pm reyes notes on taxation 1 - general principles (working draft) (updated 28 dec 2012)

PM REYES NOTES ON TAXATION I: GENERAL PRINCIPLES

PM REYES NOTES ON TAXATION I: GENERAL PRINCIPLES (Updated 28 December 2012)

BY PIERRE MARTIN DE LEON REYES This reviewer is a compilation of personal notes in Taxation One and notes and lectures from Atty. Gruba and Atty. Montero. References have

also been made to the following books: DE LEON & DE LEON, JR. THE FUNDAMENTALS OF TAXATION (2012); DE LEON & DE LEON, JR. COMPREHENSIVE REVIEW OF TAXATION (2010); VITUG & ACOSTA. TAX LAW AND JURISPRUDENCE (2006); DOMONDON, TAXATION VOLUME 1 GENERAL PRINCIPLES (2009); CO-UNTIAN, JR. TAX DIGEST (2009); and MAMALATEO, REVIEWER ON TAXATION (2008).

Possessors are granted the right to reproduce and distribute this reviewer as well as the right to convert the work to any medium for the purpose of preservation and/or continued distribution provided that the authors name remains clearly associated with the work and that no alterations of the form and content are made.

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Concept, Nature and Characteristics of Taxation and Taxes

Q1. What is taxation? Taxation is the power by which the sovereign raises revenue to defray the expenses of government. It is a way of apportioning the cost of government among those who is some measure are privileged to enjoy its benefits and must bear its burden.

Q1.1. What is the rationale of taxation?

In CIR VS. ALGUE [158 SCRA 9], the Supreme Court stated that taxes are what we pay for civilized society. Hence, despite the natural reluctance to surrender part of ones hard-earned income, every person who is able must contribute his share in the running of the government and the latter, 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. This 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 necessary burden to preserve the States sovereignty and to allow the State to protect the citizenry and provide them with services. (PHILIPPINE GUARANTY V. CIR [13 SCRA 775])

Q1.2. What is the benefits-received principle?

According to this principle, the basis of taxation is found in the reciprocal duties of protection and support between the State and its inhabitants. In return for his contribution, the taxpayer receives the general advantages and protection which the government affords the taxpayer and his property.

Q1.3. What are the essential characteristics of a tax?

The essential characteristics of a tax are: 1. It is a enforced contribution;

2. It is proportionate in character; 3. It is generally payable in money; 4. It is levied on persons or property; 5. It is levied by the State which has jurisdiction

over the person or property; 6. It is levied by the law-making body; and 7. It is levied for public purpose or purposes

Q1.4. What is the lifeblood theory? According to this theory, the existence of government is a necessity; it cannot exist nor endure without the means to pay its expenses; and for those means, the government has the right to compel all its citizens and property within its limits to contribute in the form of taxes. Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. (CIR VS. ALGUE [158 SCRA 9]). The lifeblood theory states that an assessment of a tax is enforceable despite it being contested because of the urgency to collect taxes, this being the governments primary source of revenue (CIR V. CEBU PORTLAND [156 SCRA 535]).

Q1.4.1 Where is the application of the lifeblood theory manifested?

It is illustrated in the following cases: 1. The prohibition against set-off of taxes [see

Section 204(C), NIRC] 2. The prohibition against the issuance of an

injunction to restrain the collection of taxes 3. Presumption of correctness of assessments In CIR V. CEBU PORTLAND [156 SCRA 535], the taxpayer argued that that the deficiency assessment


PIERRE MARTIN DE LEON REYES 2

cannot be enforced because it is still being contested. The Supreme Court held that this argument loses sight of the urgency of the need to collect taxes as the lifeblood of the government. If the payment of taxes could be postponed by simply questioning heir validity, the machinery of the state would grind to a halt and all government functions would be paralyzed. In PHILIPPINE GUARANTY V. CIR [13 SCRA 775], the Supreme Court stated that the requirement that the withholding agent should withhold the tax before addressing a query to the Commissioner of Internal Revenue is not without meaning for it is in keeping with the general operation of our tax laws: payment precedes defense. Likewise, validity of a tax cannot be assailed until after the taxpayer has paid the tax under protest. By questioning a taxs legality without first paying it, a taxpayer, in collusion with BIR officials, can unduly delay, if not totally evade, the payment of such tax. In CIR v. CTA [234 SCRA 348], the Supreme Court held that government cannot and must not be stopped in matters involving taxes as they are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents. In PHILIPPINE NATIONAL OIL COMPANY VS. CA [457 SCRA 32], the Supreme Court held that the Government cannot be estopped from collecting taxes by the mistake, negligence, or omission of its agents. Upon taxation depends the Governments ability to serve the people for whose benefit the taxes are collected. Neglect or omission of government officials entrusted to collect taxes should not be allowed to bring harm or detriment to the people. In SEC. OF FINANCE VS. ORO MAURA SHIPPING LINES [593 SCRA 14], the Supreme Court opined that assuming further that MARINA merely committed a mistake in approving the vessels proposed cost and that the Collector of the Port of Manila similarly erred, we reiterate the legal principle that estoppel generally finds no application against the State when it acts to rectify mistakes, errors, irregularities, or illegal acts of its officials and agents irrespective of rank. The rule holds true even if the rectification prejudices parties who had meanwhile received benefits.

Q1.4.2 What is the exception to the prohibition on the issuance of an injunction to restrain the collection of taxes?

An injunction may be issued to restrain the collection of taxes when in the opinion of the Court the collection may jeopardize the interest of the Government and/or the taxpayer, the Court at any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court. (Section 11, RA 1125, as amended by RA 9282). In resolving the issue of whether the CTA may issue writs of injunction to enjoin the CIR from collecting taxes due in the exercise of its original jurisdiction, the Supreme Court held in CIR VS. J.C. YUSECO that nowhere does the law vest in the CTA original jurisdiction to issue writs of prohibition or injunction independently of, and apart from, an appealed case. The writ of prohibition or injunction that it may issue to suspend the collection of taxes, is merely ancillary to and in furtherance of its appellate jurisdiction. Taxes being the chief source of revenue for the government to keep it running, must be paid immediately and without delay. A taxpayer who feels aggrieved by a decision of a revenue officer and appeals to the CTA must pay the tax assessed, except if the CTA opines that collection would jeopardize the interest of the Government and/or taxpayer, it could suspend the collection and require the taxpayer to deposit the amount claimed or to file a bond

Q1.5. What are the aspects of taxation (three stages of taxation)?

The three stages or aspects of taxation are: 1. Levy This refers to the enactment of a law by

Congress imposing a tax 2. Assessment and collection This is the act of

administration and implementation of the tax law by the executive department through the administrative agencies

3. Payment This is the act of compliance by the taxpayer



Q1.6. What are the basic principles of a sound tax system?

The basic principles are the following: 1. Fiscal Adequacy The source of government

revenue must be sufficient to meet governmental expenditures and other public needs

2. Theoretical Justice a good tax system must be based on the taxpayers ability to pay

3. Administrative feasibility taxes should be capable of being effectively enforced.

In CHAVEZ V. ONGPIN [186 SCRA 331], at issue was the increase, via an Executive Order, of the property values for purposes of real property taxes. The Supreme Court held that to continue collecting at valuations arrived at several years ago is not in consonance with a sound tax system. Fiscal adequacy requires that the sources of revenue must be adequate to meet government expenditures. In DIAZ V. SEC. OF FINANCE [654 SCRA 97], one of the grounds raised in assailing the validity of the imposition of VAT on the collection of toll way operators was that it violated the principle of administrative feasibility.

1 The Supreme Court held

that while administrative feasibility is a canon of a sound tax system, the non-observance thereof will not render a tax imposition invalid except to the extent that specific constitutional or statutory limitations are impaired.

Q1.7. What are the non-revenue (or sumptuary) objectives of taxation?

1. Taxation can strengthen anemic enterprises; 2. Taxes may be increased in period of prosperity to

curb spending power and halt inflation and lowered in periods of slump to expand business and ward off depression

3. Taxes on imports may be increased to protect local industries

4. Taxes on imported goods may be used as a bargaining tool by a country by setting trarrif rates first at a relatively high level before trade negotiations

1 The petitioner asserted that the substantiation requirements for

claiming the input VAT were impractical and incapable of implementation as in order to claim input VAT, the name, address

and TIN of the toll way user must be indicated in the VAT receipt or invoice. In addition, the rounding off of the toll rate and putting the excess collection in an escrow is illegal while the giving of the

change to meet the exact toll rate would be a logistical nightmare.

