EN BANC

CHAMBER OF REAL G.R. No. 160756

ESTATE AND BUILDERS
ASSOCIATIONS, INC.,
Petitioner, Present: - v e r s u s - LEONARDO-DE CASTRO,
THE HON. EXECUTIVE
SECRETARY ALBERTO ROMULO,
THE HON. ACTING SECRETARY OF
FINANCE JUANITA D. AMATONG,
and THE HON. COMMISSIONER OF
INTERNAL REVENUE GUILLERMO
PARAYNO, JR.,
Respondents. Promulgated:

March 9, 2010

CORONA, J.:

In this original petition for certiorari and mandamus,[1] petitioner Chamber of Real Estate and
Builders Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act
(RA) 8424[2] and the revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR)
to implement said provision and those involving creditable withholding taxes.[3]

Petitioner is an association of real estate developers and builders in the Philippines. It

impleaded former Executive Secretary Alberto Romulo, then acting Secretary of Finance
Juanita D. Amatong and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as
respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on
corporations and creditable withholding tax (CWT) on sales of real properties classified as
ordinary assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by
RR 9-98. Petitioner argues that the MCIT violates the due process clause because it levies
income tax even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR
2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and
procedures for the collection of CWT on the sale of real properties categorized as ordinary
assets. Petitioner contends that these revenue regulations are contrary to law for two
reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital
assets and second, respondent Secretary of Finance has no authority to collect CWT, much
less, to base the CWT on the gross selling price or fair market value of the real properties
classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate
the due process clause because, like the MCIT, the government collects income tax even when
the net income has not yet been determined. They contravene the equal protection clause as
well because the CWT is being levied upon real estate enterprises but not on other business
enterprises, more particularly those in the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;
(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from sales of real properties classified as
ordinary assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

OVERVIEW OF THE ASSAILED PROVISIONS

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed
an MCIT of 2% of its gross income when such MCIT is greater than the normal corporate
income tax imposed under Section 27(A).[4] If the regular income tax is higher than the MCIT,
the corporation does not pay the MCIT. Any excess of the MCIT over the normal tax shall be
carried forward and credited against the normal income tax for the three immediately
succeeding taxable years. Section 27(E) of RA 8424 provides:

Section 27 (E). [MCIT] on Domestic Corporations. -

(1) Imposition of Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the
taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title,
beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum income tax is greater than the tax
computed under Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over the normal
income tax as computed under Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3) immediately succeeding taxable years.

(3) Relief from the [MCIT] under certain conditions. The Secretary of Finance is hereby
authorized to suspend the imposition of the [MCIT] on any corporation which suffers losses on
account of prolonged labor dispute, or because of force majeure, or because of legitimate
business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the

Commissioner, the necessary rules and regulations that shall define the terms and conditions
under which he may suspend the imposition of the [MCIT] in a meritorious case.

(4) Gross Income Defined. For purposes of applying the [MCIT] provided under Subsection
(E) hereof, the term gross income shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. Cost of goods sold shall include all business expenses
directly incurred to produce the merchandise to bring them to their present location and use.

For trading or merchandising concern, cost of goods sold shall include the invoice cost of the
goods sold, plus import duties, freight in transporting the goods to the place where the goods
are actually sold including insurance while the goods are in transit.

For a manufacturing concern, cost of goods manufactured and sold shall include all costs of
production of finished goods, such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials
to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, gross income means gross receipts less
sales returns, allowances, discounts and cost of services. Cost of services shall mean all direct
costs and expenses necessarily incurred to provide the services required by the customers and
clients including (A) salaries and employee benefits of personnel, consultants and specialists
directly rendering the service and (B) cost of facilities directly utilized in providing the service
such as depreciation or rental of equipment used and cost of supplies: Provided, however, that
in the case of banks, cost of services shall include interest expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of

the Commissioner of Internal Revenue (CIR), promulgated RR 9-98 implementing Section
27(E).[5] The pertinent portions thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the end of
the taxable year (whether calendar or fiscal year, depending on the accounting period
employed) is hereby imposed upon any domestic corporation beginning the fourth (4th) taxable
year immediately following the taxable year in which such corporation commenced its business
operations. The MCIT shall be imposed whenever such corporation has zero or negative
taxable income or whenever the amount of minimum corporate income tax is greater than the
normal income tax due from such corporation.

For purposes of these Regulations, the term, normal income tax means the income tax rates
prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1,
2000 and thereafter.

xxx xxx xxx

(2) Carry forward of excess [MCIT]. Any excess of the [MCIT] over the normal income tax as
computed under Sec. 27(A) of the Code shall be carried forward on an annual basis and
credited against the normal income tax for the three (3) immediately succeeding taxable years.

xxx xxx xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR,
promulgated RR 2-98 implementing certain provisions of RA 8424 involving the withholding of
taxes.[6] Under Section 2.57.2(J) of RR No. 2-98, income payments from the sale, exchange or
transfer of real property, other than capital assets, by persons residing in the Philippines and
habitually engaged in the real estate business were subjected to CWT:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner
for the sale, exchange or transfer of. Real property, other than capital assets, sold by an
individual, corporation, estate, trust, trust fund or pension fund and the seller/transferor is
habitually engaged in the real estate business in accordance with the following schedule
Those which are exempt from a
withholding tax at source as xxx xxx xxx
prescribed in Sec. 2.57.5 of these
regulations. Exempt Gross selling price
shall mean the
With a selling price of five consideration stated
hundred thousand pesos in the sales
(P500,000.00) or less. 1.5% document or the fair
market value
With a selling price of more than determined in
five hundred thousand pesos accordance with
(P500,000.00) but not more than Section 6 (E) of the
two million pesos Code, as amended,
(P2,000,000.00). 3.0% whichever is
higher. In an
With selling price of more than exchange, the fair
two million pesos (P2,000,000.00) market value of the
5.0% property received in
exchange, as
determined in the Income Tax Regulations shall be used.

Where the consideration or part thereof is payable on installment, no withholding tax is required
to be made on theperiodic installment payments where the buyer is an individual not engaged in
trade or business. In such a case, the applicable rate of tax based on the entire consideration
shall be withheld on the last installment or installments to be paid to the seller.

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the
tax shall be deducted and withheld by the buyer on every installment.
This provision was amended by RR 6-2001 on July 31, 2001:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of real property classified as ordinary asset. - A
[CWT] based on the gross selling price/total amount of consideration or the fair market value
determined in accordance with Section 6(E) of the Code, whichever is higher, paid to the
seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be
imposed upon the withholding agent,/buyer, in accordance with the following schedule:

Where the seller/transferor is exempt from

[CWT] in accordance with Sec. 2.57.5 of these
regulations. Exempt

Upon the following values of real property,

where the seller/transferor is habitually
engaged in the real estate business.

With a selling price of Five Hundred Thousand

Pesos (P500,000.00) or less. 1.5%

With a selling price of more than Five Hundred

Thousand Pesos (P500,000.00) but not more
than Two Million Pesos (P2,000,000.00).
3.0%

With a selling price of more than two Million

Pesos (P2,000,000.00). 5.0%
xxx xxx xxx

Gross selling price shall remain the consideration stated in the sales document or the fair
market value determined in accordance with Section 6 (E) of the Code, as amended, whichever
is higher. In an exchange, the fair market value of the property received in exchange shall be
considered as the consideration.

xxx xxx xxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise,

these rules shall apply:

(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do
not exceed 25% of the selling price), the tax shall be deducted and withheld by the buyer on
every installment.

(ii) If, on the other hand, the sale is on a cash basis or is a deferred-payment sale not on the
installment plan (that is, payments in the year of sale exceed 25% of the selling price), the buyer
shall withhold the tax based on the gross selling price or fair market value of the property,
whichever is higher, on the first installment.

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless
the [CWT] due on the sale, transfer or exchange of real property other than capital asset has
been fully paid. (Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter
or exchange subject to the CWT will not be recorded by the Registry of Deeds until the CIR has
certified that such transfers and conveyances have been reported and the taxes thereof have
been duly paid:[7]

Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of land or land and
building/improvement thereon arising from sales, barters, or exchanges subject to the creditable
expanded withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his
duly authorized representative has certified that such transfers and conveyances have been
reported and the expanded withholding tax, inclusive of the documentary stamp tax, due
thereon have been fully paid xxxx.

On February 11, 2003, RR No. 7-2003[8] was promulgated, providing for the guidelines in
determining whether a particular real property is a capital or an ordinary asset for purposes of
imposing the MCIT, among others. The pertinent portions thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition of real
property. - Gains/Income derived from sale, exchange, or other disposition of real properties
shall, unless otherwise exempt, be subject to applicable taxes imposed under the Code,
depending on whether the subject properties are classified as capital assets or ordinary assets;

a. In the case of individual citizen (including estates and trusts), resident aliens, and non-
resident aliens engaged in trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets,
shall be subject to the [CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended,
based on the gross selling price or current fair market value as determined in accordance with
Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary income tax
imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net
taxable income.

xxx xxx xxx

c. In the case of domestic corporations.

xxx xxx xxx

(ii) The sale of land and/or building classified as ordinary asset and other real property
(other than land and/or building treated as capital asset), regardless of the classification thereof,
all of which are located in the Philippines, shall be subject to the [CWT] (expanded) under Sec.
2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary income tax under Sec.
27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may
become subject to the [MCIT] under Sec. 27(E) of the Code, whichever is applicable.

xxx xxx xxx

We shall now tackle the issues raised.

EXISTENCE OF A JUSTICIABLE CONTROVERSY

Courts will not assume jurisdiction over a constitutional question unless the following requisites
are satisfied: (1) there must be an actual case calling for the exercise of judicial review; (2) the
question before the court must be ripe for
adjudication; (3) the person challenging the validity of the act must have standing to do so; (4)
the question of constitutionality must have been raised at the earliest opportunity and (5) the
issue of constitutionality must be the very lis mota of the case.[9]

Respondents aver that the first three requisites are absent in this case. According to them, there
is no actual case calling for the exercise of judicial power and it is not yet ripe for adjudication
because

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been
assessed by the BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did
petitioner allege that its members have shut down their businesses as a result of the payment of
the MCIT or CWT. Petitioner has raised concerns in mere abstract and hypothetical form
without any actual, specific and concrete instances cited that the assailed law and revenue
regulations have actually and adversely affected it. Lacking empirical data on which to base any
conclusion, any discussion on the constitutionality of the MCIT or CWT on sales of real property
is essentially an academic exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating
abstract issues. Otherwise, adjudication would be no different from the giving of advisory
opinion that does not really settle legal issues.[10]

An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal
claims which is susceptible of judicial resolution as distinguished from a hypothetical or abstract
difference or dispute.[11] On the other hand, a question is considered ripe for adjudication when
the act being challenged has a direct adverse effect on the individual challenging it.[12]

Contrary to respondents assertion, we do not have to wait until petitioners members have shut
down their operations as a result of the MCIT or CWT. The assailed provisions are already
being implemented. As we stated in Didipio Earth-Savers Multi-Purpose Association,
Incorporated (DESAMA) v. Gozun:[13]

By the mere enactment of the questioned law or the approval of the challenged act, the dispute
is said to have ripened into a judicial controversy even without any other overt act. Indeed, even
a singular violation of the Constitution and/or the law is enough to awaken judicial duty.[14]

If the assailed provisions are indeed unconstitutional, there is no better time than the present to
settle such question once and for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the
Philippines. Petitioners did not allege that [it] itself is in the real estate business. It did not allege
any material interest or any wrong that it may suffer from the enforcement of [the assailed
provisions].[15]

Legal standing or locus standi is a partys personal and substantial interest in a case such that it
has sustained or will sustain direct injury as a result of the governmental act being
challenged.[16] In Holy Spirit Homeowners Association, Inc. v. Defensor,[17] we held that the
association had legal standing because its members stood to be injured by the enforcement of
the assailed provisions:

Petitioner association has the legal standing to institute the instant petition xxx. There is no
dispute that the individual members of petitioner association are residents of the NGC. As such
they are covered and stand to be either benefited or injured by the enforcement of the IRR,
particularly as regards the selection process of beneficiaries and lot allocation to qualified
beneficiaries. Thus, petitioner association may assail those provisions in the IRR which it
believes to be unfavorable to the rights of its members. xxx Certainly, petitioner and its
members have sustained direct injury arising from the enforcement of the IRR in that they have
been disqualified and eliminated from the selection process.[18]

In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the
requirements of an actual case, ripeness or legal standing when paramount public interest is
involved.[19] The questioned MCIT and CWT affect not only petitioners but practically all
domestic corporate taxpayers in our country. The transcendental importance of the issues
raised and their overreaching significance to society make it proper for us to take cognizance of
this petition.[20]

CONCEPT AND RATIONALE OF THE MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine
taxation system. It came about as a result of the perceived inadequacy of the self-assessment
system in capturing the true income of corporations.[21] It was devised as a relatively simple and
effective revenue-raising instrument compared to the normal income tax which is more difficult
to control and enforce. It is a means to ensure that everyone will make some minimum
contribution to the support of the public sector. The congressional deliberations on this are
illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of
reporting constantly a loss in their operations to avoid the payment of taxes, and thus avoid
sharing in the cost of government. In this regard, the Tax Reform Act introduces for the first time
a new concept called the [MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation
in the country and for administrative convenience. This will go a long way in ensuring that
corporations will pay their just share in supporting our public life and our economic
advancement.[22]

Domestic corporations owe their corporate existence and their privilege to do business to the
government. They also benefit from the efforts of the government to improve the financial
market and to ensure a favorable business climate. It is therefore fair for the government to
require them to make a reasonable contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while having large turn-
overs, report minimal or negative net income resulting in minimal or zero income taxes year in
and year out, through under-declaration of income or over-deduction of expenses otherwise
called tax shelters.[23]

Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is why they have
proposed the [MCIT]. Because from experience too, you have corporations which have been
losing year in and year out and paid no tax. So, if the corporation has been losing for the past
five years to ten years, then that corporation has no business to be in business. It is dead. Why
continue if you are losing year in and year out? So, we have this provision to avoid this type of
tax shelters, Your Honor.[24]

The primary purpose of any legitimate business is to earn a profit. Continued and repeated
losses after operations of a corporation or consistent reports of minimal net income render its
financial statements and its tax payments suspect. For sure, certain tax avoidance schemes
resorted to by corporations are allowed in our jurisdiction. The MCIT serves to put a cap on
such tax shelters. As a tax on gross income, it prevents tax evasion and minimizes tax
avoidance schemes achieved through sophisticated and artful manipulations of deductions and
other stratagems. Since the tax base was broader, the tax rate was lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were
incorporated into the law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major
capital expenditures, the imposition of the MCIT commences only on the fourth taxable year
immediately following the year in which the corporation commenced its operations.[25] This grace
period allows a new business to stabilize first and make its ventures viable before it is subjected
to the MCIT.[26]

Second, the law allows the carrying forward of any excess of the MCIT paid over the normal
income tax which shall be credited against the normal income tax for the three immediately
succeeding years.[27]
Third, since certain businesses may be incurring genuine repeated losses, the law authorizes
the Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due
to prolonged labor dispute, force majeure and legitimate business reverses.[28]
Even before the legislature introduced the MCIT to the Philippine taxation system, several other
countries already had their own system of minimum corporate income taxation. Our lawmakers
noted that most developing countries, particularly Latin American and Asian countries, have the
same form of safeguards as we do. As pointed out during the committee hearings:

[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room
for underdeclaration of gross receipts have this same form of safeguards.
In the case of Thailand, half a percent (0.5%), theres a minimum of income tax of half a percent
(0.5%) of gross assessable income. In Korea a 25% of taxable income before deductions and
exemptions. Of course the different countries have different basis for that minimum income tax.

The other thing youll notice is the preponderance of Latin American countries that employed this
method. Okay, those are additional Latin American countries.[29]

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary
have their own versions of the MCIT.[30]

MCIT IS NOT VIOLATIVE OF DUE PROCESS

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is
highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without
due process of law. It explains that gross income as defined under said provision only considers
the cost of goods sold and other direct expenses; other major expenditures, such as
administrative and interest expenses which are equally necessary to produce gross income,
were not taken into account.[31] Thus, pegging the tax base of the MCIT to a corporations gross
income is tantamount to a confiscation of capital because gross income, unlike net income, is
not realized gain.[32]

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor
endure. The exercise of taxing power derives its source from the very existence of the State
whose social contract with its citizens obliges it to promote public interest and the common
good.[33]

Taxation is an inherent attribute of sovereignty.[34] It is a power that is purely

legislative.[35] Essentially, this means that in the legislature primarily lies the discretion to
determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs
(place) of taxation.[36] It has the authority to prescribe a certain tax at a specific rate for a
particular public purpose on persons or things within its jurisdiction. In other words, the
legislature wields the power to define what tax shall be imposed, why it should be imposed, how
much tax shall be imposed, against whom (or what) it shall be imposed and where it shall be
imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its
very nature no limits, so that the principal check against its abuse is to be found only in the
responsibility of the legislature (which imposes the tax) to its constituency who are to pay
it.[37] Nevertheless, it is circumscribed by constitutional limitations. At the same time, like any
other statute, tax legislation carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat [no] person shall be deprived
of life, liberty or property without due process of law. In Sison, Jr. v. Ancheta, et al.,[38] we held
that the due process clause may properly be invoked to invalidate, in appropriate cases, a
revenue measure[39] when it amounts to a confiscation of property.[40] But in the same case, we
also explained that we will not strike down a revenue measure as unconstitutional (for being
violative of the due process clause) on the mere allegation of arbitrariness by the
taxpayer.[41] There must be a factual foundation to such an unconstitutional taint.[42] This merely
adheres to the authoritative doctrine that, where the due process clause is invoked, considering
that it is not a fixed rule but rather a broad standard, there is a need for proof of such persuasive
character.[43]

Petitioner is correct in saying that income is distinct from capital.[44] Income means all the wealth
which flows into the taxpayer other than a mere return on capital.Capital is a fund or property
existing at one distinct point in time while income denotes a flow of wealth during a definite
period of time.[45] Income is gain derived and severed from capital.[46] For income to be taxable,
the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from
taxation.[47]

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not
income. In other words, it is income, not capital, which is subject to income tax.However, the
MCIT is not a tax on capital.
The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost of goods[48] and other direct expenses from
gross sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net
income tax, and only if the normal income tax is suspiciously low. The MCIT merely
approximates the amount of net income tax due from a corporation, pegging the rate at a very
much reduced 2% and uses as the base the corporations gross income.

Besides, there is no legal objection to a broader tax base or taxable income by eliminating all
deductible items and at the same time reducing the applicable tax rate.[49]

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found
in many jurisdictions. Tax thereon is generally held to be within the power of a state to impose;
or constitutional, unless it interferes with interstate commerce or violates the requirement as to
uniformity of taxation.[50]

The United States has a similar alternative minimum tax (AMT) system which is generally
characterized by a lower tax rate but a broader tax base.[51] Since our income tax laws are of
American origin, interpretations by American courts of our parallel tax laws have persuasive
effect on the interpretation of these laws.[52] Although our MCIT is not exactly the same as the
AMT, the policy behind them and the procedure of their implementation are comparable. On the
question of the AMTs constitutionality, the United States Court of Appeals for the Ninth Circuit
stated in Okin v. Commissioner:[53]

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the
system growing from large numbers of taxpayers with large incomes who were yet paying no
taxes.

xxx xxx xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a
rational means of obtaining a broad-based tax, and therefore is constitutional.[54]

The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would
contribute a minimum amount of taxes was a legitimate governmental end to which the AMT
bore a reasonable relation.[55]
American courts have also emphasized that Congress has the power to condition, limit or deny
deductions from gross income in order to arrive at the net that it chooses to tax.[56] This is
because deductions are a matter of legislative grace.[57]

Absent any other valid objection, the assignment of gross income, instead of net income, as the
tax base of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not
constitutionally objectionable.
Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its
members nor does it present empirical data to show that the implementation of the MCIT
resulted in the confiscation of their property.
In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is
arbitrary and confiscatory. The Court cannot strike down a law as unconstitutional simply
because of its yokes.[58] Taxation is necessarily burdensome because, by its nature, it adversely
affects property rights.[59] The party alleging the laws unconstitutionality has the burden to
demonstrate the supposed violations in understandable terms.[60]
RR 9-98 MERELY CLARIFIES
SECTION 27(E) OF RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because
the MCIT is being imposed and collected even when there is actually a loss, or a zero or
negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such corporation has zero
or negative taxable income or whenever the amount of [MCIT] is greater than the normal
income tax due from such corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or
negative taxable income, merely defines the coverage of Section 27(E). This means that even if
a corporation incurs a net loss in its business operations or reports zero income after deducting
its expenses, it is still subject to an MCIT of 2% of its gross income. This is consistent with the
law which imposes the MCIT on gross income notwithstanding the amount of the net
income. But the law also states that the MCIT is to be paid only if it is greater than the normal
net income. Obviously, it may well be the case that the MCIT would be less than the net income
of the corporation which posts a zero or negative taxable income.

