ASG Law

Tag: National Taxes

  • Redefining Local Autonomy: LGUs’ Fair Share of National Taxes

    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

  • Local Autonomy vs. Congressional Power: Defining the ‘Just Share’ in National Taxes

    In a landmark decision, the Supreme Court of the Philippines declared that local government units (LGUs) are entitled to a ‘just share’ of all national taxes, not just internal revenue taxes, effectively increasing their financial autonomy. This ruling mandates that the base for calculating the LGUs’ share must include collections from all national taxes, such as customs duties, thereby empowering them to better fund local projects and services. This decision aims to ensure a more equitable distribution of resources and enhance local governance, allowing LGUs to become more self-reliant and responsive to the needs of their communities.

    Balancing the Scales: How Local Governments and National Interests Collide Over Tax Revenue

    The case of Congressman Hermilando I. Mandanas, et al. v. Executive Secretary Paquito N. Ochoa, Jr., et al. and Honorable Enrique T. Garcia, Jr. v. Honorable Paquito N. Ochoa, Jr., et al., consolidated under G.R. Nos. 199802 and 208488, presents a pivotal question: Can Congress limit the sources of revenue used to calculate the ‘just share’ of local government units in national taxes, as mandated by the Constitution? The petitioners argued that Section 284 of the Local Government Code (LGC), which restricted this share to national internal revenue taxes, was unconstitutional, thereby depriving LGUs of a significant portion of their rightful financial resources. This case illuminates the ongoing tension between the national government’s fiscal control and the constitutional commitment to local autonomy.

    The central issue revolved around the interpretation of Section 6, Article X of the 1987 Constitution, which stipulates that LGUs shall have a ‘just share, as determined by law, in the national taxes which shall be automatically released to them.’ The debate centered on whether the phrase ‘as determined by law’ granted Congress the power to define ‘national taxes’ narrowly, or simply to set the percentage of the ‘just share.’ The petitioners contended that limiting the base to ‘national internal revenue taxes’ violated the spirit of local autonomy, while the respondents maintained that Congress had broad discretion to determine the scope of the LGUs’ share.

    The Court’s analysis hinged on the principle that while Congress has the power to legislate, it cannot contravene the express mandates of the Constitution. The Court emphasized that the term ‘national taxes’ in Section 6, Article X, is broader than ‘national internal revenue taxes.’ According to the Court, restricting the base to only internal revenue taxes effectively deprived LGUs of their rightful share from other national taxes, such as customs duties, which are also exactions whose proceeds become public funds. This departure from the constitutional text, the Court reasoned, was impermissible.

    To further clarify this point, the Court noted that taxes are classified into national and local taxes. National taxes are those levied by the National Government, while local taxes are those levied by the LGUs. Taxes, the Court explained, are the enforced proportional contributions exacted by the State from persons and properties pursuant to its sovereignty in order to support the Government and to defray all the public needs.

    However, the Court clarified that this interpretation does not grant LGUs an unrestricted entitlement to all national tax revenues. The Court recognized that certain exclusions from the base amount are permissible, particularly those relating to special purpose funds and special allotments for the utilization and development of the national wealth. These exceptions, according to the Court, find support in other constitutional provisions, such as Section 29(3), Article VI, which mandates that money collected for a special purpose be treated as a special fund and used only for that purpose.

    Further, the court explained Section 7, Article X of the 1987 Constitution, which allows affected LGUs to have an equitable share in the proceeds of the utilization and development of the nation’s national wealth “within their respective areas,” to wit:

    Section 7. Local governments shall be entitled to an equitable share in the proceeds of the utilization and development of the national wealth within their respective areas, in the manner provided by law, including sharing the same with the inhabitants by way of direct benefits.

    The implications of this decision are far-reaching. By expanding the base for calculating the LGUs’ ‘just share,’ the Court has potentially unlocked significant additional resources for local development. The decision reinforces the constitutional commitment to local autonomy, empowering LGUs to become more financially independent and responsive to the needs of their constituents. This will lead to more responsive local governance.

    Recognizing the potential disruption to national finances, the Court applied the doctrine of operative fact, which means that the ruling would only be applied prospectively. This decision means that LGUs cannot claim arrears or past due amounts based on the expanded definition of ‘national taxes.’ This limitation mitigated the potential financial strain on the national government while setting the stage for a more equitable distribution of resources in the future.

    Ultimately, the Court’s decision strikes a balance between upholding the constitutional mandate of local autonomy and respecting the fiscal authority of Congress. While it expands the financial resources available to LGUs, it also acknowledges the need for careful management of national funds and adherence to established legal principles. The ruling serves as a reminder of the importance of adhering to the spirit of the Constitution while adapting to the evolving needs of local governance.

