taxation law 1 reviewer

tax law reviewer

GENERAL PRINCIPLES OF TAXATION

A. TAXATION: ITS GENERAL CONCEPTS

1) Taxation as a power

As a power, taxation refers to the inherent power of the state to demand enforced contributions for public purpose or purposes.

i. Nature of the power of taxation

Inherent in sovereignty The power of taxation is inherent in sovereignty as an incident or attribute thereof, being essential to the existence of every government. It can be exercised by the government even if the Constitution is entirely silent on the subject.

a. Constitutional provisions relating to the power of taxation do not operate as grants of the power to the government. They merely constitute limitations upon a power which would otherwise be practically without limit.

b. While the power to tax is not expressly provided for in our constitutions, its existence is recognized by the provisions relating to taxation.

In the case of Mactan Cebu International Airport Authority vs. Marcos, Sept. 11, 1996, as an incident of sovereignty, the power to tax has been described as unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislative which imposes the tax on the constituency who are to pay it.

Legislative in character The power to tax is exclusively legislative and cannot be exercised by the executive or judicial branch of the government.

Subject to constitutional and inherent limitations Although in one decided case the Supreme Court called it an awesome power, the power of taxation is subject to certain limitations. Most of these limitations are specifically provided in the Constitution or implied there from while the rest are inherent and they are those which spring from the nature of the taxing power itself although, they may or may not be provided in the Constitution. For example the power to tax may not be delegated except when provided for by the constitution.

Is the Power to Tax the Power to Destroy?

In the case of Churchill, et al. vs. Concepcion (34 Phil 969) it has been ruled that:

The power to impose taxes is one so unlimited in force and so searching in extent so that the courts scarcely venture to declare that it is subject to any restriction whatever, except such as rest in the discretion of the authority which exercise it. No attribute of sovereignty is more pervading, and at no point does the power of government affect more constantly and intimately all the relations of life than through the exaction made under it.

And in the notable case of McCulloch vs. Maryland, Chief Justice Marshall laid down the rule that the power to tax involves the power to destroy.

According to an authority, the above principle is pertinent only when there is no power to tax a particular subject and has no relation to a case where such right to tax exists. This opt-quoted maxim instead of being regarded as a blanket authorization of the unrestrained use of the taxing power for any and all purposes, irrespective of revenue, is more reasonably construed as an epigrammatic statement of the political and economic axiom that since the financial needs of a state or nation may outrun any human calculation, so the power to meet those needs by taxation must not be limited even though the taxes become burdensome or confiscatory. To say that the power to tax is the power to destroy is to describe not the purposes for which the taxing power may be used but the degree of vigor with which the taxing power may be employed in order to raise revenue (I Cooley 179-181)

Constitutional Restraints Re: Taxation is the Power to Destroy

While taxation is said to be the power to destroy, it is by no means unlimited. It is equally correct to postulate that the power to tax is not the power to destroy while the Supreme Court sits, because of the constitutional restraints placed on a taxing power that violated fundamental rights.

In the case of Roxas, et al vs. CTA (April 26, 1968), the SC reminds us that although the power of taxation is sometimes called the power to destroy, in order to maintain the general publics trust and confidence in the Government, this power must be used justly and not treacherously. The Supreme Court held:

The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg. And, in order to maintain the general public trust and confidence in the Government this power must be used justly and not treacherously.

The doctrine seeks to describe, in an extreme, the consequential nature of taxation and its resulting implications, to wit:

a. The power to tax must be exercised with caution to minimize injury to proprietary rights of a taxpayer;

b. If the tax is lawful and not violative of any of the inherent and constitutional limitations, the fact alone that it may destroy an activity or object of taxation will not entirely permit the courts to afford any relief; and

c. A subject or object that may not be destroyed by the taxing authority may not likewise be taxed. (e.g. exercise of a constitutional right)

Cases:

Sison vs. Ancheta, 130 SCRA 654

Municipality of Makati vs. Court of Appeals, 190 SCRA 206

ii. Importance of Taxation and the Lifeblood Doctrine

Rationale of Taxation - The Supreme Court held:

It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of ones hard-earned income to the taxing authorities, every person who is able must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. The symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.

Taxation is a symbiotic relationship, whereby in exchange for the protection that the citizens get from the government, taxes are paid. (Commissioner of Internal Revenue vs. Algue, Inc., et al., L-28896, Feb. 17, 1988)

The areas which used to be left to private enterprise and initiative and which the government was called upon to enter optionally, and only because it was better equipped to administer for the public welfare than is any private individual or group of individuals, continue to lose their well-defined boundaries and to be absorbed within activities that the government must undertake in its sovereign capacity it is to meet the increasing social challenges of the times. Hence, the need for more revenues. (Justice Makalintal in Sison vs. Ancheta, July 25, 1984)

iii. Justifications for the exercise of the taxing power

1. The Benefits-Protection Theory/Benefit-Received Theory

The basis of taxation is the reciprocal duty of protection between the state and its inhabitants. In return for the contributions, the taxpayer receives the general advantages and protection which the government affords the taxpayer and his property.

Qualifications of the Benefit-Protection Theory:

a. It does not mean that only those who are able to pay and do pay taxes can enjoy the privileges and protection given to a citizen by the government.

b. From the contributions received, the government renders no special or commensurate benefit to any particular property or person.

c. The only benefit to which the taxpayer is entitled is that derived from his enjoyment of the privileges of living in an organized society established and safeguarded by the devotion of taxes to public purposes. (Gomez vs. Palomar, 25 SCRA 829)

d. A taxpayer cannot object to or resist the payment of taxes solely because no personal benefit to him can be pointed out as arising from the tax. (Lorenzo vs. Posadas, 64 Phil 353)

2. Necessity Theory

Taxes proceed upon the theory that the existence of the government is a necessity; that it cannot continue without the means to pay its expenses; and that for those means, it has the right to compel all citizens and properties within its limits to contribute.

In a case, the Supreme Court held that:

Taxation is a power emanating from necessity. It is a necessary burden to preserve the States sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the citizenry and those which come with the States territory and facilities, and protection which a government is supposed to provide. (Phil. Guaranty Co., Inc. vs. Commissioner of Internal Revenue, 13 SCRA 775).

3. Lifeblood Theory

Taxes are the lifeblood of the government, being such, their prompt and certain availability is an imperious need. (Collector of Internal Revenue vs. Goodrich International Rubber Co., Sept. 6, 1965) Without taxes, the government would be paralyzed for lack of motive power to activate and operate it.

iv. Purposes and Objectives of Taxation

1. Revenue to provide funds or property with which the State promotes the general welfare and protection of its citizens.

2. Non-Revenue [PR2EP]

a. Promotion of General Welfare Taxation may be used as an implement of police power in order to promote the general welfare of the people. [see Lutz vs. Araneta (98 Phil 148) and Osmea vs. Orbos (G.R. No. 99886, Mar. 31, 1993)]

b. Regulation As in the case of taxes levied on excises and privileges like those imposed in tobacco or alcoholic products or amusement places like night clubs, cabarets, cockpits, etc.

In the case of Caltex Phils. Inc. vs. COA (G.R. No. 92585, May 8, 1992), it was held that taxes may also be imposed for a regulatory purpose as, for instance, in the rehabilitation and stabilization of a threatened industry which is affected with public industry like the oil industry.

c. Reduction of Social Inequality this is made possible through the progressive system of taxation where the objective is to prevent the under-concentration of wealth in the hands of few individuals.

d. Encourage Economic Growth in the realm of tax exemptions and tax reliefs, for instance, the purpose is to grant incentives or exemptions in order to encourage investments and thereby promote the countrys economic growth.

e. Protectionism in some important sectors of the economy, as in the case of foreign importations, taxes sometimes provide protection to local industries like protective tariffs and customs duties. (Re Special Duties under the Tariff and Customs Code; See also RA 8800 re Safeguard Measures Act)

2) Taxation as a process

As a process, it is a means by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of the government. It is merely a way of apportioning the costs of government among those who in some measures are privileged to enjoy its benefits and must bear its burdens.

i. Stages in the tax process

1. Levy/Imposition

the act of imposition by the legislature such as by its enactment of the law.

determination of the persons, property or excises to be taxed, the sum or sums to be raised, the due date thereof and the time and manner of levying and collecting taxes (strictly speaking, such refers to taxation)

2. Assessment and Collection

the act of administration and implementation of the tax law by the executive through its administrative agencies.

consists of the manner of enforcement of the obligation on the part of those who are taxed.