We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes (including income taxes) are
collected.[61] Under Section 57 of RA 8424, the types of income subject to withholding tax are
divided into three categories: (a) withholding of final tax on certain incomes; (b) withholding of
creditable tax at source and (c) tax-free covenant bonds. Petitioner is concerned with the
second category (CWT) and maintains that the revenue regulations on the collection of CWT on
sale of real estate categorized as ordinary assets are unconstitutional.

Petitioner, after enumerating the distinctions between capital and ordinary assets under RA
8424, contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of
RR 7-2003 were promulgated with grave abuse of discretion amounting to lack of jurisdiction
and patently in contravention of law[62] because they ignore such distinctions. Petitioners
conclusion is based on the following premises: (a) the revenue regulations use gross selling
price (GSP) or fair market value (FMV) of the real estate as basis for determining the income tax
for the sale of real estate classified as ordinary assets and (b) they mandate the collection of
income tax on a per transaction basis, i.e., upon consummation of the sale via the CWT,
contrary to RA 8424 which calls for the payment of the net income at the end of the taxable
period.[63]
Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently,
respondents cannot disregard the distinctions set by the legislators as regards the tax base,
modes of collection and payment of taxes on income from the sale of capital and ordinary
assets.
Petitioners arguments have no merit.

AUTHORITY OF THE SECRETARY OF FINANCE TO ORDER THE COLLECTION OF CWT

ON SALES OF REAL PROPERTY CONSIDERED AS ORDINARY ASSETS

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate
the necessary rules and regulations for the effective enforcement of the provisions of the
law. Such authority is subject to the limitation that the rules and regulations must not override,
but must remain consistent and in harmony with, the law they seek to apply and implement.[64] It
is well-settled that an administrative agency cannot amend an act of Congress.[65]

We have long recognized that the method of withholding tax at source is a procedure of
collecting income tax which is sanctioned by our tax laws.[66] The withholding tax system was
devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet
his probable income tax liability; second, to ensure the collection of income tax which can
otherwise be lost or substantially reduced through failure to file the corresponding returns and
third, to improve the governments cash flow.[67] This results in administrative savings, prompt
and efficient collection of taxes, prevention of delinquencies and reduction of governmental
effort to collect taxes through more complicated means and remedies.[68]
Respondent Secretary has the authority to require the withholding of a tax on items of income
payable to any person, national or juridical, residing in the Philippines. Such authority is derived
from Section 57(B) of RA 8424 which provides:

SEC. 57. Withholding of Tax at Source.

xxx xxx xxx

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation
of the [CIR], require the withholding of a tax on the items of income payable to natural or
juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by
law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%)
thereof, which shall be credited against the income tax liability of the taxpayer for the taxable
year.

The questioned provisions of RR 2-98, as amended, are well within the authority given by
Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32%
range; the withholding tax is imposed on the income payable and the tax is creditable against
the income tax liability of the taxpayer for the taxable year.

EFFECT OF RRS ON THE TAX BASE FOR THE INCOME TAX OF INDIVIDUALS OR
CORPORATIONS ENGAGED IN THE REAL ESTATE BUSINESS

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate
business income tax from net income to GSP or FMV of the property sold.
Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to
extinguish its possible tax obligation. [69] They are installments on the annual tax which may be
due at the end of the taxable year.[70]
Under RR 2-98, the tax base of the income tax from the sale of real property classified as
ordinary assets remains to be the entitys net income imposed under Section 24 (resident
individuals) or Section 27 (domestic corporations) in relation to Section 31 of RA 8424, i.e. gross
income less allowable deductions. The CWT is to be deducted from the net income tax payable
by the taxpayer at the end of the taxable year.[71] Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-
2003 reiterate that the tax base for the sale of real property classified as ordinary assets
remains to be the net taxable income:

Section 4. Applicable taxes on sale, exchange or other disposition of real property.

- Gains/Income derived from sale, exchange, or other disposition of real properties shall unless
otherwise exempt, be subject to applicable taxes imposed under the Code, depending on
whether the subject properties are classified as capital assets or ordinary assets;

xxx xxx xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and non-
resident aliens engaged in trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall
be subject to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on
the [GSP] or current [FMV] as determined in accordance with Section 6(E) of the Code,
whichever is higher, and consequently, to the ordinary income tax imposed under Sec.
24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real property (other than
land and/or building treated as capital asset), regardless of the classification thereof, all of which
are located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of
[RR 2-98], as amended, and consequently, to the ordinary income tax under Sec. 27(A) of the
Code. In lieu of the ordinary income tax, however, domestic corporations may become subject
to the [MCIT] under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit
the taxes withheld (by the withholding agent/buyer) against its tax due. If the tax due is greater
than the tax withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax
due is less than the tax withheld, the taxpayer will be entitled to a refund or tax
credit. Undoubtedly, the taxpayer is taxed on its net income.
The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes
of practicality and convenience. Obviously, the withholding agent/buyer who is obligated to
withhold the tax does not know, nor is he privy to, how much the taxpayer/seller will have as its
net income at the end of the taxable year. Instead, said withholding agents knowledge and
privity are limited only to the particular transaction in which he is a party. In such a case, his
basis can only be the GSP or FMV as these are the only factors reasonably known or knowable
by him in connection with the performance of his duties as a withholding agent.

NO BLURRING OF DISTINCTIONS BETWEEN ORDINARY ASSETS AND CAPITAL ASSETS

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property
categorized as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final
tax and flat rate of 6% on the gain presumed to be realized from the sale of a capital asset
based on its GSP or FMV. This final tax is also withheld at source.[72]
The differences between the two forms of withholding tax, i.e., creditable and final, show that
ordinary assets are not treated in the same manner as capital assets. Final withholding tax
(FWT) and CWT are distinguished as follows:

FWT
a) The amount of income tax withheld by
the withholding agent is constituted as a
full and final payment of the income tax
due from the payee on the said income.
CWT
a) Taxes withheld on certain income
payments are intended to equal or at least
approximate the tax due of the payee on
said income.

b)The liability for payment of the tax rests
primarily on the payor as a withholding
agent.
c) The payee is not required to file an
income tax return for the particular
income.[73]
b) Payee of income is required to report
the income and/or pay the difference
between the tax withheld and the tax due
on the income. The payee also has the
right to ask for a refund if the tax withheld
is more than the tax due.
c) The income recipient is still required to
file an income tax return, as prescribed in
Sec. 51 and Sec. 52 of the NIRC, as
amended.[74]

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is
imposed on the sale of ordinary assets. The inherent and substantial differences between FWT
and CWT disprove petitioners contention that ordinary assets are being lumped together with,
and treated similarly as, capital assets in contravention of the pertinent provisions of RA 8424.
Petitioner insists that the levy, collection and payment of CWT at the time of transaction are
contrary to the provisions of RA 8424 on the manner and time of filing of the return, payment
and assessment of income tax involving ordinary assets.[75]
The fact that the tax is withheld at source does not automatically mean that it is treated exactly
the same way as capital gains. As aforementioned, the mechanics of the FWT are distinct from
those of the CWT. The withholding agent/buyers act of collecting the tax at the time of the
transaction by withholding the tax due from the income payable is the essence of the
withholding tax method of tax collection.

NO RULE THAT ONLY PASSIVE

INCOMES CAN BE SUBJECT TO CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether final or
creditable. According to petitioner, the whole of Section 57 governs the withholding of income
tax on passive income. The enumeration in Section 57(A) refers to passive income being
subjected to FWT. It follows that Section 57(B) on CWT should also be limited to passive
income:

SEC. 57. Withholding of Tax at Source.

(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the
[Secretary] may promulgate, upon the recommendation of the [CIR], requiring the filing of
income tax return by certain income payees, the tax imposed or prescribed by Sections
24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1),
27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1),
28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on
specified items of income shall be withheld by payor-corporation and/or person and paid in the
same manner and subject to the same conditions as provided in Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of
the [CIR], require the withholding of a tax on the items of income payable to natural or juridical
persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the
rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which
shall be credited against the income tax liability of the taxpayer for the taxable year. (Emphasis
supplied)

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds of income and
enumerates these as passive income. The BIR defines passive income by stating what it is not:

if the income is generated in the active pursuit and performance of the corporations primary
purposes, the same is not passive income[76]

It is income generated by the taxpayers assets. These assets can be in the form of real
properties that return rental income, shares of stock in a corporation that earn dividends or
interest income received from savings.

On the other hand, Section 57(B) provides that the Secretary can require a CWT on income
payable to natural or juridical persons, residing in the Philippines. There is no requirement that
this income be passive income. If that were the intent of Congress, it could have easily said so.

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B)
pertains to CWT. The former covers the kinds of passive income enumerated therein and the
latter encompasses any income other than those listed in 57(A). Since the law itself makes
distinctions, it is wrong to regard 57(A) and 57(B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the
text of Section 57(B). RR 2-98 merely implements the law by specifying what income is subject
to CWT. It has been held that, where a statute does not require any particular procedure to be
followed by an administrative agency, the agency may adopt any reasonable method to carry
out its functions.[77] Similarly, considering that the law uses the general term income, the
Secretary and CIR may specify the kinds of income the rules will apply to based on what is
feasible. In addition, administrative rules and regulations ordinarily deserve to be given weight
and respect by the courts[78] in view of the rule-making authority given to those who formulate
them and their specific expertise in their respective fields.

NO DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary
assets deprives its members of their property without due process of law because, in their line
of business, gain is never assured by mere receipt of the selling price. As a result, the
government is collecting tax from net income not yet gained or earned.
Again, it is stressed that the CWT is creditable against the tax due from the seller of the property
at the end of the taxable year. The seller will be able to claim a tax refund if its net income is
less than the taxes withheld. Nothing is taken that is not due so there is no confiscation of
property repugnant to the constitutional guarantee of due process. More importantly, the due
process requirement applies to the power to tax.[79] The CWT does not impose new taxes nor
does it increase taxes.[80] It relates entirely to the method and time of payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome because
taxpayers have to wait years and may even resort to litigation before they are granted a
refund.[81] This argument is misleading. The practical problems encountered in claiming a tax
refund do not affect the constitutionality and validity of the CWT as a method of collecting the
tax.
Petitioner complains that the amount withheld would have otherwise been used by the
enterprise to pay labor wages, materials, cost of money and other expenses which can then
save the entity from having to obtain loans entailing considerable interest expense. Petitioner
also lists the expenses and pitfalls of the trade which add to the burden of the realty
industry: huge investments and borrowings; long gestation period; sudden and unpredictable
interest rate surges; continually spiraling development/construction costs; heavy taxes and
prohibitive up-front regulatory fees from at least 20 government agencies.[82]
Petitioners lamentations will not support its attack on the constitutionality of the
CWT. Petitioners complaints are essentially matters of policy best addressed to the executive
and legislative branches of the government. Besides, the CWT is applied only on the amounts
actually received or receivable by the real estate entity. Sales on installment are taxed on a per-
installment basis.[83] Petitioners desire to utilize for its operational and capital expenses money
earmarked for the payment of taxes may be a practical business option but it is not a
fundamental right which can be demanded from the court or from the government.

NO VIOLATION OF EQUAL PROTECTION

Petitioner claims that the revenue regulations are violative of the equal protection clause
because the CWT is being levied only on real estate enterprises. Specifically, petitioner points
out that manufacturing enterprises are not similarly imposed a CWT on their sales, even if their
manner of doing business is not much different from that of a real estate enterprise. Like a
manufacturing concern, a real estate business is involved in a continuous process of production
and it incurs costs and expenditures on a regular basis. The only difference is that goods
produced by the real estate business are house and lot units.[84]

Again, we disagree.

The equal protection clause under the Constitution means that no person or class of persons
shall be deprived of the same protection of laws which is enjoyed by other persons or other
classes in the same place and in like circumstances.[85] Stated differently, all persons belonging
to the same class shall be taxed alike. It follows that the guaranty of the equal protection of the
laws is not violated by legislation based on a reasonable classification. Classification, to be
valid, must (1) rest on substantial distinctions; (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.[86]

The taxing power has the authority to make reasonable classifications for purposes of
taxation.[87] Inequalities which result from a singling out of one particular class for taxation, or
exemption, infringe no constitutional limitation.[88] The real estate industry is, by itself, a class
and can be validly treated differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises,
fails to realize that what distinguishes the real estate business from other manufacturing
enterprises, for purposes of the imposition of the CWT, is not their production processes but the
prices of their goods sold and the number of transactions involved. The income from the sale of
a real property is bigger and its frequency of transaction limited, making it less cumbersome for
the parties to comply with the withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of transactions
with several thousand customers every month involving both minimal and substantial amounts.
To require the customers of manufacturing enterprises, at present, to withhold the taxes on
each of their transactions with their tens or hundreds of suppliers may result in an inefficient and
unmanageable system of taxation and may well defeat the purpose of the withholding tax
system.
Petitioner counters that there are other businesses wherein expensive items are also sold
infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other capital goods yet
these are not similarly subjected to the CWT.[89] As already discussed, the Secretary may adopt
any reasonable method to carry out its functions.[90] Under Section 57(B), it may choose what to
subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners argument is not
accurate. The sales of manufacturers who have clients within the top 5,000 corporations, as
specified by the BIR, are also subject to CWT for their transactions with said 5,000
corporations.[91]

SECTION 2.58.2 OF RR NO. 2-98 MERELY IMPLEMENTS SECTION 58 OF RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds
should not effect the regisration of any document transferring real property unless a certification
is issued by the CIR that the withholding tax has been paid. Petitioner proffers hardly any
reason to strike down this rule except to rely on its contention that the CWT is
unconstitutional. We have ruled that it is not. Furthermore, this provision uses almost exactly the
same wording as Section 58(E) of RA 8424 and is unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source.

(E) Registration with Register of Deeds. - No registration of any document transferring real
property shall be effected by the Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfer has been reported, and the capital gains or
[CWT], if any, has been paid: xxxx any violation of this provision by the Register of Deeds shall
be subject to the penalties imposed under Section 269 of this Code. (Emphasis supplied

CONCLUSION

The renowned genius Albert Einstein was once quoted as saying [the] hardest thing in the world
to understand is the income tax.[92] When a party questions the constitutionality of an income tax
measure, it has to contend not only with Einsteins observation but also with the vast and well-
established jurisprudence in support of the plenary powers of Congress to impose
taxes. Petitioner has miserably failed to discharge its burden of convincing the Court that the
imposition of MCIT and CWT is unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.
 [G.R. No. 149636. June 8, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BANK OF

COMMERCE, respondent.

DECISION
CALLEJO, SR., J.:

This is a petition for review on certiorari of the Decision[1] of the Court of Appeals (CA) in CA-
G.R. SP No. 52706, affirming the ruling of the Court of Tax Appeals (CTA)[2] in CTA Case No.
5415.
The facts of the case are undisputed.
In 1994 and 1995, the respondent Bank of Commerce derived passive income in the form of
interests or discounts from its investments in government securities and private commercial
papers. On several occasions during the said period, it paid 5% gross receipts tax on its income,
as reflected in its quarterly percentage tax returns. Included therein were the respondent banks
passive income from the said investments amounting to P85,384,254.51, which had already been
subjected to a final tax of 20%.
Meanwhile, on January 30, 1996, the CTA rendered judgment in Asia Bank Corporation v.
Commissioner of Internal Revenue, CTA Case No. 4720, holding that the 20% final withholding
tax on interest income from banks does not form part of taxable gross receipts for Gross Receipts
Tax (GRT) purposes. The CTA relied on Section 4(e) of Revenue Regulations (Rev. Reg.) No.
12-80.
Relying on the said decision, the respondent bank filed an administrative claim for refund with
the Commissioner of Internal Revenue on July 19, 1996. It claimed that it had overpaid its gross
receipts tax for 1994 to 1995 by P853,842.54, computed as follows:

Gross receipts subjected to

Final Tax Derived from Passive
Investment P85,384,254.51
x 20%
20% Final Tax Withheld 17,076,850.90
at Source x 5%
P 853,842.54

Before the Commissioner could resolve the claim, the respondent bank filed a petition for
review with the CTA, lest it be barred by the mandatory two-year prescriptive period under Section
230 of the Tax Code (now Section 229 of the Tax Reform Act of 1997).
In his answer to the petition, the Commissioner interposed the following special and
affirmative defenses:

5. The alleged refundable/creditable gross receipts taxes were collected and paid pursuant to
law and pertinent BIR implementing rules and regulations; hence, the same are not refundable.
Petitioner must prove that the income from which the refundable/creditable taxes were paid
from, were declared and included in its gross income during the taxable year under review;

6. Petitioners allegation that it erroneously and excessively paid its gross receipt tax during the
year under review does not ipso facto warrant the refund/credit. Petitioner must prove that the
exclusions claimed by it from its gross receipts must be an allowable exclusion under the Tax
Code and its pertinent implementing Rules and Regulations. Moreover, it must be supported by
evidence;

7. Petitioner must likewise prove that the alleged refundable/creditable gross receipt taxes were
neither automatically applied as tax credit against its tax liability for the succeeding quarter/s of
the succeeding year nor included as creditable taxes declared and applied to the succeeding
taxable year/s;
8. Claims for tax refund/credit are construed in strictissimi juris against the taxpayer as it
partakes the nature of an exemption from tax and it is incumbent upon the petitioner to prove
that it is entitled thereto under the law. Failure on the part of the petitioner to prove the same is
fatal to its claim for tax refund/credit;

9. Furthermore, petitioner must prove that it has complied with the provision of Section 230 (now
Section 229) of the Tax Code, as amended.[3]

The CTA summarized the issues to be resolved as follows: whether or not the final income
tax withheld should form part of the gross receipts[4] of the taxpayer for GRT purposes; and
whether or not the respondent bank was entitled to a refund of P853,842.54.[5]
The respondent bank averred that for purposes of computing the 5% gross receipts tax, the
final withholding tax does not form part of gross receipts.[6] On the other hand, while the
Commissioner conceded that the Court defined gross receipts as all receipts of taxpayers
excluding those which have been especially earmarked by law or regulation for the government
or some person other than the taxpayer in CIR v. Manila Jockey Club, Inc.,[7] he claimed that such
definition was applicable only to a proprietor of an amusement place, not a banking institution
which is an entirely different entity altogether. As such, according to the Commissioner, the ruling
of the Court in Manila Jockey Club was inapplicable.
In its Decision dated April 27, 1999, the CTA by a majority decision[8] partially granted the
petition and ordered that the amount of P355,258.99 be refunded to the respondent bank.
The fallo of the decision reads:

WHEREFORE, in view of all the foregoing, respondent is hereby ORDERED to REFUND in

favor of petitioner Bank of Commerce the amount of P355,258.99 representing validly proven
erroneously withheld taxes from interest income derived from its investments in government
securities for the years 1994 and 1995.[9]

In ruling for respondent bank, the CTA relied on the ruling of the Court in Manila Jockey Club,
and held that the term gross receipts excluded those which had been especially earmarked by
law or regulation for the government or persons other than the taxpayer. The CTA also cited its
rulings in China Banking Corporation v. CIR[10] and Equitable Banking Corporation v. CIR.[11]
The CTA ratiocinated that the aforesaid amount of P355,258.99 represented the claim of the
respondent bank, which was filed within the two-year mandatory prescriptive period and was
substantiated by material and relevant evidence. The CTA applied Section 204(3) of the National
Internal Revenue Code (NIRC).[12]
The Commissioner then filed a petition for review under Rule 43 of the Rules of Court before
the CA, alleging that:

(1) There is no provision of law which excludes the 20% final income tax withheld under
Section 50(a) of the Tax Code in the computation of the 5% gross receipts tax.

