TAXATION 1.

Definition of Taxation Answer: It is an inherent power by which the sovereign; through its law making power, raises income to defray the necessary expenses of government, by appointing the cost among those who, in some measure are privileged to enjoy its benefits and, therefore, must bear its burdens. Simply stated, taxations is the power inherent in every sovereign State to impose a charge or burden upon persons, properties, or rights to raise revenues for the use and support of the government to enable it to discharge its appropriate functions. 2. Theory and Basis of Taxation Answer: The theories underlying the power of taxation are the following: a. Lifeblood theory (necessity theory) The phrase expresses the underlying basis of taxation which is governmental necessity, for indeed, without taxation, a government can neither exist nor endure. Taxation is a principal attribute of sovereignty. The exercise of the taxing power derives its source from the very existence of the State whose social contract with its citizens obliges it to promote public interest and the public good. In the case of Valley Trading Co. v. CFI G.R. No. 495529, March 31, 1989, the Supreme Court ruled that the damages that may be caused a taxpayer by being made to pay the taxes cannot be said to be as irreparable as it would negate the Government ability to collect taxes. b. Benefits-protection theory (Doctrine of Symbiotic Relationship) It involves the power of the State to demand and receive taxes based on the reciprocal duties of support and protection between the State and its citizen. Every person who is able must contribute his share in the burden of running the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their material and moral values. (CIR v. Algue, G.R. No. L-28896, February 17, 1988) Special benefits to taxpayers are not required. A person cannot object to or resist the payment of taxes solely because no personal benefit to him can be pointed out arising from the tax. (Lorenzo v. Posadas, 64 Phil. 353) It is a legal duty on the part of the citizen to pay taxes to support the Government. On the other hand, it is a reciprocal duty on the part of the Government to provide protection and benefits.

3. Non-Revenue Objectives of Taxation Cases Involved: o Lutz v. Araneta, Dec. 22, 1955 (Taxation used as an implement of Police Power) o Commissioner of Internal Revenue v. Central Luzon Drug., April 15, 2005 (Taxation used as an implement of Eminent Domain) Answer: (PRREP) a. Promotion of general welfare taxation may be used as an implement of police power to promote the general welfare of the people. b. Regulation of activities/industries c. Reduction of Social inequality a progressive system of taxation prevents the undue concentration of wealth in the hands of few individuals. Progressivity is based on the principle that those who are able to pay more should shoulder the bigger portion of the tax burden. d. Encourage economic growth the grant of incentives or exemptions encourage investment thereby stimulating economic activity. e. Protectionism In case of foreign importations, protective tariffs and customs are imposed to protect local industries. 4. Nature of the Power of Taxation Answer: The nature of the power to tax is two-fold: 1. inherent and 2. legislative. Inherent, why? It is inherent in character because its exercise is guaranteed by the mere existence of the state. It could be exercised even in the absence of a constitutional grant. 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 government (Pepsi-Cola Bottling Co. of the Philippines V. Municipality of Tanauan, Leyte, G.R. No. L-31156, February 27, 1976). No sovereign state can continue to exist without the means to pay its expenses; and that for those means, it has the right to compel all citizens and property within its limits to contribute, hence, the emergence of the power to tax. (51 Am. Jur. 42) The moment a state exists, the power to tax automatically exists. Basis: The Life-blood Doctrine. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of ones earned

income to the taxing authorities, every person who is able must contribute his share in the running of the government. (CIR v. Algue, G.R. No. L-28896, February 17, 1988) Manifestations: 1. Imposition even in the absence of constitutional grant 2. States right to select objects and subjects of taxation 3. No injunction to enjoin collection of taxes. 4. Taxes could not be the subject of compensation and set-off. 5. A valid tax may result in destruction of property. Legislative, Why? It is legislative in nature since it involves promulgation of laws. It is the Legislature which determines the coverage, object, nature, extent and situs of the tax to be imposed. May it be deligated? No, since it is essentially a legislative function. This is based upon the principle that taxes are a grant of the people who are taxed, and the grant must be made by the immediate representatives of the people. And where the people have laid the power, there it must be exercised. (Cooley) XPNs: 1. To local governments in respect of matters of local concern to be exercised by the local legislative bodies thereof. (Sec. 5, Art. X, 1987 Constitution) 2. When allowed by the Constitution. Note: The Congress may, by law, authorize the President to fix within specified limits, 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. (Sec. 28 [2], Art. VI, 1987 Constitution). 3. When the delegation relates merely to administrative implementation that may call for some degree of discretionary powers under a set of sufficient standard expressed by law (Cervantes v. Auditor General, G.R. No. L-4043, May 26, 1952) or implied from the policy and purpose of the act. (Maceda v. Macaraig, G.R. No. 88291, June 8, 1993) Note: Technically, this does not amount to a delegation of the power to tax because the questions which should be determined by Congress are already answered by Congress before the tax law leaves Congress.

