The Supreme Court affirmed that Local Government Units (LGUs) are entitled to a just share of all national taxes, not just internal revenue taxes, as mandated by the Constitution. This landmark decision enhances LGUs’ financial autonomy, ensuring they receive a fairer portion of the nation’s wealth to fund local projects and services. This ruling means more resources for local development, impacting infrastructure, healthcare, and education at the grassroots level.

From Internal Revenue to National Wealth: How Mandanas-Garcia Expanded Local Power

The cases of Congressman Hermilando I. Mandanas, et al. v. Executive Secretary Paquito Ochoa, et al. and Honorable Enrique T. Garcia, Jr. v. Honorable Paquito Ochoa, et al., consolidated as G.R. Nos. 199802 and 208488, respectively, revolve around the interpretation of Section 6, Article X of the 1987 Constitution, which guarantees LGUs a “just share” in national taxes. The dispute centered on whether this “just share” should be computed based only on national internal revenue taxes (NIRTs), as stipulated in Section 284 of the Local Government Code (LGC), or on all national taxes. The Supreme Court, in its initial July 3, 2018 decision, sided with the petitioners, ruling that limiting the base to NIRTs was unconstitutional, thereby triggering a motion for reconsideration from the respondents. The key legal question was whether Congress could restrict the constitutional mandate of providing LGUs with a “just share” of national taxes by defining that share solely in terms of internal revenue.

The Office of the Solicitor General (OSG), representing the respondents, argued that the phrase “the national taxes” in the Constitution granted Congress the discretion to determine which specific national taxes would serve as the base for computing the LGUs’ just share. This interpretation, according to the OSG, supported the validity of Section 284 of the LGC. The OSG also cautioned against expanding the base, claiming it would encroach on Congress’s exclusive power to allocate national taxes and deprive the National Government of essential funds. According to the OSG, the affected provisions of the Local Government Code (LGC) are not contrary to Section 6, Article X of the Constitution. The OSG premised its contention on the fact that the article “the” immediately precedes the phrase “national taxes” in Section 6, thereby manifesting the intent to give Congress the discretion to determine which national taxes the *just share* will be based on considering that the qualifier “the” signals that the succeeding phrase “national taxes” is a specific class of taxes. On the other hand, the petitioners contended that the constitutional provision unambiguously mandated that the base should include all national taxes, thereby rendering Section 284 of the LGC unconstitutional to the extent that it limited the base to NIRTs.

The Supreme Court firmly rejected the OSG’s arguments, reaffirming its original decision. According to the Court, to limit the base to national internal revenue taxes is a clear departure from the explicit mandate of Section 6, Article X of the Constitution. The Court emphasized that the Constitution itself defines the base as “national taxes,” leaving no room for Congress to selectively narrow that definition. The Court cited the principle of verba legis non est recedendum, which means that from the words of a statute, there should be no departure. Moreover, the Supreme Court explained that while Congress has the discretion to determine the *just share*, it cannot alter the constitutionally defined base for that share. The Supreme Court emphasized, “The intent of the people in respect of Section 6 is really that the base for reckoning the just share of the LGUs should include all national taxes. To read Section 6 differently as requiring that the just share of LGUs in the national taxes shall be determined by law is tantamount to the unauthorized revision of the 1987 Constitution.“

Building on this principle, the Court clarified which specific taxes should be included in the base. These include, but are not limited to:

• The national internal revenue taxes enumerated in Section 21 of the National Internal Revenue Code (NIRC), as amended.
• Tariff and customs duties collected by the Bureau of Customs.
• Portions of value-added taxes and other national taxes collected in the Autonomous Region in Muslim Mindanao (ARMM).
• A percentage of national taxes collected from the exploitation and development of national wealth.
• Excise taxes collected from locally manufactured tobacco products.
• Certain percentages of national taxes collected under specific sections of the NIRC.
• Portions of franchise taxes given to the National Government.

