up taxation law reviewer 2012

8/11/2019 UP Taxation Law Reviewer 2012

1/191

TTTAAA XXX AAA TTTIIIOOO NNN BAR REVIEWER UP LAW 2012

Taxation Law

Taxation Law 2 LAW ean Danilo L. Concepcion

Dean, UP College of Law

Prof. Concepcion L. JardelezaAssociate Dean, UP College of Law

Prof. Ma. Gisella D. ReyesSecretary, UP College of Law

Prof. Florin T. HilbayFaculty Adviser, UP Law Bar OperationsCommission 2012

Ramon Carlo F. MarcaidaCommissioner

Eleanor BalaquiaoMark Xavier OyalesAcademics Committee Heads

Karen Andrea TorresCamille UmaliTaxation Law Subject Heads

Graciello Timothy Reye sLayout

UP LAW BAR OPERATIONS COMMISSION


2/191

TAXATION LAW REVIEWER

2

TTTAAA XXX AAA TTTIIIOOO NNN BAR REVIEWER UP LAW 2012

BAR OPERATIONS COMMISSION 2012

EXECUTIVE COMMITTEERamon Carlo Marcaida |Commissioner

Raymond Velasco Mara Kriska Chen |Deputy Commissioners Barbie Kaye Perez |Secretary

Carmen Cecilia Veneracion |Treasurer Hazel Angeline Abenoja |Auditor

COMMITTEE HEADSEleanor Balaquiao Mark Xavier Oyales |Acads

Monique Morales Katleya Kate Belderol Kathleen MaeTuason D) Rachel Miranda D) |Special Lectures

Patricia Madarang Marinella Felizmenio |Secretariat Victoria Caranay |Publicity and Promotions

Loraine Saguinsin Ma. Luz Baldueza |Marketing Benjamin Joseph Geronimo Jose Lacas |Logistics

Angelo Bernard Ngo Annalee Toda |HR Anne Janelle Yu Alyssa Carmelli Castillo |Merchandise

Graciello Timothy Reyes |Layout Charmaine Sto. Domingo Katrina Maniquis |Mock Bar

Krizel Malabanan Karren de Chavez |Bar Candidates WelfareKarina Kirstie Paola Ayco Ma. Ara Garcia |Events

OPERATIONS HEADSCharles Icasiano Katrina Rivera |Hotel Operations

Marijo Alcala Marian Salanguit |Day-OperationsJauhari Azis |Night-Operations

Vivienne Villanueva Charlaine Latorre |Food Kris Francisco Rimban Elvin Salindo |Transpo

Paula Plaza |Linkages

LAW AXATION LAW TEAM 2012

Faculty Editor| Dina LucenarioSubject Heads| Karen Andrea Torres Camille Umali

LAYOUT TEAM 2012

Layout Artists | Alyanna Apacible NoelLuciano RM Meneses Jenin VelasquezMara Villegas Naomi Quimpo LeslieOctaviano Yas Refran Cris BernardinoLayout Head| Graciello Timothy Reyes



3/191

\ TTTAAA XXX AAA TTTIIIOOO NNN LAW

2012 UP Law Bar Reviewer

Copyright and all other relevant rights over thismaterial are owned jointly by the University of thePhilippines College of Law and the Student Editorial

Team.The ownership of the work belongs to the University ofthe Philippines College of Law. No part of this bookshall be reproduced or distributed without the consentof the University of the Philippines College of Law.

All Rights reserved.



4/191


4 Taxation Law 1

I. General Principles of Taxation ........ 8A. Definition and Concept of Taxation . 8B. Nature of the Power of Taxation .... 8

C. Characteristics of Taxation .......... 10D. Power of Taxation Compared WithOther Powers .............................. 10E. Purpose of Taxation ................... 10F. Principles of Sound Tax System .... 11G. Theory and Basis of Taxation ........ 11H. Doctrines in Taxation ................. 12I. Scope and Limitation of Taxation ... 17J. Stages of Taxation .................... 22K. Definition, Nature, andCharacteristics of Taxes ................. 22L. Requisites of a valid tax .............. 22

M. Tax as distinguished from other formsof exactions ............................... 22N. Kinds of Taxes ......................... 23

II. National Internal Revenue Code of1997 as amended (NIRC) .................. 24

A. Income Taxation ....................... 241. Income Tax Systems ............... 242. Features of the Philippine IncomeTax Law ................................. 253. Criteria in Imposing PhilippineIncome Tax ............................. 25

4. Types of Philippine Income Tax . 255. Taxable Period ...................... 256. Kinds of Taxpayers ................. 267. Income Taxation .................... 278. Income .............................. 289. Gross Income ....................... 3010. Taxation of Resident Citizens,Non-resident Citizens, and ResidentAliens .................................... 5611. Taxation of Non-resident AliensEngaged in Trade or Business ........ 6512. Exclude Non-resident Aliens Not

Engaged in Trade or Business ........ 6613. Individual Taxpayers Exempt fromIncome Tax ............................. 6614. Taxation of Domestic Corporations ........................................... 6615. Taxation of Resident ForeignCorporations ............................ 7016. Taxation of Non-resident ForeignCorporations ............................ 7217. Improperly Accumulated Earningsof Corporations ........................ 73

18. Exemption from tax oncorporations ............................ 7419. Taxation of Partnerships ........ 75A. Classification of Partnerships forTax Purposes ........................... 75B. Other Partnerships (or GeneralCo-partnerships) ....................... 7520. Taxation of General ProfessionalPartnerships ............................ 7621. Taxation on Estates and Trusts . 7722. Withholding tax ................... 77A. Definition ......................... 83B. Tax Rate and Tax Base .......... 83C. Fringe Benefits Which Are NotTaxable .................................. 83

Taxation Law 2

1. Estate Tax................................. 86I. Basic principles ............. ............ 86II. Nature ................................ 86III. Purpose or object .................. 86IV. Time and Transfer of Properties 86V. Classification of decedent ........ 86VI. Gross estate v. Net estate ........ 87VII. Determination of gross estate andNet estate ............................... 87VIII. Composition of gross estate .... 88IX. Items to be included in grossestate .................................... 88

X. Deductions from estate ............ 89XI. Exclusions from estate ............ 94XII. Tax credit for estate tax paid in aforeign country ......................... 94XIII. Exemption from certainacquisitions and transmissions ....... 95XIV. Filing of notice of death ........ 95XV. Estate tax return .................. 95

2. Donors Tax ............................ 98I. Basic principles ...................... 98II. Definition ............................ 98

III. Nature ............................... 98IV.Purpose or object .................. 98V.Requisites of valid donation ....... 98VI.Transfers which may be constitutedas donation ............................. 98VII. Transfer for less than adequateand full consideration ................. 99VIII.Classification of donor ........... 99IX. Determination of gross gift ....... 99X. Composition of gross gift .......... 99


5/191

TTTAAA XXX AAA TTTIIIOOO NNN LA W

XI. Valuation of gifts made in property ........................................... 99XII. Tax credit for donors taxes paid

in a foreign country .................. 100XIII. Exemptions of gifts from donorstax ...................................... 100XIV. Computation of Donors Tax .. 101XVI. Tax Basis ......................... 102

3. VAT.................................... 102I. Concept.............................. 103II. Characteristics ..................... 103III. Impact of tax ...................... 104IV.Incidence of tax ................... 104V.Tax credit method ................. 104

VI. Destination principle ............. 104VII. Persons liable (Sec. 105) ....... 105VIII. VAT on sale of goods orproperties .............................. 105IX. Zero-rated sales of goods orproperties, and effectively zero-ratedsales of goods or properties ......... 106X. Transactions deemed sale ( 106, B)[DR TC] ................................. 108XI. Change or cessation of status asVAT-registered person (Sec. 106(C)) .......................................... 109

XII. VAT on importation of goods ... 109XIII. VAT on sale of service and use orlease of properties ................... 109XIV. Zero-rated sale of services ( 108,B) ....................................... 110XIV. VAT exempt transactions ...... 111XV. Input tax and output tax, defined .......................................... 114XVII. Persons who can avail of inputtax credit .............................. 114XVIII. Determination of output/inputtax; VAT payable; Excess input tax

credits .................................. 115XIX. Substantiation of input tax credits .......................................... 116XX. Refund or tax credit of excessinput tax ............................... 116XXI. Invoicing requirements ......... 117XXII. Filing of return and payment . 118XXIII. Withholding of final VAT on salesto government ( 114, C) ............ 119

4. Tax Remedies .......................... 119I. Taxpayers Remedies ..............119II. Government Remedies ............134

IV. Compromise and Abatement oftaxes ....................................140

5. Organization and Function of BIR .. 144I. Rule-making authority of theSecretary of Finance .................144II. Power of the Commissioner tosuspend the business operation of ataxpayer ................................145

6. Local Taxation ......................... 145I. Fundamental principles (UEPIPI) .146

II. Nature and source of taxing power ..........................................146III. Local taxing authority ..........146IV. Scope of taxing power..........147V. Specific taxing power of localgovernment unit (LGUs) .............147III. Common limitations on the taxingpowers of LGUs ........................154IV. Collection of business tax .......154V. Taxpayers remedies ...........155VI. Civil remedies by the LGU forcollection of revenues ...............155