The two processes together constitute the taxation system.

ii. Principles of a sound tax system

1. Fiscal Adequacy

the sources of tax revenue should coincide with, and approximate the needs of government expenditure. Neither an excess nor a deficiency of revenue vis--vis the needs of government would be in keeping with the principle.

The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by Adam Smith in his Canons of Taxation (1776), as: Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state. It simply means that sources of revenues must be adequate to meet government expenditures and their variations. (ABAKADA vs. Ermita, G.R. 168056, Sept. 1, 2005)

2. Administrative Feasibility

tax system should be capable of being properly and efficiently administered by the government and enforced with the least inconveniences to the taxpayer.

3. Theoretical Justice

the tax burden should be in proportion to the taxpayers ability to pay (ability-to-pay principle). The 1987 Constitution requires taxation to be equitable and uniform.

** The non-observance of these canons, which are merely intended to make the tax system sound, will not render the tax impositions by the taxing authority invalid, except to the extent that specific constitutional or statutory limitations are impaired.

B. THE CONCEPT AND CHARACTERISTICS OF TAXES (LEMP3S)

1. It is an enforced contribution

2. It is proportionate in character - It is ordinarily based on the taxpayers ability to pay.

3. It is levied by the law-making body of the State

4. The power to tax is a legislative power which under the Constitution only Congress can exercise through the enactment of laws. Accordingly, the obligation to pay taxes is a statutory liability.

5. A tax is not a voluntary payment or donation. It is not dependent on the will or contractual assent, express or implied, of the person taxed. Taxes are not contracts but positive acts of the government.

6. It is generally payable in money

7. Tax is a pecuniary burden an exaction to be discharged alone in the form of money which must be in legal tender, unless qualified by law, such as RA 304 which allows backpay certificates as payment of taxes.

8. It is levied on persons or property - A tax may also be imposed on acts, transactions, rights or privileges.

9. It is levied for public purpose or purposes - Taxation involves, and a tax constitutes, a burden to provide income for public purposes.

10. It is levied by the State which has jurisdiction over the persons or property. - The persons, property or service to be taxed must be subject to the jurisdiction of the taxing state.

Scope of Legislative Taxing Power [S2 A P K A M]

1. subjects of Taxation (the persons, property or occupation etc. to be taxed)

2. amount or rate of the tax

3. purposes for which taxes shall be levied provided they are public purposes

4. apportionment of the tax

5. situs of taxation

6. method of collection

C. LIMITATIONS ON THE EXERCISE OF THE TAXING POWER

1) Inherent Limitations

i. Public Purpose

Important Points to Consider:

a. If taxation is for a public purpose, the tax must be used:

a.1) for the support of the state or

a.2) for some recognized objects of governments or

a.3) directly to promote the welfare of the community (taxation as an implement of police power)

b. The term public purpose is synonymous with governmental purpose; a purpose affecting the inhabitants of the state or taxing district as a community and not merely as individuals.

c. A tax levied for a private purpose constitutes a taking of property without due process of law.

d. The purposes to be accomplished by taxation need not be exclusively public. Although private individuals are directly benefited, the tax would still be valid provided such benefit is only incidental.

e. The test is not as to who receives the money, but the character of the purpose for which it is expended; not the immediate result of the expenditure but rather the ultimate.

f. In the imposition of taxes, public purpose is presumed.

Test in determining Public Purposes in tax

a. Duty Test whether the thing to be threatened by the appropriation of public revenue is something which is the duty of the State, as a government.

b. Promotion of General Welfare Test whether the law providing the tax directly promotes the welfare of the community in equal measure.

Cases:

a. Pascual vs. Secretary of Public Works, 110 Phil 331

The Court allowed petitioner to maintain a taxpayers suit assailing the constitutional soundness of Republic Act No. 920 appropriating P85,000 for the construction, repair and improvement of feeder roads within private property. All these cases involved the disbursement of public funds by means of a law.

b. Lutz vs. Araneta, 98 Phil 148

The basic defect in the plaintiff's position is his assumption that the tax provided for in Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act, and particularly of section 6 will show that the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry. In other words, the act is primarily an exercise of the police power.

c. Gomez vs. Palomar, 25 SCRA 827

The eradication of a dreaded disease is a public purpose, but if by public purpose the petitioner means benefit to a taxpayer as a return for what he pays, then it is sufficient answer to say that the only benefit to which the taxpayer is constitutionally entitled is that derived from his enjoyment of the privileges of living in an organized society, established and safeguarded by the devotion of taxes to public purposes. Any other view would preclude the levying of taxes except as they are used to compensate for the burden on those who pay them and would involve the abandonment of the most fundamental principle of government that it exists primarily to provide for the common good.

ii. Inherently Legislative

Rationale: Doctrine of Separation of Powers.

Taxation is purely legislative hence, Congress cannot delegate the power to others.

Coverage, Object, Nature, Extent, Situs

Cases:

Pepsi vs. Municipality of Tanauan, 69 SCRA 460

Pepsi vs. City of Butuan, 24 SCRA 789

Exceptions to non-delegation:

a. Delegation to the President (Art.VI. Sec. 28(2) 1987 Constitution) / Flexible Tariff Clause

The power granted to Congress under this constitutional provision to authorize the President to fix within specified limits and subject to such limitations and restrictions as it may impose, tariff rates and other duties and imposts include tariffs rates even for revenue purposes only. Customs duties which are assessed at the prescribed tariff rates are very much like taxes which are frequently imposed for both revenue-raising and regulatory purposes (Garcia vs. Executive Secretary, et. al., G.R. No. 101273, July 3, 1992)

Flexible Tariff Clause: Section 401 Modification of Duty, Tariff and Customs Code of the Philippines (TCCP)

Provide the legal basis by which the President may: (1) change the level and form of import duties, (2) impose an import quota or ban imports, and (3) levy an additional duty on all imports.

b. Delegations to the Local Government (Art. X. Sec. 5, 1987 Constitution)

It has been held that the general principle against the delegation of legislative powers as a consequence of the theory of separation of powers is subject to one well-established exception, namely, that legislative power may be delegated to local governments. The theory of non-delegation of legislative powers does not apply in matters of local concern. (Pepsi-Cola Bottling Co. of the Phil, Inc. vs. City of Butuan, et . al., L-22814, Aug. 28, 1968)

NOTE: In MCIAA vs. Marcos, the Supreme Court ruled that considering the present provisions of the Constitution, Local Government Units power to tax is no longer just a delegated power but a power granted by the Constitution.

c. Delegation to Administrative Agencies with respect to aspects of Taxation not legislative in character.

Examples: assessment and collection

Limitations on Delegation

a. It shall not contravene any Constitutional provisions or inherent limitations of taxation;

b. The delegation is effected either by the Constitution or by validly enacted legislative measures or statute; and

c. The delegated levy power, except when the delegation is by an express provision of Constitution itself, should only be in favor of the local legislative body of the local or municipal government concerned.

Tax Legislation vis--vis Tax Administration

- Every system of taxation consists of two parts:

a. the elements that enter into the imposition of the tax [S2 A P K A M], or tax regulation; and

b. the steps taken for its assessment and collection or tax administration

If what is delegated is tax legislation, the delegation is invalid; but if what is involved is only tax administration, the non-delegability rule is not violated.

iii. Territoriality


1) Territoriality or Situs of Taxation means place of taxation depending on the nature of taxes being imposed.

2) It is an inherent mandate that taxation shall only be exercised on persons, properties, and excise within the territory of the taxing power because:

b.1) Tax laws do not operate beyond a countrys territorial limit.

b.2) Property which is wholly and exclusively within the jurisdiction of another state receives none of the protection for which a tax is supposed to be compensation.

