SUMMARY OF DOCTRINES

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San Beda College of Law

2005 Centralized Bar Operations 21

San Beda College of Law

2005 Centralized Bar Operations

SUMMARY OF DOCTRINESGENERAL PRINCIPLESTax Exemption of Charitable Institutions

To determine whether an enterprise is a charitable institution/entity or not, the elements which should be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the methods of administration, the nature of the actual work performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties.

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

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitutions and the law. [LUNG CENTER OF THE PHILIPPINES vs. QUEZON CITY AND CONSTANTINO P. ROSAS. G.R. No. 144104. June 29, 2004.]

Tax Exemption; Trust Funds

The Gratuity Plan will lose its tax-exempt status if the retirement benefits are released prior to the retirement of the employees. The trust funds of employees other than those of private employers are qualified for certain tax exemptions pursuant to Section 60(B), formerly Section 53(b), of the National Internal Revenue Code. [DEVELOPMENT BANK OF THE PHILIPPINES vs. COMMISSION ON AUDIT. G.R. No. 144516. February 11, 2004.]

Income Tax; Final Withholding Tax; Gross Receipts Tax; Double TaxationAlthough the 20% FWT on respondent Bank's interest income was not actually received by respondent because it was remitted directly to the government, the fact that the amount redounded to the bank's benefit makes it part of the taxable gross receipts in computing the 5% GRT. The 5% GRT (Sec. 119 of the Tax Code) is included under "Title V. Other Percentage Taxes" and is not subject to withholding. The 20% FWT, on the other hand, falls under Section 24(e)(1) of "Title II. Tax on Income."

In a withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed; the payor, a separate entity, acts as no more than an agent of the government for the collection of the tax in order to ensure its payment. Obviously, this amount that is used to settle the tax liability is deemed sourced from the proceeds constitutive of the tax base. These proceeds are either actual or constructive.

There is no double taxation because the taxes are imposed on two different subject matters. The subject matter of the FWT is the passive income generated in the form of interest on deposits and yield on deposit substitutes, while the subject matter of the GRT is the privilege of engaging in the business of banking. A tax based on receipts is a tax on business rather than on the property; hence, it is an excise rather than a property tax. [CIR vs. SOLIDBANK CORP. G.R. No. 148191. November 25, 2003.]Tax Exemption of Special Economic Zones

It is the legislature, unless limited by a provision of the 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 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. [JOHN HAY PEOPLES ALTERNATIVE COALITION vs. VICTOR LIM. G.R. No. 119775. October 24, 2003.]Percentage tax on pawnshops; Validity of Revenue Memorandum Orders and Circulars

While it is true that pawnshops are engaged in the business of lending money, they are not considered "lending investors" for the purpose of imposing the 5% percentage taxes because: 1) pawnshops and lending investors were subjected to different tax treatments; 2) Congress never intended pawnshops to be treated in the same way as lending investors; 3) Section 116 of the NIRC of 1977, as amended by E.O. No. 273, subjects to percentage tax dealers in securities and lending investors only.

When an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance, for it gives no real consequence more than what the law itself has already prescribed. When, on the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law. [CIR vs. MICHEAL J. LHUILLIER PAWNSHOP, INC. G.R. No. 150947. July 15, 2003.]Carrying forward of excess or overpaid income tax

The carrying forward of any excess or overpaid income tax for a given taxable year is limited to the succeeding taxable year only. Section 69 of the old NIRC provides that in case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding year. [AB LEASING AND FINANCE CORPORATION vs. CIR. G.R. No. 138342. July 8, 2003.]

TAX ENFORCEMENT AND ADMINISTRATION

Tax Assessments

Unpaid tax attaches to the property and is chargeable against the person who had actual or beneficial use and possession of it regardless of whether or not he is the owner. To impose the real property tax on the subsequent owner that was neither the owner nor the beneficial user of the property during the designated periods would not only be contrary to law but also unjust.

If the taxpayer is not satisfied with the action of the local assessor in the assessment of his property, he has the right, under Section 30 of P.D. No. 464, to appeal to the Local Board of Assessment Appeals by filing a verified petition within sixty (60) days from service of said notice of assessment. If the taxpayer fails to appeal in due course, the right of the local government to collect the taxes due becomes absolute upon the expiration of such period, with respect to the taxpayer's property.

A notice of assessment as provided for in the Real Property Tax Code should effectively inform the taxpayer of the value of a specific property, or proportion thereof subject to tax, including the discovery, listing, classification, and appraisal of properties.

Section 64 of the RPTC, prohibits courts from declaring any tax invalid by reason of irregularities or informalities in the proceedings of the officers charged with the assessment or collection of taxes except upon the condition that the taxpayer pays the just amount of the tax, as determined by the court in the pending proceeding. [MERALCO vs. NELIA A. BARLIS. G.R. No. 114231. June 29, 2004.]

Tax Assessment; Proper ServiceThe legal obligation on the executor, administrator or any of the legal heirs, to inform respondent CIR of the decedents death under Section 104 of the 1977 NIRC pertains only to all cases of transfer subject to tax or where the gross value of the estate exceeds P3,000. It has absolutely no applicability to a case for deficiency of income tax.

When an estate is under administration, notice must be sent to the administrator of the estate, since it is the said administrator, as representative of the estate, who has the legal obligation to pay and discharge all debts of the estate and to perform all orders of the court. [ESTATE OF THE LATE JULIANA DIEZ vs. CIR. G.R. No. 155541. January 27,2004.]Tax Assessment; Proper ServiceWhere the notice of assessment is sent to the companys old business address, despite the fact that the new address has been communicated to the BIR, there is then no valid assessment by the BIR

Since there was a failure to effect a timely valid assessment, the period for filing a criminal case for PAC's tax liabilities had prescribed by the time Commissioner instituted the criminal cases against PACs former officers. [CIR vs. BPI, as LIQUIDATOR OF PARAMOUNT ACCEPTANCE CORPORATION. G.R. No. 135446. September 23, 2003.]

Revenue Regulations; Nature; Application

Administrative issuances may be distinguished according to their nature and substance: legislative and interpretative. A legislative rule is in the matter of subordinate legislation, designed to implement a primary legislation by providing the details thereof. An interpretative rule, on the other hand, is designed to provide guidelines to the law, which the administrative agency is in charge of enforcing.The principle is well entrenched that statutes, including administrative rules and regulations, operate prospectively only, unless the legislative intent to the contrary is manifest by express terms or by necessary implication.Tax refunds are in the nature of tax exemptions. As such, these are regarded as in derogation of sovereign authority and are to be strictly construed against the person or entity claiming the exemption. [BPI LEASING CORP. vs. COURT OF APPEALS. G.R. No. 127624. November 18, 2003.]

LOCAL TAXATIONLocal Taxation; Validity of a Municipal Ordinance

By express language of Sections 153 and 155 of RA No. 7160, local government units, through their Sanggunian, may prescribe the terms and conditions for the imposition of toll fees or charges for the use of any public road, pier or wharf funded and constructed by them. A service fee imposed on vehicles using municipal roads leading to the wharf is thus valid. However, Section 133(e) of RA No. 7160 prohibits the imposition, in the guise of wharfage, of fees as well as all other taxes or charges in any form whatsoever on goods or merchandise. [PALMA DEVELOPMENT CORPORATION vs. MUNICIPALITY OF MALANGAS. G.R. No. 152492. October 16, 2003.]

Local Taxation; Powers of City AssessorsThe determination made by the respondent City Assessor with regard to the taxability of the subject real properties squarely falls within its power to assess properties for taxation purposes subject to appeal before the Local Board of Assessment Appeals. The authority to receive evidence, as basis for classification of properties for taxation, is legally vested on the respondent City Assessor whose action is appealable to the Local Board of Assessment Appeals and the Central Board of Assessment Appeals, if necessary. [SYSTEMS PLUS COMPUTER COLLEGE OF CALOOCAN CITY vs. LOCAL GOVERNMENT OF CALOOCAN CITY. G.R. No. 146382. August 7, 2003.]REAL PROPERTY TAXATIONTax Exemption; Real Property Tax and Business Tax

The exemption of public property from taxation does not extend to improvements made thereon by homesteaders or occupants at their own expense. The warehouse in the instant case is thus, taxable; it being a mere improvement built on an alleged property of public dominion.