What is the scope of legislative power in taxation? The following are the scope of legislative power in taxation: 1. The determination of: [SAP-MAKS] a. Subjects of taxation (persons, property, occupation, excises or privileges to be taxed, provided they are within the taxing jurisdiction) b. Amount or Rate of tax c. Purposes for which taxes shall be levied provided they are public purposes

d. Method of collection Note: This is not exclusive to Congress. e. Apportionment of the tax (whether the tax shall be of general application or limited to a particular locality, or partly general and partly local) f. Kind of tax to be collected g. Situs of taxation 2. The grant tax exemptions and condonations. 3. The power to specify or provide for administrative as well as judicial remedies (Philippines Petroleum Corporation v. Municipality of Pililla, G.R. No.85318, June 3, 1991). Is taxation subject to judicial review? Courts have no power to inquire or interfere in the wisdom, objective, motive or expediency in the passage of a tax law, this being purely legislative in character. (Tolentino v. Sec. of Finance, G.R. No.115455, August 25, 1994) XPN: The courts may examine legislative acts if they violate applicable constitutional limitations or restrictions. 5. Basic principles of a Sound Tax System Answer: FAT 1. Fiscal adequacy a. Revenue raised must be sufficient to meet government/public expenditures and other public needs. (Chavez v. Ongpin, G.R. No. 76778, June 6, 1990) 2. Administrative feasibility a. Tax laws must be clear and concise. b. Capable of effective and efficient enforcement. c. Convenient as to time and manner of payment; must not obstruct business growth and economic development. 3. Theoretical justice a. Must take into consideration the taxpayers ability to pay (Ability to Pay Theory). b. Art. VI, Sec. 28(1), 1987 Constitution mandates that the rule on taxation must be uniform and equitable and that the State must evolve a progressive system of taxation. 6. What are taxes? Answer: These are enforced proportional contributions from persons and properties, levied by the State by virtue of its sovereignty for the support of the government and for all its public needs. (1Cooley 62). 7. Characteristics of taxes Answer:

SLEP4 1. It is levied by the State which has jurisdiction over the person or property 2. It is levied by the State through its Law-making body 3. It is an Enforced contribution not dependent on the will of the person taxed. 4. It is generally Payable in money 5. It is Proportionate in character 6. It is levied on Persons and property 7. It is levied for a Public purpose. Characteristics of Taxation CUPS 1. Comprehensive - It covers persons, businesses, activities, professions, rights and privileges. 2. Unlimited - It is so unlimited in force and searching in extent that courts scarcely venture to declare that it is subject to any restrictions, except those that such rests in the discretion of the authority which exercises it. (Tio v. Videogram Regulatory Board, G.R. No. 75697, June 18, 1987) 3. Plenary - It is complete. Under the NIRC, the BIR may avail of certain remedies to ensure the collection of taxes. 4. Supreme - It is supreme insofar as the selection of the subject 8. Distinction of taxes from: a. Toll Fee TAX TOLL DEFINITION An enforced proportional contribution A consideration paid for the use of a road, from persons and property for public bridge or the like, of a public nature. rrupose/s. BASIS Demand of sovereignty Demand of proprietorship AMOUNT Generally the amount is unlimited Amount is limited to the cost and maintenance of public improvement PURPOSE For the support of government For the use of anothers property AUTHORITY May be imposed by the state May be imposed by private individuals or entities b. Penalty PENALTY DEFINITION An enforced proportional contribution Sanction imposed as a punishment for a from persons and property for public violation of the law or acts deemed purpose/s. injurious; violation of tax laws may give rise to imposition of penalty. PURPOSE TAX

