CIR v. CA, COMARSECO (GR No. 125355, March 30, 2000)

G.R. No. 125355             March 30, 2000

COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS and COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION

PARDO, J.:

FACTS:

Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a corporation duly organized and existing under the laws of the Philippines. It is an affiliate of Philippine American Life Insurance Co. (Philamlife), organized by the latter to perform collection, consultative and other technical services, including functioning as an internal auditor, of Philamlife and its other affiliates.

Petitioner, Commissioner of the Bureau of Internal Revenue (BIR) issued an assessment to private respondent COMASERCO for deficiency value-added tax (VAT) amounting to P351,851.01, for taxable year 1988.

With this, COMASERCO filed with the BIR, a letter-protest objecting to the latter’s finding of deficiency VAT. In lieu however, the Commissioner of Internal Revenue sent a collection letter to COMASERCO demanding payment of the deficiency VAT.

As a result, COMASERCO filed with the Court of Tax Appeals a petition for review contesting the Commissioner’s assessment asserting that the services it rendered to Philamlife and its affiliates, relating to collections, consultative and other technical assistance, including functioning as an internal auditor, were on a “no-profit, reimbursement-of-cost-only” basis. It averred that it was not engaged in the business of providing services to Philamlife and its affiliates. COMASERCO stressed that it was not profit-motivated, thus not engaged in business. In fact, it did not generate profit but suffered a net loss in taxable year 1988, hence not liable to pay VAT.

The Court of Tax Appeals rendered decision in favor of the Commissioner of Internal Revenue.

On its appeal with the Court of Appeals, the appellate court rendered decision reversing that of the Court of Tax Appeals. The former anchored its decision on the ratiocination in another tax case involving the same parties, where it was held that COMASERCO was not liable to pay fixed and contractor’s tax for services rendered to Philamlife and its affiliates. The Court of Appeals, in that case, reasoned that COMASERCO was not engaged in business of providing services to Philamlife and its affiliates. In the same manner, the Court of Appeals held that COMASERCO was not liable to pay VAT for it was not engaged in the business of selling services.

Hence, this case.

ISSUE: Whether or not COMASERCO was engaged in the sale of services, and thus liable to pay VAT thereon?

RULING:

YES.

The Court agreed with the Petitioner that to “engage in business” and to “engage in the sale of services” are two different things. Petitioner maintains that the services rendered by COMASERCO to Philamlife and its affiliates, for a fee or consideration, are subject to VAT. VAT is a tax on the value added by the performance of the service. It is immaterial whether profit is derived from rendering the service.

Pursuant to Republic Act No. 7716, the Expanded VAT Law (EVAT), amending among other sections, Section 99 of the Tax Code, it is provided that:

Sec. 105. Persons Liable. — Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 and 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716.

The phrase “in the course of trade or business” means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members of their guests), or government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business.

Contrary to COMASERCO’s contention the above provision clarifies that even a non-stocknon-profit, organization or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of profit attributable thereto. The term “in the course of trade or business” requires the regular conduct or pursuit of a commercial or an economic activity regardless of whether or not the entity is profit-oriented.

The definition of the term “in the course of trade or business” present law applies to all transactions even to those made prior to its enactment. Executive Order No. 273 stated that any person who, in the course of trade or business, sells, barters or exchanges goods and services, was already liable to pay VAT. The present law merely stresses that even a nonstock, nonprofit organization or government entity is liable to pay VAT for the sale of goods and services.

Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase “sale of services” as the “performance of all kinds of services for others for a fee, remuneration or consideration.” It includes “the supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking or project.” 11

On February 5, 1998, the Commissioner of Internal Revenue issued BIR Ruling No. 010-98 12 emphasizing that a domestic corporation that provided technical, research, management and technical assistance to its affiliated companies and received payments on a reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT on services rendered. In fact, even if such corporation was organized without any intention realizing profit, any income or profit generated by the entity in the conduct of its activities was subject to income tax.

Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration, then the service rendered is subject to VAT.

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Law on Public Corporation

 Administrative System of RP

  • Central government
  • Territorial and political subdivision
  • Enjoys local autonomy
  • Plebiscite and referendum – direct democracy

 

President’s general supervision over LGUs

Section 25. National Supervision over Local Government Units. –

(a) Consistent with the basic policy on local autonomy, the President shall exercise general supervision over local government units to ensure that their acts are within the scope of their prescribed powers and functions.

The President shall exercise supervisory authority directly over provinces, highly urbanized cities, and independent component cities; through the province with respect to component cities and municipalities; and through the city and municipality with respect to barangays.

(b) National agencies and offices with project implementation functions shall coordinate with one another and with the local government units concerned in the discharge of these functions. They shall ensure the participation of local government units both in the planning and implementation of said national projects.

(c) The President may, upon request of the local government unit concerned, direct the appropriate national agency to provide financial, technical, or other forms of assistance to the local government unit. Such assistance shall be extended at no extra cost to the local government unit concerned.

(d) National agencies and offices including government-owned or controlled corporations with field units or branches in a province, city, or municipality shall furnish the local chief executive concerned, for his information and guidance, monthly reports including duly certified budgetary allocations and expenditures.

 

Internal Revenue Allotment (depends on the class and income remittance)

Section 284. Allotment of Internal Revenue Taxes. – Local government units shall have a share in the national internal revenue taxes based on the collection of the third fiscal year preceding the current fiscal year as follows:

(a) On the first year of the effectivity of this Code, thirty percent (30%);

(b) On the second year, thirty-five percent (35%); and

(c) On the third year and thereafter, forty percent (40%).

Provided, That in the event that the national government incurs an unmanageable public sector deficit, the President of the Philippines is hereby authorized, upon the recommendation of Secretary of Finance, Secretary of Interior and Local Government and Secretary of Budget and Management, and subject to consultation with the presiding officers of both Houses of Congress and the presidents of the “liga”, to make the necessary adjustments in the internal revenue allotment of local government units but in no case shall the allotment be less than thirty percent (30%) of the collection of national internal revenue taxes of the third fiscal year preceding the current fiscal year: Provided, further, That in the first year of the effectivity of this Code, the local government units shall, in addition to the thirty percent (30%) internal revenue allotment which shall include the cost of devolved functions for essential public services, be entitled to receive the amount equivalent to the cost of devolved personal services.

Barangay – lowest political unit; headed by a Chairperson; several brgys will constitute a city or municipality

 

Two-fold characteristic/Dual Agency/Nature of Local Government Units

Section 15. Political and Corporate Nature of Local Government Units. – Every local government unit created or recognized under this Code is a body politic and corporate endowed with powers to be exercised by it in conformity with law. As such, it shall exercise powers as a political subdivision of the national government and as a corporate entity representing the inhabitants of its territory.

  • Jure imperii – governmental in nature
  • Jure gestionis – private functions

 

Seven (7) areas of concern

  • Local legislation
  • Local fiscal administration
  • Local development plan
  • Economic enterprise development
  • Organizational management
  • Environmental protection and management
  • Community mobilization

 

Relevant Constitutional Provisions

Section 2. The territorial and political subdivisions shall enjoy local autonomy.

  • But this “autonomy” does not mean full freedom from control

LGU Roles in development

  • Periodic consultations with appropriate agencies, NGOs and POs
  • Capabilities of LGUs implementation of national programs
  • Ecological responsibility

Section 16. General Welfare. – Every local government unit shall exercise the powers expressly granted, those necessarily implied therefrom, as well as powers necessary, appropriate, or incidental for its efficient and effective governance, and those which are essential to the promotion of the general welfare. Within their respective territorial jurisdictions, local government units shall ensure and support, among other things, the preservation and enrichment of culture, promote health and safety, enhance the right of the people to a balanced ecology, encourage and support the development of appropriate and self-reliant scientific and technological capabilities, improve public morals, enhance economic prosperity and social justice, promote full employment among their residents, maintain peace and order, and preserve the comfort and convenience of their inhabitants.

 

Section 17. Basic Services and Facilities. –

  • Local government units shall endeavor to be self-reliant and shall continue exercising the powers and discharging the duties and functions currently vested upon them. They shall also discharge the functions and responsibilities of national agencies and offices devolved to them pursuant to this Code. Local government units shall likewise exercise such other powers and discharge such other functions and responsibilities as are necessary, appropriate, or incidental to efficient and effective provisions of the basic services and facilities enumerated herein.

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(e) National agencies or offices concerned shall devolve to local government units the responsibility for the provision of basic services and facilities enumerated in this Section within six (6) months after the effectivity of this Code.

As used in this Code, the term “devolution” refers to the act by which the national government confers power and authority upon the various local government units to perform specific functions and responsibilities.

 

Devolved basic services (section 17)

  • Agriculture
  • Health
  • Social services
  • Environment and natural resources
  • Public works
  • Tourism
  • School building programs

Features of Local Government Code

  • Devolves to LGUs the delivery of basic services that have always belonged to the National Government
  • Grants LGUs significant regulatory powers that traditionally always belonged to the NGAs
  • Significantly increases the financial resources available to LGUs thru increased IRA
  • Recognizes and encourages the active participation of the private sector, NGOs, POs in the process of governance

 

 

Structure, powers and functions

Section 3, Article X of the 1987 Constitution

Section 3. The Congress shall enact a local government code which shall provide for a more responsive and accountable local government structure instituted through a system of decentralization with effective mechanisms of recall, initiative, and referendum, allocate among the different local government units their powers, responsibilities, and resources, and provide for the qualifications, election, appointment and removal, term, salaries, powers and functions and duties of local officials, and all other matters relating to the organization and operation of the local units.