3) However, the fundamental basis of the right to tax is the capacity of the government to provide benefits and protection to the object of the tax. A person may be taxed, even if he is outside the taxing state, where there is between him and the taxing state, a privity of relationship justifying the levy.

Factors to Consider in determining Situs of Taxation

1) kind and Classification of the Tax

2) location of the subject matter of the tax

3) domicile or residence of the person

4) citizenship of the person

5) source of income

6) place where the privilege, business or occupation is being exercised

iv. International Comity


a. The property of a foreign state or government may not be taxed by another.

b. The grounds for the above rule are:

b.1) sovereign equality among states

b.2) usage among states that when one enter into the territory of another, there is an implied understanding that the power does not intend to degrade its dignity by placing itself under the jurisdiction of the latter

b.3) foreign government may not be sued without its consent so that it is useless to assess the tax since it cannot be collected

b.4) reciprocity among states

v. Tax Exemption of the Government


Reasons for Exemptions:

a.1) To levy tax upon public property would render necessary new taxes on other public property for the payment of the tax so laid and thus, the government would be taxing itself to raise money to pay over to itself;

a.2) In order that the functions of the government shall not be unduly impede; and

a.3) To reduce the amount of money that has to be handed by the government in the course of its operations.

Unless otherwise provided by law, the exemption applies only to government entities through which the government immediately and directly exercises its sovereign powers (Infantry Post Exchange vs. Posadas, 54 Phil 866)

Notwithstanding the immunity, the government may tax itself in the absence of constitutional limitations.

Government-owned or controlled corporations, when performing proprietary functions are generally subject to tax in the absence of tax exemption provisions in their charters or law creating them.

2) Constitutional Limitations

i. Due Process Clause

Basis: Sec. 1 Art. 3 No person shall be deprived of life, liberty or property without due process of law x x x.

Requisites:

1. The interest of the public generally as distinguished from those of a particular class require the intervention of the state;

2. The means employed must be reasonably necessary to the accomplishment for the purpose and not unduly oppressive;

3. The deprivation was done under the authority of a valid law or of the constitution; and

4. The deprivation was done after compliance with fair and reasonable method of procedure prescribed by law.

In a string of cases, the Supreme Court held that in order that due process of law must not be done in an arbitrary, despotic, capricious, or whimsical manner.

Cases:

Villegas vs. Hiu Chiong Tsau Pao Ho, November 10, 1978

Requiring a person before he can be employed to get a permit from the City Mayor of Manila who may withhold or refuse it at will is tantamount to denying him the basic right of the people in the Philippines to engage in a means of livelihood. While it is true that the Philippines as a State is not obliged to admit aliens within its territory, once an alien is admitted, he cannot be deprived of life without due process of law which includes the means of livelihood. The shelter of protection under the due process and equal protection clause is given to all persons, both aliens and citizens.

City of Baguio vs. De Leon, 25 SCRA 938

At any rate, it has been expressly affirmed by us that such an "argument against double taxation may not be invoked where one tax is imposed by the state and the other is imposed by the city ..., it being widely recognized that there is nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the same occupation, calling or activity by both the state and the political subdivisions thereof.

Sison vs. Ancheta, GR L-59431, 25 July 1984

Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. Where the differentiation conforms to the practical dictates of justice and equity, similar to the standards of equal protection, it is not discriminatory within the meaning of the clause and is therefore uniform.

CIR vs. CA and Fortune, G.R. No. 119761, August 29, 1996

Unless there is due notice to the taxpaying public, due compliance with Internal Revenue Tax rules and regulations may not be reasonably expected. And most importantly, their strict enforcement could possibly suffer from legal infirmity in the light of the constitutional provision on `due process of law' and the essence of the Civil Code provision concerning effectivity of laws, whereby due notice is a basic requirement.

ii. Equal Protection Clause and the Rule on Uniformity of Taxation

Basis: Sec.1 Art. 3 xxx Nor shall any person be denied the equal protection of the laws.


1. Equal protection of the laws signifies that all persons subject to legislation shall be treated under circumstances and conditions both in the privileges conferred and liabilities imposed

2. This doctrine prohibits class legislation which discriminates against some and favors others.

Cases:

Association of Customs Brokers vs. Manila, 93 Phil 107

While the tax in the Ordinance refers to property tax and it is fixed ad valorem, it is merely levied on all motor vehicles operating within Manila with the main purpose of raising funds to be expended exclusively for the repair, maintenance and improvement of the streets and bridges in said city. The ordinance imposes a license fee although under the cloak of an ad valorem tax to circumvent the prohibition in the Motor Vehicle Law. Further, it does not distinguish between a motor vehicle for hire and one which is purely for private use. Neither does it distinguish between a motor vehicle registered in Manila and one registered in another place but occasionally comes to Manila and uses its streets and public highways. The distinction is necessary if the ordinance intends to burden with tax only those registered in Manila as may be inferred from the word operating used therein. There is an inequality in the ordinance which renders it offensive to the Constitution.

Ormoc Sugar Central vs. Ormoc Treasurer, 17 February 1968

The taxing ordinance should not be singular and exclusive as to exclude any subsequently established sugar central, of the same class as plaintiff, for the coverage of the tax. As it is now, even if later a similar company is set up, it cannot be subject to the tax because the ordinance expressly points only to Ormoc City Sugar Company, Inc. as the entity to be levied upon.

Philreca vs. DILG. 10 June 2003

Supreme Court held that there is reasonable classification under the Local Government Code to justify the different tax treatment between electric cooperatives covered by P.D. No. 269, as amended, and electric cooperatives under R.A. No. 6938. First, substantial distinctions exist between cooperatives under P.D. No. 269, as amended, and cooperatives under R.A. No. 6938. Second, the classification of tax-exempt entities in the Local Government Code is germane to the purpose of the law. Finally, Sections 193 and 234 of the Local Government Code permit reasonable classification as these exemptions are not limited to existing conditions and apply equally to all members of the same class.

NOTE: see also Tio vs. Videogram, 151 SCRA 208.

Requisites for a Valid Classification

1. Must not be arbitrary

2. Must not be based upon substantial distinctions

3. Must be germane to the purpose of law.

4. Must not be limited to existing conditions only; and

5. Must apply equally to all members of a class.

iii. Freedom of Religion

Basis: Sec. 5 Art. III. No law shall be made respecting an establishment of religion or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. x x x


1. License fees/taxes would constitute a restraint on the freedom of worship as they are actually in the nature of a condition or permit of the exercise of the right.

2. However, the Constitution or the Free Exercise of Religion clause does not prohibit imposing a generally applicable sales and use tax on the sale of religious materials by a religious organization. (see Tolentino vs. Secretary of Finance, 235 SCRA 630)

Cases:

Free Exercise Clause

American Bible Society vs. City of Manila, 101 Phil 386

In the case at bar the license fee herein involved is imposed upon appellant for its distribution and sale of bibles and other religious literature. It may be true that in the case at bar the price asked for the bibles and other religious pamphlets was in some instances a little bit higher than the actual cost of the same but this cannot mean that appellant was engaged in the business or occupation of selling said "merchandise" for profit. SC believes that the provisions of City of Manila Ordinance No. 2529, as amended, cannot be applied to appellant, for in doing so it would impair its free exercise and enjoyment of its religious profession and worship as well as its rights of dissemination of religious beliefs.

With respect to Ordinance No. 3000, as amended, which requires the obtention the Mayor's permit before any person can engage in any of the businesses, trades or occupations enumerated therein, SC do not find that it imposes any charge upon the enjoyment of a right granted by the Constitution, nor tax the exercise of religious practices.

