFPZ
can enter the Secured Area and consume any
quantity of consumption items in hotels and
restaurants within the Secured Area. However, they
can purchase and bring out [of] the Secured Area to
other parts of the Philippine territory consumer items
worth not exceeding US$200 per year per person.
Only Filipinos age 15 and over are entitled to this
privilege.
Petitioners assail the $100 monthly and $200 yearly
tax-free shopping privileges granted by the
aforecited provisions respectively to SSEZ residents
living outside the Secured Area of the SSEZ and to
Filipinos aged 15 and over residing outside the SSEZ.
On February 23, 1998, petitioners thus filed the
instant petition, seeking the declaration of nullity of
the assailed issuances on the following grounds:
I.
EXECUTIVE ORDER NO. 97-A, SECTION 5 OF
EXECUTIVE ORDER NO. 80, AND SECTION 4 OF
BCDA BOARD RESOLUTION NO. 93-05-034 ARE NULL
AND VOID [FOR] BEING AN EXERCISE OF
EXECUTIVE LAWMAKING.
II.
EXECUTIVE ORDER NO. 97-A, SECTION 5 OF
EXECUTIVE ORDER NO. 80, AND SECTION 4 OF
BCDA BOARD RESOLUTION NO. 93-05-034 ARE
UNCONSTITUTIONAL FOR BEING VIOLATIVE OF THE
EQUAL PROTECTION CLAUSE AND THE PROHIBITION
AGAINST UNFAIR COMPETITION AND PRACTICES IN
RESTRAINT OF TRADE.
III.
EXECUTIVE ORDER NO. 97-A, SECTION 5 OF
EXECUTIVE ORDER NO. 80, AND SECTION 4 OF
BCDA BOARD RESOLUTION NO. 93-05-034 ARE NULL
AND VOID [FOR] BEING VIOLATIVE OF REPUBLIC
ACT NO. 7227.
IV.
THE CONTINUED IMPLEMENTATION OF THE
CHALLENGED ISSUANCES IF NOT RESTRAINED WILL
CONTINUE TO CAUSE PETITIONERS TO SUFFER
GRAVE AND IRREPARABLE INJURY.
In their Comments, respondents point out procedural
issues, alleging lack of petitioners’ legal standing,
the unreasonable delay in the filing of the petition,
laches, and the propriety of the remedy of
prohibition.
Anent the claim on lack of legal standing,
respondents argue that petitioners, being mere
suppliers of the local retailers operating outside the
special economic zones, do not stand to suffer direct
injury in the enforcement of the issuances being
assailed herein. Assuming this is true, this Court has
nevertheless held that in cases of paramount
importance where serious constitutional questions
are involved, the standing requirements may be
relaxed and a suit may be allowed to prosper even
where there is no direct injury to the party claiming
the right of judicial review.
In the same vein, with respect to the other alleged
procedural flaws, even assuming the existence of
such defects, this Court, in the exercise of its
discretion, brushes aside these technicalities and
takes cognizance of the petition considering the
importance to the public of the present case and in
keeping with the duty to determine whether the
other branches of the government have kept
themselves within the limits of the Constitution.
Now, on the constitutional arguments raised:
As this Court enters upon the task of passing on the
validity of an act of a co-equal and coordinate
branch of the Government, it bears emphasis that
deeply ingrained in our jurisprudence is the time-
honored principle that a statute is presumed to be
valid. This presumption is rooted in the doctrine of
separation of powers which enjoins upon the three
coordinate departments of the Government a
becoming courtesy for each other’s acts. Hence, to
doubt is to sustain. The theory is that before the act
was done or the law was enacted, earnest studies
were made by Congress, or the President, or both, to
insure that the Constitution would not be breached.
This Court, however, may declare a law, or portions
thereof, unconstitutional where a petitioner has
shown a clear and unequivocal breach of the
Constitution, not merely a doubtful or argumentative
one. In other words, before a statute or a portion
thereof may be declared unconstitutional, it must be
shown that the statute or issuance violates the
Constitution clearly, palpably and plainly, and in
such a manner as to leave no doubt or hesitation in
the mind of the Court.