 

Section 4 of the Local Government Code

Section 4. Scope of Application. – This Code shall apply to all provinces, cities, municipalities, barangays, and other political subdivisions as may be created by law, and, to the extent herein provided, to officials, offices, or agencies of the national government.

 

Charter cities – section 34 (f), LGC

 

Regulatory powers

  1. Eminent domain

Section 19. Eminent Domain. – A local government unit may, through its chief executive and acting pursuant to an ordinance, exercise the power of eminent domain for public use, or purpose or welfare for the benefit of the poor and the landless, upon payment of just compensation, pursuant to the provisions of the Constitution and pertinent laws: Provided, however, That the power of eminent domain may not be exercised unless a valid and definite offer has been previously made to the owner, and such offer was not accepted: Provided, further, That the local government unit may immediately take possession of the property upon the filing of the expropriation proceedings and upon making a deposit with the proper court of at least fifteen percent (15%) of the fair market value of the property based on the current tax declaration of the property to be expropriated: Provided, finally, That, the amount to be paid for the expropriated property shall be determined by the proper court, based on the fair market value at the time of the taking of the property.

 

  1. Open and close roads

Section 21. Closure and Opening of Roads. –

(a) A local government unit may, pursuant to an ordinance, permanently or temporarily close or open any local road, alley, park, or square falling within its jurisdiction: Provided, however, That in case of permanent closure, such ordinance must be approved by at least two-thirds (2/3) of all the members of the sanggunian, and when necessary, an adequate substitute for the public facility that is subject to closure is provided.

(b) No such way or place or any part thereof shall be permanently closed without making provisions for the maintenance of public safety therein. A property thus permanently withdrawn from public use may be used or conveyed for any purpose for which other real property belonging to the local government unit concerned may be lawfully used or conveyed: Provided, however, That no freedom park shall be closed permanently without provision for its transfer or relocation to a new site.

(c) Any national or local road, alley, park, or square may be temporarily closed during an actual emergency, or fiesta celebrations, public rallies, agricultural or industrial fairs, or an undertaking of public works and highways, telecommunications, and waterworks projects, the duration of which shall be specified by the local chief executive concerned in a written order: Provided, however, That no national or local road, alley, park, or square shall be temporarily closed for athletic, cultural, or civic activities not officially sponsored, recognized, or approved by the local government unit concerned.

(d) Any city, municipality, or barangay may, by a duly enacted ordinance, temporarily close and regulate the use of any local street, road, thoroughfare, or any other public place where shopping malls, Sunday, flea or night markets, or shopping areas may be established and where goods, merchandise, foodstuffs, commodities, or articles of commerce may be sold and dispensed to the general public.

 

  1. Reclassify agricultural lands

Section 20. Reclassification of Lands. –

(a) A city or municipality may, through an ordinance passed by the sanggunian after conducting public hearings for the purpose, authorize the reclassification of agricultural lands and provide for the manner of their utilization or disposition in the following cases: (1) when the land ceases to be economically feasible and sound for agricultural purposes as determined by the Department of Agriculture or (2) where the land shall have substantially greater economic value for residential, commercial, or industrial purposes, as determined by the sanggunian concerned: Provided, That such reclassification shall be limited to the following percentage of the total agricultural land area at the time of the passage of the ordinance:

(1) For highly urbanized and independent component cities, fifteen percent (15%);

(2) For component cities and first to the third class municipalities, ten percent (10%); and

(3) For fourth to sixth class municipalities, five percent (5%): Provided, further, That agricultural lands distributed to agrarian reform beneficiaries pursuant to Republic Act Numbered Sixty-six hundred fifty-seven (R.A. No. 6657). otherwise known as “The Comprehensive Agrarian Reform Law”, shall not be affected by the said reclassification and the conversion of such lands into other purposes shall be governed by Section 65 of said Act.

(b) The President may, when public interest so requires and upon recommendation of the National Economic and Development Authority, authorize a city or municipality to reclassify lands in excess of the limits set in the next preceding paragraph.

(c) The local government units shall, in conformity with existing laws, continue to prepare their respective comprehensive land use plans enacted through zoning ordinances which shall be the primary and dominant bases for the future use of land resources: Provided. That the requirements for food production, human settlements, and industrial expansion shall be taken into consideration in the preparation of such plans.

(d) Where approval by a national agency is required for reclassification, such approval shall not be unreasonably withheld. Failure to act on a proper and complete application for reclassification within three (3) months from receipt of the same shall be deemed as approval thereof.

(e) Nothing in this Section shall be construed as repealing, amending, or modifying in any manner the provisions of R.A. No. 6657.

 

  1. Inspection of food products
  2. Adopt quarantine regulations
  3. Enforcement of the National Building Code
  4. Regulation of operation of tricycles
  5. Regulate real estate trade and business
  6. Licensing of cockpits and regulation thereof

 

Corporate Powers

Section 22. Corporate Powers. –

(a) Every local government unit, as a corporation, shall have the following powers:

(1) To have continuous succession in its corporate name;

(2) To sue and be sued;

(3) To have and use a corporate seal;

(4) To acquire and convey real or personal property;

(5) To enter into contracts; and

(6) To exercise such other powers as are granted to corporations, subject to the limitations provided in this Code and other laws.

(b) Local government units may continue using, modify, or change their existing corporate seals: Provided, That newly established local government units or those without corporate seals may create their own corporate seals which shall be registered with the Department of the Interior and Local Government: Provided, further, That any change of corporate seal shall also be registered as provided hereon.

(c) Unless otherwise provided in this Code, no contract may be entered into by the local chief executive in behalf of the local government unit without prior authorization by the sanggunian concerned. A legible copy of such contract shall be posted at a conspicuous place in the provincial capitol or the city, municipal or barangay hall.

(d) Local government units shall enjoy full autonomy in the exercise of their proprietary functions and in the limitations provided in this Code and other applicable laws.

 

 

 

 

 

 

 

 

Types of LGUs under the Constitution

  1. Section 1. The territorial and political subdivisions of the Republic of the Philippines are the provinces, cities, municipalities, and barangays. There shall be autonomous regions in Muslim Mindanao and the Cordilleras as hereinafter provided.

 

  1. Section 11. The Congress may, by law, create special metropolitan political subdivisions, subject to a plebiscite as set forth in Section 10 hereof. The component cities and municipalities shall retain their basic autonomy and shall be entitled to their own local executive and legislative assemblies. The jurisdiction of the metropolitan authority that will thereby be created shall be limited to basic services requiring coordination.

 

LGU Creation criteria

Section 7. Creation and Conversion. – As a general rule, the creation of a local government unit or its conversion from one level to another level shall be based on verifiable indicators of viability and projected capacity to provide services, to wit:

(a) Income. – It must be sufficient, based on acceptable standards, to provide for all essential government facilities and services and special functions commensurate with the size of its population, as expected of the local government unit concerned;

(b) Population. – It shall be determined as the total number of inhabitants within the territorial jurisdiction of the local government unit concerned; and

(c) Land Area. – It must be contiguous, unless it comprises two or more islands or is separated by a local government unit independent of the others; properly identified by metes and bounds with technical descriptions; and sufficient to provide for such basic services and facilities to meet the requirements of its populace.

Compliance with the foregoing indicators shall be attested to by the Department of Finance (DOF), the National Statistics Office (NSO), and the Lands Management Bureau (LMB) of the Department of Environment and Natural Resources (DENR).

 

Section 10. Plebiscite Requirement. – No creation, division, merger, abolition, or substantial alteration of boundaries of local government units shall take effect unless approved by a majority of the votes cast in a plebiscite called for the purpose in the political unit or units directly affected. Said plebiscite shall be conducted by the Commission on Elections (COMELEC) within one hundred twenty (120) days from the date of effectivity of the law or ordinance effecting such action, unless said law or ordinance fixes another date.

 

INCOME

LGU Income requirement (annual income)
Province or city At least 20 million*
Municipality converted into a city At least 200 million
Municipality 2.5 million
Barangay No specific income requirement

*for the immediately preceding 2 consecutive years based on 1991 constant prices

 

POPULATION

LGU Population requirement
Province or city Not less than 250,000 inhabitants
Municipality Not less than 150,000
Barangay At least 2,000
  But if within cities and municipalities in Metro Manila or HUCs – at least 5,000 inhabitants

 

LAND AREA

LGU Land area requirement (square kilometers)
Province 2,000
City 100
Municipality 50
Barangay Must be contiguous; identified by metes and bounds or by more or less permanent natural boundaries

 

Branches/Composition

Executive Branch – composed of Provincial Governor, City and Municipal mayors, and Punong Barangays called local chief executives (LCEs), they exercise executive powers

Legislative Branch – serves as lawmaking and consultative body: Sangguniang Panlalawigan (Province), Sangguniang Panglungsod (City), Sangguniang Bayan (Municipality); and Sannguniang Pangbarangay (Section 48, LGC)

 

Sanggunian composition

Section 48. Local Legislative Power. – Local legislative power shall be exercised by the sangguniang panlalawigan for the province; the sangguniang panlungsod for the city; the sangguniang bayan for the municipality; and the sangguniang barangay for the barangay.

