PRiMUS CUT AND PASTE:

The BAR STAR NOTES

in

TAXATI0N With selected Supreme Court decisions

up to May 10, 2009

VER: 09.05.12

by

ABELARDO T. DOMONDON

How to use the Notes: These Notes in the form of textual materials and representative review questions were

specially prepared by Prof. Domondon for the exclusive

use of Bar Candidates who attended his 2009 lectures on

Taxation, and others he has personally authorized.

The purpose of these Notes is to test the candidates

ability to answer probable questions that may be asked in the

September 33, 2009 Bar Examinations in Taxation. The last

version to be released is Ver. 09.08.17 which may

substantially alter the contents of this Ver. 09.05.12 Be sure

to secure the last version to replace this version.

DO NOT MEMORIZE the suggested answers. Some of

the answers were purposely made to be lengthy in order to

serve as explanatory devices. This is so because you do not

have time anymore to refer back to your review materials.

The materials are arranged in accordance with the bar

examination coverage. The actual bar questions may not be

so arranged. Likewise, these Notes are only indicative of the

areas from where Bar questions may be sourced. The

questions shown in these Notes may or may not be exactly

worded in the actual Bar questions.

The reader is advised to take note of the areas marked

with stars:

If pressed for time, the reader should read only the

items marked and . These areas represent 80% to

90% of the sources of questions that would probably be given

in the 2009 Bar exams. The reader should merely browse

the areas marked and the unmarked areas because they

represent only 10% to 20% of the areas from where questions

may probably be sourced this year.

WARNING:

These materials are copyrighted and/or based on the

writers books on Taxation and future revisions. It is

prohibited to reproduce any part of these Notes in any form

or any means, electronic or mechanical, including

photocopying without the written permission of the author.

These materials are authorized for the use only of Bar

reviewees the author has personally authorized. Unauthorized

users shall not be prosecuted but SHALL BE SUBJECT TO

THE LAW OF KARMA SUCH THAT THEY WILL NEVER

PASS THE BAR OR WOULD BE UNHAPPY IN LIFE for

stealing the intellectual property of the author.

Only copies with the signature of Prof. Domondon, or

his authorized representative and the corresponding number

on this page are considered authorized copies. Holders of

authorized copies are requested not to lend their copies for

reproduction through Xerox or otherwise.

GENERAL PRINCIPLES OF TAXATION

TAXATION, IN GENERAL

2

1. Why are tax laws construed strictly against the State and liberally in favor of the State ? SUGGESTED ANSWER: In case of doubt, tax laws must be construed strictly against the State and liberally in favor of the taxpayer because taxes, as burdens which must be endured by the taxpayer, should not be presumed to go beyond what the law expressly and clearly declares. (Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)

2. Why are tax exemptions are strictly construed

against the taxpayer and liberally in favor of the State ? SUGGESTED ANSWER: Taxes are necessary for the continued existence of the State.

3. Strict interpretation of tax exemption laws. Taxes are what civilized people pay for civilized society. They are the lifeblood of the nation. Thus, statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority. A claim of tax exemption must be clearly shown and based on language in law too plain to be mistaken. Otherwise stated, taxation is the rule, exemption is the exception. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing Mactan Cebu International Airport

Authority v. Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA

667, 680) The burden of proof rests upon the party claiming the exemption to prove that it is in fact covered by the exemption so claimed. (Quezon City, supra citing Agpalo, R.E., Statutory Construction, 2003 ed., p. 301)

4. Rationale for strict interpretation of tax

exemption laws. The basis for the rule on strict construction to statutory provisions granting tax exemptions or deductions is to minimize differential treatment and foster impartiality, fairness and equality of treatment among taxpayers. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008) He who claims an exemption from his share of common burden must justify his claim that the legislature intended to exempt him by unmistakable terms. For exemptions from taxation are not favored in law, nor are they presumed. They must be expressed in the clearest and most unambiguous language and not left to mere implications. It has been held that exemptions are never presumed the burden is on the claimant to establish clearly his right to exemption and cannot be made out of inference or implications but must be laid beyond reasonable doubt. In other words, since

taxation is the rule and exemption the exception, the intention to make an exemption ought to be expressed in clear and unambiguous terms. (Quezon City, supra citing Agpalo, R.E., Statutory Construction, 2003 ed., p. 302)

5. What is the effect of a BIR reversal of a previous

ruling interpreting a law as exempting a taxpayer ? SUGGESTED ANSWER: A reversal of a BIR ruling favorable to a taxpayer would not necessarily create a perpetual exemption in his favor, for after all the government is never estopped from collecting taxes because of mistakes or errors on the part of its agents. (Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)

6. Why is the right to collect taxes imprescriptible

? SUGGESTED ANSWER: a. As a general rule, revenue laws are not intended to be liberally construed, and exemptions are not given retroactive application, considering that taxes are the lifeblood of the government and in Holmes memorable metaphor, the price we pay for civilization, tax laws must be faithfully and strictly implemented. (Commissioner of Internal Revenue v. Acosta, etc.,G. R. No. 154068, August 3, 2007) However, statutes may provide for prescriptive periods for the collection of particular kinds of taxes. b. Tax laws, unlike remedial laws, are not to be applied retroactively. Revenue laws are substantive laws and their application must not be equated with remedial laws. (Acosta, supra)

7. It is said that taxes are the lifeblood of the

government and any delay in its collection would impair

the rendition of government services. May the collection

of taxes be restrained by a court ? SUGGESTED ANSWER: As a general rule, No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge. (Sec. 218, NIRC) However, the Court of Tax Appeals is empowered to enjoin the collection of taxes through administrative remedies when collection could jeopardize the interest of the government or taxpayer. (Sec. 11, Rep. Act No. 1125)

8. What are the grounds and procedure for

suspension of collection of taxes ?

3

SUGGESTED ANSWER: Where the collection of the amount of the taxpayers liability, sought by means of a demand for payment, by levy, distraint or sale of property of the taxpayer, or by whatever means, as provided under existing laws, may jeopardize the interest of the government or the taxpayer, an interested party may file a motion for the suspension of the collection of the tax liability (Sec. 1, Rule 10, RRCTA effective December 15, 2005) with the Court of Tax Appeals. The motion for suspension of the collection of the tax may be filed together with the petition for review or with the answer, or in a separate motion filed by the interested party at any stage of the proceedings. (Sec. 3, Rule 10, RRCTA effective December 15, 2005)

9. Explain the sumptuary purpose of taxation. SUGGESTED ANSWER: The sumptuary purpose of taxation is to promote the general welfare and to protect the health, safety or morals of the inhabitants. It is in the joint exercise of the power of taxation and police power where regulatory taxes are collected. Taxation may be made the implement of the states police power. The motivation behind many taxation measures is the implementation of police power goals. [Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005 citing Lutz v. Araneta, 98 Phil. 148, 152 (1955); in turn citing Great Atl. & Pac. Tea Co. v. Grosjean, 302 U.S. 412; U.S. v. Biutler, 297 U.S. 1; McCulloch v. Maryland, 4 Wheaton 316] The reader should note that the August 3, 2005 Southern Cross case is the decision on the motion for reconsideration of the July 8, 2004 Southern Cross decision. The so-called sin taxes on alcohol and tobacco manufacturers help dissuade the consumers from excessive intake of these potentially harmful products. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)

10. Explain the compensatory purpose of taxation. SUGGESTED ANSWER: The compensatory purpose of taxation is to implement the social justice provisions of the constitution through the progressive system of taxation, which would result to equal distribution of wealth, etc. Progressive income taxes alleviate the margin between rich and poor. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005)

11. What are the distinctions between a tax and a

license fee ? SUGGESTED ANSWER: The following are the distinctions between a tax and a license fee: a. PURPOSE: A tax is imposed for revenue purposes WHILE a license fee is imposed for regulatory purposes. (Unless it is a joint exercise of both the police power and the power of taxation) b. BASIS: A tax is imposed under the power of taxation WHILE a license fee is imposed under police power. c. AMOUNT: There is no limit as to the amount of a tax WHILE the amount of license fee that could be collected is limited to the cost of the license and the expenses of police surveillance and regulation. d. TIME OF PAYMENT: Taxes are normally paid after the start of a business WHILE a license fee before the commencement of business. e. EFFECT OF NON-PAYMENT: Failure to pay a tax does not make the business illegal WHILE failure to pay a license fee makes the business illegal. f. SURRENDER: Taxes being the lifeblood of the state, cannot be surrendered except for lawful consideration WHILE a license fee may be surrendered with or without consideration.