Any income or profit generated by an entity, even of a corporation organized without any intention of realizing profit in the conduct of its activities, is subject to tax. What matters is the established fact that it leased out its building to ten private entities from which it regularly earned substantial income. Thus, in the absence of any proof of exemption therefrom, petitioner is liable for the assessed business taxes. [PHILIPPINE PORTS AUTHORITY vs. CITY OF ILOILO. G.R. No. 109791. July 14, 2003.]TARIFF AND CUSTOMS CODEJurisdiction of the Collector of Customs & Commissioner of Customs

There is no question that Regional Trial Courts are devoid of any competence to pass upon the validity or regularity of seizure and forfeiture proceedings conducted by the Bureau of Customs and to enjoin or otherwise interfere with these proceedings. The Collector of Customs sitting in seizure and forfeiture proceedings has exclusive jurisdiction to hear and determine all questions touching on the seizure and forfeiture of dutiable goods. The Regional Trial Courts are precluded from assuming cognizance over such matters even through petitions of certiorari, prohibition or mandamus. [R.V. MARZAN FREIGHT, INC. vs. COURT OF APPEALS & SHIELAS MANUFACTURING INC. G.R. No. 128064. March 4, 2004.]

CASE DIGESTGENERAL PRINCIPLESTax Exemption of Charitable InstitutionsLUNG CENTER OF THE PHILIPPINES vs. QUEZON CITY and CONSTANTINO P. ROSAS

[G.R. No. 144104. June 29, 2004.]

CALLEJO, SR., J:

FACTS:The petitioner Lung Center of the Philippines is a non-stock and non-profit entity by virtue of Presidential Decree No. 1823. It is the registered owner of a parcel of land with a hospital in the middle, located at Quezon City. A big space at the ground floor is being leased to private parties, for canteen and small store spaces, and to medical or professional practitioners who use the same as their private clinics. A big portion of the land is being leased for commercial purposes to a private enterprise.

The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients, both paying and non-paying. It also receives annual subsidies from the government.

On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real property taxes. The petitioner filed a Claim for Exemption from real property taxes with the City Assessor, predicated on its claim that it is a charitable institution. The petitioner's request was denied, and a petition was, thereafter, filed before the Local Board of Assessment Appeals of Quezon City (QC-LBAA). The petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution, the property is exempt from real property taxes. The QC-LBAA dismissed the petition and held the petitioner liable for real property taxes.

The Central Board of Assessment Appeals of Quezon City and the Court of Appeals (CBAA) affirmed QC-LBAAs decision.

ISSUES:

1. Whether petitioner is a charitable institution within the context of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160.

2. Whether the real properties of the petitioner are exempt from real property taxes.

HELD:1. YES. To determine whether an enterprise is a charitable institution/entity or not, the elements which should be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the methods of administration, the nature of the actual work performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties.

Charity may be applied to almost anything that tend to promote the well-doing and well-being of social man. It embraces the improvement and promotion of the happiness of man. The word "charitable" is not restricted to relief of the poor or sick. The test of a charity and a charitable organization are in law the same. The test whether an enterprise is charitable or not is whether it exists to carry out a purpose reorganized in law as charitable or whether it is maintained for gain, profit, or private advantage.

Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which was organized for the welfare and benefit of the Filipino people principally to help combat the high incidence of lung and pulmonary diseases in the Philippines. The medical services of the petitioner are to be rendered to the public in general in any and all walks of life including those who are poor and the needy without discrimination.

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

The fundamental ground upon which all exemptions in favor of charitable institutions are based is the benefit conferred upon the public by them, and a consequent relief, to some extent, of the burden upon the state to care for and advance the interests of its citizens.

2. NO. Even though the petitioner is a charitable institution, those portions of its real property that are leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes.

The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The effect of an exemption is equivalent to an appropriation. Hence, a claim for exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken.The tax exemption under Section 28(3), Article VI of the 1987 Philippine Constitution covers property taxes only. What is exempted is not the institution itself; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes.Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitution and the law.

What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes.

INCOME TAXATIONTax-Exemption; Trust Funds

DEVELOPMENT BANK OF THE PHILIPPINES vs. COMMISSION ON AUDIT

[G.R. No. 144516. February 11, 2004]

CARPIO, J:

FACTS: On February 20, 1980, the Development Bank of the Philippines (DBP) Board of Governors adopted Resolution No. 794 creating the DBP Gratuity Plan and authorizing the setting up of a retirement fund to cover the benefits due to DBP retiring officials and employees under Commonwealth Act No. 186, as amended. In 1983, the Bank established a Special Loan Program availed thru the facilities of the DBP Provident Fund and funded by placements from the Gratuity Plan Fund. Under the Special Loan Program, a prospective retiree is allowed the option to utilize in the form of a loan a portion of his outstanding equity in the gratuity fund and to invest it in a profitable investment or undertaking. The earnings of the investment shall then be applied to pay for the interest due on the gratuity loan which was initially set at 9% per annum subject to the minimum investment rate resulting from the updated actuarial study. The excess or balance of the interest earnings shall then be distributed to the investor-members.

Pursuant to the investment scheme, DBP-TSD paid to the investor-members a total of P11,626,414.25 representing the net earnings of the investments for the years 1991 and 1992. The payments were disallowed by the Auditor under Audit Observation Memorandum No. 93-2 dated March 1, 1993, on the ground that the distribution of income of the Gratuity Plan Fund (GPF) to future retirees of DBP is irregular and constituted the use of public funds for private purposes which is specifically proscribed under Section 4 of P.D. 1445. The Auditor reasoned that the Fund is still owned by the Bank, the Board of Trustees is a mere administrator of the Fund in the same way that the Trust Services Department where the fund was invested was a mere investor and neither can the employees, who have still an inchoate interest in the Fund be considered as rightful owner of the Fund.

ISSUE: Whether or not the distribution of income of the Gratuity Plan Fund (GPF) to future retirees of DBP make it lose its tax-exempt status

HELD: YES. The Gratuity Plan will lose its tax-exempt status if the retirement benefits are released prior to the retirement of the employees. The trust funds of employees other than those of private employers are qualified for certain tax exemptions pursuant to Section 60(B), formerly Section 53(b), of the National Internal Revenue Code.

The Gratuity Plan provides that the gratuity benefits of a qualified DBP employee shall be released only upon retirement under the Plan. If the earnings and principal of the Fund are distributed to DBP employees prior to their retirement, the Gratuity Plan will no longer qualify for exemption under Section 60(B). To recall, DBP Resolution No. 794 creating the Gratuity Plan expressly provides that since the gratuity plan will be tax qualified under the National Internal Revenue Code xxx, the Banks periodic contributions thereto shall be deductible for tax purposes and the earnings therefrom tax free. If DBP insists that its employees may receive the P11,626,414.25 dividends, the necessary consequence will be the non-qualification of the Gratuity Plan as a tax-exempt plan.

Final Withholding Tax; Gross Receipts Tax; Double Taxation

COMMISSIONER OF INTERNAL REVENUE vs. SOLIDBANK CORP.

[G.R. No. 148191. November 25, 2003.]

PANGANIBAN, J:FACTS:For the calendar year 1995, respondent filed its Quarterly Percentage Tax Returns reflecting gross receipts (pertaining to 5% [Gross Receipts Tax] rate) in the total amount of P1,474,691,693.44 with corresponding gross receipts tax payments in the sum of P73,734,584.60. Respondent alleges that the total gross receipts in the amount of P1,474,691,693.44 included the sum of P350,807,875.15 representing gross receipts from passive income which was already subjected to 20% final withholding tax.

The Court of Tax Appeals rendered a decision in CTA Case No. 4720 entitled Asian Bank Corporation vs. Commissioner of Internal Revenue, wherein it was held that the 20% final withholding tax on a bank's interest income should not form part of its taxable gross receipts for purposes of computing the gross receipts tax. On the strength of the aforementioned decision, respondent filed with the Bureau of Internal Revenue [BIR] a letter-request for the refund or issuance of a tax credit certificate in the aggregate amount of P3,508,078.75, representing, allegedly overpaid gross receipts tax for the year 1995. Respondent on the same day filed a petition for review with the CTA in order to toll the running of the two-year prescriptive period to judicially claim for the refund of any overpaid internal revenue tax, pursuant to Section 230 [now 229] of the Tax Code. After trial on the merits, the CTA rendered its decision ordering petitioner to refund in favor of respondent the reduced amount of P1,555,749.65 as overpaid gross receipts tax for the year 1995.

ISSUES:

1. Does the 20% final withholding tax on a bank's interest income form part of the taxable gross receipts in computing the 5% gross receipts tax?

