Jt Fundamental Principles Taxation Defined Taxation is the process or means by which the sovereign (independent State), through its law-making body (the legislature), imposes burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. In simple terms, it is the act of levying a tax to apportion the cost of government among those who, in some measure, are privileged to enjoy its benefits and must therefore bear its burdens. It is a power inherent in every sovereign State being essential to the existence of every government. Hence, even if not mentioned in the constitution, the State can still exercise the power. Therefore, any constitutional provision regarding the State's power to tax should not be interpreted as a “grant of power”, but merely a limitation on the State’s power to tax. Taxes, on the other hand, are the enforced proportional contributions or charges from persons and property levied by the law-making body of the State by virtue of its sovereignty for the support of the government and all public needs. Under American Jurisprudence, the power to tax Is considered inherent in a sovereign State because it is 4 necessary attribute of sovereignty. Without this power no sovereign State can exist or endure. The power to tax proceeds upon the theory that the existence of a government is a necessity and this power Is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent State or goverment. No sovereign State can continue to exist without the means to pay its expenses; and that for those means, it has the fight to compel all citizens and property within its limits to contribute, hence, the emergence of the power to tax. (51 Am. Jur., Taxation 40),Pepsi-Cola Bottling Company of the Philippines, Inc. v. Municipality of Tanauan, Leyte, G.R. No. L-31156, February 27,1976 ISSUE: Whether a legislative body may enact laws to raise revenues in the absence of a constitutional provision granting said body the power to tax. ANSWER: Yes, the legislative body may enact laws even in the absence of a constitutional provision because the power to tax is inherent in the government and not merely a constitutional grant. The power of taxation is an essential and inherent attribute of sovereignty belonging as a matter of right to every independent government without being expressly granted by the people. The Three (3) Inherent Powers of the State 4. Police Power. \tis the power of the State for promoting public welfare by restraining and regulating the use of liberty and property. It may be exercise only by the government. The property taken in the exercise of this power is destroyed because it is noxious or intended for a noxious purpose. 2. Power of Taxation. \tis the power by which the State raises revenue to defray the necessary expenses of the government. 3. Power of Eminent Domain. It is the power of the State to acquire private property for public purpose upon payment of just compensation. Meaning of “INHERENT Power” = Builtin, inbom, ingrained = Existing in something as a permanent, essential, or characteristic attribute. = Vested in someone (i.e., State or government) as a tight or privilege. Similarities among the three (3) Inherent powers of the State They are inherent in the State. Me} exist independently of the Constitution although the conditions for eir exercise may be prescribed by the Constitution. Ways by which the State Inte i i i ys by terfere with . Legislative in nature and character. pores tee prone Presuppose an equi i indi quivalent compen: i i directly, by the persons affected. pensation received, directly or int y; Ae 2. apeERD) TAXATION Power to enforce contributions to raise gov't funds. 4, Nature 2. Authority Government only “ 3, Purpose For the support of the gover nment Community or a class of individuals. Applies to all persons, property and excises that may be subject thereto 4, Persons affected 4, Scope Plenary, comprehensive, supreme 5. Effect Contribution becomes part of public fund 6. Benefits In form of protection and received benefits received from government 7.Amount No limit C lo limit imposition ISTINCTIONS AMONG prema eed Ou ueeivon Mes Chapter ¢ Findamental Principles POLICE POWER Power to make and implement laws for the general welfare EMINENT DOMAIN Power to take private property for public use with just compensation. Government only May be granted to public service/utility companies Promotion of general The taking of private welfare through property for public use. regulation Community or a class of On an individual as the individuals. owner of personal property. Only particular property is comprehended Applies to all persons, property and excises that may be subject thereto. Merely a power to take private property for public use. Broader in application. General power to make and implement law. No transfer or title. There may just be a restraint on the injurious use of property. There is a transfer of title to property. No direct and immediate benefit but only such as may arise from the maintenance of a healthy economic. standard of society. Market value of property taken. Sufficient to cover cost of the license and the necessary expenses of police surveillance and regulation. No imposition. The owner is paid equivalent to the fair value of his propertyCNdster € ~ lLutdanental Pring ry Set to Tax — Government only 2 Police Power — Government only 3. Eminent Domain | , 0 May be granted to public service/utility companies © Example: Eminent domain granted to Manila Water under RA 11601 dated December 10, 2021, as follows: Section 12. Right of Eminent Domain. - Subject to the limitations and Procedures prescribed by law, the grantee, its successors or assignees, exercise the power of eminent domain insofar as it may be reason: ly for_the efficient _ establishment, improvement. upgrading. rehabilitation, maintenance, and operation of services. The grantee is authorized to install and maintain its water pipelines and other facilities over, under, and across Public property, including streets, highways, parks, and other similar property of the Government of the Philippines, its branches, or any of its instrumentalities. The grantee may acquire private property as is actually necessary for the realization of the purposes for which this franchise is granted, including pipelines, buildings, infrastructure, machineries, and equipment Previously, currently, or actually used. or intended to be used, or have been abandoned, unused, or underutilized, or which obstructs its facilities, for the operation of a waterworks and sewerage system for the conveyance of water supply and sewerage services to end-users in its service area’ Provided, That expropriation proceedings before the proper court Shail have been instituted and just compensation paid PURPOSES OF TAXATION 1. Primary: Revenue or Fiscal Purpose The primary purpose of taxation on the part of the government is to Provide funds or property with which to Promote the general welfare and the protection of its citizens and to enable it to finance its multifarious activities. A government can run its administrative set up only through Public funding which is Collected in the form of tax. Examples of taxes imposed for raising revenues are income and business faxes. Secondary: Regulatory Purpose (or Sumptuary/Compensatory) Si While the primary purpose of taxation is to raise revenue for the cae of the government, taxation is often employed as a devise for ‘gulation or contro{ (implementation of State’s Police power) by means of which certain effect: ‘onditi at achieved such a iS Or conditions envisioned by the government may bea) Promotion Chapler © ~ EUMg Qn“ o£ J co of General Welfare jh) Reduction of Social Inequality o Economic Growth Examples of Taxes * imposed for regulation Excise taxes for sin products such as cigarettes and alcohols « Amusement taxes for “amusement places” such as night and day clubs, cockpits and racetracks of means * Increasing taxes in periods of prosperity to curb en ari some spending power and halt inflation. , social OF economic * Granting tax incentives to promote new/pioneer objectives through industries and encourage growth of local taxation industries. ; = Lowering taxes in case of economic breakdown due to pandemic such as the Covid19 pandemic (ie. CREATE Law signed by the President on March 26, 2021) RELATED CALTEX V. COMMISSIONER, 208 SCRA 755 CASES “Taxation is no longer a measure merely to raise revenue to support the existence of the government. Taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power of the State. The oil industry is imbued with public interest as it vitally affects general welfare” | TIOV. VIDEOGRAM, 151 SCRA 208 \ PD1987 which created the Videogram Regulatory Board also imposed a 30% tax on the gross receipts payable to the local goverment. The Supreme Court upheld the validity of the law ruling that the 30% tax also served a regulatory purpose to answer the need for regulating the video industry, particularly the rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of pornographic video tapes. |i" = a Ps Chapter 1 - £ undamental L “incipl OF TAXATION SIS THEORY and BASIS or oD THEORY and/or NECESSITY THEORY Theory (Authority): Li The power of taxation proceeds upon the theory that the existence of government is a necessity (‘Necessity theory ). As stated in the case of Phil, Guaranty Co., Inc. v. Commissioner [13 SCRA 775], is a power predicated upon necessity. It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements for the enjoyment of the citizenry, and those which come within the State's territory