7. Real Property Taxation ............... 159I. Fundamental principles ...........159II. Nature of real property tax ......159III. Imposition of real property tax .159IV. Appraisal and assessment of realproperty tax ...........................160V. Collection of real property tax ..161VI. Refund or credit of real propertytax ......................................163VII. Taxpayers remedies ............163

8. Tariff and Customs Code ............. 168I. Tariff and duties, defined.........168II. General rule: All imported articlesare subject to duty. Importation bythe government taxable. ............168III. Purpose for imposition ...........168IV. Flexible tariff clause .............168V. Requirements of importation .168VI. Importation in violation of TCC 170


6/191


6

VII. Classification of goods .......... 171VIII. Classification of duties ........... 175

IX. Drawbacks ......................... 178X. Remedies......................... 179

9. Judicial Remedies ..................... 183I. Jurisdiction of the Court of TaxAppeals ................................. 183II. Judicial Procedures ............... 185III. Taxpayers suit impugning thevalidity of tax measures or acts oftaxing authorities ..................... 190


7/191

TTTAAA XXX AAA TTTIIIOOO NNN

LAWAR OPERATIONS COMMISSION 2012

EXECUTIVE COMMITTEERamon Carlo Marcaida |Commissioner

Raymond Velasco Mara Kriska Chen |Deputy Commissioners Barbie Kaye Perez |Secretary

Carmen Cecilia Veneracion |Treasurer Hazel Angeline Abenoja |Auditor

COMMITTEE HEADSEleanor Balaquiao Mark Xavier Oyales |Acads

Monique Morales Katleya Kate Belderol Kathleen Mae Tuason D) RachelMiranda D) |Special Lectures

Patricia Madarang Marinella Felizmenio |Secretariat Victoria Caranay |Publicity and Promotions

Loraine Saguinsin Ma. Luz Baldueza |Marketing Benjamin Joseph Geronimo Jose Lacas |Logistics

Angelo Bernard Ngo Annalee Toda |HR Anne Janelle Yu Alyssa Carmelli Castillo |Merchandise

Graciello Timothy Reyes |Layout Charmaine Sto. Domingo Katrina Maniquis |Mock Bar

Krizel Malabanan Karren de Chavez |Bar Candidates WelfareKarina Kirstie Paola Ayco Ma. Ara Garcia |Events

OPERATIONS HEADS

Charles Icasiano

Katrina Rivera |Hotel OperationsMarijo Alcala Marian Salanguit |Day-OperationsJauhari Azis |Night-Operations

Vivienne Villanueva Charlaine Latorre |Food Kris Francisco Rimban Elvin Salindo |Transpo

Paula Plaza |Linkages

Taxation Law 1


BAR REVIEWER UP LAW 2012

TAXATION LAW TEAM 2012Faculty Editor| DinaLucenarioSubject Heads| Karen AndreaTorres Camille Umali

LAYOUT TEAM 2012Layout Artists | AlyannaApacible Noel Luciano RMMeneses Jenin Velasquez Mara Villegas NaomiQuimpo Leslie Octaviano Yas Refran Cris BernardinoLayout Head| Graciello Timothy Reyes


8/191


8Taxation Law 1

TAXATION LAWTaxation Law 1Taxation Law 2

I. General Principles of TaxationII. National Internal Revenue Code of

1997 as amended (NIRC)

I. General Principles of TaxationA. Definition and Concept of TaxationB. Nature of TaxationC. Characteristics of TaxationD. Power of Taxation ComparedE. Purpose of TaxationF. Principles of Sound Tax SystemG. Theory and Basis of TaxationH. Doctrines of TaxationI. Scope and Limitation of TaxationJ. Stages of TaxationK. Definition, Nature and Characteristics of TaxesL. Requisites of valid taxM. Tax as distinguished from other forms ofexactions

N. Kinds of Taxes

A. Definition and Concept of Taxation

TAXATION- is a mode by which governments make

exactions for revenue in order to supporttheir existence and carry out theirlegitimate objectives.

- a mode of raising revenue for publicpurpose; the exercise of sovereign power toraise revenue for the expense of thegovernment;

- the act of laying a tax, i.e., the process ormeans by which the sovereign, through itslaw-making body, raises income to defraythe necessary expenses of government.(1Cooley 72-73)

- the process or means by which thesovereign, through its law-making body,raises income to defray the necessaryexpenses of government; a method ofapportioning the cost of government amongthose who in some measure are privilegedto enjoy its benefits and must, therefore,bear its burdens, (see 51 Am. Jur. 341; 1Cooley 72-93.)

- as a power , it refers to the inherent power

of the state to demand enforcedcontributions for public purpose orpurposes.

TAXES- are enforced proportional contributions

from persons and property levied by thelaw-making body of the State by virtue ofits sovereignty for the support of thegovernment and all public needs.

- The enforced proportional and pecuniarycontributions from persons and propertylevied by the law-making body of the state

having jurisdiction over the subject of theburden for the support of the governmentand public needs.

- CIR v. Algue : Taxes are the lifeblood of thegovernment and so should be collectedwithout unnecessary hindrance. On theother hand, such collection should be madein accordance with law as any arbitrarinesswill negate the very reason for governmentitself... It is said that taxes are what wepay for civilized society. Without taxes, thegovernment would be paralyzed for lack ofthe motive power to activate and operateit. Hence, despite the natural reluctance tosurrender part of one's hard earned incometo the taxing authorities, every person whois able to must contribute his share in therunning of the government. The governmentfor its part, is expected to respond in theform of tangible and intangible benefitsintended to improve the lives of the peopleand enhance their moral and materialvalues. This symbiotic relationship is therationale of taxation and should dispel theerroneous notion that it is an arbitrarymethod of exaction by those in the seat ofpower.

Underlying theory and basis of taxationThe power of taxation proceeds upon the theory that the existence of government is a necessity; thatit cannot continue without means to pay itsexpenses; and that for those means it has the rightto compel all citizens and property within its limitsto contribute.

The basis of taxation is found in the reciprocalduties of protection and support between the Stateand its inhabitants. The State receives taxes that it

may be enabled to carry its mandates into effect andperform the functions of government and the citizenpays the portion of taxes demanded in order that hemay, by means thereof, be secured in the enjoymentof the benefits of an organized society, (see 51 Am.Jur. 42-43.)This is the so-called benefits-received

principle . One is compensation or consideration forthe other: protection for support and support forprotection.

B. Nature of the Power of Taxation

The power to tax, being inherent in an independentstate for its existence and survival by thefurtherance of its multifarious functions, the samedoes not require delegation from the Constitution.However, exercise of such power upon theinhabitants is subject to limitations inhabitants issubject to limitations.

The power of taxation is inherent in sovereignty asan incident or attribute thereof, being essential tothe existence of every government. It exists apartfrom constitutions and without being expresslyconferred by the people (71 Am.Jur.2d 397-398).Hence, it can be exercised by the government evenif the Constitution is entirely silent on the subject.


9/191


Constitutional provisions relating to the power oftaxation do not operate as grants of the power tothe government. They merely constitute limitationsupon a power which would otherwise be practicallywithout limit. (1 Cooley 150). While the power to taxis not expressly provided for in our Constitution, itsexistence is recognized by the provisions relating totaxation (infra).

It is essentially a legislative function. Even in theabsence of any constitutional provision, the powerfalls to the legislature as a part of the more generalpower of law-making. The power to tax is peculiarlyand exclusively legislative and cannot be exercisedby the executive or judicial branch of thegovernment (1 Cooley 160-161). Hence, onlyCongress, our national legislative body, can imposetaxes. The levy of a tax, however, may also bemade by a local legislative body subject to suchlimitations as may be provided by law. TheConstitution expressly grants the power to tax tolocal government units (see Sec. 5, Art. X,Constitution).

It is subject to constitutional and inherentlimitations. These limitations are those provided inthe fundamental law (e.g., equal protection of thelaws, due process of law, rule of uniformity, etc.) orimplied therefrom (e.g., public purpose and non-delegation of legislative power which are alsoinherent limitations), while the rest spring from thenature of the taxing power itself although they mayor may not be provided in the Constitution (e.g.,territoriality, international comity, and exemption ofgovernment entities).

Scope of taxation Subject to constitutional and inherent restrictions,the power of taxation is regarded as supreme,

unlimited and comprehensive . The principal checkon its abuse rests only on the responsibility of themembers of the legislature to their constituents.

Extent of the legislative power to taxThe power of taxation being legislative, all itsincidents are naturally within the control of thelegislature. Subject to constitutional and inherentrestrictions , the legislature has discretion todetermine the matters mentioned subsequently.

(1) The subjects or objects to be taxed. - Theserefer to the coverage and the kind or natureof the tax. They may be persons, whethernatural or juridical; property, whether realor personal, tangible or intangible;businesses, transactions, rights, orprivileges. A state is free to select thesubject of taxation and it has beenrepeatedly held that that inequalities whichresult from a singling out of one particularclass for taxation or exemption infringe noconstitutional limitation so long as suchexemption is reasonable and not arbitrary.(see Lutz vs. Araneta, 98 Phil. 148; City ofBaguio vs. De Leon, 25 SCRA 938 [1968];Sison, Jr. vs. Ancheta, 130 SCRA 654 [1984])

Thus, the power to tax carries with it thepower to grant exemption therefrom.

(2) The purpose or object of the tax so long asit is a public purpose. - The legislative bodycan levy a tax or make an appropriationprovided it is for a public purpose. Itsdetermination, however, on the question ofwhat is a public purpose is not conclusive.The courts can inquire into whether thepurpose is really public or private.