2. Is there double taxation?HELD:1. YES. Although, the 20% FWT on respondent's interest income was not actually received by respondent because it was remitted directly to the government, the fact that the amount redounded to the bank's benefit makes it part of the taxable gross receipts in computing the 5% GRT. The 5% GRT (Sec. 119 of the Tax Code) is included under "Title V. Other Percentage Taxes" and is not subject to withholding. The banks and non-bank financial intermediaries liable therefor shall, under Section 125(a)(1), file quarterly returns on the amount of gross receipts and pay the taxes due thereon within twenty (20) days after the end of each taxable quarter. The 20% FWT, on the other hand, falls under Section 24(e)(1) of "Title II. Tax on Income." It is a tax on passive income, deducted and withheld at source by the payor-corporation and/or person as withholding agent pursuant to Section 50, and paid in the same manner and subject to the same conditions as provided for in Section 51. Two types of taxes are involved in the present controversy: (1) the GRT, which is a percentage tax; and (2) the FWT, which is an income tax. As a bank, petitioner is covered by both taxes. A percentage tax is a national tax measured by a certain percentage of the gross selling price or gross value in money of goods sold, bartered or imported; or of the gross receipts or earnings derived by any person engaged in the sale of services. It is not subject to withholding. An income tax, on the other hand, is a national tax imposed on the net or the gross income realized in a taxable year. It is subject to withholding.

In a withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed; the payor, a separate entity, acts as no more than an agent of the government for the collection of the tax in order to ensure its payment. Obviously, this amount that is used to settle the tax liability is deemed sourced from the proceeds constitutive of the tax base. These proceeds are either actual or constructive.

In our withholding tax system, possession is acquired by the payor as the withholding agent of the government, because the taxpayer ratifies the very act of possession for the government. There is thus constructive receipt. There being constructive receipt of such income part of which is withheld RR 17-84 applies, and that income is included as part of the tax base upon which the GRT is imposed.

2. There is NO double taxation. Double taxation means taxing the same property twice when it should be taxed only once; that is, ". . . taxing the same person twice by the same jurisdiction for the same thing." It is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise described as "direct duplicate taxation," the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind or character.

First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT is the passive income generated in the form of interest on deposits and yield on deposit substitutes, while the subject matter of the GRT is the privilege of engaging in the business of banking. A tax based on receipts is a tax on business rather than on the property; hence, it is an excise rather than a property tax. It is not an income tax, unlike the FWT.

Second, although both taxes are national in scope because they are imposed by the same taxing authority the national government under the Tax Code and operate within the same Philippine jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different. The FWT is deducted and withheld as soon as the income is earned, and is paid after every calendar quarter in which it is earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only after every taxable quarter in which it is earned.

Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to withholding, while the GRT is a percentage tax not subject to withholding.

Tax Exemption of Special Economic Zones

JOHN HAY PEOPLES ALTERNATIVE COALITION vs. VICTOR LIM

[G.R. No. 119775. October 24, 2003.]

CARPIO MORALES, J:

FACTS:Assailed in this case is Proclamation No. 420 issued by then Pres. Ramos in pursuance to Republic Act No. 7227 which seeks to convert military bases such as Subic, Clark & Camp John Hay into other productive uses. R.A. No. 7227 created the Subic Special Economic [and Free Port] Zone (Subic SEZ) which under Sec. 12 thereof, granted the Subic SEZ incentives ranging from tax and duty-free importations, exemption of businesses therein from local and national taxes, to other hallmarks of a liberalized financial and business climate. R.A. No. 7227 expressly gave authority to the President to create through executive proclamation, subject to the concurrence of the local government units directly affected, other Special Economic Zones (SEZ) including Camp John Hay.

Subsequently, the Sanggunian of Bagiuo passed Resolution No. 255, seeking and supporting, subject to its concurrence, the issuance by then President Ramos of a presidential proclamation declaring an area of 288.1 hectares of the camp as a SEZ in accordance with the provisions of R.A. No. 7227. Then President Ramos issued Proclamation No. 420, which established a SEZ on a portion of Camp John Hay providing for, among others, the same incentives granted to Subic.

Petitioners challenged the constitutionality and validity of Presidential Proclamation 420 in so far as it grants tax exemptions. They contend that nowhere in RA 7227 can it be found an express provision granting such tax exemption to Camp John Hay as a SEZ.

ISSUE: Whether Proclamation No. 420 is constitutional by providing for national and local tax exemption within and granting other economic incentives to the John Hay Special Economic Zone.

HELD: NO. Proclamation No. 420 is unconstitutional. Nowhere in R.A. No. 7227 is there a grant of tax exemption to SEZs yet to be established in base areas, unlike the grant under Section 12 thereof of tax exemption and investment incentives to the therein established Subic SEZ. The grant of tax exemption to the John Hay SEZ thus contravenes Article VI, Section 28(4) of the Constitution, which provides that "No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of Congress.

It is clear that under Section 12 of R.A. No. 7227 it is only the Subic SEZ that was granted by Congress with tax exemption, investment incentives and the like. There is no express extension of the aforesaid benefits to other SEZs still to be created at the time via presidential proclamation. 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 the 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 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 the John Hay SEZ the same tax exemption and incentives given to the Subic SEZ, it would have so expressly provided in the R.A. No. 7227.Percentage tax on pawnshops; Validity of Revenue Memorandum Orders and Circulars

COMMISSIONER OF INTERNAL REVENUE vs. MICHEL J. LHUILLIER PAWNSHOP, INC.

[G.R. No. 150947. July 15, 2003.]DAVIDE, JR., C.J:FACTS: On 11 March 1991, CIR Jose U. Ong issued Revenue Memorandum Order (RMO) No. 15-91 imposing a 5% lending investor's tax on pawnshops because the principal activity of pawnshops is lending money at interest and incidentally accepting a "pawn" of personal property delivered by the pawner to the pawnee as security for the loan.

This RMO was clarified by Revenue Memorandum Circular (RMC) No. 43-91 on 27 May 1991, providing for a uniform cut-off date, that is January 1, 1991 and also subjecting pawnshops to documentary stamp taxes.

Pursuant to these issuances, the BIR issued an assessment notice against Lhuillier demanding payment of deficiency percentage tax for 1994 inclusive of interest and surcharges.

Lhuillier filed an administrative protest with the Office of the Revenue Regional Director contending that (1) neither the Tax Code nor the VAT Law expressly imposes 5% percentage tax on the gross income of pawnshops; (2) pawnshops are different from lending investors; (3) RMO No. 15-91 impliedly amends the Tax Code and is therefore taxation by implication, which is proscribed by law; and (5) RMO No. 15-91 is a "class legislation" because it singles out pawnshops among other lending and financial operations.

ISSUES:

1. Are pawnshops included in the term lending investors for the purpose of imposing the 5% percentage tax under then Section 116 of the National Internal Revenue Code (NIRC) of 1977, as amended by Executive Order No. 273?

2. Are RMO No. 15-91 and RMC No. 43-91 valid?

HELD:1. NO. Pawnshops are not subject to the 5% lending investors tax. Under Section 157(u) of the NIRC of 1986, as amended, the term lending investor includes "all persons who make a practice of lending money for themselves or others at interest." A pawnshop, on the other hand, is defined under Section 3 of P.D. No. 114 as "a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous, and may be used interchangeably, with pawnbroker or pawn brokerage."

While it is true that pawnshops are engaged in the business of lending money, they are not considered "lending investors" for the purpose of imposing the 5% percentage taxes for the following reasons:

First. Under Section 192, paragraph 3, sub-paragraphs (dd) and (ff), of the NIRC of 1977, prior to its amendment by E.O. No. 273, as well as Section 161, paragraph 2, sub-paragraphs (dd) and (ff), of the NIRC of 1986, pawnshops and lending investors were subjected to different tax treatments

Second. Congress never intended pawnshops to be treated in the same way as lending investors. We note that the definition of lending investors found in Section 157 (u) of the NIRC of 1986 is not found in the NIRC of 1977, as amended by E.O. No. 273, where Section 116 invoked by the CIR is found.

Third. Section 116 of the NIRC of 1977, as amended by E.O. No. 273, subjects to percentage tax dealers in securities and lending investors only. There is no mention of pawnshops. Under the maxim expressio unius est exclusio alterius, the mention of one thing implies the exclusion of another thing not mentioned.

Fourth. The BIR had ruled several times prior to the issuance of RMO No. 15-91 and RMC 43-91 that pawnshops were not subject to the 5% percentage tax imposed by Section 116 of the NIRC of 1977, as amended by E.O. No. 273.