5. Taxes can discourage certain business (e.g. tobacco and alcohol)

6. Taxes can also minimize inequity In PHILIPPINE COCONUT PRODUCERS FEDERATION VS. PCGG [178 SCRA 236], the Supreme Court held that the coconut industry is one of the major industries supporting the national economy. It is therefore, the States concern to make it a strong and secure source not only of the livelihood of a significant segment of the population but also of export earnings the sustained growth of which is one of the imperatives of economic stability. In PHILIPPINE HEALTH CARE PROVIDERS VS. CIR [554 SCRA 411], the Supreme Court, on the issue of whether Health maintenance organizations (HMOs) were exempt from Documentary Stamp Tax (DST), held that it is not the purpose of the government to throttle private business. On the contrary, the government ought to encourage private enterprise. HMOs, just like any concern organized for a lawful economic activity have a right to maintain a legitimate business. Hence, HMOs should not be arbitrarily and unjustly included in the DST coverage.

Q2. What is the nature of the power of taxation?

The power of taxation is: 1. An inherent attribute of sovereignty The power of taxation is inherent in the State, being an attribute of sovereignty. The power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it. (MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY VS. MARCOS [261 SCRA 667]) The power of taxation can exist apart from constitutions and without being expressly conferred by the people. It can be exercised by the government even if the Constitution is entirely silent on the subject 2. Legislative in character The power of taxation is essentially a legislative function. Taxation is an attribute of sovereignty. It is the strongest of all powers of the government. There is a presumption in favor of legislative determination.



Public policy decrees that since upon the prompt collection of revenue depends the very existence of government itself, whatever determination shall be arrived at by the legislature should not be interfered with, unless there be a clear violation of some constitutional inhibition. (SARASOLA VS. TRINIDAD [40 PHIL.252]) The legislature has the inherent power to select the subjects of taxation and to grant exemptions. The reason for this is that classification has been a device for fitting tax programs to local needs and usages in order to achieve an equitable distribution of the tax burden (GOMEZ V. PALOMAR [25 SCRA 827]. In responding to the issue on why the taxes collected under the Sugar Stabilization Fund should be exclusively spent in aid of the sugar industry and not for other industries in need of similar protection, the Supreme Court in LUTZ V. ARANETA [98 SCRA 149] held that the Legislature is free to select the subjects of taxation and it may determine within reasonable bounds what is necessary for its protection and expedients for its promotion. 3. Generally not delegated to executive or

judicial departments As a general rule, the power to tax is purely legislative and it cannot be delegated. As exceptions, delegation is allowed in the following cases: a. Local governments in respect of matters of local

concern to be exercise by the local legislative bodies (see Sec. 5, Article 10, 1987 Constitution)

Note, however, that a municipal corporation has no inherent right to impose taxes. Its power to tax must always yield to a legislative act which is superior having been passed by the state itself which has the inherent power to tax. (see BASCO VS. PAGCOR [197 SCRA 52)

b. When allowed by the Constitution. Thus, 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 (see Sec. 28(2), Article 6, 1987 Constitution)

c. When the delegation relates merely to administrative implementation what may call for some degree of discretionary powers under a set of sufficient standards expressed by law (see MACEDA VS. MACARAIG [197 SCRA 771])

4. Subject to constitutional and inherent

limitations The power of taxation is not absolute. It subject to certain limitations or restrictions. In REYES V. ALMANZOR [196 SCRA 322], the Supreme Court held that while the power to tax is the strongest of all the powers of government, it is not unconfined as there are restrictions. Adversely affecting as it does property rights, both due process and equal protection clauses of the Constitution may be properly invoked to invalidate in appropriate cases a revenue measure.

Q2.1. What is the scope of the legislatures taxing power?

The legislative taxing power or discretion extends to the following: 1. nature (kind of tax to be collected); 2. object (purpose for which the tax shall be levied); 3. extent (amount or rate of tax to be collected); 4. coverage (the persons, property or occupation to

be taxed); 5. apportionment of the tax (general or limited to a

particular locality or partly general or partly local); 6. method of collection; and 7. situs (place) of taxation.

Q2.2. Differentiate the power to tax from police power and the power of eminent domain.

TAXATION

EMINENT

DOMAIN

POLICE

POWER

Authority

who exercises the power

Only by the

government or its political subdivisions

May be

exercised by government or political

subdivisions AND granted to public

utilities

Only by

government or its political subdivisions

Purpose The property is taken for

the support of the

The property is taken for

public use and must be

The use of the properly is

regulated for promoting the



government compensated general welfare and is not compensable

Persons affected

Operates on a community or class of

individuals

Operates on an individual as owner of a

particular property

Operates on a community or class of

individuals

Effect The money contributed becomes part

of the public funds

There is a transfer of the right to

property

There is no transfer of title. At most, there

is restraint on the injurious use of property

Benefits received

It is assumed that the individual

receives the equivalent of the tax in the

form of protection and benefits

he receives from the government

He receives the market value of the

property taken from him

The person affected receives

indirect benefits as may arise from the

maintenance of a healthy economic

standard of society

Amount of imposition

Generally, there is no limit on the

amount of tax that may be imposed

No amount imposed but rather the

owner is paid the market value of

property taken

Amount imposed should not be more

than sufficient to cover license and necessary

expenses

Relationship to

Constitution

Subject to certain

constitutional limitations; including the

impairment of obligation of contracts

Inferior to the impairment of

obligations of contracts prohibition;

government cannot expropriate

property which under a contract it had

previously bound itself to purchase

Relatively free from

constitutional limitations; it is superior to the

impairment of contract provision

Classifications and Distinctions Q3. How are taxes classified?

TAX DEFINITION

As to subject matter

Personal Tax Taxes of a fixed amount upon all persons of a certain class within the jurisdiction of the taxing power without regard to the amount of their property or the occupations of businesses in which they may

be engaged (e.g. community tax)

Property Tax Taxes assessed on all property or all property of a certain class within the jurisdiction of the taxing power (e.g. real estate tax)

Excise Tax Taxes laid upon the manufacture, sale or consumption of commodities within the country; upon licenses to pursue certain occupations and upon corporate privileges (e.g. value-added tax)

As to who bears the burden

Direct Tax Taxes wherein both the tax liability as well as the impact or burden of the tax falls on the same person (e.g. corporate and individual income tax)

Indirect Tax Taxes wherein the tax liability falls on one person but the burden thereof may be shifted or passed to another. (e.g. value-added tax, percentage taxes)

As to purpose

General Taxes Taxes levied for the general or ordinary purposes of Government (e.g. income tax, value-added tax)

Special Taxes Taxes levied for a special purpose (e.g. protective tariffs, custom duties)

As to determination of amount (Tax Rates)

Specific Taxes Tax which imposes a specific sum by the head or number or by some standard of weight or measurement and which requires no assessment beyond a listing and classification of the subjects to be taxed (e.g. taxes on distilled spirits)

Ad Valorem Taxes

Tax upon the value of the article or thing subject of



taxation (e.g. real estate tax)

As to scope or authority imposing the tax

National Taxes Taxes levied by the National Government (e.g. national internal revenue taxes)

Local Taxes Taxes levied by the local governments subject to such guidelines and limitations as the Congress may provide (e.g. real estate tax)

According to graduation (Tax base and Tax Rate)

Progressive taxes

Taxes imposed where the tax rate increases as the tax base increases (e.g. income tax)

Regressive taxes

Taxes imposed where the tax rate decreases as the tax base increases.

Mixed The tax rates are partly progressive and partly regressive

Proportionate The tax rates are fixed (in amounts or in percentage) on a flat tax base) (e.g. real estate tax)

Q3.1. How do you determine if a tax is a

property tax or an excise tax?

As held in the case of ASSOCIATION OF CUSTOMS BROKERS VS. MUNICIPAL BOARD OF MANILA [95 PHIL. 107], a tax is in its nature an excise. It does not become a property tax because it is proportioned in amount to the value of the property used in connection with the occupation, privilege or act which is taxed. Every excise necessarily must finally fall upon and be paid by property and so may be indirectly a tax upon property; but if it is really imposed upon the performance of an act, enjoyment of a privilege, or the engaging in an occupation, it will be considered an excise.

Q3.2. How do you determine if a tax is direct or indirect?