and facilities and protection which a government is supposed to provide. The power of taxation is essential because the government can neither exist nor endure without taxation. “Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need” (Lifeblood Doctrine). The government cannot continue to perform its basic functions of serving and protecting its people without means to pay its expenses. Consequently, the State has the right to compel all its citizens and property within its limits to contribute. | RELATED COMMISSIONER v. ALGUE CASES The Supreme Court held that taxes are the lifeblood of the | government and should be collected without unnecessary hindrance - They are what we pay for a civilized society. Without taxes, the government | would be paralyzed for lack of motive power to activate and operate it. The government, for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. PHIL. GUARANTEE CO., INC. v CIR, 13 SCRA 775 The power to tax is an attribute of sovereignty. It is a power emanating | from necessity. It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, @ navy bo | defend its shores ftom invasion, a corps of civil servants to serve, puble | improvements designed for the enjoyment of the citizenry and those wich | come within the State's territory, and facilities and protection which @ government is supposed to provide. Considering that the reinsurance premiums in question were afforded protection by the government and he recipient foreign reinsurers exercised rights and privileges guaranteed By o% laws, such reinsurance premiums and reinsurers should share the burden ———_____Maintaining the State.Chipte 7 - Fundamental’ Princisl ciple gasis of Taxation: BENEFITS RECEIVED or RECIPROCITY THEORY is is the reciprocal duties of protection and support between the The is inhabitants. The State collects taxes from the subjects of sete in order that it may be able to perform the functions of government. tax izens, on the other hand, pay taxes in order that they may be secured The citizens, on tf” Oe benefits of organized society. This theory spawned the it men ne hi Symbiotic Relationship which means, taxes are what we pay for a civilized society (Commissioner v. Algue). i it tion the State xpayers receive benefits from taxes through the protect Piet D hem. For the protection they get arises their obligation to support the government through payment of taxes. (CIR v. Algue, Inc., G.R. No. L- 78896, February 17, 1988, 158 SCRA 9) TABLE 1-2: Doctrine of Symbiotic Relationship or PP eae ke cco Every person who is able to, must contribute his share in the running of the government by paying taxes. In return for the contributions made, the taxpayers receive the general advantages and protection in the form of tangible or intangible benefits intended to improve the lives of the people and enhanced their material and moral values which the government affords the taxpayer and his property.C) am - f, Chapter 7 + Fundamental lin HE LIFEBLOOD THEORY: eS ae coppel against the Government.” 2) hat in the performance of its governmental functions, 7 mee stato cannot be estopped by the neglect of its agents/officers, . Enoneoile application and enforcement of law by public officers do not block the subsequent correct application of statutes. b) Collection of taxes cannot be enjoined (stopped) by injunction, Under section 218 of the Tax Code (as amended), no court, except Taxes are the (Cour of Tax Appeals (through Jes a fe Ite administrative remedies when collection Thus, it should be could jeopardize the interest of the collected without government or taxpayer - Section 11, unnecessary delay. Its RA 1125), shall have the authority to collection, however. grant an injunction to restrain the should not be tainted collection of any national internal with arbitrariness, revenue tax, fee or charge imposed by the tax code. This prohibition shall apply to all collection activities, including imposition and collection of taxes, issuance of warrants of distraint and garnishment, and/or levy on final decisions of the BIR on disputed assessments, cases filed before the CTA, and the sale of property distrained or garnished (RMO 42-2010). Taxes could not be the subject of compensation or set-off. Taxes cannot be subject to set-off or compensation since claim for taxes is not a debt or contract, A distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. If taxes could be 2 abuse, depriving the government of authority over the manner by which taxpayers can credit and offset their tax liabilities. In the case of Republic vs. Mambulao Lumber Co. (6 SCRA 622; Caltex Phils. vs. COA-208 SCRA 726), the no set-off rule also states that faxes are not subject to set-off or legal compensation because the government and the taxpayer are not mutual creditor and debtor of each other. An exception to the rule is where both the claims of the government and the taxpayer against each other have already become due, demandable and fully liquidated. In this case, compensation taxes Place by operation of law and both obligations are extinguished to thei concurrent amounts (Domingo v. Garlitos, 8 SCRA 443). 8my - 2, Chapter t - Fundamental Urinciple “RELATED (FRANCIA VS. IAC. G.R 76749, June 28. 1988) ~ CASES xis the owner of a residential lot situated at Quirino Avenue, Pasay City. | Tho lot has an area of 300 square meters. On June 1, 1994, 100 square sinters of said lot ovmed by X vas expropriated by the government to be rd inthe widening of Quirino Avenue, for P300,000.00 representing the estimated assessed value of said portion, From 1991 to 1996, X, who ig a businessman, has not been paying his income taxes. X is now being | assessed for the unpaid income taxes in the total amount of | 150,000.00. X claims his income tax liability has already been | compensated by the amount of P300.000 which the government owes him for the expropriation of his property. Decide. | ANSWER: The income tax lability of X cannot be compensated with the amount owed by the Goverment as compensation for his property expropriated, taxes are of distint kind, essence and nature than ordinary | Sbigations. | Taxes and debts cannot be the subject of compensation pecause the Government and X are not mutually creditors and debtors of each other and a claim for taxes is not a debt, demand, contract, or judgment as is allowable to be set off PHILEX MINING CORI IR, GR NO. 125704, Auf. 29, 1998) May a taxpayer who has pending claims for VAT input credit or refund, set-off said claims against his other tax liabilities? ANSWER: No. Set-off is available only if both obligations are liquidated and demandable. Liquidated debts are those where the exact amounts have already been determined. In the instant case, the claim of the taxpayer for VAT refund is still pending and the amount has still to be determined. The liquidated obligation of the taxpayer to the government cannot, therefore, be set-off against the unliquidated claim which the _____ taxpayer conceived to exist in his favor. 4) Right to select objects (subjects) of taxation The power to tax is essentially legislative i i C _ gislative in nature. Hence, the right eaecue objects/subjects of taxation rests with the Congress. The Me in the competence of the legislature include the determination 1) The subject or object to be taxed ) The purpose of th e tax as long as it is i 2 The amount or rate of the ae Mere ate ) Kind of tax :e f - FP }., Chapter 1 ~ Eanda mental Princisle, f 5) Apportionment of the tax 6) Situs of taxation . . 7) The manner, means, and agencies of collection of the tax. A valid tax may result in the destruction of the taxpayer's property. The power to tax includes the “power to destroy”, where the tax is a valid tax. This is so because a taxpayer could not seek the nullification of the valid tax solely upon the premise that the tax will impoverish him. Likewise, the exercise of the power to tax is “not destructive of taxpayer’s property” where it is an invalid tax, which violates the inherent or constitutional limitations. This is so because there is a sympathetic court that shall come to the succor of the taxpayer and declare such tax as invalid. | RELATED — ROXAS vs. CTA (23 SCRA 276) _ | CASE “The power to tax is viewed as the power to destroy in the sense that a lawful tax cannot be defeated just because its exercise would be destructive or would bring about insolvency to a taxpayer An imposition of lawful regulatory taxes would be destructive to the taxpayers and business. establishments because the government can compel payment of tax and forfeiture of property through the exercise | of police power’. —_ _| In McCulloh v. Maryland, U.S. Chief Justice Marshall declared that the power to tax involves the power to destroy. This maxim only means that the power to tax includes the power to regulate even to the extent of prohibition or destruction of businesses. The reason is that the legislature has the inherent power to determine who to tax, what to tax and how much tax is to be imposed. Pursuant to the regulatory purpose of taxation, the legislature may impose tax in order to discourage or prohibit things or enterprises inimical to the public welfare. For instance, the legislature's imposition of prohibitive sin tax on cigarettes is congruent with its purpose of discouraging the public form smoking cigarettes which are hazardous to health. SCOPE of the Power to Tax In the case of Sison vs. Ancheta (130 SCRA 654), the Supreme Court held that the power of taxation is the most absolute of all powers of a government. It has the broadest scope of all the powers of the governme! 