2. NO. RMO No. 15-91 and RMC No. 43-91 are invalid. Since Section 116 of the NIRC of 1977, which breathed life on the questioned administrative issuances, had already been repealed, RMO 15-91 and RMC 43-91, which depended upon it, are deemed automatically repealed. Hence, even granting that pawnshops are included within the term lending investors, the assessment from 27 May 1994 onward would have no leg to stand on. Adding to the invalidity of the RMC No. 43-91 and RMO No. 15-91 is the absence of publication. While the rule-making authority of the CIR is not doubted, like any other government agency, the CIR may not disregard legal requirements or applicable principles in the exercise of quasi-legislative powers.

A legislative rule is in the nature of subordinate legislation, designed to implement a primary legislation by providing the details thereof. An interpretative rule, on the other hand, is designed to provide guidelines to the law which the administrative agency is in charge of enforcing.

When an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance, for it gives no real consequence more than what the law itself has already prescribed. When, on the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law.

Without these disputed CIR issuances, pawnshops would not be liable to pay the 5% percentage tax, considering that they were not specifically included in Section 116 of the NIRC of 1977, as amended. In so doing, the CIR did not simply interpret the law. The due observance of the requirements of notice, hearing, and publication should not have been ignored.

Carrying forward of excess or overpaid income tax

AB LEASING AND FINANCE CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE

[G.R. No. 138342. July 8, 2003]

CARPIO-MORALES, J:

FACTS: For taxable year 1993, petitioner AB Leasing and Finance Corporation had a net income of P1,775,832.00 for which it was liable to pay income tax in the amount of P621,541.00. It appeared, however, that for the year 1993, petitioner had made payments in the total amount of P1,594,756.00 inclusive of unused prior year's tax credits. Petitioner thus opted to apply its excess payment of P973,215.00 (P1,594,756.00 less P621,541.00) as tax credits for the following year, 1994. In the third quarter of taxable year 1994, petitioner had a net income of P3,624,280.89 for which it paid income tax in the amount of P295,283.32. At the end of 1994, however, petitioner incurred a net loss of P3,450,916.00 to thereby exempt it from payment of income tax for taxable year 1994. It was thus unable to apply the P973,215.00 tax credits incurred in 1993.

Petitioner thereupon indicated in its amended annual income tax return for calendar year ending December 31, 1994 that it made excess tax payments totaling P1,268,498.00 (P973,215.00 in 1993 plus P295,283.32 in 1994). On April 12, 1996, petitioner filed with respondent, Commissioner of Internal Revenue, a letter-claim for refund of overpaid income taxes for taxable year 1993 in the amount of P973,215.00. As respondent had not acted on the claim, petitioner filed on April 15, 1996 a petition for review with the CTA, docketed as C.T.A. Case No. 5372, praying for the refund of the overpaid income taxes remitted in 1993, offering as part of its evidence its income tax returns for 1993 and 1994. On April 15, 1997, petitioner filed another case with the CTA, docketed as C.T.A. Case No. 5513, seeking a refund of overpaid income taxes for taxable year 1994. In said case, it offered as part of its evidence its income tax returns for 1994, 1995, and 1996. By Decision of July 2, 1997, the CTA dismissed C.T.A. Case No. 5372 for insufficiency of evidence, drawing petitioner to file a motion for new trial and reconsideration which was denied by the CTA.

ISSUE: Is the carrying forward of any excess or overpaid income tax for a given taxable year limited to the succeeding taxable year only?

HELD: YES, the carrying forward of any excess or overpaid income tax for a given taxable year then is limited to the succeeding taxable year only. Section 69 of the old NIRC provides that in case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding year.

Since the case at bar involves a claim for refund of overpaid taxes for 1993, petitioner could only have applied the 1993 excess tax credits to its 1994 income tax liabilities. To further carry-over to 1995 the 1993 excess tax credits is violative of above-quoted Section 69 of the old NIRC. That petitioner had signified its intention to apply the entire amount of P1,268,498 representing excess tax payments of P973,215.00 for 1993 and P295,283.00 for 1994 to the year 1995 is immaterial. Only the amount of P295,283.00 representing the 1994 income tax overpayments may only be applied to the succeeding taxable year, 1995.

But even assuming that there was a need for petitioner to present in evidence the 1995 income tax return or the breakdown of its excess taxes paid for the taxable year ending 1994, the CTA could have taken judicial notice of the records of C.T.A. Case No. 5513, petitioner's claim for refund of P295,283.00 overpaid income taxes for taxable year 1994, which was already pending before it.

TAX ENFORCEMENT AND ADMINISTRATIONTax AssessmentsMANILA ELECTRIC COMPANY vs. NELIA A. BARLIS

[G.R. No. 114231. June 29, 2004.]

CALLEJO, SR., J:

FACTS: From 1968 to 1972, petitioner MERALCO, erected four (4) power generating plants in Sucat, Muntinlupa. To equip the power plants, various machineries and equipment were purchased both locally and abroad. When the Real Property Tax Code took effect on June 1, 1974, MERALCO filed its tax declarations covering the Sucat power plants, including the buildings thereon as well as the machineries and equipment. From 1975 to 1978, MERALCO paid the real property taxes on the said properties on the basis of their assessed value as stated in its tax declarations.

On December 29, 1978, MERALCO sold all the power-generating plants including the landsite to the National Power Corporation (NAPOCOR).

In 1985, the Municipal Assessor of Muntinlupa discovered that MERALCO, for the years 1976-1978, misdeclared and/or failed to declare for taxation purposes a number of real properties consisting of several equipment and machineries found in the said power plants. A review of the Deed of Sale which MERALCO executed in favor of NAPOCOR allegedly shows that the true value of the machineries and equipment was misdeclared/undeclared.

Thereafter, the Municipal Treasurer of Muntinlupa issued three notices to MERALCO, requesting it to pay the full amount of the claimed deficiency with a warning that its properties could be sold at public auction unless the tax due was paid. Still, MERALCO did not pay, nor take steps to question the tax assessed.

Accordingly, the Municipal Treasurer issued, on October 4, 1990, Warrants of Garnishment ordering the attachment of MERALCO's bank deposits with its depository banks to the extent of its unpaid real property taxes.

On October 10, 1990, MERALCO filed before the RTC of Makati a Petition for Prohibition with Prayer for Writ of Preliminary Mandatory Injunction and/or Temporary Restraining Order (TRO) praying, among others, that a TRO be issued to enjoin the Municipal Treasurer of Muntinlupa from enforcing the warrants of garnishment. The petitioner averred that real estate tax is a tax on real property; as such, any tax delinquency on property should follow the present owner, in this case, the NAPOCOR.

The Municipal Treasurer filed a Motion to Dismiss on the following grounds: (a) lack of jurisdiction, since under Sec. 64 of the Real Property Tax Code, courts are prohibited from entertaining any suit assailing the validity of a tax assessed thereunder until the taxpayer shall have paid, under protest, the tax assessed against him; and (b) lack of cause of action, by reason of MERALCO's failure to question the notice of assessment issued to it by the Municipality of Muntinlupa before the Local Board of Assessment Appeals.

In its June 17, 1991 Order, the trial court denied the said motion, ratiocinating that since MERALCO was not the present owner or possessor of the properties in question, it was not the "taxpayer" contemplated under Section 64 of the Tax Code.

On a Petition for Certiorari filed before the Supreme Court, later endorsed to the Court of Appeals, the Municipal Treasurer of Muntinlupa assailed the June 17, 1991 Order of the RTC alleging that MERALCO was the taxpayer liable for the tax due and the penalties thereon; that despite receipt by it of the 1985 notice of assessment from the Municipal Assessor, it failed to appeal therefrom and, as such, the assessment had become final and enforceable; and, that MERALCO was proscribed from filing its petition assailing the assessment.

The Court of Appeals granted the petition and declared the assailed June 17, 1991 order void and without life in law, having been issued without jurisdiction.

The Supreme Court resolves to grant this Motion for Reconsideration since its decisions on this case on February 1, 2002 and May 18, 2001 are inconsistent with each other.

ISSUES:

1. Whether or not the petitioner was the taxpayer for the purpose of an assessment under the Real Property Tax Code from whom collection can be made

2. Whether or not the RTC did commit any grave abuse of discretion when it denied the respondent's motion to dismiss on the claim that for the petitioner's failure to appeal from the 1986 notice of assessment of the Municipal Assessor, the assessment had become final and enforceable under Section 64 of P.D. No. 464.3. Whether or not the letters sent to the petitioner by the respondent municipal treasurer can be considered as notices of assessment.

4. Whether or not the courts are prohibited from entertaining any suit assailing the validity of a tax assessed under the Real Property Tax Code until the taxpayer shall have paid, under protest.