Direct taxes are taxes wherein both the incidence and liability for the payment of the tax as well as the impact or burden of the tax falls on the same person. On the other hand, indirect tax are taxes wherein

the incidence of or the tax liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed to another. In CIR v. PLDT [478 SCRA 61]), the Supreme Court distinguished direct taxes from indirect taxes by stating that direct taxes are those that are extracted 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, or are paid by, one person in the expectation and intention that he can shift the burden to someone else.

Q3.2.1 In the refund of indirect taxes, who is the proper party to claim the said refund?

In the refund of indirect taxes, the statutory taxpayer is the proper party who can claim the refund (SILKAIR VS. CIR [544 SCRA 100]) As held in the case of EXXONMOBIL V. CIR [640 SCRA 203], in the case of indirect taxes, it is the manufacturer of the goods who is entitled to claim any refund thereof. Indirect taxes paid by the manufacturers or producers of the goods cannot be refunded to the purchasers of the goods because the purchasers are not the taxpayers (see CONTEX CORPORATION VS. CIR [433 SCRA 577]) The liability for the payment of the indirect tax lies only with the seller of the goods or services, not in the buyer thereof. In indirect taxes, when the seller passes on the tax to his buyer, he, in effect, shifts the burden, not the liability to pay it, to the purchaser as part of the price of goods sold or rendered (CIR v. PLDT).

Q3.2.2 How were indirect taxes distinguished from withholding taxes in the recent case of Asia International Auctioneers v. CIR [G.R. 179115, Sept. 26, 2012]?

Indirect taxes, like VAT and excise tax, are different from withholding taxes. To distinguish, in indirect taxes, the incidence of taxation falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it. On the other hand, in case of withholding taxes, the incidence and burden of taxation fall on the same entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who merely collects, by withholding, the tax due from income payments to



entities arising from certain transactions and remits the same to the government.

Q4. Distinguish taxes from other impositions/exactions

Q4.1. How do you distinguish a tax from

a toll?

Toll Tax

Demand of proprietorship Demand of sovereignty

Paid for use of anothers property

Paid for the support of government

Amount depends upon the cost of construction or maintenance of the public improvement used

Generally, no limit on the amount of tax that may be imposed

Imposed by the government or private individuals or entities

Imposed only by the government


a penalty?

Penalty Tax

Imposed as a punishment for violation of law or acts deemed injurious

Violation of tax laws may give rise to imposition of a penalty

Designed to regulate conduct

Generally intended to raise revenue

May be imposed by the government or private individuals or entities

Imposed only by the government

In the case of REPUBLIC OF THE PHILIPPINES VS. PATANAO [20 SCRA 712], the Supreme Court held that the acquittal of the taxpayer in the criminal proceeding does not necessarily entail exoneration from his liability to pay the taxes.


a special assessment?2

As held in the case of THE APOSTOLIC PREFECT OF THE MOUNTAIN PROVINCE V. TREASURER OF BAGUIO [71 PHIL. 547], the difference between a special assessment and a tax is that:

2 A special assessment is a demand for contribution to help defray

the cost of improvement on real property owners of a particular

locale directly benefited by such improvement.

1. a special assessment can be levied only on land; 2. a special assessment cannot (at least in most

states) be made a personal liability of the person assessed;

3. a special assessment is based wholly on benefits; and

4. a special assessment is exceptional both as to time and locality.

Q4.4. How do you distinguish a tax from a debt?

Debt Tax

Generally based on contract

Based on law

Assignable Cannot generally be assigned

May be paid in kind Generally payable in money

May be the subject of set-off or compensation

Cannot be the subject of set-off

Person cannot be imprisoned for non-payment

Imprisonment is a sanction for non-payment

Governed by ordinary periods of prescription

Governed by prescriptive periods provided under tax laws

Draws interest when it is so stipulated

Does not draw interest except only when delinquent


a subsidy?

A subsidy is a legislative grant of money in aid of a private enterprise deemed to promote a public welfare. It is not a tax although it may be necessary to raise the money to pay the subsidy by means of a tax.


customs duties and fees

Customs Duties and fees are those charged upon commodities on their being imported in or exported from the country. Customs duties are taxes but a tax is a broader term to include not only customs duties but other taxes as well.



Q4.7. How do you distinguish a tax from revenue

Revenue is a broad term that includes not only taxes but income from other sources as well.

Q4.8. How do you distinguish a tax from a license fee?

As held in the case of PROGRESSIVE DEVELOPMENT CORPORATION VS. QUEZON CITY [172 SCRA 629], the term "tax" frequently applies to all kinds of exactions of monies which become public funds. It is often loosely used to include levies for revenue as well as levies for regulatory purposes such that license fees are frequently called taxes although license fee is a legal concept distinguishable from tax: a license fee is imposed in the exercise of police power primarily for purposes of regulation, while a tax is imposed under the taxing power primarily for purposes of raising revenues (see also COMPANIA GENERAL DE TABACOS DE FILIPINAS V. CITY OF MANILA [8 SCRA 367].

Q4.8.1 What are the three types of license fees?

The three types of license fees are: 1. License for the regulation of useful occupation or

enterprises 2. License for the regulation or restriction of non-

useful occupation or enterprises 3. License for revenue only

3

(See VICTORIAS MILLING CO. VS. CIR [22 SCRA 13])

Q4.8.2 What is the importance of determining whether a particular imposition is a tax or a license fee?

It is necessary because some limitations apply only to one and not to the other, and for the reason that exemption from taxes may not include exemption from license fees.

Q4.8.3 What is a license tax and how do you distinguish it from a license fee?

As explained by the Supreme Court in the case of VICTORIAS MILLING CO. VS. CIR [22 SCRA 13], the term "license tax" has not acquired a fixed meaning. 3 This shouldnt be a type of license fee. It is instead a license tax.

It is often "used indiscriminately to designate impositions exacted for the exercise of various privileges."

It does not refer solely to a license for

regulation. In many instances, it refers to "revenue-raising exactions on privileges or activities." On the other hand, license fees are commonly called taxes. But, legally speaking, license taxes are "for the purpose of raising revenues," in contrast to license fees which are imposed "in the exercise of police power for purposes of regulation."

Q4.8.4 What should be the extent of the exaction for it to be considered a license fee?

As held in the case of G.A. CUUNJIENG V. PATSTONE [42 PHIL 818], the amount of the exaction must only be of sufficient amount to include the cost of licensing, regulating and surveillance.

Q4.8.4.1 Does the above rule apply to

all types of license fees?

No. In the case of license fees for non-useful occupations, wider discretion in fixing the amount is given to municipal corporations and the exaction may be very large without necessarily being a tax. This is so because municipal corporations are authorized to enact ordinances to provide for the health and safety and promote the morality, peace and general welfare of its inhabitants. Thus, in the case of PHYSICAL THERAPY ORGANIZATION OF THE PHILIPPINES V. MUNICIPAL BOARD OF THE CITY OF MANILA [101 PHIL. 1142], the Supreme Court found the imposed license fee as reasonable as the practice of hygienic and aesthetic massage not as a useful and beneficial occupation which will promote and is conducive to public morals.

Q5. How do you determine if an imposition is a tax or a (regulatory) fee?

In determining whether an imposition is a tax or a regulatory fee, one must inquire into the following: 1. The purpose of the imposition 2. The amount of the exaction 3. The designation



Q5.1. How do you distinguish a tax from a regulatory fee in terms of their purpose?

A fee is imposed for purposes of regulation (in exercise of police power) while a tax is imposed for revenue generation purpose (the power of taxation). If the generating of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if the regulation is the primary purpose, the fact that incidentally revenue is also obtained does not make the imposition a tax (PROGRESSIVE DEVELOPMENT CORPORATION V. QUEZON CITY [172 SCRA 629]).

Q5.1.1. When an exaction is imposed to discourage certain businesses, is the exaction a tax?

No, it is a regulatory fee. In COMPANIA GENERAL DE TABACOS DE FILIPINAS V. CITY OF MANILA [8 SCRA 367], the Supreme Court held that the municipal license fees for the privilege to engage in the business of selling liquor or alcoholic beverages were imposed for regulatory purposes as such products are potentially harmful to public health and morals.

Q5.1.2. When an exaction is imposed to provide means for the rehabilitation and stabilization of a threatened industry, is the exaction a tax?