In the final analysis, therefore, the decisionon the question is not a legislative but ajudicial function. But once it is settled thatthe purpose is public, the courts can makeno other inquiry into the objective of thelegislature in imposing a tax (see Pascualvs. Sec. of Public Works, 110 Phil. 331[1961]), or the wisdom, advisability, orexpediency of the tax. (Blunt vs. U.S., 255Fed. 322.)

Judicial action is limited only to a reviewwhere it involves:(a) The determination of the validity of the

tax in relation to constitutionalprecepts or provisions. Thus, a tax maybe declared invalid because it violatesthe constitutional requirement ofuniformity and equity in taxation ; or

(b) The determination in an appropriatecase of the application of a tax law.(see 1 Cooley 165.) Thus, a court maydecide that a tax has been illegallycollected where the taxpayer isentitled to tax exemption or hisliability has already been extinguishedby reason of prescription.

(3) The amount or rate of the tax. - As ageneral rule, the legislature may levy a taxof any amount or rate it sees fit. If thetaxes are oppressive or unjust, the onlyremedy is the ballot box and the election ofnew representatives. (see 1 Cooley 178-181.)

According to Chief Justice John Marshall,"the power to tax involves the power todestroy." (McCulloch vs. Maryland, 17 U.S.[4 Wheat.] 316-428, 4L. ed. 579.) To say,however, that the power to tax is thepower to destroy is to describe not thepurposes for which the taxing power may beused but the extent to which it may beemployed in order to raise revenues. (see 1Cooley 178.) Thus, even if a tax shoulddestroy a business, such fact alone couldnot invalidate the tax. (84 C.J.S. 46.)

As long as the power is exercised within thebounds of constitutional limitations, a taxcannot be held invalid merely because thepower which is manifested by its impositionmay involve the power to destroy. (see 51Am. Jur. 80-81.)


10/191


0

Incidentally, our Constitution mandates that"the rule of taxation shall be uniform andequitable." In a case, our Supreme Courtsaid: "The power of taxation is sometimescalled also the power to destroy. Therefore,it should be exercised with caution tominimize injury to the proprietary rights ofthe taxpayer. It must be exercised fairly,equally and uniformly, lest the tax collectorkills the 'hen that lays the golden eggs.' Andin order to maintain the general public'strust and confidence in the government,this power must be used justly and nottreacherously." (Roxas vs. Court of TaxAppeals, 23 SCRA276, App120, 1968; PhilexMining Corp. vs. Comm. of InternalRevenue, 97 SCAD 777,294 SCRA 687, Aug.28, 1998.)

(4) The manner, means, and agencies ofcollection of the tax. - These refer to theadministration of the tax or theimplementation of tax laws. Having the solepower to tax, the legislature must equallypossess the sole power to prescribe themode or method by which the tax shall becollected, and to designate the officersthrough whom its will shall be enforced aswell as the remedies which the State or thetaxpayer may avail in connection therewith.While it is true that executive officialsenforce tax laws, their power or authoritydoes not involve the choice of the subjectsto be taxed, the definition of the purposefor which the tax is imposed, or thedetermination of the amount thereof.Furthermore, they must observe and complywith the procedural requirementsprescribed in the administration of tax

laws.

C. Characteristics of Taxation

(1) It is an enforced contribution for itsimposition is in no way dependent upon thewill or assent of the person taxed.

(2) It is generally payable in the form ofmoney , although the law may providepayment in kind (e.g. backpay certificatesunder Sec. 2, R.A. No. 304, as amended);;

(3) It is proportionate in character or is laid bysome rule of apportionment which isusually based on ability to pay;

(4) It is levied on persons, property, rights,acts, privileges, or transactions . In eachcase, however, it is only a person who paysthe tax; ; the property is resorted to for thepurpose of ascertaining the amount of thetax that must be paid and of enforcingpayment in case of default of the taxpayer(84 C.J.S. 36).

(5) It is levied by the State which has jurisdiction or control over the subject tobe taxed . This is necessary in order that thetax can be enforced;

(6) It is levied by the law-making body of theState. The power to tax is a legislativepower which only the legislature canexercise. The power to tax is also grantedto local governments, but subject to suchguidelines and limitations as may beprovided by law (Sec. 5, Art. X,Constitution); and;

(7) It is levied for public purpose. Taxationinvolves, and a tax constitutes, a charge orburden imposed to provide public revenuefor the support of the government, theadministration of the law, or the paymentof public expenses. (71 Am. Jur. 2d 344).Revenues derived from taxes cannot beused for purely private purposes or for theexclusive benefit of private persons.(Gaston v. Republic Planters Bank, 158 SCRA626, March 15, 1988). The public purposeor purposes of the imposition is implied inthe levy of tax. (see Mendoza v.Municipality, 94 Phil. 1047[1954]), A taxlevied for a private purpose constitutes ataking of property without due process oflaw.

It is also an important characteristic of most taxesthat they are commonly required to be paid atregular periods or intervals (see 1 Colley 64) everyyear,

D. Power of Taxation Compared WithOther Powers

See Annex A.

E. Purpose of Taxation

Revenue-raisingPrimary purpose of taxation is to provide funds orproperty with which to promote the general welfareand protection it its citizens ( Ex . Income tax,percentage tax)

Fees may be properly regarded as taxes even thoughthey also serve as an instrument of regulation... Ifthe purpose is primarily revenue, or if revenue is, atleast, one of the real and substantial purposes, thenthe exaction is properly called a tax. [PAL v. Edu]

Non-revenue/special or regulatoryTaxation is often employed as a device for regulation

by means of which certain effects or conditionsenvisioned by governments may be achieved. Thus:

(1) Taxation can strengthen anemic enterprisesor provide incentive to greater productionthrough grant of tax exemptions or thecreation of conditions conducive to theirgrowth.

(2) Taxes on imports may be increased to protect local industries against foreigncompetition or decreased to encourageforeign trade.


11/191


(3) Taxes on imported goods may also be usedas a bargaining tool by a country by settingtariff rates first at a relatively high levelbefore trade negotiations are entered intowith another country to enhance itsbargaining power.

(4) Taxes may be increased in periods ofprosperity to curb spending power and haltinflation or lowered in periods of slump toexpand business and ward off depression.

(5) Taxes may be levied to reduce inequalitiesin wealth and incomes, as for instance, theestate, donor's and income taxes, theirpayers being the recipients of unearnedwealth or mostly in the higher incomebrackets.

(6) Taxes may be levied to promote science andinvention (see RA. No. 5448) or to financeeducational activities (see RA. No. 5447) orto improve the efficiency of local police

forces in the maintenance of peace andorder through grant of subsidy (see RA.No.6141.).

(7) Taxation may be made as an implement ofthe police power to promote the generalwelfare. By way of illustration, it has beenheld that the Sugar Adjustment Act is anact enacted primarily under the policepower and designed to obtain areadjustment of the benefits derived bypeople interested in the sugar industry aswell as to rehabilitate and stabilize theindustry which constitutes one of the greatsources of the country's wealth and,therefore, affects a great portion of the

population of the country. (see Lutz vs.Araneta, 78 Phil. 148; Republic vs. Bacolod-Murcia Milling Co., 17 SCRA 632 [1966]; seePres. Decree No. 388.)

As long as a tax is for a public purpose, its validity isnot affected by collateral purposes or motives of thelegislature in imposing the levy, or by the fact that ithas a regulatory effect (51 Am. Jur. 381-382.) or itdiscourages or even definitely deters the activitiestaxed. The principle applies even though therevenue obtained from the tax appears verynegligible or the revenue purpose is only secondary.(see United States vs. Sanchez, 340 U.S. 42; Tio vs.Videogram Regulatory Board, 151 SCRA 208 [1987])

Taxation is no longer envisioned as merely to raiserevenue to support the existence of government;taxes may be levied with a regulatory purpose toprovide means for rehabilitation and stabilization ofa threatened industry which is imbued with publicinterest as to be within the police power of theState. The stabilization of oil prices is one of primeconcern which the State, via police power, mayproperly address. [Caltex v . COA]

F. Principles of Sound Tax System

(1) Fiscal Adequacy - the sources (proceeds) oftax revenue should coincide with, andapproximate the needs of, governmentexpenditures. The revenue should be elasticor capable of expanding or contractingannually in response to variations in publicexpenditures.

(2) Administrative Feasibility - Tax lawsshould be capable of convenient, just andeffective administration. Each tax should beclear and plain to the taxpayer, capable ofuniform enforcement by governmentofficials, convenient as to the time, place,and manner of payment, and not undulyburdensome upon, or discouraging tobusiness activity.

(3) Theoretical Justice or Equality - The taxburden should be in proportion to thetaxpay ers ability to pay. This is the so -called ability to pay principle. It alsoconnoted that the contribution of eachperson towards the expense of thegovernment should be so apportioned suchthat he would feel neither more nor lessinconvenienced from his share of thepayment than every other personexperiences from his. In other words,taxation should be uniform as well asequitable

Note: The non-observance of the above principleswill not necessarily render the tax imposed invalidexcept to the extent that specific constitutionallimitations are violated. (De Leon)

G. Theory and Basis of Taxation

Lifeblood TheoryTaxes are the lifeblood of the government and theirprompt and certain availability is an imperious need. [CIR v. Pineda]

Taxes are the lifeblood of the government and soshould be collected without unnecessary hindrance.It is said that taxes are what we pay for civilizedsociety. Without taxes, the government would beparalyzed for lack of the motive power to activateand operate it. [CIR v. Algue]

Necessity TheoryThe power of taxation proceeds upon theory that theexistence of government is a necessity; that iscannot continue without means to pay its expenses;and that for those means it has the right to compelall citizens and property within its limits tocontribute.