To raise revenue Maybe imposed by the State only

To regulate conduct AUTHORITY Maybe imposed by private entities

c. Special assessment or special levy (Sec. 240-245 of the LGC) o Apostolic v. City Treasury of Baguio (in relation to Sec. 240 234 of the LGC) TOLL SPECIAL ASSESSMENT NATURE An enforced proportional An enforce proportional contributions contribution from persons and from owners of lands especially those property for public purpose/s. who are peculiarly benefited by public improvements. SUBJECT Imposed on persons, property rights Levied only on land or transactions PERSON LIABLE A personal liability of the taxpayer Not a personal liability of the person assessed PURPOSE For the support of the government Contribution to the most of public improvement SCOPE Regular exaction Exceptional as to time and locality
NOTE: SECTION 240. Special Levy by Local Government Units. - A province, city or municipality may a special levy on the lands comprised within its territorial jurisdiction specially benefited by public works projects or improvements funded by the local government unit concerned: Provided, however, That the special levy shall not exceed sixty percent (60%) of the actual cost of such projects and improvements, including the costs of acquiring land and such other real property in connection therewith: Provided, further, That the special levy shall not apply to lands exempt from basic real property tax and the remainder of the land portions of which have been donated to the local government unit concerned for the construction of such projects or improvements. SECTION 241. Ordinance Imposing a Special Levy. - A tax ordinance imposing a special levy shall describe with reasonable accuracy the nature, extent, and location of the public works projects or improvements to be undertaken, state the estimated cost thereof, specify the metes and bounds by monuments and lines and the number of annual installments for the payment of the special levy which in no case shall be less than five (5) nor more than ten (10) years. The Sanggunian concerned shall not be obliged, in the apportionment and computation of the special levy, to establish a uniform percentage of all lands subject to the payment of the tax for the entire district, but it may fix different rates for different parts or sections thereof, depending on whether such land is more or less benefited by the proposed work. SECTION 242. Publication of Proposed Ordinance Imposing a Special Levy. - Before the of an imposing a special levy, the Sanggunian concerned shall conduct a public hearing thereon; notify in writing the owners of the real property to be affected or the persons having legal interest therein as to the date and place thereof and afford the latter the opportunity to express their positions or objections relative to the proposed ordinance. SECTION 243. Fixing the Amount of Special Levy. - The special levy authorized herein shall be apportioned, computed, and assessed according to the assessed valuation of the lands affected as shown

by the books of the assessor concerned, or its current assessed value as fixed by said assessor if the property does not appear of record in his books. Upon the effectivity of the ordinance imposing special levy, the assessor concerned shall forthwith proceed to determine the annual amount of special levy assessed against each parcel of land comprised within the area especially benefited and shall send to each landowner a written notice thereof by mail, personal service or publication in appropriate cases. SECTION 244. Taxpayers' Remedies Against Special Levy. - Any owner of real property affected a special levy or any person having a legal interest therein may, upon receipt of the written notice of assessment of the special levy, avail of the remedies provided for in Chapter 3, Title Two, Book II of this Code. SECTION 245. Accrual of Special Levy. -The special levy shall accrue on the first day of the next following the effectivity of the ordinance imposing such levy.

d. License Fee o Phil. Airline v. _______ (di ko narinig! XD) 164 SCRA 320 TAX LICENSE FEE PURPOSE Imposed to raise revenue For regulation and control BASIS Collected under the power of taxation Collected under the police power AMOUNT Generally, amount is unlimited Limited to the necessary expenses of regulation and control SUBJECT Imposed on persons, property, rights Imposed in the exercise of a right or or transaction privilege EFFECT OF NON-PAYMENT Non-payment does not make the Non-payment makes the business business illegal illegal TIME OF PAYMENT Normally paid after the start of Normally paid before the business commencement of the business e. Debt o o

Domingo v. Carlitos, Jun 29, 1963 Caltex v. CA 208 SCRA 726 TAX

DEBT BASIS Obligation created by law Obligation based on contract, express or implied ASSIGNABILITY Not assignable Assignable MODE OF PAYMENT Payable in money or in kind Payable in kind or in money SET-OFF Not subject to set-off Subject to set-off EFFECT OF NON-PAYMENT May result to imprisonment No imprisonment (except when debt

raises from crime) INTEREST Bears interest only if delinquent Interest depends upon the written stipulation of the parties PRESCRIPTION Governed by the special prescriptive Governed by the ordinary periods of periods provided for the NIRC prescription 9. Classification of Taxes as to: a. Subject matter Personal/Poll or Capitation tax A fixed amount imposed upon all persons, or upon all persons of a certain class, residents within a specified territory, without regard to their property or occupation. E.g. Community tax Property tax 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 Property tax Excise / Privilege tax a charge upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation. An excise tax is a tax that does not fall as personal or property. E.g. Income tax, Estate tax, Donors tax, VAT b. Who bears the burden? Direct one that is demanded from the person who also shoulders the burden of tax. E.g. Income tax, Estate tax and Donors tax Indirect one which is shifted by the taxpayer to someone else. E.g. VAT and Other percentage taxes c. Determination of amount Specific tax of a fixed amount imposed by the head or number, or by some standard of weight or measurement. E.g. Excise tax on cigar, cigarettes and liquors Ad valorem tax based on the value of the property with respect to which the tax is assessed. It requires the intervention of assessors or appraisers to estimate the value of such property before the amount due can be determined. E.g. VAT, Income tax, Donors tax and Estate tax d. Purpose General/Fiscal or Revenue tax imposed solely for the general purpose of the government. E.g. Income tax and Donors tax