12. Distinguish taxation from police power. SUGGESTED ANSSWER: Taxation is distinguishable from police power as to the means employed to implement these public goals. Those doctrines that are unique to taxation arose from peculiar considerations such as those especially punitive effects (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005 citing U. S. Chief Marshall who once said, the power to tax involves the power to destroy, McCulloch v. Maryland, 4 Wheaton 316, cited in Sison v. Ancheta, G. R. No. L 59431, July 25, 130 SCRA 654) and the belief that taxes are lifeblood of the state. (Southern Cross Cement Corporation v. Cement Manufacturers Association of the Philippines, et al., G. R. No. 158540, August 3, 2005 citing [T]axes being the lifeblood of the government, their prompt and certain availability is of the essence. Sison v. Ancheta, id., citing Vera v. Fernandez, G. R. No. L-31364, March 30, 1979, 89 SCRA 199]

4

These considerations necessitated the evolution of taxation as a distinct legal concept from police power. (Southern Cross Cement Corporation, supra) If the question asks for an enumeration of the distinctions between the power of taxation and police power, the candidate should reformulate no. 17 above.

13. What is the purpose of the Sugar

Adjustment Act ? SUGGESTED ANSWER: The Sugar Adjustment Act which increased existing taxes on sugar was enacted to stabilize the sugar industry to prepare it for the loss of its quota in the U.S. market was levied for a regulatory purpose to protect and promote the sugar industry which is also for a public purpose. (Lutz v. Araneta, 98 Phil. 148) The Philsugin fund, an imposition on sugar, to raise funds to conduct research for the improvement of the sugar industry, is for the purpose of stabilizing the sugar industry which one of the pillars of the Philippine economy which affects the welfare of the State. The levy is not so much an exercise of the power of taxation, nor the imposition of a special levy, but the exercise of police power which is for the general welfare of the entire country, therefore for a public purpose. (Republic v. Bacolod-Murcia Co., et al., G.R. No. L-19824, July 9, 1966)

14. Section 40 (g) of the Public Service Act

authorizes the collection of x x x fees as reimbursement

of its expenses in the authorization, supervision and/or

regulation of the public services: x x x g) For each permit,

authorizing the increase in equipment, the installation of

new units or authorizing the increase of capacity, or the

extension of means or general extensions in the services,

twenty centavos for each one hundred pesos or fraction

of the additional capital necessary to carry out the

permit. (paraphrasing supplied)

Is the imposition a tax measure ? Explain. SUGGESTED ANSWER: No. It is not a tax measure but a simple regulatory provision for the collection of fees imposed pursuant to the exercise of the States police power. A tax is imposed under the taxing power of government principally for the purpose of raising revenues. The law in question, however, merely authorizes and requires the collection of fees for the reimbursement

of the Commissions expenses in the authorization, supervision and/or regulation of public services. (Republic, etc., v. International Communications Corporation (ICC), G. R. No. 141667, July 17, 2006)

15. How may the power of taxation also be used to

implement power of eminent domain ? SUGGESTED ANSWER: Tax measures are but enforced contributions exacted on pain of penal sanctions and clearly imposed for public purpose. In most recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005) Establishments granting the 20% senior citizens discount may claim the discounts granted to senior citizens as tax deduction based on the net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction from gross income for the same taxable year that the discount is granted. Provided, further, That the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue Code, as amended. [M.E. Holding Corporation v. Court of Appeals, et al., G.R. No. 160193, March 3, 2008 citing Expanded Senior Citizens Act of 2003, Sec. 4 (a)]

16. What is purpose for the limitations on the

power of taxation ? SUGGESTED ANSWER: The inherent and constitutional limitations to the power of taxation are safeguards which would prevent abuse in the exercise of this otherwise unlimited and plenary power. The limitations also serve as a standard to measure the validity of a tax law or the act of a taxing authority. A violation of the limitations serves to invalidate a tax law or act in the exercise of the power to tax. INHERENT LIMITATIONS

1. What are the inherent limitations on the power of taxation ? SUGGESTED ANSWER: The inherent limitations are

5

a. Public purpose. The revenues collected from taxation should be devoted to a public purpose. b. No improper delegation of legislative authority to tax. Only the legislature can exercise the power of taxes unless the same is delegated to some other governmental body by the constitution or through a law which does not violate any provision of the constitution. c. Territoriality. The taxing power should be exercised only within territorial boundaries of the taxing authority. d. Recognition of government exemptions; and e. Observance of the principle of comity. Comity is the respect accorded by nations to each other because they are equals. On the other hand taxation is an act of sovereign. Thus, the power should be imposed upon equals out of respect. Some authorities include no double taxation.

2. When are taxes considered as being for a

public purpose ? SUGGESTED ANSWER: The tax revenues are for a public purpose if utilized for the benefit of the community in general. An alternative meaning is that tax proceeds should be utilized only to attain the objectives of government.

Public use is no longer confined to the traditional notion of use by the public but held synonymous with public interest, public benefit, public welfare, and public convenience. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, April 16, 2005)

3. Define a taxpayers suit. SUGGESTED ANSWER: Taxpayers suit is a case where the act complained of directly involves the illegal disbursement of public funds derived from taxation. (Justice Melo, dissenting in Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110)

4. What is locus standi ? SUGGESTED ANSWER: Locus standi is a right of

appearance in a court of justice on a given question. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)

It is a partys personal and substantial interest in the case, such that the party has sustained or will sustain (Ibid.)direct injury as a result of the government act being challenged. It calls for more than just a generalized grievance.

A party need not be a party to the contract to challenge its validity. (Ibid.)

5. What is meant by the term material interest ? SUGGESTED ANSWER: The term interest means a material interest, an interest in issue affected by the decree, as distinguished from mere interest in the question involved, or a mere incidental interest. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)

6. What is the rationale for locus standi ? SUGGESTED ANSWER: The rationale for requiring a party

who challenges the constitutionality of a statute to allege such a personal stake in the outcome of the controversy is to ensure that a concrete adverseness which sharpens the presentation of issues upon which the court so largely depends for illumination of different constitutional questions. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)

7. When may locus standi be brushed aside ? SUGGESTED ANSWER: In cases of paramount importance

where serious constitutional questions are involved, the standing requirements may be relaxed and a suit may be allowed to prosper even where there is no direct injury to the party claiming the right of judicial review. [Coconut Oil Refiners Association, Inc., etc., et al., vs. Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing Bayan (Bagong Alyansang Makabayan) v. Zamora, G. R. No. 138570, October 10, 2000, 342 SCRA 449, in turn citing Kilosbayan, Inc. v. Guingona, Jr., G. R. No. 113375, May 5, 1994, 232 SCRA 110]

8. What are the requirements that must be met before taxpayers, concerned citizens and

legislators may be accorded standing to sue ? SUGGESTED ANSWER: a. The case should involve constitutional issues; b. For taxpayers, there must be a claim of illegal disbursement of public funds or that the tax measure is unconstitutional. c. For voters, there must be a showing of obvious interest in the validity of the election law in question. d. For concerned citizens, there must be a showing that the issues raised are of transcendental importance which must be settled early. e. For legislators, there must be a claim that the official action complained of infringes upon their prerogatives as legislators.