HELD:

1. YES, MERALCO is the taxpayer for purposes of assessment and collection. The fact that NAPOCOR is the present owner of the Sucat power plant machineries and equipment does not constitute a legal barrier to the collection of delinquent taxes from the previous owner, MERALCO, who has defaulted in its payment. In Testate Estate of Concordia T. Lim vs. City of Manila, the Court held that the unpaid tax attaches to the property and is chargeable against the person who had actual or beneficial use and possession of it regardless of whether or not he is the owner. To impose the real property tax on the subsequent owner that was neither the owner nor the beneficial user of the property during the designated periods would not only be contrary to law but also unjust.

2. NO. The RTC did not commit any grave abuse of discretion when it denied the respondent's motion to dismiss on the claim that for the petitioner's failure to appeal from the 1986 notice of assessment of the Municipal Assessor, the assessment had become final and enforceable under Section 64 of P.D. No. 464.

Section 22 of P.D. No. 464 states that, upon discovery of real property, the provincial, city or municipal assessor shall make an appraisal and assessment of such real property in accordance with Section 5 of the law, irrespective of any previous assessment or taxpayer's valuation thereon.

An assessment fixes and determines the tax liability of a taxpayer. It is a notice to the effect that the amount therein stated is due as tax and a demand for payment thereof. The assessor is mandated under Section 27 of the law to give written notice within thirty days of such assessment, to the person in whose name the property is declared. For purposes of giving effect to such assessment, it is deemed made when the notice is released, mailed or sent to the taxpayer. As soon as the notice is duly served, an obligation arises on the part of the taxpayer to pay the amount assessed and demanded.

If the taxpayer is not satisfied with the action of the local assessor in the assessment of his property, he has the right, under Section 30 of P.D. No. 464, to appeal to the Local Board of Assessment Appeals by filing a verified petition within sixty (60) days from service of said notice of assessment. If the taxpayer fails to appeal in due course, the right of the local government to collect the taxes due becomes absolute upon the expiration of such period, with respect to the taxpayer's property.

Conformably to Section 57 of P.D. No. 464, it is the local treasurer who is tasked with collecting taxes due from the taxpayer. The duty of the local treasurer to collect the taxes commences from the time the taxpayer fails or refuses to pay the taxes due, following the latter's failure to question the assessment in the Local Board of Assessment Appeals and/or to the Central Board of Assessment Appeals. This, in turn, renders the assessment of the local assessor final, executory and demandable, thus, precluding the taxpayer from disputing the correctness of the assessment or from invoking any defense that would reopen the question of its liability on the merits.

The records, however, are bereft of any evidence showing actual receipt by petitioner of the real property tax declaration sent by the Municipal Assessor.

3. NO. The letters cannot qualify as notices of tax assessment. A notice of assessment as provided for in the Real Property Tax Code should effectively inform the taxpayer of the value of a specific property, or proportion thereof subject to tax, including the discovery, listing, classification, and appraisal of properties. The notices do not contain the essential information that a notice of assessment must specify, namely, the value of a specific property or proportion thereof which is being taxed, nor does it state the discovery, listing, classification and appraisal of the property subject to taxation. In fact, the tenor of the notices bespeaks an intention to collect unpaid taxes, thus the reminder to the taxpayer that the failure to pay the taxes shall authorize the government to auction off the properties subject to taxes.

The petitioner is also correct in pointing out that the last paragraph of the said notices that inform the taxpayer that in case payment has already been made, the notices may be disregarded is an indication that it is in fact a notice of collection.

Indeed, respondent did not issue any notice of assessment because statutorily, he is not the proper officer obliged to do so. Under Chapter VIII, Sections 90 and 90-A of the Real Property Tax Code, the functions related to the appraisal and assessment for tax purposes of real properties situated within a municipality pertains to the Municipal Deputy Assessor and for the municipalities within Metropolitan Manila, the same is lodged, pursuant to P.D. No. 921, on the Municipal Assessor.

4. YES. The trial court is without authority to address the alleged irregularity in the issuance of the notices of assessment without prior tax payment, under protest, by petitioner. Section 64 of the RPTC, prohibits courts from declaring any tax invalid by reason of irregularities or informalities in the proceedings of the officers charged with the assessment or collection of taxes except upon the condition that the taxpayer pays the just amount of the tax, as determined by the court in the pending proceeding. As petitioner failed to make a protest payment of the tax assessed, any argument regarding the procedure observed in the preparation of the notice of assessment and collection is futile as the trial court in such a scenario cannot assume jurisdiction over the matter.

Tax Assessment; Proper Service

ESTATE OF THE LATE JULIANA DIEZ vs. COMMISSIONER OF INTERNAL REVENUE

[G.R. No. 155541. January 27, 2004]

YNARES-SANTIAGO, J:

FACTS:During the lifetime of the decedent, Juliana vda. De Gabriel, her business affairs where managed by the Philippine Trust Companies (Philtrust). The decedent died on April 3, 1979. Two days after her death, Philtrust filed her income tax return for 1978 without indicating that the decedent died. Philtrust also filed a petition for appointment as a special administrator with the RTC, but the court appointed one of the heirs.

On November 18, 1982, BIR sent by registered mail a demand letter and assessment notice addressed to the decedent c/o Philippine Trust Companies, Sta. Cruz Manila, which was the address stated in her 1978 income tax return. Philtrust made no response.

On June 18, 1984, respondent issued warrants of distraint and levy to enforce collection of the decedents deficiency income tax liability, which were served upon her heir, Francisco Gabriel. On November 22, 1984, respondent filed a Motion for Allowance of Claim and for an Order of Payment of Taxes with the court a quo. A letter of protest was filed with the Litigation Division of the BIR, which was not acted upon because the assessment notice had allegedly become final, executory and incontestable.

The trial court issued an order denying respondent claim against the estate after finding that there was no notice of its tax assessment on the proper party. The Appellate Court reversed the decision claiming that Philtrust in filing the decedents 1978 income tax return had constituted itself as the administrator of the estate of the deceased at least in so far as the said return is concerned.

ISSUES:

1. Whether or not there was a proper service of deficiency tax assessment through Philtrust

2. Whether or not the assessment became final and executory and incontestable.

HELD:1. NO. There was no proper service. The relationship between the decedent and Philtrust was one of agency, which is a personal relationship between agent and principal. Under the Civil Code, death of the agent or principal automatically terminates the agency. Since the relationship between Philtrust and the decedent was automatically severed at the moment of the Taxpayers death, none of Philtrusts acts or omissions could bind the estate of the Taxpayer. Service on Philtrust of the demand letter and Assessment Notice was improperly done. There was absolutely no legal obligation on the part of Philtrust to either 1) respond to the demand letter and assessment notice; 2) inform respondent of the decedents death; or 3) inform the petitioner that it had received said demand letter and assessment notice.

The legal obligation on Philtrust to inform respondent of the decedents death under Section 104 of the 1977 NIRC pertains only to all cases of transfer subject to tax or where the gross value of the estate exceeds P3,000. It has absolutely no applicability to a case for deficiency of income tax, such as the case at bar.

When an estate is under administration, notice must be sent to the administrator of the estate, since it is the said administrator, as representative of the estate, who has the legal obligation to pay and discharge all debts of the estate and to perform all orders of the court.

2. NO. Since there was never any valid notice of this assessment, it could not have become final, executory and incontestable, and, for failure to make the assessment within the five-year period provided in Section 318 of the National Internal Revenue Code of 1977, respondents claim against the petitioner Estate is barred.

Tax Assessment; Proper ServiceCOMMISSIONER OF INTERNAL REVENUE vs. BANK OF THE PHILIPPINE ISLANDS, as liquidator of PARAMOUNT ACCEPTANCE CORPORATION

[G.R. No. 135446. September 23, 2003.]

CORONA, J:

FACTS:Respondent Bank of the Philippine Islands (BPI) is the liquidator of Paramount Acceptance Corporation (PAC), a financing corporation which was dissolved on July 17, 1989. After the dissolution of the PAC, respondent BPI learned that petitioner CIR filed certain criminal cases against Horacio V. Poblador and Ramon A. Albert, former president and treasurer of PAC, respectively, for willful failure to pay the corporation's final deficiency tax assessments for the years 1981 and 1982.

Respondent informed petitioner that it was willing to compromise and pay the deficiency tax. At the same time, respondent asked for the withdrawal of the criminal cases against Poblador and Albert. The parties agreed to settle. Respondent paid to the petitioner a total amount of P119,815.13.

However, in spite of the payment, petitioner continued to prosecute the criminal cases against Poblador and Albert: Criminal Cases Nos. 91-5800, 91-5801 and 91-5802, involving the 1981 assessments, before the Regional Trial Court of Makati, Branch 150; and, Criminal Case No. 91-4007 involving the 1982 percentage tax deficiency, pending in the Regional Trial Court of Makati, Branch 143.