(2) The Tax Court erred in applying the ruling in Collector of Internal Revenue vs. Manila
Jockey Club (108 Phil. 821) in the resolution of the legal issues involved in the instant
case.[13]

The Commissioner reiterated his stand that the ruling of this Court in Manila Jockey Club,
which was affirmed in Visayan Cebu Terminal Co., Inc. v. Commissioner of Internal Revenue,[14] is
not decisive. He averred that the factual milieu in the said case is different, involving as it did the
wager fund. The Commissioner further pointed out that in Manila Jockey Club, the Court ruled
that the race tracks commission did not form part of the gross receipts, and as such were not
subjected to the 20% amusement tax. On the other hand, the issue in Visayan Cebu Terminal was
whether or not the gross receipts corresponding to 28% of the total gross income of the service
contractor delivered to the Bureau of Customs formed part of the gross receipts was subject to
3% of contractors tax under Section 191 of the Tax Code. It was further pointed out that the
respondent bank, on the other hand, was a banking institution and not a contractor. The petitioner
insisted that the term gross receipts is self-evident; it includes all items of income of the
respondent bank regardless of whether or not the same were allocated or earmarked for a specific
purpose, to distinguish it from net receipts.
 On August 14, 2001, the CA rendered judgment dismissing the petition. Citing Sections 51
and 58(A) of the NIRC, Section 4(e) of Rev. Reg. No. 12-80[15] and the ruling of this Court in Manila
Jockey Club, the CA held that the P17,076,850.90 representing the final withholding tax derived
from passive investments subjected to final tax should not be construed as forming part of the
gross receipts of the respondent bank upon which the 5% gross receipts tax should be imposed.
The CA declared that the final withholding tax in the amount of P17,768,509.00 was a trust fund
for the government; hence, does not form part of the respondents gross receipts. The legal
ownership of the amount had already been vested in the government. Moreover, the CA declared,
the respondent did not reap any benefit from the said amount. As such, subjecting the said amount
to the 5% gross receipts tax would result in double taxation. The appellate court further
cited CIR v. Tours Specialists, Inc.,[16] and declared that the ruling of the Court in Manila Jockey
Club was decisive of the issue.
The Commissioner now assails the said decision before this Court, contending that:

THE COURT OF APPEALS ERRED IN HOLDING THAT THE 20% FINAL WITHHOLDING TAX
ON BANKS INTEREST INCOME DOES NOT FORM PART OF THE TAXABLE GROSS
RECEIPTS IN COMPUTING THE 5% GROSS RECEIPTS TAX (GRT, for brevity).[17]

The petitioner avers that the reliance by the CTA and the CA on Section 4(e) of Rev. Reg.
No. 12-80 is misplaced; the said provision merely authorizes the determination of the amount of
gross receipts based on the taxpayers method of accounting under then Section 37 (now Section
43) of the Tax Code. The petitioner asserts that the said provision ceased to exist as of October
15, 1984, when Rev. Reg. No. 17-84 took effect. The petitioner further points out that under
paragraphs 7(a) and (c) of Rev. Reg. No. 17-84, interest income of financial institutions (including
banks) subject to withholding tax are included as part of the gross receipts upon which the gross
receipts tax is to be imposed. Citing the ruling of the CA in Commissioner of Internal Revenue v.
Asianbank Corporation[18] (which likewise cited Bank of America NT & SA v. Court of
Appeals,[19]) the petitioner posits that in computing the 5% gross receipts tax, the income need
not be actually received. For income to form part of the taxable gross receipts, constructive receipt
is enough. The petitioner is, likewise, adamant in his claim that the final withholding tax from the
respondent banks income forms part of the taxable gross receipts for purposes of computing the
5% of gross receipts tax. The petitioner posits that the ruling of this Court in Manila Jockey Club is
not decisive of the issue in this case.
The petition is meritorious.
The issues in this case had been raised and resolved by this Court in China Banking
Corporation v. Court of Appeals,[20] and CIR v. Solidbank Corporation.[21]
Section 27(D)(1) of the Tax Code reads:

(D) Rates of Tax on Certain Passive Incomes.

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. A final tax at
the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency
bank deposit and yield or any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements received by domestic corporations, and royalties, derived from
sources within the Philippines: Provided, however, That interest income derived by a domestic
corporation from a depository bank under the expanded foreign currency deposit system shall
be subject to a final income tax at the rate of seven and one-half percent (7%) of such interest
income.

On the other hand, Section 57(A)(B) of the Tax Code authorizes the withholding of final tax
on certain income creditable at source:

SEC. 57. Withholding of Tax at Source.

(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the
Secretary of Finance may promulgate, upon the recommendation of the Commissioner,
requiring the filing of income tax return by certain income payees, the tax imposed or prescribed
by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E);
27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c),
28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this
Code on specified items of income shall be withheld by payor-corporation and/or person and
paid in the same manner and subject to the same conditions as provided in Section 58 of this
Code.

(B) Withholding of Creditable Tax at Source. The Secretary of Finance may, upon the
recommendation of the Commissioner, require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons
as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two
percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for
the taxable year.

The tax deducted and withheld by withholding agents under the said provision shall be held
as a special fund in trust for the government until paid to the collecting officer.[22]
Section 121 (formerly Section 119) of the Tax Code provides that a tax on gross receipts
derived from sources within the Philippines by all banks and non-bank financial intermediaries
shall be computed in accordance with the schedules therein:

(a) On interest, commissions and discounts from lending activities as well as income from
financial leasing, on the basis of remaining maturities of instruments from which such receipts
are derived:

Short-term maturity (not in excess of two (2) years) 5%

Medium-term maturity (over two (2) years but

not exceeding four (4) years) 3%

Long-term maturity

(1) Over four (4) years but not exceeding

seven (7) years 1%

(2) Over seven (7) years 0%

(b) On dividends 0%

(c) On royalties, rentals of property, real or personal,

profits from exchange and all other items treated
as gross income under Section 32 of this Code 5%

Provided, however, That in case the maturity period referred to in paragraph (a) is shortened
thru pre-termination, then the maturity period shall be reckoned to end as of the date of pre-
termination for purposes of classifying the transaction as short, medium or long-term and the
correct rate of tax shall be applied accordingly.

Nothing in this Code shall preclude the Commissioner from imposing the same tax herein
provided on persons performing similar banking activities.

The Tax Code does not define gross receipts. Absent any statutory definition, the Bureau of
Internal Revenue has applied the term in its plain and ordinary meaning.[23]
In National City Bank v. CIR,[24] the CTA held that gross receipts should be interpreted as the
whole amount received as interest, without deductions; otherwise, if deductions were to be made
from gross receipts, it would be considered as net receipts. The CTA changed course, however,
when it promulgated its decision in Asia Bank; it applied Section 4(e) of Rev. Reg. No. 12-80 and
the ruling of this Court in Manila Jockey Club, holding that the 20% final withholding tax on the
petitioner banks interest income should not form part of its taxable gross receipts, since the final
tax was not actually received by the petitioner bank but went to the coffers of the government.
 The Court agrees with the contention of the petitioner that the appellate courts reliance on
Rev. Reg. No. 12-80, the rulings of the CTA in Asia Bank, and of this Court in Manila Jockey
Club has no legal and factual bases. Indeed, the Court ruled in China Banking Corporation v.
Court of Appeals[25] that:

In Far East Bank & Trust Co. v. Commissioner and Standard Chartered Bank v. Commissioner,
both promulgated on 16 November 2001, the tax court ruled that the final withholding tax forms
part of the banks gross receipts in computing the gross receipts tax. The tax court held that
Section 4(e) of Revenue Regulations No. 12-80 did not prescribe the computation of the amount
of gross receipts but merely authorized the determination of the amount of gross receipts on the
basis of the method of accounting being used by the taxpayer.

The word gross must be used in its plain and ordinary meaning. It is defined as whole, entire,
total, without deduction. A common definition is without deduction.[26] Gross is also defined as
taking in the whole; having no deduction or abatement; whole, total as opposed to a sum
consisting of separate or specified parts.[27] Gross is the antithesis of net.[28] Indeed, in China
Banking Corporation v. Court of Appeals,[29] the Court defined the term in this wise:

As commonly understood, the term gross receipts means the entire receipts without any
deduction. Deducting any amount from the gross receipts changes the result, and the meaning,
to net receipts. Any deduction from gross receipts is inconsistent with a law that mandates a tax
on gross receipts, unless the law itself makes an exception. As explained by the Supreme Court
of Pennsylvania in Commonwealth of Pennsylvania v. Koppers Company, Inc., -

Highly refined and technical tax concepts have been developed by the accountant and legal
technician primarily because of the impact of federal income tax legislation. However, this in no
way should affect or control the normal usage of words in the construction of our statutes; and
we see nothing that would require us not to include the proceeds here in question in the gross
receipts allocation unless statutorily such inclusion is prohibited. Under the ordinary basic
methods of handling accounts, the term gross receipts, in the absence of any statutory definition
of the term, must be taken to include the whole total gross receipts without any deductions, x x
x. [Citations omitted] (Emphasis supplied)

Likewise, in Laclede Gas Co. v. City of St. Louis, the Supreme Court of Missouri held:

The word gross appearing in the term gross receipts, as used in the ordinance, must have been
and was there used as the direct antithesis of the word net. In its usual and ordinary meaning
gross receipts of a business is the whole and entire amount of the receipts without deduction, x
x x. On the contrary, net receipts usually are the receipts which remain after deductions are
made from the gross amount thereof of the expenses and cost of doing business, including fixed
charges and depreciation. Gross receipts become net receipts after certain proper deductions
are made from the gross. And in the use of the words gross receipts, the instant ordinance, of
course, precluded plaintiff from first deducting its costs and expenses of doing business, etc., in
arriving at the higher base figure upon which it must pay the 5% tax under this ordinance.
(Emphasis supplied)

Absent a statutory definition, the term gross receipts is understood in its plain and ordinary
meaning. Words in a statute are taken in their usual and familiar signification, with due regard to
their general and popular use. The Supreme Court of Hawaii held in Bishop Trust Company v.
Burns that -

xxx It is fundamental that in construing or interpreting a statute, in order to ascertain the intent of
the legislature, the language used therein is to be taken in the generally accepted and usual
sense. Courts will presume that the words in a statute were used to express their meaning in
common usage. This principle is equally applicable to a tax statute. [Citations omitted]
(Emphasis supplied)

The Court, likewise, declared that Section 121 of the Tax Code expressly subjects interest
income of banks to the gross receipts tax. Such express inclusion of interest income in taxable
gross receipts creates a presumption that the entire amount of the interest income, without any
deduction, is subject to the gross receipts tax. Indeed, there is a presumption that receipts of a
person engaging in business are subject to the gross receipts tax. Such presumption may only
be overcome by pointing to a specific provision of law allowing such deduction of the final
withholding tax from the taxable gross receipts, failing which, the claim of deduction has no leg to
stand on. Moreover, where such an exception is claimed, the statute is construed strictly in favor
of the taxing authority. The exemption must be clearly and unambiguously expressed in the
statute, and must be clearly established by the taxpayer claiming the right thereto. Thus, taxation
is the rule and the claimant must show that his demand is within the letter as well as the spirit of
the law.[30]
In this case, there is no law which allows the deduction of 20% final tax from the respondent
banks interest income for the computation of the 5% gross receipts tax. On the other hand,
Section 8(a)(c), Rev. Reg. No. 17-84 provides that interest earned on Philippine bank deposits
and yield from deposit substitutes are included as part of the tax base upon which the gross
receipts tax is imposed. Such earned interest refers to the gross interest without deduction since
the regulations do not provide for any such deduction. The gross interest, without deduction, is
the amount the borrower pays, and the income the lender earns, for the use by the borrower of
the lenders money. The amount of the final tax plainly covers for the interest earned and is
consequently part of the taxable gross receipt of the lender.[31]
The bare fact that the final withholding tax is a special trust fund belonging to the government
and that the respondent bank did not benefit from it while in custody of the borrower does not
justify its exclusion from the computation of interest income. Such final withholding tax covers for
the respondent banks income and is the amount to be used to pay its tax liability to the
government. This tax, along with the creditable withholding tax, constitutes payment which would
extinguish the respondent banks obligation to the government. The bank can only pay the money
it owns, or the money it is authorized to pay.[32]
In the same vein, the respondent banks reliance on Section 4(e) of Rev. Reg. No. 12-80 and
the ruling of the CTA in Asia Bank is misplaced. The Courts discussion in China Banking
Corporation[33] is instructive on this score:

CBC also relies on the Tax Courts ruling in Asia Bank that Section 4(e) of Revenue Regulations
No. 12-80 authorizes the exclusion of the final tax from the banks taxable gross receipts.
Section 4(e) provides that:

Sec. 4. x x x

(e) Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and
other non-bank financial intermediaries not performing quasi-banking functions. - The rates of
taxes to be imposed on the gross receipts of such financial institutions shall be based on all
items of income actually received. Mere accrual shall not be considered, but once payment is
received on such accrual or in cases of prepayment, then the amount actually received shall be
included in the tax base of such financial institutions, as provided hereunder: x x x. (Emphasis
supplied by Tax Court)

Section 4(e) states that the gross receipts shall be based on all items of income actually
received. The tax court in Asia Bank concluded that it is but logical to infer that the final tax, not
having been received by petitioner but instead went to the coffers of the government, should no
longer form part of its gross receipts for the purpose of computing the GRT.

The Tax Court erred glaringly in interpreting Section 4(e) of Revenue Regulations No. 12-80.
Income may be taxable either at the time of its actual receipt or its accrual, depending on the
accounting method of the taxpayer. Section 4(e) merely provides for an exception to the rule,
making interest income taxable for gross receipts tax purposes only upon actual receipt. Interest
is accrued, and not actually received, when the interest is due and demandable but the
borrower has not actually paid and remitted the interest, whether physically or constructively.
Section 4(e) does not exclude accrued interest income from gross receipts but
merely postpones its inclusion until actual payment of the interest to the lending bank. This is
clear when Section 4(e) states that [m]ere accrual shall not be considered, but once payment is
received on such accrual or in case of prepayment, then the amount actually received shall be
included in the tax base of such financial institutions x x x.
Actual receipt of interest income is not limited to physical receipt. Actual receipt may either be
physical receipt or constructive receipt. When the depository bank withholds the final tax to pay
the tax liability of the lending bank, there is prior to the withholding a constructive receipt by the
lending bank of the amount withheld. From the amount constructively received by the lending
bank, the depository bank deducts the final withholding tax and remits it to the government for
the account of the lending bank. Thus, the interest income actually received by the lending
bank, both physically and constructively, is the net interest plus the amount withheld as final tax.

The concept of a withholding tax on income obviously and necessarily implies that the amount
of the tax withheld comes from the income earned by the taxpayer. Since the amount of the tax
withheld constitutes income earned by the taxpayer, then that amount manifestly forms part of
the taxpayers gross receipts. Because the amount withheld belongs to the taxpayer, he can
transfer its ownership to the government in payment of his tax liability. The amount withheld
indubitably comes from income of the taxpayer, and thus forms part of his gross receipts.

The Court went on to explain in that case that far from supporting the petitioners contention,
its ruling in Manila Jockey Club, in fact even buttressed the contention of the Commissioner. Thus:

CBC cites Collector of Internal Revenue v. Manila Jockey Club as authority that the final
withholding tax on interest income does not form part of a banks gross receipts because the
final tax is earmarked by regulation for the government. CBCs reliance on the Manila Jockey
Club is misplaced. In this case, the Court stated that Republic Act No. 309 and Executive Order
No. 320 apportioned the total amount of the bets in horse races as follows:

87 % as dividends to holders of winning tickets, 12 % as commission of the Manila Jockey Club,

of which % was assigned to the Board of Races and 5% was distributed as prizes for owners of
winning horses and authorized bonuses for jockeys.

A subsequent law, Republic Act No. 1933 (RA No. 1933), amended the sharing by ordering the
distribution of the bets as follows:

Sec. 19. Distribution of receipts. The total wager funds or gross receipts from the sale of pari-
mutuel tickets shall be apportioned as follows: eighty-seven and one-half per centum shall be
distributed in the form of dividends among the holders of win, place and show horses, as the
case may be, in the regular races; six and one-half per centum shall be set aside as the
commission of the person, racetrack, racing club, or any other entity conducting the races; five
and one-half per centum shall be set aside for the payment of stakes or prizes for win, place
and show horses and authorized bonuses for jockeys; and one-half per centum shall be paid to
a special fund to be used by the Games and Amusements Board to cover its expenses and
such other purposes authorized under this Act. xxx. (Emphasis supplied)

Under the distribution of receipts expressly mandated in Section 19 of RA No. 1933, the gross
receipts apportioned to Manila Jockey Club referred only to its own 6 % commission. There is
no dispute that the 5 % share of the horse-owners and jockeys, and the % share of the Games
and Amusements Board, do not form part of Manila Jockey Clubs gross receipts. RA No. 1933
took effect on 22 June 1957, three years before the Court decided Manila Jockey Club on 30
June 1960.

Even under the earlier law, Manila Jockey Club did not own the entire 12 % commission. Manila
Jockey Club owned, and could keep and use, only 7% of the total bets. Manila Jockey Club
merely held in trust the balance of 5 % for the benefit of the Board of Races and the winning
horse-owners and jockeys, the real owners of the 5 1/2 % share.

The Court in Manila Jockey Club quoted with approval the following Opinion of the Secretary of
Justice made prior to RA No. 1933:

There is no question that the Manila Jockey Club, Inc. owns only 7-1/2% [sic] of the bets
registered by the Totalizer. This portion represents its share or commission in the total amount
of money it handles and goes to the funds thereof as its own property which it may legally
disburse for its own purposes. The 5% [sic] does not belong to the club. It is merely held in trust
for distribution as prizes to the owners of winning horses. It is destined for no other object than
the payment of prizes and the club cannot otherwise appropriate this portion without incurring
liability to the owners of winning horses. It can not be considered as an item of expense
because the sum used for the payment of prizes is not taken from the funds of the club but from
a certain portion of the total bets especially earmarked for that purpose. (Emphasis supplied)

Consequently, the Court ruled that the 5 % balance of the commission, not being owned by
Manila Jockey Club, did not form part of its gross receipts for purposes of the amusement tax.
Manila Jockey Club correctly paid the amusement tax based only on its own 7% commission
under RA No. 309 and Executive Order No. 320.

Manila Jockey Club does not support CBCs contention but rather the Commissioners position.
The Court ruled in Manila Jockey Club that receipts not owned by the Manila Jockey Club but
merely held by it in trust did not form part of Manila Jockey Clubs gross receipts. Conversely,
receipts owned by the Manila Jockey Club would form part of its gross receipts.[34]

We reverse the ruling of the CA that subjecting the Final Withholding Tax (FWT) to the 5% of
gross receipts tax would result in double taxation. In CIR v. Solidbank Corporation,[35] we ruled,
thus:

We have repeatedly said that the two taxes, subject of this litigation, are different from each
other. The basis of their imposition may be the same, but their natures are different, thus
leading us to a final point. Is there double taxation?

The Court finds none.

Double taxation means taxing the same property twice when it should be taxed only once; that
is, xxx 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. In fact, we have already held
that one can be taxed for engaging in business and further taxed differently for the income
derived therefrom. Akin to our ruling in Velilla v. Posadas, these two taxes are entirely distinct
and are assessed under different provisions.

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.

In short, there is no double taxation, because there is no taxing twice, by the same taxing
authority, within the same jurisdiction, for the same purpose, in different taxing periods, some of
the property in the territory. Subjecting interest income to a 20% FWT and including it in the
computation of the 5% GRT is clearly not double taxation.

IN LIGHT OF THE FOREGOING, the petition is GRANTED. The decision of the Court of
Appeals in CA-G.R. SP No. 52706 and that of the Court of Tax Appeals in CTA Case No. 5415
are SET ASIDE and REVERSED. The CTA is hereby ORDERED to DISMISS the petition of
respondent Bank of Commerce. No costs.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-21913 November 18, 1967

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MALAYAN INSURANCE COMPANY, INC., respondent.

Office of the Solicitor General for petitioner.

Meer, Meer and Meer for respondent.

REYES J.B.L., J.:

This is a petition for review of the decision of the Court of Tax Appeals (in CTA Case No. 1018),
ordering the refund to Malayan Insurance Company, Inc., of the sum of P958.00 which was
allegedly paid erroneously, and the dismissal of the counterclaim of the Commissioner of
Internal Revenue for payment of the withholding tax for P15,416.96.