6

(David, et al., v. President Gloria Macapagal-Arroyo, etc., et al., G. R. No. 171396, May 3, 2006)

9. What are the requisites for challenging

constitutionality of law including a tax law ? SUGGESTED ANSWER: The party bringing suit must show not only that the law or act is invalid, but also that he has sustained or is in immediate, or imminent danger of sustaining some direct injury as a result of its enforcement and not merely that he suffers thereby in some indefinite way. (Soriano III v. Lista, et al., G. R. No. 153881, March 24, 2003)

10. Locus standi being merely a matter of

procedure, have been waived in certain instances where a

party who is not personally injured may be allowed to

bring suit. Give some examples. SUGGESTED ANSWER: The following are examples of instances where suits have been brought by parties who have not have been personally injured by the operation of a law or any other government act but by concerned citizens, taxpayers or voters who actually sue in the public interest: a. Taxpayers suits to question contracts entered into by the national government or government-owned or controlled corporations allegedly in contravention of the law.

b. A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public money is being deflected to any improper purpose, or that there is a wastage of public funds through the enforcement of an invalid or unconstitutional law. (Abaya v. Ebdane, G. R. No. 167919, February 14, 2007)

11. The petitioners impugn the validity of the

establishment of tax and duty-free shops within the Subic

Special Economic Zone (SSEZ) and the removal of

consumer goods and items from the zones without

payment of corresponding duties and taxes for the reason

that this constitute executive legislation in violation of the

rule on separation of powers, that only raw material,

capital and equipment should be allowed the privilege.

Rule on the objections and reason out your answer

briefly.

SUGGESTED ANSWER: The objections should not be given credence. It is legal to setup duly authorized duty-free shops in the SSEZ to sell tax and duty-free consumer items in the Secured Area. This is in line with the policy enunciated in the law that the Subic Special Economic Zone shall be developed into a self-sustaining, industrial, commercial, financial and investment center to generate employment opportunities in and around the zone and to attract and promote productive foreign investments.

While it is true that Section 12 (b) of Rep. Act No. 7227 mentions only raw materials, capital and equipment, this does not necessarily mean that the tax and duty free buying privilege is limited to these types of articles to the exclusion of consumer goods. It must be remembered that in construing statutes, the proper course is to start out and follow the true intent of the Legislature and to adopt that sense which harmonizes best with the context and promotes to the fullest manner the policy and objects of the Legislature. The concept of inclusio unius est exclusio alterius does not find application because the phrase tax and duty-free importations of raw materials, capital and equipment was merely cited as an example of incentives that the SSEZ is authorized to grant, in line with its being a free port zone. Thus, the legislative intent is that consumer goods entering the SSEZ which satisfy the needs of the zone and are consumed there are not subject to duties and taxes in accordance with Philippine law. (Coconut Oil Refiners Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527, July 29, 2005)

` Would your answer be the same if a Presidential

Proclamation allowed for the limited withdrawal from the

Clark Special Economic Zone or the John Hay Economic

Zone of consumer goods tax and duty-free ? SUGGESTED ANSWER: The answer would not be the

same. This time the Presidential Proclamation would be invalid as the statutory tax exempt privilege was granted only to the Subic Special Economic Zone and not to John Hay or Clark. This is so because the Constitution mandates that no law granting tax exemption shall be passed without the concurrence of a majority of all the members of Congress. (Coconut Oil Refiners Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing John Hay Peoples Alternative Coalition, et al., v. Lim, etc., et al., G.R. No. 119775, October 24, 2003, 414 SCRA 356) Furthermore, the law is very clear that the exportation or removal of goods from the territory of the Subic Special Economic

7

Zone to other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines. (Ibid.)

11-A. Nature of actual case or controversy. An actual case or controversy involves a conflict of legal rights, an assertion of opposite legal claims susceptible of judicial adjudication. (ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing Cruz, Isagani, PHILIPPINE CONSTITUTIONAL LAW, 1995 edition, p. 23)

11-B. Criteria of being ripe for judicial determination. A closely related requirement is ripeness, that is, the question must be ripe for adjudication. And a constitutional question is ripe for adjudication when the governmental act being challenged has a direct adverse effect on the individual challenging it. (ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing Bernas, Joaquin, THE 1987 CONSTITUTION OF THE REPUBLIC OF THE PHILIPPINES: A COMMENTARY, 1996 edition, pp.

848-849) Thus, to be ripe for judicial adjudication, the petitioner must show a personal stake in the outcome of the case or an injury to himself that can be redressed by a favorable decision of the Court. [ABAKADA Guro Party List, etc., supra, v. Purisima, etc., citing Cruz v.

Secretary of Environment and Natural Resources, 400 Phil. 904 (2000), Vitug, J., separate opinion]

11-C. Personal injury must be shown for judicial

controversy to be ripe for judicial determination. In this case, aside from the general claim that the dispute has ripened into a judicial controversy by the mere enactment of the law even without any further overt act. (ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing La Bugal-

BLaan Tribal Association, Inc. v. Ramos, G.R. No. 127882, 01 December 2004, 445 SCRA 1)

Thus, where petitioners fail either to assert any specific and concrete legal claim or to demonstrate any direct adverse effect of the law on them or are unable to show a personal stake in the outcome of this case or an injury to themselves their petition is procedurally infirm. (ABAKADA Guro Party List, etc., supra)

11-D. Constitutionality of law is exception to the

doctrine of ripe for judicial determination. This notwithstanding, public interest requires the resolution of the constitutional issues raised by petitioners. The grave nature of their

allegations tends to cast a cloud on the presumption of constitutionality in favor of the law. And where an action of the legislative branch is alleged to have infringed the Constitution, it becomes not only the right but in fact the duty of the judiciary to settle the dispute. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing Taada v. Angara, 338 Phil. 546 (1997)]

12. The VAT law provides that, the President,

upon the recommendation of the Secretary of Finance,

shall, effective January 1, 2006, raise the rate of value-

added tax to twelve percent (12%) after any of the

following conditions have been satisfied. (i) value-added

tax collection as a percentage of Gross Domestic Product

(GDP) of the previous year exceeds two and four-fifth

percent (2 4/5%) or (ii) national government deficit as a

percentage of GDP of the previous year exceeds one and

one-half percent (1 %).

Was there an invalid delegation of legislative power

? SUGGESTED ANSWER: No. There is no undue delegation of legislative power but only of the discretion as to the execution of the law. This is constitutionally permissible. Congress does not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority. In the above case the Secretary of Finance becomes merely the agent of the legislative department, to determine and declare the even upon which its expressed will takes place. The President cannot set aside the findings of the Secretary of Finance, who is not under the conditions acting as the execute alter ego or subordinate. . [Abakada Guro Party List (etc.) v. Ermita, etc., et al., G. R. No. 168056, September 1, 2005 and companion cases citing various cases]] 13. The power to tax should be exercised only within

the territorial boundaries of the taxing authority. In theory, it is only within a states territorial boundaries that a state could give protection, hence it is only within that territory that it could demand support in the form of taxes. 14. Situs of taxation is the place or the authority that

has the power to collect taxes. It is premised upon the symbiotic relation between the taxpayer and the State.

8

15. The place that gives protection is the place that has

the right to demand that it be supported in the form of taxes so

it could continually give protection. 16. The situs of real property taxes is the place where

the property is located because it is that place that gives

protection. The applicable concept is lex situs or lex rei sitae.

17. The situs of taxation of tangible personal property

is the place where the owner is located because it is that place that gives protection to the owner which protection extends to the tangible personal property. The applicable concept is mobilia sequuntur personam. 18. Intangible personal property may have obtained a

business situs in a particular place even if located elsewhere. Thus, the dividends earned from domestic corporations are considered as income from within, irrespective where the shares of stock of such domestic corporation is located. 19. The situs of income taxation is determined by the

nationality, residence of the taxpayer and source of income. Please refer to general principles of income taxation under income taxation. 20. The situs of excise taxes is the place where the

privilege is exercised because it is that place that gives

protection.

21. The situs of transfer taxes, such as estate and

donors taxes, is determined by the nationality and residence of

the taxpayer and the place where the property is located. Please refer to estate and donors taxes.