The power to tax is an attribute of sovereignty. It isa power emanating from necessity. It is a necessaryburden to preserve the State's sovereignty and ameans to give the citizenry an army to resist an


12/191


2

aggression, a navy to defend its shores frominvasion, a corps of civil servants to serve, publicimprovement designed for the enjoyment of thecitizenry and those which come within the State'sterritory, and facilities and protection which agovernment is supposed to provide. [Phil. Guarantyv. CIR]

Benefits-Protection Theory (SymbioticRelationship)This principle serves as the basis of taxation and isfounded on the reciprocal duties of protection andsupport between the State and its inhabitants. Alsocalled symbiotic relation between the State andits citizens.

The eradication of a dreaded disease is a publicpurpose, but if by public purpose the petitionermeans benefit to a taxpayer as a return for what hepays, then it is sufficient answer to say that the onlybenefit to which the taxpayer is constitutionallyentitled is that derived from his enjoyment of theprivileges of living in an organized society,established and safeguarded by the devotion of taxesto public purposes. Any other view would precludethe levying of taxes except as they are used tocompensate for the burden on those who pay themand would involve the abandonment of the mostfundamental principle of government that it existsprimarily to provide for the common good. [Gomezv. Palomar]

The obligation to pay taxes rests not upon theprivileges enjoyed by, or the protection afforded to,a citizen by the government but upon the necessityof money for the support of the state. For thisreason, no one is allowed to object to or resist thepayment of taxes solely because no personal benefit

to him can be pointed out. [Lorenzo v . Posadas]

Jurisdiction over subject and objectsThe limited powers of sovereignty are confined toobjects within the respective spheres ofgovernmental control. These objects are the propersubjects or objects of taxation and none else.

H. Doctrines in Taxation

Prospectivity of tax laws

General rule: Tax laws are prospective in operation.The reason is that the nature and amount of the taxcould not be foreseen and understood by thetaxpayer at the time the transaction which the lawseeks to tax was completed.

Exception: Tax laws may be applied retroactively provided it is expressly declared or clearly the legislative intent. For instance, it has been theuniversal practice to increase taxes on incomealready earned; yet notwithstanding this retroactiveoperation, income taxes have not been successfullyassailed as invalid.

Exception to the exception: a tax law should not begiven retroactive application when it would be soharsh and oppressive for in such case, theconstitutional limitation of due process would beviolated ( Republic v. Fernandez) .

It is a cardinal rule that laws hall have no retroactiveeffect, unless the contrary is provided (citing Art. 4of the Civil Code). [Hydro Resources v. CA]

Collection of interest in tax cases is not penal innature; it is but a just compensation to the State.The constitutional prohibition against ex post factolaws is not applicable to the collection of interest onback taxes. [Central Azucarera v. CTA]

Though a tax statute may be applied retroactively,legislative intent to that effect should be perfectlyclear i.e., the language of the statute clearlydemands or presses that it shall have a retroactiveeffect. [Lorenzo v. Posadas]

Non-retroactivity of Rulings (Sec. 246)

General rule: IF REVOCATION, MODIFICATION ORREVERSAL WILL BE PRJUDICIAL TO THE TAXPAYER Any revocation, modification, or reversal of any ofthe rules and regulations promulgated by theSecretary of Finance and rulings and circularspromulgated by the CIR shall NOT be givenretroactive effect.

Exceptions: (1) Where the taxpayer deliberately misstates

or omits material facts from his return orany document required of him by BIR;

(2) Where the facts subsequently gathered bythe BIR are materially different from thefacts on which the ruling is based; OR

(3) Where the taxpayer acted in bad faith.

Imprescriptibility

Unless otherwise provided by the tax itself, taxesare imprescriptible. (CIR v. Ayala SecuritiesCorporation)

The National Internal Revenue Code provides forstatute of limitations (see Section 203 and 222) inthe assessment and collection of taxes thereinimposed.

For the purpose of safeguarding taxpayers from anyunreasonable examination, investigation orassessment, our tax law provides a statute oflimitations in the collection of taxes. Thus, the lawon prescription, being a remedial measure, shouldbe liberally construed in order to afford suchprotection. As a corollary, the exceptions to the lawon prescription should perforce be strictlyconstrued. [Commissioner v. C.A., G.R.No. 104171(1999)]

The Tariff and Customs Code does not express anygeneral statute of limitation; it provides, however,


13/191


that when articles have been entered and passed free of duty or final adjustments of duties made,with subsequent delivery, such entry and passagefree of duty or settlements of duties will, after theexpiration of one (1) year , from the date of the finalpayment of duties, in the absence of fraud or protestor compliance audit pursuant to the provisions ofthis Code, be final and conclusive upon all parties,unless the liquidation of the import entry was merelytentative. (Sec. 1603)

The Local Government Code prescribes prescriptiveperiods for the assessment (5 years) and collection(5 years) of taxes. (see Sections 194 and 270, Rep.Act No. 7160).

Double taxation

Means taxing twice for the same tax period the samething or activity, when it should be taxed once, forthe same purpose and with the same kind ofcharacter of tax.

Strict sense

In order to constitute double taxation in the strictsense or direct duplicate taxation:(1) the same property must be taxed twice

when it should be taxed once;(2) both taxes must be imposed on the same

property or subject matter;(3) for the same purpose ;(4) by the same State, Government, or taxing

authority;(5) within the same territory, jurisdiction or

taxing district;(6) during the same taxing period ; and(7) of the same kind or character of tax .

Broad senseThere is double taxation in the broad sense or thereis indirect duplicate taxation (not an obnoxiousdouble taxation, says the Supreme Court inCommissioner v. Lednicky, 11 SCRA 603) if any of theelements for direct duplicate taxation is absent .

It extends to all cases in which there is a burden oftwo or more pecuniary impositions. For example, atax upon the same property imposed by twodifferent states.

Double taxation, standing alone and not beingforbidden by our fundamental law, is not a validdefense against the legality of a tax measure ( PepsiCola v. Mun. of Tanauan) But from it might emanatesuch defences against taxation as oppressiveness andinequality of the tax.

Constitutionality of double taxationThere is no constitutional prohibition against doubletaxation in the Philippines. It is something notfavored, but is permissible, provided some otherconstitutional requirement is not thereby violated,such as the requirement that taxes must be uniform. [Villanueva v. City of Iloilo (1968)]

Double taxation in its narrow sense is undoubtedlyunconstitutional but that in the broader sense is notnecessarily so. (De Leon citing 26 R.C.L 264-265)

If the tax law follows the constitutional rule onuniformity, making all income, business or propertyof the same class taxable at the same rate, therecan be no valid objection to taxing the same income,business or property twice. [China Banking Corp. v.CA, G.R.No. 146749 (2003)]

Modes of eliminating double taxation(1) Allowing reciprocal exemption either by law

or by treaty;(2) Allowance of tax credit for foreign taxes

paid(3) Allowance of deduction for foreign taxes

paid(4) Reduction of Philippine tax rate.

Escape from taxation

1. Shifting of tax burden

SHIFTING - is the transfer of the burden of a tax bythe original payer or the one on whom the tax wasassessed or imposed to someone else. What istransferred is not the payment of the tax but theburden of the tax.

Ways of shifting the tax burden(1) Forward shifting - When the burden of the

tax is transferred from a factor ofproduction through the factors ofdistribution until it finally settles on theultimate purchaser or consumer. Example:VAT, percentage tax

(2) Backward shifting - When the burden of thetax is transferred from the consumer orpurchaser through the factors ofdistribution to the factor of production.Example: Consumer or purchaser may shifttax imposed on him to retailer bypurchasing only after the price is reduced,and from the latter to the wholesaler, andfinally to the manufacturer or producer.The tax is shifted to the extent that theprice is reduced by reason of the tax.

(3) Onward shifting - When the tax is shiftedtwo or more times either forward orbackward. Thus, a transfer from the seller

to the purchaser involves one shift; fromthe producer to the wholesaler, then toretailer, we have two shifts; and if the taxis transferred again to the purchaser by theretailer, we have three shifts in all.

Taxes that can be shiftedOnly indirect taxes may be shifted; direct taxescannot be shifted.

Meaning of impact and incidence of taxationImpact of taxation is the point on which a tax isoriginally imposed. In so far as the law is concerned,


14/191


4

the taxpayer is the person who must pay the tax tothe government. He is also termed as the statutorytaxpayer the one on whom the tax is formallyassessed. He is the subject of the tax.Incidence of taxation is that point on which the taxburden finally rests or settle down. It takes placewhen shifting has been effected from the statutorytaxpayer to another.

Relationship between Impact, Shifting, andIncidence of a TaxThe impact is the initial phenomenon, the shifting isthe intermediate process, and the incidence is theresult. Thus, the impact in a sales tax (i.e. VAT) ison the seller (manufacturer) who shifts the burdento the customer who finally bears the incidence ofthe tax.

Impact is the imposition of the tax; shifting is thetransfer of the tax; while incidence is the setting orcoming to rest of the tax.