Malayan Insurance Company, Inc. (hereafter referred to as MALAYAN), a domestic corporation

which has reinsurance contract with Orion Insurance Company, Ltd. of London (hereafter
referred to as ORION) a non-resident foreign corporation, without previous authorization, filed
the latter's income tax return for 1958 and paid the tax due thereon, in the sum of P958.00.
Finding later that ORION had commissioned another domestic entity, Filipinas Compañia de
Seguros (to be referred hereafter as FILIPINAS) to file the income tax return on its behalf, and
that the said agent paid the sum of P778.00 as corresponding income tax for the same year
(1958), MALAYAN requested the Commissioner of Internal Revenue for the refund of the
P958.00 it had paid. When no action was taken thereon, MALAYAN filed a petition in the Court
of Tax Appeals for the same purpose.

In his amended answer to the petition, the Commissioner of Internal Revenue alleged, inter alia,
that in 1958, petitioner had ceded to ORION reinsurance premiums covering risks located in the
Philippines amounting to P64,327.36; that this amount is subject to withholding tax in the sum of
P15,416.96; that demand for payment of the withholding tax was made upon petitioner on
February 16, 1962; and that even if petitioner is to be credited with the sum of P958.00 there
would still be due from the latter the sum of P14,458.96. Respondent, therefore, asked the
Court that the petition be dismissed and petitioner be ordered to pay P14,458.96, with the
penalties incident to late payment.

The parties submitted the case for decision on the pleadings. On July 16, 1963, the Tax Court
decided for therein petitioner and ordered the refund of the sum of P958.00 it had erroneously
paid as income tax of ORION for 1958. And for the reason that FILIPINAS is the duly authorized
representative of ORION, respondent's counterclaim for P15,416.96 was dismissed without
prejudice. The Commissioner of Internal Revenue interposed this appeal.

In the present proceeding, petitioner Commissioner of Internal Revenue reiterates the allegation
that in 1958, MALAYAN had ceded to ORION reinsurance premiums1 amounting to P64,327.36,
on which amount MALAYAN should have paid withholding tax of P15,416.96. Petitioner does
not dispute that FILIPINAS was commissioned by ORION to file its income tax return for 1958,
in a communication that reads as follows:

Dear Sirs,

Income Tax Return of Annual Net Income

With reference to your letter dated 26th December 1958, addressed to Alexr. Howden &
Co., Ltd., we would like to accept your offer to act on our behalf and appoint you our
 Agents for the purposes of filing the Return of Annual Net Income as required by Section
46 of Commonwealth Act 496.

It is understood and argued that neither the Appointment nor the filing of the Return is to
be taken as an indication of the Company's acceptance of liability to pay Income Tax,
and the Company retains the right to appeal for a refund of Tax whether this be Income
Tax or Withholding Tax. (p. 26, B.I.R. Record)

and that said agent, accordingly, had paid the sum of P778.00 as tax supposedly on the entire
taxable income of ORION for 1958.

In assailing the correctness of the ruling of the Court of Tax Appeals, however, the petitioner
Commissioner of Internal Revenue contends that the payment by FILIPINAS of the supposed
tax on the incomes derived by ORION from Philippine sources did not relieve MALAYAN of its
obligation to withhold and pay the withholding tax on the reinsurance premiums it had ceded to
ORION. The contention is meritorious.

Section 53 (b) of the National Internal Revenue Code,2 provides:

Sec. 53. Withholding of tax at source. —

xxx xxx xxx

(b) Nonresident aliens. — All persons, corporations and general copartnership

(compañias colectivas) in whatever capacity acting, including lessees or mortgagors of
real or personal property, trustees acting in any trust capacity, executors, administrators,
receivers, conservators, fiduciaries, employers, and all officers and employees of the
Government of the Philippines having the control, receipt, custody, disposal, or payment
of interest, dividends, rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments or other fixed or determinable annual or periodical gains,
profits, and income of any nonresident alien individual within the Philippines and not
having any office or place of business therein shall (except in the cases provided for a
subsection [a] of this section) deduct and withhold from such annual or periodical gains,
profits and income a tax equal to sixteen per centum thereof : . . ." (Emphasis supplied.)

It may be noted that the abovequoted provision is not only broad and all-embracing — covering
the receipt, control, custody, etc. by any person, natural or judicial, for a foreign corporation not
doing business in the Philippines, of practically all forms of income as long as they are fixed or
determinable and are received with regularity;3 but also, the obligation imposed thereunder
upon the withholding agent is compulsory. This is evident from paragraph (c) of the same
Section 53 of the Tax Code which makes the withholding agent personally liable for payment of
the tax treated therein. And this has to be so, for it must be realized that the withholding
provision of Section 53 (b) is a device without which the Philippine Government may not be able
to collect the proper and correct tax on incomes, derived from sources in the Philippines, by
aliens who are outside of the taxing jurisdiction of this country. It is for this reason that the
withholding provision is not being applied if the income is to be remitted to Filipino citizens, or
resident aliens, or to non-resident aliens but conducting business and maintaining office or
place of business in the Philippines.4 In this connection, this Court has already held5 that
reinsurance premiums ceded by domestic entities to non-resident foreign corporations are
determinable, periodical income of those foreign corporations from sources within the
Philippines and, therefore, are subject to withholding tax.6

The Court of Tax Appeals, nevertheless, dismissed the Government's claim for withholding tax
against the withholding agent, on the ground that the authorized representative of the taxpayer
is FILIPINAS — an indirect way of saying that the demand, if at all, should be made on the
latter.

This is error. The cause of action of the Commissioner against MALAYAN is not for collection of
income tax, but for the enforcement of the withholding provision of Section 53 of the Tax Code
— the compliance with which obligation is imposed on the withholding agent, not upon the
taxpayer.7 Whether or not the taxpayer, ORION, has a duly authorized representative in this
country is, consequently, beside the point. There is no showing that any of the reinsurance
premiums ceded by MALAYAN to ORION ever passed to the hands of FILIPINAS, the
representative of ORION.

There is no evidence here that MALAYAN withheld a certain percentage of the reinsurance
premiums transmitted to ORION and that it (MALAYAN) had filed a return thereon, as required
by Section 53 (c) of the Tax Code. What is actually material is whether that obligation of the
withholding agent is affected by the payment by FILIPINAS of the income tax of ORION for
1958.

We have to rule that the payment by FILIPINAS of the alleged tax on the incomes of ORION did
not relieve the withholding agent of its legal duty. Firstly, the filing of the tax return and payment
of the amount of P778.00 as income tax cannot be considered in this case as final. Not only is
there no proof that the return made by FlLIPINAS for ORION included the reinsurance
premiums ceded by MALAYAN, but the great difference between the amount paid and that
which should have been withheld and transmitted to the Philippine Government, to take care of
the taxes that may be due on that income (P15,416.96), is sufficient to put one in expectancy of
further proceedings on that return. In fact, an investigation of the tax return filed by FILIPINAS
was already conducted, and in April, 1962, the examiners recommended the assessment
against the taxpayer of deficiency income tax in the sum of P6,442.00 (p. 67, B.I.R. Record).

In the second place, this is as appropriate an instance as any for the operation of the provision
of Section 53 (b). Because, in the event the taxpayer is finally found liable for deficiency tax on
its incomes from the Philippines in 1958, the Government would have no way of collecting what
is still due from said taxpayer, which is a foreign corporation not engaged in trade or business
and without office or place of business in the Philippines. FILIPINAS cannot be considered the
authorized agent through which any deficiency tax against ORION may be collectible. As
specified from the letter of appointment of FILIPINAS, hereinbefore quoted, the filing of the tax
return by the agent, which was therein authorized, would not even bind the principal to pay the
tax based thereon. The right to appeal or claim for refund is also withheld from the agent. In the
circumstances, the importance of the withholding under Section 53 is clearly underscored.

For the foregoing considerations, the decision appealed from is modified; the ruling of the Court
of Tax Appeals is reversed, insofar as it dismissed the counterclaim of the Commissioner of
Internal Revenue. In the collection of the withholding tax (and penalties incident to late payment)
upon the reinsurance premiums ceded by respondent MALAYAN to ORION in 1958, said
respondent should be credited with the sum of P958.00 it had erroneously paid as income tax of
that foreign corporation. No cost. So ordered.

G.R. No. 184450

JAIME N. SORIANO, MICHAEL VERNON M. GUERRERO, MARY ANN L. REYES, MARAH

SHARYN M. DE CASTRO and CRIS P. TENORIO, Petitioners,
vs.
SECRETARY OF FINANCE and the COMMISSIONER OF INTERNAL REVENUE,
Respondents.

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

G.R. No. 184508

SENATOR MANUEL A. ROXAS, Petitioner,

vs.
MARGARITO B. TEVES, in his capacity as Secretary of the Department of Finance and
LILIAN B. HEFTI, in her capacity as Commissioner of the Bureau of Internal
Revenue, Respondents.

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

G.R. No. 184538

TRADE UNION CONGRESS OF THE PHILIPPINES (TUCP), represented by its President,

DEMOCRITO T. MENDOZA, Petitioner,
vs.
MARGARITO B. TEVES, in his capacity as Secretary of the Department of Finance and
LILIAN B. HEFTI, in her capacity as Commissioner of the Bureau of Internal
Revenue, Respondents.

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

G.R. No. 185234

SENATOR FRANCIS JOSEPH G. ESCUDERO, TAX MANAGEMENT ASSOCIATION OF THE

PHILIPPINES, INC. and ERNESTO G. EBRO, Petitioners,
vs.
MARGARITO B. TEVES, in his capacity as Secretary of the Department of Finance and
SIXTO S. ESQUIVIAS IV, in his capacity as Commissioner of the Bureau of Internal
Revenue, Respondents.

DECISION

SERENO, CJ.:

Before us are consolidated Petitions for Certiorari, Prohibition and Mandamus, under Rule 65 of
the 1997 Revised Rules of Court. These Petitions seek to nullify certain provisions of Revenue
Regulation No. (RR) 10-2008. The RR was issued by the Bureau of Internal Revenue (BIR) on
24 September 2008 to implement the provisions of Republic Act No. (R.A.) 9504. The law
granted, among others, income tax exemption for minimum wage earners (MWEs), as well as
an increase in personal and additional exemptions for individual taxpayers.

Petitioners assail the subject RR as an unauthorized departure from the legislative intent of R.A.
9504. The regulation allegedly restricts the implementation of the MWEs income tax exemption
only to the period starting from 6 July 2008, instead of applying the exemption to the entire year
2008. They further challenge the BIR's adoption of the prorated application of the new set of
personal and additional exemptions for taxable year 2008. They also contest the validity of the
RR's alleged imposition of a condition for the availment by MWEs of the exemption provided by
R.A. 9504. Supposedly, in the event they receive other benefits in excess of ₱30,000, they can
no longer avail themselves of that exemption. Petitioners contend that the law provides for the
unconditional exemption of MWEs from income tax and, thus, pray that the RR be nullified.

ANTECEDENT FACTS

R.A. 9504
On 19 May 2008, the Senate filed its Senate Committee Report No. 53 on Senate Bill No. (S.B.)
2293. On 21 May 2008, former President Gloria M. Arroyo certified the passage of the bill as
urgent through a letter addressed to then Senate President Manuel Villar. On the same day, the
bill was passed on second reading IN the Senate and, on 27 May 2008, on third reading. The
following day, 28 May 2008, the Senate sent S.B. 2293 to the House of Representatives for the
latter's concurrence.

On 04 June 2008, S.B. 2293 was adopted by the House of Representatives as an amendment
to House Bill No. (H.B.) 3971.

On 17 June 2008, R.A. 9504 entitled "An Act Amending Sections 22, 24, 34, 35, 51, and 79 of
Republic Act No. 8424, as Amended, Otherwise Known as the National Internal Revenue Code
of 1997," was approved and signed into law by President Arroyo. The following are the salient
features of the new law:

1. It increased the basic personal exemption from ₱20,000 for a single individual,
₱25,000 for the head of the family, and ₱32,000 for a married individual to P50,000 for
each individual.

2. It increased the additional exemption for each dependent not exceeding four from
₱8,000 to ₱25,000.

3. It raised the Optional Standard Deduction (OSD) for individual taxpayers from 10% of
gross income to 40% of the gross receipts or gross sales.

4. It introduced the OSD to corporate taxpayers at no more than 40% of their gross
income.

5. It granted MWEs exemption from payment of income tax on their minimum wage,
holiday pay, overtime pay, night shift differential pay and hazard pay. 1

Section 9 of the law provides that it shall take effect 15 days following its publication in
the Official Gazette or in at least two newspapers of general circulation. Accordingly, R.A. 9504
was published in the Manila Bulletin and Malaya on 21 June 2008. On 6 July 2008, the end of
the 15-day period, the law took effect.

RR 10-2008

On 24 September 2008, the BIR issued RR 10-2008, dated 08 July 2008, implementing the
provisions of R.A. 9504. The relevant portions of the said RR read as follows:

SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read as

follows:

Sec. 2.78.1. Withholding of Income Tax on Compensation Income.

xxxx

The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not be
considered in determining the ₱30,000.00 ceiling of 'other benefits' excluded from gross income
under Section 32 (b) (7) (e) of the Code. Provided that, the excess of the 'de minimis' benefits
over their respective ceilings prescribed by these regulations shall be considered as part of
'other benefits' and the employee receiving it will be subject to tax only on the excess over the
₱30,000.00 ceiling. Provided, further, that MWEs receiving 'other benefits' exceeding the
₱30,000.00 limit shall be taxable on the excess benefits, as well as on his salaries, wages
and allowances, just like an employee receiving compensation income beyond the SMW.

xxxx
(B) Exemptions from Withholding Tax on Compensation. - The following income payments are
exempted from the requirements of withholding tax on compensation:

xxxx

(13) Compensation income of MWEs who work in the private sector and being paid the
Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity Board
(RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the place where
he/she is assigned.

The aforesaid income shall likewise be exempted from income tax.

'Statutory Minimum Wage' (SMW) shall refer to the rate fixed by the Regional Tripartite Wage
and Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics
(BLES) of the Department of Labor and Employment (DOLE). The RTWPB of each region shall
determine the wage rates in the different regions based on established criteria and shall be the
basis of exemption from income tax for this purpose.

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided, however,
that an employee who receives/earns additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the allowable statutory amount of
₱30,000.00, taxable allowances and other taxable income other than the SMW, holiday
pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege
of being a MWE and, therefore, his/her entire earnings are not exempt from income tax,
and consequently, from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation income
are not exempted from income tax on their entire income earned during the taxable year. This
rule, notwithstanding, the SMW, holiday pay, overtime pay, night shift differential pay and
hazard pay shall still be exempt from withholding tax.

For purposes of these regulations, hazard pay shall mean the amount paid by the employer to
MWEs who were actually assigned to danger or strife-torn areas, disease-infested places, or in
distressed or isolated stations and camps, which expose them to great danger of contagion or
peril to life. Any hazard pay paid to MWEs which does not satisfy the above criteria is deemed
subject to income tax and consequently, to withholding tax.

xxxx

SECTION 3. Section 2. 79 of RR 2-98, as amended, is hereby further amended to read as

follows:

Sec. 2.79. Income Tax Collected at Source on Compensation Income. --

(A) Requirement of Withholding. - Every employer must withhold from compensation paid an
amount computed in accordance with these Regulations. Provided, that no withholding of tax
shall be required on the SMW, including holiday pay, overtime pay, night shift differential and
hazard pay of MWEs in the private/public sectors as defined in these Regulations. Provided,
further, that an employee who receives additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the allowable statutory amount of
₱30,000.00, taxable allowances and other taxable income other than the SMW, holiday
pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege
of being a MWE and, therefore, his/her entire earnings are not exempt from income tax
and, consequently, shall be subject to withholding tax.

xxxx

For the year 2008, however, being the initial year of implementation of R.A. 9504, there shall be
a transitory withholding tax table for the period from July 6 to December 31, 2008 (Annex "D")
determined by prorating the annual personal and additional exemptions under R.A. 9504 over a
period of six months. Thus, for individuals, regardless of personal status, the prorated personal
exemption is ₱25,000, and for each qualified dependent child (QDC), ₱12,500.

xxxx

SECTION 9. Effectivity. -

These Regulations shall take effect beginning July 6, 2008. (Emphases supplied)

The issuance and effectivity of RR 10-2008 implementing R.A. 9504 spawned the present
Petitions.1âwphi1

G.R. No. 184450

Petitioners Jaime N. Soriano et al. primarily assail Section 3 of RR 10-2008 providing for the
prorated application of the personal and additional exemptions for taxable year 2008 to begin
only effective 6 July 2008 for being contrary to Section 4 of Republic Act No. 9504. 2

Petitioners argue that the prorated application of the personal and additional exemptions under
RR 10-2008 is not "the legislative intendment in this jurisdiction."3 They stress that Congress
has always maintained a policy of "full taxable year treatment"4 as regards the application of tax
exemption laws. They allege further that R.A. 9504 did not provide for a prorated application of
the new set of personal and additional exemptions. 5

G.R. No. 184508

Then Senator Manuel Roxas, as principal author of R.A. 9504, also argues for a full taxable
year treatment of the income tax benefits of the new law. He relies on what he says is clear
legislative intent. In his "Explanatory Note of Senate Bill No. 103," he stresses "the very spirit of
enacting the subject tax exemption law"6 as follows:

With the poor, every little bit counts, and by lifting their burden of paying income tax, we give
them opportunities to put their money to daily essentials as well as savings. Minimum wage
earners can no longer afford to be taxed and to be placed in the cumbersome income tax
process in the same manner as higher-earning employees. It is our obligation to ease their
burdens in any way we can.7(Emphasis Supplied)

Apart from raising the issue of legislative intent, Senator Roxas brings up the following legal
points to support his case for the full-year application of R.A. 9504's income tax benefits. He
says that the pro rata application of the assailed RR deprives MWEs of the financial relief
extended to them by the law;8 that Umali v. Estanislao9serves as jurisprudential basis for his
position that R.A. 9504 should be applied on a full-year basis to taxable year 2008; 10and that
the social justice provisions of the 1987 Constitution, particularly Articles II and XIII, mandate a
full application of the law according to the spirit of R.A. 9504. 11

On the scope of exemption of MWEs under R.A. 9504, Senator Roxas argues that the
exemption of MWEs is absolute, regardless of the amount of the other benefits they receive.
Thus, he posits that the Department of Finance (DOF) and the BIR committed grave abuse of
discretion amounting to lack and/or excess of jurisdiction. They supposedly did so when they
provided in Section l of RR 10-2008 the condition that an MWE who receives "other benefits"
exceeding the ₱30,000 limit would lose the tax exemption. 12 He further contends that the real
intent of the law is to grant income tax exemption to the MWE without any limitation or
qualification, and that while it would be reasonable to tax the benefits in excess of ₱30,000, it is
unreasonable and unlawful to tax both the excess benefits and the salaries, wages and
allowances. 13

G.R. No. 184538

Petitioner Trade Union Congress of the Philippine contends that the provisions of R.A. 9504
provide for the application of the tax exemption for the full calendar year 2008. It also espouses
the interpretation that R.A. 9504 provides for the unqualified tax exemption of the income of
MWEs regardless of the other benefits they receive. 14 In conclusion, it says that RR 10-2008,
which is only an implementing rule, amends the original intent of R.A. 9504, which is the
substantive law, and is thus null and void.

G.R. No. 185234

Petitioners Senator Francis Joseph Escudero, the Tax Management Association of the
Philippines, Inc., and Ernesto Ebro allege that R.A. 9504 unconditionally grants MWEs
exemption from income tax on their taxable income, as well as increased personal and
additional exemptions for other individual taxpayers, for the whole year 2008. They note that the
assailed RR 10-2008 restricts the start of the exemptions to 6 July 2008 and provides that those
MWEs who received "other benefits" in excess of ₱30,000 are not exempt from income taxation.
Petitioners believe this RR is a "patent nullity" 15 and therefore void.

Comment of the OSG

The Office of the Solicitor General (OSG) filed a Consolidated Comment16 and took the position
that the application of R.A. 9504 was intended to be prospective, and not retroactive. This was
supposedly the general 1ule under the rules of statutory construction: law will only be applied
retroactively if it clearly provides for retroactivity, which is not provided in this instance. 17

The OSG contends that Umali v. Estanislao is not applicable to the present case.1âwphi1 It
explains that R.A. 7167, the subject of that case, was intended to adjust the personal exemption
levels to the poverty threshold prevailing in 1991. Hence, the Court in that case held that R.A.
7167 had been given a retroactive effect. The OSG believes that the grant of personal
exemptions no longer took into account the poverty threshold level under R.A. 9504, because
the amounts of personal exemption far exceeded the poverty threshold levels. 18

The OSG further argues that the legislative intent of non-retroactivity was effectively confirmed
by the "Conforme" of Senator Escudero, Chairperson of the Senate Committee on Ways and
Means, on the draft revenue regulation that became RR 10-2008.