Section 49. Presiding Officer. –

(a) The vice-governor shall be the presiding officer of the sangguniang panlalawigan; the city vice-mayor, of the sangguniang panlungsod; the municipal vice-mayor, of the sangguniang bayan; and the punong barangay, of the sangguniang barangay. The presiding officer shall vote only to break a tie.

(b) In the event of the inability of the regular presiding officer to preside at a sanggunian session, the members present and constituting a quorum shall elect from among themselves a temporary presiding officer. He shall certify within ten (10) days from the passage of ordinances enacted and resolutions adopted by the sanggunian in the session over which he temporarily presided.

 

Powers of the Local Chief Executives (LCEs)

  • Execute laws and ordinances
  • Appointing authority
  • Supervisory authority
  • Issue Executive orders
  • Police power
  • Visitorial power
  • Issuance of permit
  • Mayors can solemnize marriage

 

Powers of Sanggunian

  • Approve ordinance and pass resolutions
  • Generate and maximize the use of resources and revenues
  • Enact ordinances, levying taxes, charges and fees
  • Grant tax exemption

 

Officials common to all Barangays

  • Punong Barangay
  • 7 Sanggunian Members
  • Sangguniang Kabataan Chairman
  • Barangay Secretary
  • Barangay Treasurer

 

Elective Officials common to all Provinces

  • Governor
  • Vice Governor
  • Sangguniang Panlalawigan
    • Presiding Officer
    • Regular member
    • President of Liga ng mga Barangay
    • President of SK Federation
    • President of Federation of Sanggunian Members
    • 3 sectoral representatives

 

Approval of ordinances (section 54)

Section 54. Approval of Ordinances. –

(a) Every ordinance enacted by the sangguniang panlalawigan, sangguniang panlungsod, or sangguniang bayan shall be presented to the provincial governor or city or municipal mayor, as the case may be. If the local chief executive concerned approves the same, he shall affix his signature on each and every page thereof; otherwise, he shall veto it and return the same with his objections to the sanggunian, which may proceed to reconsider the same. The sanggunian concerned may override the veto of the local chief executive by two-thirds (2/3) vote of all its members, thereby making the ordinance or resolution effective for all legal intents and purposes.

(b) The veto shall be communicated by the local chief executive concerned to the sanggunian within fifteen (15) days in the case of a province, and ten (10) days in the case of a city or a municipality; otherwise, the ordinance shall be deemed approved as if he had signed it.

(c) Ordinances enacted by the sangguniang barangay shall, upon approval by the majority of all its members, be signed by the punong barangay.

 

Veto power of LCEs

Section 55. Veto Power of the Local Chief Executive. –

(a) The local chief executive may veto any ordinance of the sanggunian panlalawigan, sangguniang panlungsod, or sanggunian bayan on the ground that it is ultra vires or prejudicial to the public welfare, stating his reasons therefor in writing.

(b) The local chief executive, except the punong barangay, shall have the power to veto any particular item or items of an appropriations ordinance, an ordinance or resolution adopting a local development plan and public investment program, or an ordinance directing the payment of money or creating liability. In such a case, the veto shall not affect the item or items which are not objected to. The vetoed item or items shall not take effect unless the sanggunian overrides the veto in the manner herein provided; otherwise, the item or items in the appropriations ordinance of the previous year corresponding to those vetoed, if any, shall be deemed reenacted.

(c) The local chief executive may veto an ordinance or resolution only once. The sanggunian may override the veto of the local chief executive concerned by two-thirds (2/3) vote of all its members, thereby making the ordinance effective even without the approval of the local chief executive concerned.

 

Issues and concerns in decentralization

  • Devolution simply increase the powers of local bosses and warlords further entrenching them
  • “absorptive capacities of LGUs” – are they adequately prepared to assume the increased responsibilities and exercise the powers devolved to them?
  • Resistance of certain devolved agencies to devolution and subsequent moves to recentralize the health sector
  • Unequal distribution of financial resources due to not-so studied formula with cities gaining a windfull while municipalities and provinces are not able to afford the cost of devolution
  • “lags” in the release of IRA
  • Lack of guidelines from the NGs in operationalizing devolution
  • Continuing need to define and clarify intergovernmental relations
  • Hesitance among NGOs and POs to participate due to distrust
  • General lack of information about the LGC among various stakeholders
  • Do NGOs have capabilities to assume increased responsibilities in local governance?
  • Need to monitor “people empowerment provisions” harmonize GO-NGO relations and clarify and delineate intra-NGO relation
  • 40-60 share in the national revenues equivalent only to 14% of national budget
  • 45-55 personnel services limitation

 

Section 76. Organizational Structure and Staffing Pattern. – Every local government unit shall design and implement its own organizational structure and staffing pattern taking into consideration its service requirements and financial capability, subject to the minimum standards and guidelines prescribed by the Civil Service Commission.

Appointive Officials

  • Mandatory positions must be filled and cannot be contractualized

 

Guidelines on Organizational Structure

  • LGUs may create an optional position provided all mandatory positions were created in accordance with budgetary limitations
  • Administrative staff, Information Officer and Legal Officers are co-terminus with the LCE
  • Heads of departments and offices may be appointed by LCE with majority concurrence of all members of Sanggunian
  • Office
    • Section – at least 3 personnel
    • Division – at least 2 sections
    • Department – at least 4 divisions

 

Human Resource Management

Section 77. Responsibility for Human Resources and Development. – The chief executive of every local government unit shall be responsible for human resources and development in his unit and shall take all personnel actions in accordance with the Constitutional provisions on civil service, pertinent laws, and rules and regulations thereon, including such policies, guidelines and standards as the Civil Service Commission may establish: Provided, That the local chief executive may employ emergency or casual employees or laborers paid on a daily wage or piecework basis and hired through job orders for local projects authorized by the sanggunian concerned, without need of approval or attestation by the Civil Service Commission: Provided, further, That the period of employment of emergency or casual laborers as provided in this Section shall not exceed six (6) months.

The Joint Commission on Local Government Personnel Administration organized pursuant to Presidential Decree Numbered Eleven Hundred thirty-six (P.D. No. 1136) is hereby abolished and its personnel, records, equipment and other assets transferred to the appropriate office in the Civil Service Commission.

 

Identified Appointing Authorities

  • Local Chief Executives
  • Vice Governor/Mayor
  • Finance Secretary

 

Limitation on Appointment

Section 79. Limitation to Appointments. – No person shall be appointed in the career service of the local government if he is related within the fourth civil degree of consanguinity or affinity to the appointing or recommending authority.

 

Public Notice of Vacancy; personnel selection board

Section 80. Public Notice of Vacancy; Personnel Selection Board. –

(a) Whenever a local executive decides to fill a vacant career position, there shall be posted notices of the vacancy in at least three (3) conspicuous public places in the local government unit concerned for a period of not less than fifteen (15) days.

(b) There shall be established in every province, city or municipality a personnel selection board to assist the local chief executive in the judicious and objective selection or personnel for employment as well as for promotion, and in the formulation of such policies as would contribute to employee welfare.

 

Compensation

Section 81. Compensation of Local Officials and Employees. – The compensation of local officials and personnel shall be determined by the sanggunian concerned: Provided, That the increase in compensation of elective local officials shall take effect only after the terms of office of those approving such increase shall have expired: Provided, further, That the increase in compensation of the appointive officials and employees shall take effect as provided in the ordinance authorizing such increase: Provided, however, That said increases shall not exceed the limitations on budgetary allocations for personal services provided under Title Five, Book II of this Code: Provided, finally, That such compensation may be based upon the pertinent provisions of Republic Act Numbered Sixty-seven fifty-eight (R.A. No 6758), otherwise known as the “Compensation and Position Classification Act of 1989”.

The punong barangay, the sangguniang barangay member, the sangguniang kabataan chairman, the barangay treasurer, and the barangay secretary shall be entitled to such compensation, allowances, emoluments, and such other privileges as provided under Title One Book III of this Code.

Elective local officials shall be entitled to the same leave privileges as those enjoyed by appointive local officials, including the cumulation and commutation thereof.

 

Resignation of elective officials

Section 82. Resignation of Elective Local Officials. –

(a) Resignations by elective local officials shall be deemed effective only upon acceptance by the following authorities:

(1) The President, in the case of governors, vice-governors, and mayors and vice-mayors of highly urbanized cities and independent component cities;

(2) The governor, in the case of municipal mayors, municipal vice-mayors, city mayors and city vice-mayors of component cities;

(3) The sanggunian concerned, in the case of sanggunian members; and

(4) The city or municipal mayor, in the case of barangay officials.

(b) Copies of the resignation letters of elective local officials, together with the action taken by the aforesaid authorities, shall be furnished the Department of the Interior and Local Government.

(c) The resignation shall be deemed accepted if not acted upon by the authority concerned within fifteen (15) days from receipt thereof.

(d) Irrevocable resignations by sanggunian members shall be deemed accepted upon presentation before an open session of the sanggunian concerned and duly entered in its records: Provided, however, That this subsection does not apply to sanggunian members who are subject to recall elections or to cases where existing laws prescribed the manner of acting upon such resignations.

 

 

 

 

 

 

 

 

 

 

 

Practice of Profession

Section 90. Practice of Profession. –

(a) All governors, city and municipal mayors are prohibited from practicing their profession or engaging in any occupation other than the exercise of their functions as local chief executives.