Special / Regulatory or Sumptuary tax levied for specific purpose, i.e. to achieve some social or economic ends E.g. Tariff and certain duties on imports

e. Scope of authority National tax Tax levied by the National Government. E.g. Income tax, Estate tax, Donors tax, Value added tax, Other Percentage taxes and Documentary Stamp taxes Local or Municipal A tax levied by a local government. E.g. Real Estate tax and Community tax f. Proportionality or Graduation Progressive A tax rate which increases as the tax base or bracket increases. E.g. Income tax, Estate tax and Donors tax Regressive The tax rate decreases as the tax base or bracket increases. Proportional A tax of a fixed percentage of amount of the base (value of the property, or amount of gross receipts etc.) E.g. VAT and Other Percentage taxes

g. Tax Base Gross Taxation does not admit of any deductions. Net Taxation admits of deductions in arriving at the taxable base. h. Regressive and progressive taxation 10. Limitations on the power to tax a. Inherent limitation Answer: Inherent limitations proceeds from the very nature of the taxing power itself. They are otherwise known as elements or characteristics of taxation. [SPINE] a. Situs or territoriality b. Public purpose c. International comity d. Non-delegability of the taxing power itself e. Exemption of the Government
Note: A violation of the inherent limitations constitutes taking without due process of law. (Vitug and Acosta, Tax Law and Jurisprudence, p.4, citing Pepsi Cola

b. Constitutional limitation o Direct Art. 3, Sec. 20 of the Phil. Consti. Art. 6, Sec. 28, Par. 1 of the Phil. Consti. Art. 6, Sec. 28, Par. 2 of the Phil. Consti.

Art. 6, Sec. 28, Par. 3 of the Phil. Consti. Art. 6, Sec. 28, Par. 4 of the Phil. Consti. Art. 14, Sec. 4, Par. 3-4 of the Phil. Consti. Art. 6, Sec. 29, Par. 3 of the Phil. Consti. Art. 6, Sec. 22, Par. 2 of the Phil. Consti. Art. 8, Sec. 5, Par. 2 of the Phil. Consti. Art. 6, Sec. 24 of the Phil. Consti. Art. 10, Sec. 5-6 of the Phil. Consti.

Indirect Art. 3, Sec. 1 of the Phil. Consti. Art. 3, Sec. 5 of the Phil. Consti. Art. 3, Sec. 4 of the Phil. Consti. Art. 6, Sec. 29, Par. 2 of the Phil. Consti. Art. 3, Sec. 10 of the Phil. Consti.

11. Territoriality What is territoriality/situs? It is the place or authority that has the right to impose and collect taxes. (Commissioner v. Marubeni, G.R. No. 137377, Dec.18, 2001)

Explain territoriality as a limitation on the power to tax. GR: The taxing power of a country is limited to persons and property within and subject to its jurisdiction. Reasons: 1. Taxation is an act of sovereignty which could only be exercised within a countrys territorial limits. 2. This is based on the theory that taxes are paid for the protection and services provided by the taxing authority which could not be provided outside the territorial boundaries of the taxing State. XPNs: 1. Where tax laws operate outside territorial jurisdiction i.e. Taxation of resident citizens on their incomes derived abroad. 2. Where tax laws do not operate within the territorial jurisdiction of the State. a. When exempted by treaty obligations; or b. When exempted

What are the factors that determine the situs of taxation? Answer: (RCNSS) o Residence of the taxpayer o Citizenship of the taxpayer o Nature of the tax o Subject matter of the tax o Source of income OBJECT INCOME TAX Nationality Place Residence SITUS Upon sources of income derived within and without the Philippines. Upon sources of income derived within the Philippines Upon sources of income derived within the Philippines PROPERTY TAX Real Property Tax Location of the Property (lex rei sitae/lex situs) Rationale: 1. The taxing authority has control because of the stationary and fixed character of the property. 2. The place where the real property is situated gives protection to the real property; hence the property or its owner should support the government of that place. Personal Property Domicile of the owner (mobilia sequuntur personam) Rationale: 1. The place where the tangible personal property is found gives its protection. Tangible Personal Property Intangible Personal Property Where the property is physically located although the owner resides in another jurisdiction GR: Situs of intangible personal property is the domicile of the owner pursuant of the mobilia sequntur personam. XPN: 1. When the property has acquired a business situs in another jurisdiction; 2. When an express provision of the statute provide for another rule.