10“~ 7 = Fxg yp Chapter 7 - Fundamental Principle ce of limitations, it is considered as comprehensive’ in the absent it because plenary and supreme. unlimited, Comprehensive — as it covers persons, businesses, activities, a. professions, rights and privileges. In the absence of limitations prescribed by law or the constitution, the power to tax is unlimited and comprehensive. Its force is so searching to the extent that the courts scarcely venture to declare that it is subject to restrictions. b. Unlimited — c. Plenary — as itis complete; the BIR may avail of certain remedies to ensure collection of taxes. d. Supreme - in so far as the selection of the subject of taxation. ESSENTIAL ELEMENTS OF TAX a. Itis an enforced contribution. Payment of tax is not voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority. b. It is generally payable in money. tis a pecuniary burden payable in money which must be in legal tender. c. It is proportionate in character. Payment of taxes should be based on the ability to pay theory or theoretical justice. The use of a graduated tax rates is in consonance with this rule. 4. It is levied on persons, property, or the exercise of a right or privil Ie 5 i > lege (subjects or objects of taxation). 8 p 8 Itis levied by the law-making bod i i i ly of the State. The power of “imposing” es ee eete aay legislative function. Congress cannot delegate such. ~ This limitation arises from the doctrine of separati among the three branches of the government. een inoue Itis levied for Public purpose 11C eptir 7 - Landanental Prin y ofp Aspects refer to “stages or phases” that are included or embodied in the term “taxation” such as: ASPECTS OF TAXATION 1. Levying or imposition of the tax which is a legislative act or function. 2. Assessment or determination of the correct amount of applicable tax. 3. Collection of the tax levied which is essentially administrative in character, The national agency charged with the function of collecting interna revenue taxes is the Bureau of Internal Revenue. A eS aKa Seu) ee 3. Collection 1. Levying (Executive Function) (Legislative Function) 2. Assessment (Executive Function) NATURE/CHARACTERISTICS of the State’s Power to Tax Itis inherent in sovereignty. The State, having sovereignty, can enforce contribution (tax) even in the absence of a constitutional provision because the State has the supreme Power to command and enforce obedience to its will from the people within its Jurisdiction. Itis legislative in character. ively The power to tax (levying or imposition) is peculiarly and exclusi ey legislative in nature. It cannot be exercise by the executive or judi branches of the government. 12Chapler 7 Findam ental Princip i EXCEPTIONS to non-delegation rule: provided for in the 1987 Constitution such as “Delegation to the President” under Section 28 Article VI stating that the Congress may authorize by law, 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. a. Delegation as b. Delegation to local government units as provided under Section 5, Art. X f of the Constitution. The power of local government units to impose taxes - and fees is always subject to the limitations which Congress may provide, the former having no inherent power to tax. UNSER a CaM en Cie mceem eel NATIONAL LOCAL Authority Inherent Delegated (through constitutional grant) Nature Legislative in nature through —_ Legislative in nature through enactment of tax laws by the enactment of focal ordinances Congress and the Senate by the local legislative branch CASE to Ponder: = Since the authority of the LGUs to tax is merely a delegated power, may the Congress, under the 1987 Constitution, abolish the power of the former to tax? ANSWER: «NO. Congress cannot abolish what is expressly granted by the fundamental law. The only authority conferred to Congress is to provide the guidelines and limitations on the local government's exercise of the power to tax (Sec. 5, Art. X, 1987 Constitution). c. peceation to Administrative Agencies eran aspects of the taxing process that are not really legislative in Re are vested in administrative agencies such as: Power to value property nat 13Te Furdanental Crin Power to assess and collect taxes = Power to perform details of computation, appraisement or adjustment; among others. ov ILLUSTRATIVE The Secretary of Finance, upon recommendation of CASE Commissioner of Internal Revenue, issued a Revenue. Regu : using gross income as the tax base for Corporation on | 6 business in the Philippines. Is the Revenue Regulation yen 2 ANSWER: NO The regulation establishing gross income as the tax base for Corporations doing business in the Philippines (domestic ag well s resident foreign) is not valid. This is no longer implementation of the law (administrative function) but actually it constitutes legislation because among the powers that are exclusively within the legislative authority to tax is the power to determine the amount of the tax. d. It is subject to Constitutional and inherent limitations ILLUSTRATIVE The Congress, after much public hearing and consultations with varous CASE sectors of society, came to the conclusion that it will be good for the country to have only one system of taxation by centralizing the imposition and collection of all taxes in the national government. Accordingly, itis thinking of passing a law that would abolish the taxing power of all loca government units. Would such a law be valid under the presert Constitution? ANSWER: NO The law centralizing the imposition and collection of all taxes in ne national government would contravene the Constitution which mandates that: ir owt "Each local government unit shall have the power fo create thee ° 4 sources of revenue and fo levy taxes, fees, and charges eel such guidelines and limitations as Congress may provide ¢ with the basic policy of local autonomy.” | | ittions on | Itis clear that Congress can only give the guidelines and init a exercise by the local governments of the power to tax ranted by the fundamental law cannot be withdrawn by Congress 14es Chaster € Vandanental Urinegal, yj ( / overnment entities, agencies and instrumentalities. Immunity f 3, Exemption O} . order that governmental functions will not be impeded 4. 5. 6. ; i is ne ne government will be taxing itself to raise money for itself. The fone ules shall apply in determining whether government entities and encies are subject to tax’ Agencies performing governmental functions are tax exempt unless a. expressly taxed. b. Agencies performing proprietary functions are subject to tax unless expressly exempted. Government owned and controlled corporations (GOCCs) performing proprietary functions are subject to tax, however, the following were granted tax exemptions: Government Service Insurance System (GSIS) » Social Security System (SSS) = Philippine Health Insurance Corporation (PHIC) = Local Water Districts (RA 10026) = Home Development Mutual Fund (HDMF or Pag-ibig) NOTE: = HDMF or Pag-ibig is exempt upon the effectivity of CREATE Law on April 11, 2021 = PCSO became taxable beginning Jan. 1, 2018 or upon effectivity of the TRAIN Law. INTERNATIONAL COMITY (Polite and friendly agreement[s] among nations) Under international law, property of a foreign State may not be taxed by another State due to: * Sovereign equality of States. o When one State enters the territory of another State, there is an implied understanding that the former does not intend to denigrate its dignity by placing itself under the jurisdiction of the other State. * Immunity from suit of a State. Limitation on territorial jurisdiction Clkatie sla laws Cannot operate beyond a State's territorial limits. Property ne's jurisdiction does not receive any protection from the State. Strongest Fl SCRA 854) 7" the inherent powers of the State (Sison v. Ancheta, 130 15oa as Jay. , Chitter 1 Fandanental Priness CLASSIFICATION OF TAXES AS TO SCOPE a. National ~ tax, donor's e National Government (e.g. income tax, estate it th imposed by je taxes, documentary stamp tax) tax, VAT other percentag it units such as muni i ed by local government cipal b. Local tions (e.9 real estate tax and professional tax receipts). The local Ee ent unit's power to tax is based on a constitutional grant that govern for the enactment of the Local Government Code of the wa i " ° Eee ence, the local government's power to tax is not inherent TO SUBJECT MATTER OR OBJECT ° oe Personal, poll or capitation — tax of a fixed amount imposed upon individual, whether citizens or not, residing within a specified territory without regard to their property or the occupation in which he may be engaged (e.g. community tax) b. Property — tax imposed on property, whether real or personal, in proportion either to its value, or in accordance with some other reasonable method of apportionment (e.g. real estate tax) c. Excise — any tax which does not fall within the classification of a poll tax or a property tax. This is a tax on the exercise of certain rights and privileges (e.g. income tax, estate tax, donor's tax). Excise tax may also refer to the tax levied or imposed on sin products and non-essential goods such as cigars and liquors (Discussed in volume 2 — Transfer and Business Taxes). Excise taxes of this nature are taxes applicable to certain specified articles or products manufactured in the Philippines for domestic sale or consumption or any other disposition and to specified things or goods imported into the Philippines. It may be specific or ad valorem 3. AS TO WHO BEARS THE