(b) Sanggunian members may practice their professions, engage in any occupation, or teach in schools except during session hours: Provided, That sanggunian members who are also members of the Bar shall not:

(1) Appear as counsel before any court in any civil case wherein a local government unit or any office, agency, or instrumentality of the government is the adverse party;

(2) Appear as counsel in any criminal case wherein an officer or employee of the national or local government is accused of an offense committed in relation to his office.

(3) Collect any fee for their appearance in administrative proceedings involving the local government unit of which he is an official; and

(4) Use property and personnel of the government except when the sanggunian member concerned is defending the interest of the government.

(c) Doctors of medicine may practice their profession even during official hours of work only on occasions of emergency: Provided, That the officials concerned do not derive monetary compensation therefrom.

 

 

 

 

 

 

 

Prohibitions

Section 89. Prohibited Business and Pecuniary Interest. –

(a) It shall be unlawful for any local government official or employee, directly or indirectly, to:

(1) Engage in any business transaction with the local government unit in which he is an official or employee or over which he has the power of supervision, or with any of its authorized boards, officials, agents, or attorneys, whereby money is to be paid, or property or any other thing of value is to be transferred, directly or indirectly, out of the resources of the local government unit to such person or firm;

(2) Hold such interests in any cockpit or other games licensed by a local government unit;

(3) Purchase any real estate or other property forfeited in favor of such local government unit for unpaid taxes or assessment, or by virtue of a legal process at the instance of the said local government unit;

(4) Be a surety for any person contracting or doing business with the local government unit for which a surety is required; and

(5) Possess or use any public property of the local government unit for private purposes.

(b) All other prohibitions governing the conduct of national public officers relating to prohibited business and pecuniary interest so provided for under Republic Act Numbered Sixty-seven thirteen (R.A. No. 6713) otherwise known as the “Code of Conduct and Ethical Standards for Public Officials and Employees” and other laws shall also be applicable to local government officials and employees.

 

Section 93. Partisan Political Activity. – No local official or employee in the career civil service shall engage directly or indirectly in any partisan political activity or take part in any election, initiative, referendum, plebiscite, or recall, except to vote, nor shall he use his official authority or influence to cause the performance of any political activity by any person or body. He may, however, express his views on current issues, or mention the names of certain candidates for public office whom he supports. Elective local officials may take part in partisan political and electoral activities, but it shall be unlawful for them to solicit contributions from their subordinates or subject these subordinates to any of the prohibited acts under the Omnibus Election Code.

 

Section 94. Appointment of Elective and Appointive Local Officials; Candidates Who Lost in an Election. – (a) No elective or appointive local official shall be eligible for appointment or designation in any capacity to any public office or position during his tenure.

Unless otherwise allowed by law or by the primary functions of his position, no elective or appointive local official shall hold any other office or employment in the government or any subdivision, agency or instrumentality thereof, including government-owned or controlled corporations or their subsidiaries.

 

Section 95. Additional or Double Compensation. – No elective or appointive local official or employee shall receive additional, double, or indirect compensation, unless specifically authorized by law, nor accept without the consent of Congress, any present, emoluments, office, or title of any kind from any foreign government. Pensions or gratuities shall not be considered as additional, double, or indirect compensation.

 

 

 

 

 

 

 

 

 

 

 

Permission to Leave Station

Section 96. Permission to Leave Station. –

(a) Provincial, city, municipal, and barangay appointive officials going on official travel shall apply and secure written permission from their respective local chief executives before departure. The application shall specify the reasons for such travel, and the permission shall be given or withheld based on considerations of public interest, financial capability of the local government unit concerned and urgency of the travel.

Should the local chief executive concerned fall to act upon such application within four (4) working days from receipt thereof, it shall be deemed approved.

(b) Mayors of component cities and municipalities shall secure the permission of the governor concerned for any travel outside the province.

(c) Local government officials traveling abroad shall notify their respective sanggunian: Provided, That when the period of travel extends to more than three (3) months, during periods of emergency or crisis or when the travel involves the use of public funds, permission from the Office of the President shall be secured.

(d) Field officers of national agencies or offices assigned in provinces, cities, and municipalities shall not leave their official stations without giving prior written notice to the local chief executive concerned. Such notice shall state the duration of travel and the name of the officer whom he shall designate to act for and in his behalf during his absence.

 

Annual Report

Section 97. Annual Report. – On or before March 31 of each year, every local chief executive shall submit an annual report to the sanggunian concerned on the socio-economic, political and peace and order conditions, and other matters concerning the local government unit, which shall cover the immediately preceding calendar year. A copy of the report shall be forwarded to the Department of the Interior and Local Government. Component cities and municipalities shall likewise provide the sangguniang panlalawigan copies of their respective annual reports.

 

LOCAL FISCAL ADMINISTRATION AND TAXATION

Section 305. Fundamental Principles. – The financial affairs, transactions, and operations of local government units shall be governed by the following fundamental principles:

(a) No money shall be paid out of the local treasury except in pursuance of an appropriations ordinance or law;

(b) Local government funds and monies shall be spent solely for public purposes;

(c) Local revenue is generated only from sources expressly authorized by law or ordinance, and collection thereof shall at all times be acknowledged properly;

(d) All monies officially received by a local government officer in any capacity or on any occasion shall be accounted for as local funds, unless otherwise provided by law;

(e) Trust funds in the local treasury shall not be paid out except in fulfillment of the purpose for which the trust was created or the funds received;

(f) Every officer of the local government unit whose duties permit or require the possession or custody of local funds shall be properly bonded, and such officer shall be accountable and responsible for said funds and for the safekeeping thereof in conformity with the provisions of law;

(g) Local governments shall formulate sound financial plans, and local budgets shall be based on functions, activities, and projects, in terms of expected results;

(h) Local budget plans and goals shall, as far as practicable, be harmonized with national development plans, goals, and strategies in order to optimize the utilization of resources and to avoid duplication in the use of fiscal and physical resources;

(i) Local budgets shall operationalize approved local development plans;

(j) Local government units shall ensure that their respective budgets incorporate the requirements of their component units and provide for equitable allocation of resources among these component units;

(k) National planning shall be based on local planning to ensure that the needs and aspirations of the people as articulated by the local government units in their respective local development plans are considered in the formulation of budgets of national line agencies or offices;

(l) Fiscal responsibility shall be shared by all those exercising authority over the financial affairs, transactions, and operations of the local government units; and

(m) The local government unit shall endeavor to have a balanced budget in each fiscal year of operation.

 

Resource generation and allocation

Sources

Local

Taxes

 

Section 134. Scope of Taxing Powers. – Except as otherwise provided in this Code, the province may levy only the taxes, fees, and charges as provided in this Article.

 

 

Real Property Tax

Section 197. Scope. – This Title shall govern the administration, appraisal, assessment, levy and collection of real property tax.

 

External

IRA

Section 284. Allotment of Internal Revenue Taxes. – Local government units shall have a share in the national internal revenue taxes based on the collection of the third fiscal year preceding the current fiscal year as follows:

(a) On the first year of the effectivity of this Code, thirty percent (30%);

(b) On the second year, thirty-five percent (35%); and

(c) On the third year and thereafter, forty percent (40%).

Provided, That in the event that the national government incurs an unmanageable public sector deficit, the President of the Philippines is hereby authorized, upon the recommendation of Secretary of Finance, Secretary of Interior and Local Government and Secretary of Budget and Management, and subject to consultation with the presiding officers of both Houses of Congress and the presidents of the “liga”, to make the necessary adjustments in the internal revenue allotment of local government units but in no case shall the allotment be less than thirty percent (30%) of the collection of national internal revenue taxes of the third fiscal year preceding the current fiscal year: Provided, further, That in the first year of the effectivity of this Code, the local government units shall, in addition to the thirty percent (30%) internal revenue allotment which shall include the cost of devolved functions for essential public services, be entitled to receive the amount equivalent to the cost of devolved personal services.

 

National Wealth

Section 289. Share in the Proceeds from the Development and Utilization of the National Wealth. – Local government units shall have an equitable share in the proceeds derived from the utilization and development of the national wealth within their respective areas, including sharing the same with the inhabitants by way of direct benefits.

 

Allocation to Local Government

Section 285. Allocation to Local Government Units. – The share of local government units in the internal revenue allotment shall be collected in the following manner:

(a) Provinces – Twenty-three percent (23%);

(b) Cities – Twenty-three percent (23%);

(c) Municipalities – Thirty-four percent (34%); and

(d) Barangays – Twenty percent (20%)

Provided, however, That the share of each province, city, and municipality shall be determined on the basis of the following formula:

(a) Population – Fifty percent (50%);

(b) Land Area – Twenty-five percent (25%); and

(c) Equal sharing – Twenty-five percent (25%)

Provided, further, That the share of each barangay with a population of not less than one hundred (100) inhabitants shall not be less than Eighty thousand (P80,000.00) per annum chargeable against the twenty percent (20%) share of the barangay from the internal revenue allotment, and the balance to be allocated on the basis of the following formula:

(a) On the first year of the effectivity of this Code:

(1) Population – Forty percent (40%); and

(2) Equal sharing – Sixty percent (60%)

(b) On the second year:

(1) Population – Fifty percent (50%); and

(2) Equal sharing – Fifty percent (50%)

(c) On the third year and thereafter:

(1) Population – Sixty percent (60%); and

(2) Equal sharing – Forty percent (40%).