2. Tax avoidance

The exploitation by the taxpayer of legallypermissible alternative tax rates or methods ofassessing taxable property or income in order toavoid or reduce tax liability. It is politely called taxminimization and is not punishable by law.

Example: A person refrains from engaging in someactivity or enjoying some privilege in order to avoidthe incidental taxation or to lower his tax bracketfor a taxable year.

A taxpayer has the legal right to decrease theamount of what otherwise would be his taxes oraltogether avoid them by means which the lawpermits.

3. Transformation

TRANSFORMATION method of escape in taxationwhereby the manufacturer or producer upon whomthe tax has been imposed, fearing the loss of hismarket if he should add the tax to the price, paysthe tax and endeavors to recoup himself byimproving his process of production thereby turningout his units of products at a lower cost.

The taxpayer escapes by a transformation of the taxinto a gain through the medium of production.

4. Tax evasionTAX EVASION - is the use by the taxpayer of illegalor fraudulent means to defeat or lessen the paymentof a tax. It is also known as tax dodging. It ispunishable by law.

Example: Deliberate failure to report a taxableincome or property; deliberate reduction of incomethat has been received.

Elements of Tax Evasion(1) The end to be achieved. Example: the

payment of less than that known by the

taxpayer to be legally due, or in paying notax when such is due.

(2) An accompanying state of mind described asbeing evil, in bad faith, willful ordeliberate and not accidental.

(3) A course of action (or failure of action)which is unlawful.

Since fraud is a state of mind, it need not be provedby direct evidence but may be inferred from thecircumstances of the case. Thus:

(1) The failure of the taxpayer to declare fortaxation purposes his true and actualincome derived from his business for twoconsecutive years has been held as anindication of his fraudulent intent to cheatthe government of its due taxes. (Republicv. Gonzales, 13 SCRA 633 [1965]).

(2) The substantial underdeclaration of incomein the income tax returns of the taxpayerfor four (4) consecutive years coupled withhis intentional overstatement of deductionsjustifies the finding of fraud. (Perez v. CTAand Collector, 103 Phil. 1167 [1958]).

Exemption from taxation

Meaning of exemption from taxationThe grant of immunity to particular persons orcorporations or to person or corporations of aparticular class from a tax which persons andcorporations generally within the same state ortaxing district are obliged to pay. It is an immunityor privilege; it is freedom from a financial charge orburden to which others are subjected.

Strictly construed against the taxpayer.

General rule: In the construction of tax statutes,exemptions are not favoured and are construedstrictissimi juris (by the most strict right or law)against the taxpayer. An exemption from thecommon burden cannot be permitted to exist uponvague implication or inference.

The fundamental theory is that all taxable propertyshould bear its share of the cost and expense ofgovernment. Moreover, applying the rule of strictconstruction to statutory provisions granting taxexemptions (or deductions) would minimizedifferential treatment and foster fairness andequality of treatment among taxpayers.

Taxation is the rule and exemption, the exception,and therefore, he who claims exemption must beable to justify his claim or right thereto, by a grantexpressed in terms too plain to be mistaken and toocatego rical to be misinterpreted. If not expresslymentioned in the law, it must at least be within itspurview by clear legislative intent.

Nature of tax exemption(1) Mere personal privilege. Being personal in

nature, it cannot be assigned or transferredwithout the consent of the Legislature. Thelegislative consent to the transfer may be


15/191


given either in the original act granting theexemption or in a subsequent law

(2) General rule: revocable by the government.

Exception : It is founded on a contract whichis protected from impairment. But thecontract must contain the essentialelements of other contracts, such as forexample, a valid cause or consideration. Anexemption provided for in a franchise,however, may be repealed or amendedpursuant to the Constitution (see Sec. 11,Art. XII). A legislative franchise is in thenature of a contract.

(3) Implies a waiver on the part of the government of its right to collect taxes dueto it, and, in this sense, is prejudicialthereto. Hence, it exists only by virtue ofan express grant and must be strictlyconstrued.

(4) Not necessarily discriminatory, provided ithas reasonable foundation or rational basis.Where, however, no valid distinction exists,the exemption may be challenged asviolative of the equal protection guaranteeor the uniformity rule.

(5) General rule: Strict construction againsttaxpayer claiming exemption.

Exceptions:(a) The rule on strict interpretation against

the grantees does not apply to taxexemptions in favor of a politicalsubdivision or instrumentality of thegovernment (Maceda v. Macaraig), or ofcharitable, religious, and educationalinstitutions (De Leon).

(b) When the law itself expressly providesfor a liberal construction, that is, in

case of doubt it shall be resolved infavor of tax exemption. (De Leon).(c) Exemptions to traditional grantees,

such as those in favor of religious andcharitable institutions.

(d) Exemptions from certain taxes grantedunder special circumstances to specialclasses of persons. (Vitug and Acosta)

Kinds of tax exemption(1) Express or Affirmative - When certain

persons, property, or transactions are, byexpress provision, exempted from all orcertain taxes, either entirely or in part.This exemption may be made by provisionsof the Constitution, statutes, treaties,ordinances, franchises, or contracts.

(2) Implied or Exemption by Omission - whena tax is levied on certain classes of persons,properties, or transactions, withoutmentioning the other classes. Every taxstatute, in a very real sense, makesexemptions since all those not mentionedare deemed exempted. The omission maybe either accidental or intentional.Exemptions are not presumed, but when

public property is involved, exemption isthe rule, and taxation, the exception.

(3) Contractual - agreed to by the taxingauthority in contracts lawfully entered into.Subject to non-impairment of contracts. Inthe real sense of the term and where thenon-impairment clause of the Constitutioncan rightly be invoked, are those agreed toby the taxing authority in contracts, such asthose contained in government bonds ordebentures, lawfully entered into by themunder enabling laws in which thegovernment, acting in its private capacity,sheds its cloak of authority and waives itsgovernmental immunity. Truly, taxexemptions of this kind may not be revokedwithout impairing the obligations ofcontracts. These contractual taxexemptions, however, are not to beconfused with tax exemptions grantedunder franchises. A franchise partakes thenature of a grant which is beyond thepurview of the non-impairment clause ofthe Constitution. (Manila Electric Companyv. Province of Laguna, G.R.No. 131359, May5, 1999)

Rationale/grounds for exemption

Rationale of Tax ExemptionSuch exemption will benefit the body of the peopleand not particular individuals or private interest andthat the public benefit is sufficient to offset themonetary loss entailed in the grant of theexemption.

Grounds for tax exemption(1) It may be based on contract. (2) It may be based on some ground of public

policy. (3) It may be created in a treaty on grounds of

reciprocity or to lessen the rigors ofinternational or multiple taxation.

But: equity is NOT a ground for tax exemption. Thus,the fact that one person may not have been requiredto pay his tax does not exempt another from thepayment of his legal taxes, or legally entitle him to arefund of any taxes which he has paid. Exemptionfrom tax is allowable only if there is a clearprovision therefor. While equity cannot be used as abasis or justification for tax exemption, a law may

validly authorize the condonation of taxes onequitable considerations.

Revocation of tax exemption

Generally revocable by the government. Contractualtax exemptions, however, may not be unilaterally sorevoked by the taxing authority without therebyviolating the non-impairment clause of theConstitution

Compensation and Set-off


16/191


6General rule: Taxes cannot be the subject of set-offor compensation (Republic v. Mambulao Lumber) . Reasons:

(1) This would adversely affect the governmentrevenue system (Philex Mining v. CA) .

(2) Government and the taxpayer are notcreditors and debtors of each other. Thepayment of taxes is not a contractualobligation but arises out of a duty to pay.(Republic v. Mambulao)

Exception: If the claims against the government havebeen recognized and an amount has already beenappropriated for that purpose, set-off orcompensation may be had. Where both claims havealready become due and demandable as well as

fully liquidated , compensation takes place byoperation of law under Art. 1200 in relation toArticles 1279 and 1290 of the NCC, and both debtsare extinguished to the concurrent amount. [Domingo v. Garlitos]

Doctrine of Equitable Recoupment - a claim for

refund barred by prescription may be allowed tooffset unsettled tax liabilities. The doctrine FINDSNO application in this jurisdiction. (Collector v.UST).

Compromise

A contract whereby the parties, by makingreciprocal concessions avoid litigation or put an endto one already commenced. It involves a reductionof the taxpayers liabi lity.

Tax amnesty

Definition

A tax amnesty, being a general pardon or intentionaloverlooking by the State of its authority to imposepenalties on persons otherwise guilty of evasion orviolation of a revenue or tax law, partakes of anabsolute forgiveness or waiver by the Governmentof its right to collect what otherwise would be dueit, and in this sense, prejudicial thereto, particularlyto give tax evaders, who wish to relent and arewilling to reform a chance to do so and become apart of the new society with a clean slate . [Republicv. IAC (1991)]

Distinguished from tax exemption

Tax amnesty is an immunity from all criminal andcivil oblifgations arising from non-payment of taxes.It is a general pardon given to all taxpayers. Itapplies to past tax periods, hence of retroactiveapplication. (People v. Castaeda, 1988).

Tax exemption is an immunity from all civil liabilityonly. It is an immunity or privilege, a freedom froma charge or burden of which others are subjected. It

is generally prospective in application. (Dimaampao,2005, p. 111)

Construction and Interpretation of:

1. Tax laws

In case of doubt in the interpretation of statuteslevying taxes or duties, such are to be construed strictly against the government and liberally in

favor of the taxpayer.