The Issue on Executive Legislation
Petitioners claim that the assailed issuances
(Executive Order No. 97-A; Section 5 of Executive
Order No. 80; and Section 4 of BCDA Board
Resolution No. 93-05-034) constitute executive
legislation, in violation of the rule on separation of
powers. Petitioners argue that the Executive
Department, by allowing through the questioned
issuances the setting up of tax and duty-free shops
and the removal of consumer goods and items from
the zones without payment of corresponding duties
and taxes, arbitrarily provided additional exemptions
to the limitations imposed by Republic Act No. 7227,
which limitations petitioners identify as follows:
(1) [Republic Act No. 7227] allowed only tax and
duty-free importation of raw materials, capital and
equipment.
(2) It provides that any exportation or removal of
goods from the territory of the Subic Special
Economic Zone to other parts of the Philippine
territory shall be subject to customs duties and taxes
under the Customs and Tariff Code and other
relevant tax laws of the Philippines.
Anent the first alleged limitation, petitioners contend
that the wording of Republic Act No. 7227 clearly
limits the grant of tax incentives to the importation
of raw materials, capital and equipment only. Hence,
they claim that the assailed issuances constitute
executive legislation for invalidly granting tax
incentives in the importation of consumer goods
such as those being sold in the duty-free shops, in
violation of the letter and intent of Republic Act No.
7227.
A careful reading of Section 12 of Republic Act No.
7227, which pertains to the SSEZ, would show that it
does not restrict the duty-free importation only to
“raw materials, capital and equipment.” Section 12
of the cited law is partly reproduced, as follows:
SECTION 12. Subic Special Economic Zone. —
. . .
The abovementioned zone shall be subject to the
following policies:
. . .
(b) The Subic Special Economic Zone shall be
operated and managed as a separate customs
territory ensuring free flow or movement of goods
and capital within, into and exported out of the
Subic Special Economic Zone, as well as provide
incentives such as tax and duty-free importations of
raw materials, capital and equipment. However,
exportation or removal of goods from the territory of
the Subic Special Economic Zone to the other parts
of the Philippine territory shall be subject to customs
duties and taxes under the Customs and Tariff Code
and other relevant tax laws of the Philippines.
While it is true that Section 12 (b) of Republic Act
No. 7227 mentions only raw materials, capital and
equipment, this does not necessarily mean that the
tax and duty-free buying privilege is limited to these
types of articles to the exclusion of consumer goods.
It must be remembered that in construing statutes,
the proper course is to start out and follow the true
intent of the Legislature and to adopt that sense
which harmonizes best with the context and
promotes in the fullest manner the policy and
objects of the Legislature.
In the present case, there appears to be no logic in
following the narrow interpretation petitioners urge.
To limit the tax-free importation privilege of
enterprises located inside the special economic zone
only to raw materials, capital and equipment clearly
runs counter to the intention of the Legislature to
create a free port where the “free flow of goods or
capital within, into, and out of the zones” is insured.
The phrase “tax and duty-free importations of raw
materials, capital and equipment” was merely cited
as an example of incentives that may be given to
entities operating within the zone. Public respondent
SBMA correctly argued that the maxim expressio
unius est exclusio alterius, on which petitioners
impliedly rely to support their restrictive
interpretation, does not apply when words are
mentioned by way of example. It is obvious from the
wording of Republic Act No. 7227, particularly the
use of the phrase “such as,” that the enumeration
only meant to illustrate incentives that the SSEZ is
authorized to grant, in line with its being a free port
zone.
Furthermore, said legal maxim should be applied
only as a means of discovering legislative intent
which is not otherwise manifest, and should not be
permitted to defeat the plainly indicated purpose of
the Legislature.