EXCISE TAX / DONORS TAX / ESTATE TAX

Nationality Place Residence BUSINESS TAX

Taxed upon their properties wherever situated. Taxed on properties situated within the Philippines. Taxed upon their properties wherever situated. Place where the act/business is performed or occupation is engaged in. Where the goods, property or service are destined, used or consumed.

VAT

Note: what is meant by the doctrine of mobilia sequuntur personam? It means, movable follows the person/owner. However, a tangible property may acquire situs elsewhere provided it has a definite location there with some degree of permanency. What is the situs of taxation in electronic taxation? Answer: As provided for under Section 23 of the E-Commerce Act (R.A. 8792), an electronic data message or electronic document is deemed to be dispatched at the place where the originator has its place of business and received at the place where the addressee has its place of business. This rules shall also apply to determine the tax situs of such transaction. What are the remedies available against multiplicity of situs? Answer: Tax laws and treaties with other states may: a. Exempt foreign nationals from local taxation and local nations from foreign taxation under the principle of reciprocity; b. Credit foreign taxes paid from local taxes due; c. Allow foreign taxes as deduction from gross income; or d. Reduce the Philippine income tax rate. What is the situs of income taxation? Answer: a. Individual Income Taxation Residence RA, NRC Place NRA, NRC Citizenship - RC b. Corporate Income Taxation Residence - RFC Place - NRFC Nationality DC Discuss the rule on situs of taxation with respect to the imposition of the estate tax on property left behind by a non-resident decedent. Answer:

The value of the gross estate of a non-resident decedent who is a Filipino citizen at the time of his death shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated to the extent of the interest therein of the decedent at the time of his death (Sec. 85 [A], NIRC). These properties shall have a situs of taxation in the Philippines hence subject to Philippines estate taxes. On the other hand, in the case of a non-resident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines to the extent of the interest therein of the decedent at the time of his death shall be included in his taxable estate. Provided, that, with respect to intangible personal property, we apply the rule of reciprocity. What is the situs of business tax? SITUATION RECOGNITION OF SALE PAYMENT OF TAX With branch or sales office or All sales made in the locality The tax shall be payable to the warehouse where the branch or office or city or municipality where the warehouse is located same is located. Where there is no branch or The municipality where the sale The tax shall accrue to the city or sales office or warehouse or transaction is made. municipality where said principal The sale shall be recorded in the office is located. principal office along with the sales made by said principal office Branch office a fixed place in a locality which conducts operations of the business as an extension of the principal office. Principal office head or main office of the business appearing in pertinent documents submitted to the SEC and specifically mentioned in the Articles of Incorporation. Where there is a factory, project All sales shall be recorded in the Of all sales recorded in the office, plant or plantation in principal office. principal office: pursuit of business 1. 30% taxable to the city or municipality where the principal If plantation is at a place other All sales shall be recorded in the office is located. 2. 70% taxable to the city or than where the factory is principal office municipality where the factory, located plant, etc. is located. If manufacturer, contractor, etc. All sales shall be recorded in the The 70% (above) shall be divided has two or more factories, principal office. as follows: project offices, plants or 1. 60% to the city or municipality plantations located in different where the factory is. localities. 2. 40% to the city or municipality where the plantation is located. The 70% shall be prorated among the localities where such factories, project offices, plants and plantations are located

based on their respective volumes of production.

Situs according to Jurisprudence: Sales Tax With respect to sale, it is the place of the consummation of the sale, associated with the delivery of the things which are the subject matter of the contract that determines the situs of the contract for purposes of taxation, and not merely the place of the perfection of the contract. (Shell Co., Inc. v. Municipality of Sipocot, Camarines Sur, 105 Phil 1263) SEC. 104. Definitions. - For purposes of this Title, the terms 'gross estate' and 'gifts' include real and personal property, whether tangible or intangible, or mixed, wherever situated: Provided, however, That where the decedent or donor was a nonresident alien at the time of his death or donation, as the case may be, his real and personal property so transferred but which are situated outside the Philippines shall not be included as part of his 'gross estate' or 'gross gift': Provided, further, That franchise which must be exercised in the Philippines; shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of the business of which is located in the Philippines; shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; shares or rights in any partnership, business or industry established in the Philippines, shall be considered as situated in the Philippines: Provided, still further, that no tax shall be collected under this Title in respect of intangible personal property: (a) if the decedent at the time of his death or the donor at the time of the donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. The term 'deficiency' means: (a) the amount by which tax imposed by this Chapter exceeds the amount shown as the tax by the donor upon his return; but the amount so shown on the return shall first be increased by the amount previously assessed (or Collected without assessment) as a deficiency, and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax, or (b) if no amount is shown as the tax by the donor, then the amount by which the tax exceeds the amounts previously assessed, (or collected without assessment) as a deficiency, but such amounts previously assessed, or collected without assessment, shall first be decreased by the amount previously abated, refunded or otherwise repaid in respect of such tax 12. What are the basic forms of escape from taxation? Answer: a. Shifting

b. c. d. e. f.