ISSUES

Assailing the validity of RR 10-2008, all four Petitions raise common issues, which may be
distilled into three major ones:

First, whether the increased personal and additional exemptions provided by R.A. 9504 should
be applied to the entire taxable year 2008 or prorated, considering that R.A. 9504 took effect
only on 6 July 2008.

Second, whether an MWE is exempt for the entire taxable year 2008 or from 6 July 2008 only.

Third, whether Sections 1 and 3 of RR 10-2008 are consistent with the law in providing that an
MWE who receives other benefits in excess of the statutory limit of ₱30,000 19 is no longer
entitled to the exemption provided by R.A. 9504.

THE COURT'S RULING

I.

Whether the increased personal and additional exemptions provided by R.A. 9504 should
be applied to the entire taxable year 2008 or prorated, considering that the law took effect
only on 6 July 2008

The personal and additional exemptions established by R.A. 9504 should be applied to the
entire taxable year 2008.

Umali is applicable.
Umali v. Estanislao20supports this Comi's stance that R.A. 9504 should be applied on a full-year
basis for the entire taxable year 2008.21 In Umali, Congress enacted R.A. 7167 amending the
1977 National Internal Revenue Code (NIRC). The amounts of basic personal and additional
exemptions given to individual income taxpayers were adjusted to the poverty threshold level.
R.A. 7167 came into law on 30 January 1992. Controversy arose when the Commission of
Internal Revenue (CIR) promulgated RR 1-92 stating that the regulation shall take effect on
compensation income earned beginning 1 January 1992. The issue posed was whether the
increased personal and additional exemptions could be applied to compensation income earned
or received during calendar year 1991, given that R.A. 7167 came into law only on 30 January
1992, when taxable year 1991 had already closed.

This Court ruled in the affirmative, considering that the increased exemptions were already
available on or before 15 April 1992, the date for the filing of individual income tax returns.
Further, the law itself provided that the new set of personal and additional exemptions would be
immediately available upon its effectivity. While R.A. 7167 had not yet become effective during
calendar year 1991, the Court found that it was a piece of social legislation that was in part
intended to alleviate the economic plight of the lower-income taxpayers. For that purpose, the
new law provided for adjustments "to the poverty threshold level" prevailing at the time of the
enactment of the law. The relevant discussion is quoted below:

[T]he Court is of the considered view that Rep. Act 7167 should cover or extend to
compensation income earned or received during calendar year 1991.

Sec. 29, par.(L), Item No. 4 of the National Internal Revenue Code, as amended, provides:

Upon the recommendation of the Secretary of Finance, the President shall automatically adjust
not more often than once every three years, the personal and additional exemptions taking into
account, among others, the movement in consumer price indices, levels of minimum wages,
and bare subsistence levels.

As the personal and additional exemptions of individual taxpayers were last adjusted in 1986,
the President, upon the recommendation of the Secretary of Finance, could have adjusted the
personal and additional exemptions in 1989 by increasing the same even without any legislation
providing for such adjustment. But the President did not.

However, House Bill 28970, which was subsequently enacted by Congress as Rep. Act 7167,
was introduced in the House of Representatives in 1989 although its passage was delayed and
it did not become effective law until 30 January 1992. A perusal, however, of the sponsorship
remarks of Congressman Hernando B. Perez, Chairman of the House Committee on Ways and
Means, on House Bill 28970, provides an indication of the intent of Congress in enacting Rep.
Act 716 7. The pertinent legislative journal contains the following:

At the outset, Mr. Perez explained that the Bill Provides for increased personal additional
exemptions to individuals in view of the higher standard of living.

The Bill, he stated, limits the amount of income of individuals subject to income tax to enable
them to spend for basic necessities and have more disposable income.

xxxx

Mr. Perez added that inflation has raised the basic necessities and that it had been three years
since the last exemption adjustment in 1986.

xxxx

Subsequently, Mr. Perez stressed the necessity of passing the measure to mitigate the effects
of the current inflation and of the implementation of the salary standardization law. Stating that it
is imperative for the government to take measures to ease the burden of the individual income
tax filers, Mr. Perez then cited specific examples of how the measure can help assuage the
burden to the taxpayers.
He then reiterated that the increase in the prices of commodities has eroded the purchasing
power of the peso despite the recent salary increases and emphasized that the Bill will serve to
compensate the adverse effects of inflation on the taxpayers. x x x (Journal of the House of
Representatives, May 23, 1990, pp. 32-33).

It will also be observed that Rep. Act 7167 speaks of the adjustments that it provides for, as
adjustments "to the poverty threshold level." Certainly, "the poverty threshold level" is the
poverty threshold level at the time Rep. Act 7167 was enacted by Congress, not poverty
threshold levels in futuro, at which time there may be need of further adjustments in personal
exemptions. Moreover, the Court can not lose sight of the fact that these personal and
additional exemptions are fixed amounts to which an individual taxpayer is entitled, as a
means to cushion the devastating effects of high prices and a depreciated purchasing
power ofthe currency. In the end, it is the lower-income and the middle-income groups of
taxpayers (not the high-income taxpayers) who stand to benefit most from the increase
of personal and additional exemptions provided for by Rep. Act 7167. To that extent, the
act is a social legislation intended to alleviate in part the present economic plight of the
lower income taxpayers. It is intended to remedy the inadequacy of the heretofore
existing personal and additional exemptions for individual taxpayers.

And then, Rep. Act 7167 says that the increased personal exemptions that it provides for shall
be available thenceforth, that is, after Rep. Act 7167 shall have become effective. In other
words, these exemptions are available upon the filing of personal income tax returns
which is, under the National Internal Revenue Code, done not later than the 15th day of
April after the end of a calendar year. Thus, under Rep. Act 7167, which became effective,
as aforestated, on 30 January 1992, the increased exemptions are literally available on or
before 15 April 1992 (though not before 30 January 1992). But these increased exemptions
can be available on 15 April 1992 only in respect of compensation income earned or received
during the calendar year 1991.

The personal exemptions as increased by Rep. Act 7167 cannot be regarded as available in
respect of compensation income received during the 1990 calendar year; the tax due in respect
of said income had already accrued, and been presumably paid, by 15 April 1991 and by 15
July 1991, at which time Rep. Act 7167 had not been enacted. To make Rep. Act 7167 refer
back to income received during 1990 would require language explicitly retroactive in purport and
effect, language that would have to authorize the payment of refunds of taxes paid on 15 April
1991 and 15 July 1991: such language is simply not found in Rep. Act 7167.

The personal exemptions as increased by Rep. Act 7167 cannot be regarded as available
only in respect of compensation income received during 1992, as the implementing
Revenue Regulations No. 1-92 purport to provide. Revenue Regulations No. 1-92 would in
effect postpone the availability of the increased exemptions to 1 January-15 April 1993,
and thus literally defer the effectivity of Rep. Act 7167 to 1 January 1993. Thus, the
implementing regulations collide frontally with Section 3 of Rep. Act 7167 which states that the
statute "shall take effect upon its approval." The objective of the Secretary of Finance and the
Commissioner of Internal Revenue in postponing through Revenue Regulations No. 1-92 the
legal effectivity of Rep. Act 7167 is, of course, entirely understandable - to defer to 1993 the
reduction of governmental tax revenues which irresistibly follows from the application of Rep.
Act 7167. But the law-making authority has spoken and the Court can not refuse to apply the
law-maker's words. Whether or not the government can afford the drop in tax revenues resulting
from such increased exemptions was for Congress (not this Court) to decide.22 (Emphases
supplied)

In this case, Senator Francis Escudero's sponsorship speech for Senate Bill No. 2293 reveals
two important points about R.A. 9504: (1) it is a piece of social legislation; and (2) its intent is to
make the proposed law immediately applicable, that is, to taxable year 2008:

Mr. President, distinguished colleagues, Senate Bill No. 2293 seeks, among others, to exempt
minimum wage earners from the payment of income and/or withholding tax. It is an attempt to
help our people cope with the rising costs of commodities that seem to be going up
unhampered these past few months.
Mr. President, a few days ago, the Regional Tripartite and Wages Productivity Board granted an
increase of ₱20 per day as far as minimum wage earners are concerned. By way of impact,
Senate Bill No. 2293 would grant our workers an additional salary or take-home pay of
approximately ₱34 per day, given the exemption that will be granted to all minimum wage
earners. It might be also worthy of note that on the part of the public sector, the Senate
Committee on Ways and Means included, as amongst those who will be exempted from the
payment of income tax and/or withholding tax, government workers receiving Salary Grade V.
We did not make any distinction so as to include Steps 1 to 8 of Salary Grade V as long as one
is employed in the public sector or in government.

In contradistinction with House Bill No. 3971 approved by the House of Representatives
pertaining to a similar subject matter, the House of Representatives, very much like the Senate,
adopted the same levels of exemptions which are:

From an allowable personal exemption for a single individual of ₱20,000, to a head of family of
₱25,000, to a married individual of ₱32,000, both the House and the Senate versions contain a
higher personal exemption of ₱50,000.

Also, by way of personal additional exemption as far as dependents are concerned, up to four,
the House, very much like the Senate, recommended a higher ceiling of ₱25,000 for each
dependent not exceeding four, thereby increasing the maximum additional exemptions and
personal additional exemptions to as high as ₱200,000, depending on one's status in life.

The House also, very much like the Senate, recommended by way of trying to address the
revenue loss on the part of the government, an optional standard deduction (OSD) on gross
sales, and/or gross receipts as far as individual taxpayers are concerned. However, the House,
unlike the Senate, recommended a Simplified Net Income Tax Scheme (SNITS) in order to
address the remaining balance of the revenue loss.

By way of contrast, the Senate Committee on Ways and Means recommended, in lieu of SNITS,
an optional standard deduction of 40% for corporations as far as their gross income is
concerned.

Mr. President, if we total the revenue loss as well as the gain

brought about by the 40% OSD on individuals on gross sales and receipts and 40% on gross
income as far as corporations are concerned, with a conservative availment rate as computed
by the Department of Finance, the government would still enjoy a gain of ₱.78 billion or ₱780
million if we use the high side of the computation however improbable it may be.

For the record, we would like to state that if the availment rate is computed at 15% for
individuals and 10% for corporations, the potential high side of a revenue gain would amount to
approximately ₱18.08 billion.

Mr. President, we have received many suggestions increasing the rate of personal exemptions
and personal additional exemptions. We have likewise received various suggestions pertaining
to the expansion of the coverage of the tax exemption granted to minimum wage earners to
encompass as well other income brackets.

However, the only suggestion other than or outside the provisions contained in House Bill No.
3971 that the Senate Committee on Ways and Means adopted, was an expansion of the
exemption to cover overtime, holiday, nightshift differential, and hazard pay also being enjoyed
by minimum wage earners. It entailed an additional revenue loss of ₱l billion approximately on
the part of the government. However, Mr. President, that was taken into account when I stated
earlier that there will still be a revenue gain on the conservative side on the part of government
of ₱780 million.

Mr. President, [my distinguished colleagues in the Senate, we wish to provide a higher
exemption for our countrymen because of the incessant and constant increase in the
price of goods.Nonetheless, not only Our Committee, but also the Senate and Congress, must
act responsibly in recognizing that much as we would like to give all forms of help that we can
and must provide to our people, we also need to recognize the need of the government to
defray its expenses in providing services to the public. This is the most that we can give at this
time because the government operates on a tight budget and is short on funds when it comes to
the discharge of its main expenses.]23

Mr. President, time will perhaps come and we can improve on this version, but at
present, this is the best, I believe, that we can give our people. But by way of comparison, it
is still ₱10 higher than what the wage boards were able to give minimum wage earners. Given
that, we were able to increase their take-home pay by the amount equivalent to the tax
exemption we have granted.

We urge our colleagues, Mr. President, to pass this bill in earnest so that we can
immediately grant relief to our people.

Thank you, Mr. President. (Emphases Supplied)24

Clearly, Senator Escudero expressed a sense of urgency for passing what would subsequently
become R.A. 9504. He was candid enough to admit that the bill needed improvement, but
because time was of the essence, he urged the Senate to pass the bill immediately. The idea
was immediate tax relief to the individual taxpayers, particularly low-compensation earners, and
an increase in their take-home pay.25

Senator Miriam Defensor-Santiago also remarked during the deliberations that "the increase in
personal exemption from ₱20,000 to ₱50,000 is timely and appropriate given the increased cost
of living. Also, the increase in the additional exemption for dependent children is necessary and
timely."26

Finally, we consider the President's certification of the necessity of the immediate enactment of
Senate Bill No. 2293. That certification became the basis for the Senate to dispense with the
three-day rule27 for passing a bill. It evinced the intent of the President to afford wage earners
immediate tax relief from the impact of a worldwide increase in the prices of commodities.
Specifically, the certification stated that the purpose was to "address the urgent need to cushion
the adverse impact of the global escalation of commodity prices upon the most vulnerable within
the low income group by providing expanded income tax relief."28

In sum, R.A. 9504, like R.A. 7167 in Umali, was a piece of social legislation clearly intended to
afford immediate tax relief to individual taxpayers, particularly low-income compensation
earners. Indeed, if R.A. 9504 was to take effect beginning taxable year 2009 or half of the year
2008 only, then the intent of Congress to address the increase in the cost of living in 2008 would
have been negated.

Therefore, following Umali, the test is whether the new set of personal and additional
exemptions was available at the time of the filing of the income tax return. In other words, while
the status of the individual taxpayers is determined at the close of the taxable year, 29 their
personal and additional exemptions - and consequently the computation of their taxable income
- are reckoned when the tax becomes due, and not while the income is being earned or
received.

The NIRC is clear on these matters. The taxable income of an individual taxpayer shall be
computed on the basis of the calendar year.30 The taxpayer is required to file an income tax
return on the 15th of April of each year covering income of the preceding taxable year. 31 The tax
due thereon shall be paid at the time the return is filed. 32

It stands to reason that the new set of personal and additional exemptions, adjusted as a form
of social legislation to address the prevailing poverty threshold, should be given effect at the
most opportune time as the Court ruled in Umali.

The test provided by Umali is consistent with Ingalls v. Trinidad, 33 in which the Court dealt with
the matter of a married person's reduced exemption. As early as 1923, the Court already
provided the reference point for determining the taxable income:
[T]hese statutes dealing with the manner of collecting the income tax and with the deductions to
be made in favor of the taxpayer have reference to the time when the return is filed and the tax
assessed. If Act No. 2926 took, as it did take, effect on January 1, 1921, its provisions must be
applied to income tax returns filed, and assessments made from that date. This is the reason
why Act No. 2833, and Act No. 2926, in their respective first sections, refer to income
received during the preceding civil year. (Italics in the original)

There, the exemption was reduced, not increased, and the Court effectively ruled that income
tax due from the individual taxpayer is properly determined upon the filing of the return. This is
done after the end of the taxable year, when all the incomes for the immediately preceding
taxable year and the corresponding personal exemptions and/or deductions therefor have been
considered. Therefore, the taxpayer was made to pay a higher tax for his income earned during
1920, even if the reduced exemption took effect on 1 January 1921.

In the present case, the increased exemptions were already available much earlier than the
required time of filing of the return on 15 April 2009. R.A. 9504 came into law on 6 July 2008,
more than nine months before the deadline for the filing of the income tax return for taxable year
2008. Hence, individual taxpayers were entitled to claim the increased amounts for the entire
year 2008. This was true despite the fact that incomes were already earned or received prior to
the law's effectivity on 6 July 2008.

Even more compelling is the fact that R.A. 9504 became effective during the taxable year in
question. In Umali, the Court ruled that the application of the law was prospective, even if the
amending law took effect after the close of the taxable year in question, but before the deadline
for the filing of the return and payment of the taxes due for that year. Here, not only did R.A.
9504 take effect before the deadline for the filing of the return and payment for the taxes due for
taxable year 2008, it took effect way before the close of that taxable year. Therefore, the
operation of the new set of personal and additional exemption in the present case was all the
more prospective.

Additionally, as will be discussed later, the rule of full taxable year treatment for the availment of
personal and additional exemptions was established, not by the amendments introduced by
R.A. 9504, but by the provisions of the 1997 Tax Code itself. The new law merely introduced a
change in the amounts of the basic and additional personal exemptions. Hence, the fact that
R.A. 9504 took effect only on 6 July 2008 is irrelevant.

The present case issubstantially

identical with Umali and not with
Pansacola.

Respondents argue that Umali is not applicable to the present case. They contend that the
increase in personal and additional exemptions were necessary in that case to conform to the
1991 poverty threshold level; but that in the present case, the amounts under R.A. 9504 far
exceed the poverty threshold level. To support their case, respondents cite figures allegedly
coming from the National Statistical Coordination Board. According to those figures, in 2007, or
one year before the effectivity of R.A. 9504, the poverty threshold per capita was ₱14,866 or
₱89,196 for a family of six. 34

We are not persuaded.

The variance raised by respondents borders on the superficial. The message of Umali is that
there must be an event recognized by Congress that occasions the immediate application of the
increased amounts of personal and additional exemptions. In Umali, that event was the failure
to adjust the personal and additional exemptions to the prevailing poverty threshold level. In this
case, the legislators specified the increase in the price of commodities as the basis for the
immediate availability of the new amounts of personal and additional exemptions.

We find the facts of this case to be substantially identical to those of Umali.

First, both cases involve an amendment to the prevailing tax code. The present petitions call for
the interpretation of the effective date of the increase in personal and additional exemptions.
Otherwise stated, the present case deals with an amendment (R.A. 9504) to the prevailing tax
code (R.A. 8424 or the 1997 Tax Code). Like the present case, Umali involved an amendment
to the then prevailing tax code - it interpreted the effective date of R.A. 7167, an amendment to
the 1977 NIRC, which also increased personal and additional exemptions.

Second, the amending law in both cases reflects an intent to make the new set of personal and
additional exemptions immediately available after the effectivity of the law. As already pointed
out, in Umali, R.A. 7167 involved social legislation intended to adjust personal and additional
exemptions. The adjustment was made in keeping with the poverty threshold level prevailing at
the time.

Third, both cases involve social legislation intended to cure a social evil - R.A. 7167 was meant
to adjust personal and additional exemptions in relation to the poverty threshold level, while R.A.
9504 was geared towards addressing the impact of the global increase in the price of goods.

Fourth, in both cases, it was clear that the intent of the legislature was to hasten the enactment
of the law to make its beneficial relief immediately available.

Pansacola is not applicable.

In lieu of Umali, the OSG relies on our ruling in Pansacola v.Commissioner of Internal
Revenue. 35 In that case, the 1997 Tax Code (R.A. 8424) took effect on 1 January 1998, and the
petitioner therein pleaded for the application of the new set of personal and additional
exemptions provided thereunder to taxable year 1997. R.A. 8424 explicitly provided for its
effectivity on 1 January 1998, but it did not provide for any retroactive application.

We ruled against the application of the new set of personal and additional exemptions to the
previous taxable year 1997, in which the filing and payment of the income tax was due on 15
April 1998, even if the NIRC had already taken effect on 1 January 1998. This court explained
that the NIRC could not be given retroactive application, given the specific mandate of the law
that it shall take effect on 1 January 1998; and given the absence of any reference to the
application of personal and additional exemptions to income earned prior to 1January 1998. We
further stated that what the law considers for the purpose of determining the income tax due is
the status at the close of the taxable year, as opposed to the time of filing of the return and
payment of the corresponding tax.

The facts of this case are not identical with those of Pansacola.

First, Pansacola interpreted the effectivity of an entirely new tax code - R.A. 8424, the Tax
Reform Act of 1997. The present case, like Umali, involves a mere amendment of some specific
provisions of the prevailing tax code: R.A. 7167 amending then P.D. 1158 (the 1977 NIRC)
in Umali and R.A. 9504 amending R.A. 8424 herein.

Second, in Pansacola, the new tax code specifically provided for an effective date - the
beginning of the following year - that was to apply to all its provisions, including new tax rates,
new taxes, new requirements, as well as new exemptions. The tax code did not make any
exception to the effectivity of the subject exemptions, even if transitory provisions 36 specifically
provided for different effectivity dates for certain provisions.