The records of the Senate containing the discussion
of the concept of “special economic zone” in Section
12 (a) of Republic Act No. 7227 show the legislative
intent that consumer goods entering the SSEZ which
satisfy the needs of the zone and are consumed
there are not subject to duties and taxes in
accordance with Philippine laws, thus:
Senator Guingona. . . . The concept of Special
Economic Zone is one that really includes the
concept of a free port, but it is broader. While a
free port is necessarily included in the Special
Economic Zone, the reverse is not true that a free
port would include a special economic zone.
Special Economic Zone, Mr. President, would include
not only the incoming and outgoing of vessels, duty-
free and tax-free, but it would involve also tourism,
servicing, financing and all the appurtenances of an
investment center. So, that is the concept, Mr.
President. It is broader. It includes the free port
concept and would cater to the greater needs of
Olangapo City, Subic Bay and the surrounding
municipalities.
Senator Enrile. May I know then if a factory located
within the jurisdiction of Morong, Bataan that was
originally a part of the Subic Naval reservation, be
entitled to a free port treatment or just a special
economic zone treatment?
Senator Guingona. As far as the goods required for
manufacture is concerned, Mr. President, it would
have privileges of duty-free and tax-free. But in
addition, the Special Economic Zone could embrace
the needs of tourism, could embrace the needs of
servicing, could embrace the needs of financing and
other investment aspects.
Senator Enrile. When a hotel is constructed, Mr.
President, in this geographical unit which we call a
special economic zone, will the goods entering to be
consumed by the customers or guests of the hotel be
subject to duties?
Senator Guingona. That is the concept that we are
crafting, Mr. President.
Senator Enrile. No. I am asking whether those
goods will be duty-free, because it is constructed
within a free port.
Senator Guingona. For as long as it services the
needs of the Special Economic Zone, yes.
Senator Enrile. For as long as the goods remain
within the zone, whether we call it an economic zone
or a free port, for as long as we say in this law that
all goods entering this particular territory will be
duty-free and tax-free, for as long as they remain
there, consumed there or reexported or destroyed in
that place, then they are not subject to the duties
and taxes in accordance with the laws of the
Philippines?
Senator Guingona. Yes.
Petitioners rely on Committee Report No. 1206
submitted by the Ad Hoc Oversight Committee on
Bases Conversion on June 26, 1995. Petitioners put
emphasis on the report’s finding that the setting up
of duty-free stores never figured in the minds of the
authors of Republic Act No. 7227 in attracting
foreign investors to the former military baselands.
They maintain that said law aimed to attract
manufacturing and service enterprises that will
employ the dislocated former military base workers,
but not investors who would buy consumer goods
from duty-free stores.
The Court is not persuaded. Indeed, it is well-
established that opinions expressed in the debates
and proceedings of the Legislature, steps taken in
the enactment of a law, or the history of the
passage of the law through the Legislature, may be
resorted to as aids in the interpretation of a statute
with a doubtful meaning. Petitioners’ posture,
however, overlooks the fact that the 1995 Committee
Report they are referring to came into being well
after the enactment of Republic Act No. 7227 in
1993. Hence, as pointed out by respondent
Executive Secretary Torres, the aforementioned
report cannot be said to form part of Republic Act
No. 7227’s legislative history.
Section 12 of Republic Act No. 7227, provides in
part, thus:
SEC. 12. Subic Special Economic Zone. -- . . .
The abovementioned zone shall be subject to the
following policies:
(a) Within the framework and subject to the
mandate and limitations of the Constitution and the
pertinent provisions of the Local Government Code,
the Subic Special Economic Zone shall be developed
into a self-sustaining, industrial, commercial,
financial and investment center to generate
employment opportunities in and around the zone
and to attract and promote productive foreign
investments.
The aforecited policy was mentioned as a basis for
the issuance of Executive Order No. 97-A, thus:
WHEREAS, Republic Act No. 7227 provides that
within the framework and subject to the mandate
and limitations of the Constitution and the pertinent
provisions of the Local Government Code, the Subic
Special Economic and Free Port Zone (SSEFPZ) shall
be developed into a self-sustaining industrial,
commercial, financial and investment center to
generate employment opportunities in and around
the zone and to attract and promote productive
foreign investments; and
WHEREAS, a special tax and duty-free privilege
within a Secured Area in the SSEFPZ subject, to
existing laws has been determined necessary to
attract local and foreign visitors to the zone.