Jurisprudence provides that such exactions are considered regulatory fees in light of their purpose. In OSMENA V. ORBOS [220 SCRA 703], in determining whether the taxes collected for the Oil Price Stabilization Fund are taxes or regulatory fees, the Supreme Court stated that while the funds were referred to as taxes, they were exacted not under the power of taxation, but in the exercise of the police power of the State. The main objective was not revenue but to stabilize the price of oil and petroleum products. . In REPUBLIC V. BACOLOD-MURCIA MILLING [17 SCRA 632], in determining whether the levy for the Philippine Sugar Institute Fund is a fee or a tax, the Supreme Court held that such levy was not so much an exercise of the power of taxation but an exercise of the police power to aid and support the sugar industry.

Q5.1.2.1. When the exaction is imposed to make a private company viable, is it a fee or a tax?

The exaction should be considered a tax. In PLANTERS PRODUCT V. FERTIPHIL CORPORATION [548 SCRA 485], an Letter of Instruction was issue imposing a capital recovery component on the domestic sales of all fertilizer grades and such exaction shall be collected until adequate capital was raised to make Planters Product, a private company, viable. The Supreme Court held that the levy was invalid for not serving a public purpose as the ultimate beneficiary was a private company. Hence, the primary purpose was for revenue generation.

Q5.1.2.2. Are royalty fees (on a per liter basis) imposed on the movement of petroleum fuel to and from special economic zones a tax or a fee?

The royalty fees imposed on the movement of petroleum fuel are regulatory fees. As held in CHEVRON PHILIPPINES V. BCDA [630 SCRA 521], the royalty fees were exacted on a per liter basis because the higher the volume of fuel entering the special economic zone, the greater the extent and frequency of supervision and inspection required to ensure safety, security and order within the zone.

Q5.1.2.3. Should margin fees be considered a tax or a fee?

Margin fees are regulatory fees. In ESSO STANDARD EASTERN V. CIR [175 SCRA 149], the company sought to deduct the margin fees it paid from its gross income. The Supreme Court held that the margin fees cannot be deducted as they are not taxes. Margin fees are imposed to curb excessive demand upon the international reserves in order to stabilize the currency. It is applied to strengthen the countrys international reserves and is not imposed for revenue purposes. Hence, as they are not taxes, they cannot be considered as a deductible business expense.

Q5.1.2.4. Should universal charges (for electricity end-users) be considered a tax or a fee?



Universal charges are regulatory fees. In GEROCHI V. DOE, in determining whether the Universal Charge imposed on electricity end-users by distributors is a tax, the Supreme Court held in the negative and stated that the universal charge is a regulatory fee levied to ensure the viability of the countrys electric power industry

Q5.2. How do you distinguish a tax from a regulatory fee in terms of the amount of the exaction?

If the amount levied is too high and/or if the amount levied is not related to costs of regulation, the exaction should be considered a tax as it is levied for revenue purposes. In VILLEGAS V. HIU CHIONG TSAI PAO HO [86 SCRA 270], in determining whether the exaction of P50.00 from aliens securing an employment permit (from the Mayor of Manila) is a fee or a tax, the Supreme Court held that the amount was too excessive and that there was no logic or justification in the exaction from aliens who have been cleared for employment. The Court opined that it was obvious that the purpose of the exaction is to raise money under the guise of regulation. In PLANTERS PRODUCT V. FERTIPHIL CORPORATION [548 SCRA 485], the Supreme Court held that the amount collected from the imposition on the domestic sales of fertilizer grades was too excessive to serve a mere regulatory purpose. In AMERICAN MAIL LINE V. CITY OF BASILAN [2 SCRA 309], the Supreme Court stated that for fees to be regulatory in nature, the same must be no more than sufficient to cover the actual cost of inspection or examination. In ANGELES UNIVERSITY V. CITY OF ANGELES [G.R. 189999, JUNE 27, 2012], the Supreme Court held that a charge which bears no relation at all to the cost of inspection and regulation may be held to be a tax rather than an exercise of the police power.

Q5.2.1. Can an imposition which, at first, was regulatory in nature be considered a tax because of the substantial increase in the amount collected?

Yes. In PAL V. EDU [164 SCRA 320], in determining whether the motor vehicle registration fees (MVRF) were taxes or fees, the Supreme Court held that

while the MVRFs were originally intended for regulation, as motor vehicles became absolute necessities and vehicular traffic exploded in number, the registration of vehicles because a convenient way of raising revenues. Thus, their nature has become that of taxes notwithstanding the fact one-fifth or less of the amount collected is set aside for operating expenses of the agency administering the program.

Q5.3. Does designation matter in determining whether an exaction is a fee or a tax?

No. In VICTORIAS MILLING CO. VS. CIR [22 SCRA 13], the Supreme Court stated that the designation given by the authorities does not decide whether the imposition is properly a tax or a fee.

Q5.4. Which factor then should be given importance?

The purpose of the exaction is the primary factor to consider. In GEROCHI V. DOE [527 SCRA 696], the Supreme Court stated the conservative and pivotal distinction between the power of taxation and police power rests in the purpose for which the charge is made.

Q5.5. Can an exaction be considered

both a tax and a regulatory fee? No, simply because they are levied for different purposes. The power to regulate as an exercise of police power does not include the power to impose fees for revenue purposes (G.A. CUUNJIENG V. PATSTONE [42 PHIL 818]; AMERICAN MAIL LINE V. CITY OF BASILAN [2 SCRA 309]) However, in PCGG v. COJUANGCO, the Supreme Court stated that the coco levy funds were raised through the States police and taxing powers. The implication of this statement from the court is that it is possible for an exaction to be both a tax and a fee. This statement should be disregarded along with other cases which associates or links the three powers of the State in relation to exactions such as in the cases of LUTZ V. ARANETA [98 SCRA 148] and ESSO EASTERN STANDARD V. CIR [175 SCRA 149] where the Court stated that the power of tax may be used as an implement of police power as well as the case of CIR VS. CENTRAL LUZON DRUG CORPORATION, where the Supreme Court stated that taxation power can also be used as an implement for the exercise of the power of eminent domain.



The three powers of the State are separate and distinct from one another. As stated by the Court in AMERICAN MAIL LINE V. CITY OF BUTUAN [2 SCRA 309], the power to regulate as an exercise of police power does not include the power to impose fees for revenue purposes. Thus, the rule is plain and simple: if the imposition is for revenue purposes, it is a tax and it is in the exercise of the power to tax; if it is for regulatory purposes, it is a fee and it is in the exercise of police power.

Limitations on the Power of Taxation A. Inherent Limitations Q6. What are the inherent limitations on the

power to tax? The inherent limitations are those limitations which exist despite the absence of an express constitutional provision thereon. The inherent limitations are: 1. Public purpose 2. Non-delegability of the taxing power 3. Territoriality or situs of taxation 4. Tax exemption of the State 5. Principle of Comity

Q6.1. What is meant by public purpose

as an inherent limitation on the power to tax?

The right of taxation can only be used in aid of a public purpose. In PASCUAL V. SECRETARY OF PUBLIC WORKS [110 SCRA 331], the Supreme Court explained that the right of the legislature to appropriate public funds is correlative with its right to tax and as such the power of taxation may only be exercised for public purposes. In that case, the appropriation of public funds for the construction of feeder roads on land owned by a private person is invalid for being made for other than a public purpose. The rule can also be seen in PEPSI COLA V. MUNICIPALITY OF TANUAN [69 SCRA 460] where the Supreme Court held that one of the requisites for the valid exercise of the power of tax is that the tax must be for a public purpose.

In TIO VS. VIDEOGRAM REGULATORY BOARD [151 SCRA 208], the Supreme Court held that the levy of 30% tax on videogram operators is for a public purpose. It was imposed primarily to answer the need for regulating the video industry, particularly rampant film piracy and flagrant violation of intellectual property rights.

Q6.2. Is the power to tax delegable? Yes. In PEPSI COLA V. MUNICIPALITY OF TANUAN [69 SCRA 460], the Supreme Court opined that the power of taxation may be delegated to local governments in respect of matters of local concern. The legislative power to create political corporations for purposes of local self-government carries with it the power to confer on such local governments the power to tax. It must be noted, however, that the power is not inherent in the local government unlike in the national government. In MANILA ELECTRIC COMPANY VS. PROVINCE OF LAGUNA [306 SCRA 750], the Supreme Court held that local governments do not have the inherent power to tax except to the extent that such power might be delegated to them either by basic law or by statute. Under the now prevailing Constitution, where there is neither a grant nor a prohibition by statue, the tax power of LGUs must be deemed to exist although Congress may provide statutory limitations and guidelines

Q6.3. What is meant by territoriality or situs of taxation as a limitation on the power of taxation?

