JOHN HAY V. LIM (TAX)

Issue: Whether the tax exemptions and other financial incentives granted to the Subic SEZ under Section 12 of RA 7227 are applicable to the John Hay SEZ.

NO.

It is the legislative branch which has the inherent power not only to select the subjects of taxation but also grant exemptions. Paragraph 4, Section 28 of Article VI of the Constitution is crystal clear: "No law granting tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress."

Hence, it is only the legislature, as limited by the provisions of the Constitution, which has full power to exempt any person or corporation or class of property from taxation.

The Constitution may itself provide for specific tax exemptions or local governments may pass ordinances providing for exemption from local taxes, but otherwise, it is only the legislative branch which has the power to grant tax exemptions, its power to exempt being as broad as its power to tax.

There is absolutely nothing in RA 7227 which can be considered a grant of tax exemption in favor of public respondent BCDA. Rather, the beneficiaries of the tax exemptions and other incentives in Section 12 (the only provision in RA 7227 which expressly grants tax exemptions) are clearly the business enterprises located within the Subic SEZ.

Consequently, respondents' arguments for a liberal construction of RA 7227 in favor of tax exemptions and incentives to business enterprises in the John Hay SEZ must necessarily fail. As the Court, speaking through Justice Mendoza in the recent case of PLDT v. city of Davao, has occasion to stress:

"Along with the police power and eminent domain, TAXATION is one of the three necessary attributes of sovereignty. Consequently, statutes in derogation of sovereignty, such as those containing exemption from taxation, should be strictly construed in favor of the state. A state cannot be stripped of this most essential power by doubtful words and of this highest attribute of sovereignty by ambiguous language."

Necessarily, respondents' arguments, dependent as they are on a liberal construction of tax exemptions, also fail.

Public respondents' argument that tax exemptions are "inherent" in the term "special economic zone" stands the concept on its head and cannot be accepted. The tax exempt character of an SEZ proceeds from the statutory provisions expressly conferring such exemptions, not vice versa. The tail does not wag the dog.