2. Tax exemption and exclusion

General RuleTax exemptions must be shown to exist clearly andcategorically , and supported by clear legalprovisions. [NPC v. Albay]

Claims for an exemption must be able to point outsome provision of law creating the right, and cannotbe allowed to exist upon a mere vague implicationor inference . [Floro Cement v. Gorospe]

Refunds are in the nature of exemption, and must beconstrued strictly against the grantee/taxpayer. [CIRv. CA]

Exception(1) When the law provides for liberal

construction(2) Exemptions in favor of government, its

political subdivisions, and instrumentalities;or in case of property owned by the state ora city or other public corporations (Macedav. Macaraig)

(3) The rule of strict construction of taxexemption should not be applied toorganizations performing strictly religious,charitable, and educational functions.

(4) Exemptions from certain taxes grantedunder special circumstances to specialclasses of persons. (Vitug and Acosta)

3. Tax rules and regulations

The Secretary of Finance, upon recommendation ofthe CIR, shall promulgate all needful rules andregulations for the effective enforcement of theprovisions of the NIRC. (Sec. 244)

Requisites of a valid tax regulation

(1) Reasonable(2) Within the authority conferred(3) Not contrary to law(4) Must be published in the Official Gazette

and filed with the UP Law Center

NOTE: Administrative regulations must always be inharmony with the provisions of the law. In case ofdiscrepancy between the basic law and theimplementing rule or regulation, the formerprevails.

4. Penal provisions of tax laws


17/191


Penal provisions of tax laws must be strictlyconstrued. Where penalties for infringement areimposed, it is not legitimate to stretch the languageof a rule, however beneficent its intention, beyondthe fair and ordinary meaning of its language.

5. Non-retroactivity of tax laws

General rule: Tax laws are prospective in operation.

Exception: Tax laws may be applied retroactively provided it is expressly declared or clearly the legislative intent.

Exception to the exception: A tax law should not begiven retroactive application when it would be soharsh and oppressive for in such case, theconstitutional limitation of due process would beviolated ( Republic v. Fernandez) .

I. Scope and Limitation of Taxation

Inherent Limitations

1. Public Purpose

The test of the constitutionality of a statuterequiring the use of public funds is whether thestatute is designed to promote the public interest,as opposed to the furtherance of the advantage ofindividuals, although each advantage to individualsmight incidentally serve the public. [Pascual v.Secretary of Public Works (1960)]

Taxation may be made the implement of the States

police power. The protection and promotion of thesugar industry is a matter of public concern; thelegislature may determine within reasonable boundswhat is necessary for its protection and expedientfor its promotion. [Lutz v Araneta (1955)]

The public purpose of a tax may legally exist even ifthe motive which impelled the legislature to imposethe tax was to favor one industry over another. [Tiov. Videogram (1987)]

Tests in Determining Public Purpose:(1) Duty Test - Whether the thing to be

furthered by the appropriation of publicrevenue is something which is the duty ofthe State as a government to provide.

(2) Promotion of General Welfare Test -Whether the proceeds of the tax willdirectly promote the welfare of thecommunity in equal measure.

(3) Character of the Direct Object of theExpenditure It is the essential character ofthe direct object of the expenditure whichmust determine its validity as justifying atax and not the magnitude of the intereststo be affected nor the degree to which thegeneral advantage of the community, andthus the public welfare, may be ultimately

benefited by their promotion. Incidentaladvantage to the public or to the State,which results from the promotion of privateenterprises or business, does not justifytheir aid with public money. [Pascual v.Sec. of Public Works]

2. Inherently Legislative

Stated in another way, taxation may exceptionallybe delegated, subject to such well-settledlimitations as

(1) The delegation shall not contravene anyconstitutional provision or the inherentlimitations of taxation;

(2) The delegation is effected either by theConstitution or by validly enactedlegislative measures or statute; and

(3) The delegated levy power, except when thedelegation is by an express provision of theConstitution itself, should only be in favorof the local legislative body of the local ormunicipal government concerned. [Vitugand Acosta]

General Rule: Delegata potestas non potestdelegari . The power to tax is exclusively vested inthe legislative body as delegates of the people; andit may not be re-delegated.

With the legislature primarily lies the discretion todetermine the

(1) nature (kind),(2) object (purpose),(3) extent (rate),(4) coverage (subjects) and(5) situs (place) of taxation.

The court cannot freely delve into those matterswhich, by constitutional fiat, rightly rest onlegislative judgment. [Tan v. Del Rosario (1994)]

Exceptions(1) Delegation to local governments - LGUs

have power to create its own sources ofrevenue and to levy taxes, fees andcharges, subject to such guidelines andlimitations as the Congress may providewhich, however, must be consistent withthe basic policy of local autonomy. [Art X,Sec 5, 1987 Consti]

(2) Delegation to the President to enter intoExecutive agreements, and to ratify treatieswhich grant tax exemption subject toSenate concurrence. The Congress may, bylaw, authorize the President to fix withinspecified limits, and subject to suchlimitations and restrictions as it mayimpose, tariff rates, import and exportquotas, tonnage and wharfage dues, andother duties or imposts within theframework of the national developmentprogram of the Government. [Art. 6, Sec.28 (2), 1987 Consti]


18/191


8

(3) Delegation to administrative agencies -Limited to the administrativeimplementation that calls for some degreeof discretionary powers under sufficientstandards expressed by law or implied fromthe policy and purposes of the Act. Note: Delegation to administrative agenciesis really not an exception to the rule as nodelegation of the strictly legislative powerto tax is involved. The powers which are notlegislative include:(a) The power to value property for

purposes of taxation pursuant to fixedrules;

(b) The power to assess and collect thetaxes; and

(c) The power to perform any of theinnumerable details of computation,appraisement, and adjustment, and thedelegation of such details. [Cervantesv. Auditor General]

3. Territorial

Meaning of Situs of TaxationSitus of taxation refers to the place of taxation, orthe state or political unit which has jurisdiction toimpose tax over its inhabitants.

General Rule: The taxing of a country is limited topersons and property within and subject to itsjurisdiction.

Reasons:(1) Taxation is an act of sovereignty which

could only be exercised within a countrysterritorial limits.

(2) This is the result of the concept that taxesare paid for the protection and servicesprovided by the taxing authority whichcould not be provided outside the territorialboundaries of the taxing State.

Exceptions:(1) Where tax laws operate outside territorial

jurisdiction. (i.e., Taxation of residentcitizens on their incomes derived fromabroad.)

(2) Where tax laws do not operate within theterritorial jurisdiction of the State.

(3) When exempted by treaty obligations.(4) When exempted by international comity.

Factors that Determine Situs:(1) Nature of the tax;(2) Subject matter of the tax;(3) Citizenship of the taxpayer;(4) Residence of the taxpayer;(5) Source of income.

KIND OF TAX SITUSProperty Tax

Real property Where it is located (lex rei sitae)TangiblePersonalproperty

Where the property is physicallylocated although the ownerresides in another jurisdiction.

Intangiblepersonalproperty

Gen Rule: Domicile of the owner.Mobilia sequuntur personam(movables follow the person)

Exceptions:(1) When property has

acquired a business situs inanother jurisdiction; or

(2) When the law provides forthe situs of the subject oftax (i.e., Sec 104 NIRC)

Excise TaxIncome Source of the income, nationality

or residence of the taxpayer (Sec23 NIRC)

Donors Tax Location of the property;nationality or residence of thetaxpayer

Estate Location of the property;nationality or residence of thetaxpayer

VAT Where the transaction is madeOthers

Poll,

Capitation orCommunityTax

Residence of the taxpayer,

regardless of the source ofincome or location of theproperty of the taxpayer

4. International Comity

Comity is the respect accorded by nations to eachother because they are sovereign equals. Thus, theproperty or income of a foreign state or governmentmay not be the subject of taxation by another state.

Reasons:(1) In par in parem non habet imperium . As

between equals there is no sovereign.

(Doctrine of Sovereign Equality)(2) The rule of international law that a foreigngovernment may not be sued without itsconsent so that it is useless to impose a taxwhich could not be collected.

(3) The concept that when a foreign sovereignenters the territorial jurisdiction ofanother, it does not subject itself to thejurisdiction of the other.

5. Exemption of Government Entities,Agencies, and Instrumentalities

If the taxing authority is the National Government:

General Rule: The government is exempt from tax.

Exception: When it chooses to tax itself. Nothingcan prevent Congress from decreeing that eveninstrumentalities or agencies of the governmentperforming governmental functions may be subjectto tax. Where it is done precisely to fulfill aconstitutional mandate and national policy, no onecan doubt its wisdom. (Mactan Cebu Airport vMarcos, 1996)

If the taxing authority is the local government unit:RA 7160 expressly prohibits LGUs from levying tax on


19/191


the National Government, its agencies andinstrumentalities and other LGUs.

Constitutional Limitations

1. Provisions Directly Affecting Taxation

Prohibition against imprisonment for non-paymentof poll taxArt III, Sec 20, 1987 Consti- No person shall beimprisoned for debt or non-payment of a poll tax.

Uniformity and equality of taxationArt VI, Sec 28(1), 1987 Consti- The rule of taxationshall be uniform and equitable. The Congress shallevolve a progressive system of taxation.

(1) Uniformity- All taxable articles orproperties of the same class shall be taxedat the same rate.