BURDEN a. Direct — tax which is demanded from the person who also shoulders the burden of tax or tax which the taxpayer cannot shift to another. Both the incidence (liability for the payment of the tax) as well as the impact oF burden of the tax falls on the same person (e.g. income tax, estate tax. donor's tax). b. Indirect — tax which is demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another. ee are taxes wherein the incidence of or the liability for the payment of l 16Chapter 7 ~ Candanental Prin / rson but the burden thereof can be shifted or passed en eter oe (e.g. VAT, percehtage tax, excise tax on exciseable a icles) In the case of Maceda v. Macaraig (197 SCRA 771), an indirect ans defined ‘as one paid by a person who is not directly liable therefor, and who may therefore shift or pass on the tax to another person or entity, which ultimately assumes the tax burden ETERMINATION OF AMOUNT: : a aie — tax of fixed amount imposed by the head or number, or by some standard of weight or measurement (e.g. excise tax on cigars and liquors) b. Ad valorem — tax of fixed proportion of the value of the property with ; respect to which the tax is assessed (e.g. vat, income tax, donor's tax and estate tax) TABLE 1-5: SAMPLE AD-VALOREM and SPECIFIC TAX EXCISE TAXES ON ALCOHOL PRODUCTS 1. DISTILLED SPIRITS Excise Tax Due = Ad valorem tax + Specific Tax Date of AD VALOREM TAX [Based SPECIFIC TAX Effectivity ‘on net retail price per proof (per proof liter) (excluding excise tax and vat)] Jan. 1, 2022 22% P52.00 Jan. 1, 2023 22% 59,00 Jan. 1, 2024 22% 66.00 2025 onwards 22% Specific tax rate shall be increased by 6% and every year thereafter 2. FERMENTED LIQUORS Date of Effectivity Specific Tax (per liter) Jan. 1, 2022 P30.00 Jan. 1, 2023 Pai.00 Jan. 1, 2024 43,00 2025 onwards Specific tax rate shall be increased by 6% and every year thereafter 17Chapter T - Fundamental Princisl, 4 ent Ag TO PURPOSE . i Purpose- tax imposed solely ft ary, Fiscal, or Revenue Purt 'y for the gene; a. Primary, of the goverment, i.e., to raise revenue for government OSE ? purposes (e.g. income tax, donor's tax and estate tax). 5, b. Secondary, Regulatory, Special or Sumptuary Purpose — tax imposed for a specific purpose, ie., to achieve some social or economic ends irrespective of whether revenue is actually raised or not (e.g. tariff and certain duties on imports) 6. AS TO GRADUATION OR RATE Proportional — tax based on a fixed percentages of amount of the property, receipts, or other basis to be taxed [e.g. VAT, Table 1-5 above (Ad-valorem tax on distilled spirits)] a. b. Progressive or graduated — tax the rate of which increases as the tax base or bracket increases (e.g. income tax on individual taxpayers) c. Regressive — tax the rate of which decreases as the tax base or bracket increases 7. AS TO TAXING AUTHORITY a. National — taxes imposed under the National Internal Revenue Code (commonly known as the Tax Code) collected by the national government through the Bureau of Internal Revenue (BIR) and other national government agencies. Other national taxes other than those collected by the BIR as provided for under special laws include but not limited to: = Customs duties «Taxes on narcotic drugs = Special education fund taxes = Energy taxes on aircraft, motorized wal power consumption = Sugar adjustment taxes * Travel tax * Private motor vehicle tax tercraft, and electric b. Local - taxes imposed by local government units 18Chapter / Findimental Pre) / ELEMENTS OF SOUND TAX SYSTEM jscal Adequacy a. a. Fiscal et undamental purpose of taxation is to raise the revenue necessary 10 fund public services. Consequently, it is necessary that the sources of revenues must be adequate to meet government expenditures and sustain the level of public services demanded by citizens and policymakers. Theoretical Justice or Equity (‘ability to pay principle”) Taxpayer's ability to pay must be taken into consideration. The tax burden should be proportionate to the taxpayer's ability to pay c. Administrative Feasibility Tax laws must be capable of effective and efficient enforcement. A good tax system requires informed stakeholders who understand how taxes are assessed, collected and complied with: It should be clear who and what is being taxed, and how tax burdens affect them. Therefore, the tax system should be as simple as possible, and should minimize gratuitous complexity. Complicated tax rules make the tax system difficult for citizens to understand. Complexity also makes it harder for governments to monitor and enforce tax collections, and makes it easier for lawmakers to enact (and conceal) targeted tax breaks benefitting particular groups. LIMITATIONS ON THE STATE’S POWER TO TAX 4. Inherent Limitations These are restrictions arising from the very nature of the power to tax itself, Inherent limitations are those limitations which exist despite the absence of an express constitutional provision. a) Purpose must be public in nature This one is synonymous to “governmental purpose. "A tax must always be imposed for a public purpose, otherwise, it will be declared as invalid. No tax law may be enacted for the purpose of raising revenue for private purposes. The purpose should affect the inhabitants of the State or taxing district as a community and not merely as individuals. 19OS 6 EEE EAALS ENG CUBE, S ples It has been said that the best test of rightful taxatio, the proceeds of the tax must be used: a. For the support of the government; or b. For some of the recognized objects of government; or c. To promote the welfare of the community, , Nis thay In the case of Gomez vs. Palomar (25 SCRA 827) Philippine Guarantee Company vs. CIR (13 SCRA 775), it fe been held that tax has been utilized for public purpose if > welfare of the nation or the greater portion of its Population hae benefited for use. s EFFECT OF INCIDENTAL BENEFIT TO PRIVATE INTEREST The purposes to be accomplished by taxation need not be exclusively public. Although private individuals are directly benefited the tax would still be valid provided such benefit is only incidental. | LEGISLATIVE PREROGATIVE It is the Congress which has the power to determine whether the purpose is public or private. A question on the validity of such tax measure may be raised before the courts on the ground that it is not for public purpose. However, once it is settled that it is for @ public purpose, it can’ no longer be a subject of inquiry. CASE “It is not the immediate result but the ultimate result thet determines, whether the purpose is public or not. It is not the number of | persons benefited but it is the character of the purpose that determines the public character of such law. What is not allowed is that if it has no link to public welfare. Public purpose is determined by the use to which the tax money is devoted. If it benefits the community in general, then it is for public purpose no matter who collects it’. - | RELATED TiO vs. VIDEOGRAM b) Prohibition against delegation of the taxing power What cannot be delegated is the “enactment/imposition/levying” of tax measure. regards to administrative implementation of a tax law assessment, collection, valuation of property for tax purpo that can be delegated. legislative However, a8 (i.e. se), c) Territorial limitation (Refer to page 15) 20Chapter 1 ~ Saudanental Prin 2. Constitutional Limitations a) Due process of law There must be a valid law and the measure should not be unconscionable and unjust as to amount to confiscation of property. Tax statute must not be arbitrary as to find no support in the Constitution. The power to tax should not be harsh, oppressive or confiscatory. This limitation is also known as the right to notice and hearing. b) Equal protection of laws All persons subject to legislation shall be treated alike under % similar circumstances and conditions both in the privileges conferred and liabilities imposed. The doctrine does not require that persons or properties different in fact be treated in law as though they were the same. What it prohibits is class legislation which discriminates against some and favors others. As long as there are rational or reasonable grounds for so doing, Congress may group persons or properties to be taxed and it is sufficient if all members of the same class are subject to the same rate and the tax is administered impartially upon them. CASE/ | ILLUSTRATION ‘An Executive Order was issued pursuant to law, granting tax and duty incentives only to businesses and residents within the "secured area" of the Subic Economic Special Zone, and denying said incentives to those who live within the Zone but outside such “secured area". Is the constitutional right to equal protection of the law violated by the Executive Order? [ca ~TiU-etal vs.CA (GR. No. 127410, January 20, 1999) ANSWER: No. Equal protection of the law clause is subject to reasonable classification. Classification, to be valid, must = Rest on substantial distinctions, = Be germane to the purpose of the law, * Not be limited to existing conditions only, = Apply equally to all members of the same class. There are substantial differences between big investors being enticed to the "secured area" and the business operators outside iat Oi. that are in accord with the equal protection clause that does not 21i - EL as require territorial uniformity of laws. The classification ji equally fo al the resident indvidvals and businesses me “secured area’. The residents, being in ike cirounertt Me contributing directly to the achievement of the end purpose on law, are not categorized