22. Juliane a non-resident alien appointed as

a commission agent by a domestic corporation with a

sales commission of 10% all sales actually concluded and

collected through her efforts. The local company withheld

the amount of P107,000 from her sales commission and

remitted the same to the BIR.

She filed a claim for refund alleging that her sales

commission is not taxable because the same was a

compensation for her services rendered in Germany and

therefore considered as income from sources outside the

Philippines.

Is her contention correct ? SUGGESTED ANSWER: Yes. The important factor which determines the source of income of personal services is not the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but the place where the services were actually performed. Since the activity of securing the sales were in Germany, then the income did not originate from sources from within the Philippines. (Commissioner of Internal Revenue v. Baier-Nickel, G. R. No. 153793, August 29, 2006) NOTE AND COMMENTS: In the above case, the Supreme Court reiterated the rule that source of income relates to the property, activity or service that produced the income. With respect to rendition of labor or personal service, it is the place where the labor or service was performed that determines the source of the income. The above Baier-Nickel case discussed the import of the landmark cases (Howden and BOAC) involving sources of income for tax purposes both of which may be dangerous for Bar purposes:

23. A domestic insurance company decided to

reinsure with a foreign reinsurer the risks it has

undertaken with its local clients. The foreign reinsurer

does not have an office, neither does it do business in the

Philippines. Are the reinsurance premiums subject to

Philippine income taxation ? SUGGESTED ANSWER: Yes because the undertaking of the foreign insurance company to indemnify the local insurance company is the activity that produced the income. The reinsurance premiums remitted to the foreign reinsurer had for their source the undertaking to indemnify the local insurer against liability. Said undertaking is the activity that produced there insurance premiums, and the same took place in the Philippines. The reinsured, the liabilities insured and the risk originally undertaken by the local insurance company, upon which the reinsurance premiums and indemnity were based, were all situated in the Philippines. (Alexander Howden & Co., Ltd. v. Collector of

9

Internal Revenue, 121 Phil. 579; 13 SCRA 601 (1965) cited in Baier-Nickel)

24. BOAC, a foreign airline company which

does not maintain any flight to and from the Philippines

sold air tickets in the Philippines, through a general sales

agent, relating to the carriage of passengers and cargo

between two points, both outside the Philippines.

Is BOAC subject to income taxes on the sale of the

tickets ? SUGGESTED ANSWER: Yes. The source of income which is taxable is that activity which produced the income. The sale of tickets in the Philippines is the activity that determines whether such income is taxable in the Philippines. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. the flow of wealth proceeded from and occurred, within the Philippine territory, enjoying the protection accorded by the Philippine Government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. (Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC), 149 SCRA 395 cited in Bauer-Nickel) NOTES AND COMMENTS: The concept of imposition of the gross Philippine billings that taxes only flights that originate from the Philippines apply only to resident foreign corporations doing business in the Philippines [Sec. 28 (A) (3) (a), NIRC of 1997] AND NOT TO incomes of non-resident foreign corporations that are taxed on the gross income. [Sec. 28 (B) (1)]

25. No improper delegation of legislative authority

to tax. The power to tax is inherent in the State, such power being inherently legislative, based on the principle that taxes are a grant of the people who are taxed, and the grant must be made by the immediate representatives of the people; and where the people have laid the power, there it must remain and be exercised. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008 citing COOLEY TAXATION, 3

rd Ed., p. 43

cited in DIMAAMPAO, TAX PRINCIPLE AND REMEDIES, p. 13)

26. Instances where the national revenue officers

had ventured in the area of unauthorized administrative

legislation.

a. By adding the qualification that the tax due after the 12% increase becomes effective shall not be lower than the tax actually paid prior to 1 January 2000, Revenue Regulation No. 17-99 effectively imposes a tax which is the higher amount between the ad valorem tax being paid at the end of the three (3)-year transition period and the specific tax under paragraph C, sub-paragraph (1)-(4), as increased by 12%a situation not supported by the plain wording of Section 145 of the Tax Code. (Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R. Nos. 167274-75, July 21, 2008)

b. Respondent was not informed in writing of the law and the facts on which the assessment of estate taxes was made pursuant to Section 228 of the 1997 Tax Code, as amended by Republic Act (R.A.) No. 8424. She was merely notified of the findings by the Commissioner, who had simply relied upon the old provisions of the law and Revenue Regulation No. 12-85 which was based on the old provision of the law. The Court held that in case of discrepancy between the law as amended and the implementing regulation based on the old law, the former necessarily prevails. The law must still be followed, even though the existing tax regulation at that time provided for a different procedure. (Ibid., Commissioner of Internal Revenue v. Reyes, G.R. No. 159694, 27 January 2006, 480 SCRA

382 in turn citing Philippine Petroleum Corp. v. Municipality of Pililla, Rizal,

198 SCRA 82, 88, 3 June 1991, likewise citing Shell Philippines, Inc. v.

Central Bank of the Philippines, 162 SCRA 628, 634, 27 June 1988)

c. The tax authorities gave the term tax credit in Sections 2(i) and 4 of Revenue Regulation 2-94 a meaning utterly disparate from what R.A. No. 7432 provides. Their interpretation muddled up the intent of Congress to grant a mere discount privilege and not a sales discount. The Court, striking down the revenue regulation, held that an administrative agency issuing regulations may not enlarge, alter or restrict the provisions of the law it administers, and it cannot engraft additional requirements not contemplated by the legislature. (Ibid., Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, 15 April 2005, 456 SCRA 414) d. Commissioner Jose Ong issued Revenue Memorandum Order (RMO) No. 15-91, as well as the clarificatory Revenue Memorandum Circular (RMC) 43-91, imposing a 5% lending investors tax under the 1977 Tax Code, as amended by Executive Order (E.O.) No. 273, on pawnshops. The Commissioner anchored the imposition on the definition of lending investors provided in the 1977 Tax Code which, according to him, was broad enough to include pawnshop operators. However, the Court noted that pawnshops and lending investors were subjected to different tax

10

treatments under the Tax Code prior to its amendment by the executive order; that Congress never intended to treat pawnshops in the same way as lending investors; and that the particularly involved section of the Tax Code explicitly subjected lending investors and dealers in securities only to percentage tax. And so the Court affirmed the invalidity of the challenged circulars, stressing that administrative issuances must not override, supplant or modify the law, but must remain consistent with the law they intend to carry out. (Ibid., citing Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc., 453 Phil. 1043 (2003), at 1052 in turn citing Commissioner

of Internal Revenue v. Court of Appeals, G.R. No. 108358, 20 January

1995, 240 SCRA 368, 372; Romulo, Mabanta, Buenaventura, Sayoc & De

los Angeles v. Home Development Mutual Fund, G.R. No. 131082, 19 June 2000; 333 SCRA 777, 786)

e. The then acting Commissioner issued RMC 7-85, changing the prescriptive period of two years to ten years for claims of excess quarterly income tax payments, thereby creating a clear inconsistency with the provision of Section 230 of the 1977 Tax Code. The Court nullified the circular, ruling that the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by Congress. [Ibid., Philippine Bank of Communications v. Commissioner of Internal Revenue, 361 Phil. 916 (1999)]

f. The Supreme Court ruled as invalid RMO 4-87 which had construed the amnesty coverage under E.O. No. 41 (1986) to include only assessments issued by the BIR after the promulgation of the executive order on 22 August 1986 and not assessments made to that date. The Supreme Court resolved in the negative. [Ibid., Commissioner of Internal Revenue v. CA, et al., 310 Phil. 392 (1995)]

27. The rule-making power must be confined to details for regulating the mode or proceedings in order to carry into

effect the law as it has been enacted. a. It cannot be extended to amend or expand the statutory requirements or to embrace matters not covered by the statute. [Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R.