The Court also addressed the issue of whether certain taxes, such as those earmarked for special purposes, should be included. It held that taxes levied for a special purpose, and therefore treated as special funds, could be excluded, aligning with Section 29 (3), Article VI of the 1987 Constitution. Furthermore, the Court maintained the validity of apportioning franchise taxes collected from the Manila Jockey Club and Philippine Racing Club, Inc., and excluded proceeds from the sale of former military bases converted to alienable lands.

This approach contrasts with the argument that including these taxes would deprive the National Government of much-needed funds. The Supreme Court acknowledged the potential financial implications but asserted that its role was to interpret and apply the Constitution, not to make policy decisions about resource allocation. As such, the Court rejected the idea that it should defer to Congress on matters of constitutional interpretation, stating that between two possible interpretations, one free from constitutional infirmity is to be preferred. In addition to the Court’s assertion, it held that Congress was granted the power to determine, by law, the just share. The Constitution did not empower Congress to determine the just share and the base amount other than national taxes.

Finally, the Court addressed the issue of the decision’s retroactivity. While acknowledging the potential for LGUs to claim arrears, the Court invoked the doctrine of operative fact. The doctrine of operative fact recognizes the existence of the law or executive act prior to the determination of its unconstitutionality as an operative fact that produced consequences that cannot always be erased, ignored or disregarded. The Court, therefore, ruled that its decision would have prospective application, with the adjusted amounts to be granted to LGUs starting with the 2022 budget cycle. This means that LGUs would only begin receiving the adjusted Internal Revenue Allotment (IRA) in 2022, based on collections from the third preceding fiscal year.

In conclusion, the Supreme Court’s resolution denying the motions for reconsideration in the Mandanas-Garcia cases solidifies the principle that LGUs are entitled to a just share of all national taxes. This ruling enhances local autonomy, providing LGUs with greater financial resources to address local needs and promote development. This decision is a significant step toward fiscal decentralization, ensuring that local communities benefit more directly from the nation’s wealth. The Court has expressly mandated the prospective application of its ruling.

FAQs

What was the key issue in this case?	The central issue was whether the “just share” of LGUs in national taxes, as mandated by the Constitution, should be computed based only on national internal revenue taxes or on all national taxes.
What did the Supreme Court decide?	The Supreme Court ruled that the “just share” of LGUs should be based on all national taxes, not just internal revenue taxes, thereby expanding the base for computation.
Why did the Court make this decision?	The Court held that limiting the base to internal revenue taxes was unconstitutional, as it contradicted the explicit mandate of Section 6, Article X of the Constitution.
What is the practical impact of this ruling?	LGUs will receive a larger share of national taxes, providing them with more resources for local projects and services, thereby enhancing their financial autonomy.
Which taxes are included in the computation of the LGUs’ share?	The computation includes national internal revenue taxes, tariff and customs duties, portions of taxes collected in the ARMM, taxes from the exploitation of national wealth, excise taxes on tobacco products, and certain franchise taxes.
Are there any taxes excluded from this computation?	Yes, taxes levied for a special purpose and treated as special funds, as well as proceeds from the sale of former military bases, are excluded.
When does this ruling take effect?	The ruling has prospective application, with the adjusted amounts to be granted to LGUs starting with the 2022 budget cycle.
What is the doctrine of operative fact?	The doctrine of operative fact recognizes that a law or executive act, even if later declared unconstitutional, had real effects before the declaration, and those effects must be taken into account.
Did the Supreme Court encroach on the powers of Congress?	No, the Court clarified that while Congress has the discretion to determine the “just share,” it cannot alter the constitutionally defined base for that share.

This Supreme Court decision marks a pivotal moment for local governance in the Philippines, promising to empower LGUs with greater financial resources and autonomy. By clarifying the constitutional mandate, the Court has paved the way for a more equitable distribution of national wealth, fostering sustainable development and improved services at the local level. This ruling signifies a renewed commitment to fiscal decentralization and the strengthening of local communities across the nation.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Congressman Hermilando I. Mandanas, et al. v. Executive Secretary Paquito Ochoa, et al., G.R Nos. 199802, April 10, 2019