further. Instead, they are simiay,, 0 ty treated. both in privileges granted and obligations required IY treated c) Rule of uniformity and equity in taxation “The rule of taxation shall be uniform and equitable.” |p Tequires the uniform application and operation, without discrimination Of the tax in every place where the subject of the tax is found. It does ne however, require absolute identity or equality under 3) circumstances, but subject to reasonable classification, . For classification to be valid, the following must concur: «It must be based on substantial distinction « — It must apply both to present and future conditions = It must be germane to the purposes of the law = It must apply equally to all members of the same class RELATED PLDT vs. GLOBE and SMART CASE RA 7926 provides for equality of treatment of the telecommunications industry cannot be a valid basis for PLDT to claim the same exemption ang privilege granted to GLOBE and SMART. PLDT is not similarly situated nor is the same as GLOBE and SMART who provide for handheld phone communication. Being not similarly situated, the same is not of simiz class. Hence, no room for the application of uniformity and equality A progressive system of taxation means that tax laws shall place emphasis on direct taxes rather than on indirect taxes, with ability to pay as the principal criterion. (Article VI, Section 28 of the Constitution). Regressive tax rates refer to tax rates which decreases as the tax base or bracket increases. Regressive tax rates should be differentiated from a regressive system of taxation which exists whe there are more indirect taxes imposed than direct taxes. d) Prohibition against imprisonment for non-payment of “poll tax” No person shall be imprisoned for debt or non-payment : poll tax. The non-imprisonment rule applies to non-paynen Poll tax which is punishable only by a surcharge, but not to we violations like falsification of community tax certificate and sed Payment of other taxes. Poll tax is a tax of fixed amount imp’ 090e) g Chaplet l— Landamental [rincisles ciples on residents within a specific territory regardless of citizenship business OF profession. : Prohibition against impairment of obligation of contracts No law impairing the obligation of contracts shall be passed. The obligation of a contract is impaired when its terms or conditions are changed by law or by a party without the consent of the other, thereby weakening the position or rights of the latter. An example of impairment by law is when a later taxing statute revokes a tax exemption based on a contract. But this only applies when the tax exemption has been granted for a valid If the tax exemption pertains, for instance, toa later statute may revoke such exemption because franchise tax is subject to consideration. franchise tax, a the constitution provides that a amendment, alteration or repeal. Prohibition against infringement of religious freedom No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. The free exercise and enjoyment «of religious profession and worship, without discrimination or preference, shall forever be allowed. No religious test shall be required for the exercise of civil or political rights. The payment of license fees for the distribution and sale of bibles suppresses the constitutional right of free exercise of religion. Prohibition against appropriation of proceeds of taxation for the use, benefit, or support of any church No public money or property shall be appropriated, applied, paid, or employed directly or indirectly, for the use, benefit, or support of any church, denomination, sectarian institution or system of religion, or of any priest, preacher, minister or other religious teacher, or dignitary as such except when such priest, preacher, minister or dignitary is assigned to the armed forces, or to any penal institution, or government orphanage or leprosarium Prohibition against taxation of religious, charitable and educational entities Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, | buildings and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation, This is an exemption from real 230 OPE © EMMANUEL €- Vinee L. S es property tax only. The exemption in favor of Property exclusively for charitable or educational Purposes is not limited «2 property actually indispensable therefore, but extends to faciitie® which are incidental to and reasonably Necessary for ie accomplishment of said purposes. The test of exemption refers ° actual use, not ownership. The term “exclusively” should i. interpreted as “primarily” rather than “solely”. e | ILLUSTRATIVE Mr. Ramos is the owner of a 5,000 Sq. m. parcel of land located int | CASE city limits of Naga City. He leased the Property for P50,000 a a ! religious congregation for a period of fifteen (15) years (2040-2095" ‘The religious congregation built on a 1,000 sq. m. portion a seminan and a chapel that it used in connection with its religious Activities. |g Constructed a ten (10) storey building on the remaining 4,009 4. m. which it rented out to various commercial establishments, the Proceeds of which go to the support of its various Seminaries located throughout the Philippines. These seminaries are organized as non-profit and Ton- stock educational institutions. _ Questions: 1. Is Mr. Ramos exempt from the payment of real property taxes? = Yes, Mr. Ramos is exempt from the payment of real Property taxes on the 1,000 sq. m. portion of his 5,000 Sq. M. lot, as well as on the Temaining 4,000 sq.m. 2. Is the religious congregation exempt from the Payment of real Property taxes? * The religious congregation should pay real property taxes on the 4,000 Sq. m. parcel of land and the 10-storey building because the basis for taxation of real property is use and not Ownership. However, it is exempt from real property taxes on the 1,000 Sq. M. parcel of land as well as on the improvements the chapel and the Seminary. This is so because they are actually, directly and exclusively used for religious purposes. The treatment is different with regard to the 4,000 Sq. m. lot and the 10 storey building which it rented out to commercial establishments. 3. Is the religious Congregation exempt from the payment of income taxes on the rental receipts? = The religious Congregation is subject to income taxation. The constttions tax exemptions refer only to real property that are actually, directly a exclusively used for religious, charitable or educational purposes, and ms the only Constitutionally recognized exemption from taxation of men we those earned by non-profit, non-stock educational institutions whic actually, directly and exclusively used for educational purposes. OAi), Prohibition against taxation of non-stock, non-profit educational institutions. All. revenues and assets of non- stock, non-profit ‘educational institutions Nonprofit non-stock used actually, directly, and exclusively | Educational Institution for educational purposes shall be This exemption covers d duties. However, income, property, donor's tax, exempt from taxes an | they shall be subject to internal revenue | and customs duties tax on income from trade, business or | {astra from Selo in ivit is not e preceding page whic! other activity, the conduct of which is no! | ertains only 10 oy eX) related to the exercise or performance by such educational institution of its KO i educational purposes or functions. Taxation of “proprietary” educational institutions Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law including restrictions on dividends and provisions for investment. Proprietary educational institutions and hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income, except for passive incomes which are subject to different tax rates as discussed in Chapter 4. j) OTHERS 4. Grant of tax exemption No law granting any tax exemption (i.e., -amnesties, condonations and refunds) shall be passed without the concurrence of a majority of all Members of Congress (voting separately). 2. Veto of appropriation, revenue, tariff bills by the President j The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to Which he does not object. An item in a bill refers to particulars, details, the distinct and severable parts of a bill. In budgetary legislation, an item is an individual sum of money dedicated 1, ul y 253 Craster C Landamental lrincisl A / Delegated authority of President to impose tariff rates, impo and export quotas, tonnage and wharfage dues as delegates by Congress through a law (subject to Congressional ‘iri and restrictions) within the framework — of nations, development program. ‘al Non-impairment of the Supreme Court (SC) jurisdiction Congress cannot take away from the Supreme Cour the power given to it by the Constitution as the final arbiter of tax cases. The Supreme Court shall have the followin, powers: Review, revise, reverse, modify, or affirm on apiied or certiorari, as the law or the Rules of Court may Provide. final judgments and orders of lower courts in all cases involving the legality of any tax, impost, assessment, or tol) or any penalty imposed in relation thereto. ‘ REVENUE BILLS shall originate exclusively from the House of Representatives All appropriation, revenue or tariff bills, _ bills authorizing an increase of the public debt, bills of Socal application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments. The Constitution simply means that the initiative for the filing of bills must come from the House of Representatives, on the theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems. Given the power