Provided, finally, That the financial requirements of barangays created by local government units after the effectivity of this Code shall be the responsibility of the local government unit concerned.

 

Section 286. Automatic Release of Shares. –

(a) The share of each local government unit shall be released, without need of any further action, directly to the provincial, city, municipal or barangay treasurer, as the case may be, on a quarterly basis within five (5) days after the end of each quarter, and which shall not be subject to any lien or holdback that may be imposed by the national government for whatever purpose.

(b) Nothing in this Chapter shall be understood to diminish the share of local government units under existing laws.

 

Section 290. Amount of Share of Local Government Units. – Local government units shall, in addition to the internal revenue allotment, have a share of forty percent (40%) of the gross collection derived by the national government from the preceding fiscal year from mining taxes, royalties, forestry and fishery charges, and such other taxes, fees, or charges, including related surcharges, interests, or fines, and from its share in any co-production, joint venture or production sharing agreement in the utilization and development of the national wealth within their territorial jurisdiction.

Section 291. Share of the Local Governments from any Government Agency or Owned or Controlled Corporation. – Local government units shall have a share based on the preceding fiscal year from the proceeds derived by any government agency or government-owned or controlled corporation engaged in the utilization and development of the national wealth based on the following formula whichever will produce a higher share for the local government unit:

(a) One percent (1%) of the gross sales or receipts of the preceding calendar year; or

(b) Forty percent (40%) of the mining taxes, royalties, forestry and fishery charges and such other taxes, fees or charges, including related surcharges, interests, or fines the government agency or government owned or controlled corporation would have paid if it were not otherwise exempt.

 

Section 292. Allocation of Shares. – The share in the preceding Section shall be distributed in the following manner:

(a) Where the natural resources are located in the province:

(1) Province – Twenty percent (20%);

(2) Component City/Municipality – Forty-five percent (45%); and

(3) Barangay – Thirty-five percent (35%)

Provided, however, That where the natural resources are located in two (2) or more provinces, or in two (2) or more component cities or municipalities or in two (2) or more barangays, their respective shares shall be computed on the basis of:

(1) Population – Seventy percent (70%); and

(2) Land area – Thirty percent (30%)

(b) Where the natural resources are located in a highly urbanized or independent component city:

(1) City – Sixty-five percent (65%); and

(2) Barangay – Thirty-five percent (35%)

Provided, however, That where the natural resources are located in such two (2) or more cities, the allocation of shares shall be based on the formula on population and land area as specified in paragraph (a) of this Section.

 

Budgetary Limitation

Section 325. General Limitations. – The use of the provincial, city, and municipal funds shall be subject to the following limitations:

(a) The total appropriations, whether annual or supplemental, for personal services of a local government unit for one (1) fiscal year shall not exceed forty-five percent (45%) in the case of first to third class provinces, cities and municipalities, and fifty-five percent (55%) in the case of fourth class or lower, of the total annual income from regular sources realized in the next preceding fiscal year. The appropriations for salaries, wages, representation and transportation allowances of officials and employees of the public utilities and economic enterprises owned, operated, and maintained by the local government unit concerned shall not be included in the annual budget or in the computation of the maximum amount for personal services. The appropriations for the personal services of such economic enterprises shall be charged to their respective budgets;

(b) No official or employee shall be entitled to a salary rate higher than the maximum fixed for his position or other positions of equivalent rank by applicable laws or rules and regulations issued thereunder;

(c) No local fund shall be appropriated to increase or adjust salaries or wages of officials and employees of the national government, except as may be expressly authorized by law;

(d) In cases of abolition of positions and the creation of new ones resulting from the abolition of existing positions in the career service, such abolition or creation shall be made in accordance with pertinent provisions of this code and the civil service law, rules and regulations;

(e) Positions in the official plantilla for career positions which are occupied by incumbents holding permanent appointments shall be covered by adequate appropriations;

(f) No changes in designation or nomenclature of positions resulting in a promotion or demotion in rank or increase or decrease in compensation shall be allowed, except when the position is actually vacant, and the filling of such positions shall be strictly made in accordance with the civil service law, rules and regulations;

(g) The creation of new positions and salary increases or adjustments shall in no case be made retroactive;

(h) The annual appropriations for discretionary purposes of the local chief executive shall not exceed two percent (2%) of the actual receipts derived from basic real property tax in the next preceding calendar year. Discretionary funds shall be disbursed only for public purposes to be supported by appropriate vouchers and subject to such guidelines as may be prescribed by law. No amount shall be appropriated for the same purpose except as authorized under this Section.

 

Review of Appropriate Ordinances

Section 326. Review of Appropriation Ordinances of Provinces, Highly-Urbanized Cities, Independent Component Cities, and Municipalities within the Metropolitan Manila Area. – The Department of Budget and Management shall review ordinances authorizing the annual or supplemental appropriations of provinces, highly-urbanized cities, independent component cities, and municipalities within the Metropolitan Manila Area in accordance with the immediately succeeding Section.

 

Section 327. Review of Appropriation Ordinances of Component Cities and Municipalities. – The sangguniang panlalawigan shall review the ordinance authorizing annual or supplemental appropriations of component cities and municipalities in the same manner and within the same period prescribed for the review of other ordinances.

If within ninety (90) days from receipt of copies of such ordinance, the sangguniang panlalawigan takes no action thereon, the same shall be deemed to have been reviewed in accordance with law and shall continue to be in full force and effect. If within the same period, the sangguniang panlalawigan shall have ascertained that the ordinance authorizing annual or supplemental appropriations has not complied with the requirements set forth in this Title, the sangguniang panlalawigan shall, within the ninety-day period hereinabove prescribed declare such ordinance inoperative in its entirety or in part. Items of appropriation contrary to limitations prescribed in this Title or in excess of the amounts prescribed herein shall be disallowed or reduced accordingly.

The sangguniang panlalawigan shall within the same period advise the sangguniang panlungsod or sangguniang bayan concerned through the local chief executive of any action on the ordinance under review. Upon receipt of such advice, the city or municipal treasurer concerned shall not make further disbursements of funds from any of the items of appropriation declared inoperative, disallowed or reduced.

 

 

 

Intergovernmental relations

Section 25. National Supervision over Local Government Units. –

(a) Consistent with the basic policy on local autonomy, the President shall exercise general supervision over local government units to ensure that their acts are within the scope of their prescribed powers and functions.

The President shall exercise supervisory authority directly over provinces, highly urbanized cities, and independent component cities; through the province with respect to component cities and municipalities; and through the city and municipality with respect to barangays.

(b) National agencies and offices with project implementation functions shall coordinate with one another and with the local government units concerned in the discharge of these functions. They shall ensure the participation of local government units both in the planning and implementation of said national projects.

(c) The President may, upon request of the local government unit concerned, direct the appropriate national agency to provide financial, technical, or other forms of assistance to the local government unit. Such assistance shall be extended at no extra cost to the local government unit concerned.

(d) National agencies and offices including government-owned or controlled corporations with field units or branches in a province, city, or municipality shall furnish the local chief executive concerned, for his information and guidance, monthly reports including duly certified budgetary allocations and expenditures.

 

Relations with PNP

Section 28. Powers of Local Chief Executives over the Units of the Philippine National Police. – The extent of operational supervision and control of local chief executives over the police force, fire protection unit, and jail management personnel assigned in their respective jurisdictions shall be governed by the provisions of Republic Act Numbered Sixty-nine hundred seventy-five (R.A. No. 6975), otherwise known as “The Department of the Interior and Local Government Act of 1990”, and the rules and regulations issued pursuant thereto.

Section 29. Provincial Relations with Component Cities and Municipalities. – The province, through the governor, shall ensure that every component city and municipality within its territorial jurisdiction acts within the scope of its prescribed powers and functions. Highly urbanized cities and independent component cities shall be independent of the province.

 

Section 35. Linkages with People’s and Non-governmental Organizations. – Local government units may enter into joint ventures and such other cooperative arrangements with people’s and non-governmental organizations to engage in the delivery of certain basic services, capability-building and livelihood projects, and to develop local enterprises designed to improve productivity and income, diversity agriculture, spur rural industrialization, promote ecological balance, and enhance the economic and social well-being of the people.

 

Section 36. Assistance to People’s and Non-governmental Organizations. – A local government unit may, through its local chief executive and with the concurrence of the sanggunian concerned, provide assistance, financial or otherwise, to such people’s and non-governmental organizations for economic, socially-oriented, environmental, or cultural projects to be implemented within its territorial jurisdiction.

Taxation – sources of income of local governments

If it’s not in the IRA, you cannot collect it

In terms of spending, there (1) should have basis on law; and, (2) with public purpose

 

Local Revenue generation

Section 129. Power to Create Sources of Revenue. – Each local government unit shall exercise its power to create its own sources of revenue and to levy taxes, fees, and charges subject to the provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local government units.

