Mandanas vs. Ochoa

The just share of local government units under Section 6, Article X of the 1987 Constitution shall be computed based on all national taxes, not merely national internal revenue taxes; Congress may determine the percentage share but has no power to alter the constitutionally fixed base.

Section 6, Article X of the 1987 Constitution mandates that LGUs shall have a just share in national taxes, as determined by law, which shall be automatically released to them. Congress implemented this through Section 284 of Republic Act No. 7160 (Local Government Code), which pegged the share to “national internal revenue taxes” rather than all national taxes. Petitioners—local government officials and a member of the House of Representatives—challenged the limitation as violative of the Constitution, asserting that it excluded customs duties and other national taxes, thereby curtailing the fiscal autonomy guaranteed to LGUs. In its main decision, the Court struck down the phrase “internal revenue” and ordered the inclusion of all national taxes, with specific exclusions anchored on other constitutional provisions. The motions for reconsideration sought to reinstate the limited base and, alternatively, to clarify the prospective application.

• Constitutional command: Section 6, Article X of the 1987 Constitution entitles LGUs to a “just share … in the national taxes,” to be determined by law and automatically released.
• Legislative provision: Section 284 of the Local Government Code provided that LGUs shall have a share in “national internal revenue taxes” based on the collection of the third fiscal year preceding, at rates of 30%, 35%, and 40%.
• Petitioners’ challenge: Petitioners, including Congressman Mandanas and Representative Garcia, argued that by limiting the base to national internal revenue taxes, Congress effectively excluded customs duties and other national taxes, contravening the textual mandate of Section 6, Article X.
• Main ruling (July 3, 2018): The Court declared the phrase “internal revenue” unconstitutional; ordered that the just share be sourced from all national taxes; specified which national taxes are included and which are excluded based on special purpose funds, constitutional sharing of national wealth, and the ARMM’s fiscal autonomy; and gave the ruling prospective application, denying arrears.
• Motions for reconsideration: The OSG contended that “the national taxes” in Section 6 refers to a specific class Congress may define, and that legislatively narrowing the base is a valid exercise of the power to determine the just share. Petitioner Garcia insisted on the recovery of arrears from 1992.

• Arrears (Garcia): Petitioner Garcia maintained that because the unconstitutional limitation had been embedded in the Local Government Code since its enactment, the LGUs were entitled to the difference between the shares actually received and the shares they should have received had all national taxes been included from the start.

• Interpretation of Section 6, Article X: Respondents argued that the definite article “the” preceding “national taxes” signals a specific, not all-encompassing, class of taxes, thereby allowing Congress to identify which national taxes form the base.
• Legislative discretion: The OSG insisted that the phrase “as determined by law” empowers Congress not only to fix the percentage but also to define the tax base; deleting “internal revenue” constitutes an unconstitutional judicial encroachment on legislative prerogative.
• Exclusion of specific taxes: Respondents contended that tariffs and customs duties, ARMM-collected taxes, national wealth taxes, excise taxes on tobacco, VAT shares, and certain franchise taxes should be excluded because their inclusion would result in double sharing, deprive the National Government of essential funds, or violate special-purpose fund allocations.
• Prospective timing: Should the ruling stand, the OSG urged that the adjusted shares be granted only beginning Fiscal Year 2022.

• Constitutional base: Whether Section 6, Article X of the 1987 Constitution requires that the just share of LGUs be drawn from all national taxes, or whether Congress may validly restrict the base to national internal revenue taxes.
• Legislative power: Whether Congress possesses the discretion, under the “as determined by law” clause, to select which national taxes serve as the base, and whether the judicial deletion of “internal revenue” usurps legislative power.
• Specific inclusions: Whether tariffs and customs duties, ARMM tax collections, national wealth taxes, excise taxes on tobacco, VAT shares, and franchise taxes are properly included in the recomputed base.
• Prospective application and arrears: Whether the ruling should be purely prospective and from what date, and whether LGUs are entitled to arrears for past under-remittances.

• Constitutional base: Section 6, Article X explicitly identifies “national taxes” as the source of the just share. The narrower phrase “national internal revenue taxes” in Section 284 of the Local Government Code contravenes the Constitution. Verba legis non est recedendum — the plain constitutional text admits no departure. All national taxes must be included, subject only to constitutionally grounded exclusions.
• Legislative power: The qualifier “as determined by law” modifies “just share,” not “national taxes.” Congress may fix the percentage share but may not redefine the constitutionally prescribed base. A contrary reading would allow Congress to amend the Constitution through ordinary legislation, a result impermissibly at odds with the supremacy of the fundamental law. Striking “internal revenue” restores, rather than impairs, the constitutional command.
• Specific inclusions: Tariff and customs duties are national taxes and are included. From ARMM collections, 50% of value-added taxes and 30% of other national taxes are included, with the balance retained by the ARMM under its organic act. Sixty percent of national taxes from the exploitation and development of national wealth are included, the 40% share of host LGUs under Section 7, Article X being excluded. Eighty-five percent of excise taxes on locally manufactured Virginia and other tobacco products are included, with 15% going to special purpose funds. The entire 50% of national taxes collected under Sections 106, 108, and 116 of the NIRC is included. Five percent of the 25% franchise taxes allocated to the National Government under R.A. No. 6631 and R.A. No. 6632 is included. Proceeds from the sale of military bases are not taxes and remain excluded. The COA auditing fee (1/2 of 1% of national tax collections) is a valid special purpose fund and is excluded.
• Prospective application and arrears: The operative fact doctrine applies: the unconstitutional limitation, while in force, produced consequences that cannot justly be erased. The declaration of unconstitutionality is given prospective effect only, and the claim for arrears is denied. The adjusted just share takes effect upon the finality of this resolution, computed on national tax collections of the third fiscal year preceding, using the percentages in the modified Section 284.