Tolentino vs. Secretary of Finance, 25 August 1994

The registration requirement is a central feature of the VAT system, designed to provide a record of tax credits because any person who is subject to the payment of the VAT pays an input tax, even as he collects an output tax on sales made or services rendered. The registration fee is thus a mere administrative fee, one not imposed on the exercise of a privilege, much less a constitutional right.

iv. Freedom of Speech and of the Press

Basis: Sec. 4 Art. III. No law shall be passed abridging the freedom of speech, of expression or of the press xxx


1. There is curtailment of press freedom and freedom of thought if a tax is levied in order to suppress the basic right of the people under the Constitution.

2. A business license may not be required for the sale or contribution of printed materials like newspaper for such would be imposing a prior restraint on press freedom

3. However, an annual registration fee on all persons subject to the value-added tax does not constitute a restraint on press freedom since it is not imposed for the exercise of a privilege but only for the purpose of defraying part of cost of registration.

v. Uniformity, Equitability and Progressivity of Taxation

Basis: Sec. 28(1) Art. VI. The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.


1. Uniformity (equality or equal protection of the laws) means all taxable articles or kinds or property of the same class shall be taxed at the same rate. A tax is uniform when the same force and effect in every place where the subject of it is found.

2.Equitable means fair, just, reasonable and proportionate to ones ability to pay.

3.Progressive system of Taxation places stress on direct rather than indirect taxes, or on the taxpayers ability to pay

4.Inequality which results in singling out one particular class for taxation or exemption infringes no cons938titutional limitation. (See Commissioner vs. Lingayen Gulf Electric, 164 SCRA 27)

5.The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly attainable.

Cases:

Tolentino vs. Secretary of Finance

c. Indeed, regressivity is not a negative standard for courts to enforce. What Congress is required by the Constitution to do is to "evolve a progressive system of taxation." This is a directive to Congress, just like the directive to it to give priority to the enactment of laws for the enhancement of human dignity and the reduction of social, economic and political inequalities (Art. XIII, Sec. 1), or for the promotion of the right to "quality education" (Art. XIV, Sec. 1). These provisions are put in the Constitution as moral incentives to legislation, not as judicially enforceable rights.

City of Baguio vs. De Leon, 25 SCRA

vi. Non-imprisonment for non-payment of poll tax

Basis: Sec. 20 Art. III. No person shall be imprisoned for debt or non-payment of poll tax.


1.The only penalty for delinquency in payment is the payment of surcharge in the form of interest at the rate of 24% per annum which shall be added to the unpaid amount from due date until it is paid. (Sec. 161, LGC)

2. The prohibition is against imprisonment for non-payment of poll tax. Thus, a person is subject to imprisonment for violation of the community tax law other than for non-payment of the tax and for non-payment of other taxes as prescribed by law.

vii. Non-impairment Clause

Basis: Sec. 10 Art. III. No law impairing the obligation of contract shall be passed.


1. A law which changes the terms of the contract by making new conditions, or changing those in the contract, or dispenses with those expressed, impairs the obligation.

2.The non-impairment rule, however, does not apply to public utility franchise since a franchise is subject to amendment, alteration or repeal by the Congress when the public interest so requires. (See MERALCO vs. Province of Laguna, G.R. No. 131359, May 5, 1999)

Cases:

Cagayan Power and Light Co. vs. CIR, G.R. No. 60126, September 25, 1985

SC held that Congress could impair petitioner's legislative franchise by making it liable for income tax from which heretofore it was exempted by virtue of the exemption provided for in its franchise. Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting to income tax all corporate taxpayers not expressly exempted therein and in section 27 of the Code, had the effect of withdrawing petitioner's exemption from income tax.

Casanova s. Hord, 8 Phil 125

RCPI vs. Provincial Assessor of South Cotabato, G.R. 131359, May 5, 1999

City Government of Quezon City vs. Bayantel, G.R. No. 162015, March 6, 2006

viii. Tax Exemption of Traditional Exemptees

Taxation of Properties Actually, Directly and Exclusively used for Religious, Charitable and Educational Purposes

Basis: Sec. 28(3) Art. VI. Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, building, and improvements actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation.


a. Test of the tax exemption: the use and not ownership of the property

b. To be tax-exempt, the property must be actually, directly and exclusively used for the purposes mentioned.

c. The word exclusively means primarily.

NOTE: But see Lung Center vs. QC, 29 June 2004 stating that exclusively means solely.

d. The exemption is not limited to property actually indispensable but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes.

e. The constitutional exemption applies only to property tax.

f. However, it would seem that under existing law, gifts made in favor or religious charitable and educational organizations would nevertheless qualify for donors gift tax exemption. (Sec. 101(9)(3), NIRC)

Cases:

Lladoc vs. CIR, 14 Phil 292

Manifestly, gift tax is not within the exempting provisions (Art VI, Sec. 28 (3)). A gift tax is not a property tax, but an excise tax imposed on the transfer of property by way of gift inter vivos, the imposition of which on property used exclusively for religious purposes, does not constitute an impairment of the Constitution.

Abra Valley College vs. Aquino, 15 June 1988

The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the school building as well as the lot where it is built should be taxed, not because the second floor of the same is being used by the Director and his family for residential purposes, but because the first floor thereof is being used for commercial purposes. However, since only a portion is used for purposes of commerce, it is only fair that half of the assessed tax be returned to the school involved.

Bishop of Nueva Segovia vs. Provincial Board of Ilocos Norte, 51 Phil 352

The Supreme Court included in the exemption a vegetable garden in an adjacent lot and another lot formerly used as a cemetery. It was clarified that the term "used exclusively" considers incidental use also. Thus, the exemption from payment of land tax in favor of the convent includes, not only the land actually occupied by the building but also the adjacent garden devoted to the incidental use of the parish priest. The lot which is not used for commercial purposes but serves solely as a sort of lodging place also qualifies for exemption because this constitutes incidental use in religious functions.

Herrera vs. QC Board of Assessment Appeals, 30 September 1961

Within the purview of the Constitutional exemption from taxation, the St. Catherine's Hospital is a charitable institution, and the fact that it admits pay-patients does not bar it from claiming that it is devoted exclusively to benevolent purposes, it being admitted that the income derived from pay-patients is devoted to the improvement of the charity wards. The existence of "St. Catherine's School of Midwifery" does not, and cannot, affect the exemption to which St. Catherine's Hospital is entitled under our fundamental law. On the contrary, it furnishes another ground for exemption.

Similarly, the garage in the building above referred to which was obviously essential to the operation of the school of midwifery and were entitled to transportation thereto for Mrs. Herrera received no compensation as directress of St. Catherine's Hospital were incidental to the operation of the latter and of said school, and, accordingly, did not affect the charitable character of said hospital and the educational nature of said school.

Lung Center of the Philippines vs. QC, 29 June 2004

The portions of the land leased to private entities as well as those parts of the hospital leased to private individuals are not exempt from such taxes. On the other hand, the portions of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real property taxes.

ix. Tax Exemption of Non-stock, non-profit educational institutions

Basis: Sec. 4 (3), Art. XIV. All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law.

Department of Finance Order No. 137-87, dated Dec. 16, 1987

The following are some of the highlights of the DOF order governing the tax exemption of non-stock, non-profit educational institutions:

1. The tax exemption is not only limited to revenues and assets derived strictly from school operations like income from tuition and other miscellaneous fees such as matriculation, library, ROTC, etc. fees, but it also extends to incidental income derived from canteen, bookstore and dormitory facilities.

2. In the case, however, of incidental income, the facilities mentioned must not only be owned and operated by the school itself but such facilities must be located inside the school campus. Canteens operated by mere concessionaires are taxable.

3. Income which is unrelated to school operations like income from bank deposits, trust fund and similar arrangements, royalties, dividends and rental income are taxable.

4.The use of the schools income or assets must be in consonance with the purposes for which the school is created; in short, use must be school-related, like the grant of scholarships, faculty development, and establishment of professional chairs, school building expansion, library and school facilities.