    FAQs

    What was the key issue in this case? The key issue was whether Section 284 of the Local Government Code, limiting the IRA base to national internal revenue taxes, was constitutional given the broader mandate of ‘national taxes’ in the Constitution.
    What did the Supreme Court decide? The Supreme Court declared the phrase ‘internal revenue’ in Section 284 of the LGC unconstitutional, mandating that the IRA be based on all national taxes, not just internal revenue taxes.
    What are ‘national taxes’ according to the Supreme Court? According to the Supreme Court national taxes refer to all taxes levied by the National Government. It includes the customs duties aside from what is enumerated in Section 21 of the National Internal Revenue Code.
    Does this ruling mean LGUs will receive more money now? Yes, LGUs will potentially receive more funds in the future. This is because the base for calculating their IRA will now include a broader range of national tax collections.
    Can LGUs claim unpaid IRA from previous years? No, the Supreme Court applied the doctrine of operative fact, meaning the ruling only applies prospectively, and LGUs cannot claim unpaid IRA from past years.
    What is the doctrine of operative fact? The doctrine of operative fact recognizes that a law or executive act, even if later declared unconstitutional, has legal effects before the declaration that cannot be ignored for reasons of fairness and equity.
    What are some examples of taxes that are now included in the IRA base? Examples now included are customs duties and other taxes previously excluded due to the limited definition of internal revenue taxes.
    Does this ruling affect the power of Congress over LGUs? Yes, this ruling affirmed that the power of the national government is not absolute. The power of the legislature is also limited by constitutional provisions.
    Are there any exceptions to which revenue can be excluded in IRA? Yes, Special funds can be deducted from the IRA. Moreover, those that are granted by the Constitution to particular LGUs are also deducted from the computation of IRA to be divided with all LGUs.

    In conclusion, the Supreme Court’s decision represents a significant step toward strengthening local autonomy and ensuring a more equitable distribution of national resources. While the full impact of the ruling remains to be seen, it sets a new precedent for the relationship between the national government and LGUs, emphasizing the importance of adhering to the constitutional principles of decentralization and local empowerment. 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: Mandanas v. Ochoa, G.R. Nos. 199802 & 208488, July 3, 2018

  • Local Autonomy Under Siege: Safeguarding the LGU’s Share in National Taxes

    The Supreme Court declared as unconstitutional the earmarking of five billion pesos from the Internal Revenue Allotment (IRA) for the Local Government Service Equalization Fund (LGSEF) in the General Appropriations Acts (GAAs) of 1999, 2000, and 2001. This ruling affirmed that such earmarking, along with the conditions imposed by the Oversight Committee on Devolution (OCD) for the release of these funds, violated the constitutional principle of local autonomy. It ensures that the LGUs’ share in national taxes is automatically released to them, free from national government control, thus protecting their fiscal independence and ability to address local needs effectively.

    The Province’s Fight: Can the National Government Restrict Local Funds?

    The Province of Batangas, led by its Governor Hermilando I. Mandanas, challenged the constitutionality of certain provisos in the General Appropriations Acts (GAAs) of 1999, 2000, and 2001. These provisos earmarked five billion pesos annually from the Internal Revenue Allotment (IRA) for the Local Government Service Equalization Fund (LGSEF). The province argued that these earmarks, coupled with conditions for release imposed by the Oversight Committee on Devolution (OCD), infringed on the constitutional guarantee of local autonomy.

    The heart of the legal battle lay in the interpretation of Section 6, Article X of the Constitution, which mandates that local government units (LGUs) shall have a “just share” in the national taxes, to be “automatically” released to them. Sections 18 and 286 of the Local Government Code of 1991 reinforce this by stating that the “just share” should be “automatically and directly” released without needing any further action. Batangas contended that subjecting the LGSEF distribution to the Oversight Committee’s regulations contravened this constitutional directive.

    The province further asserted that vesting the Oversight Committee with the power to determine the distribution and release of the LGSEF, a part of the LGUs’ IRA, was a violation of the principle of local autonomy. The petitioner cited a past incident in 2001, where the LGSEF release was delayed because the Oversight Committee did not convene, and no guidelines were issued. Moreover, the potential disapproval of project proposals by the Oversight Committee could result in a reduction of the LGUs’ IRA share, which is a key source of funding for local projects.

    The respondents, through the Office of the Solicitor General, defended the constitutionality of the questioned provisions. They argued that Section 6, Article X of the Constitution, did not specify that the LGUs’ “just share” should be solely determined by the Local Government Code of 1991. They further claimed that Congress has the power to determine what the “just share” of the LGUs in the national taxes should be, and this is within the authority of Congress. Essentially, the respondents stated that Section 285 of the Local Government Code of 1991 was not fixed.