• Verba legis non est recedendum — From the clear words of the Constitution there shall be no departure. The plain text “national taxes” cannot be narrowed by Congress to “national internal revenue taxes.”
• Operative fact doctrine — An unconstitutional law, prior to formal nullification, is an operative fact whose effects may be sustained in the interest of equity and fair play. Its application here barred recovery of arrears and confined the ruling to prospective operation.
• Special purpose fund principle (Section 29(3), Article VI) — Taxes levied for a special purpose must be treated as a special fund and spent solely for that purpose, justifying their exclusion from the base of the LGUs’ just share.
• Ut res magis valeat quam pereat — Between two possible constructions, the one that avoids constitutional infirmity must be preferred. The interpretation that preserves the expansive guarantee of fiscal autonomy was adopted over one that would sustain a restrictive legislative act.

• “Verba legis non est recedendum (from the words of a statute there should be no departure). Equally impermissible is that Congress has also thereby curtailed the guarantee of fiscal autonomy in favor of the LGUs under the 1987 Constitution.”
• “The phrase ‘as determined by law’ in Section 6 follows and qualifies the phrase ‘just share’, and cannot be construed as qualifying the succeeding phrase ‘in the national taxes’. The intent of the people in respect of Section 6 is really that the base for reckoning the just share of the LGUs should include all national taxes.”
• “The doctrine of operative fact recognizes the existence of the law or executive act prior to the determination of its unconstitutionality as an operative fact that produced consequences that cannot always be erased, ignored or disregarded. In short, it nullifies the void law or executive act but sustains its effects.”

• Garcia v. Executive Secretary — Relied upon for the definition that customs duties are taxes, supporting their inclusion in the base.
• Araullo v. Aquino III — Applied for its restatement of the operative fact doctrine, underscoring that rigid nullity rules may be tempered by equity and practicality.
• De Agbayani v. Philippine National Bank — Quoted extensively to articulate the rationale and limits of the operative fact doctrine.
• De la Cruz v. Paras — Invoked for the canon that, between competing interpretations, the one free from constitutional infirmity is preferred.
• Commissioner of Internal Revenue v. Filipinos Shell Petroleum Corporation — Cited for the rule that statutory provisions must be read in context and harmonized as a whole.

• Section 6, Article X, 1987 Constitution — Guarantees LGUs a just share in national taxes, determined by law, automatically released. Construed to fix the base at all national taxes.
• Section 284, Republic Act No. 7160 (Local Government Code) — Originally limited the allotment to national internal revenue taxes; declared unconstitutional insofar as it narrowed the base, with “internal revenue” ordered deleted.
• Sections 285, 287, 290, Local Government Code — Conforming amendments deleting “internal revenue” to reflect the base of “national taxes.”
• Section 29(3), Article VI, 1987 Constitution — Mandates that taxes levied for a special purpose be treated as a special fund; justifies exclusion of certain special-purpose national taxes.
• Section 7, Article X, 1987 Constitution — Entitles LGUs to an equitable share in proceeds of national wealth; justifies exclusion of the host LGUs’ 40% share from the base.
• Section 21, National Internal Revenue Code — Enumerates national internal revenue taxes that are now included as part of national taxes.
• Sections 106, 108, 116, and 283, NIRC — VAT provisions; 50% of the increase in collections included.
• Republic Act No. 9054 (ARMM Organic Act) — Governs sharing of ARMM taxes; 50% of VAT and 30% of other national taxes included, balance retained by ARMM.
• Republic Act No. 7171 and Republic Act No. 8240 (Tobacco excise laws) — Allocate 15% of tobacco excise taxes to special funds; that portion excluded.
• Republic Act No. 7227 (Bases Conversion Act) — Proceeds from the sale of military bases are not taxes and are excluded.
• Republic Act No. 6631 and Republic Act No. 6632 (Franchise taxes of racing clubs) — Apportionment valid; 5% national government share included.
• Section 24(3), Presidential Decree No. 1445 (Government Auditing Code) — One-half of one percent of national tax collections as COA auditing fee; excluded as a special purpose fund.

Carpio, Peralta, Gesmundo, J. Reyes, Jr., Hernando, Carandang, and Lazaro-Javier, JJ., concurred. Del Castillo and Jardeleza, JJ., were on official leave and took no part; Perlas-Bernabe, J., was on leave.

• Justice Leonen (joined by A. Reyes, Jr.) — Dissented, maintaining that the phrase “internal revenue” in the Local Government Code falls within Congress’s prerogative to determine the just share; the deletion amounts to judicial legislation that overrides legislative policy. Justice Caguioa maintained his prior dissent.