Diaz v. Finance Secretary

G.R. No. 193007 (July 19, 2011)

SC upheld BIR's VAT on toll fees; Diaz and Timbol's challenge was denied.

Facts:

Petitioners Renato V. Diaz and Aurora Ma. F. Timbol filed a petition for declaratory relief against the impending imposition of value-added tax (VAT) by the Bureau of Internal Revenue (BIR) on toll fees collected by tollway operators. The petitioners, both of whom have significant backgrounds in government service and legislative processes, argued that the imposition of VAT would lead to increased toll fees, thereby affecting regular users of tollways, including themselves. Diaz claimed to have sponsored the approval of the Expanded VAT Law (Republic Act 7716) and the National Internal Revenue Code (Republic Act 8424), while Timbol had served in various capacities related to trade and toll regulation.

The BIR had previously attempted to impose VAT on toll fees during the administration of President Gloria Macapagal-Arroyo, but this was deferred due to opposition. However, under President Benigno C. Aquino III, the BIR revived the plan to impose VAT on toll fees starting August 16, 2010. The petitioners contended that toll fees are not a "sale of services" subject to VAT, but rather a "user's tax" and that imposing VAT would violate the non-impairment clause of the Constitution since VAT was not included in the formula for computing toll fees.

On August 13, 2010, the Court issued a temporary restraining order (TRO) against the BIR's action, requiring the government to comment on the petition. The government, represented by the Secretary of Finance and the Commissioner of Internal Revenue, argued that the National Internal Revenue Code (NIRC) imposes VAT on all services rendered by franchise grantees, including tollway operations, unless specifically exempted by law. The government also contended that the petitioners lacked standing to invoke the non-impairment clause and that the imposition of VAT would not significantly affect tollway operators or users.

Legal Issues:

  1. Whether the Court may treat the petition for declaratory relief as one for prohibition.
  2. Whether petitioners Diaz and Timbol have legal standing to file the action.
  3. Whether the government is unlawfully expanding VAT coverage by including tollway operators and operations under the terms "franchise grantees" and "sale of services."
  4. Whether the imposition of VAT on tollway operators constitutes a tax on tax, impairs the operators' right to a reasonable return on investment, and is administratively feasible.

Arguments:

  • Petitioners' Arguments:

    • The imposition of VAT on toll fees is not intended by Congress when enacting the NIRC.
    • Toll fees are a "user's tax" and should not be subject to VAT.
    • The imposition of VAT would violate the non-impairment clause of the Constitution.
    • They have a personal interest as regular users of tollways and have standing to challenge the BIR's action.

  • Government's Arguments:

    • The NIRC clearly imposes VAT on all services rendered for a fee, including those by franchise grantees.
    • The petitioners lack standing as they do not have a direct interest in the toll operating agreements.
    • The imposition of VAT is consistent with previous BIR rulings and does not violate the non-impairment clause.
    • The VAT is an indirect tax that can be passed on to consumers and does not constitute a tax on tax.

Court's Decision and Legal Reasoning:

The Court treated the petition as one for prohibition rather than declaratory relief, emphasizing the far-reaching implications of the VAT imposition on toll fees. It ruled that the petitioners had standing to bring the action due to the significant impact on the public.

On the substantive issues, the Court held that:

  1. The NIRC's Section 108 imposes VAT on "all kinds of services" rendered for a fee, which includes tollway operations. The law's language indicates a broad interpretation of services, and tollway operators are considered franchise grantees under the law.
  2. Toll fees are not taxes but fees collected by private operators for the use of their facilities. The imposition of VAT does not constitute a tax on tax, as VAT is an indirect tax that can be passed on to consumers.
  3. The non-impairment clause does not apply to the petitioners, particularly Timbol, who lacks a direct interest in the tollway operators' contracts.
  4. Concerns regarding the administrative feasibility of implementing VAT do not invalidate the tax unless specific legal violations are shown.

The Court ultimately dismissed the petition for lack of merit and set aside the TRO, affirming the BIR's authority to impose VAT on tollway operations.

Significant Legal Principles Established:

  • The broad interpretation of "services" under the NIRC includes tollway operations as subject to VAT.
  • Toll fees are classified as fees for services rather than taxes, and the imposition of VAT does not constitute a tax on tax.
  • The non-impairment clause of the Constitution does not provide standing for individuals without a direct interest in the contracts affected by tax impositions.