 

Five distinct classes of potential LGU revenues

  1. Land-based tool*
  2. Community activity-based tools**
  3. Infrastructure based tools (sections 250, 155)
  4. Debt-based tools (sections 297-302)
  5. Revenue-sharing tools (sections 290, 291 and congressional funds)

*sections 232, 235, 135, 236, 235 (a), 257, 258, 260, 20, 557, 558, 138

**sections 143, 156, 137, 136, 139, 140, 141, 149, 153

 

System of Budget Administration

Local government budgeting

  1. Allocation
    • Economic efficiency
    • Technical efficiency
    • Net social benefits/costs
  2. Distribution
  3. Stabilization/Growth

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Budget preparation

  • Done by the local chief executive and the local finance committee

Section 317. Submission of budget proposals by Heads of Departments or Offices

  • Each head of department or office shall submit a budget proposal for his department or office to the local chief executive on or before the 15th of July each year;
  • Provided, that the budget proposal for each department or office shall be categorized under either proposal of economic, social or general services;
  • Provided, further, that each service shall be covered by the budget of at least 1 department or office of the LGU concerned.

xxx

 

Two parts of executive budget:

Section 317 (b)

Budget proposals of departments or offices shall be divided into 2 primary categories, namely:

(1) the current operating expenditures; and,

(2) the capital outlay

 

xxx

 

Preparation of the Budget by the Local Executive

Section 318, par. 2.

  • The local chief executive shall submit the said executive budget to the sanggunian concerned not later than the 16th of October of the current fiscal year.
  • Failure to submit such budget on the date prescribed herein shall subject the LCE to such criminal and administrative penalties as provided for under this Code and other applicable laws

 

Budgetary requirements (section 324)

The budgets of LGUs for any fiscal year shall comply with the following requirements:

  1. 1. Barangay Aid – aid to barangays by the province, city or municipality shall not be less than P1,000 per barangay (324 c)
  2. Calamity Fund – 5% of the annual appropriations for unforeseen expenditures shall be set aside in the local budget for calamities as declared by the sanggunian concerned (324 d)
  3. Development Plan/debt servicing – debt servicing in the local budget is fixed at not more than 20% of the regular income of the local government unit (324 b)
  4. Discretionary Fund (sec. 325 h) – the annual appropriations for discretionary purposes of the LCE shall not exceed 2% of the actual receipts derived from basic real property tax in the next preceding calendar year

Budget Authorization

  • Legislative discussion of proposed budget is done by the Sanggunian between October 16 and November 17
  • Enact annual budget via appropriation ordinance on or before the current fiscal year

 

Budget Review

Section 326. Review of appropriation ordinances of provinces, HUCs, ICCs and Municipalities within Metro Manila Areas.

  • DBM Power of review. The DBM has the power to review ordinances authorizing annual or supplemental appropriations of provinces, cities and municipalities

Section 327. Review of appropriation ordinances of component cities and municipalities.

  • The Sangguniang Panlalawigan shall review the ordinance authorizing the annual or supplemental appropriations of component cities and municipalities in the same manner and within the same period prescribed for the review of other ordinances
  • If within 90 days from receipt, the Sanngunian takes no action, the same shall be deemed to have been reviewed in accordance with law and shall continue to be in full force and effect.
  • Sangguniang Panglungsod or Bayan power of review – sanggunians of cities and municipalities have the power to review the barangay budgets.
    • The review must be completed within 60 days from receipt of the ordinance
    • If no action was taken within the said period, the ordinance is deemed approved (328 b)

Budget execution

  • Actual release and disbursement of funds

 

Limitations in disbursements

  • Overdrafts discouraged (337) – disbursements may be made from amounts in the possession of the local treasury but in no case shall such exceed 50% of the uncollected estimated revenue

 

  • Cash advances (339) – no cash advance shall be granted to any local official or employee, elective or appointive, unless made in accordance with the rules and regulations as the COA may prescribe

 

  • No advance payments (338) – no money shall be paid on account of any contract under which no services have been rendered or goods delivered

 

  • No transfer of appropriation from one item to another (336) [technical malversation; juggling funds not allowed] –

 

  • Funds shall be available exclusively for the specific purpose for which they have been appropriated
  • No ordinance shall be passed authorizing any transfer of appropriations from one item to another
  • juggling of funds whereby monies appropriated for specific purposes are transferred or utilized for other purposed is prohibited

 

Budget Accountability (COA)

  • see Section 340

 

 

 

MR HOLDINGS, LTD. vs. SHERIFF CARLOS P. BAJAR, SHERIFF FERDINAND M. JANDUSAY, SOLIDBANK CORPORATION, AND MARCOPPER MINING CORPORATION (FIA; Doing business)

G.R. No. 138104. April 11, 2002

MR HOLDINGS, LTD., petitioner, vs. SHERIFF CARLOS P. BAJAR, SHERIFF FERDINAND M. JANDUSAY, SOLIDBANK CORPORATION, AND MARCOPPER MINING CORPORATION, respondents.

FACTS:

On 04 November 1992, a Principal Loan Agreement and Complementary Loan Agreement, was executed between Asian Development Bank (ADB), a multilateral development finance institution, and Marcopper Mining Corporation (Marcopper) to extend a loan to the latter in the aggregate amount of US$40,000,000.00 to finance the latter’s mining project at Sta. Cruz, Marinduque.

On even date, ADB and Placer Dome, Inc., (Placer Dome), a foreign corporation which owns 40% of Marcopper, executed a Support and Standby Credit Agreement whereby the latter agreed to provide Marcopper with cash flow support for the payment of its obligations to ADB.

To secure the loan, Marcopper executed in favor of ADB a Deed of Real Estate and Chattel Mortgage dated November 11, 1992, covering substantially all of its (Marcoppers) properties and assets in Marinduque. It was registered with the Register of Deeds on November 12, 1992.

When Marcopper defaulted in the payment of its loan obligation, Placer Dome, in fulfilment of its undertaking under the Support and Standby Credit Agreement, and presumably to preserve its international credit standing, agreed to have its subsidiary corporation, petitioner MR Holding, Ltd., assumed Marcopper’s obligation to ADB in the amount of US$ 18,453,450.02. Consequently, in an Assignment Agreement dated March 20, 1997, ADB assigned to petitioner all its rights, interests and obligations under the principal and complementary loan agreements, (Deed of Real Estate and Chattel Mortgage, and Support and Standby Credit Agreement).

On December 8, 1997, Marcopper likewise executed a Deed of Assignment in favor of petitioner. Under its provisions, Marcopper assigns, transfers, cedes and conveys to petitioner, its assigns and/or successors-in-interest all of its (Marcoppers) properties, mining equipment and facilities.

Meanwhile, it appeared that on May 7, 1997, Solidbank Corporation (Solidbank) obtained a Partial Judgment against Marcopper from the RTC, Branch 26, Manila.

Upon Solidbank’s motion, the RTC of Manila issued a writ of execution pending appeal directing Carlos P. Bajar, respondent sheriff, to require Marcopper to pay the sums of money to satisfy the Partial Judgment. Thereafter, respondent Bajar issued two notices of levy on Marcoppers personal and real properties, and over all its stocks of scrap iron and unserviceable mining equipment. Together with sheriff Ferdinand M. Jandusay (also a respondent) of the RTC, Branch 94, Boac, Marinduque, respondent Bajar issued two notices setting the public auction sale of the levied properties on August 27, 1998 at the Marcopper mine site.

Having learned of the scheduled auction sale, petitioner served an Affidavit of Third-Party Claim upon respondent sheriffs on August 26, 1998, asserting its ownership over all Marcoppers mining properties, equipment and facilities by virtue of the Deed of Assignment.

Upon the denial of its Affidavit of Third-Party Claim by the RTC of Manila, petitioner commenced with the RTC of Boac, Marinduque, presided by Judge Leonardo P. Ansaldo, a complaint for reivindication of properties, etc., with prayer for preliminary injunction and temporary restraining order against respondents Solidbank, Marcopper, and sheriffs Bajar and Jandusay.

On October 6, 1998, Judge Ansaldo denied petitioners application for a writ of preliminary injunction on the ground, among others, that petitioner has no legal capacity to sue, it being a foreign corporation doing business in the Philippines without license. This decision was affirmed and sustained by the Court of Appeals.

Petitioner contends that it has the legal capacity to sue and seek redress from Philippine courts as it is a non-resident foreign corporation not doing business in the Philippines and suing on isolated transactions. But the appellate court ruled otherwise, it stressed that while petitioner may just be an assignee to the Deeds of Assignment, it may still fall within the meaning of doing business. Where a single act or transaction however is not merely incidental or casual but indicates the foreign corporations intention to do other business in the Philippines, said single act or transaction constitutes doing or engaging in or transacting business in the Philippines.

ISSUE: Whether or not Petitioner has legal capacity to sue and seek redress from Philippine Courts?

 

RULING:

YES.

First, the Court enumerated the principles governing a foreign corporation’s right to sue in local courts as settled in our Corporation Law, to wit:

  1. a)if a foreign corporation does business in the Philippines without a license, it cannot sue before the Philippine courts;
  2. b) if a foreign corporation is not doing businessin the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction; and,
  3. c)if a foreign corporation does businessin the Philippines with the required license, it can sue before Philippine courts on any transaction.

Apparently, it is not the absence of the prescribed license but the doing (of) business in the Philippines without such license which debars the foreign corporation from access to our courts.

Batas Pambansa Blg. 68, otherwise known as The Corporation Code of the Philippines, is silent as to what constitutes doing or transacting business in the Philippines. Fortunately, jurisprudence has supplied the deficiency and has held that the term implies a continuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object for which the corporation was organized.

In Mentholatum Co. Inc., vs. Mangaliman, this Court laid down the test to determine whether a foreign company is doing business, thus:

x x x The true test, however, seems to be whether the foreign corporation is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another. (Traction Cos. vs. Collectors of Int. Revenue [C.C.A., Ohio], 223 F. 984,987.) x x x.