Executive Order No. 97-A provides guidelines to
govern the “tax and duty-free privileges within the
Secured Area of the Subic Special Economic and Free
Port Zone.” Paragraph 1.6 thereof states that “(t)he
sale of tax and duty-free consumer items in the
Secured Area shall only be allowed in duly
authorized duty-free shops.”
The Court finds that the setting up of such
commercial establishments which are the only ones
duly authorized to sell consumer items tax and
duty-free is still well within the policy enunciated in
Section 12 of Republic Act No. 7227 that “. . .the
Subic Special Economic Zone shall be developed into
a self-sustaining, industrial, commercial, financial
and investment center to generate employment
opportunities in and around the zone and to attract
and promote productive foreign investments.”
(Emphasis supplied.)
However, the Court reiterates that the second
sentences of paragraphs 1.2 and 1.3 of Executive
Order No. 97-A, allowing tax and duty-free removal
of goods to certain individuals, even in a limited
amount, from the Secured Area of the SSEZ, are null
and void for being contrary to Section 12 of Republic
Act No. 7227. Said Section clearly provides that
“exportation or removal of goods from the territory
of the Subic Special Economic Zone to the other
parts of the Philippine territory shall be subject to
customs duties and taxes under the Customs and
Tariff Code and other relevant tax laws of the
Philippines.”
On the other hand, insofar as the CSEZ is concerned,
the case for an invalid exercise of executive
legislation is tenable.
In John Hay Peoples Alternative Coalition, et al. v.
Victor Lim, et al., this Court resolved an issue, very
much like the one herein, concerning the legality of
the tax exemption benefits given to the John Hay
Economic Zone under Presidential Proclamation No.
420, Series of 1994, “CREATING AND DESIGNATING
A PORTION OF THE AREA COVERED BY THE FORMER
CAMP JOHN AS THE JOHN HAY SPECIAL ECONOMIC
ZONE PURSUANT TO REPUBLIC ACT NO. 7227.”
In that case, among the arguments raised was that
the granting of tax exemptions to John Hay was an
invalid and illegal exercise by the President of the
powers granted only to the Legislature. Petitioners
therein argued that Republic Act No. 7227 expressly
granted tax exemption only to Subic and not to the
other economic zones yet to be established. Thus,
the grant of tax exemption to John Hay by
Presidential Proclamation contravenes the
constitutional mandate that “[n]o law granting any
tax exemption shall be passed without the
concurrence of a majority of all the members of
Congress.”
This Court sustained the argument and ruled that
the incentives under Republic Act No. 7227 are
exclusive only to the SSEZ. The President, therefore,
had no authority to extend their application to John
Hay. To quote from the Decision:
More importantly, the nature of most of the assailed
privileges is one of tax exemption. It is the
legislature, unless limited by a provision of a state
constitution, that has full power to exempt any
person or corporation or class of property from
taxation, its power to exempt being as broad as its
power to tax. Other than Congress, the Constitution
may itself provide for specific tax exemptions, or
local governments may pass ordinances on
exemption only from local taxes.
The challenged grant of tax exemption would
circumvent the Constitution’s imposition that a law
granting any tax exemption must have the
concurrence of a majority of all the members of
Congress. In the same vein, the other kinds of
privileges extended to the John Hay SEZ are by
tradition and usage for Congress to legislate upon.
Contrary to public respondents’ suggestions, the
claimed statutory exemption of the John Hay SEZ
from taxation should be manifest and unmistakable
from the language of the law on which it is based; it
must be expressly granted in a statute stated in a
language too clear to be mistaken. Tax exemption
cannot be implied as it must be categorically and
unmistakably expressed.
If it were the intent of the legislature to grant to
John Hay SEZ the same tax exemption and incentives
given to the Subic SEZ, it would have so expressly
provided in R.A. No. 7227.