Hence, the Court did not find any legislative intent to make the new rates of personal and
additional exemptions available to the income earned in the year previous to R.A. 8424's
effectivity. In the present case, as previously discussed, there was a clear intent on the part of
Congress to make the new amounts of personal and additional exemptions immediately
available for the entire taxable year 2008. R.A. 9504 does not even need a provision providing
for retroactive application because, as mentioned above, it is actually prospective - the new law
took effect during the taxable year in question.

Third, in Pansacola, the retroactive application of the new rates of personal and additional
exemptions would result in an absurdity - new tax rates under the new law would not apply, but
a new set of personal and additional exemptions could be availed of. This situation does not
obtain in this case, however, precisely because the new law does not involve an entirely new
tax code. The new law is merely an amendment to the rates of personal and additional
exemptions.

Nonetheless, R.A. 9504 can still be made applicable to taxable year 2008, even if we apply
the Pansacola test. We stress that Pansacola considers the close of the taxable year as the
reckoning date for the effectivity of the new exemptions. In that case, the Court refused the
application of the new set of personal exemptions, since they were not yet available at the close
of the taxable year. In this case, however, at the close of the taxable year, the new set of
exemptions was already available. In fact, it was already available during the taxable year - as
early as 6 July 2008 - when the new law took effect.

There may appear to be some dissonance between the Court's declarations in Umali and those
in Pansacola, which held:

Clearly from the abovequoted provisions, what the law should consider for the purpose of
determining the tax due from an individual taxpayer is his status and qualified dependents at the
close of the taxable year and not at the time the return is filed and the tax due thereon is paid.
Now comes Section 35(C) of the NIRC which provides,

xxxx

Emphasis must be made that Section 35(C) of the NIRC allows a taxpayer to still claim the
corresponding full amount of exemption for a taxable year, e.g. if he marries; have additional
dependents; he, his spouse, or any of his dependents die; and if any of his dependents marry,
turn 21 years old; or become gainfully employed. It is as if the changes in his or his dependents
status took place at the close of the taxable year.

Consequently, his correct taxable income and his corresponding allowable deductions
e.g. personal and additional deductions, if any, had already been determined as of the
end of the calendar year.

x x x. Since the NIRC took effect on January 1, 1998, the increased amounts of personal and
additional exemptions under Section 35, can only be allowed as deductions from the individual
taxpayers gross or net income, as the case maybe, for the taxable year 1998 to be filed in 1999.
The NIRC made no reference that the personal and additional exemptions shall apply on
income earned before January 1, 1998.37

It must be remembered, however, that the Court therein emphasized that Umali was interpreting
a social legislation:

In Umali, we noted that despite being given authority by Section 29(1)(4) of the National Internal
Revenue Code of 1977 to adjust these exemptions, no adjustments were made to cover 1989.
Note that Rep. Act No. 7167 is entitled "An Act Adjusting the Basic Personal and Additional
Exemptions Allowable to Individuals for Income Tax Purposes to the Poverty Threshold Level,
Amending for the Purpose Section 29, Paragraph (L), Items (1) and (2) (A), of the National
Internal Revenue Code, As Amended, and For Other Purposes." Thus, we said in Umali, that
the adjustment provided by Rep. Act No. 7167 effective 1992, should consider the poverty
threshold level in 1991, the time it was enacted. And we observed therein that since the
exemptions would especially benefit lower and middle-income taxpayers, the exemption should
be made to cover the past year 1991. To such an extent, Rep. Act No. 7167 was a social
legislation intended to remedy the non-adjustment in 1989. And as cited in Umali, this legislative
intent is also clear in the records of the House of Representatives' Journal.

This is not so in the case at bar. There is nothing in the NIRC that expresses any such
intent. The policy declarations in its enactment do not indicate it was a social legislation
that adjusted personal and additional exemptions according to the poverty threshold
level nor is there any indication that its application should retroact. x x x.38 (Emphasis
Supplied)
Therefore, the seemingly inconsistent pronouncements in Umali and Pansacola are more
apparent than real. The circumstances of the cases and the laws interpreted, as well as the
legislative intents thereof, were different.

The policy in this jurisdiction is full

taxable year treatment.

We have perused R.A. 9504, and we see nothing that expressly provides or even suggests a
prorated application of the exemptions for taxable year 2008. On the other hand, the policy of
full taxable year treatment, especially of the personal and additional exemptions, is clear under
Section 35, particularly paragraph C of R.A. 8424 or the 1997 Tax Code:

SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -

(A) In General. - For purposes of determining the tax provided in Section 24(A) of this Title,
there shall be allowed a basic personal exemption as follows:

xxxx

(B) Additional Exemption for Dependents.-There shall be allowed an additional exemption of...
for each dependent not exceeding four (4).

x x xx

(C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as
defined above during the taxable year, the taxpayer may claim the corresponding additional
exemption, as the case may be, in full for such year.

If the taxpayer dies during the taxable year, his estate may still claim the personal and additional
exemptions for himself and his dependent(s) as if he died at the close of such year.

If the spouse or any of the dependents dies or if any of such

dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during
the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of
the dependents died, or as if such dependents married, became twenty-one (21) years old or
became gainfully employed at the close of such year. (Emphases supplied)

Note that paragraph C does not allow the prorating of the personal and additional exemptions
provided in paragraphs A and B, even in case a status-changing event occurs during the
taxable year. Rather, it allows the fullest benefit to the individual taxpayer. This manner of
reckoning the taxpayer's status for purposes of the personal and additional exemptions clearly
demonstrates the legislative intention; that is, for the state to give the taxpayer the maximum
exemptions that can be availed, notwithstanding the fact that the latter's actual status would
qualify only for a lower exemption if prorating were employed.

We therefore see no reason why we should make any distinction between the income earned
prior to the effectivity of the amendment (from 1 January 2008 to 5 July 2008) and that earned
thereafter (from 6 July 2008 to 31 December 2008) as none is indicated in the law. The principle
that the courts should not distinguish when the law itself does not distinguish squarely app1ies
to this case. 39

We note that the prorating of personal and additional exemptions was employed in the 1939 Tax
Code. Section 23(d) of that law states:

Change of status. - - If the status of the taxpayer insofar as it affects the personal and additional
exemptions for himself or his dependents, changes during the taxable year, the amount of the
personal and additional exemptions shall be apportioned, under rules and regulations
prescribed by the Secretary of Finance, in accordance with the number of months before
and after such change. For the purpose of such apportionment a fractional part of a month
shall be disregarded unless it amounts to more than half a month, in which case it shall be
considered as a month.40 (Emphasis supplied)

On 22 September 1950, R.A. 590 amended Section 23(d) of the 1939 Tax Code by restricting
the operation of the prorating of personal exemptions. As amended, Section 23(d) reads:

(d) Change of status. - If the status of the taxpayer insofar as it affects the personal and
additional exemption for himself or his dependents, changes during the taxable year by reason
of his death, the amount of the personal and additional exemptions shall be apportioned, under
rules and regulations prescribed by the Secretary of Finance, in accordance with the number of
months before and after such change. For the purpose of such apportionment a fractional part
of a month shall be disregarded unless it amounts to more than half a month, in which case it
shall be considered as a month.41(Emphasis supplied)

Nevertheless, in 1969, R. A. 6110 ended the operation of the prorating scheme in our
jurisdiction when it amended Section 23(d) of the 1939 Tax Code and adopted a full taxable
year treatment of the personal and additional exemptions. Section 23(d), as amended, reads:

(d) Change of status. -

If the taxpayer married or should have additional dependents as defined in subsection (c) above
during the taxable year the taxpayer may claim the corresponding personal exemptions in full
for such year.

If the taxpayer should die during the taxable year, his estate may still claim the personal and
additional deductions for himself and his dependents as if he died at the close of such year.

If the spouse or any of the dependents should die during the year, the taxpayer may still claim
the same deductions as if they died at the close of such year.

P.D. 69 followed in 1972, and it retained the full taxable year scheme. Section 23(d) thereof
reads as follows:

(d) Change of status. - If the taxpayer marries or should have additional dependents as defined
in subsection (c) above during the taxable year the taxpayer may claim the corresponding
personal exemptions in full for such year.

If the taxpayer should die during the taxable year, his estate may still claim the personal and
additional deductions for himself and his dependents as if he died at the close of such year.

If the spouse or any of the dependents should die or become twenty-one years old during the
taxable year, the taxpayer may still claim the same exemptions as if they died, or as if such
dependents became twenty-one years old at the close of such year.

The 1977 Tax Code continued the policy of full taxable year treatment. Section 23(d) thereof
states:

(d) Change of status.- If the taxpayer married or should have additional dependents as defined
in subsection (c) above during the taxable year, the taxpayer may claim the corresponding
personal exemption in full for such year.

If the taxpayer should die during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependents as if he died at the close of such year.

If the spouse or any of the dependents should die or become

twenty-one years old during the taxable year, the taxpayer may still claim the same exemptions
as if they died, or as if such dependents became twenty-one years old at the close of such year.
While Section 23 of the 1977 Tax Code underwent changes, the provision on full taxable year
treatment in case of the taxpayer's change of status was left untouched.42 Executive Order No.
37, issued on 31 July 1986, retained the change of status provision verbatim. The provision
appeared under Section 30(1)(3) of the NIRC, as amended:

(3) Change of status.- If the taxpayer married or should have additional dependents as defined
above during the taxable year, the taxpayer may claim the corresponding personal and
additional exemptions, as the case may be, in full for such year.

If the taxpayer should die during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependents as if he died at the close of such year.

If the spouse or any of the dependents should die or if any of such

dependents becomes twenty-one years old during the taxable year, the taxpayer may still claim
the same exemptions as if they died, or if such dependents become twenty-one years old at the
close of such year.

Therefore, the legislative policy of full taxable year treatment of the personal and additional
exemptions has been in our jurisdiction continuously since 1969. The prorating approach has
long since been abandoned. Had Congress intended to revert to that scheme, then it should
have so stated in clear and unmistakeable terms. There is nothing, however, in R.A. 9504 that
provides for the reinstatement of the prorating scheme. On the contrary, the change-of-status
provision utilizing the full-year scheme in the 1997 Tax Code was left untouched by R.A. 9504.

We now arrive at this important point: the policy of full taxable year treatment is established, not
by the amendments introduced by R.A. 9504, but by the provisions of the 1997 Tax Code, which
adopted the policy from as early as 1969.

There is, of course, nothing to prevent Congress from again adopting a policy that prorates the
effectivity of basic personal and additional exemptions. This policy, however, must be explicitly
provided for by law - to amend the prevailing law, which provides for full-year treatment. As
already pointed out, R.A. 9504 is totally silent on the matter. This silence cannot be presumed
by the BIR as providing for a half-year application of the new exemption levels. Such
presumption is unjust, as incomes do not remain the same from month to month, especially for
the MWEs.

Therefore, there is no legal basis for the BIR to reintroduce the prorating of the new personal
and additional exemptions. In so doing, respondents overstepped the bounds of their rule-
making power. It is an established rule that administrative regulations are valid only when these
are consistent with the law. 43 Respondents cannot amend, by mere regulation, the laws they
administer.44 To do so would violate the principle of non-delegability of legislative powers.45

The prorated application of the new set of personal and additional exemptions for the year 2008,
which was introduced by respondents, cannot even be justified under the exception to the
canon of non-delegability; that is, when Congress makes a delegation to the executive
branch.46 The delegation would fail the two accepted tests for a valid delegation of legislative
power; the completeness test and the sufficient standard test.47 The first test requires the law to
be complete in all its terms and conditions, such that the only thing the delegate will have to do
is to enforce it.48 The sufficient standard test requires adequate guidelines or limitations in the
law that map out the boundaries of the delegate's authority and canalize the delegation.49

In this case, respondents went beyond enforcement of the law, given the absence of a provision
in R.A. 9504 mandating the prorated application of the new amounts of personal and additional
exemptions for 2008. Further, even assuming that the law intended a prorated application, there
are no parameters set forth in R.A. 9504 that would delimit the legislative power surrendered by
Congress to the delegate. In contrast, Section 23(d) of the 1939 Tax Code authorized not only
the prorating of the exemptions in case of change of status of the taxpayer, but also authorized
the Secretary of Finance to prescribe the corresponding rules and regulations.

II.
Whether an MWE is exempt for the entire taxable
year 2008 or from 6 July 2008 only

The MWE is exempt for the entire taxable year 2008.

As in the case of the adjusted personal and additional exemptions, the MWE exemption should
apply to the entire taxable year 2008, and not only from 6 July 2008 onwards. We see no
reason why Umali cannot be made applicable to the MWE exemption, which is undoubtedly a
piece of social legislation. It was intended to alleviate the plight of the working class, especially
the low-income earners. In concrete terms, the exemption translates to a ₱34 per day benefit,
as pointed out by Senator Escudero in his sponsorship speech.50

As it stands, the calendar year 2008 remained as one taxable year for an individual taxpayer.
Therefore, RR 10-2008 cannot declare the income earned by a minimum wage earner from 1
January 2008 to 5 July 2008 to be taxable and those earned by him for the rest of that year to
be tax-exempt. To do so would be to contradict the NIRC and jurisprudence, as taxable income
would then cease to be determined on a yearly basis.

Respondents point to the letter of former Commissioner of Internal Revenue Lilia B. Hefti dated
5 July 2008 and petitioner Sen. Escudero's signature on the Conforme portion thereof. This
letter and the conforme supposedly establish the legislative intent not to make the benefits of
R.A. 9504 effective as of 1 January 2008.

We are not convinced. The conforme is irrelevant in the determination of legislative intent.

We quote below the relevant portion of former Commissioner Hefti's letter:

Attached herewith are salient features of the proposed regulations to implement RA 9504 x x x.
We have tabulated critical issues raised during the public hearing and comments received from
the public which we need immediate written resolution based on the inten[t]ion of the law more
particularly the effectivity clause. Due to the expediency and clamor of the public for its
immediate implementation, may we request your confirmation on the proposed recommendation
within five (5) days from receipt hereof. Otherwise, we shall construe your affirmation. 51

We observe that a Matrix of Salient Features of Proposed Revenue Regulations per R.A. 9504
was attached to the letter.52 The Matrix had a column entitled "Remarks" opposite the
Recommended Resolution. In that column, noted was a suggestion coming from petitioner
TMAP:

TMAP suggested that it should be retroactive considering that it was [for] the benefit of the
majority and to alleviate the plight of workers. Exemption should be applied for the whole
taxable year as provided in the NIRC. x x x Umali v. Estanislao [ruled] that the increase[d]
exemption in 1992 [was applicable] [to] 1991.

Majority issues raised during the public hearing last July 1, 2008 and emails received suggested
[a] retroactive implementation. 53(Italics in the original)

The above remarks belie the claim that the conforme is evidence of the legislative intent to
make the benefits available only from 6 July 2008 onwards. There would have been no need to
make the remarks if the BIR had merely wanted to confirm was the availability of the law's
benefits to income earned starting 6 July 2008. Rather, the implication is that the BIR was
requesting the conformity of petitioner Senator Escudero to the proposed implementing rules,
subject to the remarks contained in the Matrix. Certainly, it cannot be said that Senator
Escudero's conforme is evidence of legislative intent to the effect that the benefits of the law
would not apply to income earned from 1 January 2008 to 5 July 2008.

Senator Escudero himself states in G.R. No. 185234:

In his bid to ensure that the BIR would observe the effectivity dates of the grant of tax
exemptions and increased basic personal and additional exemptions under Republic Act No.
9504, Petitioner Escudero, as Co-Chairperson of the Congressional Oversight Committee on
Comprehensive Tax Reform Program, and his counterpart in the House of Representatives,
Hon. Exequiel B. Javier, conveyed through a letter, dated 16 September 2008, to Respondent
Teves the legislative intent that "Republic Act (RA) No. 9504 must be made applicable to the
entire taxable year 2008" considering that it was "a social legislation intended to somehow
alleviate the plight of minimum wage earners or low income taxpayers". They also jointly
expressed their "fervent hope that the corresponding Revenue Regulations that will be issued
reflect the true legislative intent and rightful statutory interpretation of R.A. No. 9504." 54

Senator Escudero repeats in his Memorandum:

On 16 September 2008, the Chairpersons (one of them being herein Petitioner Sen. Escudero)
of the Congressional Oversight Committee on Comprehensive Tax Reform Program of both
House of Congress wrote Respondent DOF Sec. Margarito Teves, and requested that the
revenue regulations (then yet still to be issued)55 to implement Republic Act No. 9504 reflect the
true intent and rightful statutory interpretation thereof, specifically that the grant of tax exemption
and increased basic personal and additional exemptions be made available for the entire
taxable year 2008. Yet, the DOF promulgated Rev. Reg. No. 10-2008 in contravention of such
legislative intent.x x x.56

We have gone through the records and we do not see anything that would to suggest that
respondents deny the senator's assertion.

Clearly, Senator Escudero's assertion is that the legislative intent is to make the MWE' s tax
exemption and the increased basic personal and additional exemptions available for the entire
year 2008. In the face of his assertions, respondents' claim that his conforme to Commissioner
Hefti's letter was evidence of legislative intent becomes baseless and specious. The remarks
described above and the subsequent letter sent to DOF Secretary Teves, by no less than the
Chairpersons of the Bi-camera! Congressional Oversight Committee on Comprehensive Tax
Reform Program, should have settled for respondents the matter of what the legislature
intended for R.A. 9504's exemptions.

Accordingly, we agree with petitioners that RR 10-2008, insofar as it allows the availment of the
MWE's tax exemption and the increased personal and additional exemptions beginning only on
6 July 2008 is in contravention of the law it purports to implement.

A clarification is proper at this point. Our ruling that the MWE exemption is available for the
entire taxable year 2008 is premised on the fact of one's status as an MWE; that is, whether the
employee during the entire year of 2008 was an MWE as defined by R.A. 9504. When
the wages received exceed the minimum wage anytime during the taxable year, the employee
necessarily loses the MWE qualification. Therefore, wages become taxable as the employee
ceased to be an MWE. But the exemption of the employee from tax on the income previously
earned as an MWE remains.

This rule reflects the understanding of the Senate as gleaned from the exchange between
Senator Miriam Defensor-Santiago and Senator Escudero:

Asked by Senator Defensor-Santiago on how a person would be taxed if, during the year, he is
promoted from Salary Grade 5 to Salary Grade 6 in July and ceases to be a minimum wage
employee, Senator Escudero said that the tax computation would be based starting on the new
salary in July. 57

As the exemption is based on the employee's status as an MWE, the operative phrase is "when
the employee ceases to be an MWE. Even beyond 2008, it is therefore possible for one
employee to be exempt early in the year for being an MWE for that period, and subsequently
become taxable in the middle of the same year with respect to the compensation income, as
when the pay is increased higher than the minimum wage. The improvement of one's lot,
however, cannot justly operate to make the employee liable for tax on the income earned as an
MWE.

Additionally, on the question of whether one who ceases to be an MWE may still be entitled to
the personal and additional exemptions, the answer must necessarily be yes. The MWE
exemption is separate and distinct from the personal and additional exemptions. One's status as
an MWE does not preclude enjoyment of the personal and additional exemptions. Thus, when
one is an MWE during a part of the year and later earns higher than the minimum wage and
becomes a non-MWE, only earnings for that period when one is a non-MWE is subject to tax. It
also necessarily follows that such an employee is entitled to the personal and additional
exemptions that any individual taxpayer with taxable gross income is entitled.

A different interpretation will actually render the MWE exemption a totally oppressive legislation.
It would be a total absurdity to disqualify an MWE from enjoying as much as ₱150,00058 in
personal and additional exemptions just because sometime in the year, he or she ceases to be
an MWE by earning a little more in wages. Laws cannot be interpreted with such absurd and
unjust outcome. It is axiomatic that the legislature is assumed to intend right and equity in the
laws it passes.59

Critical, therefore, is how an employee ceases to become an MWE and thus ceases to be
entitled to an MWE's exemption.

III.

Whether Sections 1 and 3 of RR 10-2008 are consistent with the law in

declaring that an MWE who receives other benefits in excess of the

statutory limit of ₱30,000 is no longer entitled to the exemption provided

by R.A. 9504, is consistent with the law.

Sections 1 and 3 of RR 10-2008 add a requirement not found in the law by effectively declaring
that an MWE who receives other benefits in excess of the statutory limit of ₱30,000 is no longer
entitled to the exemption provided by R.A. 9504.

The BIR added a requirement not

found in the law.

The assailed Sections 1 and 3 of RR 10-2008 are reproduced hereunder for easier reference.

SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read as

follows:

Sec. 2.78.1. Withholding of Income Tax on Compensation Income. -

(A) Compensation Income Defined. – x x x

xxxx

(3) Facilities and privileges of relatively small value. - Ordinarily, facilities, and privileges (such
as entertainment, medical services, or so-called "courtesy" discounts on purchases), otherwise
known as "de minimis benefits," furnished or offered by an employer to his employees, are not
considered as compensation subject to income tax and consequently to withholding tax, if such
facilities or privileges are of relatively small value and are offered or furnished by the employer
merely as means of promoting the health, goodwill, contentment, or efficiency of his employees.

The following shall be considered as "de minimis" benefits not subject to income tax, hence, not
subject to withholding tax on compensation income of both managerial and rank and file
employees:

(a) Monetized unused vacation leave credits of employees not exceeding ten (10) days during
the year and the monetized value of leave credits paid to government officials and employees;
(b) Medical cash allowance to dependents of employees not exceeding ₱750.00 per employee
per semester or ₱125 per month;

(c) Rice subsidy of ₱l,500.00 or one (1) sack of 50-kg. rice per month amounting to not more
than ₱l,500.00;

(d) Uniforms and clothing allowance not exceeding ₱4,000.00 per annum;

(e) Actual yearly medical benefits not exceeding ₱10,000.00 per annum;

(f) Laundry allowance not exceeding ₱300.00 per month;

(g) Employees achievement awards, e.g., for length of service or safety achievement, which
must be in the form of a tangible personal property other than cash or gift certificate, with an
annual monetary value not exceeding ₱10,000.00 received by the employee under an
established written plan which does not discriminate in favor of highly paid employees;

(h) Gifts given during Christmas and major anniversary celebrations not exceeding
₱5,000.00per employee per annum;

(i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g.,
on account of illness, marriage, birth of a baby, etc.; and

(j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic
minimum wage.60

The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not be
considered in determining the ₱30,000.00 ceiling of 'other benefits' excluded from gross income
under Section 32(b)(7)(e) of the Code. Provided that, the excess of the 'de minimis' benefits
over their respective ceilings prescribed by these regulations shall be considered as part of
'other benefits' and the employee receiving it will be subject to tax only on the excess over the
₱30,000.00 ceiling. Provided, further, that MWEs receiving 'other benefits' exceeding the
P30,000.00 limit shall be taxable on the excess benefits, as well as on his salaries, wages
and allowances, just like an employee receiving compensation income beyond the SMW.

Any amount given by the employer as benefits to its employees, whether classified as 'de
minimis' benefits or fringe benefits, shall constitute [a] deductible expense upon such employer.

Where compensation is paid in property other than money, the employer shall make necessary
arrangements to ensure that the amount of the tax required to be withheld is available for
payment to the Bureau of Internal Revenue.

xxxx

(B) Exemptions from Withholding Tax on Compensation. - The following income payments
are exempted from the requirements of withholding tax on compensation:

xxxx

(13) Compensation income of MWEs who work

in the private sector and being paid the Statutory Minimum Wage (SMW), as fixed by
Regional Tripartite Wage and Productivity Board (RTWPB)/National Wages and Productivity
Commission (NWPC), applicable to the place where he/she is assigned.

The aforesaid income shall likewise be exempted from income tax.

"Statutory Minimum Wage" (SMW) shall refer to the rate fixed by the Regional Tripartite Wage
and Productivity Board (RTWPB), as defined by the Bureau of Labor and Employment Statistics
(BLES) of the Department of Labor and Employment (DOLE). The RTWPB of each region shall
determine the wage rates in the different regions based on established criteria and shall be the
basis of exemption from income tax for this purpose.

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided, however,
that an employee who receives/earns additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the allowable statutory amount of
₱30,000.00, taxable allowances and other taxable income other than the SMW, holiday
pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege
of being a MWE and, therefore, his/her entire earnings are not exempt form income
tax, and consequently, from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation income
are not exempted from income tax on their entire income earned during the taxable year. This
rule, notwithstanding, the [statutory minimum wage], [h]oliday pay, overtime pay, night
shift differential pay and hazard pay shall still be exempt from withholding tax.

For purposes of these regulations, hazard pay shall mean x x x.

In case of hazardous employment, x x x

The NWPC shall officially submit a Matrix of Wage Order by region x x x

Any reduction or diminution of wages for purposes of exemption from income tax shall constitute
misrepresentation and therefore, shall result to the automatic disallowance of expense, i.e.
compensation and benefits account, on the part of the employer. The offenders may be
criminally prosecuted under existing laws.

(14) Compensation income of employees in the public sector with compensation income of
not more than the SMW in the non-agricultural sector, as fixed by RTWPB/NWPC, applicable to
the place where he/she is assigned.

The aforesaid income shall likewise be exempted from income tax.

The basic salary of MWEs in the public sector shall be equated to the SMW in the non-
agricultural sector applicable to the place where he/she is assigned. The determination of the
SMW in the public sector shall likewise adopt the same procedures and consideration as those
of the private sector.

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE in the public sector shall likewise be covered by the above
exemption. Provided, however, that a public sector employee who receives additional
compensation such as commissions, honoraria, fringe benefits, benefits in excess of the
allowable statutory amount of ₱30,000.00, taxable allowances and other taxable income
other than the SMW, holiday pay, overtime pay, night shift differential pay and hazard pay shall
not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not
exempt from income tax and, consequently, from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation income
are not exempted from income tax on their entire income earned during the taxable year. This
rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift differential pay
and hazard pay shall still be exempt from withholding tax.

For purposes of these regulations, hazard pay shall mean xxx

In case of hazardous employment, x x x

xxxx
SECTION 3. Section 2.79 of RR 2-98, as amended, is hereby further amended to read as
follows:

Sec. 2.79. Income Tax Collected at Source on Compensation Income. -

(A) Requirement of Withholding. - Every employer must withhold from compensation paid an
amount computed in accordance with these Regulations. Provided, that no withholding of tax
shall be required on the SMW, including holiday pay, overtime pay, night shift differential and
hazard pay of MWEs in the private/public sectors as defined in these Regulations. Provided,
further, that an employee who receives additional compensation such as commissions,
honoraria, fringe benefits, benefits in excess of the allowable statutory amount
of₱30,000.00, taxable allowances and other taxable income other than the SMW, holiday
pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege
of being a MWE and, therefore, his/her entire earnings are not exempt from income tax
and, consequently, shall be subject to withholding tax.

xxxx

For the year 2008, however, being the initial year of implementation of R.A. 9504, there shall be
a transitory withholding tax table for the period from July 6 to December 31, 2008 (Annex "D")
determined by prorating the annual personal and additional exemptions under R.A. 9504 over a
period of six months. Thus, for individuals, regardless of personal status, the prorated personal
exemption is ₱25,000, and for each qualified dependent child (QDC), ₱12,500.

On the other hand, the pertinent provisions of law, which are supposed to be implemented by
the above-quoted sections of RR10-2008, read as follows:

SECTION 1. Section 22 of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended by adding the following
definitions after Subsection (FF) to read as follows:

Section 22. Definitions.- when used in this Title:61

(A) x x x

(FF) x x x

(GG) The term 'statutory minimum wage' shall refer to the rate fixed by the Regional
Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment
Statistics (BLES) of the Department of Labor and Employment (DOLE).

(HH) The term 'minimum wage earner' shall refer to a worker in the private sector paid the
statutory minimum wage, or to an employee in the public sector with compensation
income of not more than the statutory minimum wage in the non-agricultural sector where
he/she is assigned.

SECTION 2. Section 24(A) of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended to read as follows:

SEC. 24. Income Tax Rates. -

(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. -

(l)x x x

x x x x; and

(c) On the taxable income defined in Section 31 of this Code, other than income subject to tax
under Subsections (B), (C) and (D)of this Section, derived for each taxable year from all sources
within the Philippines by an individual alien who is a resident of the Philippines.
(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in accordance
with and at the rates established in the following schedule:

xxxx

For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof,
shall compute separately their individual income tax based on their respective total taxable
income: Provided, That if any income cannot be definitely attributed to or identified as income
exclusively earned or realized by either of the spouses, the same shall be divided equally
between the spouses for the purpose of determining their respective taxable income.

Provided, That mm1mum wage earners as defined in Section 22(HH) of this Code shall be
exempt from the payment of income tax on their taxable income: Provided, further, That
the holiday pay, ovr.rtime pay, night shift differential pay and hazard pay received by
such minimum wage earners shall likewise be exempt from income tax.

xxxx

SECTION 5. Section 51(A)(2) of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended to read as follows:

SEC. 51. Individual Return. -

(A) Requirements. -

(1) Except as provided in paragraph (2) of this Subsection, the following individuals are required
to file an income tax return:

(a) x x x

xxxx

(2) The following individuals shall not be required to file an income tax return:

(a) x x x

(b) An individual with respect to pure compensation income, as defined in Section 32(A)(l),
derived from sources within the Philippines, the income tax on which has been correctly
withheld under the provisions of Section 79 of this Code:

Provided, That an individual deriving compensation concurrently from two or more employers at
any time during the taxable year shall file an income tax return;

(c) x x x; and

(d) A minimum wage earner as defined in Section 22(HH) of this Code or an individual who
is exempt from income tax pursuant to the provisions of this Code and other laws, general or
special.

xxxx

SECTION 6. Section 79(A) of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended to read as follows:

SEC. 79. Income Tax Collected at Source. –

(A) Requirement of Withholding. - Except in the case of a minimum wage earner as

defined in Section 22(HH) of this Code, every employer making payment of wages shall
deduct and withhold upon such wages a tax determined in accordance with the rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation of the
Commissioner. (Emphases supplied)

Nowhere in the above provisions of R.A. 9504 would one find the qualifications prescribed by
the assailed provisions of RR 10-2008. The provisions of the law are clear and precise; they
leave no room for interpretation - they do not provide or require any other qualification as to who
are MWEs.

To be exempt, one must be an MWE, a term that is clearly defined. Section 22(HH) says he/she
must be one who is paid the statutory minimum wage if he/she works in the private sector, or
not more than the statutory minimum wage in the non-agricultural sector where he/she is
assigned, if he/she is a government employee. Thus, one is either an MWE or he/she is not.
Simply put, MWE is the status acquired upon passing the litmus test - whether one receives
wages not exceeding the prescribed minimum wage.

The minimum wage referred to in the definition has itself a clear and definite meaning. The law
explicitly refers to the rate fixed by the Regional Tripartite Wage and Productivity Board, which
is a creation of the Labor Code.62 The Labor Code clearly describes wages and Minimum Wage
under Title II of the Labor Code. Specifically, Article 97 defines "wage" as follows:

(f) "Wage" paid to any employee shall mean the remuneration or earnings, however designated,
capable of being expressed in terms of money, whether fixed or ascertained on a time, task,
piece, or commission basis, or other method of calculating the same, which is payable by an
employer to an employee under a written or unwritten contract of employment for work done or
to be done, or for services rendered or to be rendered and includes the fair and reasonable
value, as determined by the Secretary of Labor and Employment, of board, lodging, or other
facilities customarily furnished by the employer to the employee. "Fair and reasonable value"
shall not include any profit to the employer, or to any person affiliated with the employer.

While the Labor Code's definition of "wage" appears to encompass any payments of any
designation that an employer pays his or her employees, the concept of minimum wage is
distinct.63 "Minimum wage" is wage mandated; one that employers may not freely choose on
their own to designate in any which way.

In Article 99, minimum wage rates are to be prescribed by the

Regional Tripartite Wages and Productivity Boards. In Articles 102 to 105, specific instructions
are given in relation to the payment of wages. They must be paid in legal tender at least once
every two weeks, or twice a month, at intervals not exceeding 16 days, directly to the worker,
except in case of force majeure or death of the worker.

These are the wages for which a minimum is prescribed. Thus, the minimum wage exempted by
R.A. 9504 is that which is referred to in the Labor Code. It is distinct and different from other
payments including allowances, honoraria, commissions, allowances or benefits that an
employer may pay or provide an employee.

Likewise, the other compensation incomes an MWE receives that are also exempted by R.A.
9504 are all mandated by law and are based on this minimum wage. Additional compensation in
the form of overtime pay is mandated for work beyond the normal hours based on the
employee's regular wage.64 Those working between ten o'clock in the evening and six o'clock in
the morning are required to be paid a night shift differential based on their regular
wage.65Holiday/premium pay is mandated whether one works on regular holidays or on one's
scheduled rest days and special holidays. In all of these cases, additional compensation is
mandated, and computed based on the employee's regular wage.66

R.A. 9504 is explicit as to the coverage of the exemption: the wages that are not in excess of
the minimum wage as determined by the wage boards, including the corresponding holiday,
overtime, night differential and hazard pays.

In other words, the law exempts from income taxation the most basic compensation an
employee receives - the amount afforded to the lowest paid employees by the mandate of law.
In a way, the legislature grants to these lowest paid employees additional income by no longer
demanding from them a contribution for the operations of government. This is the essence of
R.A. 9504 as a social legislation. The government, by way of the tax exemption, affords
increased purchasing power to this sector of the working class.

This intent is reflected in the Explanatory Note to Senate Bill No. 103 of Senator Roxas:

This bill seeks to exempt minimum wage earners in the private sector and government workers
in Salary Grades 1 to 3, amending certain provisions of Republic Act 8424, otherwise known as
the National Internal Revenue Code of 1997, as amended.

As per estimates by the National Wages and Productivity Board, there are 7 million
workers earning the minimum wage and even below. While these workers are in the
verge of poverty, it is unfair and unjust that the Government, under the law, is taking
away a portion of their already subsistence-level income.

Despite this narrow margin from poverty, the Government would still be mandated to
take a slice away from that family's meager resources. Even if the Government has
recently exempted minimum wage earners from withholding taxes, they are still liable to
pay income taxes at the end of the year. The law must be amended to correct this
injustice. (Emphases supplied)

The increased purchasing power is estimated at about ₱9,500 a year.67 RR 10-2008, however,
takes this away. In declaring that once an MWE receives other forms of taxable income like
commissions, honoraria, and fringe benefits in excess of the non-taxable statutory amount of
₱30,000, RR 10-2008 declared that the MWE immediately becomes ineligible for tax exemption;
and otherwise non-taxable minimum wage, along with the other taxable incomes of the MWE,
becomes taxable again.

Respondents acknowledge that R.A.9504 is a social legislation meant for social justice,68 but
they insist that it is too generous, and that consideration must be given to the fiscal position and
financial capability of the government.69While they acknowledge that the intent of the income tax
exemption of MWEs is to free low-income earners from the burden of taxation, respondents, in
the guise of clarification, proceed to redefine which incomes may or may not be granted
exemption. These respondents cannot do without encroaching on purely legislative
prerogatives.

By way of review, this ₱30,000 statutory ceiling on benefits has its beginning in 1994 under R.
A. 7833, which amended then Section 28(b )(8) of the 1977 NIRC. It is substantially carried over
as Section 32(B) (Exclusion from Gross Income) of Chapter VI (Computation of Gross Income)
of Title II (Tax on Income) in the 1997 NIRC (R.A. 8424). R.A. 9504 does not amend that
provision of R.A. 8424, which reads:

SEC. 32. Gross Income.-

(A) General Definition.- x x x

(B) Exclusions from Gross Income.- The following items shall not be included in gross income
and shall be exempt from taxation under this title:

(1) x x x

xxxx

(7) Miscellaneous Items. -

(a) x x x

xxxx
(e) 13th Month Pay and Other Benefits.- Gross benefits received by officials and employees of
public and private entities: Provided, however, That the total exclusion under this subparagraph
shall not exceed Thirty thousand pesos (₱30,000) which shall cover:

(i) Benefits received by officials and employees of the national and local government pursuant to
Republic Act No. 668670;

(ii) Benefits received by employees pursuant to Presidential Decree No. 85171, as amended by
Memorandum Order No. 28, dated August 13, 1986;

(iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as
amended by Memorandum Order No. 28, dated August 13, 1986;and

(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That
the ceiling of Thirty thousand pesos (₱30,000) may be increased through rules and regulations
issued by the Secretary of Finance, upon recommendation of the Commissioner, after
considering among others, the effect on the same of the inflation rate at the end of the taxable
year.

(f) x x x

The exemption granted to MWEs by R.A. 9504 reads:

Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall be
exempt from the payment of income tax on their taxable income: Provided, further, That the
holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum
wage earners shall likewise be exempt from income tax.

"Taxable income" is defined as follows:

SEC. 31. Taxable Income Defined.- The term taxable income means the pertinent items of
gross income specified in this Code, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by this Code or other special laws.

A careful reading of these provisions will show at least two distinct groups of items of
compensation. On one hand are those that are further exempted from tax by R.A. 9504; on the
other hand are items of compensation that R.A. 9504 does not amend and are thus unchanged
and in no need to be disturbed.

First are the different items of compensation subject to tax prior to R.A. 9504. These are
included in the pertinent items of gross income in Section 31. "Gross income" in Section 32
includes, among many other items, "compensation for services in whatever form paid, including,
but not limited to salaries, wages, commissions, and similar items." R.A. 9504 particularly
exempts the minimum wage and its incidents; it does not provide exemption for the many other
forms of compensation.

Second are the other items of income that, prior to R.A. 9504, were excluded from gross income
and were therefore not subject to tax. Among these are other payments that employees may
receive from employers pursuant to their employer-employee relationship, such as bonuses and
other benefits. These are either mandated by law (such as the 13th month pay) or granted upon
the employer's prerogative or are pursuant to collective bargaining agreements (as productivity
incentives). These items were not changed by R.A. 9504.

It becomes evident that the exemption on benefits granted by law in 1994 are now extended to
wages of the least paid workers under R.A. 9504. Benefits not beyond ₱30,000 were exempted;
wages not beyond the SMW are now exempted as well. Conversely, benefits in excess of
₱30,000 are subject to tax and now, wages in excess of the SMW are still subject to tax.

What the legislature is exempting is the MWE's minimum wage and other forms statutory
compensation like holiday pay, overtime pay, night shift differential pay, and hazard pay. These
are not bonuses or other benefits; these are wages. Respondents seek to frustrate this
exemption granted by the legislature.

In respondents' view, anyone receiving 13th month pay and other benefits in excess of ₱30,000
cannot be an MWE. They seek to impose their own definition of "MWE" by arguing thus:

It should be noted that the intent of the income tax exemption of MWEs is to free the low-income
earner from the burden of tax. R.A. No. 9504 and R.R. No. 10-2008 define who are the low-
income earners. Someone who earns beyond the incomes and benefits above-enumerated is
definitely not a low-income earner. 72

We do not agree.

As stated before, nothing to this effect can be read from R.A. 9504. The amendment is silent on
whether compensation-related benefits exceeding the ₱30,000 threshold would make an MWE
lose exemption. R.A. 9504 has given definite criteria for what constitutes an MWE, and R.R. 10-
2008 cannot change this.

An administrative agency may not enlarge, alter or restrict a provision of law. It cannot add to
the requirements provided by law. To do so constitutes lawmaking, which is generally reserved
for Congress. 73 In CIR v. Fortune Tobacco, 74 we applied the plain meaning rule when the
Commissioner of Internal Revenue ventured into unauthorized administrative lawmaking:

[A]n administrative agency issuing regulations may not enlarge, alter or restrict the provisions of
the law it administers, and it cannot engraft additional requirements not contemplated by the
legislature. The Court emphasized that tax administrators are not allowed to expand or
contract the legislative mandate and that the "plain meaning rule" or verba legis in
statutory construction should be applied such that where the words of a statute are
clear, plain and free from ambiguity, it must be given its literal meaning and applied
without attempted interpretation.

As we have previously declared, rule-making power must be confined to details for regulating
the mode or proceedings in order to carry into effect the law as it has been enacted, and it
cannot be extended to amend or expand the statutory requirements or to embrace matters not
covered by the statute. Administrative regulations must always be in harmony with the
provisions of the law because any resulting discrepancy between the two will always be
resolved in favor of the basic law. 75 (Emphases supplied)

We are not persuaded that RR 10-2008 merely clarifies the law. The CIR' s clarification is not
warranted when the language of the law is plain and clear. 76

The deliberations of the Senate reflect its understanding of the outworking of this MWE
exemption in relation to the treatment of benefits, both those for the ₱30,000 threshold and
the de minimis benefits:

Senator Defensor Santiago. Thank you. Next question: How about employees who are only
receiving a minimum wage as base pay, but are earning significant amounts of income from
sales, commissions which may be even higher than their base pay? Is their entire income from
commissions also tax-free? Because strictly speaking, they are minimum wage earners. For
purposes of ascertaining entitlement to tax exemption, is the basis only the base pay or should it
be the aggregate compensation that is being received, that is, inclusive of commissions, for
example?