Capitalization Avoidance Transformation Evasion Exemption

SHIFTING the transfer of the burden of tax by the original payer or the one on whom the tax was assessed or imposed to another or someone else without violating the law. What are the kinds of shifting? a. Forward shifting when the burden of tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer. b. Backward shifting when the burden is transferred from the consumer through the factors of distribution to the factors of production. Note: it applies to indirect taxes since the law allows the burden of the tax to be transferred. In case of a direct tax, the shifting of burden can only be via a contractual provision. Examples: Examples of taxes when shifting may apply are VAT, percentage tax, excise tax on excisable articles, ad valorem tax that oil company pays to BIR upon removal of petroleum products from its refinery. What is incidence of taxation? Answer: The incidence of taxation is upon the person statutorily liable to pay the tax. Note: Where the burden of the tax is shifted to the purchaser, the amount passed on to it is no longer a tax but becomes an added cost on the goods purchased, which constitutes a part of the purchase price. Distinguish tax avoidance from tax evasion? TAX AVOIDANCE Legal and not subject to criminal penalty Minimization of taxes

TAX EVASION VALIDITY Illegal and subject to criminal penalty EFFECT Almost always result in absence of tax payment.

What is tax avoidance? Answer: It is the scheme where the taxpayer uses legally permissible alternative method of assessing taxable property or income, in order to avoid or reduce tax liability. Note: Also known as Tax Minimization, tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. (Commissioner v. Estate of Benigno Toda Jr., G.R. No. 30554, Feb 28, 1983) What is tax evasion? Answer: It is the scheme where the taxpayer uses illegal or fraudulent means to defeat or lessen payment of a tax. Note: Tax evasion is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities (Commissioner v. Estate of Benigno Toda Jr. G.R. No. 30554, Feb. 28, 1983). Tax evasion is sometimes referred to as Tax Dodging.

What are the elements to be considered in determining that there is tax evasion? Answer: ESC 1. End to be achieved, i.e., payment of less than that known by the taxpayer to be legally due, or nonpayment of tax when it is shown that the tax is due; 2. Accompanying State of mind which is described as being evil, in bad faith, willful or deliberate and not accidental; and 3. Course of action which is unlawful. What may be used as evidence to prove tax evasion? Answer: 1. Failure of taxpayer to declare for taxation purposes his true and actual income derived from business for two (2) consecutive years; (Republic v. Gonzales, G.R. No. L-17744, April 30, 1965) 2. Substantial under declaration of income in the income tax return for four (4) consecutive years coupled intentional overstatement of deductions. (Perez v. CTA, G.R. No. L-10507, May 30, 1958) CIC entered into an alleged simulated sale of a 16-storey commercial building. CIC authorized Benigno Toda, Jr., its President to sell the Cibeles Building and the two parcels of land on which the building stands. Toda purportedly sold the property for P100 million to Altonaga, who, in turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million evidenced by Deeds of Absolute Sale notarized on the same day by the same notary public. For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million. The BIR sent an assessed deficiency income tax arising from the sale alleging that CIC evaded the payment of higher corporate income tax of 35% with regard to the resulting gain. Is the scheme perpetuated by Toda a case of tax evasion or tax avoidance? Answer: It is a tax evasion scheme. The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning (one way of tax avoidance). Such scheme is tainted with fraud. In the case, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax and not the 35% corporate income tax. (Commissioner v. Benigno Toda Jr., GR No. 147188, Sept. 14, 2004) What is capitalization? Answer: It is the reduction in the price of the taxed object equal to the capitalized value of future taxes which the purchaser expects to be called upon to pay. What is transformation? Answer: It is the scheme where the manufacturer or producer upon whom the tax has been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and endeavors to recoup himself by improving his process of production, thereby turning out his units of products at a lower cost. What is meant by tax exemption? Answer:

It is the grant of immunity, express or implied, to particular persons or corporations, from a tax upon property or an excise tax which persons or corporations generally within the same taxing districts are obliged to pay.