However broad the power of taxation may be as to its character and no matter how searching it is in its extent, such power is necessarily limited only to persons, property or businesses within its jurisdiction. Thus, in ILOILO BOTTLERS INC. VS. CITY OF ILOILO [164 SCRA 607], the Supreme Court, on the issue of whether a bottling company which sells soft drinks in Iloilo City but operates its bottling plant in another is liable for the excise tax imposed by said City on the distribution, manufacture and bottling of soft drinks, held that since truck sales were made in the City, the acts or privileges of the company is within its jurisdiction.



In CIR V. MARUBENI [204 SCRA 377], what was involved was a contract on a turn-key basis

4 which

the CIR sought to tax as an indivisible contract. The Supreme Court held that the contract actually involved two taxing jurisdictions. While the construction and installation work were completed in the Philippines, some pieces of equipment and supplies were completely designed and engineered in Japan. These services made and completed in Japan are not subject to contractors tax as they are rendered outside the taxing jurisdiction of the Philippines. In REAGAN v. CIR [30 SCRA 968], the Supreme Court held that bases under lease to the US under the Military Bases Agreement remain part of Philippine territory. It is not foreign territory for purposes of income tax legislation. The power to tax has been preserved except for those matters where an appropriate exemption was provided for.

Q6.4. Can local governments tax the national government, its agencies, and instrumentalities?

No. In MIAA v. CA [495 SCRA 591], the Supreme Court, in resolving the issue on whether the lands and buildings owned by the Manila International Airport Authority were subject to real property tax, ruled in the negative. The Supreme Court opined that since MIAA is not a GOCC but instead as government instrumentality vested with corporate powers or a government corporate entity, it is exempt from real property tax. By express provision of the Local Government Code, local governments cannot levy taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities. Furthermore, the said lands and buildings are property of the public dominion and therefore owned by the State. They are devoted to public use. Thus, they cannot be auctioned as they are outside the commerce of man. However, the portions of the property leased to private entities are subject to real property tax.

Q6.5. What is the principle of comity in relation to the power to tax?

4 In a turn key contract, the contractor is entrusted to design,

construct, commission and handover the project to the employer in

a completed state.

As held in TANADA V. ANGARA [272 SCRA 18], By their voluntary act, nations may surrender some aspects of their state power in exchange for greater benefits granted or derived from a convention of pact. The underlying consideration in this partial surrender of sovereignty is the reciprocal commitment of the other contracting states in granting the same privilege and immunities to the Philippines, its officials and its citizens. The point is that a portion of sovereignty may be waived without violating the Constitution, based on the rationale that the Philippines "adopts the generally accepted principles of international law as part of the law of the land and adheres to the policy of . . . cooperation and amity with all nations." Note that the principle of comity entails an exchange in benefits. Thus, in SEA-LAND SERVICE V. CA [357 SCRA 441], the Supreme Court ruled that the hauling and transport of household goods and personal effects of U.S. military personnel were not tax exempt under the RP-US Military Bases Agreement as they do not directly contribute to the defense and security of the Philippines. In CIR v. Mitsubishi Metal Corp [181 SCRA 214], the Supreme Court held that scrupulous care must be taken when international comity is invoked on the representation that funds involved in the loans are those of a foreign government as we should avoid opening the floodgates to the violation of our tax laws.

Q6.6. What are other inherent limitations

to the power to tax?

The other recognized limitations are:

1. Reconciliation of conflicting interests of tax authorities and taxpayers;

2. Prospective application;5

3. Promptness in payment; 4. Injunction against Collection of taxes; 5. Inapplicability of Estoppel against the State;

and 6. No legal compensation between Taxes and

Debts

5 As a general rule, taxes must only be imposed prospectively. As

an exception, taxes may be imposed retroactively if the law

expressly provides.



B. Constitutional Limitations

Q7. What are the direct constitutional

provisions on the power to tax?

The direct constitutional provisions on taxation are: 1. Non-imprisonment for non-payment of poll-tax

(Article 3, Sec. 20) 2. The rule which requires that revenue,

appropriation and tariff bills shall originate exclusively in the House of Representatives (Article 6, Section 24)

3. Uniformity, equitability and progressivity of taxation (Article 6, Section 28, par. 1).

4. Limitations in congressional power to delegate to the president the authority to fix tariff rates, import and export quotas, etc (Article 6, Section 28, par. 2)

5. Tax exemption of properties actually, directly, and exlusively used for religious, charitable and educational purposes (Article 6, Section 28, par. 3)

6. Voting requirement in connection with the legislative grant of tax exemption (Article 6, Section 28, par. 4)

7. The provision which mandates that money collected on a tax levied for a public purpose shall be paid out for such purpose only (Article 6, Section 29, par. 3)

8. Non-impairment of the Supreme Courts jurisdiction in tax cases (Article 8, Sec. 5, par. 2(b))

9. Power of local governments to create its own souces of revenue and to levy axes subject to Congressional limitations (Article 10, Section 6)

10. Exemption from taxes of the revenues and assets of educational institutions including grants, endowments, donations or contributions. (Article 16, Section 4, par. 3)

Q8. What are the general (indirect) constitutional provisions on the power to tax?

The general constitutional limitations are: 1. Due process 2. Equal protection 3. Religious Freedom 4. Payment of just compensation 5. Non-Impairment of Contracts

(i) Due Process Q8.1. How is the due process clause

applied to taxation?

In PEPSI-COLA BOTTLING COMPANY VS. MUNICIPALITY OF TANAUAN, LEYTE [69 SCRA 460], the Supreme Court held that taking of property without due process of law may not be passed over under the guise of taxing power, except when the latter is exercised lawfully as when: 1. the tax is for a public purpose; 2. the rule on uniformity of taxation is observed; 3. either the person or property taxed is within the

jurisdiction of the government levying the tax; and 4. in the assessment and collection of taxes notice

and opportunity for hearing are provided.

(ii) Uniformity, Equitable, and Progressive

Q8.2. What is meant by uniformity?

Uniformity requires that all subjects or objects of taxation similarly situated are to be treated alike or put on equal footing both in privileges and liabilities (SISON V. ANCHETA [130 SCRA 654]; see also CIR V. LINGAYEN GULF [164 SCRA 27])

Q8.3. How does the principle of

uniformity relate to the equal protection clause?

The test of uniformity Is based on the requisites for a valid classification under the equal protection clause. As held in SISON V. ANCHETA [130 SCRA 654], uniformity of taxation is quite similar to the standard of equal protection. Under the equal protection clause, for a classification to be valid, it must: 1. Rest on substantial distinctions; 2. Be germane to the purpose of the law; 3. Not be limited to existing conditions only; and 4. Apply equally to all members of the same class.

Q8.3.1. Is there a violation of the

uniformity of taxation or equal protection when the State gives preferential tax treatment to



locators inside special economic zones?

No. As held in TIU V. CA [301 SCRA 278], there are substantial differences between the big investors who are being lured to establish and operate their industries in the special economic zones and those business operators outside the zones. One of these is that the former bring in billion-peso investments and thousands of new jobs. The Supreme Court also stated that the equal protection guarantee does not require territorial uniformity of laws.

Q8.3.1.1. Should tax incentives be

uniform for all special economic zones?

Not necessarily. In JOHN HAY V. LIM [414 SCRA 356], at issue was the extension of benefits given to the Subic SEZ under RA 7227 to the John Hay SEZ via a proclamation, the Supreme Court ruled that tax exemptions must be strictly and expressly provided for and that the power to grant exemption is only within Congress. The same rationale was used with respect to locators in the Clark SEZ in the case of COCONUT OIL REFINERS ASSOCIATION V. TORRES [465 SCRA 48]. The implication of these two cases is that special economic zones can have different tax incentives. However, it must be noted that by virtue of RA 9400, the same incentives have been granted to Clark, John Hay, Poro Point and Morong SEZs.

Q8.3.2. Does the Attrition Law (RA 9335),

which gives incentives to BOR/BOC employees, violate the equal protection clause?

No. In ABAKADA GURO PARTY-LIST V. PURISIMA [562 SCRA 251], the Supreme Court held that there was no violation of the equal protection clause. The equal protection clause recognizes a valid classification, that is, a classification that has a reasonable foundation or rational basis and not arbitrary. The subject of the Attrition Law was revenue generation and collection of the BIR and BOC, thus, the incentives and sanctions should logically pertain to them and not to other government agencies. This has been reiterated in the recent case of BOCEA V. TEVES [G.R. 181704, DEC. 6, 2011].

