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RENATO V. DIAZ v. SECRETARY OF FINANCE

FACTS:

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol filed a petition for declaratory relief challenging the impending imposition of value-added tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway operators. They argue that the VAT would result in increased toll fees and they, as regular tollway users, have an interest in stopping the BIR's action. Diaz claims to have sponsored the approval of the 1994 Expanded VAT Law and the 1997 National Internal Revenue Code at the House of Representatives, while Timbol claims to have served as Assistant Secretary of the Department of Trade and Industry and consultant of the Toll Regulatory Board in the past administration. The BIR previously attempted to impose VAT on toll fees during President Gloria Macapagal-Arroyo's administration but deferred it due to opposition. However, under President Benigno C. Aquino III, the BIR revived the idea and planned to impose the tax starting from August 16, 2010. Petitioners argue that toll fees should not be subject to VAT because they are considered user's tax, not a sale of services, and their imposition would violate the non-impairment clause of the Constitution. The Court issued a temporary restraining order (TRO) on the implementation of the VAT and required the government to comment on the petition.

ISSUES:

  1. Procedural Issues

    1. Whether or not the Court may treat the petition for declaratory relief as one for prohibition.

    2. Whether or not petitioners Diaz and Timbol have legal standing to file the action.

  2. Substantive Issues

    1. Whether or not the government is unlawfully expanding VAT coverage by including tollway operators and tollway operations in the terms "franchise grantees" and "sale of services" under Section 108 of the Code.

    2. Whether or not the imposition of VAT on tollway operators:

      • amounts to a tax on tax and not a tax on services;

      • will impair the tollway operators' right to a reasonable return of investment under their TOAs;

      • is not administratively feasible and cannot be implemented.

RULING:

  1. Procedural Issues

    • The Court treated the petition for declaratory relief as one for prohibition due to the far-reaching implications and the need for resolution for the public good.

    • Petitioners Diaz and Timbol have legal standing to file the action as the issues are of great importance to the public.

  2. Substantive Issues

    • The government is not unlawfully expanding VAT coverage by including tollway operators and tollway operations in the terms "franchise grantees" and "sale of services" under Section 108 of the Code.

    • The imposition of VAT on tollway operators:

      • is not a tax on tax but a tax on the services rendered by tollway operators;

      • does not impair the tollway operators' right to a reasonable return of investment under their TOAs;

      • concerns regarding the administrative feasibility of the VAT imposition do not render the tax invalid, and this must be addressed to the BIR first.

PRINCIPLES:

  • Doctrine of Procedural Flexibility The Court can treat a petition for declaratory relief as one for prohibition if the case has far-reaching implications and raises questions that need resolution for the public good.

  • Legal Standing Procedural requirements such as locus standi can be waived when the legal questions to be resolved are of great importance to the public.

  • Inclusive Interpretation of "All Kinds of Services" Section 108 of the NIRC, which states VAT is imposed on "all kinds of services" rendered for a fee, includes tollway operations.

  • Franchise Definition The term “franchise” under Section 108 of the NIRC broadly covers government grants of special rights, including those granted by administrative agencies.

  • Non-Impairment Clause The non-impairment clause cannot be invoked by those without personal interest in existing contracts and cannot limit the State’s sovereign taxing power.

  • Tax vs. User's Fee Fees paid to tollway operators for the use of tollways are not taxes but payments for services rendered.

  • Administrative Feasibility Concerns about the practicality of implementing VAT do not invalidate the tax unless it breaches specific constitutional or statutory limitations.