In the present case, while Section 12 of Republic Act
No. 7227 expressly provides for the grant of
incentives to the SSEZ, it fails to make any similar
grant in favor of other economic zones, including the
CSEZ. Tax and duty-free incentives being in the
nature of tax exemptions, the basis thereof should
be categorically and unmistakably expressed from
the language of the statute. Consequently, in the
absence of any express grant of tax and duty-free
privileges to the CSEZ in Republic Act No. 7227,
there would be no legal basis to uphold the
questioned portions of two issuances: Section 5 of
Executive Order No. 80 and Section 4 of BCDA Board
Resolution No. 93-05-034, which both pertain to the
CSEZ.
Petitioners also contend that the questioned
issuances constitute executive legislation for
allowing the removal of consumer goods and items
from the zones without payment of corresponding
duties and taxes in violation of Republic Act No.
7227 as Section 12 thereof provides for the taxation
of goods that are exported or removed from the
SSEZ to other parts of the Philippine territory.
On September 26, 1997, Executive Order No. 444
was issued, curtailing the duty-free shopping
privileges in the SSEZ and the CSEZ “to prevent
abuse of duty-free privilege and to protect local
industries from unfair competition.” The pertinent
provisions of said issuance state, as follows:
SECTION 3. Special Shopping Privileges Granted
During the Year-round Centennial Anniversary
Celebration in 1998. — Upon effectivity of this Order
and up to the Centennial Year 1998, in addition to
the permanent residents, locators and employees of
the fenced-in areas of the Subic Special Economic
and Freeport Zone and the Clark Special Economic
Zone who are allowed unlimited duty free purchases,
provided these are consumed within said fenced-in
areas of the Zones, the residents of the
municipalities adjacent to Subic and Clark as
respectively provided in R.A. 7227 (1992) and E.O.
97-A s. 1993 shall continue to be allowed One
Hundred US Dollars (US$100) monthly shopping
privilege until 31 December 1998. Domestic tourists
visiting Subic and Clark shall be allowed a shopping
privilege of US$25 for consumable goods which shall
be consumed only in the fenced-in area during their
visit therein.
SECTION 4. Grant of Duty Free Shopping Privileges
Limited Only To Individuals Allowed by Law. —
Starting 1 January 1999, only the following persons
shall continue to be eligible to shop in duty free
shops/outlets with their corresponding purchase
limits:
a. Tourists and Filipinos traveling to or returning
from foreign destinations under E.O. 97-A s. 1993 —
One Thousand US Dollars (US$1,000) but not to
exceed Ten Thousand US Dollars (US$10,000) in any
given year;
b. Overseas Filipino Workers (OFWs) and
Balikbayans defined under R.A. 6768 dated 3
November 1989 — Two Thousand US Dollars
(US$2,000);
c. Residents, eighteen (18) years old and above,
of the fenced-in areas of the freeports under R.A.
7227 (1992) and E.O. 97-A s. 1993 — Unlimited
purchase as long as these are for consumption
within these freeports.
The term "Residents" mentioned in item c above
shall refer to individuals who, by virtue of domicile
or employment, reside on permanent basis within the
freeport area. The term excludes (1) non-residents
who have entered into short- or long-term property
lease inside the freeport, (2) outsiders engaged in
doing business within the freeport, and (3) members
of private clubs (e.g., yacht and golf clubs) based or
located within the freeport. In this regard, duty free
privileges granted to any of the above individuals
(e.g., unlimited shopping privilege, tax-free
importation of cars, etc.) are hereby revoked.
A perusal of the above provisions indicates that
effective January 1, 1999, the grant of duty-free
shopping privileges to domestic tourists and to
residents living adjacent to SSEZ and the CSEZ had
been revoked. Residents of the fenced-in area of the
free port are still allowed unlimited purchase of
consumer goods, “as long as these are for
consumption within these freeports.” Hence, the only
individuals allowed by law to shop in the duty-free
outlets and remove consumer goods out of the free
ports tax-free are tourists and Filipinos traveling to
or returning from foreign destinations, and Overseas
Filipino Workers and Balikbayans as defined under
Republic Act No. 6768.
