NPC vs City of CabanatuanFact:NAPOCOR, the petitioner, is a government-owned and controlled corporation created under Commonwealth Act 120. It is tasked to undertake the development of hydroelectric generations of power and the production of electricity from nuclear, geothermal, and other sources, as well as, the transmission of electric power on a nationwide basis.For many years now, NAPOCOR sells electric power to the resident Cabanatuan City. Pursuant to Sec. 37 of Ordinance No. 165-92, the respondent assessed the petitioner a franchise tax representing 75% of 1% of the formers gross receipts for the preceding year.Petitioner, whose capital stock was subscribed and wholly paid by the Philippine Government, refused to pay the tax assessment. It argued that the respondent has no authority to impose tax on government entities. Petitioner also contend that as a non-profit organization, it is exempted from the payment of all forms of taxes, charges, duties or fees in accordance with Sec. 13 of RA 6395, as amended.Issue:(1) Is the NAPOCOR excluded from the coverage of the franchise tax simply because its stocks are wholly owned by the National Government and its charter characterized is as a non-profit organization?(2) Is the NAPOCORs exemption from all forms of taxes repealed by the provisions of the Local Government Code (LGC)?Held:(1) NO. To stress, a franchise tax is imposed based not on the ownership but on the exercise by the corporation of a privilege to do business. The taxable entity is the corporation which exercises the franchise, and not the individual stockholders. By virtue of its charter, petitioner was created as a separate and distinct entity from the National Government. It can sue and be sued under its own name, and can exercise all the powers of a corporation under the Corporation Code.To be sure, the ownership by the National Government of its entire capital stock does not necessarily imply that petitioner is not engaged in business.(2) YES. One of the most significant provisions of the LGC is the removal of the blanket exclusion of instrumentalities and agencies of the National Government from the coverage of local taxation. Although as a general rule, LGUs cannot impose taxes, fees, or charges of any kind on the National Government, its agencies and instrumentalities, this rule now admits an exception, i.e. when specific provisions of the LGC authorize the LGUs to impose taxes, fees, or charges on the aforementioned entities. The legislative purpose to withdraw tax privileges enjoyed under existing laws or charter is clearly manifested by the language used on Sec. 137 and 193 categorically withdrawing such exemption subject only to the exceptions enumerated. Since it would be tedious and impractical to attempt to enumerate all the existing statutes providing for special tax exemptions or privileges, the LGC provided for an express, albeit general, withdrawal of such exemptions or privileges. No more unequivocal language could have been used.Lifeblood Theory:Taxes are the lifeblood of the government,for without taxes, the government can neither exist nor endure. A principal attribute of sovereignty,the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity;without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people.In recent years, the increasing social challenges of the times expanded the scope of state activity, and taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar objectives. Taxation assumes even greater significance with the ratification of the 1987 Constitution.