    The Supreme Court addressed several procedural issues before delving into the substantive question. The Court emphasized the requirement for a party to have locus standi, demonstrating a direct and personal interest in the outcome of the controversy. The Court acknowledged that the Province of Batangas possessed the necessary standing to maintain the suit, as it sought to protect the interests of LGUs concerning their share in the national taxes or the IRA.

    The Court underscored that the automatic release of the LGUs’ IRA was intended to guarantee and promote local autonomy. In the case of Pimentel, Jr. v. Aguirre, the Supreme Court declared that Section 4 of Administrative Order No. 372 could not be upheld because a basic feature of local fiscal autonomy is the automatic release of the shares of LGUs in the national internal revenue. In this case, AO 372 ordered the withholding of 10 percent of the LGUs’ IRA pending assessment, which the court struck down as unconstitutional.

    The Supreme Court then declared the questioned provisions in the GAAs and the OCD resolutions as unconstitutional. The Court held that the LGSEF is part of the IRA or “just share” of the LGUs in the national taxes and subjecting its distribution and release to the Oversight Committee’s implementing rules and regulations makes the release not automatic. The Court further held that the use of the word “shall” connotes a mandatory order, with the Supreme Court stating:

    Where the law, the Constitution in this case, is clear and unambiguous, it must be taken to mean exactly what it says, and courts have no choice but to see to it that the mandate is obeyed.

    Additionally, the assailed OCD resolutions and the questioned provisos in the GAAs of 1999, 2000, and 2001 were argued to have improperly amended Section 285 of the Local Government Code of 1991 on the percentage sharing of the IRA among the LGUs. The Court agreed with the argument and stated that the percentage sharing of the IRA, fixed in the Local Government Code of 1991, are matters of general and substantive law. Thus, the Court cannot sanction any amendments through the GAAs.

    The Supreme Court also said that a general appropriations bill is a special type of legislation, whose content is limited to specified sums of money dedicated to a specific purpose or a separate fiscal unit. Any provision therein which is intended to amend another law is considered an “inappropriate provision.” As such, increasing or decreasing the IRA of the LGUs or modifying their percentage sharing therein are matters of general and substantive law.

    FAQs

    What was the key issue in this case? The key issue was whether earmarking a portion of the IRA for the LGSEF and imposing conditions for its release violated the constitutional principle of local autonomy, which guarantees LGUs a “just share” of national taxes to be automatically released.
    What is the Internal Revenue Allotment (IRA)? The IRA is the share of local government units in the national internal revenue taxes, intended to fund local projects and services. It is a crucial source of income for LGUs and is constitutionally mandated to be released automatically.
    What is the Local Government Service Equalization Fund (LGSEF)? The LGSEF was a fund created to address funding shortfalls of functions and services devolved to the LGUs and other funding requirements of the program. It was sourced from the IRA but subjected to specific guidelines and mechanisms for its distribution.
    What did the Supreme Court rule? The Supreme Court ruled that the assailed provisos in the General Appropriations Acts of 1999, 2000 and 2001, and the assailed OCD Resolutions, are unconstitutional. It held that subjecting the release of the LGSEF to conditions set by the Oversight Committee violated the automatic release mandate.
    What is local autonomy? Local autonomy refers to the degree of self-governance granted to local government units, enabling them to manage their own affairs with minimal interference from the national government. It includes both administrative and fiscal autonomy.
    What is the role of the Oversight Committee on Devolution (OCD)? The Oversight Committee on Devolution was created to formulate rules and regulations for the effective implementation of the Local Government Code of 1991. However, the Supreme Court clarified that its authority does not extend to controlling the IRA of LGUs.
    Why did the Court consider the case despite the IRA having been released? The Court considered the case because it involved a grave violation of the Constitution and the issue was capable of repetition, yet evading review. This means similar provisions could appear in future appropriations laws, necessitating a definitive ruling.
    What does “automatic release” mean? “Automatic release” means that the LGUs’ share in national taxes should be released to them without the need for further action or compliance with additional conditions. The funds should be transferred directly and without any holdbacks imposed by the national government.

    In conclusion, the Supreme Court’s decision reinforces the constitutional principle of local autonomy, ensuring that LGUs receive their “just share” of national taxes without undue restrictions. This ruling is a key win for decentralization and empowers local governments to address the needs of their communities more effectively.

    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: THE PROVINCE OF BATANGAS VS. HON. ALBERTO G. ROMULO, G.R. No. 152774, May 27, 2004