Case: CIR vs. CA, 14 October 1998 (YMCA)

YMCA is not an educational institution within the purview of Article XIV, Section 4, paragraph 3 of the Constitution. The term educational institution or institution of learning has acquired a well-known technical meaning, of which the members of the Constitutional Commission are deemed cognizant. Under the Education Act of 1982, such term refers to schools. The school system is synonymous with formal education, which refers to the hierarchically structured and chronological graded learnings organized and provided by the formal school system and for which certification is required in order for the learner to progress through the grades or move to the higher levels. The Court has examined the Amended Articles of Incorporation and By-Laws of the YMCA, but found nothing in them that even hints that it is a school or an educational institution.

x. Tax Exemptions of Revenues and Assets, including grants, endowments, donations or contributions to Educational Institutions

Basis: Sec. 4(4) Art. XIV. Subject to the conditions prescribed by law, all grants, endowments, donations or contributions used actually, directly and exclusively for educational purposes shall be exempt from tax.


1. The exemption granted to non-stock, non-profit educational institution covers income, property, and donors taxes, and custom duties.

2. To be exempt from tax or duty, the revenue, assets, property or donation must be used actually, directly and exclusively for educational purpose.

3. In the case or religious and charitable entities and non-profit cemeteries, the exemption is limited to property tax.

4. The said constitutional provision granting tax exemption to non-stock, non-profit educational institution is self-executing.

5. Tax exemptions, however, of proprietary (for profit) educational institutions require prior legislative implementation. Their tax exemption is not self-executing.

6. Lands, Buildings, and improvements actually, directly, and exclusively used for educational purposed are exempt from property tax, whether the educational institution is proprietary or non-profit.

xi. Origin or Revenue, Appropriation and Tariff Bills

Basis: Sec. 24 Art. VI. All appropriation, revenue or tariff bills, bill authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments.

Under the above provision, the Senators power is not only to only concur with amendments but also to propose amendments. (Tolentino vs. Sec. of Finance, supra)

xii. Flexible Tariff Clause

Delegation of Legislative Authority to Fix Tariff Rates, Imports and Export Quotas

Basis: Sec. 28(2) Art. VI x x x The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the government.

xiii. Voting Requirements in connection with the Legislative Grant for tax exemption

Basis: Sec. 28(4) Art. VI. No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of the Congress.

The above provision requires the concurrence of a majority not of attendees constituting a quorum but of all members of the Congress.

xiv. Non-impairment of the Supreme Courts jurisdiction in Tax Cases

Basis: Sec. 5 (2) Art. VIII. The Congress shall have the power to define, prescribe, and apportion the jurisdiction of the various courts but may not deprive the Supreme Court of its jurisdiction over cases enumerated in Sec. 5 hereof.

Sec. 5 (2b) Art. VIII. The Supreme Court shall have the following powers: x x x(2) Review, revise, modify or affirm on appeal or certiorari x x x final judgments and orders of lower courts in x x x all cases involving the legality of any tax, impost, assessment, or toll or any penalty imposed in relation thereto.

xv. Taxation by Local Government Units

3) The Doctrine of Judicial Non-Interference / Power of Judicial Review in Taxation

The courts cannot review the wisdom or advisability or expediency of a tax. The courts power is limited only to the application and interpretation of the law.

Judicial action is limited only to review where involves:

1. The determination of validity on the tax in relation to constitutional precepts or provisions.

2. The determination, in an appropriate case, of the application of the law.

4) Taxpayers Suit

It is only when an act complained of, which may include legislative enactment, directly involves the illegal disbursement of public funds derived from taxation that the taxpayers suit may be allowed.

D. FORMS OF ESCAPE FROM TAXATION

1) Resulting to Losses to Governments Revenue

i. Tax Evasion

the use of the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax.

an illegal practice where aperson, organization or corporationintentionally avoids paying his/her/its true tax liability. Those caught evading taxes are generally subject to criminal charges and substantial penalties.

Indicia of Fraud in Taxation

a. Failure to declare for taxation purposes true and actual income derived from business for two consecutive years, and

b. Substantial underdeclaration of income tax returns of the taxpayer for four consecutive years coupled with overstatement of deduction.

Evasion of the tax takes place only when there are no proceeds. Evasion of Taxation is tantamount, fiscally speaking, to the absence of taxation

ii. Tax Avoidance

is the use by the taxpayer of legally permissible alternative tax rates or method of assessing taxable property or income in order to avoid or reduce tax liability.

is the legal utilization of the tax regime to one's own advantage, in order to reduce the amount of tax that is payable by means that are within the law.

Tax Avoidance is not punishable by law, a taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or altogether avoid by means which the law permits.

Distinction between Tax Evasion and AvoidanceTax Evasion vs. Tax Avoidance

accomplished by breaking the letter of the lawaccomplished by legal procedures or means which maybe contrary to the intent of the sponsors of the tax law but nevertheless do not violate the letter of the law

iii. Tax Exemption

is a grant of immunity, express or implied, to particular persons or corporations from the obligations to pay taxes.

Nature of Tax Exemption

1. It is merely a personal privilege of the grantee

2. It is generally revocable by the government unless the exemption is founded on a contract which is protected from impairment, but the contract must contain the other essential elements of contracts, such as, for example, a valid cause or consideration.

3. It implies a waiver on the part of the government of its right to collect what otherwise would be due to it, and in this sense is prejudicial thereto.

4. It is not necessarily discriminatory so long as the exemption has a reasonable foundation or rational basis.

Rationale of tax Exemption

Public interest would be subserved by the exemption allowed which the law-making body considers sufficient to offset monetary loss entailed in the grant of the exemption. (CIR vs. Bothelo Shipping Corp., L-21633, June 29, 1967; CIR vs. PAL, L-20960, Oct. 31, 1968)

Grounds for Tax Exemptions

1. May be based on a contract in which case, the public represented by the Government is supposed to receive a full equivalent therefore

2. May be based on some ground of public policy, such as, for example, to encourage new and necessary industries.

3. May be created in a treaty on grounds of reciprocity or to lessen the rigors of international double or multiple taxation which occur where there are many taxing jurisdictions, as in the taxation of income and intangible personal property.

Equity, not a ground for Tax Exemption

There is no tax exemption solely on the ground of equity, but equity can be used as a basis for statutory exemption. At times the law authorizes condonation of taxes on equitable considerations. (Sec 276, 277, Local Government Code)

Kinds of Tax Exemptions

1. As to basis

a. Constitutional Exemptions Immunities from taxation which originate from the Constitution

b. Statutory Exemptions Those which emanate from Legislation

2. As to form

a. Express Exemption Whenever expressly granted by organic or statute of law

b. Implied Exemption Exist whenever particular persons, properties or excises are deemed exempt as they fall outside the scope of the taxing provision itself

3. As to extent

a. Total Exemption Connotes absolute immunity

b. Partial Exemption One where collection of a part of the tax is dispensed with

Principles Governing the Tax Exemption

1. Exemptions from taxation are highly disfavored by law, and he who claims an exemption must be able to justify by the clearest grant of organic or statute of law. (Asiatic Petroleum vs. Llanes, 49 PHIL 466; Collector of Internal Revenue vs. Manila Jockey Club, 98 PHIL 670)

2. He who claims an exemption must justify that the legislative intended to exempt him by words too plain to be mistaken. (Visayan Cebu Terminal vs. CIR, L-19530, Feb. 27, 1965)

3. He who claims exemptions should convincingly prove that he is exempt

4. Tax exemptions must be strictly construed (Phil. Acetylene vs. CIR, L-19707, Aug. 17, 1967)

5. Tax Exemptions are not presumed. (Lealda Electric Co. vs. CIR, L-16428, Apr. 30, 1963)

6. Constitutional grants of tax exemptions are self-executing (Opinion No. 130, 1987, Sec. Of Justice)

7. Tax exemption is personal.

8. Deductions for income tax purposes partake of the nature of tax exemptions, hence, they are strictly construed against the tax payer

9. A tax amnesty, much like a tax exemption is never favored or presumed by law (CIR vs. CA, G.R. No. 108576, Jan. 20, 1999)

10. The rule of strict construction of tax exemption should not be applied to organizations performing strictly religious, charitable, and educational functions

2) Not Resulting to Losses

i. Shifting

Transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or imposed to another or someone else

Impact of taxation is the point at which a tax is originally imposed.