Nos. 167274-75, July 21, 2008 citing Landbank of the Philippines v. Court

of Appeals, 327 Phil. 1047, 1052 (1996)] An administrative agency issuing regulations may not enlarge, alter or restrict the provisions of the law it administers, and it cannot engraft additional requirements not contemplated by the legislature. (Ibid., Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, 15 April 2005, 456 SCRA 414) The plain meaning rule or verba legis in statutory construction should be applied such that where the words of a

statute are clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted interpretation. (Ibid.) b. Administrative regulations must always be in harmony with the provisions of the law because any resulting discrepancy between the two will always be resolved in favor of the basic law. [Commissioner of Internal Revenue v. Fortune Tobacco Corporation, G. R.

Nos. 167274-75, July 21, 2008 citing Landbank of the Philippines v. Court

of Appeals, 327 Phil. 1047, 1052 (1996)]

CONSTITUTIONAL LIMITATIONS 1. What are the constitutional limitations on the power

of taxation ? SUGGESTED ANSWER: The general or indirect constitutional limitations as well as the specific or direct constitutional limitations.

2. What are the general or indirect

constitutional limitations on the power of taxation ? SUGGESTED ANSWER: The general or indirect constitutional limitations are the following: a. Due process clause; b. Equal protection clause; c. Freedom of the press; d. Religious freedom; e. No taking of private property without just compensation; f. Non-impairment clause; g. Law-making process: 1) Bill should embrace only one subject expressed in the title thereof; 2) Three (3) readings on three separate days; 3) Printed copies in final form distributed three (3) days before passage. h. Presidential power to grant reprieves, commutations and pardons and remittal of fines and forfeiture after conviction by final judgment.

3. What are the specific or direct

constitutional limitation ? SUGGESTED ANSWER: a. No imprisonment for non-payment of a poll tax; b. Taxation shall be uniform and equitable; c. Congress shall evolve a progressive system of taxation;

11

d. All appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives, but the Senate may propose and concur with amendments; e. 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; f. Delegated power of the President to impose tariff rates, import and export quotas, tonnage and wharfage dues: 1) Delegation by Congress 2) through a law 3) subject to Congressional limits and restrictions 4) within the framework of national development program. g. Tax exemption of charitable institutions, churches, parsonages and convents appurtenant thereto, mosques, and all lands, buildings and improvements of all kinds actually, directly and exclusively used for religious, charitable or educational purposes; h. No tax exemption without the concurrence of majority vote of all members of Congress; i. No use of public money or property for religious purposes except if priest is assigned to the armed forces, penal institutions, government orphanage or leprosarium; j. Money collected on tax levied for a special purpose to be used only for such purpose, balance if any, to general funds; k. The Supreme Court's power to review judgments or orders of lower courts in all cases involving the legality of any tax, impose, assessment or toll or the legality of any penalty imposed in relation to the above; l. Authority of local government units to create their own sources of revenue, to levy taxes, fees and other charges subject to guidelines and limitations imposed by Congress consistent with the basic policy of local autonomy; m. Automatic release of local government's just share in national taxes; n. Tax exemption of all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes; o. Tax exemption of all revenues and assets of proprietary or cooperative educational institutions subject to limitations provided by law including restrictions on dividends and provisions for reinvestment of profits; p. Tax exemption of grants, endowments, donations or contributions used actually, directly and exclusively for educational purposes subject to conditions prescribed by law.

3-A. No denial of due process when the respondent

is given the opportunity to file affidavits and other

pleadings during the preliminary investigation. A respondent cannot claim denial of due process when she was given the opportunity to file her affidavits and other pleadings and submit evidence before the DOJ during the preliminary investigation of her case and before the Information was filed against her. Due process is merely an opportunity to be heard. In addition, preliminary investigation conducted by the DOJ is merely inquisitorial. It is not a trial of the case on the merits. Its sole purpose is to determine whether a crime has been committed and whether the respondent therein is probably guilty of the crime. It is not the occasion for the full and exhaustive display of the parties evidence. Hence, if the investigating prosecutor is already satisfied that he can reasonably determine the existence of probable cause based on the parties evidence thus presented, he may terminate the proceedings and resolve the case. (Santos v. People, et al, G. R. No. 173176, August 26, 2008 citing De Ocampo v. Secretary of Justice, G.R. No. G.R. No. 147932, 25 January 2006, 480 SCRA 71, 81-82)

4. Equal protection of the law clause is subject to

reasonable classification. If the groupings are characterized by substantial distinctions that make real differences, one class may be treated and regulated differently from another. The classification must also be germane to the purpose of the law and must apply to all those belonging to the same class. (Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999)

4-A. The equal protection of the laws clause of the

Constitution allows classification. Classification in law, as in the other departments of knowledge or practice, is the grouping of things in speculation or practice because they agree with one another in certain particulars. A law is not invalid because of simple inequality. The very idea of classification is that of inequality, so that it goes without saying that the mere fact of inequality in no manner determines the matter of constitutionality. All that is required of a valid classification is that it be reasonable, which means that the classification should be based on substantial distinctions which make for real differences, that it must be germane to the purpose of the law; that it must not be limited to existing conditions only; and that it must apply equally to each member of the class. This Court has held that the standard is satisfied if the classification or distinction is based on a reasonable

12

foundation or rational basis and is not palpably arbitrary. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008]

4-B. State has discretion to make the classification. In the exercise of its power to make classifications for the purpose of enacting laws over matters within its jurisdiction, the state is recognized as enjoying a wide range of discretion. It is not necessary that the classification be based on scientific or marked differences of things or in their relation. Neither is it necessary that the classification be made with mathematical nicety. Hence, legislative classification may in many cases properly rest on narrow distinctions, for the equal protection guaranty does not preclude the legislature from recognizing degrees of evil or harm, and legislation is addressed to evils as they may appear. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008]

4-C. Equal protection does not demand absolute

equality. The equal protection clause exists to prevent undue favor or privilege. It is intended to eliminate discrimination and oppression based on inequality. Recognizing the existence of real differences among men, the equal protection clause does not demand absolute equality. It merely requires that all persons shall be treated alike, under like circumstances and conditions, both as to the privileges conferred and liabilities enforced. (Santos v. People, et al, G. R. No. 173176, August 26, 2008 citing Himagan v. People, G.R. No. 113811, 7 October 1994, 237 SCRA 538, 551.

It is imperative to duly establish that the one invoking equal protection and the person to which she is being compared were indeed similarly situated, i.e., that they committed identical acts for which they were charged with the violation of the same provisions of the NIRC; and that they presented similar arguments and evidence in their defense - yet, they were treated differently. (Santos, supra)

5. What are the requisites for the validity of

a classification ? SUGGESTED ANSWER: Classification, to be valid, must (a) rest on substantial distinctions, (b) be germane to the purpose of the law, (c) not be limited to existing conditions only, and (d) apply equally to all members of the same class. (Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999)

6. The law grant of tax and duty-free status under Rep. Act No. 7227, to retailers inside the SSEZ

without granting the same to those outside the SSEZ. Is

there a violation of the equal protection clause ? SUGGESTED ANSWER: There is no violation of equal protection because there exists a valid classification as shown below: a. Significant distinctions exist between the two groups. Those outside of the SSEZ maintain their business within Philippine customs territory while those within the SSEZ operate within the so-called separate customs territory. To grant the same privileges would clearly defeat the statues intent to carve a territory out of the military reservations in Subic Bay where free flow of goods and capital is maintained. b. The classification is germane to the purpose of Rep. Act No. 7227. As held in Tiu, the real concern of the law is to convert the lands formerly occupied by the US military bases into economic or industrial areas. In furtherance of such objective, Congress deemed it necessary to extend economic incentives, in terms of a complete package of tax incentives and other benefits, to the establishments within the zone to attract and encourage foreign and local investors. c. The classification is not limited to the existing conditions when the law was promulgated but to future conditions as well, inasmuch as the law envisioned the former military reservation to ultimately develop into a self-sustaining investment center. d. The classification applies equally to all retailers found within the secured area. As ruled in Tiu, the individuals and businesses within the secured area, being in like circumstances or contributing directly to the achievement of the end purposes of the law, are not categorized further. They are all similarly treated, both in privileges granted and in obligations required. (Coconut Oil Refiners Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999, 301 SCRA 278)

7. Is the statutory grant of tax and duty-free importation into the Subic Special Economic Zone

violative the preferential use concept of the Constitution

? SUGGESTED ANSWER: No. The mere fact that the law

authorizes the importation and trade of foreign goods does not suffice to declare it unconstitutional on this ground.