Subsequently, on October 20, 2000, Executive Order
No. 303 was issued, amending Executive Order No.
444. Pursuant to the limited duration of the
privileges granted under the preceding issuance,
Section 2 of Executive Order No. 303 declared that
“[a]ll special shopping privileges as granted under
Section 3 of Executive Order 444, s. 1997, are
hereby deemed terminated. The grant of duty free
shopping privileges shall be restricted to qualified
individuals as provided by law.”
It bears noting at this point that the shopping
privileges currently being enjoyed by Overseas
Filipino Workers, Balikbayans, and tourists traveling
to and from foreign destinations, draw authority not
from the issuances being assailed herein, but from
Executive Order No. 46 and Republic Act No. 6768,
both enacted prior to the promulgation of Republic
Act No. 7227.
From the foregoing, it appears that petitioners’
objection to the allowance of tax-free removal of
goods from the special economic zones as previously
authorized by the questioned issuances has become
moot and academic.
In any event, Republic Act No. 7227, specifically
Section 12 (b) thereof, clearly provides that
“exportation or removal of goods from the territory
of the Subic Special Economic Zone to the other
parts of the Philippine territory shall be subject to
customs duties and taxes under the Customs and
Tariff Code and other relevant tax laws of the
Philippines.”
Thus, the removal of goods from the SSEZ to other
parts of the Philippine territory without payment of
said customs duties and taxes is not authorized by
the Act. Consequently, the following italicized
provisions found in the second sentences of
paragraphs 1.2 and 1.3, Section 1 of Executive Order
No. 97-A are null and void:
1.2 Residents of the SSEFPZ living outside the
Secured Area can enter and consume any quantity of
consumption items in hotels and restaurants within
the Secured Area. However, these residents can
purchase and bring out of the Secured Area to other
parts of the Philippine territory consumer items
worth not exceeding US $100 per month per person.
Only residents age 15 and over are entitled to this
privilege.
1.3 Filipinos not residing within the SSEFPZ can
enter the Secured Area and consume any quantity of
consumption items in hotels and restaurants within
the Secured Area. However, they can purchase
and bring out of the Secured Area to other parts of
the Philippine territory consumer items worth not
exceeding US $200 per year per person. Only
Filipinos age 15 and over are entitled to this
privilege.
A similar provision found in paragraph 5, Section
4(A) of BCDA Board Resolution No. 93-05-034 is also
null and void. Said Resolution applied the incentives
given to the SSEZ under Republic Act No. 7227 to
the CSEZ, which, as aforestated, is without legal
basis.
Having concluded earlier that the CSEZ is excluded
from the tax and duty-free incentives provided under
Republic Act No. 7227, this Court will resolve the
remaining arguments only with regard to the
operations of the SSEZ. Thus, the assailed issuance
that will be discussed is solely Executive Order No.
97-A, since it is the only one among the three
questioned issuances which pertains to the SSEZ.
Equal Protection of the Laws
Petitioners argue that the assailed issuance
(Executive Order No. 97-A) is violative of their right
to equal protection of the laws, as enshrined in
Section 1, Article III of the Constitution. To support
this argument, they assert that private respondents
operating inside the SSEZ are not different from the
retail establishments located outside, the products
sold being essentially the same. The only distinction,
they claim, lies in the products’ variety and source,
and the fact that private respondents import their
items tax-free, to the prejudice of the retailers and
manufacturers located outside the zone.
Petitioners’ contention cannot be sustained. It is an
established principle of constitutional law that the
guaranty of the equal protection of the laws is not
violated by a legislation based on a reasonable
classification. Classification, to be valid, must (1)
rest on substantial distinction, (2) be germane to the
purpose of the law, (3) not be limited to existing
conditions only, and (4) apply equally to all members
of the same class.