of the Senate to propose amendments, it can propose its own version even wilt respect to bills which are required by the Constitution to originate in the House nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation of its receipt of the bill from the House, so long as action by the Senate as a body is withheld pending receipt of the House bill. (Tolentino v. Secretary of Finance, 235 SCRA 630)CMMEEEEL © a RELATED (TOLENTINO V SECRETARY OF FINANCE, GR No, 115455, Oct 30, CASE 1995). ISSUE: The House of Representatives introduced HB 7000 which envisioned to levy @ tax on various transactions Alter the bill was approved by the House, the bill was sent to the Senate as so required by the Constitution. in the upper house, instead of a deliberation on the House Bill, the Senate introduced SB 6000 which was its own VTE of the same tax The Senate deliberated on this Senate Bill and approved the same. The House Bill and the Senate Bill were then consolidated in the Bicameral Committee. Eventually, the consolidated bill was approved and sent to the President who signed the same. The private sectors affected by the new law questioned the validity of the enactment on the ground that the constitutional provision requiring that all revenue bills should originate from the House of Representatives had been violated Resolve the issue. ANSWER: There is nO violation of the constitutional requirement that all revenue bills should originate from the House of Representatives. Whatis prohibited is for the Senate to enact revenue measures on its own without a bill originating from the House. But once the revenue bill was passed by the House and sent to the Senate, the latter can pass its own version on the same subject matter consonant with the latter's power to propose oF concur with amendments. This follows from the co-equality of the two _ chambers of Congress. _ 6. _ Infringement of press freedom This limitation does not mean that the press is exempt from taxation. Taxation constitutes an infringement of press freedom when it operates as a prior restraint to the exercise of this constitutional right. When the tax is imposed ‘on the receipts or the income of the press it is a valid exercise of the sovereign prerogative. “7. Revocation of Tax Exemptions Tax exemptions, such as “grant of franchise” may be revoked by another law as it is specifically provided in the Constitution that the grant of any franchise is always subject to amendment, alteration, or repeal by the Congress when the common good so requires. O7"yx" Corporation was the recipient of two tax exemptions bot! ILLUSTRATIVE oats one law exempting the company's bond issues from tae | CAS! the other exempting the company from taxes in the operation of its pubjg utilities. The two laws extending the tax exemptions were revoked 4, Congress before their expiry dates. Were the revocations constitutional? ANSWER: YES The exempting statutes are both granted unilaterally by Congress in the exercise of taxing powers. Since taxation is the rule and tax exemption the exception, any tax exemption unilaterally granted can be withdrawn at the pleasure of the taxing authority without violating the Constitution Neither of these were issued by the taxing authority in a contract lawfully entered by it so that their revocation would not constitute an impairment of the obligations of contracts. (Mactan Cebu International Airport ___ Authority v, Marcos, G.R No. 120082, September 11,1996). SITUS OF TAXATION Literally, situs of taxation means “place” of taxation. It is the State or political unit which has jurisdiction to impose a particular tax. The State where the subject to be taxed has a situs may rightfully levy and collect the tax. The situs is necessarily in the State which has jurisdiction or which exercises dominion over the subject in question. FACTORS TO CONSIDER IN DETERMINING THE SITUS OF TAXATION Subject matter (person, property, or activity) Nature of the tax Citizenship Residence of the taxpayer Source of income Place of excise, business or occupation being taxed o\-/03 EXAMPLES OF SITUS OF TAXATION | | Persons Residence of the taxpayer | Real Property Location -eaogD | ; | Personal Property Location; Place of sale or transaction -_sChapter 7 - Fandamental Vrinciples intangible — Domicile of the owner except when the intangible has a situs elsewhere personal Property suchas: ; ‘= Franchise, patents, copyrights, trademarks: Situs is the place or country where such intangibles are exercised = Receivables: Domicile or residence of the debtor = Bank deposits: Location of the depository bank. s+ shares of stock in a domestic corporation of a nonresident alien are taxable in the Philippines because the said shares receive the protection and benefit of the Philippine laws. *** Source of income Income | * — Occupation - where the occupation is engaged in = Transaction - where the transaction took place | Business Place of the business | Gratuitous Residence or citizenship of the taxpayer, or location of the property | Transfer __ ys sat 2 _ _ TAX DISTINGUISHED FROM OTHER TERMS OR IMPOSTS 4. TAX versus TOLL A Toll is a sum of money for the use of something, generally applied to the consideration, which is paid of the use of a road, bridge or the like of a public nature. Demand of proprietorship Demand of sovereignty Paid for the use of another's property Paid for the support of government Amount is based on cost of construction or Amount is based on the necessities of the maintenance of the public improvement State used Maybe imposed by the government or May be imposed only by the State rivate individuals or entities 2. TAX versus PENALTY Penalty is a sanction imposed as a punishment for violation of law or acts deem injuri edi Shite t penalty jurious. The violation of tax may give right to imposition ofChifley € — Landdmental Dring / Primarily aimed at Hsing revenue Designed to regulate conduct May be imposed by the government or May be imposed only by the govemment private individuals or entities 3. TAX versus SPECIAL ASSESSMENT Special assessment is an enforced proportional Contribution from owners of lands for special benefits resulting from public improvements, In Republic v. Bacolod, 17SCRA632, a special assessment is a levy on property which derives some special benefit from the improvement. jts purpose is to finance such improvement, thus accruing only to the owners thereof who, after all, pay the assessment. It is not a tax measure intended to raise revenues for the government because the Proceeds thereof may be devoted to the specific purpose for which the assessment was authorized CHARACTERISTICS OF SPECIAL ASSESSMENT a. Levied only on land b. Nota personal liability of the person assessed c. Based wholly on benefits (not necessary) d. Exceptional both as to time and place 4. TAX versus REVENUE Revenue refers to all the funds or income derived by the government, whether from tax or any other source. | Amour collected —.._____ Amount imposed - 5. TAX versus SUBSIDY ___ Subsidy is a pecuniary aid directly granted the government to an individual or private commercial enterprise deemed beneficial to the pute Subsidy is not a tax although tax may have to be imposed to pay it. 6. TAX versus PERMIT or LICENSE FEE Permit or License is a charge imposed under the police power for Purposes of regulation, .Pe menweeen saa For regulation f police power a = mies to the necessary Generally no limit expenses of regulation Imposed on the right of reward of an Imposed also on persons or property officer for specific services i reward of an officer An enforced contribution assesses by Lena eons “ sovereign authority to defray public fresno expenses For revenue Exercise of taxing power d contribution assesses by ‘lure to pay license fee makes the act or An enforce ! banees lege sovereign authority to defray public expenses TEST IN DETERMINING IF THE IMPOSITION IS A TAX OR LICENSE FEE: «= If the purpose is primarily or if revenue is, at least, one of the real and substantial purposes, then the exaction is a tax. If the purpose is regulatory in nature, it is a license (PAL v. Edu) PAL vs. EDU, 164 SCRA 320 (1988) The Supreme Court ruled that “Fees” may be regarded as taxes even though they also serve as instruments of regulation because taxation may be made as an implementation of the State’s police power. |f the purpose of the “fee” is primarily to raise revenue or if “revenue” is at least one of the real and substantial purposes, then the exaction is properly called tax. In the case provided, the Purpose behind the law requiring owners of vehicles to pay for their registration is mainly to raise revenue or funds for the construction and maintenance of highways and, to a much lesser degree, pay the Operating expenses of the administering agency. Hence, such exaction or fee is classified as tax. 7. ae versus CUSTOMS DUTIES . ‘usto} i i i oa cuny are taxes imposed on goods exported from or imported 31. TAX versus DEBT 2 DEE Based on contract May be paid in kind Assignable/May be the subject of set-off or compensation A person cannot be imprisoned for non- payment of debt (except when it arises from a crime) Draw interest when stipulated or when of prescription default 9. TAX versus TARIFF . 