Respondent, in a letter to petitioner, pointed out that the assessments were not sent to the proper address and asked for the refund of the P119,815.13 it paid under the compromise agreement since the criminal cases against Poblador and Albert were not dropped as agreed upon.

ISSUE:Is PAC liable to pay the tax assessments?

HELD:NO. PAC is not liable. The RTC of Makati City, Branch 143, rendered a decision in Criminal Case No. 91-4007 acquitting Poblador and Albert of willful failure to pay the corporate percentage tax deficiency for 1982. Furthermore, a copy of the said decision was served on petitioner by registered mail, prior to the submission of its memorandum in this case.

In its decision in Criminal Case No. 91-4007, the trial court ruled that the prosecution failed to establish that PAC was in fact liable for deficiency taxes prior to its liquidation. Assuming arguendo that there was a deficiency tax for which PAC was liable, petitioners failed to make a valid assessment on it since the notice of assessment was sent to the PAC's old (and therefore improper) office address. PAC already indicated its new address in its 1986 tax return filed with the BIR's Makati office. This notwithstanding, petitioner CIR sent the notice of assessment to PAC's old business address instead of its new address, which was also BPI's (PAC's liquidator) office address.

Since there was a failure to effect a timely valid assessment, the period for filing a criminal case for PAC's tax liabilities had prescribed by the time petitioner instituted the criminal cases against PACs former officers.

Revenue Regulations; Nature; Application

BPI LEASING CORP. vs. COURT OF APPEALS

[G.R. No. 127624. November 18, 2003.]

AZCUNA, J:

FACTS:BLC is a corporation engaged in the business of leasing properties. For the calendar year 1986, BLC paid the Commissioner of Internal Revenue (CIR) a total of P1,139,041.49 representing 4% "contractor's percentage tax" then imposed by Section 205 of the National Internal Revenue Code (NIRC).

On November 10, 1986, the CIR issued Revenue Regulation 19-86. Section 6.2 thereof provided that finance and leasing companies registered under Republic Act 5980 shall be subject to gross receipt tax of 5%-3%-1% on actual income earned. This means that companies registered under Republic Act 5980, such as BLC, are not liable for "contractor's percentage tax" under Section 205 but are, instead, subject to "gross receipts tax" under Section 260 (now Section 122) of the NIRC. Since BLC had earlier paid the aforementioned "contractor's percentage tax," it re-computed its tax liabilities under the "gross receipts tax" and arrived at the amount of P361,924.44.

On April 11, 1988, BLC filed a claim for a refund with the CIR for the amount of P777,117.05, representing the difference between the P1,139,041.49 it had paid as "contractor's percentage tax" and P361,924.44 it should have paid for "gross receipts tax."

Petitioner filed a petition for review with the CTA which dismissed the petition and denied BLC's claim of refund. The CTA held that Revenue Regulation 19-86, as amended, may only be applied prospectively such that it only covers all leases written on or after January 1, 1987, as stated under Section 7 of said revenue regulation.

The CTA ruled that, since BLC's rental income was all received prior to 1986, it follows that this was derived from lease transactions prior to January 1, 1987, and hence, not covered by the revenue regulation.

ISSUE:

1. Whether RR19-86, as amended, is legislative or interpretative in nature.

2. Whether RR19-86, as amended, is prospective or retroactive in application.

HELD:1. RR19-86 is legislative in nature. Administrative issuances may be distinguished according to their nature and substance: legislative and interpretative. A legislative rule is in the matter of subordinate legislation, designed to implement a primary legislation by providing the details thereof. An interpretative rule, on the other hand, is designed to provide guidelines to the law which the administrative agency is in charge of enforcing.Section 1 of Revenue Regulation 19-86 plainly states that it was promulgated pursuant to Section 277 of the NIRC. Section 277 (now Section 244) is an express grant of authority to the Secretary of Finance to promulgate all needful rules and regulations for the effective enforcement of the provisions of the NIRC. In Paper Industries Corporation of the Philippines v. Court of Appeals, the Court recognized that the application of Section 277 calls for none other than the exercise of quasi-legislative or rule-making authority. Verily, it cannot be disputed that Revenue Regulation 19-86 was issued pursuant to the rule-making power of the Secretary of Finance, thus making it legislative, and not interpretative as alleged by BLC.

2. RR 19-86 is prospective in application. The principle is well entrenched that statutes, including administrative rules and regulations, operate prospectively only, unless the legislative intent to the contrary is manifest by express terms or by necessary implication. In the present case, there is no indication that the revenue regulation may operate retroactively. Furthermore, there is an express provision stating that it "shall take effect on January 1, 1987," and that it "shall be applicable to all leases written on or after the said date." Being clear on its prospective application, it must be given its literal meaning and applied without further interpretation. Thus, BLC is not in a position to invoke the provisions of Revenue Regulation 19-86 for lease rentals it received prior to January 1, 1987.

It is also apt to add that tax refunds are in the nature of tax exemptions. As such, these are regarded as in derogation of sovereign authority and are to be strictly construed against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption and he must be able to justify his claim by the clearest grant under Constitutional or statutory law, and he cannot be permitted to rely upon vague implications. LOCAL TAXATIONLocal Taxation; Validity of a Municipal Ordinance

PALMA DEVELOPMENT CORPORATION vs. MUNICIPALITY OF MALANGAS

[G.R. No. 152492. October 16, 2003.]

PANGANIBAN, J:

FACTS:Petitioner Palma Development Corporation is engaged in milling and selling rice and corn to wholesalers in Zamboanga City. It uses the municipal port of Malangas, Zamboanga del Sur as transshipment point for its goods.

Municipal Revenue Code No. 09, Series of 1993, was passed and approved on August 4, 1994. Section 5G.01 of the ordinance reads:

Section 5G.01.Imposition of fees. There shall be collected service fee for its use of the municipal road[s] or streets leading to the wharf and to any point along the shorelines within the jurisdiction of the municipality and for police surveillance on all goods and all equipment harbored or sheltered in the premises of the wharf and other within the jurisdiction of this municipality

The service fees imposed by Section 5G.01 of the ordinance was paid by petitioner under protest. It contended that under Republic Act No. 7160, otherwise known as the Local Government Code of 1991, municipal governments did not have the authority to tax goods and vehicles that passed through their jurisdictions.

The trial court declared the entire Municipal Revenue Code No. 09 as ultra vires and, hence, null and void. The CA held that local government units already had revenue-raising powers as provided for under Sections 153 and 155 of RA No. 7160. It ruled as well that within the purview of these provisions and therefore valid is Section 5G.01, which provides for a "service fee for the use of the municipal road or streets leading to the wharf and to any point along the shorelines within the jurisdiction of the municipality" and "for police surveillance on all goods and all equipment harbored or sheltered in the premises of the wharf and other within the jurisdiction of this municipality."

ISSUE:Is Section 5G.01 of Municipal Revenue Code No. 09 valid?

HELD:NO. The imposition of a service fee for police surveillance on all goods harbored or sheltered in the premises of the municipal port of Malangas under Sec. 5G.01 of the Malangas Municipal Revenue Code No. 09, series of 1993, is NULL AND VOID for being violative of Republic Act No. 7160.

By express language of Sections 153 and 155 of RA No. 7160, local government units, through their Sanggunian, may prescribe the terms and conditions for the imposition of toll fees or charges for the use of any public road, pier or wharf funded and constructed by them. A service fee imposed on vehicles using municipal roads leading to the wharf is thus valid. However, Section 133(e) of RA No. 7160 prohibits the imposition, in the guise of wharfage, of fees as well as all other taxes or charges in any form whatsoever on goods or merchandise.

It is therefore irrelevant if the fees imposed are actually for police surveillance on the goods, because any other form of imposition on goods passing through the territorial jurisdiction of the municipality is clearly prohibited by Section 133(e).

Under Section 131(y) of RA No. 7160, wharfage is defined as "a fee assessed against the cargo of a vessel engaged in foreign or domestic trade based on quantity, weight, or measure received and/or discharged by vessel." It is apparent that a wharfage does not lose its basic character by being labeled as a service fee "for police surveillance on all goods."

Local Taxation; Powers of City Assessors

SYSTEMS PLUS COMPUTER COLLEGE OF CALOOCAN CITY vs. LOCAL GOVERNMENT

OF CALOOCAN CITY

[G.R. No. 146382. August 7, 2003.]