Applying the foregoing test to the present case, this
Court finds no violation of the right to equal
protection of the laws. First, contrary to petitioners’
claim, substantial distinctions lie between the
establishments inside and outside the zone,
justifying the difference in their treatment. In Tiu v.
Court of Appeals, the constitutionality of Executive
Order No. 97-A was challenged for being violative of
the equal protection clause. In that case, petitioners
claimed that Executive Order No. 97-A was
discriminatory in confining the application of
Republic Act No. 7227 within a secured area of the
SSEZ, to the exclusion of those outside but are,
nevertheless, still within the economic zone.
Upholding the constitutionality of Executive Order
No. 97-A, this Court therein found substantial
differences between the retailers inside and outside
the secured area, thereby justifying a valid and
reasonable classification:
Certainly, there are substantial differences between
the big investors who are being lured to establish
and operate their industries in the so-called “secured
area” and the present business operators outside the
area. On the one hand, we are talking of billion-peso
investments and thousands of new jobs. On the
other hand, definitely none of such magnitude. In
the first, the economic impact will be national; in the
second, only local. Even more important, at this time
the business activities outside the “secured area” are
not likely to have any impact in achieving the
purpose of the law, which is to turn the former
military base to productive use for the benefit of the
Philippine economy. There is, then, hardly any
reasonable basis to extend to them the benefits and
incentives accorded in R.A. 7227. Additionally, as the
Court of Appeals pointed out, it will be easier to
manage and monitor the activities within the
“secured area,” which is already fenced off, to
prevent “fraudulent importation of merchandise” or
smuggling.
It is well-settled that the equal-protection guarantee
does not require territorial uniformity of laws. As
long as there are actual and material differences
between territories, there is no violation of the
constitutional clause. And of course, anyone,
including the petitioners, possessing the requisite
investment capital can always avail of the same
benefits by channeling his or her resources or
business operations into the fenced-off free port
zone.
The Court in Tiu found real and substantial
distinctions between residents within the secured
area and those living within the economic zone but
outside the fenced-off area. Similarly, real and
substantial differences exist between the
establishments herein involved. A significant
distinction between the two groups is that
enterprises outside the zones maintain their
businesses within Philippine customs territory, while
private respondents and the other duly-registered
zone enterprises operate within the so-called
“separate customs territory.” To grant the same tax
incentives given to enterprises within the zones to
businesses operating outside the zones, as
petitioners insist, would clearly defeat the statute’s
intent to carve a territory out of the military
reservations in Subic Bay where free flow of goods
and capital is maintained.
The classification is germane to the purpose of
Republic Act No. 7227. As held in Tiu, the real
concern of Republic Act No. 7227 is to convert the
lands formerly occupied by the US military bases into
economic or industrial areas. In furtherance of such
objective, Congress deemed it necessary to extend
economic incentives to the establishments within the
zone to attract and encourage foreign and local
investors. This is the very rationale behind Republic
Act No. 7227 and other similar special economic
zone laws which grant a complete package of tax
incentives and other benefits.
The classification, moreover, is not limited to the
existing conditions when the law was promulgated,
but to future conditions as well, inasmuch as the law
envisioned the former military reservation to
ultimately develop into a self-sustaining investment
center.
And, lastly, the classification applies equally to all
retailers found within the “secured area.” As ruled in
Tiu, the individuals and businesses within the
“secured area,” being in like circumstances or
contributing directly to the achievement of the end
purpose of the law, are not categorized further.
 They are all similarly treated, both in privileges
granted and in obligations required.
With all the four requisites for a reasonable
classification present, there is no ground to
invalidate Executive Order No. 97-A for being
violative of the equal protection clause.
Prohibition against Unfair Competition
and Practices in Restraint of Trade
Petitioners next argue that the grant of special tax
exemptions and privileges gave the private
respondents undue advantage over local enterprises
which do not operate inside the SSEZ, thereby
creating unfair competition in violation of the
constitutional prohibition against unfair competition
and practices in restraint of trade.