The traditional case law definition has metamorphosed into a statutory definition, having been adopted with some qualifications in various pieces of legislation in our jurisdiction. For instance, Republic Act No. 7042, otherwise known as the Foreign Investment Act of 1991, defines doing business as follows:

  1. d) The phrase doing business shall include soliciting orders, service contracts, opening offices, whether called liaison offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eight(y) (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity, or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works; or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organizationProvided, however,That the phrase doing business shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor, nor having a nominee director or officer to represent its interests in such corporation, nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account. (Emphasis supplied)

In the case at bar, the Court of Appeals categorized as doing business petitioners participation under the Assignment Agreement and the Deed of Assignment. This is simply untenable. 

The expression doing business should not be given such a strict and literal construction as to make it apply to any corporate dealing whatever. At this early stage and with petitioner’s acts or transactions limited to the assignment contracts, it cannot be said that it had performed acts intended to continue the business for which it was organized.

Being a mere assignee does not constitute “doing business” in the Philippines. MR Holdings, a foreign corporation, cannot be said to be doing business simply because it became an assignee of Marcopper. MR Holdings was not doing anything else other than being a mere assignee. The only time that MR Holdings is considered to be doing business here is that if it continues the business of Marcopper – which it did not.

Therefore, since it is not doing business here, pursuant to the rules above, it can sue without any license before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction.

Indeed, the Court of Appeals holding that petitioner was determined to be doing business in the Philippines is based mainly on conjectures and speculation. Absent overt acts of petitioner from which we may directly infer its intention to continue Marcopper’s business, the Court said it cannot give its concurrence.

Also, petitioner’s payment of US$ 18,453, 450.12 to ADB was more of a fulfilment of an obligation under the Support and Standby Credit Agreement rather than an investment. That petitioner had to step into the shoes of ADB as Marcopper’s creditor was just a necessary legal consequence of the transactions that transpired, hence, the alleged intention of petitioner to continue Marcopper’s business could have no basis for at that time.

The Court was convinced that petitioner was engaged only in isolated acts or transactions. Single or isolated acts, contracts, or transactions of foreign corporations are not regarded as a doing or carrying on of business.

VAN ZUIDEN BROS., LTD. vs. GTVL MANUFACTURING INDUSTRIES, INC. (Foreign Investments; Doing Business)

G.R. No. 147905, May 28, 2007

VAN ZUIDEN BROS., LTD., Petitioner, vs. GTVL MANUFACTURING INDUSTRIES, INC., Respondent.

Facts:

Petitioner, B.Van Zuiden (Zuiden, for brevity) is a corporation, incorporated under the laws of Hong Kong, and engaged in the importation and exportation of several products, including lace products.

On 13 July 1999, petitioner filed a complaint for sum of money against respondent GTVL Mfg. (GTVL for brevity).

It appears that on several occasions, GTVL purchased lace products from Petitioner. In their transaction, the agreement was that ZUIDEN delivers the products purchased by GTVL, to a certain Hong Kong corporation, known as Kenzar Ltd. (KENZAR), and the products are then considered as sold, upon receipt by KENZAR of the goods purchased by GTVL. Thereafter, KENZAR had the obligation to deliver the products to the Philippines and/or to follow whatever instructions GTVL had on the matter.

However, commencing October 31, 1994 until the filing of the complaint, GTVL has failed and refused to pay the agreed purchase price for several deliveries ordered by it and delivered by ZUIDEN, the obligation amounts to U.S.$32,088.02 [inclusive of interest].

Instead of filing an answer, respondent filed a Motion to Dismiss on the ground that petitioner has no legal capacity to sue. Respondent alleged that petitioner is doing business in the Philippines without securing the required license. Accordingly, petitioner cannot sue before Philippine courts.

On 10 November 1999, the trial court dismissed the complaint; the decision which the Court of Appeals sustained.

The Court of Appeals found that the parties entered into a contract of sale whereby petitioner sold lace products to respondent in a series of transactions. While petitioner delivered the goods in Hong Kong to Kenzar, another Hong Kong company, the party with whom petitioner transacted was actually respondent, a Philippine corporation, and not Kenzar. The Court of Appeals believed Kenzar is merely a shipping company. The Court of Appeals concluded that the delivery of the goods in Hong Kong did not exempt petitioner from being considered as doing business in the Philippines.

In the present controversy, petitioner is a foreign corporation which claims that it is not doing business in the Philippines. As such, it needs no license to institute a collection suit against respondent before Philippine courts. Respondent argues otherwise.

Issue:

Whether or not petitioner, an unlicensed foreign corporation, has a legal capacity to sue before the Philippine courts?

Held: YES.

Ruling:

Section 133 of the Corporation Code provides:

 

Doing business without license. No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.

The law is clear. An unlicensed foreign corporation doing business in the Philippines cannot sue before Philippine courts. On the other hand, an unlicensed foreign corporation not doing business in the Philippines can sue before Philippine courts.

Likewise, under Section 3(d) of Republic Act No. 7042 (RA 7042) or “The Foreign Investments Act of 1991,” the phrase “doing business” includes:

x x x soliciting orders, service contracts, opening offices, whether called “liaison” offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That the phrase “doing business” shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account.

The series of transactions between petitioner and respondent cannot be classified as “doing business” in the Philippines under Section 3(d) of RA 7042. An essential condition to be considered as “doing business” in the Philippines is the actual performance of specific commercial acts within the territory of the Philippines for the plain reason that the Philippines has no jurisdiction over commercial acts performed in foreign territories.

In this case, there is no showing that petitioner performed within the Philippine territory the specific acts of doing business mentioned in Section 3(d) of RA 7042. Petitioner did not also open an office here in the Philippines, appoint a representative or distributor, or manage, supervise or control a local business. While petitioner and respondent entered into a series of transactions implying a continuity of commercial dealings, the perfection and consummation of these transactions were done outside the Philippines. Considering the given facts, it is worthy to note that the sale of lace products was consummated in Hong Kong.

The Court also finds no single activity which petitioner performed here in the Philippines pursuant to its purpose and object as a business organization. Moreover, petitioner’s desire to do business within the Philippines is not discernible from the allegations of the complaint or from its attachments. Therefore, there is no basis for ruling that petitioner is doing business in the Philippines.

We disagree with the Court of Appeals’ ruling that the proponents to the transaction determine whether a foreign corporation is doing business in the Philippines, regardless of the place of delivery or place where the transaction took place.

For example, in exporting. An exporter in one country may export its products to many foreign importing countries without performing in the importing countries specific commercial acts that would constitute doing business in the importing countries. The mere act of exporting from one’s own country, without doing any specific commercial act within the territory of the importing country, cannot be deemed as doing business in the importing country. Otherwise exporters, by the mere act alone of exporting their products, could be considered by the importing countries to be doing business in those countries and will require them to secure a business license in every foreign country where they usually export their products. Such a legal concept will have a deleterious effect not only on Philippine exports, but also on global trade.

Considering that petitioner is not doing business in the Philippines, it does not need a license in order to initiate and maintain a collection suit against respondent for the unpaid balance of respondent’s purchases.

Philippine First Insurance Company, Inc. v. Ma. Carmen Hartigan, CGH and O. Engkee (Formation and Org of Corporation)

G.R. No. L-26370, 31 July 1970 (74 SCRA 252)

Philippine First Insurance Company, Inc. v. Ma. Carmen Hartigan, CGH and O. Engkee

 Barredo, J.:

 FACTS:

Plaintiff was originally organized as an insurance corporation under the name of ‘The Yek Tong Lin Fire and Marine Insurance Co., Ltd.,’ in 1953. But on 26 May 1961, its Articles of Incorporation were amended changing the name of the corporation to ‘Philippine First Insurance, Co., Inc.’.

The case arose when plaintiff, acting in the name of Yek Tong, signed as co-maker together with defendants, a promissory note in favor of China Banking Corporation. Subsequently, as form of security, defendants signed an indemnity agreement in favor of plaintiff in case damages or loses arises thereof.

Defendant Hartigan failed to pay, hence, the complaint for collection of sum of money with interest and other fees.

Defendants deny the allegations, claiming, among others that there is no privity of contract between them and plaintiff since the plaintiff did not conduct its business under the name of Yek Tong Insurance, hence not entitled to the indemnification agreement which is named in favor of Yek Tong.

Decision of the CFI: The Court of First Instance of Manila dismissed the action against plaintiff PFIC, based on the following grounds, among others:

  1. The change of name of the Yek Tong Lin Fire & Marine Insurance Co. to PFIC is of dubious validity, because such change in effect dissolved the original corporation by a process of dissolution not authorized by the Corporation Law;
  2. Assuming the change is valid, Yek Tong is considered dissolved, hence, at the time the indemnity agreement was signed, it has no capacity to enter into such agreement anymore;
  3. Assuming further that the chance is valid, Yek Tong is deemed as continuing as a body corporate for three (3) years for the purpose of prosecuting and defending suits, hence, Yek Tong should be the proper party in interest.

Its Motion for Reconsideration having been denied, the plaintiff filed this present case.

ISSUE: Whether or not a Philippine Corporation may change its name and still retain its original personality and individuality?

RULING: YES.

RATIO:

Under section 18 of the Corporation Code, the law authorizes corporations to amend their charter, its procedure and restrictions for such amendments. There is restriction on the term of their existence and the increase or decrease of the capital stock but there is no prohibition against the change of name.