CIR vs FilipinasFacts:Respondent Filipinas Compaia de Seguros, an insurance company, is also engaged in business as a real estate dealer. On January 4, 1956, respondent, in accordance with the single rate then prescribed under Section 182 of the National Internal Revenue Code.paid the amount of P150.00 as real estate dealer's fixed annual tax for the year 1956. Subsequently said Section 182 of the Code was amended by Republic Act No. 1612, which took effect on August 24, 1956, by providing a small of graduated rates: P150 if the annual income of the real estate dealer from his business as such is P4,000, but does not exceed P10,000; P300, if such annual income exceeds P10,000 but does not exceed P30,000; and P500 if such annual income exceeds P30,000.On June 17, 1957, petitioner Commissioner of Internal Revenue assessed and demanded from respondent (whose annual income exceeded P30,000.00) the amount of P350.00 as additional real estate dealer's fixed annual tax for the year 1956. Respondent wrote a letter to petitioner stating that the "records will show that the real estate dealer's fixed tax for 1956 of this Company was fully paid by us prior to the effectivity of Republic Act No. 1612 which amended, among other things, Sections 178 and 192 of the National Internal Revenue Code." And, as to the retroactive effect of said Republic Act No. 1612, respondent added that the Republic Act No. 1856 which, among other things, amended Section 182 of the National Internal Revenue Code, Congress has clearly shown its intention when it provided that the increase in rates of taxes envisioned by Republic Act No. 1612 is to be made effective as of 1 January 1957the Court of Tax Appeals rendered a decision sustaining the contention of respondent company and ordering the petitioner Commissioner of Internal Revenue to desist from collecting the P350.00 additional assessmentIssue: WON the Act should have a retroactive effectHeld:No. As a rule, laws have no retroactive effect, unless the contrary is provided. (Art. 4, Civil Code of the Philippines; Manila Trading and Supply Co. vs. Santos, et al., 66 Phil., 237; La Provisora Filipina vs. Ledda, 66 Ph 573.) Otherwise stated, a state should be consider as prospective in its operation whether it enacts, amen or repeals a tax, unless the language of the statute clearly demands or expresses that it shall have a retroactive effect.The rule applies with greater force to the case bar, considering that Republic Act No. 1612, which imposes the new and higher rates of real estate dealer's annual fixed tax, expressly provides in Section 21 thereof the said Act "shall take effect upon its approval" on August 24, 1956.The instant case involves the fixed annual real estat dealer's tax for 1956. There is no dispute that before the enactment of Republic Act No. 1612 on August 2 1956, the uniform fixed annual real estate dealer's was P150.00 for all owners of rental properties receiving an aggregate amount of P3,000.00 or more a year in the form of rentals and that. "the yearly fixed taxes are due on the first of January of each year" unless tendered in semi-annual or quarterly installments. Since the petitioner indisputably paid in full on January 4, 1956, the total annual tax then prescribed for the year 1956, require it to pay an additional sum of P350.00 to complete the P500.00 provided in Republic Act No. 1612 which became effective by its very terms only on August 24 1956, would, in the language of the Court of Tax Appeals result in the imposition upon respondent of a tax burden to which it was not liable before the enactment of said amendatory act, thus rendering its operation retroactive rather than prospective, which cannot be done, as it would contravene the aforecited Section 21 of Republic Act No. 1612 as well as the established rule regarding prospectivity of operation of statutes.It is also to be observed that said House Bill No. 5819 as originally presented, was expressly intended to amend certain provisions of the National Internal Revenue Code dealing on fixed taxeson business. The provisions in respect of fixed taxon occupationwere merely subsequently added. This would seem to indicate that the proviso in question was intended to cover not only fixed taxes on occupation, but also fixed taxes on business. The fact that said proviso was placed only at the end of paragraph "(B) On occupation" is not, therefore, view of the circumstances, decisive and unmistakable indication that Congress limited the proviso to occupation taxes.Lim vs CA/PPGRN L- 48134-37October 18, 1990Fernan, J.:Facts:Petitioner spouses Emilio E. Lim,Sr. andAntoniaSun Lim were engagedin the dealership of various household appliances. They filed income tax returns for years 1958 and 1959.On October 5, 1959 a raid was conductedby virtue of a search warrant in their business address in Manilaand another in their addressin Quezon City. On October 14, 1960, the Chief of the Investigation Division of the BIR informed petitioners that revenue examiners had been authorized to examine their books of account.On September 30, 1964 Senior Revenue Examiner Raphael S. Daet submitted a memorandum with the findings that the income tax returns filed by petitioners for the years 1958 and 1959 were false or fraudulent.Acting Commissioner of the BIR, Benjamin M. Tabios informed petitioners that there deficiencies in their taxes on 1958 and 1959, giving them until May 7, 1965 to pay the amount.On April 10, 1965, petitioner Emilio E. Lim, Sr., requested for a reinvestigation. The BIR expressed willingness to grant such request but on condition that within ten days from notice, Lim would accomplish a waiver of defense of prescription under the Statute of Limitations and that one half of the deficiency income tax would be deposited with the BIR and the other half secured by a surety bond. If within the ten-day period the BIR did not hear from petitioners, then it would be presumed that the request for reinvestigation had been abandoned.Petitioner Emilio E. Lim, Sr. refused to comply with the above conditions and reiterated his request for another investigation.the BIR Commissioner informed petitioners that their deficiency income tax liabilities for 1958 and 1959. Petitioners were given until March 7, 1967 to submit their objections with the admonition that if they failed to do so, it would be assumed that they were agreeable to the assessment and a formal demand would issue.On March 15, 1967, petitioners wrote