Title
Diaz vs. Secretary of Fice
Case
G.R. No. 193007
Decision Date
Jul 19, 2011
Petitioners challenged VAT imposition on toll fees, arguing it was a "user's tax" and unconstitutional. Court ruled tollway operators are franchise grantees; VAT is valid under NIRC, not impairing contracts. Petition denied.

Case Summary (G.R. No. 193007)

Petitioners’ Claims and Relief Sought

Petitioners sought declaratory relief and injunctive relief to prevent the BIR from imposing value‑added tax (VAT) on toll fees collected by tollway operators effective August 16, 2010. Their core contentions were: (1) Congress did not intend to subject toll fees to VAT under the NIRC; (2) toll fees are “user’s tax” rather than a sale of services; (3) imposing VAT on toll fees would amount to a tax on public service and impair contractual rights (violating the constitutional non‑impairment clause) because VAT was not factored into toll rate formulas; and (4) administrative requirements for input VAT substantiation and the BIR’s proposed mechanics (rounding and escrow) render VAT implementation unworkable or unlawful.

Government’s Position

The government, through the Office of the Solicitor General, asserted that Section 108 of the NIRC imposes VAT on “all kinds of services” and specifically includes services of franchise grantees, which encompass tollway operators. The government relied on prior BIR rulings and circulars (including VAT Ruling 045‑03 and RMCs 52‑2005, 72‑2009, 30‑2010) to show longstanding administrative interpretation. The government also contended that petitioners lack the requisite personal interest in existing Toll Operating Agreements (TOAs) to invoke the non‑impairment clause, that the taxing power is not limited by contractual provisions, and that non‑inclusion of VAT in the parametric formula does not exempt operators from VAT liability. The government further argued that any burden on motorists would be minimal.

Key Dates and Procedural Actions

  • BIR planned VAT imposition on toll fees effective August 16, 2010.
  • August 13, 2010: Supreme Court issued a temporary restraining order (TRO) enjoining VAT implementation.
  • August 23, 2010: Government filed its comment through the OSG.
  • August 24, 2010: Court treated the petition as an action for prohibition and denied the government’s motion for reconsideration of that characterization. The TRO was ultimately set aside in the final decision.

Governing Law and Constitutional Framework

Applicable constitution: 1987 Constitution (decision date post‑1990). Relevant statutory provisions: Section 108 (definition and scope of “sale or exchange of services” for VAT purposes), Section 105 (persons liable), Section 111 (transitional input tax credits), Section 119 (tax on franchises), R.A. 7716 (Expanded VAT law), R.A. 8424 (NIRC amendments), and P.D. 1112 (establishing tollway legal regime). Administrative issuances: BIR rulings and Revenue Memorandum Circulars including BIR RMC 63‑2010.

Issues Presented

Procedural issues:

  1. Whether the Court properly treated the petition for declaratory relief as one for prohibition.
  2. Whether petitioners Diaz and Timbol had standing to bring the action.
    Substantive issues:
  3. Whether the government unlawfully expanded VAT coverage by including tollway operators within “franchise grantees” and “sale of services” under Section 108.
  4. Whether (a) VAT on toll fees would be a tax on a tax (i.e., a user’s tax taxed again), (b) imposition would impair TOA‑based rights to a reasonable return, and (c) VAT is administratively infeasible or unenforceable.

Court’s Procedural Analysis and Ruling on Characterization

The Court concluded that treating the petition as one for prohibition was appropriate despite the petitioners’ original designation as seeking declaratory relief. The Court relied on precedents allowing transformation of actions where issues raised are of broad public importance and where executive acts may amount to usurpation of legislative authority. Given the potentially far‑reaching fiscal and administrative consequences of imposing VAT on toll fees (affecting hundreds of thousands of motorists and government revenue operations), and to avoid practical difficulties if a retrospective nullification were later required, the Court exercised its discretion to waive strict compliance with technical Rule 65 requisites and to adjudicate the matter under prohibition.

Court’s Ruling on Standing

The Court found that procedural standing requirements are flexible in matters of significant public interest and, while noting limitations, did not dismiss the petition on strict standing grounds at the outset. However, the Court addressed specific standing contentions substantively where relevant (for example, Timbol’s capacity to invoke contractual non‑impairment).

Statutory Interpretation: Scope of “Sale of Services” and “Franchise Grantees”

Analyzing Section 108, the Court emphasized that VAT is levied on “all kinds of services” rendered in the Philippines for a fee and that the enumerated examples are illustrative, not exhaustive. The statutory phrase “all kinds” was read expansively to include activities that permit others’ use of facilities for a fee. The Court concluded that tollway operators render services for a fee—namely construction, maintenance and operation of expressways under P.D. 1112 and related TOAs—and that these activities fall squarely within the broad statutory definition. The Court further held that tollway operators are “franchise grantees” within the meaning of Section 108: the term “franchise” encompasses governmental grants of special rights by Congress or by delegated administrative authority (e.g., TRB) and is not limited to congressional or legislative franchises. Tollway operations are of public consequence and require a special grant; the existence of a Toll Operation Certificate and delegated franchise‑granting powers support their classification as franchise grantees. Section 119’s exceptions did not cover tollway operators, and there was no statutory provision expressly exempting tollway services from VAT.

Tax Characterization: Toll Fees Are Not Government Taxes

The Court rejected the argument that toll fees constitute a “user’s tax” in the governmental sense and therefore could not be subject to VAT. Drawing from the MIAA discussion cited by petitioners, the Court distinguished fees collected by private tollway concessionaires (reimbursement and compensation for private investment under build‑operate‑transfer schemes) from sovereign taxes imposed by the government for public revenue. Toll fees collected by private operators largely accrue as private earnings (subject only to contractual sharing with government where specified) and are not levied by the State exercising taxation power. Consequently, toll fees are not government taxes merely by virtue of their public use context.

VAT as an Indirect Tax and the “Tax on Tax” Argument

The Court addressed the concern that imposing VAT on toll fees would amount to a tax on tax. It explained that VAT is an indirect tax where legal incidence (liability) and economic burden may differ: the taxpayer (the seller/rendering person) is legally liable but may shift the economic burden to the buyer. Under Section 105, the tollway operator—being the seller of services—is the person liable for VAT; any pass‑through to motorists is a shifting of economic burden, not a second imposition of a sovereign tax on an already governmental user’s tax. Thus, VAT on tollway operations is assessed on the operator’s gross receipts and is not, in legal effect, a tax on top of a government levy.

Contractual Impairment and Speculative Injury

Regarding the non‑impairment clause, the Court held that petitioner Timbol lacked legal personality to assert contractual impairment on behalf of private investors and that her assertions of impairment were speculative. The Court declined to enjoin the State’s exercise of its taxing power on uncertain or prophetic grounds and emphasized that allegations of diminution in the private investors’ rate of return were conjectural and thus insufficient to restrain sovereign taxation in advance.

Administrative Feasibility and Implementation Concerns

Petitioners argued that VAT implementation would be impractical due to input VAT substantiation requirements (demanding user details on receipts), logistical issues in exact fare collection, and the legality of BIR’s proposed rounding/escrow mechanism and BIR RMC 63‑2010 directing zero accumulated input VAT balance as of August 16, 2010. The Court recognized administrative feasibility as a recognized canon of sound taxation but reiterated that administrative difficulty alone does not inv

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