13

While the Constitution does not encourage the unlimited entry of foreign goods, services and investments into the country, it does not prohibit them either. In fact, it allows an exchange on the basis of equality and reciprocity, frowning only in foreign competition that is unfair. (Coconut Oil Refiners Association, Inc., etc., et al., v. Torres, etc., et al., G. R. No. 132527, July 29, 2005 citing Tanada v. Angara, G. R. No. 118295, May 2, 1997, 272 SCRA 18) 8. Equality and uniformity of taxation may mean the

same as equal protection. In such a case, the terms would mean that all subjects and objects of taxation which are similarly situated shall be subject to the same burdens and granted the same privileges without any discrimination whatsoever. 9. Uniformity may have a restrictive meaning different

from equality and equal protection. It would mean then that the same rate shall be imposed for the same subjects and objects within the territorial boundaries of a taxing authority. 10. It is inherent in the power to tax that the State be

free to select the subjects of taxation, and it has been repeatedly held that, "inequalities which result from a singling out of one particular class of taxation, or exemption, infringe no constitutional limitation." (Commissioner of Internal Revenue, et al., v. Santos, et al., 277 SCRA 617)

10-A. The law providing financial rewards to tax

collectors is constitutional. Public service is its own reward. Nevertheless, public officers may by law be rewarded for exemplary and exceptional performance. A system of incentives for exceeding the set expectations of a public office is not anathema to the concept of public accountability. In fact, it recognizes and reinforces dedication to duty, industry, efficiency and loyalty to public service of deserving government personnel. The U.S. Supreme Court validated a law which awards to officers of the customs as well as other parties an amount not exceeding one-half of the net proceeds of forfeitures in violation of the laws against smuggling. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008 citing United

States v. Matthews, 173 U.S. 381 (1899)]

The offer of a portion of such penalties to the collectors is to stimulate and reward their zeal and industry in detecting fraudulent attempts to evade payment of duties and taxes. [ABAKADA Guro

Party List, etc., supra citing Dorsheimer v. United States, 74 U.S. 166 (1868)]

In the same vein, employees of the BIR and the BOC may by law be entitled to a reward when, as a consequence of their zeal in the enforcement of tax and customs laws, they exceed their revenue targets. Public service is its own reward. Nevertheless, public officers may by law be rewarded for exemplary and exceptional performance. A system of incentives for exceeding the set expectations of a public office is not anathema to the concept of public accountability. In fact, it recognizes and reinforces dedication to duty, industry, efficiency and loyalty to public service of deserving government personnel. (ABAKADA Guro Party List, etc., supra)

10-B. Rewards law establishes safeguards to ensure

that the reward system will not create bounty hunters. The Attrition Act of 2005 RA 9335 establishes safeguards to ensure that the reward will not be claimed if it will be either the fruit of bounty hunting or mercenary activity or the product of the irregular performance of official duties. One of these precautionary measures is embodied in Section 8 of the law: SEC. 8. Liability of Officials, Examiners and Employees of the BIR and the BOC. The officials, examiners, and employees of the [BIR] and the [BOC] who violate this Act or who are guilty of negligence, abuses or acts of malfeasance or misfeasance or fail to exercise extraordinary diligence in the performance of their duties shall be held liable for any loss or injury suffered by any business establishment or taxpayer as a result of such violation, negligence, abuse, malfeasance, misfeasance or failure to exercise extraordinary diligence. (ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008)

10-C. The rewards law to tax collectors does not

violate equal protection. Equality guaranteed under the equal protection clause is equality under the same conditions and among persons similarly situated; it is equality among equals, not similarity of treatment of persons who are classified based on substantial differences in relation to the object to be accomplished. When things or persons are different in fact or circumstance, they may be treated in law differently. The guaranty of equal protection of the laws is not a guaranty of equality in the application of the laws upon all citizens of the [S]tate. It is not, therefore, a requirement, in order to avoid the constitutional prohibition against inequality, that every man, woman

14

and child should be affected alike by a statute. Equality of operation of statutes does not mean indiscriminate operation on persons merely as such, but on persons according to the circumstances surrounding them. It guarantees equality, not identity of rights. The Constitution does not require that things which are different in fact be treated in law as though they were the same. The equal protection clause does not forbid discrimination as to things that are different. It does not prohibit legislation which is limited either in the object to which it is directed or by the territory within which it is to operate. [ABAKADA Guro Party List, etc., v. Purisima, etc., et al., G. R. No. 166715, August 14, 2008]

The equal protection clause recognizes a valid classification, that is, a classification that has a reasonable foundation or rational basis and not arbitrary.

1[22] With respect to RA 9335, its expressed

public policy is the optimization of the revenue-generation capability and collection of the BIR and the BOC. Since the subject of the law is the revenue- generation capability and collection of the BIR and the BOC, the incentives and/or sanctions provided in the law should logically pertain to the said agencies. Moreover, the law concerns only the BIR and the BOC because they have the common distinct primary function of generating revenues for the national government through the collection of taxes, customs duties, fees and charges. Both the BIR and the BOC are bureaus under the DOF. They principally perform the special function of being the instrumentalities through which the State exercises one of its great inherent functions taxation. Indubitably, such substantial distinction is germane and intimately related to the purpose of the law. Hence, the classification and treatment accorded to the BIR and the BOC under RA 9335 fully satisfy the demands of equal protection. [ABAKADA Guro Party List, etc. supra)]

10-D. The prosecution of one guilty person while

others equally guilty are not prosecuted, however, is not,

by itself, a denial of the equal protection of the laws. Where the official action purports to be in conformity to the statutory classification, an erroneous or mistaken performance of the statutory duty, although a violation of the statute, is not without more a denial of the equal protection of the laws. The unlawful administration by officers of a statute fair on its face, resulting in its unequal application to those who are entitled to be treated alike, is not a denial of equal protection unless there is shown to be present in it an element of intentional or purposeful discrimination. This may

appear on the face of the action taken with respect to a particular class or person, or it may only be shown by extrinsic evidence showing a discriminatory design over another not to be inferred from the action itself. But a discriminatory purpose is not presumed, there must be a showing of clear and intentional discrimination. [Santos v. People, et al, G. R. No. 173176, August 26, 2008 citing People v. Dela Piedra, 403 Phil. 31, 54-56 (2001)]

10-E. There is no denial of equal protection where

the prosecution exercises its discretion in determining

probable cause. The discretion of who to prosecute depends on the prosecutions sound assessment whether the evidence before it can justify a reasonable belief that a person has committed an offense. The presumption is that the prosecuting officers regularly performed their duties, and this presumption can be overcome only by proof to the contrary, not by mere speculation. There must be evidence to overcome this presumption. The mere allegation a Cebuana, was charged with the commission of a crime, while a Zamboanguea, was not, is insufficient to support a conclusion that the prosecution officers acted in denial of the equal protection of the laws. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)

10-F. Equal protection should not be used to protect

commission of crime. While all persons accused of crime are to be treated on a basis of equality before the law, it does not follow that they are to be protected in the commission of crime. It would be unconscionable, for instance, to excuse a defendant guilty of murder because others have murdered with impunity. The remedy for unequal enforcement of the law in such instances does not lie in the exoneration of the guilty at the expense of society x x x. Protection of the law will be extended to all persons equally in the pursuit of their lawful occupations, but no person has the right to demand protection of the law in the commission of a crime. Likewise, [i]f the failure of prosecutors to enforce the criminal laws as to some persons should be converted into a defense for others charged with crime, the result would be that the trial of the district attorney for nonfeasance would become an issue in the trial of many persons charged with heinous crimes and the enforcement of law would suffer a complete breakdown. (Santos v. People, et al, G. R. No. 173176, August 26, 2008)