The general rule as to corporations is that each corporation shall have a name by which it is to sue and be sued and do all legal acts. The name of a corporation in this respect designates the corporation in the same manner as the name of an individual designates the person.” Since an individual has the right to change his name under certain conditions, there is no compelling reason why a corporation may not enjoy the same right.

Further, the Court held that a change of corporate name is not against public policy. As such, what is held to be contrary to public policy is the use by one corporation of the name of another corporation as its trade name.

Likewise, it was ruled that change of name does not result in a corporation’s dissolution. In settled jurisprudence, the Court held that an authorized change in the name of a corporation has no more effect upon its identity as a corporation than a change of name of a natural person has upon his identity. It does not affect the rights of the corporation or lessen or add to its obligations. After a corporation has effected a change in its name it should sue and be sued in its new name.

From the foregoing, the Court believes that the lower court erred in holding that plaintiff is not the right party in interest to sue defendants-appellees. As correctly pointed out by appellant, the approval by the stockholders of the amendment of its articles of incorporation changing the name “The Yek Tong Lin Fire & Marine Insurance Co., Ltd.” to “Philippine First Insurance Co., Inc.” on March 8, 1961, did not automatically change the name of said corporation on that date. Hence, the lower court likewise erred in dismissing appellant’s complaint.

WHEREFORE, judgment of the lower court is reversed, and this case is remanded to the trial court for further proceedings consistent herewith with costs against appellees.

Heirs of Fe Tan Uy v. International Exchange Bank (Corporate Entity)

G.R. No. 166282, 13 February 2013 (690 SCRA 519)

Heirs of Fe Tan Uy v. International Exchange Bank

 Mendoza, J.:

 

FACTS:

Respondent International Exchange Bank (iBank), granted loans to Hammer Garments Corporation (Hammer), covered by promissory notes and deeds of assignment. The loans were likewise secured by a P 9 Million-Peso Real Estate Mortgage executed by Goldkey Development Corporation (Goldkey) over several of its properties and a P 25 Million-Peso Surety Agreement signed by Chua and his wife, Fe Tan Uy (Uy).

However, Hammer defaulted in the payment of its loans, prompting iBank to foreclose on Goldkey’s third-party Real Estate Mortgage. The mortgaged properties were sold for P 12 million during the foreclosure sale, leaving an unpaid balance of P 13,420,177.62.9. For failure of Hammer to pay the deficiency, iBank filed a Complaint for sum of money on December 16, 1997 against Hammer, Chua, Uy, and Goldkey before the Regional Trial Court, Makati City (RTC).

Hammer did not file any Answer, thus it was held in default. On the other hand, Uy claimed that she was not liable to iBank because she never executed a surety agreement in favor of iBank. Goldkey also denies liability, averring that it acted only as a third-party mortgagor and that it was a corporation separate and distinct from Hammer.

RTC decision: ruled in favor of iBank. The lower court said that while it made the pronouncement that the signature of Uy on the Surety Agreement was a forgery, it nevertheless held her liable for the outstanding obligation of Hammer because she was an officer and stockholder of the said corporation. The RTC agreed with Goldkey that as a third-party mortgagor, its liability was limited to the properties mortgaged. It came to the conclusion, however, that Goldkey and Hammer were one and the same entity.

Aggrieved, the heirs of Uy and Goldkey (petitioners) elevated the case to the CA.

CA decision: affirming the findings of the RTC. The CA found that iBank was not negligent in evaluating the financial stability of Hammer. According to the appellate court, iBank was induced to grant the loan because petitioners, with intent to defraud the bank, submitted a falsified Financial Report for 1996 which incorrectly declared the assets and cashflow of Hammer. Because petitioners acted maliciously and in bad faith and used the corporate fiction to defraud iBank, they should be treated as one and the same as Hammer.

Hence, the present petitions filed separately by the heirs of Uy and Goldkey which later on consolidated by this Court.

ISSUE: Whether or not the doctrine of piercing the corporate veil should apply in this case?

RULING: NO.

 RATIO:

Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. Following this principle, obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. A director, officer or employee of a corporation is generally not held personally liable for obligations incurred by the corporation.

Nevertheless, this legal fiction may be disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues.

In this case, petitioners are correct to argue that it was not alleged, much less proven, that Uy committed an act as an officer of Hammer that would permit the piercing of the corporate veil. A reading of the complaint reveals that with regard to Uy, iBank did not demand that she be held liable for the obligations of Hammer because she was a corporate officer who committed bad faith or gross negligence in the performance of her duties such that the lifting of the corporate mask would be merited. What the complaint simply stated is that she, together with her errant husband Chua, acted as surety of Hammer, as evidenced by her signature on the Surety Agreement which was later found by the RTC to have been forged.

The Court emphasized that the application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from an erroneous application.

However, the Court finds Goldkey liable for it is a mere alter ego of Hammer.

Goldkey contends, among others, that iBank is estopped from expanding Goldkey’s liability beyond the real estate mortgage. It adds that it did not authorize the execution of the said mortgage. Finally, it passes the blame on to iBank for failing to exercise the requisite due diligence in properly evaluating Hammer’s creditworthiness before it was extended an omnibus line.

The Court disagrees.

Goldkey’s argument, that iBank is barred from pursuing Goldkey for the satisfaction of the unpaid obligation of Hammer because it had already limited its liability to the real estate mortgage, is completely absurd. Goldkey needs to be reminded that it is being sued not as a consequence of the real estate mortgage, but rather, because it acted as an alter ego of Hammer. Accordingly, they must be treated as one and the same entity, making Goldkey accountable for the debts of Hammer.

Similarly, Goldkey is undoubtedly mistaken in claiming that iBank is seeking to enforce an obligation of Chua. The records clearly show that it was Hammer, of which Chua was the president and a stockholder, which contracted a loan from iBank. What iBank sought was redress from Goldkey by demanding that the veil of corporate fiction be lifted so that it could not raise the defense of having a separate juridical personality to evade liability for the obligations of Hammer.

Under a variation of the doctrine of piercing the veil of corporate fiction, when two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or one and the same.

Concept Builders v NLRC (Corporate Entity)

G.R. No. 108374, 29 May 1996 (257 SCRA 149)

Concept Builders, Inc. v. National Labor Relations Commission (NLRC), et al.

 Hermosisima, Jr., J.:

 FACTS:

Petitioner Concept Builders, Inc., a domestic corporation, while private respondents were employed by said company as laborers, carpenters and riggers.

On November, 1981, private respondents were served individual written notices of termination of employment by petitioner, stating that their contracts of employment had expired and the project in which they were hired had been completed.

Public respondent found however, that at the time of said termination, the project in which they were hired had not yet been finished and completed. In fact, petitioner had to engage the services of sub-contractors whose workers performed the functions of private respondents.

Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and non-payment of their legal holiday pay, overtime pay and thirteenth-month pay against petitioner with the Labor Arbiter (LA).

Labor Arbiter: ruled against petitioner and order the latter to reinstate private respondents and to pay them back wages.

NLRC: Petitioner moved for reconsideration with the National Labor Relations Commission (NLRC) but it dismissed the motion on the ground that the said decision had already become final and executory.

A writ of execution directing the sheriff to execute the Decision, which was partially satisfied through garnishment of sums from petitioner’s debtor, the Metropolitan Waterworks and Sewerage Authority. Thereafter, an Alias Writ of Execution was issued by the Labor Arbiter directing the sheriff to collect from herein petitioner representing the balance of the judgment award, and to reinstate private respondents to their former positions.

The alias Writ of Execution cannot be enforced by the sheriff because all the employees inside petitioner’s premises in Valenzuela claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by petitioner. Thus, NLRC issued a break-open order against Concept Builders and HPPI.

Hence, this present case. Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the execution of its decision despite a third-party claim on the levied property. Petitioner further contends, that the doctrine of piercing the corporate veil should not have been applied, in this case, in the absence of any showing that it created HPPI in order to evade its liability to private respondents.

 ISSUE: Whether or not the doctrine of piercing the corporate veil should apply in this case?

RULING: YES.

RATIO:

It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporations to which it may be connected. But, this separate and distinct personality of a corporation is merely a fiction created by law for convenience and to promote justice. So, when the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws, this separate personality of the corporation may be disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation.

There is no hard and fast rule but there are some probative factors of identity that will justify the application of the doctrine of piercing the corporate veil, to wit:

  1. Stock ownership by one or common ownership of both corporations.
  2. Identity of directors and officers.
  3. The manner of keeping corporate books and records.
  4. Methods of conducting the business.

Likewise, the Court laid down the test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows:

  1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;
  2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal rights; and
  3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

The absence of any one of these elements prevents piercing the corporate veil in applying the instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendants relationship to that operation.

In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations on April 29, 1986, it filed an Information Sheet with the Securities and Exchange Commission on May 15, 1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party claimant, submitted on the same day, a similar information sheet stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila.

Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of backwages and to bar their reinstatement to their former positions. HPPI is obviously a business conduit of petitioner corporation and its emergence was skillfully orchestrated to avoid the financial liability that already attached to petitioner corporation.

Also, in view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of the execution, private respondents had no other recourse but to apply for a break-open order after the third-party claim of HPPI was dismissed for lack of merit by the NLRC.

Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open order issued by the Labor Arbiter.

WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated April 23, 1992 and December 3, 1992, are AFFIRMED.