CORONA, J:

FACTS:Petitioner Systems Plus Computer College is a non-stock and non-profit educational institution. As such, it enjoys property tax exemption from the local government on its buildings but not on the parcels of land which petitioner is renting for P5,000 monthly from its sister companies, Consolidated Assembly and Pair Management (CAPM). Sometime, petitioner requested respondent to extend tax exemption to the parcels of land claiming that the same were being used actually, directly and exclusively for educational purposes. Respondent city government, denied the request on the ground that the subject parcels of land were owned by CAPM which derived income therefrom in the form of rentals and other local taxes assumed by the petitioner. Hence, from the land owners' standpoint, the same were not actually, directly and exclusively used for educational purposes.

Subsequently, petitioner and the CAPM entered into separate agreements which in effect novated their existing contracts of lease and converted them to donations of the beneficial use thereof. Because of this, petitioner sought a reconsideration of respondent's earlier denial of the application for tax exemption. Respondent city government again denied the application for tax exemption, reasoning out that: a) said agreement was made in order to evade payment of Real Property Taxes; b) the grant of exemption from taxation rests upon the theory that an exemption will benefit the body of people, and not upon any idea of lessening the burden of individual or corporate owners; c) while the beneficial use of the properties being sought to be exempt from Real Property Taxes were donated to SYSTEMS PLUS COMPUTER COLLEGE, there is no showing that the same are "actually, directly and exclusively" used either for religious, charitable, or educational purposes.

Twice debunked, petitioner filed a petition for mandamus with the respondent Regional Trial Court of Caloocan City, Branch 121, which, however, dismissed it for being premature.

ISSUE:Does the determination made by respondent City Assessor fall within its power to assess properties?

HELD:YES. Under Section 226 of RA 7160, the remedy of appeal to the Local Board of Assessment Appeals is available from an adverse ruling or action of the provincial, city or municipal assessor in the assessment of property. Under Section 199(f), Title II, Book II, of the Local Government Code of 1991, "assessment" is defined as the act or process of determining the value of a property, or proportion thereof subject to tax, including the discovery, listing, classification and appraisal of properties. Viewed from this broader perspective, the determination made by the respondent City Assessor with regard to the taxability of the subject real properties squarely falls within its power to assess properties for taxation purposes subject to appeal before the Local Board of Assessment Appeals.

It must be stressed that the authority to receive evidence, as basis for classification of properties for taxation, is legally vested on the respondent City Assessor whose action is appealable to the Local Board of Assessment Appeals and the Central Board of Assessment Appeals, if necessary.REAL PROPERTY TAXATIONTax Exemption; Real Property Tax and Business Tax

PHILIPPINE PORTS AUTHORITY vs. CITY OF ILOILO

[G.R. No. 109791. July 14, 2003.]AZCUNA, J:

FACTS:The City of Iloilo filed an action for the recovery of sum of money against the Phil. Ports Authority (PPA), a government corporation. Respondent seeks to collect real property taxes on its warehouse as well as business taxes computed from the last quarter of 1984 up to 4th quarter of 1988. PPA is engaged in the business of arrastre and stevedoring services and the leasing of real estate. Petitioner claimed that being a government owned corporation engaged in performing governmental functions, it is exempted from paying taxes under its charter, the Real Property Tax Code and E.O. No. 93. The court a quo rendered its decision holding petitioner liable for real property taxes and for business taxes with respect to petitioner's lease of real property. It, however, held that respondent may not collect business taxes on petitioner's arrastre and stevedoring services, as these form part of petitioner's governmental functions.

ISSUE: Is the Philippine Ports Authority exempt from the payment of real property tax and business tax?

HELD:NO. Petitioner is liable for both taxes.

"Ports constructed by the State" are properties of the public dominion, as Article 420 of the Civil Code enumerates these as properties "intended for public use." The warehouse in the case at bar may not be held as part of the port, considering its separable nature as an improvement upon the port, and the fact that it is not open for use by everyone and freely accessible to the public. In the same way that we ruled in one case that the exemption of public property from taxation does not extend to improvements made thereon by homesteaders or occupants at their own expense, we likewise uphold the taxability of the warehouse in the instant case, it being a mere improvement built on an alleged property of public dominion, assuming petitioner's port to be so. Moreover, petitioner may not invoke the definition of "port" in its charter to expand the meaning of "ports constructed by the State" in the Civil Code to include improvements built thereon.

Originally, petitioner was exempt from real property taxes on the basis of Sec. 40 of the Real Property Tax Code. Petitioner's charter, P.D. 857, further specifically exempted it from real property taxes. On June 11, 1984, however, P.D. 1931 effectively withdrew all tax exemption privileges granted to government-owned or controlled corporations as stated in Section 1 thereof. Under the same law, the exemption can be restored in special cases through an application for restoration with the Secretary of Finance, which, notably, petitioner did not avail. Subsequently, Executive Order (E.O.) No. 93 was enacted on December 17, 1986 restoring tax exemptions provided under certain laws, one of which is the Real Property Tax Code. Hence, petitioner is liable for real property taxes on its warehouse, computed from the last quarter of 1984 up to December 1986.

As admitted by petitioner, it leases out its premises to private persons for "convenience" and not necessarily as part of its governmental function of administering port operations. Any income or profit generated by an entity, even of a corporation organized without any intention of realizing profit in the conduct of its activities, is subject to tax. What matters is the established fact that it leased out its building to ten private entities from which it regularly earned substantial income. Thus, in the absence of any proof of exemption therefrom, petitioner is liable for the assessed business taxes.

TARIFF AND CUSTOMS CODEJurisdiction of the Collector of Customs & Commissioner of Customs

R.V. MARZAN FREIGHT, INC. vs COURT OF APPEALS & SHIELAS MANUFACTURING INC.

[G.R. No. 128064. March 4, 2004]

CALLEJO, SR., J:

FACTS: RV Marzan Freight Inc., was the owner and operator of a customs-bonded warehouse while Shielas Manufacturing, Inc., was engaged in the garment business.

On April 12, 1989, the raw materials consigned to the private respondent arrived in the Philippines. The Bureau of Customs treated the raw materials as subject to ordinary import taxes and were not immediately released to the private respondent. Moreover, the consignee failed to file the requisite import entry and failed to claim the cargo.

The District Collector of Customs initiated an abandonment proceedings over the cargo of the private respondent and issued a notice to the consignee of various overstaying cargo, including that of the private respondent, giving them fifteen (15) days from notice thereof to file entry of the cargoes without prejudice to the right of the consignees to redeem articles pursuant to Section 1801 of the Tariff and Customs Code within the prescribed period therein; otherwise, the cargoes would be deemed abandoned and sold at public auction. The declaration of abandonment in the aforestated proceedings became final and executory.

After more than two years from the arrival of the cargo in the Philippines, the private respondent filed a complaint for damages before the RTC against the petitioner. The trial court held petitioner solely liable for the loss. The appellate court affirmed the lower courts decision.

ISSUE:Whether or not the RTC is vested with jurisdiction to review and nullify a declaration made by the District Collector of Customs that the shipment was abandoned cargo and, thus, ipso facto belonged to the government.HELD: NO. The trial court has no jurisdiction. The declaration by the District Collector of Customs is found by the Court to be ineffective. Under the law, notice of the proceedings of abandonment was not given to the consignee or the plaintiff herein or his agent. The consignee in this case being known, should have been notified of the abandonment of his property and that he should have been given a chance at a public hearing to present evidence and to be heard with respect to the cargo subject of abandonment. This is part of due process.

Evidently, the resolution of the foregoing issues is within the exclusive competence of the District Collector of Customs, the Commissioner of Customs and within the appellate jurisdiction of the Court of Tax Appeals.

In Jao v. Court of Appeals, we held that the RTC is devoid of any competence to pass upon the validity or regularity of seizure and forfeiture proceedings conducted by the Bureau of Customs, and to enjoin or otherwise interfere with the said proceedings even if the seizure was illegal. Such act does not deprive the Bureau of Customs of jurisdiction thereon. Thus, we held:

There is no question that Regional Trial Courts are devoid of any competence to pass upon the validity or regularity of seizure and forfeiture proceedings conducted by the Bureau of Customs and to enjoin or otherwise interfere with these proceedings. The Collector of Customs sitting in seizure and forfeiture proceedings has exclusive jurisdiction to hear and determine all questions touching on the seizure and forfeiture of dutiable goods. The Regional Trial Courts are precluded from assuming cognizance over such matters even through petitions of certiorari, prohibition or mandamus.