the BIR to protest the latest assessment and repeated their request for a reinvestigation.On October 10, 1967, the BIR rendered a final decision holding that there was no cause for reversal of the assessment against the Lim couple. Petitioners were required to pay deficiency income taxes for 1958 and 1959. The final notice and demand for payment was served on petitioners through their daughter-in-law on July 3, 1968.RTC found spouses guilty but Emilio Lim died and CA resolved that counsel petitioners should inform the court as to who are the heirs of Emilio.Issue:1. Whether or not the filing for Criminal Cases should be time-barred.2. Whether or not the crime has been prescribed.Held:No. Preliminarily, it must be made clear that what we are dealing here arecriminal prosecutionsfor filing fraudulent income tax returns and for refusing to pay deficiency taxes. The governing penal provision of the National Internal Revenue Codes is Section 73 in conjunction with Section 354. The dispute centers on the interpretation of Section 354 because in an effort to exculpate themselves, petitioners have raised the defense of prescription. On the five-year prescriptive period, both parties are in agreement.Petitioners maintain that the five-year period of limitation under Section 354 should be reckoned from April 7, 1965, the date of the original assessment while the Government insists that it should be counted from July 3, 1968 when the final notice and demand was served on petitioners' daughter-in-law.Inasmuch as the final notice and demand for payment of the deficiency taxes was served on petitioners on July 3, 1968, it was only then that the cause of action on the part of the BIR accrued. This is so because prior to the receipt of the letter-assessment, no violation has yet been committed by the taxpayers. The offense was committed only after receipt was coupled with the wilful refusal to pay the taxes due within the alloted period. The two criminal informations, having been filed on June 23, 1970, are well-within the five-year prescriptive period and are not time-barred.No. the fact of discovery, there must be a judicial proceeding for the investigation and punishment of the tax offense before the five-year limiting period begins to run. It was on September 1, 1969 that the offenses subject of Criminal Cases Nos. 1790 and 1791 were indorsed to the Fiscal's Office for preliminary investigation. Inasmuch as a preliminary investigation is a proceeding for investigation and punishment of a crime, it was only on September 1, 1969 that the prescriptive period commenced.As Section 354 stands in the statute book (and to this day it has remained unchanged) it would indeed seem that tax cases, such as the present ones, are practically imprescriptible for as long as the period from the discoveryandinstitution of judicial proceedings for its investigation and punishment,up tothe filing of the information in court does not exceed five (5) years.Villanueva vs. Iloilo CityGR L-26521, 28 December 1968En Banc, Castro (J): 8 concurFacts: On 30 September 1946, the Municipal Board of Iloilo City enacted Ordinance 86 imposing license tax fees upon tenement house (P25); tenemen house partly engaged or wholly engaged in and dedicated to business in Baza, Iznart, and Aldeguer Streets (P24 per apartment); and tenement house, padtly or wholly engaged in business in other streets (P12 per apartment). The validity of such ordinance was challenged by Eusebio and Remedios Villanueva, owners of four tenement houses containing 34 apartments. The Supreme Court held the ordinance to be ultra vires. On 15 January 1960, however, the municipal board, believing that it acquired authority to enact an ordinance of the same nature pursuant to the Local Autonomy Act, enacted Ordinance 11 (series of 1960), Eusebio and Remedios Villaniueva assailed the ordinance anew.Issue: Whether Ordinance 11 violate the rule of uniformity of taxation.Held: The Court has ruled that tenement houses constitute a distinct class of property; and that taxes are uniform and equal when imposed upon all property of the same class or character within the taxing authority. The fact that the owners of the other classes of buildings in Iloilo are not imposed upon by the ordinance, or that tenement taxes are imposed in other cities do not violate the rule of equality and uniformity. The rule does not require that taxes for the same purpose should be imposed in different territorial subdivisions at the same time. So long as the burden of tax falls equally and impartially on all owners or operators of tenement houses similarly classified or situated, equality and uniformity is accomplished. The presumption that tax statutes are intended to operate uniformly and equally was not overthrown herein.CIR VS SC JOHNSON & SON, INCS AND CA [G.R. No. 127105. June 25, 1999]Respondent, JOHNSON AND SON, INCa domestic corporation organized and operating under the Philippine laws, entered into a license agreement with SC Johnson and Son, United States of America (USA), a non-resident foreign corporation based in the U.S.A. pursuant to which the [respondent] was granted the right to use the trademark, patents and technology owned by the latter including the right to manufacture, package and distribute the products covered by the Agreement and secure assistance in management, marketing and production from SC Johnson and Son, U. S. A.The said License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of Registration No. 8064 . For the use of the trademark or technology,SC JOHNSON AND SON, INCwas obliged to pay SC Johnson and Son, USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which respondent paid for the period covering July 1992 to May 1993.00 On October 29, 1993,SC JOHNSON AND SON, USAfiled with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that, since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the respondent. Respondent submits that royalties paid to SC Johnson and Son, USA is only subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. The Internal Tax Affairs Division of the BIR ruled against SC Johnson and Son, Inc. and an appeal was filed by the former to the Court of tax appeals.The CTA ruled against CIR and ordered that a tax credit be issued in favor of SC Johnson and Son, Inc. Unpleased with the decision, the CIR filed an appeal to the CA which subsequently affirmed in toto the decision of the CTA. Hence, an appeal on certiorari was filed to the SC.