8 DEEN: LT ihe NG Based on law Generally payable in money Cannot generally be assignable/subj set-off or compensation stay Imprisonment is a Sanction for Non. Payment of tax (except poll tax) . Does NOT draw interest ex Cept only wh delinquent Yeon ‘Tariff may be used in one of three (3) senses: a. A book of rates drawn usually in alphabetical order cont names of several kinds of merchandise with the Corresponding duties to be paid for the same; or b. The duties payable on goods imported or exported; or c. The system or principle of imposing duties on the importation (or exportation) of goods. *The term tariff and customs duties are used interchangeably in the Tarif and Customs Code DOUBLE TAXATION In its strict sense, double taxation referred to is direct duplicate taxation. In its broad sense, double taxation is referred to as indirect double taxation. It extends to all cases in which Direct double taxation becomes legally objectionable for being there is a burden of two or more oppressive and 'mpositions. inequitable. It violates the Direct double taxation means concept of ~— equal taxing twice 1. By the same taxing authority, jurisdiction or taxing district For the same purpose Same subject or object Same kind/character of the tax Vikon In the same year or taxing period protection, uniformity and equitableness of taxation in the Constitution.not prohibite' not present. expressly Pro! favored. Se ECE ee / There is indirect double/duplicate taxation (Broad Sense ~ which is d by the constitution) if any of the elements described above is Unlike the United States Constitution, our Constitution does not hibit direct double taxation. However, it is something not Such taxation should, whenever possible, be avoided ang prevented ILLUSTRATIVE CASES: Determine if there is double taxation in the following independent cases: RELATED _VILLANUEVAvs. CITY OF ILOILO (26 SCRA 578 CASE The Supreme Court held that there is no constitutional prohibition against “double taxation” in the Philippines. However, in its strict sense, there is ‘direct’ double taxation (strict sense) when the same property is taxed twice when it should be taxed only once, provided both taxes must be imposed = Onthe 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 period; and . They must be the same kind or character of tax Jimsom, a lessor of a property, pays the following; real estate tax on the premises, a real estate dealer's tax based on rental receipts and income tax on the rentals. Jimson claims that this is double taxation.Decide. Answer: There is no double taxation. DOUBLE TAXATION means taxing for the same tax period the same thing or activity twice, when it should be taxed but once, by the same taxing authority for the same purpose and with the same kind or character of tax. The REAL ESTATE TAX isa tax on property; the REAL ESTATE DEALER'S TAX is a tax on the privilege to engage in business; while the INCOME TAX is a tax on the privilege to earn an income. These taxes are imposed by different taxing authorities and are essentially of different kind and character (Villanueva vs. City of lloilo, 26 SCRA 578) Municipality of Cordon has an ordinance which requires that all stores, restaurants, and other establishments selling liquor should pay a fixed annual fee of P500. Subsequently, the Municipal board proposed an ordinance imposing a sales tax equivalent to 5% of the amount paid for the purchase or consumption of liquor in Stores, restaurants and other. establishments. The Municipal mayor, refused to Sign the ordinance on the ground that it would constitute double taxation. Is the Tefusal of the mayor justified?7 Answer: is not justified. The impositions are of different nature No. The refusal of the Maye : s in the nature of a license fee impose fixed annual fee i and character of police power while the 5% tax on purchase oF Consumption tow i tax imposed through the exercise of taxing powers. Both a license fee si . ax fay be imposed on the same business or occupation, or for selling the ant ie i in violati he rule against double t ‘and this is not in violation of tl t axation sar gna ener de Tabacos de Filipinos v. City of Manila, 8 SCRA 3¢7 [1963)). MEANS OF AVOIDING OR MINIMIZING THE BURDEN OF TAXATION 4. Shiftin: - Siting is the transfer of the burden of a tax by the original payer or the one on whom the tax was assessed or imposed to someone else. Transferred is not the payment of the tax but the burden of the tax. Only indirect taxes may be shifted; direct taxes cannot be shifted. Example: = Manufacturer or producer may shift tax assessed to wholesaler, who in turn shifts it to the retailer, who also shifts it to the final purchaser or consumer. Taxes that may be shifted: « VAT; Percentage taxes; Excise taxes on excisable articles = Ad-valorem taxes that oil companies pay to BIR upon removal of petroleum products from its refinery 2. Transformation An escape from taxation where the producer or manufacturer pays the tax and endeavor to recoup himself by improving his process of production thereby turning out his units of products at a lower cost 3. Tax Evasion Tax evasion is the use by the taxpayer of illegal or fraudulent means, to defeat or lessen the payment of a’tax. It is also known as ‘tax dodging. It is connotes fraud through the use of pretenses or forbidden devices to lessen or defeat taxes. Example: * Deliberate failure to report a taxable income or prop deliberate reduction erly; 34ELEMEN (Based on Commissi Benigno Tax evasion Ct The en a) °) P. TS OF TAX EVASION oner of Internal Revenue, petitioner, vs. The Estate of Toda, Jr, G.R. No. 147188, September 14, 2004) ‘connotes the integration of three factors: d to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; An accompanying state of mind which is described as being "evil," in "bad faith," "willful," or "deliberate and not accidental"; and A course of action or failure of action which is unlawful. Tax Avoidance Tax avoidance is the exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income in order to avoid or reduce tax liability. It is a tax saving device within the means sanctioned by law. It is politely called “tax minimization” and is not punishable by law. This method should be used by the taxpayer in good faith and at arm’s length. ILLUSTRATIVE Pedro's income from leasing his property reaches the maximum rate of tax CASE under the law. He donated one-half of his said property to a non-stock, non-profit educational institution whose income and assets are actually, directly and exclusively used for educational purposes, and therefore qualified for tax exemption under Article XIV, Section 4 (3) of the Constitution and Section 30 (h) of the Tax Code. Having thus transferred a portion of his said asset, Pedro succeeded in paying a lesser tax on the rental income derived from his property under the lower tax bracket. Is there tax avoidance or tax evasion? | ANSWER: There is tax avoidance. Pedro has exploited a fully permissive alternative method to reduce his income tax by transferring part of his rental income to a tax-exempt entity through a donation of one-half of the income producing Property. The donation is likewise exempt from the donor's tax. The donation is the legal means employed to transfer the incidence of income __ {ax on the rental income. 355. Exemption i ns or corporations or A 0 particular perso. ‘“ lo Itis the grant ar cular class from a tax net persons and persons oF COrPOT™” AN in the same State or taxing = re obliged corporations gon mt or privilege; it is freedom from a financial charge to pay. Its an inthe a ‘are subjected (Greenfield v. Meer - 77 Phil which others s a clear provision therefor. Itis or burden to 5 Sets | tion is allowed only ! e an soesatily discriminatory as long as there is a reasonable foundation rational basis. In the construction of tax statutes, exemptions are not favored and are construed against the taxpayer. FOR GRANTING TAX EXEMPTIONS , ; Saran based on contract. In such a case, the public which is ° represented by the government is supposed to receive a full equivalent therefore, i.e. charter of a corporation. b. May be based on some ground of public policy, i.e., to encourage new industries or to foster charitable institutions. Here, the government need not receive any consideration in return for the tax exemption. c. May be based on grounds of reciprocity or to lessen the rigors of international double or multiple taxation NATURE OF POWER TO GRANT TAX EXEMPTION a. National government. The power to grant tax exemptions is an attribute of sovereignty for the power to prescribe who or what Persons or property shall be taxed implies the power to prescribe who or what persons or property shall not be taxed. It is inherent in the exercise of the power to tax that the sovereign State be free to select the subjects of taxation and to grant exemptions therefrom. b. Local governments. Municipal corporations are clothed with no inherent Power to tax or to grant tax exemptions. But the moment the tee ‘o impose a particular tax is granted, they also have the power eon hen therefrom unless forbidden by some provision of Pe Institution or the law. The legislature may delegate its power to grant tax exemptions to the same extent that it may exercise the Power to exempt.t o KINDS OF TAX EXEMPTION sis? i i i As 10 a stitutional. Immunities from taxation which originate from the itution. . con an Immunities from taxation which emanates from legislation. form: “a i epress. Exemptions expressly granted by statute. ie rty, or rights are deemed Implied. When particular persons, property, orr e dee! i Benak as they fall outside the scope of the taxing provision itself. As to extent: ; | 4. Total. Connotes absolute immunity. | ; 2. Partial. One where a collection of a part of the tax is dispensed with. PRINCIPLES GOVERNING TAX EXEMPTIONS Exemptions from taxation are highly disfavored. in