(2) Equity The burden of the tax shouldconsider the taxpayers ability to pay

Taxation does not require identity or equality underall circumstances, or negate the authority toclassify the objects of taxation. The classificationto be valid, must, be reasonable and thisrequirement is not deemed satisfied unless: (1) it isbased upon substantial distinctions which make realdifferences; (2) these are germane to the purpose ofthe legislation or ordinance; (3) the classificationapplies, not only to present conditions, but, also, tofuture conditions substantially identical to those ofthe present; and (4) the classification appliesequally to all those who belong to the same class.(Pepsi-Cola v. Butuan City, 24 SCRA 789)

Grant by Congress of authority to the President to

impose tariff ratesDelegation of Tariff powers to the President underthe flexible tariff clause [Art VI, Sec 28(2), 1987Constitution]

Prohibition against taxation of religious, charitableentities, and educational entities Art VI, Sec 28, 1987 Constitution xxx (3) Charitableinstitutions, churches and personages or conventsappurtenant thereto, mosques, non-profitcemeteries, and all lands, buildings, andimprovements, actually, directly, and exclusivelyused for religious, charitable, or educationalpurposes shall be exempt from taxation.

The tax exemption under this constitutionalprovision covers real property taxes only.

In general, special assessments are not covered bythe exemption because by nature they are notclassified as taxes. [Apostolic Prefect v. CityTreasurer of Baguio]

To be entitled to the exemption, the petitioner mustprove that:

(1) it is a charitable institution

(2) its real properties are actually , directly andexclusively used for charitable purposes.

Revenue or income from trade , business or otheractivity, the conduct of which is not related to theexercise or performance of religious, educationaland charitable purposes or functions shall be subjectto internal revenue taxes when the same is notactually, directly or exclusively used for theintended purposes. (BIR Ruling 046-2000)

Test ofExemption

Use of the property, and not theownership

Nature of UseActual, direct and exclusive usefor religious, charitable oreducational purposes.

Scope ofExemption

Real property taxes on facilitieswhich are

(1) actual,(2) incidental to, or(3) reasonably necessary for

the accomplishment of saidpurposes. [Abra Valley College v.

Aquino]

The TEST whether an enterprise is charitable or notis whether it exists to carry out a purpose recognizedin law as charitable or whether it is maintained forgain, profit, or private advantage.

As a general principle, a charitable institution doesnot lose its character as such and its exemption fromtaxes simply because it derives income from payingpatients, whether out-patient, or confined in thehospital, or receives subsidies from the government,so long as the money received is devoted or usedaltogether to the charitable object which it isintended to achieve; and no money inures to theprivate benefit of the persons managing or operatingthe institution.

Exclusive" is defined as possessed and enjoyed tothe exclusion of others; debarred from participationor enjoyment; and "exclusively" is defined, "in amanner to exclude; as enjoying a privilegeexclusively." If real property is used for one or morecommercial purposes, it is not exclusively used forthe exempted purposes but is subject to taxation. The words "dominant use" or "principal use" cannotbe substituted for the words "used exclusively"without doing violence to the Constitutions and thelaw. Solely is synonymous with exclusively. [LungCenter of the Philippines v. Quezon City (2004)]

NOTE: Lung Center did not necessarily overturn thecase of Abra Valley College v. Aquino (1988). Lungcenter just provided a stricter interpretation of therule. In Abra Valley, the court held: The primary useof the school lot and building is the basic andcontrolling guide, norm and standard to determinetax exemption, and not the mere incidental usethereof. Under the 1935 Constitution, the trial courtcorrectly arrived at the conclusion that the schoolbuilding as well as the lot where it is built, should betaxed, not because the second floor of the same isbeing used by the Director and his family for


20/191


0

residential purposes (incidental to its educationalpurpose), but because the first floor thereof is beingused for commercial purposes. However, since only aportion is used for purposes of commerce, it is onlyfair that half of the assessed tax be returned to theschool involved.

Prohibition against taxation of non-stock, non-profit institutionsArt XIV, Sec 4, 1987 Consti xxx

(3) All revenues and assets of non-stock, non-profit educational institutions usedactually, directly, and exclusively foreducational purposes shall be exempt fromtaxes and duties . Upon the dissolution orcessation of the corporate existence of suchinstitutions, their assets shall be disposed ofin the manner provided by law.

Proprietary educational institutions,including those cooperatively owned, maylikewise be entitled to such exemptions,subject to the limitations provided by law,including restrictions on dividends andprovisions for reinvestment.

(4)

Subject to conditions prescribed by law, allgrants, endowments, donations, orcontributions used actually, directly, andexclusively for educational purposes shallbe exempt from tax.

This provision covers only non-stock, non-profiteducational institutions

The exemption covers internal revenue taxes,custom duties on all revenues and assets of suchinstitutions, and incidental income from facilitieslocated inside the school campus.

However, incomes which are unrelated to schooloperations are taxable.

Art. VI, sec. 28, par. 3 Art. XIV, sec. 4, par. 3Charitable institutions,churches and parsonagesor convents appurtenantthereto, mosques, non-profit cemeteries, and alllands, buildings, andimprovements, actually,directly, and exclusively used for religious,charitable, or educationalpurposes.

Non-stock, non-profiteducational institutions.

Property taxes Income, property, anddonors taxes andcustom duties.

Majority vote of Congress for grant of taxexemptionArt 6, Sec 28, 1987 Consti xxx

(4) No law granting any tax exemption shall bepassed without the concurrence of amajority of all the Members of theCongress.

Basis of the grant: The inherent power of the stateto impose taxes carries with it the power to granttax exemptions.

Exemptions may be created by: (1) the Constitution or(2) statute subject to constitutional limitations

Vote required for the grant of exemption: Absolutemajority of the members of Congress (at least plus 1 of ALL the members voting separately)

Vote required for withdrawal of such grant ofexemption: Relative majority is sufficient (majorityof the quorum)

Grants in the nature of tax exemptions: (1) Tax amnesties(2) Tax condonations (3) Tax refunds

Note:(1) The LGU shall have the authority to grant

local tax exemption privileges. (Sec. 192,LGC)

(2) The President of the Philippines may, whenpublic interest so requires, condone orreduce real property taxes and interest.(Sec. 277, LGC)

Prohibition on use of tax levied for special purposeAll money collected on any tax levied for a specialpurpose shall be treated as a special fund and paidout for such purpose only. If the purpose for which aspecial fund was created has been fulfilled orabandoned, the balance, if any, shall be transferredto the general funds of the Government.

Presidents veto power on appropriation, revenue,tariff billsArt 6, Sec 28, 1987 Constitution

(2) The President shall have the power to vetoany particular item or items in anappropriation, revenue, or tariff bill, butthe veto shall not affect the item or itemsto which he does not object.

Non-impairment of jurisdiction of the SupremeCourtArt VIII, Sec 5 par 2[b], 1987 Consti The SupremeCourt shall have the power to review, revise, modifyor affirm on appeal or certiorari, as the laws or theRules of Court may provide, final judgments andorders of lower courts in all cases involving thelegality of any tax, impost, assessment or toll or anypenalty imposed in relation thereto.

San Miguel Corp v. Avelino: It is undoubted thatunder the Constitution, even the legislative bodycannot deprive this Court of its appellate jurisdictionover all cases coming from inferior courts where theconstitutionality or validity of an ordinance or thelegality of any tax, impost, assessment, or toll is inquestion.


21/191


Art VI, Sec 30 of the Constitution provides that nolaw shall be passed increasing the appellatejurisdiction of the Supreme Court without its adviceand concurrence.

Scope of Judicial Review in taxation: The Power ofJudicial Review in taxation is limited only to theinterpretation and application of tax laws. Thejudicial tribunals have no concern on the wisdom ofthe taxing act. Its power does not include inquiryinto the policy of legislation. Neither can itlegitimately question or refuse to sanction theprovisions of any law consistent with theConstitution. (Bisaya Land Transportation Co v.Collector, May 29, 1959)

Grant of power to the local government units tocreate its own sources of revenueLGUs have power to create its own sources ofrevenue and to levy taxes, fees and charges, subjectto such guidelines and limitations as the Congressmay provide which, however, must be consistentwith the basic policy of local autonomy. [Art X, Sec5, 1987 Consti]

Flexible tariff clause Delegation of Tariff powers to the President underthe flexible tariff clause [Art VI, Sec 28(2), 1987Consti]

The flexible tariff clause refers to the authoritygiven to the President, upon the recommendation ofNEDA, to adjust the tariff rates under Sec. 401 ofthe Code in the interest of national economy,general welfare and/or national security.

Exemption from real property taxesSec. 28(3), Art. VI, 1987 Constitution: Charitableinstitutions, churches and personages or conventsappurtenant thereto, mosques, non-profitcemeteries, and all lands, buildings, andimprovements, actually, directly, and exclusivelyused for religious, charitable, or educationalpurposes shall be exempt from taxation.

No appropriation or use of public money forreligious purposesArt VI, Sec 29.

(1) No money shall be paid out of the Treasuryexcept in pursuance of an appropriationmade by law.

(2) No public money or property shall beappropriated, applied, paid, or employed,directly or indirectly, for the use, benefit,or support of any sect, church,denomination, sectarian institution, orsystem of religion, or of any priest,preacher, minister, other religious teacher,or dignitary as such, except when suchpriest, preacher, minister, or dignitary isassigned to the armed forces, or to anypenal institution, or government orphanageor leprosarium.