Incidence of Taxation is the point on which a tax burden finally rests or settles down.

Relations among Shifting, Impact and Incidence of Taxation the impact is the initial phenomenon, the shifting is the intermediate process, and the incidence is the result.

Kinds of Shifting:

1. Forward Shifting the burden of tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer

2. Backward Shifting effected when the burden of tax is transferred from the consumer or purchaser through the factors of distribution to the factor of production

3. Onward Shifting this occurs when the tax is shifted two or more times either forward or backward

ii. Capitalization

the reduction in the price of the taxed object equal to the capitalized value of future taxes which the purchaser expects to be called upon to pay

iii. Transformation

The method whereby the manufacturer or producer upon whom the tax has been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and endeavours to recoup himself by improving his process of production thereby turning out his units of products at a lower cost.

3) Illustrative Cases

i. Republic vs. Heirs of Cesar Jalandoni, 20 Sept 1965

Record shows that the three lots alleged to have been excluded in the return were already declared in the earlier return submitted by Bernardino Jalandoni as part of his property and his wife for purposes of income tax, there is reason to believe that their omission from the return submitted by Cesar Jalandoni was merely due to an honest mistake or inadvertence as properly explained by appellants. We can hardly dispute this conclusion as it would be stretching too much the imagination if we would find that, because of such inadvertence, which appears to be inconsequential, the heirs of the deceased deliberately omitted from the return the three lots with the only purpose of defrauding the government after declaring therein as asset of the estate property worth P1,324,555.80.

The same thing may be said with regard to the alleged undervaluation of certain sugar and rice lands reported by Cesar Jalandoni for the same can at most be considered as the result of an honest difference of opinion and not necessarily an intention to commit fraud.

Finally, SC finds it unreasonable to impute with regard to the appraisal made by appellants of the shares of stock of the deceased simply because Cesar Jalandoni placed in his return an aggregate market value instead of mentioning the book value declared by said corporations in the returns filed by them with the Bureau of Internal Revenue. The fact that the value given in the returns did not tally with the book value appearing in the corporate books is not in itself indicative of fraud especially when it is taken into consideration the circumstance that said book value only became known several months after the death of the deceased. Moreover, it is a known fact that stock securities frequently fluctuate in value and a mere difference of opinion in relation thereto cannot serve as proper basis for assessing an intention to defraud the government.

ii. CIR vs. Norton and Harrisson, 31 August 1964

Based on an over-all appraisal of the circumstances presented by the facts of the case, it yields to the conclusion that the Jackbilt is merely an adjunct, business conduit or alter ego, of Norton and Harrison and that the fiction of corporate entities, separate and distinct from each, should be disregarded. This is a case where the doctrine of piercing the veil of corporate fiction, should be made to apply.

It may not be amiss to state in this connection, the advantages to Norton in maintaining a semblance of separate entities. If the income of Norton should be considered separate from the income of Jackbilt, then each would declare such earning separately for income tax purposes and thus pay lesser income tax. The combined taxable Norton-Jackbilt income would subject Norton to a higher tax.

Thus the SC held that Norton & Harrison is liable for the deficiency sales taxes assessed against it by the appellant Commissioner of Internal Revenue

iii. Philippine Acetylene vs. CIR, 17 August 1967

Sales tax are paid by the manufacturer or producer who must make a true and complete return of the amount of his, her or its gross monthly sales, receipts or earnings or gross value of output actually removed from the factory or mill, warehouse and to pay the tax due thereon. The tax imposed by Section 186 of the Tax Code is a tax on the manufacturer or producer and not a tax on the purchaser except probably in a very remote and inconsequential sense. Accordingly, its levy on the sales made to tax-exempt entities like the Napocor is permissible. On the other hand, there is nothing in the language of the Military Bases Agreement to warrant the general exemption granted by General Circular V-41 (1947). Thus, the expansive construction of the tax exemption is void; and the sales to the VOA are subject to the payment of percentage taxes under Section 186 of the Tax Code. Therefore, tax exemption is strictly construed and exemption will not be held to be conferred unless the terms under which it is granted clearly and distinctly show that such was the intention.

iv. CIR vs. American Rubber, 29 November 1966

In Philippine Packing Corporation vs. Collector of Internal Revenue (100 Phil. 545 et seq.), it was ruled that the exemption from sales tax established in Section 188(b) of the Internal Revenue Tax Code in favor of sales of agricultural products, whether in their original form or not, made by the producer or owner of the land where produced is not taken away merely because the produce undergoes processing at the hand of said producer or owner for the purpose of working his product into a more convenient and valuable form suited to meet the demand of an expanded market; that the exemption was not designed in favor of the small agricultural producer, already exempted by the subsequent paragraphs of the same Section 188, but that said exemption is not incompatible with large scale agricultural production that incidentally required resort to preservative processes designed to increase or prolong marketability of the product.

v. CIR vs. John Gotamco and Sons, 27 February 1987

Direct taxes are those that are demanded from the very person who, it is intended or desired, should pay them; while indirect taxes are those that are demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else. Herein, the contractors tax is payable by the contractor but it is the owner of the building that shoulders the burden of the tax because the same is shifted by the contractor to the owner as a matter of self-preservation. Such tax is an indirect tax on the organization, as the payment thereof or its inclusion in the bid price would have meant an increase in the construction cost of the building.

Hence, the Contractees (WHO) exemption from indirect taxes implies that contractor (Gotamco) is exempt from contractors tax.

vi. Maceda vs. Macaraig, 31 May 1991, 8 June 1993

NAPOCOR is a non-profit public corporation created for the general good and welfare, and wholly owned by the government of the Republic of the Philippines. From the very beginning of the corporations existence, NAPOCOR enjoyed preferential tax treatment to enable the corporation to pay the indebtness and obligation and effective implementation of the policy enunciated in Section 1 of RA 6395. From the preamble of PD 938, it is evident that the provisions of PD 938 were not intended to be strictly construed against NAPOCOR. On the contrary, the law mandates that it should be interpreted liberally so as to enhance the tax exempt status of NAPOCOR. It is recognized principle that the rule on strict interpretation does not apply in the case of exemptions in favor of government political subdivision or instrumentality. In the case of property owned by the state or a city or other public corporations, the express exception should not be construed with the same degree of strictness that applies to exemptions contrary to the policy of the state, since as to such property exception is the rule and taxation the exception.

vii. Contex vs. CIR, G.R. No. 151135, July 2, 2004

Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast, exemption only removes the VAT at the exempt stage, and it will actually increase, rather than reduce the total taxes paid by the exempt firms business or non-retail customers. It is for this reason that a sharp distinction must be made between zero-rating and exemption in designating a value-added tax.

Apropos, the petitioners claim to VAT exemption in the instant case for its purchases of supplies and raw materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically exempts them from all national and local internal revenue taxes, including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95.

On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of Registration issued by the BIR. As such, it is exempt from VAT on all its sales and importations of goods and services.

viii. CIR vs. Estate of Benigno Toda, Jr., G.R. No. 147188, September 14, 2004

Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being evil, in bad faith, willful, or deliberate and not accidental; and (3) a course of action or failure of action which is unlawful. All these factors are present in the instant case.

The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud.

Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Altonagas sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the consequent income tax liability.

ix. John Hay Peoples Alternative Coalition vs. Lim, et.al., G.R. No. 119775, October 24, 2003

It is clear that under Section 12 of R.A. No. 7227 it is only the Subic SEZ which was granted by Congress with tax exemption, investment incentives and the like. There is no express extension of the aforesaid benefits to other SEZs still to be created at the time via presidential proclamation.

While the grant of economic incentives may be essential to the creation and success of SEZs, free trade zones and the like, the grant thereof to the John Hay SEZ cannot be sustained. The incentives under R.A. No. 7227 are exclusive only to the Subic SEZ, hence, the extension of the same to the John Hay SEZ finds no support therein.

More importantly, the nature of most of the assailed privileges is one of tax exemption. It is the legislature, unless limited by a provision of the state constitution that has full power to exempt any person or corporation or class of property from taxation, its power to exempt being as broad as its power to tax.