What are the kinds of tax exemption? Answer: AS TO BASIS 1. Constitutional Immunities from taxation which originate from the Constitution. 2. Statutory Those which emanate from legislation. 3. Contractual Agreed to by the taxing authority in contracts lawfully entered into by them under enabling laws. 4. Treaty 5. Licensing ordinance AS TO FORM 1. Express Expressly granted by organic or statute law. 2. Implied When particular persons, properties or excises are deemed exempt as they fall outside the scope of the taxing provision. AS TO EXTENT 1. Total Connotes absolute immunity. 2. Partial One where a collection of a part of the tax is dispensed with. AS TO OBJECT 1. Personal Granted directly in favor of certain persons. 2. Impersonal Granted directly in favor of a certain class of property.

What is value-added tax (VAT)? Answer: It is an indirect tax and the amount of tax may, by law, be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. (Sec. 105, NIRC) It is a tax on the estimated market value added to a product or material at each stage of its manufacture or distribution, ultimately passed on to the consumer. What is the nature of VAT? Answer: It is an indirect tax. VAT is a tax on consumption levied on the sale, barter, exchange, or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines The seller is the one statutorily liable for the payment of the tax but the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. However, in the case of importation, the importer is the one liable for the VAT. (Sec 4.105-2 RR 16-2005) Explain VAT as an indirect tax.

Answer: The amount of tax paid on the goods, properties or services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee. Unlike a direct tax, such as the income tax, which primarily taxes an individuals ability to pay based on his income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions involving the same. The VAT, thus, forms a substantial portion of consumer expenditures. Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the burden of the tax. As earlier pointed out, the amount of tax paid may be shifted or passed on by the seller to the buyer. What is transferred in such instances is not the liability for the tax, but the tax burden. In adding or including the VAT due to the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax. Stated differently, a seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or consumer of such goods or services who, although not directly and legally liable for the payment thereof, ultimately bears the burden of the tax. (Contex v. CIR, GR No. 151135, July 2, 2004) What is the effect of VAT being an indirect tax on exemptions? Answer: If a special law merely exempts a party as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase transaction is not exempt. It is because VAT is a tax on consumption, the amount of which may be shifted or passed on by the seller to the purchaser of the goods, properties or services. (CIR v. Seagate Technology, G.R. No. 153866, Feb. 11, 2005) What are the characteristics of VAT? Answer: a. It is an indirect tax where tax shifting is always presumed b. It is consumption-based. c. It is imposed on the value-added in each stage of distribution. d. It is a credit-invoice method value-added tax. e. It is not a cascading tax. 13. INDIRECT LIMITATION Due Process clause (Sec. 1 Art. III of the Constitution) o No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws. Equal Protection Clause (Sec. 1 Art. III of the Constitution) o No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws. Freedom of the Press (Sec. 4 Art. III of the Constitution) o No law shall be passed abridging the freedom of speech, of expression, or of the press, or the right of the people peaceably to assemble and petition the government for redress of grievances. Religious Freedom (Sec. 5 Art. III of the Constitution) o 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. Eminent Domain (Sec. 9 Art. III of the Constitution) o Private property shall not be taken for public use without just compensation. Non-impairment clause (Sec. 10 Art. III of the Constitution) o No law impairing the obligations of contracts shall be passed. Law-making process (Sec. 26 Art. VI of the Constitution) o (1)Every bill passed by the Congress shall embrace only one subject which shall be expressed in the title thereof. (2)No bill passed by either House shall become a law unless it has passed three readings on separate days, and printed copies thereof in its final form have been distributed to its Members three days before its passage, except when the President certifies to the necessity of its immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, n amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and nays entered in the Journal. Presidential power to grant reprieves, commutations, pardons and remits fines and forfeitures after conviction by final judgment. (Sec. 19, Art. VII of the Constitution) o Except in cases of impeachment, or as otherwise provided in this Constitution, the President may grant reprieves, commutations, and pardons, and remit fines and forfeitures, after conviction by final judgment.

14. Define double taxation. Answer: Otherwise described as direct duplicate taxation, the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and the taxes must be of the same kind or character. (City of Manila v. Coca Cola Bottlers Philippines, G.R. No. 181845, Aug. 4, 2009) What are the kinds of double taxation? Answer: 1. As to validity a. Direct Double Taxation the objectionable or prohibited sense since it violates the equal protection clause of the Constitution. b. Indirect Double Taxation not repugnant to the Constitution. o This is allowed if the taxes are of different nature or character imposed by different taxing authorities. o Generally, it extends to all cases when one or more elements of direct taxation are not present. 2. As to scope c. Domestic Double Taxation - when the taxes are imposed by the local and national government within the same state. d. International Double Taxation occurs when there is an imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. What are the elements of double taxation?