(3) All money collected on any tax levied for aspecial purpose shall be treated as a special

fund and paid out for such purpose only. Ifthe purpose for which a special fund wascreated has been fulfilled or abandoned,the balance, if any, shall be transferred tothe general funds of the Government.

2. Provisions Indirectly Affecting Taxation

Due process

Art III, Sec 1, 1987 Consti: No person shall bedeprived of life, liberty, or property without due process of law , nor shall any person be denied theequal protection of the laws.

Deprivation of life, liberty or property by thegovernment conforms with due process when the ffconcur:

(1) Substantive Due Process An act is doneunder the authority of a valid law or theConstitution itself.

(2) Procedural Due Process An act is doneafter compliance with fair and reasonablemethods or procedure prescribed by law.

Due Process in Taxation requirements:(1) Tax must be for public purpose(2) It must be imposed within taxing authoritys

territorial jurisdiction(3) Assessment or collection must not be

arbitrary or oppressive

When taxpayer may invoke violation of due process:The due process clause may be invoked where ataxing statute is so arbitrary that it finds no supportin the Constitution, as where it can be shown toamount to the confiscation of property. (Sison v.

Ancheta)

Instances of violations of the due process clause:(1) If the tax statute amounts to confiscation of

property;(2) If the subject of confiscation is beyond the

jurisdiction of the state;(3) If the tax statute is not for a public

purpose;(4) If the retroactive law is harsh and

unreasonable. (Sison v. Ancheta)

Equal protectionArt III, Sec 1, 1987 Consti: No person shall bedeprived of life, liberty, or property without due

process of law, nor shall any person be denied theequal protection of the laws .

All persons subject to legislation shall be treatedalike under similar circumstances and conditionsboth in the privileges conferred and liabilitiesimposed.

The equal protection clause is subject to reasonableclassification. Classification is valid as long as:

(1) classification rests on substantialdistinctions which make real differences,


22/191


2

(2) classification is germane to achieve thelegislative purpose,

(3) the law applies, all things being equal, toboth present and future conditions, and

(4) the classification applies equally well to allthose belonging to the same class.

Religious freedomArt III, Sec 5, 1987 Consti-. No law shall be maderespecting an establishment of religion, orprohibiting the free exercise thereof. (non-establishment clause) The free exercise andenjoyment of religious profession and worship,without discrimination or preference, shall foreverbe allowed. (free exercise clause) No religious testshall be required for the exercise of civil or politicalrights.

The free exercise clause is the basis of taxexemptions.

License fees on the sale of bibles and religiousarticles by a non-stock, non-profit missionaryorganization not for purposes of profit amounts to acondition or permit for the exercise of their right,thus violating the free exercise clause. [AmericanBible Society v. City of Manila, L-9637 April 30,1957] However, if the activity is for profit or fromany of their property, the income is taxable

Non-impairment of obligations of contractsArt III, Sec 10. No law impairing the obligation ofcontracts shall be passed.

Not only are existing laws read into contracts inorder to fix obligations as between parties, but thereservation of essential attributes of sovereignpower is also read into contracts as a basic postulateof the legal order. The Contract Clause has never

been thought as a limitation on the exercise of theState's power of taxation save only where a taxexemption has been granted for a validconsideration. [Tolentino v. Secretary of Finance]

J. Stages of Taxation

(1) Levy the act of the Legislature in choosingthe persons, properties, rights, or privilegesto be subjected to taxation.

(2) Assessment and Collection the act ofexecuting the law through administrativeagencies of the government.

(3) Payment the act of the taxpayer insettling his tax obligations.(4) Refund reimbursement of the tax paid

under grounds provided for by law.

K. Definition, Nature, andCharacteristics of Taxes

TAXATION - is a mode by which governments makeexactions for revenue in order to support theirexistence and carry out their legitimate objectives.

TAXES - are enforced proportional contributionsfrom persons and property levied by the law-makingbody of the State by virtue of its sovereignty for thesupport of the government and all public needs.

NATURE: The power to tax, being inherent in anindependent state for its existence and survival bythe furtherance of its multifarious functions, thesame does not require delegation from theConstitution. However, exercise of such power uponthe inhabitants is subject to limitations.

CHARACTERISTICS:(1) It is an enforced contribution for its

imposition is in no way dependent upon thewill or assent of the person taxed.

(2) It is generally payable in the form ofmoney , although the law may providepayment in kind;

(3) It is laid by some rule of apportionment which is usually based on ability to pay;

(4) It is levied on persons, property, acts, privileges, or transactions . In each case,however, it is only a person who pays thetax;

(5) It is levied by the State which has jurisdiction or control over the subject tobe taxed . This is necessary in order that thetax can be enforced;

(6) It is levied by the law-making body of theState. The power to tax is legislative powerwhich only the legislature can exercise. Thepower to tax is also granted to localgovernments, but subject to such guidelinesand limitations as may be provided by law;

(7) It is levied for public purpose. Taxationinvolves, and a tax constitutes, a charge orburden imposed to provide public revenuefor the support of the government, the

administration of the law, or the paymentof public expenses. A tax levied for aprivate purpose constitutes a taking ofproperty without due process of law.

L. Requisites of a valid tax

(1) It should be for a public purpose (2) The rule of taxation should be uniform (3) That either the person or property taxed be

within the jurisdiction of the taxingauthority

(4) That the assessment and collection be in

consonance with the due process clause (5) The tax must not infringe on the inherentand constitutional limitations of the powerof taxation

M. Tax as distinguished from otherforms of exactions

TariffTAXES TARIFF

All embracing term to A kind of tax imposed on


23/191


include various kinds ofenforced contributionsupon persons for theattainment of publicpurposes

articles which are tradedinternationally

TollTAXES TOLL

Paid for the support of

the government

Paid for the use ofanothers property.

Demand of sovereignty Demand ofproprietorship

Generally, no limit onthe amount collected aslong as it is notexcessive, unreasonableor confiscatory

Amount paid dependsupon the cost ofconstruction ormaintenance of thepublic improvementused.

Imposed only by thegovernment

Imposed by thegovernment or by privateindividuals or entities.

License feeTAXES LICENSE AND

REGULATORY FEEImposed under thetaxing power of the statefor purposes of revenue.

Levied under the policepower of the state.

Forced contributions forthe purpose ofmaintaining governmentfunctions.

Exacted primarily toregulate certainbusinesses oroccupations.

Generally, unlimited asto amount

Should not unreasonablyexceed the expenses ofissuing the license and ofsupervision.

Imposed on persons,

property and to exercisea privilege.

Imposed only on the

right to exercise aprivilegeFailure to pay does notnecessarily make the actor business illegal.

Penalty for non-payment: surcharges orimprisonment (exceptpoll tax).

Failure to pay makes theact or business illegal.

Progressive Development Corp v. QC (1989): To beconsidered a license fee (PRIMARY PURPOSE TEST):

(1) the imposition questioned must relate to anoccupation or activity that so engages thepublic interest in health, morals, safety anddevelopment as to require regulation forthe protection and promotion of such publicinterest;

(2) the imposition must also bear a reasonablerelation to the probable expenses ofregulation, taking into account not only thecosts of direct regulation but also itsincidental consequences as well.

Note: Taxes may also be imposed for regulatory purposes. It is called regulatory tax.

Fees may be properly regarded as taxes even thoughthey also served as an instrument of regulation. Ifthe purpose is primarily revenue, or if revenue is, atleast, one of the real and substantial purposes, thenthe exaction is properly called a tax. [PAL v. Edu(1988)]

Special assessmentTAXES SPECIAL ASSESSMENTImposed regardless of

public improvementsImposed because of anincrease in value of landbenefited by publicimprovement.

Levied only on land.Contribution of ataxpayer for the supportof the government.

Contribution of a personfor the construction of apublic improvement

It has generalapplication both as totime and place.

Exceptional both as totime and locality.

Debt TAXES DEBTBased on laws Generally based on

contract, express orimplied.

Generally cannot beassigned

Assignable

Generally paid in money May be paid in kind.Cannot be a subject ofset off

Can be a subject of setoff

Non-payment is punishedby imprisonment exceptin poll tax

No imprisonment in caseof non-payment (Art. III,Sec. 20 1987Constitution)

Governed by the specialprescriptive periodsprovided for in the NIRC.

Governed by theordinary periods ofprescription.

Does not draw interestexcept only whendelinquent

Draws interest when it isso stipulated or wherethere is default.

Imposed only by publicauthority

Can be imposed byprivate individual

N. Kinds of Taxes

As to object

(1) Personal, Poll or Capitation Tax tax of afixed amount imposed on persons residingwithin a specified territory, whethercitizens or not, without regard to theirproperty or the occupation or business inwhich they may be engaged. (i.e.community tax)

(2) Property Tax tax imposed on property,real or personal, in proportion to its valueor in accordance with some otherreasonable method of apportionment. (ie.,real estate tax)


24/191


4

(3) Privilege/Excise Tax a charge imposedupon the performance of an act, theenjoyment of a privilege, or the engaging inan occupation.

2. As to burden or incidence

(1) Direct Taxes taxes which are demandedfrom persons who are primarily burdened topay them (eg. Income, estate, donorstaxes)

(2) Indirect Taxes taxes levied upontransactions or activit

up taxation law reviewer 2012

Documents