11. A fixed annual license fee on those engaged in the

business of general enterprise was also imposed on the sale of

15

bibles by a religious sect. Is this valid or violative of the

constitutionally guaranteed freedom of religion ? SUGGESTED ANSWER: It is not valid because it violates the constitutionally guaranteed freedom of religion. As a license fee is fixed in amount and unrelated to the receipts of the taxpayer, such a license fee, when applied to a religious sect is actually imposed as a condition for the free exercise of religion. A license fee restrains in advance those constitutional liberties of press and religion and inevitably tends to suppress their exercise. 12. A lawful tax on a new subject, or an increased tax

on an old one, does not interfere with a contract or impairs its

obligation, within the meaning of the constitution. Even though such taxation may affect particular contracts, as it may increase the debt of one person and lessen the security of another, or may impose additional burdens upon one class and release the burdens of another, still the tax must be paid unless prohibited by the constitution, nor can it be said that it impairs the obligations of any existing contract in its true and legal sense. (Tolentino v. Secretary of Finance, et al., and companion cases, 235 SCRA 630) 13. Under the now prevailing Constitution, where there is

neither a grant nor prohibition by statute, the taxing power of

local governments must be deemed to exist although Congress

may provide statutory limitations and guidelines in order to safeguard the viability and self-sufficiency of local government units by directly granting them general and broad tax powers. (City Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)

13-A. Franchise tax is a direct tax. The franchise tax

is a percentage tax imposed only on franchise holders. It is

imposed under Section 119 of the Tax Code and is a direct

liability of the franchise grantee. (Quezon City, et al., v. ABS-

CBN Broadcasting Corporation, G. R. No. 166408, October 6,

2008. The author opines that since practically all franchises

granted to telecommunications companies are similarly

worded that the above doctrine finds application to the

others.)

14. The Local Government Code explicitly authorizes

provinces and cities, notwithstanding any exemption granted

by any law or other special law to impose a tax on businesses

enjoying a franchise. Indicative of the legislative intent to carry out the constitutional mandate of vesting broad tax powers to local government units, the Local Government Code has withdrawn tax exemptions or incentives theretofore enjoyed by certain entities. (City Government of San Pablo, Laguna, et al., v. Reyes, et al., G.R. No. 127708, March 25, 1999)

15. Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001, upheld the authority of the City of Davao, a local government unit, to impose and collect a local franchise tax because the Local Government has withdrawn all tax exemptions previously enjoyed by all persons and authorized local government units to impose a tax on business enjoying a franchise tax notwithstanding the grant of tax exemption to them.

16. Explain the concept of the paradigm shift in local government taxation. SUGGESTED ANSWER: Paradigm shift from exclusive Congressional power to direct grant of taxing power to local legislative bodies. The power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to Article X, section 5 of the 1987 Constitution. (Batangas Power Corporation v. Batangas City, et al. G. R. No. 152675, and companion case, April 28, 2004 citing National Power Corporation v. City of Cabanatuan, G. R. No. 149110, April 9, 2003) 17. The fundamental law did not intend the direct grant

to local government units to be absolute and unconditional, the constitutional objective obviously is to ensure that, while local government units are being strengthened and made more autonomous, the legislature must still see to it that: a. the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions; b. each local government unit will have its fair share of available resources; c. the resources of the national government will be unduly disturbed; and d. local taxation will be fair, uniform and just. (Manila Electric Company v. Province of Laguna, et al., G.R. No. 131359, May 5, 1999)

16

17-A. Taxing power of the local government is

limited. The taxing power of local governments is limited in the sense that Congress can enact legislation granting tax exemptions. While the system of local government taxation has changed with the onset of the 1987 Constitution, the power of local government units to tax is still limited. While the power to tax by local governments may be exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution, the basic doctrine on local taxation remains essentially the same, the power to tax is [still] primarily vested in the Congress. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City

Government of Quezon City, et al. v. Bayan Telecommunications, Inc.,

G.R. No. 162015, March 6, 2006, 484 SCRA 169 in turn referring to Mactan

Cebu International Airport Authority, v. Marcos, G.R. No. 120082,

September 11, 1996, 261 SCRA 667, 680)

17-B. Further amplification by Bernas of the local

governments power to tax. What is the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does not change the doctrine that municipal corporations do not possess inherent powers of taxation. What it does is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue. They no longer have to wait for a statutory grant of these powers. The power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers. Moreover, these limitations must be consistent with the basic policy of local autonomy. The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal corporations. Henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in favor of municipal corporations. It is understood, however, that taxes imposed by local government must be for a public purpose, uniform within a locality, must not be confiscatory, and must be within the jurisdiction of the local unit to pass. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008 citing City Government of

Quezon City, et al. v. Bayan Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 169)

17-C. Reconciliation of the local governments

authority to tax and the Congressional general taxing

power. Congress has the inherent power to tax, which includes the

power to grant tax exemptions. On the other hand, the power of local governments, such as provinces and cities for example Quezon City, to tax is prescribed by Section 151 in relation to Section 137 of the LGC which expressly provides that notwithstanding any exemption granted by any law or other special law, the City or a province may impose a franchise tax. It must be noted that Section 137 of the LGC does not prohibit grant of future exemptions.

The Supreme Court in a series of cases has sustained the power of Congress to grant tax exemptions over and above the power of the local governments delegated power to tax. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408,

October 6, 2008 citing City Government of Quezon City, et al. v. Bayan

Telecommunications, Inc., G.R. No. 162015, March 6, 2006, 484 SCRA 16)

Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations. [Ibid., referring to Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao] 18. The withdrawal of a tax exemption should not be

construed as prohibiting future grants of exemption from all

taxes. Indeed, the grant of taxing powers to local government units under the Local Government Code does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations. (Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001)

18-A. Tax exemptions in franchises are always

subject to withdrawal. Moreover, Smarts franchise was granted with the express condition that it is subject to amendment, alteration, or repeal. (1987 CONSTITUTION, Art. XII, Sec. 11) It is enough to say that the parties to a contract cannot, through the exercise of prophetic discernment, fetter the exercise of the taxing power of the State. For not only are existing laws read into contracts in order to fix obligations as between parties, but the reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of the legal order. The policy of protecting contracts against impairment presupposes the

17

maintenance of a government which retains adequate authority to secure the peace and good order of society. In truth, the Contract Clause has never been thought as a limitation on the exercise of the States power of taxation save only where a tax exemption has been granted for a valid consideration. Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008 citing Tolentino v. Secretary of Finance, G. R. No. 115455, August 25, 1994, 235 SCRA 630, 685. The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others) 19. When Congress approved a provision that, Any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchises and shall be accorded immediately and unconditionally to the grantees of such franchises: Provided, however, That the foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning territory covered by the franchise, the life span of the franchise, or the type of service authorized by the franchise. (Underscoring supplied) there was no intention for it

to operate as a blanket tax exemption to all

telecommunications entities. Applying the rule of strict construction of laws granting tax exemptions and the rule that doubts should be resolved in favor of municipal corporations in interpreting statutory provisions on municipal taxation, it was held that said provisions cannot be considered as extending its application to franchises such as that of PLDT. (Philippine Long Distance Telephone Company, Inc., v. City of Davao, et al., etc., G. R. No. 143867, August 22, 2001)

19-A. In lieu of all taxes in the franchise of ABS-CBN

does not exempt it from local franchise taxes. The in lieu of all taxes provision in the franchise of ABS-CBN does not expressly provide what kind of taxes ABS-CBN is exempted from. It is not clear whether the exemption would include both local, whether municipal, city or provincial, and national tax. Whether the in lieu of all taxes provision would include exemption from local tax is not unequivocal. The right to exemption from local franchise tax must be clearly established and cannot be made out of inference or implications but must be laid beyond reasonable doubt. Verily, the uncertainty in the in lieu of all taxes provision should be construed

against ABS-CBN. ABS-CBN has the burden to prove that it is in fact covered by the exemption so claimed but has failed to do so. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008. This is practically the same holding in an earlier case involving another telecommunications company. Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008. The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others.)