law. He who claims an exemption must be able to justify his claim by the clearest grant of t presumed. If organic or statute: law because tax exemptions are no’ ; ambiguous, there is no tax exemption. He who claims exemption should convincingly prove that he is exempted. Therefore, tax exemption must be strictly construed. No law granting any tax exemption shall be passed without the concurrence of majority of all members of Congress. { ILLUSTRATIVE As an incentive for investors, a law was passed giving newly established | CASE companies in certain economic zone exemption from all taxes, duties, | fees, imposts and other charges for a period of three years. ABC Corp was organized and was granted such incentive. In the course of business, ABC Corp. purchased mechanical equipment from XYZ Inc. The latter, in its ordinary business dealings, is subject to a sales tax. XYZ Inc. claims, however, that since it sold the equipment to ABC Corp. which is tax exempt, it should not be liable to pay the sales tax. Is this claim tenable? ANSWER: No. Exemption from taxes is personal in nature and covers only taxes for which the taxpayer-grantee is directly liable. The sales tax is a tax on the seller who is not exempt from taxes. Since XYZ Inc. is directly liable for the sales tax and no tax exemption privilege is ever given to him, its claim that the sale is tax exempt is not tenable. A tax exemption is construed in strictissimi juris and it cannot be permitted to exist upon vague implications.JESTY a intentional overlooking by the State of its authority ; Lor ilty of evasion or violatio It is the general ns otherwise guilty > 1 of to impose penalties on ft partakes of an absolute forgiveness or Waiver law. is to give tax eva a revenue or tax ight to collect. It is a way to g ers, ment of its right . , OS tercleht and are willing to reform a chance to do so. who Tax amnesty involves immunity from all criminal, civil and ax administrative liabilities from non-payment of taxes. 6. Capitalization aateanana bun 3 : ice of income producin italization is the reduction in the selling price o' 9 roan by an amount equal to the capitalized value of future taxes that may be paid by the purchaser. SOURCES OF TAX LAWS 1. Philippine Constitution Tax treaties and international agreements 2. A tax treaty is one of the sources of our law on taxation. The Philippine Government usually enters into tax treaties in order to avoid or minimize the effects of double taxation. A treaty has the force and effect of law. 3. The National Internal Revenue Code (NIRC) or the Tax Code 4. Tariff and Customs Code 5. Local Government Code 6. Local tax ordinances (City or Municipal tax codes) 7. Other Special laws 8. Decisions of the Supreme Court and the Court of Tax Appeals 9. Revenue rules and regulations and administrative tulings and opinions Effectivity of revenue rules and regulations Except when the law otherwise expressly provides, the aforesaid revenue tax issuances shall not begin to be Operative until after due Notice thereof May be fairly assumed. 38purpose of rules and regulations a. TO properly enforce and execute the laws larify and explain the law ; 7 7 7 sie effect the law's general provisions by providing details of administration and procedure Requisites for validity of rules and regulations a. They must not be contrary to law and the Constitution. b. They must be published in the Official Gazette or a newspaper of general circulation. ILLUSTRATIVE Saint Paul College of Makati vs. Hon. Kim Jacinto S. CASE Henares (Civil Case No. 13-1405, 25 July2014) The Regional Trial Court of Makati City held that under the Constitution, all revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence ‘of such institutions, their assets shall be disposed of in the manner provided by law. The exemption, which is given by the Constitution itself, may not be diminished by legislation or by administrative regulation. Applying the foregoing rationale of the provision on tax-exemption, the Court found Revenue Memorandum Order (RMO) No. 20-2013 unconstitutional as it imposes as @ prerequisite to the enjoyment by non- stock, non-profit educational institutions of the privilege of tax exemption under the Constitution both a registration and approval requirement particularly, that they submit an application for tax exemption to the BIR subject to the approval of the Commissioner of Internal Revenue in the form of a tax exemption ruling (TER) which is valid for a period of 3 years and subject to renewal. This requirement of filing a TER is in addition to the filing of an Annual Information Return that they are currently required to submit to the BIR pursuant to Section 4 of DOF Order No. 137-87. The imposition of the aforementioned requisites serves as diminution of the Constitutional privilege, which even the Congress cannot diminish by legislation, and thus more so by the Commissioner of Internal Revenue who merely exercises quasi-legislative function.a _ + Jy Chapter T - Fiudamental Pring Nature of Internal Revenue Laws litical in nature. Tax laws are ¢, revenue laws are not pol | ong tnlemnat in nature, although there are penalties provided for thei and not re purpose of tax laws in imposing penalties for delinquencies ie spal the timely payment of taxes or to punish evasion or neglect of duty io in respect thereof. Construction and Interpretation of Tax Laws or Tax Legislation Public purpose is always presumed. If the law is clear, apply the law in accordance to its plain and simple tenor. A statute will not be construed as imposing a tax unless it does go clearly, expressly and unambiguously. = In case of doubt, it is construed most strongly against the Government, and liberally in favor of the taxpayer. Provisions of a taxing act are not to be extended by implication. ly unless the purpose of the legislature "Tax laws operate prospectivel expressly declared or may be implied to give retrospective effect is from the language used. Tax laws are special laws and Prevail over a general law. RULE WHEN THERE IS DOUBT IN STATUTE OR LAW No person or property is subject to taxation unless within the terms 0” plain import of a taxing statute. In every case of doubt, tax statutes are fonstrued strictly against the government and liberally in favor of the taxpayer (Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue, et al. ae 76, 88). Taxes, being burdens, are not to be presumed beyond i ve enue expressly and clearly declares. (Lincoln Philippine Lie nsurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99)Ohupler 7 - Fandamental Prine ple provisiONS GRANTING TAX EXEMPTIONS re construed strictly against the taxpayer claiming tax tax is unquestionably imposed, a claim of exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken. [Davao Gulf Lumber Corporation; Manila Electric Company v. Vera, (67 SCRA351)]- Such provisions al exemption. When a APPLICATION OF TAX LAWS General rule: ration because the nature and d understood by the taxpayer at completed. Tax laws are prospective in opel of the tax could not be foreseen ant amount he transactions which the law seeks to tax was Ci the time t Exception: While it is not favored, a statute may nevertheless operate retroactively provided it is expressly declared or is clearly the legislative intent. But a tax law should not be given retroactive application when it would be harsh and oppressive which violate the taxpayer's constitutional rights regarding equity and due process (Fernandez vs Fernandez- 99 Phil. 934; CIR vs Filipinas Cia de Seguros — 107 Phil. 1055). : 246 of the Tax Code also provides that any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with Sections 244 and 255 or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers Section Section 24 of Rulings co Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or petereet will be prejudicial to the taxpayers, except in the following es:eo - ff. Cay, Chatter 7 - lardanelal Vines i isstates or omits mater. ‘axpayer deliberately missi er a) peers ee turn or any document required of him ’Y the Bureau of Internal Revenue; thered by the Bur the facts subsequently gat Pau of ») nee | Revenue are materially different trom the facts, which the ruling is based; or c) Where the taxpayer acted in bad faith. TAXPAYER’S SUIT It is one brought or filed by a taxpayer arguing the validity of a tax statute and its enactment or the constitutionality of its alleged public Purpose, It is a case where the act complained of directly involves the illegal disbursement of public funds derived from taxation. Taxpayers have locus standi to question the validity of tax measures or illegal expenditures of Public money. In such cases, they are parties in interest who will be prejudiced or benefited by the avails of the suit. The general rule is that not only persons individually affected but also taxpayers have sufficient interest Of preventing the illegal expenditures of money raised by taxation. They may, therefore, question in the proper court the constitutionality of statutes requiring the expenditure of public funds. But a taxpayer is not relieved from the obligation of paying a tax because of his belief that it is being misappropriated by certain officials, for otherwise, collection of taxes would be hampered and this may result in the paralyzation of important governmental functions. In Lozada vs. Comelec, “It is only when an act complained of which may include a legislative enactment of a statute, involves the illegal expenditure of public Money that the so-called taxpayers’ suit may be allowed.