The challenged grant of tax exemption would circumvent the Constitutions imposition that a law granting any tax exemption must have the concurrence of a majority of all the members of Congress.

x. See also: CIR vs. Yutivo and Sons (1961) and CIR vs. Seagate Technology (Phils.), G.R. No. 153866, 11 February 2005.

E. RULES OF CONSTRUCTION OF TAX LAWS

1) On the interpretation and construction of tax statutes, legislative intention must be considered.

2) In case of doubt, tax statutes are construed strictly against the government and liberally construed in favor of the taxpayer.

3) The rule of strict construction against the government is not applicable where the language of the tax law is plain and there is no doubt as to the legislative intent.

4) The exemptions (or equivalent provisions, such as tax amnesty and tax condonation) are not presumed and when granted are strictly construed against the grantee.

5) The exemptions, however, are construed liberally in favor of the grantee in the following:

i. When the law so provides for such liberal construction;

ii. Exemptions from certain taxes granted under special circumstances to special classes of persons;

iii. Exemptions in favor of the Government, its political subdivisions;

iv. Exemptions to traditional exemptees, such as, those in favor of charitable institutions.

6) The tax laws are presumed valid.

7) The power to tax is presumed to exist.

Case: CIR vs. CA and Ateneo, 18 April 1997

The doctrine in the interpretation of tax laws is that (a) statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. . . . (A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. In case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import.

Ateneos Institute of Philippine Culture never sold its services for a fee to anyone or was ever engaged in a business apart from and independently of the academic purposes of the university. Funds received by the Ateneo de Manila University are technically not a fee. They may however fall as gifts or donations which are tax-exempt as shown by private respondents compliance with the requirement of Section 123 of the National Internal Revenue Code providing for the exemption of such gifts to an educational institution.

F. THE CONCEPT OF TAX LAWS

1) Nature

Prospectivity of Tax Laws

General Rule: Taxes must only be imposed prospectively

Exception: The language of the statute clearly demands or express that it shall have a retroactive effect.

Important Points to Consider

1. In order to declare a tax transgressing the due process clause of the Constitution it must be so harsh and oppressive in its retroactive application (Fernandez vs. Fernandez, 99 PHIL934)

2. Tax laws are neither political nor penal in nature they are deemed laws of the occupied territory rather than the occupying enemy. (Hilado vs. Collector, 100 PHIL 288)

3. Tax laws not being penal in character, the rule in the Constitution against the passage of the ex post facto laws cannot be invoked, except for the penalty imposed.

2) Sources

i. Constitution

Other Constitutional Provisions related to Taxation

1. Subject and Title of Bills (Sec. 26(1) 1987 Constitution)

Every Bill passed by Congress shall embrace only one subject which shall be expressed in the title thereof.

NOTE: In the Tolentino E-VAT case, supra, the E-vat, or the Expanded Value Added Tax Law (RA 7716) was also questioned on the ground that the constitutional requirement on the title of a bill was not followed.

2. Power of the President to Veto items in an Appropriation, Revenue or Tariff Bill (Sec. 27(2), Art. VI of the 1987 Constitution)

The President shall have the power to veto any particular item or items in an Appropriation, Revenue or Tariff bill but the veto shall not affect the item or items to which he does not object.

3. Appropriation of Public Money for the benefit of any Church, Sect, or System of Religion (Sec. 29(2), Art. VI of the 1987 Constitution)

No public money or property shall be appropriated, applied, paid or employed, directly or indirectly for the use, benefit, support of any sect, church, denomination, sectarian institution, or system of religion or of any priest, preacher, minister, or other religious teacher or dignitary as such except when such priest, preacher, minister or dignitary is assigned to the armed forces or to any penal institution, or government orphanage or leprosarium.

4. Taxes levied for Special Purpose (Sec. 29(3), Art. VI of the 1987 Constitution)

All money collected or any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. It the purpose for which a special fund was created has been fulfilled or abandoned the balance, if any, shall be transferred to the general funds of the government.

An example is the Oil Price Stabilization Fund created under P.D. 1956 to stabilize the prices of imported crude oil.

In a decided case, it was held that where under an executive order of the President, this special fund is transferred from the general fund to a trust liability account, the constitutional mandate is not violated. The OPSF, according to the court, remains as a special fund subject to COA audit (Osmea vs. Orbos, et al., G.R. No. 99886, Mar. 31, 1993)

5. Allotment to Local Governments

Basis: Sec. 6, Art. X of the 1987 Constitution

Local Government units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them.

ii. Statutes

iii. Issuances by the Secretary of Finance

iv. Administrative Issuance by the BIR

Cases:

CIR vs. CA and Fortune, G.R. No. 119761, 29 August 1996

Prior to the issuance of RMC 37-93, the brands were in the category of locally manufactured cigarettes not bearing foreign brands, subject to 45% ad valorem tax. Without RMC 37-93, the enactment of RA7654 would not have new tax rate consequences on the companys products. In issuing RMC 37-93, the BIR legislated under its quasi-legislative authority and not simply interpreted the law. When an administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially adds to or increases the burden of those governed. It behooves the agency to accord at least to those directly affected a chance to be heard, and thereby be duly informed, before that new issuance is given the force and effect of law.

PB Com vs. CIR, 28 January 1999

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of Section 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress.

v. Tax Ordinances

vi. Tax Treaties

exist between many countries on a bilateral basis to prevent double taxation See CIR vs. SC Johnson and Son, 26 June 1999

G. OTHER DOCTRINES IN TAXATION

Imprescriptibility of Taxes

General Rule: Taxes are imprescriptible

Exception: When provided otherwise by the tax law itself.

Example: NIRC provides for statutes of limitation in the assessment and collection of taxes therein imposed

Important Point to Consider

The law on prescription, being a remedial measure, should be liberally construed to afford protection as a corollary, the exceptions to the law on prescription be strictly construed. (CIR vs. CA. G.R. No. 104171, Feb. 24, 1999)

Doctrine of Equitable Recoupment

It provides that a claim for refund barred by prescription may be allowed to offset unsettled tax liabilities should be pertinent only to taxes arising from the same transaction on which an overpayment is made and underpayment is due.

This doctrine, however, was rejected by the Supreme Court, saying that it was not convinced of the wisdom and proprietary thereof, and that it may work to tempt both the collecting agency and the taxpayer to delay and neglect their respective pursuits of legal action within the period set by law. (Collector vs. UST, 104 PHIL 1062)

INCOME TAXATION

BASIC CONCEPT OF PHILIPPINE INCOME TAXATION

A. CONCEPT OF INCOME

1. INCOME , defined;

It is understood as follows:

a. Income is all wealth that flows into the taxpayer other than a mere return of capital;

b. It includes all gains or profit as well as gains from sale or transfer of property whether real or personal, ordinary or capital asset;

c. The gains derived from capital, from labor, or both combined, provided it is understood to include profit gained through a sale or conversion of capital assets( Black Law Dictionary);

d. The amount of money coming to a person or corporation within specified time, whether as payment for services, interest or profit from investment. ( Fisher Vs. Trinidad 43 Phil 973, Conwi vs. CTA 213 SCRA 83)

2. CAPITAL, defined

Accumulated goods, possessions and assets used for the production of profits and wealth.

- Owners equity in the business.

3. INCOME vs. CAPITAL

Income as contrasted with the capital

1. The essential difference between capital and income is that capital is a fund while, income is a flow;

2. Capital is wealth while, income is the service of wealth;

3. The fact is that property is the tree, income is the fruit; labor is the tree, income is the fruit; capital is the tree, income is the fruit. (Madrigal vs. Rafferty 38 Phil 414)

B. Forms of Income

Income may either be received in the form of:

1. Cash income pertains to money or money substitutes derived as compensation or earning derived from labor, practice of profession and conduct of business.

2. Property income denotes the earned right of ownership over tangible or intangible thing as a result of labor, business or practice of profession.