19-B. In lieu of all taxes refers to national internal

revenue taxes and not to local taxes. The in lieu of all taxes clause applies only to national internal revenue taxes and not to local taxes. As appropriately pointed out in the separate opinion of Justice Antonio T. Carpio in a similar case involving a demand for exemption from local franchise taxes: [T]he "in lieu of all taxes" clause in Smart's franchise refers only to taxes, other than income tax, imposed under the National Internal Revenue Code. The "in lieu of all taxes" clause does not apply to local taxes. The proviso in the first paragraph of Section 9 of Smart's franchise states that the grantee shall "continue to be liable for income taxes payable under Title II of the National Internal Revenue Code." Also, the second paragraph of Section 9 speaks of tax returns filed and taxes paid to the "Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code." Moreover, the same paragraph declares that the tax returns "shall be subject to audit by the Bureau of Internal Revenue." Nothing is mentioned in Section 9 about local taxes. The clear intent is for the "in lieu of all taxes" clause to apply only to taxes under the National Internal Revenue Code and not to local taxes. Even with respect to national internal revenue taxes, the "in lieu of all taxes" clause does not apply to income tax. If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply to local taxes, Congress would have expressly mentioned the exemption from municipal and provincial taxes. Congress could have used the language in Section 9(b) of Clavecilla's old franchise, as follows: x x x in lieu of any and all taxes of any kind, nature or description levied, established or collected by any authority whatsoever, municipal, provincial or national, from which the grantee is hereby expressly exempted, x x x. (Emphasis supplied). However, Congress did not expressly exempt Smart from local taxes. Congress used the "in lieu of all taxes" clause only in reference to national internal revenue taxes. The only interpretation,

18

under the rule on strict construction of tax exemptions, is that the "in lieu of all taxes" clause in Smart's franchise refers only to national and not to local taxes. [Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008 citing Philippine

Long Distance Telephone Company, Inc. v. City of Davao, 447 Phil. 571, 594 (2003)]

19-C. The in lieu of all taxes clause in the franchise

of ABS-CBN has become functus officio with the abolition

of the franchise tax on broadcasting companies with

yearly gross receipts exceeding Ten Million Pesos. The clause in lieu of all taxes does not pertain to VAT or any other tax. It cannot apply when what is paid is a tax other than a franchise tax. Since the franchise tax on the broadcasting companies with yearly gross receipts exceeding ten million pesos has been abolished, the in lieu of all taxes clause has now become functus officio, rendered inoperative. (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008. This is practically the same holding in an earlier case involving another telecommunications company. Smart Communications, Inc. v. The City of Davao, etc., et al., G. R. No. 155491, September 16, 2008. The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others.)

19-D. Historical background on why ABS-CBN is

subject to VAT and not to the franchise tax. At the time of the enactment of its franchise on May 3, 1995, ABS-CBN was subject to 3% franchise tax under Section 117(b) of the 1977 National Internal Revenue Code (NIRC), as amended. On January 1, 1996, R.A. No. 7716, otherwise known as the Expanded Value Added Tax Law, took effect and subjected to VAT those services rendered by radio and/or broadcasting stations. Notably, under the same law, telephone and/or telegraph systems, broadcasting stations and other franchise grantees were omitted from the list of entities subject to franchise tax. The impression was that these entities were subject to 10% VAT but not to franchise tax. Subsequently, R.A. No. 8241 took effect on January 1, 1997 containing more amendments to the NIRC. Radio and/or television companies whose annual gross receipts do not exceed P10,000,000.00 were granted the option to choose between paying 3% national franchise tax or 10% VAT On the other hand, radio and/or television companies with yearly gross receipts exceeding P10,000,000.00 were subject to 10% VAT, pursuant to Section 102 of the NIRC.

On January 1, 1998, R.A. No. 8424 was passed confirming the 10% VAT liability of radio and/or television companies with yearly gross receipts exceeding P10,000,000.00. R.A. No. 9337 was subsequently enacted and became effective on July 1, 2005. The said law further amended the NIRC by increasing the rate of VAT to 12%. The effectivity of the imposition of the 12% VAT was later moved from January 1, 2006 to February 1, 2006. In consonance with the above survey of pertinent laws on the matter, ABS-CBN is subject to the payment of VAT. It does not have the option to choose between the payment of franchise tax or VAT since it is a broadcasting company with yearly gross receipts exceeding Ten Million Pesos (P10,000,000.00). (Quezon City, et al., v. ABS-CBN Broadcasting Corporation, G. R. No. 166408, October 6, 2008. The author opines that since practically all franchises granted to telecommunications companies are similarly worded that the above doctrine finds application to the others.)

20. Double taxation in its generic sense, this means

taxing the same subject or object twice during the same

taxable period. In its particular sense, it may mean direct duplicate taxation,

which is prohibited under the constitution because it violates the concept of equal protection, uniformity and equitableness of taxation. Indirect duplicate taxation is not anathematized by the above constitutional limitations.

21. What are the elements of direct duplicate taxation ? SUGGESTED ANSWER: a. Same 1) Subject or object is taxed twice 2) by the same taxing authority 3) for the same taxing purpose 4) during the same taxable period

b. Taxing all of the subjects or objects for the first time without taxing all of them for the second time.

If any of the elements are absent then there is indirect duplicate taxation which is not prohibited by the constitution. NOTES AND COMMENTS: a. Presence of the 2

nd element violates the equal

protection clause. If only the 1st element is present, taxing the

same subject or object twice, by the same taxing authority, etc., there is no violation of the equal protection clause because all subjects and objects that are similarly situated are subject to the

19

same burdens and granted the same privileges without any discrimination whatsoever, The presence of the 2

nd element, taxing all of the subjects and

objects for the first time, without taxing all for the second time, results to discrimination among subjects and objects that are similarly situated, hence violative of the equal protection clause. 22. Double taxation a valid defense against the legality of

a tax measure if the double taxation is direct duplicate taxation, because it would violate the equal protection clause of the constitution. 23. When an item of income is taxed in the Philippines

and the same income is taxed in another country, this would be

known as international juridical double taxation which is the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical grounds. (Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al., G.R. No. 127105, June 25, 1999)

24. What are the methods for avoiding double taxation (indirect duplicate taxation) ? SUGGESTED ANSWER: The following are the methods of avoiding double taxation: a. Tax treaties which exempts foreign nationals from local taxation and local nationals from foreign taxation under the principle of reciprocity. b. Tax credits where foreign taxes are allowed as deductions from local taxes that are due to be paid. c. Allowing foreign taxes as a deduction from gross income. 25. Tax credit generally refers to an amount that is subtracted directly from ones total tax liability, an allowance against the tax itself, or a deduction from what is owned. A tax credit reduces the tax due, including whenever applicable the income tax that is determined after applying the corresponding tax rates to taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15, 2005) 26. A tax deduction is defined as a subtraction fro income for tax purposes, or an amount that is allowed by law to reduce

income prior to the application of the tax rate to compute the amount of tax which is due. A tax deduction reduces the income that is subject to tax in order to arrive at taxable income. (Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G. R. No. 159647, April 15, 2005)

27. The petitioners allege that the R-VAT law is constitutional because the Bicameral Conference

Committed has exceeded its authority in including

provisions which were never included in the versions of

both the House and Senate such as inserting the stand-by

authority to the President to increase the VAT from 10% to

12%; deleting entirely the no pass-on provisions found in

both the House and Senate Bills; inserting the provision

imposing a 70% limit on the amount of input tax to be

credited against the output tax; and including the

amendments introduced only by Senate Bill No. 1950

regarding other kinds of taxes in addition to the value-

added tax. Thus, there was a violation of the

constitutional mandate that revenue bills shall originate

exclusively from the House of Representatives.

Are the contentions of such weight as to constitute

grave abuse of discretion which may invalidate the law ?

Explai