Q8.3.3. Does the classification freeze scheme

6 under RA 9334 violate

the equal protection clause?

No. In BRITISH AMERICAN TOBACCO V. CAMACHO [562 SCRA 511], the Supreme Court held that the classification freeze does not violate the equal protection clause as it passes the rational basis test and is meant to improve the efficiency and effectivity of the tax administration over sin products while trying to balance the same with state interests. It addresses the concerns in the simplification of tax administration of sin products, elimination of potential areas for abuse and corruption in tax collection, buoyant and stable revenue generation, and ease of projection of revenues.

Q8.3.4. Does RR 17-99 (implementing RA 8240 but applying the higher tax rule on the January 1, 2000 increase)

7 violate the equal

protection clause?

Yes. In CIR v. FORTUNE TOBACCO [658 SCRA 289], the Supreme Court ruled that the higher tax rule only applies on the transition period. To implement the higher tax rule on the January 1, 2000 increase would violate the rule of uniformity since brands belonging to the same category would be imposed with different tax rates.

Q8.3.5. Does the adoption of a gross system of income taxation to compensation income and a system of net income taxation as regards professional and business income violate the rule on uniformity?

No. In SISON V. ANCHETA [130 SCRA 654], the Supreme Court noted that taxpayers who are recipients of compensation income have practically

6 Under the classification freeze scheme, after a brand of cigarette

is classified based on its current net retail price, the classification is

frozen and only Congress can thereafter reclassify the same. Under this scheme, it would be possible that over time the net retail price of a previously classified brand would increase to a

point that its net retail price pierces tha tax bracket to which it was previously classified byt nonetheless it would still be subject to the excise tax rate under the lower tax bracket. 7 RA 8240 which took effect January 1, 1997 provides for a shift

from ad valorem taxes to specific taxes on cigarettes. The law provided that (1) the specific tax due from any brand of cigarette

within 3 years shall not be lower than the tax due before the new law (higher tax rule) and (2) the specific tax rate shall be increased by 12% on January 1, 2000. In effect, what RR 17-99 did was to implement the higher tax rule for the January 1, 2000 increase.



no overhead expenses and thus, they should not be entitled to make deductions for income tax purposes. On the other hand, professionals and businessmen have no uniformity in terms of costs or expenses necessary to produce their income. Thus, it would be unjust to disregard such disparities and giving them all zero deductions and impose on all the same tax rates.

Q8.3.6. Does the rule on uniformity

require territorial uniformity? No. As held in TIU V. CA [301 SCRA 278], the equal protection guarantee does not require territorial uniformity of laws. In VILLANUEVA V. CITY OF ILOILO [26 SCRA 578], in determining whether the imposition of a municipal license tax on tenement houses violates the equal protection clause as such taxes are not imposed in other cities, the Supreme Court ruled in the negative as the rule on uniformity does not require taxes for the same purpose should be imposed in different territorial subdivisions at the same time. It is enough that the tax falls equally and impartially on all owners or operations of tenement houses similarly classified or situated. The statement made by the Court in CIR V. LINGAYEN GULF [164 SCRA 27] to the effect that a tax is uniform when it operates with the same force and effect in every place where the subject of it is found should not be taken to mean that territorial uniformity is required.

Q8.3.7. A municipal ordinance was passed imposing a tax on the sale of soft drinks or carbonated beverages by agents/consignees of dealers doing business outside the municipality. Is there a violation of the equal protection clause?

Yes. As held in PEPSI-COLA V. CITY OF BUTUAN [24 SCRA 789], under the said municipal ordinance, sales of local dealers not acting for or on behalf of merchants established outside the municipality would be exempt from the tax while those acting as agents and consignees of dealers outside the municipality would have to pay the tax. The Supreme Court ruled that this was a violation of the uniformity required by the Constitution.

Q8.3.8. A tax ordinance was passed

expressly providing for the entity which shall be subject to tax. Is

there a violation of the equal protection clause?

Yes. In ORMOC SUGAR V. TREASURER [22 SCRA 603], the Supreme Court held that a reasonable classification should be in terms applicable to future conditions. The taxing ordinance should not be singular and exclusive as to exclude any subsequently established entity from the coverage of the tax.

Q8.4. What is meant by equitable?

Equitable means fair, just, reasonable and proportionate to ones ability to pay. In ABAKADA GURO PARTY-LIST V. ERMITA [469 SCRA 1], the Supreme Court ruled that the 12% VAT imposition was equitable as it imposes safeguards and limits in the form of VAT exemption granted to gross sales below P1.5 million. In KAPATIRAN V. TAN [163 SCRA 372], the Supreme Court held that EO 278

8 is equitable as it is imposed

only on sales of goods or services by persons engaged in a business with an aggregate gross annual sales exceeding P200,000 while small corner sari-sari stores are consequently exempt as well as sales of farm and marine products.

Q8.5. Should the system of taxation be

always progressive?

No. The Supreme Court in TOLENTINO VS. SECRETARY OF FINANCE [249 SCRA 628] explained that what Congress is required by the Constitution to do is only 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 or for the promotion of the right to "quality education." These provisions are put in the Constitution as moral incentives to legislation, not as judicially enforceable rights. Thus, even if the VAT is regressive because it is an indirect tax, it is not prohibited by the Constitution.

8 EO 278 imposing a 10% VAT on the value added by every seller

with aggregate gross annual sales of articles and/ or services

exceeding P200,000 to his purchase of goods and services



(iii) Non-Impairment9 Q9. When can the non-impairment clause be

rightly invoked against the withdrawal of a tax exemption?

In PROVINCE OF MISAMIS ORIENTAL V. CAGAYAN ELECTRIC [181 SCRA 38], the Supreme Court held that the non-impairment clause may be rightly invoked against contractual tax exemptions. Contractual tax exemptions are those agreed by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its government immunity (see also MERALCO V. PROVINCE OF LAGUNA [306 SCRA 750])

Q9.1. Is a tax exemption embodied in a

legislative franchise a contractual tax exemption (such that it impairs the obligations of contracts when revoked)?

No. As held in PROVINCE OF MISAMIS ORIENTAL V. CAGAYAN ELECTRIC [181 SCRA 38], a franchise does not take the nature of a contractual tax exemption, which cannot be revoked without impairing the obligations of contracts. A legislative franchise can be withdrawn through amendment or repeal. (see also CAGAYAN ELECTRIC POWER V. CIR [138 SCRA 629]; LEALDA ELECTRIC V. CIR [7 SCRA 928].)

(iii) Taxation of Special Entities

Q10. A municipality passed an ordinance which imposes a tax on the sale of bibles. Is the ordinance valid?

No. As held in AMERICAN BIBLE SOCIETY VS. CITY OF MANILA [101 SCRA 386], the municipal ordinances imposing a tax on the sale of bibles were declared unconstitutional as it would impair the free exercise and enjoyment of its religious profession and

9 To impair an obligation of a contract is to alter or change the

terms or effect of the contract and thus in contemplation of the law

weaken the position or rights of one or all of the parties to it. A law which changes the terms of a contract by making new conditions or changing those in the contract or dispenses with those

expressed impairs its obligations.

worship, as well as its rights of dissemination of religious beliefs.

Q11. What are special entities that are granted tax exemptions by the Constitution?

Under Article VI, Section 28, the following are exempt from real property taxes: 1. Charitable institutions 2. Churches 3. Parsonages or convents appurtenant thereto 4. Mosques 5. Non-profit cemeteries; and 6. All lands, buildings, and improvements, actually,

directly and exclusively used for religious, charitable or educational purposes.

The exemption provided for under Article VI, Section 28 pertains only to real property taxes (LLADOC V. CIR [14 SCRA 292]). Under Article XIV, Section 4(3), 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.

Q11.1. If a hospital also admits paying patients, does it lose its character as a charitable institution?

No. In CIR V. BISHOP OF MISSIONARY DISTRICT [14 SCRA 991], the Supreme Court held that the admission of pay patients does not detract from the charitable character of a hospital if its funds are devoted exclusively to the maintenance of the institution as a public charity (see also HERRERA V. QCBAA [3 SCRA 186]) In LUNG CENTER OF THE PHILIPPINES V. QUEZON CITY [433 SCRA 119], the Supreme Court stated that, as a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients , whether out-patient or confined in the hospital or receives subsidies from the government, as long as the money received is devoted or used altogether to the charitable object which it is intended to achieve, and no money inures to the private benefit of the persons managing or operating the institution.



Q11.2. Does the phrase actually, directly, and exclusively used mean that the exemption shall only cover property actually indispensable to the institution?