THE MAIN ISSUE:

WON SC JOHNSON AND SON,USAIS ENTITLED TO THE MOST FAVORED NATION TAX RATE OF 10% ONROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY.

The concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty could not apply to taxes imposed upon royalties in the RP-US Tax Treaty since the two taxes imposed under the two tax treaties are not paid under similar circumstances, they are not containing similar provisions on tax crediting.

The United States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the state of source are both permitted to tax the royalties, with a restraint on the tax that may be collected by the state of source.Furthermore, the method employed to give relief from double taxation is the allowance of a tax credit to citizens or residents of the United States against the United States tax, but such amount shall not exceed the limitations provided by United States law for the taxable year.The Philippines may impose one of three rates- 25 percent of the gross amount of the royalties; 15 percent when the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; or the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third state.

Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances. This would mean that private respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties earned from sources within the Philippines as those allowed to their German counterparts under the RPGermany Tax Treaty. The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against German income and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for double taxation, does not provide for similar crediting of 20% of the gross amount ofroyalties paid.

At the same time, the intention behind the adoption of the provision on relief from double taxation in the two tax treaties in question should be considered in light of the purpose behind the most favored nation clause.

What is the most favored nation clause?

The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the most favored among other countries. It is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the taxpayer is liable.

The RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances.

TAXATION RELATED TOPICS:

What is the purpose of a tax treaty?

The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions.

The goal of double taxation conventions would be thwarted if such treaties did not provide for effective measures to minimize, if not completely eliminate, the tax burden laid upon the income or capital of the investor. Thus, if the rates of tax are lowered by the state of source, in this case, by the Philippines, there should be a concomitant commitment on the part of the state of residence to grant some form of tax relief, whether this be in the form of a tax credit or exemption. Otherwise, the tax which could have been collected by the Philippine government will simply be collected by another state, defeating the object of the tax treaty since the tax burden imposed upon the investorwould remain unrelieved. If the state of residence does not grant some form of tax relief to the investor, no benefit would redound to the Philippines, i.e., increased investment resulting from a favorable tax regime, should it impose a lower tax rate on the royalty earnings of the investor, and it would be better to impose the regular rate rather than lose much-needed revenues to another country.

What is international double taxation and the rationale for doing away with it?

International juridical double taxation is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods; The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies.

When is there double taxation?

Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital.

What are the methods of eliminating double taxation?

First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited.

The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation.

What are the methods of relief under the second method?

There are two methods of reliefthe exemption method and the credit method. Exemption method, the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayers remaining income or capital. Credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter.

The basic difference between the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon the tax.

What is the rationale of reducing tax rates in negotiating tax treaties?

In negotiating tax treaties, the underlying rationale for reducing the tax rate is that thePhilippines will give up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by the other country.

What are tax refunds?

Tax refunds are in the nature of tax exemptions, and as such they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption.

Who has the burden of proof in tax exemption?

The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law.