Senator Escudero. Mr. President, what is included would be only the base pay and, if any, the
hazard pay, holiday pay, overtime pay and night shift differential received by a minimum wage
earner. As far as commissions are concerned, only to the extent of ₱30,000 would be
exempted. Anything in excess of ₱30,000 would already be taxable if it is being received
by way of commissions. Add to that de minimis benefits being received by an employee, such
as rice subsidy or clothing allowance or transportation allowance would also be exempted; but
they are exempted already under the existing law.
Senator Defensor Santiago. I would like to thank the sponsor. That makes it
clear. 77 (Emphases supplied)

Given the foregoing, the treatment of bonuses and other benefits that an employee receives
from the employer in excess of the ₱30,000 ceiling cannot but be the same as the prevailing
treatment prior to R.A. 9504 - anything in excess of ₱30,000 is taxable; no more, no less.

The treatment of this excess cannot operate to disenfranchise the MWE from enjoying the
exemption explicitly granted by R.A. 9504.

The government's argument that the

RR avoids a tax distortion has no
merit.

The government further contends that the "clarification" avoids a situation akin to wage
distortion and discourages tax evasion. They claim that MWE must be treated equally as other
individual compensation income earners "when their compensation does not warrant exemption
under R.A. No. 9504. Otherwise, there would be gross inequity between and among individual
income taxpayers."78 For illustrative purposes, respondents present three scenarios:

37.1. In the first scenario, a minimum wage earner in the National Ca[ital Region receiving
₱382.00 per day has an annual salary of ₱119,566.00, while a non-minimum wage earner with
a basic pay of ₱385.00 per day has an annual salary of ₱120,505.00. The difference in their
annual salaries amounts to only ₱939.00, but the non-minimum wage earner is liable for a tax of
₱8,601.00, while the minimum wage earner is tax-exempt?

37.2. In the second scenario, the minimum wage earner's "other benefits" exceed the threshold
of ₱30,000.00 by ₱20,000.00. The non-minimum wage earner is liable for ₱8,601.00, while the
minimum wage earner is still tax-exempt.

37.3. In the third scenario, both workers earn "other benefits" at ₱50,000.00 more than the
₱30,000 threshold. The non-minimum wage earner is liable for the tax of ₱l8,601.00, while the
minimum wage earner is still tax-exempt.79 (Underscoring in the original)

Again, respondents are venturing into policy-making, a function that properly belongs to
Congress. In British American Tobacco v. Camacho, we explained:80

We do not sit in judgment as a supra-legislature to decide, after a law is passed by Congress,

which state interest is superior over another, or which method is better suited to achieve one,
some or all of the state's interests, or what these interests should be in the first place. This
policy-determining power, by constitutional fiat, belongs to Congress as it is its function to
determine and balance these interests or choose which ones to pursue. Time and again we
have ruled that the judiciary does not settle policy issues. The Court can only declare what
the law is and not what the law should be. Under our system of government, policy issues are
within the domain of the political branches of government and of the people themselves as the
repository of all state power. Thus, the legislative classification under the classification freeze
provision, after having been shown to be rationally related to achieve certain legitimate state
interests and done in good faith, must, perforce, end our inquiry.

Concededly, the finding that the assailed law seems to derogate, to a limited extent, one of its
avowed objectives (i.e. promoting fair competition among the players in the industry) would
suggest that, by Congress's own standards, the current excise tax system on sin products is
imperfect. But, certainly, we cannot declare a statute unconstitutional merely because it can be
improved or that it does not tend to achieve all of its stated objectives. This is especially true for
tax legislation which simultaneously addresses and impacts multiple state interests. Absent a
clear showing of breach of constitutional limitations, Congress, owing to its vast experience and
expertise in the field of taxation, must be given sufficient leeway to formulate and experiment
with different tax systems to address the complex issues and problems related to tax
administration. Whatever imperfections that may occur, the same should be addressed to
the democratic process to refine and evolve a taxation system which ideally will achieve
most, if not all, of the state's objectives.
In fine, petitioner may have valid reasons to disagree with the policy decision of
Congress and the method by which the latter sought to achieve the same. But its remedy
is with Congress and not this Court. (Emphases supplied and citations deleted)

Respondents cannot interfere with the wisdom of R.A. 9504. They must respect and implement
it as enacted.

Besides, the supposed undesirable "income distortion" has been addressed in the Senate
deliberations. The following exchange between Senators Santiago and Escudero reveals the
view that the distortion impacts only a few - taxpayers who are single and have no dependents:

Senator Santiago.... It seems to me awkward that a person is earning just Pl above the
minimum wage is already taxable to the full extent simply because he is earning ₱l more each
day, or o more than P30 a month, or ₱350 per annum. Thus, a single individual earning ₱362
daily in Metro Manila pays no tax but the same individual if he earns ₱363 a day will be subject
to tax, under the proposed amended provisions, in the amount of ₱4,875 - I no longer took into
account the deductions of SSS, e cetera- although that worker is just ₱360 higher than the
minimum wage.

xxxx

I repeat, I am raising respectfully the point that a person who is earning just Pl above the
minimum wage is already taxable to the full extent just for a mere Pl. May I please have the
Sponsor's comment. Senator Escudero...I fully subscribe and accept the analysis and
computation of the distinguished Senator, Mr. President, because this was the very concern of
this representation when we were discussing the bill. It will create wage distortions up to the
extent wherein a person is paying or rather receiving a salary which is only higher by ₱6,000
approximately from that of a minimum wage earner. So anywhere between P1 to approximately
₱6,000 higher, there will be a wage distortion, although distortions disappears as the salary
goes up.

However, Mr. President, as computed by the distinguished Senator, the distortion is only
made apparent if the taxpayer is single or is not married and has no dependents.
Because at two dependents, the distortion would already disappear; at three dependents,
it would not make a difference anymore because the exemption would already cover
approximately the wage distortion that would be created as far as individual or single
taxpayers are concerned.81(Emphases in the original)

Indeed, there is a distortion, one that RR 10-2008 actually engenders. While respondents insist
that MWEs who are earning purely compensation income will lose their MWE exemption the
moment they receive benefits in excess of ₱30,000, RR 10-2008 does not withdraw the MWE
exemption from those who are earning other income outside of their employer-employee
relationship. Consider the following provisions of RR 10-2008:

Section 2.78.l (B):

(B) Exemptions from Withholding Tax on Compensation. -

The following income payments are exempted from the requirements of withholding tax on
compensation:

xxxx

(13) Compensation income of MWEs who work in the private sector and being paid the
Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity Board
(RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the place where
he/she is assigned.

xxxx
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided, however,
that an employee who receives/earns additional compensation such as commissions, honoraria,
fringe benefits, benefits in excess of the allowable statutory amount of ₱30,000.00, taxable
allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard
pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore,
his/her entire earnings are not exempt from income tax, and consequently, from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation income
are not exempted from income tax on their entire income earned during the taxable year. This
rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift differential pay
and hazard pay shall still be exempt from withholding tax.

xxxx

(14) Compensation income of employees in the public sector with compensation income of
not more than the SMW in the nonagricultural sector, as fixed by RTWPB/NWPC, applicable to
the place where he/she is assigned.

xxxx

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE in the public sector shall likewise be covered by the above exemption.
Provided, however, that a public sector employee who receives additional compensation such
as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount
of ₱30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay,
overtime pay, night shift differential pay and hazard pay shall not enjoy the privilege of being a
MWE and, therefore, his/her entire earnings are not exempt from income tax and, consequently,
from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation income
are not exempted from income tax on their entire income earned during the taxable year. This
rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift differential pay
and hazard pay shall still be exempt from withholding tax.

These provisions of RR 10-2008 reveal a bias against those who are purely compensation
earners. In their consolidated comment, respondents reason:

Verily, the interpretation as to who is a minimum wage earner as petitioners advance will
open the opportunity for tax evasion by the mere expedient of pegging the salary or wage of
a worker at the minimum and reflecting a worker's other incomes as some other benefits. This
situation will not only encourage tax evasion, it will likewise discourage able employers
from paying salaries or wages higher than the statutory minimum. This should never be
countenanced. 82

Again, respondents are delving into policy-making they presume bad faith on the part of the
employers, and then shift the burden of this presumption and lay it on the backs of the lowest
paid workers. This presumption of bad faith does not even reflect pragmatic reality. It must be
remembered that a worker's holiday, overtime and night differential pays are all based on the
worker's regular wage. Thus, there will always be pressure from the workers to increase, not
decrease, their basic pay.

What is not acceptable is the blatant inequity between the treatment that RR 10-2008 gives to
those who earn purely compensation income and that given to those who have other sources of
income. Respondents want to tax the MWEs who serve their employer well and thus receive
higher bonuses or performance incentives; but exempts the MWEs who serve, in addition to
their employer, their other business or professional interests.

We cannot sustain respondent’s position.

In sum, the proper interpretation of R.A. 9504 is that it imposes taxes only on the taxable
income received in excess of the minimum wage, but the MWEs will not lose their exemption as
such. Workers who receive the statutory minimum wage their basic pay remain MWEs. The
receipt of any other income during the year does not disqualify them as MWEs. They remain
MWEs, entitled to exemption as such, but the taxable income they receive other than as MWEs
may be subjected to appropriate taxes.

R.A. 9504 must be liberally construed.

We are mindful of the strict construction rule when it comes to the interpretation of tax
exemption laws. 83 The canon, however, is tempered by several exceptions, one of which is
when the taxpayer falls within the purview of the exemption by clear legislative intent. In this
situation, the rule of liberal interpretation applies in favor of the grantee and against the
government. 84

In this case, there is a clear legislative intent to exempt the minimum wage received by an MWE
who earns additional income on top of the minimum wage. As previously discussed, this intent
can be seen from both the law and the deliberations.

Accordingly, we see no reason why we should not liberally interpret R.A. 9504 in favor of the
taxpayers.

R.A. 9504 is a grant of tax relief long overdue.

We do not lose sight of the fact that R.A. 9504 is a tax relief that is long overdue.

Table 1 below shows the tax burden of an MWE over the years. We use as example one who is
a married individual without dependents and is working in the National Capital Region (NCR).
For illustration purposes, R.A. 9504 is applied as if the worker being paid the statutory minimum
wage is not tax exempt:

Table 1 -Tax Burden of MWE over the years

Law Effective NCR Minimum Daily Taxable Tax Due Tax

Wage85 Income86 Burden87
(Annual)

RA 1992 WO 3 (1993 ₱135.00 ₱24,255 ₱1,343.05 3.2%

716788 Dec)

RA WO 5 (1997 ₱185.00 ₱39,905 ₱3,064.55 5.3%

749689 May)

RA 1998 WO 6 (1998 ₱198.00 ₱29,974 ₱2,497.40 40.%

842490 Feb)

(1997 WO 13 (2007 ₱362.00 ₱81,306 ₱10,761.20 9.5%

NIRC) Aug)

WO 14 (2008 ₱382.00 ₱87,566 ₱12,013.20 10.0%

June)

RA 2008 WO 14 (2008 ₱382.00 ₱69,566 ₱8,434.90 7.1%

950491 Aug)

WO 20 (2016 ₱491.00 ₱103,683 ₱15,236.60 9.9%

June)

As shown on Table 1, we note that in 1992, the tax burden upon an MWE was just about 3.2%,
when Congress passed R.A. 7167, which increased the personal exemptions for a married
individual without dependents from ₱12,000 to ₱18,000; and R.A. 7496, which revised the table
of graduated tax rates (tax table).

Over the years, as the minimum wage increased, the tax burden of the MWE likewise
increased. In 1997, the MWE's tax burden was about 5.3%. When R.A. 8424 became effective
in 1998, some relief in the MWE's tax burden was seen as it was reduced to 4.0%. This was
mostly due to the increase in personal exemptions, which were increased from ₱18,000 to
₱32,000 for a married individual without dependents. It may be noted that while the tax table
was revised, a closer scrutiny of Table 3 below would show that the rates actually increased for
those who were earning less.

As the minimum wage continued to increase, the MWE's tax burden likewise did - by August
2007, it was 9.5%. This means that in 2007, of the ₱362 minimum wage, the MWE's take-home
pay was only ₱327.62, after a tax of ₱34.38.

This scenario does not augur well for the wage earners. Over the years, even with the
occasional increase in the basic personal and additional exemptions, the contribution the
government exacts from its MWEs continues to increase as a portion of their income. This is a
serious social issue, which R.A. 9504 partly addresses. With the ₱20 increase in minimum wage
from ₱362 to ₱382 in 2008, the tax due thereon would be about ₱30. As seen in their
deliberations, the lawmakers wanted all of this amount to become additional take-home pay for
the MWEs in 2008.92

The foregoing demonstrates the effect of inflation. When tax tables do not get adjusted, inflation
has a profound impact in terms of tax burden. "Bracket creep," "the process by which inflation
pushes individuals into higher tax brackets,"93 occurs, and its deleterious results may be
explained as follows:

[A]n individual whose dollar income increases from one year to the next might be obliged to pay
tax at a higher marginal rate (say 25% instead of 15%) on the increase, this being a natural
consequence of rate progression. If, however, due to inflation the benefit of the increase is
wiped out by a corresponding increase in the cost of living, the effect would be a heavier tax
burden with no real improvement in the taxpayer's economic position. Wage and salary-
earners are especially vulnerable. Even if a worker gets a raise in wages this year, the
raise will be illusory if the prices of consumer goods rise in the same proportion. If her
marginal tax rate also increased, the result would actually be a decrease in the taxpayer's
real disposable income.94

Table 2 shows how MWEs get pushed to higher tax brackets with higher tax rates due only to
the periodic increases in the minimum wage. This unfortunate development illustrates how
"bracket creep" comes about and how inflation alone increases their tax burden:

Table 2

Highest
Applicable
NCR Minimum Daily Tax Due Tax
Law Effective Tax Rate
Wage95 (Annual) Burden96
(Bracket
Creep)

RA WO 3 11%
1992 ₱135.00 ₱1,343.05 3.2%
716797 (1993 Dec)

WO 5 11%
RA
(1997 ₱185.00 ₱3,064.55 5.3%
749698
May)

WO 6 10%
1998 ₱198.00 ₱2,497.40 4.0%
(1998 Feb)
 WO 13 20%
RA ₱362.00 ₱10,761.20 9.5%
842499 (2007 Aug)

WO 14 20%
(1997 (2008 ₱382.00 ₱12,013.20 10.0%
NIRC) June)

RA 2008 WO 14 15%
₱382.00 ₱8,434.90 7.1%
9504100 (2008 Aug)

WO 20 20%
(2016 ₱491.00 ₱15,236.60 9.9%
June)

The overall effect is the diminution, if not elimination, of the progressivity of the rate structure
under the present Tax Code. We emphasize that the graduated tax rate schedule for individual
taxpayers, which takes into account the ability to pay, is intended to breathe life into the
constitutional requirement of equity. 101

R.A. 9504 provides relief by declaring that an MWE, one who is paid the statutory minimum
wage (SMW), is exempt from tax on that income, as well as on the associated statutory
payments for hazardous, holiday, overtime and night work.

R.R. 10-2008, however, unjustly removes this tax relief. While R.A. 9504 grants MWEs zero tax
rights from the beginning or for the whole year 2008, RR 10-2008 declares that certain workers -
even if they are being paid the SMW, "shall not enjoy the privilege."

Following RR10-2008's "disqualification" injunction, the MWE will continue to be pushed

towards the higher tax brackets and higher rates. As Table 2 shows, as of June 2016, an MWE
would already belong to the 4th highest tax bracket of 20% (see also Table 3), resulting in a tax
burden of 9.9%. This means that for every ₱100 the MWE earns, the government takes back
₱9.90.

Further, a comparative view of the tax tables over the years (Table 3) shows that while the
highest tax rate was reduced from as high as 70% under the 1977 NTRC, to 35% in 1992, and
32% presently, the lower income group actually gets charged higher taxes. Before R.A. 8424,
one who had taxable income of less than ₱2,500 did not have to pay any income tax; under
R.A. 8424, he paid 5% thereof. The MWEs now pay 20% or even more, depending on the other
benefits they receive including overtime, holiday, night shift, and hazard pays.

Table 3 – Tax Tables: Comparison of Tax Brackets and Rates

Taxable Income Bracket Rates under R. Rates under R. Rates under

A. 7496 (1992) A. 8424 (1998) R. A. 9504
(2008)

Not Over ₱2,500 0%

Over ₱2,500 but not over

1%
₱5,000 5% 5%

Over ₱5,000 but not over

3%
₱10,000

Over ₱10,000 but not over

7%
₱20,000
10% 10%
Over ₱20,000 but not over
11%
₱30,000
 Over ₱30,000 but not over
₱40,000

Over ₱40,000 but not over

15% 15% 15%
₱60,000

Over ₱60,000 but not over

₱70,000
19%
Over ₱70,000 but not over
₱100,000
20% 20%
Over ₱100,000 but not over
₱140,000
24%
Over ₱140,000 but not over
25% 25%
₱250,000

Over ₱250,000 but not over

29% 30% 30%
₱500,000

Over ₱500,00 35% 34% 32%

The relief afforded by R.A.9504 is thus long overdue. The law must be now given full effect for
the entire taxable year 2008, and without the qualification introduced by RR 10-2008. The latter
cannot disqualify MWEs from exemption from taxes on SMW and on their on his SMW, holiday,
overtime, night shift differential, and hazard pay.

CONCLUSION

The foregoing considered, we find that respondents committed grave abuse of discretion in
promulgating Sections 1 and 3 of RR 10-2008, insofar as they provide for (a) the prorated
application of the personal and additional exemptions for taxable year 2008 and for the period of
applicability of the MWE exemption for taxable year 2008 to begin only on 6 July 2008; and (b)
the disqualification of MWEs who earn purely compensation income, whether in the private or
public sector, from the privilege of availing themselves of the MWE exemption in case they
receive compensation-related benefits exceeding the statutory ceiling of ₱30,000.

As an aside, we stress that the progressivity of the rate structure under the present Tax Code
has lost its strength. In the main, it has not been updated since its revision in 1997, or for a
period of almost 20 years. The phenomenon of "bracket creep" could be prevented through the
inclusion of an indexation provision, in which the graduated tax rates are adjusted periodically
without need of amending the tax law. The 1997 Tax Code, however, has no such indexation
provision. It should be emphasized that indexation to inflation is now a standard feature of a
modern tax code. 102

We note, however, that R.A. 8424 imposes upon respondent Secretary of Finance and
Commissioner of Internal Revenue the positive duty to periodically review the other benefits, in
consideration of the effect of inflation thereon, as provided under Section 32(B)(7)(e)
entitled" 13th Month Pay and Other Benefits":

(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That
the ceiling of Thirty thousand pesos (₱30,000) may be increased through rules and regulations
issued by the Secretary of Finance, upon recommendation of the Commissioner, after
considering among others, the effect on the same of the inflation rate at the end of the taxable
year.

This same positive duty, which is also imposed upon the same officials regarding the de
minimis benefits provided under Section 33(C)(4), is a duty that has been exercised several
times. The provision reads:
(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this
Section:

(l) x x x

xxxx

(4) De minimis benefits as defined in the rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.

WHEREFORE, the Court resolves to

(a) GRANT the Petitions for Certiorari, Prohibition, and Mandamus; and

(b) DECLARE NULL and VOID the following provisions of Revenue Regulations No. 10-2008:

(i) Sections 1 and 3, insofar as they disqualify MWEs who earn purely compensation income
from the privilege of the MWE exemption in case they receive bonuses and other
compensation-related benefits exceeding the statutory ceiling of ₱30,000;

(ii) Section 3 insofar as it provides for the prorated application of the personal and additional
exemptions under R.A. 9504 for taxable year 2008, and for the period of applicability of the
MWE exemption to begin only on 6 July 2008.

(c) DIRECT respondents Secretary of Finance and Commissioner of Internal Revenue to grant
a refund, or allow the application of the refund by way of withholding tax adjustments, or allow a
claim for tax credits by (i) all individual taxpayers whose incomes for taxable year 2008 were the
subject of the prorated increase in personal and additional tax exemption; and (ii) all MWEs
whose minimum wage incomes were subjected to tax for their receipt of the 13thmonth pay and
other bonuses and benefits exceeding the threshold amount under Section 32(B)(7)(e) of the
1997 Tax Code.

SO ORDERED.