3. Services income based on the performance received in payment for the work previously rendered by one person to another.

4. Combination of cash, services or property.

C. Classification of Income

1. Compensation Income the gain derived from labor especially employment such as salaries and commission.

2. Profession or Business Income the value derived from an exercise of profession, business or utilization of capital assets. e.g. income derived from sale of assets used in trade or business

3. Passive Income income in which the taxpayer merely waits for the amount to come in. e. g. interest derived from bank accounts

4. Capital Gain an income derived from the sale of assets not used in trade or business. e.g. income from sale of personal property

B. TEST APPLIED IN DETERMINING THE EXISTENCE OF INCOME

1. Severance test/ realization test

as a capital or investment is not income subject to tax, the gain or profit derived from the exchange or transaction of said capital by the taxpayer for his separate used benefit and disposal is income subject to tax.

There is no taxable income until there is separation from capital of something of exchangeable value, thereby supplying the realization or transmutation that would result in the receipt of income.

Under this doctrine, in order that income may exist, it is necessary that there be a separation from capital of something of exchangeable value.

2. TAX benefit rule

Economic benefit rule -That even without the sale or other disposition if by reason of appraisal, the cost basis is used as the new tax base for purposes of computing the allowable depreciation expense, the net difference between the original cost basis and new basis due to appraisal is taxable.

An income is constructively received by a person when - it is credited to the amount of or segregated in his favor and which maybe drawn by him at any time without any limitations e. g.:

Interest credited on savings bank deposits dividends applied by the corporation against the indebtedness of stockholder

Share in the profit of a partner in General Professional Partnership

3. Claim of right doctrine

applicable only in those instances where money is taken, it does not involve the money or other proceeds from embezzled or stolen personal or other property. Thus, proceeds of stolen or embezzled property are taxable income, because even income from illegal sources is taxable. Ownership thereof is not in issue; the culprit has an obligation to return the same.

4. Income from whatever sources

All income not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income.

C. REQUISITES FOR THE TAXABILITY OF AN INCOME

1. Existence of a gain - Gain is a sine qua non or an indispensable requisite to the existence of taxable income. If a taxpayer receives no profit from his labor or transaction, then such condition will not give rise to taxability of income.

There must be a value received in the form of cash or its equivalent as a result of rendition of service or earnings in excess of capital invested.

A mere expectation of profits is not an income

A transaction whereby nothing of exchangeable value comes to or is received by the taxpayer does not give rise to or create taxable income.

Items or amounts received which do not add to the taxpayers net worth or redound to his benefits such as amounts merely deposited or entrusted to him are not considered as gains (CIR vs. Tours specialist, 183 SCRA 402).

Gain need not be necessarily in cash. It may be in form of payment, reduction or cancellation of Ts indebtedness, or gain from exchange of property.

2. Realization of a gain

a. Actual gain gain must be realized and receive.

b. Constructive receipt profit is set aside, declared

When an income is credited to the account of or set aside for, a taxpayer and which may be drawn by him at any time, without any substantial limitation or condition upon which payment is to be made.

GENERAL RULE: A mere increase in the value of property without actual realization, either through sale or other disposition, is not taxable. The increase in value is a mere unrealized increase in capital.

EXCEPT: ECONOMIC BENEFIT PRINCIPLE (BIR RULING NO. 029 98, MARCH 19, 1998)

That even without the sale or other disposition if by reason of appraisal, the cost basis is used as the new tax base for purposes of computing the allowable depreciation expense, the net difference between the original cost basis and new basis due to appraisal is taxable.

An income is constructively received by a person when - it is credited to the amount of or segregated in his favor and which maybe drawn by him at any time without any limitations e. g.:

Interest credited on savings bank deposits

Dividends applied by the corporation against the indebtedness of stockholder

Share in the profit of a partner in General Professional Partnership

3. Gains must not be excluded (sec 32b)

- any amount receive by an officer or employee or by his heirs from the employer as a consequence of separation from service because of death, sickness or other physical disability or for any other cause beyond his control.

The gain must not be exempted.

Property or money received by a taxpayer in which he has no business transaction right to retain, but a duty to return To the one person from whom it was received is not considered as income (e. g. payment by mistake). Reason: The receipt is offset by a liability to the party making the excess payment. However, where the duty to return is unclear, the recipient may be required to pay the tax.

D. THE PHILIPPINE INCOME TAX SYSTEM

1. Type of income tax systems

a. Schedular system vs. Global system

Schedular system

a system employed where the income tax treatment varies and is made to depend on the kind or category of taxable income of the taxpayer.

the system that itemizes the different oncom and provide for varied percentages of tax, to be applied thereto. It has different rates.

* individual taxpayer fallows the scheduler tax system because their income from different sources are classified into compensation income, business income, passive income, capital gain derived from sale of shares of stock or sale of real property. These incomes are categorized and treated differently.

Global income tax system

it is a tax system whereby gross compensation income is aggregated (globalized) with the net income from business, trade or profession to arrive at the global taxable income ( after allowable exemption) which taxable aggregate income is then subjected to a unitary progressive graduated rates of 0% to 32%.

corporate taxpayer adopts the global system of taxation. There is no classification of income from different sources with certain exceptions. All income of corporate taxpayer are globalized and tax at 32%.

Distinctions between schedular and global treatment in income tax

1. Under the scheduler treatment there are different tax rates while under the global treatment there is a unitary or single tax rate;

2. Under the shedular treatment there are different categories of taxable income while under the global treatment there is no need for classification as all taxpayer are subjected to single rate;

3. Shedular is usually used in the income of individual taxpayer while global is usually applied to corporation.

b. Schedular rates of taxes vs. Schedular system

2. Philippine income tax system as a semi global/ mixed system.

E. CRITERIA IN IMPOSING PHILIPPINE INCOME TAXES

1. Place where income was earned

- income is taxable depending on the nature of taxpayer. Citizens of the Philippines and domestic corporation are taxable on income from all sources whether earned within or without; non residents citizen, resident alien, non resident alien and foreign corporation are taxable on income only from sources realized within the Philippines.

2. Residency- test of residency

maintenance of residence here in the Philippines.

Actual physical presence in the Philippines

Though there is an intention to return, if the Taxpayer temporarily resides in the Philippines on an extended stay.

3. Citizenship

F. THE INCOME TAXPAYER AND THE GENERAL PRINCIPLE OF THEIR TAXABILITY (Tax Situs for Income Purposes)

1. General principle of income taxation (sec 23 NIRC)

Except when otherwise provided by NIRC:

a. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;

b. A nonresident citizen is taxable only on income derived from sources within the Philippines;

c. An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;

d. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;

e. A domestic corporation is taxable on all income derived from sources within and without the Philippines; and

f. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.

2. Individual Taxpayer

a.) Classification of Individual Taxpayer

1. Citizens of the Philippines may be classified into;

(a) Resident Citizens (RC) -> those residing in the Phils.

(b) Non-resident Citizens -> those not residing in the Phils.

A non-resident citizens means (sec. 22 (E) National Internal Revenue Code (NIRC):

1. One who establishes to the satisfaction of the Commissioner of Internal Revenue (CIR) the fact of his physical presence abroad with a definite intention to reside therein.

2. A citizen of the Phils. who leaves the country during the taxable year to reside abroad, either as immigrant or for employment or on permanent basis.

3. A citizen of the Phils. who works and derive from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.

4. A citizen who has been previously considered as non-resident citizen and who arrives in the Phils. at any time during the taxable year to reside permanently in the country. (He shall be considered a NRC for the taxable year in which he arrives in the Phils. with respect to his income derived from sources abroad until the date of his arrival in the Phils.)

Rev. Regulations. No. 9-73, November 26, 1973 - The continuity of residence abroad is not essential. If physical presence is established, such physical presence for the calendar year is not interrupted by reasons of travels to the Phils.

2. Aliens / Foreigners

(a.) Resident aliens (RA) -> those residing in the Philippines though not a citizen thereof.

(b.) Non resident aliens (NRA) -> those not residing in the Phils.

1.) Those engaged in trade or bu

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