No. As held in HERRERA V. QCBAA [3 SCRA 186], the exemption in favor of property used exclusively for charitable or educational purposes is not limited to property actually indispensable but extends to facilities which are incidental to or reasonably necessary for the accomplishment of its purposes.

Q11.2.1. A hospital has a school for

training nurses and midwifes. Substantial profit is derived from the operation of the said school. Is the school exempt from taxes?

As to the lands, buildings, and improvements, such is beyond the taxing power of the State irrespective of the substantial profits as all lands, buildings and improvements used exclusively for religious, charitable or educational purposes are exempt from real property taxes. The school is a facility incidental or reasonably necessary for the accomplishment of the purposes of the hospital as the students practice therein. (see HERRERA V. QCBAA [3 SCRA 186]) As to the profits, it will be exempt from taxes if it proves that it is within the coverage of Article XIV, Section 4(3) which exempts all revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes

Q11.2.2. Is a vegetable garden and an unused cemetery adjacent to a convent exempt from payment of real property taxes?

Yes. As held in BISHOP OF SEGOVIA V. PROV. BOARD OF ILOCOS NORTE [51 SCRA 352], the exemption from the payment of the land tax in favor of the convent includes not only the land actually occupied by the building, but also the adjacent ground or vegetable garden destined to the incidental use of the parish priest in his ordinary life. The unused cemetery is also exempt as it is not used for commercial purposes and instead is used as a place for those who participate in the religious festivities.

Q11.3. YMCA is a non-stock, non-profit institution with religious, charitable and educational objectives. YMCA leased part of its premises to small canteen owners and charged parking fees on the lots beside its building. Can the CIR tax YMCA for such income?

Yes. In CIR V. CA [298 SCRA 83], the Supreme Court ruled that the income from the lease and parking fees were not exempt. The last paragraph of Section 27 of the NIRC clearly provides that profits realized by exempt organizations (non-profit clubs) from real property from whatever source and wherever used are taxable. The Court noted that while YMCA is exempt from real property taxes, it is not exempt from income tax on the rentals from its property. Further, YMCA failed to prove that it was a non-stock, non-profit educational institution under Article XIV, Section 4(3) of the Constitution.

Q11.4. The Philippine Lung Center leased

portions of its real property out for commercial purposes. Are these exempt from real property taxes?

No. In LUNG CENTER OF THE PHILIPPINES V. QUEZON CITY [433 SCRA 119], the Supreme Court held that the hospital was not exempt from real property tax on the portions of its property not actually, directly, and exclusively used for charitable purposes. Thus, those leased out for commercial purposes are subject to real property tax. Those used by the hospital even if used for paying patients remain exempt from real property taxes.

Q11.5. St. Lukes Medical Center is a hospital organized as a non-stock and non-profit corporation. It admits both paying and non-paying patients. The CIR claimed that St. Lukes was liable for income tax at 10% as provided under Section 27(B)10 of the NIRC. St. Lukes argues that it is a non-stock, non-profit institution for charitable and social welfare purposes exempt from income tax

10

Section 27(B) provides that proprietary educational institutions and hospitals which are non-profit shal pay a tax of ten percent

(10%) on their taxable income



under Section 30(E) and (G) of the NIRC.11 Decide.

St. Lukes cannot claim full tax exemption under Section 30 because it has paying patients and this is notwithstanding the fact that it is a non-profit hospital. For Section 27(B) to apply, the hospital must be non-profit which means that no net income or asset accrues to or benefits any member or specific person and all the activities of the hospital are non-profit. On the other hand, Section 30(E) and (G), while providing for an exemption is qualified by the last paragraph which, in turn, provides that activities conducted for profit shall be taxable. Section 30(E) and (G) requires that an institution be operated exclusively for charitable purposes to be completely exempt from income tax. In this case, however, St. Lukes is not operated exclusively for charitable purposes insofar as its revenues from paying patients are concerned. Such revenue is subject to income tax at 10% under Section 27(B).

Q11.5.1. Is the existence of paying patients material to the real property tax exemption of the building, land and improvements of St. Lukes?

No. The lands, buildings, and improvements of St. Lukes remain exempt from real property taxes even if it admits paying patients. This is consistent with the ruling in LUNG CENTER OF THE PHILIPPINES V. QUEZON CITY [433 SCRA 119] where the Supreme Court held that a charitable institution does not lose its character as such and its exemption from real property taxes simply because it derives income from paying patients

Q11.5.2. If St. Lukes were to lease to private persons portions of its property for profit, is the property and the profits exempt from taxes?

The property will not be exempt from real property taxes and also the profits will not be exempt from income tax. Pursuant to the ruling in LUNG CENTER OF THE PHILIPPINES V. QUEZON CITY [433 SCRA 119], those portions of real property not actually used for

11

Section 30(E), NIRC provides that a non-stock corporation or association organized and operated exclusively for charitable

purposes is exempt from income tax while Section 30(G) provides that a civic league or organization not organized for profit but operated exclusively for the promotion of social welfare is likewise

exempt.

charitable purposes shall not be exempt from real property taxes. Consistent with the ruling in CIR V. CA [298 SCRA 83], profits realized from real property by exempt institutions from whatever source or wherever used are taxable.

Situs of Taxation and Double Taxation

Q12. Define situs of taxation.

Situs of taxation means the place of taxation. The rule is that the State where the subject to be taxed has a situs may rightfully levy and collect the tax; and the situs is necessarily in the state which has jurisdiction or which exercises dominion over the subject in taxation.

Q13. What is the effect of multiplicity of situs of taxation?

Due to the variance in the concept of domicile for tax purposes and considering the multiple relationships that may arise with respect to intangible property and the use to which the property may have been devoted, all of which may receive the protection of the laws of jurisdiction other than the domicile of the owner thereto, the same income or intangible property may be subject to taxation in several taxing jurisdictions.

Q13.1. How do we address multiplicity of situs of taxation?

The taxing jurisdiction may: 1. provide for exemptions or allowance of deduction

or tax credit for foreign taxes; and/or 2. enter into tax treaties with other States.

Q14. What is double taxation?

Double taxation is defined as taxing the same property twice when it should be taxed but once. It has also been defined as taxing the same person twice by the same jurisdiction over the same thing. It is sometimes known as duplicate taxation.

Q14.1. What are the two types of double taxation?

Double taxation may be direct or indirect. Direct double taxation or double taxation in the



objectionable or prohibited sense means that the same property is taxed twice when it should be taxed only once and that both taxes are imposed on the same subject matter for the same purpose, by the same taxing authority within the same jurisdiction during the same taxing period and covering the same kind of tax. On the other hand, indirect double taxation or double taxation that is not legally objectionable is one where some elements of direct double taxation are absent.

Q14.2. Is double taxation prohibited under the Constitution

No. The Constitution does not prohibit double taxation. However, while not forbidden, it is not something favored. It should be avoided and prevented whenever possible

Q14.3. What are the elements of (direct)

double taxation?

As provided in the case of CITY OF MANILA VS. COCA-COLA BOTTLERS [595 SCRA 299], there is double taxation if the two taxes are imposed: 1. On the same subject matter 2. For the same purpose 3. By the same taxing authority 4. Within the same jurisdiction 5. During the same taxing period 6. The taxes must be of the same kind or character

Q14.3.1. Bank As gross receipts from passive income is subject to 20% final withholding tax. At the same time, the total gross receipt of Bank A is subject to 5% gross receipts tax (GRT). Is the imposition of the FWT and GRT a form of double taxation?

No. First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT is the passive income generated in the form of interest on deposits and yield on deposit substitutes, while the subject matter of the GRT is the privilege of engaging in the business of banking. Second, although both taxes are national in scope because they are imposed by the same taxing authority -- the national government under the Tax Code -- and operate within the same Philippine jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different. The FWT is deducted and

withheld as soon as the income is earned, and is paid after every calendar quarter in which it is earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only after every taxable quarter in which it is earned. Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to withholding, while the GRT is a percentage tax not subject to withholding. Hence, there is no double taxation. (see CIR VS. SOLIDBANK CORP [416 SCRA 436]; CHINA BANKING CORP VS. CA [403 SCRA 634])

Q14.3.2. Under the Tax Code, Bank A is subject to 1% reserve deficiency tax if it incurs reserve deficiencies. Under the General Banking Law, Bank A must 1/10 of 1% for incurring reserve deficiencies. Is there double taxation?