SUMMARY OF DOCTRINES OF LEADING CASESFUNDAMENTALS IN TAXATIONBasic Considerations

Taxation is a high prerogative of sovereignty the relinquishment of which is never presumed, and any reduction or diminution thereof with respect to its mode or rate must be strictly construed and the same must be couched in clear terms. The general rule is that any claim for exemption from tax statutes should be construed strictly against the taxpayer. [Luzon Stevedoring Corp. vs. Court of Tax Appeals. GR No. L30232. July 29, 1988]

Taxation is a "symbiotic" relationship whereby in exchange for the protection that the citizens get from the Government, taxes are paid.

Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned income to the taxing authorities, every person who is able must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. [CIR vs. Algue. GR No. L28896. February 17, 1988]Purpose and Objectives of Taxation

While the funds collected under the OPSF may be referred to as taxes, they are exacted in the exercise of the police power of the State. From such fund, amounts are drawn to reimburse oil companies when appropriate situations arise for increases in, as well as under-recovery of, the cost of crude oil importation. [Osmea vs. Orbos. GR No. 99886. March 31, 1993]Taxation may be used as an implement of the police power in order to promote the general welfare of the people. Thus the Sugar Adjustment Act, which imposed a tax on milled sugar, is valid since the purpose of the law was to strengthen an industry that is so undeniably vital to the economy - the sugar industry. [Lutz vs. Araneta. GR No. L7859. December 22, 1955]Power of Judicial Review

Courts cannot inquire into the wisdom of a taxing act. [CIR vs. Lingayen Gulf Electric Power Co. GR No. L23771. August 4, 1968]Taxation Distinguished from Other Impositions

Penalty

If a withholding agent like NDC fails to withhold the requisite withholding tax on the income received from Philippine sources by a Japanese non-resident foreign corporation, such withholding agent (NDC) is liable to pay the tax that it did not withhold as "penalty" for its failure to withhold the tax of the foreign corporation. [National Development Co. vs. CIR. GR No. L53961. June 30, 1987] License Fees

To be considered a license fee, the imposition questioned must relate to an occupation or activity that so engages the public interest in health, morals, safety and development as to require regulation for the protection and promotion of such public interest; the imposition must also bear a reasonable relation to the probable expenses of regulation, taking into account not only the cost of direct regulation but also its incidental consequences as well. Accordingly, a charge of a fixed sum which bears no relation at all to the cost of inspection and regulation may be held to be a tax rather than an exercise of the police power. [Progressive Development Co. vs Quezon City. GR No. 36081. April 24, 1989]If the purpose is primarily revenue or if revenue is at least one of the real and substantial purposes, then the exaction is a tax. Hence, motor vehicle registration fees are taxes because the legislative intent is mainly to raise funds for the construction and maintenance of highways and, to a much lesser degree, to pay for the expenses of the Land transportation Office, a regulatory agency of the Government. [Philippine Airlines Inc. vs. Edu. GR No. L41383, August 15, 1988]While it is true that the first part which requires that the alien shall secure an employment permit from the Mayor involves the exercise of discretion and judgment in the processing and approval or disapproval of applications for employment permits and therefore is regulatory in character, the second part which requires the payment of P50.00 as employees fee is not regulatory but a revenue measure. There is no logic or justification in exacting P50.00 from aliens who have been cleared for employment. It is obvious that the purpose of the ordinance is to raise money under the guise of regulation. [Villegas vs. Hiu Chiong Tsai Pao Ho. GR No. L-29646. November 10, 1978]

Judging from the amount of the fees fixed in the ordinances in question, the so-called fees were in reality taxes for city revenue. The fees cannot possibly be considered as mere expense incurred for, or the cost of the inspection of each animal and the issuance of the corresponding permit. There would be no doubt that the fees collected would amount to a sizable sum and augment greatly the revenues of the municipal corporation. [Saldana vs. City of Iloilo GR No. L10470. June 26, 1958]Incidentally, exemption from tax does not include building permit fee and special assessments as these are not taxes but regulatory fees in the case of the license fee, and levy on account of benefits to land for the special assessments. [Apostolic Prefect of the Mountain Province vs. City Treasurer of Baguio. GR No. 47252. April 18, 1941]The amount of exaction or charge, if it is to be a license fee, must only be of a sufficient amount to include expenses of (1) issuing the license; and (2) cost of necessary inspection or police surveillance. [Cuunjieng vs. Patstone. GR No. 16254. February 21, 1922] Debts; Set-off or Compensation

A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the Government or that the collection of the tax is contingent on the result of the lawsuit it filed against the Government. [Philex Mining Corp. vs CIR. GR No. 125704. August 28, 1998]Once a taxpayer opts for either a refund or the automatic tax credit scheme and signified his option in accordance with the regulation, this does not ipso facto confer on him the right to avail of the same immediately. Prior approval by the Commissioner of Internal Revenue of the tax credit under Section 86 would appear to be more reasonable interpretation to be given to said section. An opportunity must be given the internal revenue branch of the government to investigate and confirm the veracity of the claims of the taxpayer. Insofar as the option of tax credit is concerned, this right should not be construed as an absolute right which is available to the taxpayer at his sole option. Automatic credit is not available, but this does not mean that the petitioner cannot get a refund or credit of the excess quarterly payment. [San Carlos Milling Co., Inc. vs. CIR. GR No. 103379. November 23, 1993]A corporation's outstanding claims for reimbursement against the Oil Price Stabilization Fund (OPSF) cannot be offset against its contributions to said fund. PD 1956, as amended, explicitly provides that the source of the OPSF is taxation. A taxpayer may not offset taxes due from claims that he may have against the Government.

Taxes and debts cannot be the subject of compensation because the Government and the taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not a debt, demand, contract or judgment as is allowable to be set off. [Caltex Phils. vs. Commission on Audit. GR No. 92585. May 8, 1992]No compensation is legally authorized where it appears that the parties involved are not creditors and debtors of each other (Art. 1279, Civil Code). In the case at bar, what was sought to be set off against the taxpayer's real estate tax liability to the City of Pasay was the amount of money that the taxpayer was supposed to receive as payment for his property that was expropriated by the National Government. Taxes are not subject to compensation. [Francia vs. Intermediate Appellate Court. GR No. L67649. June 28, 1988]

In this case, what appeared to be a due and demandable debt of the Government to the estate of the late Walter Scott Price, as payment for the latter's services, was allowed as a set-off against the transfer taxes due from the decedent's estate. The Court opined, citing Arts. 1279 and 1290 of the Civil Code, that when two obligations are both due and demandable and all the requisites for a valid compensation are present, compensation of the two obligations takes effect by operation of law. [Domingo vs. Carlitos. GR No. L18994. June 29, 1963]Both a license fee and tax may be imposed on the same business or occupation for selling the same article and this is not in violation of the rules against double taxation. [Compania vs. General de Tobacos de Filipinas. GR No. L16619. June 29, 1963]

Classification of Taxes : (Indirect Taxes)Where the exemption from indirect tax is given to the contractee, but the evident intention is to exempt the contractor so that such contractor may no longer shift or pass on any tax to the contractee, the contractor may claim tax exemption on the transaction. [CIR vs. John Gotamco and Sons Inc. GR No. L31092. February 27, 1987]Where the transaction in itself is tax-exempt and the buyer pays the tax as part of the purchase price, it is the seller's obligation, in case he has obtained a refund of the disputed tax, to hold such refunded tax in trust for the buyer. [CIR vs. American Rubber Co. GR No. L19801-03. November 29, 1966]The sales tax that is passed on to the purchaser as part of the purchase price of the commodity is a tax on the seller, and not the buyer. Hence, if the buyer happens to be tax-exempt, the seller is nonetheless liable for the payment of the tax as the same is a tax not on the buyer himself but is actually a tax on the seller.

When the consumer or end-user of a manufactured product is tax-exempt, such exemption covers only those taxes for which such consumer or end-user is directly liable. Indirect taxes are not included. Hence, the manufacturer cannot claim exemption from the payment of sales tax; neither can the consumer or buyer of the product demand the refund of the tax that the manufacturer might have passed on to them. [Philippine Acetylene Co., Inc. vs. CIR. GR No. L19707. August 17, 1967]

Taxpayers Suit

A duly elected Senator of the Philippines and a taxpayer thereof has the legal capacity to file an action for certiorari, prohibition and mandamus to question the legality of a claimed refund of indirect taxes like the tax on oil products, since the refund itself, if found to be without legal basis, constitutes an illegal expenditure of public funds. [Maceda vs. Macaraig. GR No. 88291. June 8, 1993]The right of a taxpayer to file an action questioning the validity or constitutionality of a statute or law has been recognized, on the theory that the expenditure of public funds by an officer of the Government for the purpose of administering or implementing an unconstitutional or invalid law, const