G.R. No. 199802 & G.R. No. 208488, April 10, 2019
CONGRESSMAN HERMILANDO I. MANDANAS, ET AL. and HON. ENRIQUE T. GARCIA, JR., Petitioners, vs. EXECUTIVE SECRETARY PAQUITO OCHOA, ET AL., Respondents.

FACTS

Petitioners, local government officials, challenged the statutory interpretation limiting the computation of their “just share” in national taxes under the Local Government Code (LGC). They argued that the phrase “internal revenue taxes” in Section 284 of the LGC was unconstitutional for being narrower than the constitutional mandate under Section 6, Article X of the 1987 Constitution, which guarantees LGUs a share in “national taxes.” The respondents, national government officials, contended that the constitutional term “national taxes” was synonymous with “internal revenue taxes” as defined by the National Internal Revenue Code.
The Supreme Court, in its July 3, 2018 Decision, partially granted the petitions. It declared the phrase “internal revenue” in Section 284 of the LGC unconstitutional and ordered its deletion, thereby expanding the base for computing the LGU share to include all national tax collections, not just internal revenue taxes. The Court then resolved the subsequent motions for reconsideration regarding the prospective application and implementation date of this ruling.

ISSUE

Whether the Court’s ruling declaring the phrase “internal revenue” in Section 284 of the LGC unconstitutional should be applied prospectively and, if so, from when the adjusted LGU shares should be computed.

RULING

The Supreme Court denied the motions for reconsideration and affirmed the prospective application of its ruling. The Court applied the doctrine of operative fact, which recognizes that an unconstitutional law or act, prior to its nullification, produced consequences that cannot be simply undone. This doctrine serves as an equitable exception to the general rule that an unconstitutional law is void ab initio.
The legal logic is grounded in equity, fair play, and the practical necessity of maintaining fiscal stability. A retroactive application would create an unmanageable financial burden on the national government, requiring it to disburse colossal, unappropriated sums covering decades of past allocations. The Court emphasized that prospective application is proper where, as here, extraordinary circumstances exist and the ruling would disrupt settled practices and state finances. Consequently, the adjusted just share for LGUs, based on all national taxes, shall be effective only after the finality of this Resolution. The Court accepted the suggestion that the new computation base be applied starting with the 2022 national budget cycle, as the ruling’s finality would be reckoned from the denial of the motions for reconsideration. The rates specified in the modified Section 284 of the LGC shall govern the allocation.