No. One is a penalty; the other is a tax. The payment of 1/10 of 1% for incurring reserve deficiencies is clearly a penalty as the primary purpose is regulation; while the payment of 1% for the same violation is a tax for the generation of income which is the primary purpose for this instance. (REPUBLIC BANK VS. CTA [213 SCRA 266])

Q14.3.3. A City passed an ordinance

imposing license tax on persons engaged in the business of operating tenement houses. Is there double taxation given that buildings pay real estate taxes and also income taxes besides the tenement tax imposed by the ordinance?

No. In order to constitute double taxation in the objectionable or prohibited sense the same property must be taxed twice when it should be taxed but once; both taxes must be imposed on the same property or subject-matter, for the same purpose, by the same State, Government, or taxing authority, within the same jurisdiction or taxing district, during the same taxing period, and they must be the same kind or character of tax. It has been shown that a real estate tax and the tenement tax imposed by the ordinance, although imposed by the same taxing authority, are not of the same kind or character. Furthermore, while it is true that they are taxable as real estate dealers (income tax) and still taxable under the ordinance, the argument against double



taxation may not be invoked. The same tax may be imposed by the national government as well as by the local government. There is nothing inherently obnoxious in the exaction of license fees or taxes with respect to the same occupation, calling or activity by both the State and a political subdivision thereof. (VILLANUEVA V. CITY OF ILOILO [26 SCRA 578])

Q14.3.4. A municipality imposed a storage fee for the storage of copra within its jurisdiction. A multinational company doing business in the Philippines stored copra in its warehouse located in the municipality and was thus assessed the storage fee. The MNC argues that it was already being taxed for the manufacture of copra so there was double taxation. Decide.

There is no double taxation. In PROCTER & GAMBLE V. MUNICIPALITY OF JAGNA [94 SCRA 894], the Supreme Court stated that there is double taxation when the same person is taxed twice by the same jurisdiction for the same thing. A tax on products is different from a tax on the privilege of storing copra in a bodega situated within the territorial jurisdiction of the municipality. Furthermore, in the former, the taxing authority is the national government while in the latter; the taxing authority is the local government.

Q14.3.5. A municipality enacted two ordinances. The first levies and collects from soft drinks producers a tax for every bottle corked while the second levies and collects on soft drinks produced and manufactured within its territorial jurisdiction. Is there double taxation?

Yes. All the elements of double taxation are present. However, it must be noted, that while the factual milieu provided is similar to the case of PEPSI COLA V. MUNICIPALITY OF TANUAN [69 SCRA 460], Supreme Court ruled that there was no double taxation in the said case because the second ordinance repealed the first ordinance. Otherwise, there would have been double taxation.

Q14.3.6. A city passed two ordinances. The first ordinance imposed a tax on the privilege of selling liquor while the second ordinance imposed a tax on the sales of liquor. Is there double taxation?

No. In COMPANIA GENERAL DE TABACOS V. CITY OF MANILA [8 SCRA 367], the Supreme Court held that both a license fee and a tax may be imposed on the same business and occupation and such as not a violation of the rule against double taxation. The impositions are of a different character. The first is a license fee for the privilege of engaging in the sale of liquor in the exercise of police power while the other is imposed for revenue purposes based on the sales made.

Q14.3.7. Company A, engaged in the manufacture of tobacco, is subject to the payment of tobacco inspection fees aside from other taxes it pays to the national government. Is there double taxation?

No. Tobacco Inspection fees are undoubtedly National Internal Revenue taxes, they being one of the miscellaneous taxes provided for under the Tax Code. The Code specifically provides for the collection and manner of payment of the said inspection fees. Tobacco inspection fees are levied and collected for purposes of regulation and control. Tobacco inspection fees are of a different kind and character from other taxes imposed. (LA SUERTE VS. CTA [134 SCRA 36])

Q14.3.8. A city ordinance imposed a license fee on any person, firm, entity or corporation doing business in the City. A contends that the ordinance constitutes double taxation as he already pays taxes imposed by the national government. Is A correct?

No. It has been expressly affirmed by the Supreme Court 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. (CITY OF BAGUIO VS. DE LEON [25 SCRA 938])

Q14.4. A local government unit wishes to levy excise taxes on quarry resources found within its jurisdiction. The national government argues that it may not do so as such articles are already taxed by the NIRC. Decide.

The local government unit may levy a tax on quarry resources extracted from public lands but not from private lands. In PROVINCE OF BULACAN V. CA [299 SCRA 442], the Supreme Court stated that the NIRC levies a tax on all quarry resources whether extracted from public or private land. Thus, the local government unit cannot impose taxes on quarry resources as they are already taxed under the NIRC. However, by express provision in the Local Government Code, the LGU may levy on quarry resources extracted from public land.

Forms of Escape from Taxation Q15. What is the difference between tax

avoidance and tax evasion?

Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Hence, as held in that case, that the execution of two sales under the corporations tax planning scheme was prompted more on the mitigation of tax liabilities than for legitimate business purposes and constitutes tax evasion. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.

Q15.1. What is the substance over form doctrine?

The doctrine provides that taxability is determined by the reality of the transaction rather than the appearance which may be contrived.

Q15.2. Husband and wife own a lot of real estate. Upon advice of their lawyer, they decided to organize a corporation to take control of their properties. The husband and wife were issued 2,500 original unissued no par value shares of stock in exchange for their properties. Is the scheme designed to avoid taxes or evade taxes?

This is only a case of tax avoidance. In DELPHER TRADES CORPORATION V. INTERMEDIATE APPELLATE COURT [157 SCRA 349], the Supreme Court opined that there was nothing wrong or objectionable about the "estate planning" scheme resorted to by the taxpayers. The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted. In the said case, the taxpayers acquired 2,500 original unissued no par value shares of stocks of the corporation in exchange for their properties. By virtue of this exchange, the taxpayers became stockholders of the corporation by subscription. In effect, they changed the nature of their ownership from unincorporated to incorporated form by organizing the corporation to take control of properties and at the same save on inheritance taxes.

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Q15.3. What are the three factors to be considered in determining if a scheme is designed to evade taxes?

The three factors to be considered are: 1. The end to be achieved which is payment of less

taxes; 2. An evil or deliberate state of mind; and 3. A course of action which is unlawful.

Q15.3.1. ABC corporation sold its building to A, who in turn, sold during the same day the same property to XYZ Corporation.

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If the properties were to be held by the spouses in the case, it

would be tied to the succession proceedings and the consequential payment of estate taxes when the owner dies. On the other hand, a corporation does not die and can hold the property for a period of

at least 50 years.



Is the scheme designed to avoid taxes or evade taxes?

This is a case of tax evasion. In CIR VS. THE ESTATE OF BENIGNO TODA, JR. [483 SCRA 293], the Supreme Court held that the three factors in tax evasion were present. The two transfers were tainted with fraud since the intermediary transfer (from the corporation to a natural person) was prompted only by the desire to mitigate tax liabilities and not for any business purpose.

Nature, Construction, Application and Sources of Tax Laws Q16. What are the sources of Tax Laws? The sources of tax laws are: 1. Constitution; 2. NIRC as amended RA 9648; 3. Tariff and Custom Code as amended RA 8181; 4. Local Government Code; 5. Local Tax Ordinance/City/Municipal Tax Code; 6. Tax Treaties/International Agreements; 7. Presidential Decree/ Executive Order; 8. Decisions of SC/CTA/CA; and 9. Revenue Rules and Regulations, Rulings

implemented by the BIR

Q17. Do tax laws continue in force during a period of enemy occupation?

Yes. In HILADO V. CIR [100 SCRA 288], the Supreme Court held that internal revenue laws are not political in nature and as such were continued in force during the period of enemy occupation and in effect actually enforced by the occupation government. Income tax returns filed during such period and income tax payments effected are considered valid and legal.

Q18. How are tax statutes construed and interpreted?

Tax statutes are construed liberally in favor of the taxpayers and strictly against the taxing authority.

Q18.1. What is the basis for applying the rule of liberal construction as to tax statutes?

As held in the case of PHILIPPINE HEALTH CARE PROVIDERS V. CIR [554 SCRA 411], tax statutes are strictly construed against the taxing authority because taxation is a destructive power which interferes with the personal and property rights of the people and takes from

pm reyes notes on taxation 1 - general principles (working draft) (updated 28 dec 2012)

Documents

characteristics of taxation

rationale of taxation

taxation volume

fundamentals of taxation

basis of taxation

seat of power taxation

leon reyes

expenses of government