The argument is without merit. Just how the
assailed issuance is violative of the prohibition
against unfair competition and practices in restraint
of trade is not clearly explained in the petition.
Republic Act No. 7227, and consequently Executive
Order No. 97-A, cannot be said to be distinctively
arbitrary against the welfare of businesses outside
the zones. The mere fact that incentives and
privileges are granted to certain enterprises to the
exclusion of others does not render the issuance
unconstitutional for espousing unfair competition.
Said constitutional prohibition cannot hinder the
Legislature from using tax incentives as a tool to
pursue its policies.
Suffice it to say that Congress had justifiable reasons
in granting incentives to the private respondents, in
accordance with Republic Act No. 7227’s policy of
developing the SSEZ into a self-sustaining entity that
will generate employment and attract foreign and
local investment. If petitioners had wanted to avoid
any alleged unfavorable consequences on their
profits, they should upgrade their standards of
quality so as to effectively compete in the market. In
the alternative, if petitioners really wanted the
preferential treatment accorded to the private
respondents, they could have opted to register with
SSEZ in order to operate within the special economic
zone.
Preferential Use of Filipino Labor, Domestic Materials
and Locally Produced Goods
Lastly, petitioners claim that the questioned issuance
(Executive Order No. 97-A) openly violated the State
policy of promoting the preferential use of Filipino
labor, domestic materials and locally produced goods
and adopting measures to help make them
competitive.
Again, the argument lacks merit. This Court notes
that petitioners failed to substantiate their sweeping
conclusion that the issuance has violated the State
policy of giving preference to Filipino goods and
labor. The mere fact that said issuance authorizes
the importation and trade of foreign goods does not
suffice to declare it unconstitutional on this ground.
Petitioners cite Manila Prince Hotel v. GSIS which,
however, does not apply. That case dealt with the
policy enunciated under the second paragraph of
Section 10, Article XII of the Constitution, applicable
to the grant of rights, privileges, and concessions
“covering the national economy and
patrimony,”which is different from the policy invoked
in this petition, specifically that of giving preference
to Filipino materials and labor found under Section
12 of the same Article of the Constitution. (Emphasis
supplied).
In Tañada v. Angara, this Court elaborated on the
meaning of Section 12, Article XII of the Constitution
in this wise:
[W]hile the Constitution indeed mandates a bias in
favor of Filipino goods, services, labor and
enterprises, at the same time, it recognizes the need
for business exchange with the rest of the world on
the bases of equality and reciprocity and limits
protection of Filipino enterprises only against foreign
competition and trade practices that are unfair. In
other words, the Constitution did not intend to
pursue an isolationist policy. It did not shut out
foreign investments, goods and services in the
development of the Philippine economy. While the
Constitution does not encourage the unlimited entry
of foreign goods, services and investments into the
country, it does not prohibit them either. In fact, it
allows an exchange on the basis of equality and
reciprocity, frowning only on foreign competition
that is unfair.

This Court notes that the Executive Department, with

its subsequent issuance of Executive Order Nos. 444
and 303, has provided certain measures to prevent
unfair competition. In particular, Executive Order
Nos. 444 and 303 have restricted the special
shopping privileges to certain individuals. Executive
Order No. 303 has limited the range of items that
may be sold in the duty-free outlets, and imposed
sanctions to curb abuses of duty-free privileges.
With these measures, this Court finds no reason to
strike down Executive Order No. 97-A for allegedly
being prejudicial to Filipino labor, domestic materials
and locally produced goods.

WHEREFORE, the petition is PARTLY GRANTED.

Section 5 of Executive Order No. 80 and Section 4
of BCDA Board Resolution No. 93-05-034 are hereby
declared NULL and VOID and are accordingly
declared of no legal force and effect. Respondents
are hereby enjoined from implementing the aforesaid
void provisions. All portions of Executive Order No.
97-A are valid and effective, except the second
sentences in paragraphs 1.2 and 1.3 of said
Executive Order, which are hereby declared
INVALID.

No costs.

SO ORDERED.