Answer: 1. The same: a. Object or property is taxed twice b. By the same taxing authority c. For the same taxing purpose d. Within the same tax period 2. Taxing all the objects or property for the first time without taxing all of them for the second time. Is double taxation prohibited? Answer: No, there is no Constitutional prohibition against double taxation. However, direct double taxation is unconstitutional as it results in violation of substantive due process and equal protection clause. 15. What is the nature of tax laws? Answer: Tax laws are: a. Not political b. Civil in nature c. Not penal in character 16. How is tax laws construed? Answer: 1. Generally, no person or property is subject to tax unless within the terms or plain import of a taxing statute. 2. Tax laws are generally prospective in nature. 3. Where the language is clear and categorical, the words employed are to be given their ordinary meaning. 4. When there is doubt, tax laws are strictly construed against the Government and liberally in favor of the taxpayer. Note: Taxes, being burdens, are not to be presumed beyond what the statute expressly and clearly provides. 5. Provisions of the taxing act are not to be extended by implication. 6. Tax laws are special laws and prevail over general laws. 17. How are tax rules and regulations construed? Answer: The construction placed by the office charged with implementing and enforcing the provisions of a Code should be given controlling weight unless such interpretation is clearly erroneous.

CASES ASSIGNED: CIR v. BRITISH OVERSEAS AIRWAYS CORPORATION FACTS: British Overseas Airways Corp (BOAC) is a 100% British Government-owned corporation engaged in international airline business and is a member of the Interline Air Transport Association, and thus, it

operates air transportation services and sells transportation tickets over the routes of the other airline members. From 1959 to 1972, BOAC had no landing rights for traffic purposes in the Philippines and thus, did not carry passengers and/or cargo to or from the Philippines but maintained a general sales agent in the Philippines - Warner Barnes & Co. Ltd. and later, Qantas Airways - which was responsible for selling BOAC tickets covering passengers and cargoes. The Commissioner of Internal Revenue assessed deficiency income taxes against BOAC. ISSUE: Whether the revenue derived by BOAC from ticket sales in the Philippines, constitute income of BOAC from Philippine sources, and accordingly taxable. HELD: The source of an income is the property, activity, or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. Herein, the sale of tickets in the Philippines is the activity that produced the income. The tickets exchanged hands here and payments for fares were also made here in the Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government. PD 68, in relation to PD 1355, ensures that international airlines are taxed on their income from Philippine sources. The 2 1/2% tax on gross billings is an income tax. If it had been intended as an excise tax or percentage tax, it would have been placed under Title V of the Tax Code covering taxes on business.

SC v. JOHNSON FACTS: SC JOHNSON AND SON, USA a domestic corporation organized and operating under the Philippine laws, entered into a license agreement with SC Johnson and Son, United States of America (USA), a non-resident foreign corporation based in the U.S.A. pursuant to which the [respondent] was granted the right to use the trademark, patents and technology owned by the latter including the right to manufacture, package and distribute the products covered by the Agreement and secure assistance in management, marketing and production from SC Johnson and Son, U. S. A. The said License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of Registration No. 8064 . For the use of the trademark or technology, SC JOHNSON AND SON, USA was obliged to pay SC Johnson and Son, USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on

royalty payments which respondent paid for the period covering July 1992 to May 1993.00 On October 29, 1993, SC JOHNSON AND SON, USA filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that, since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the respondent. We therefore submit that royalties paid by the [respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. ISSUE: WHETHER OR NOT SC JOHNSON AND SON, USA IS ENTITLED TO THE MOST FAVORED NATION TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY. HELD: In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use property or rights, i.e. trademarks, patents and technology, located within the Philippines. The United States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the state of source are both permitted to tax the royalties, with a restraint on the tax that may be collected by the state of source. Furthermore, the method employed to give relief from double taxation is the allowance of a tax credit to citizens or residents of the United States against the United States tax, but such amount shall not exceed the limitations provided by United States law for the taxable year. The Philippines may impose one of three rates- 25 percent of the gross amount of the royalties; 15 percent when the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; or the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third state. Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances. This would mean that private respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties earned from sources within the Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty. The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty, expressly allows crediting against German income and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for double taxation, does not provide for similar crediting of 20% of the gross amount of royalties paid At the same time, the intention behind the adoption of the provision on relief from double taxation in the two tax treaties in question should be considered in light of the purpose behind the most favored nation clause. The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the most favored among other

countries. The most favored nation clause is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the taxpayer is liable. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment. The RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances. It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law. Private respondent is claiming for a refund of the alleged overpayment of tax on royalties; however, there is nothing on record to support a claim that the tax on royalties under the RP-US Tax Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.

CIR v. SC Johnson & Son(Tax Treaties) Facts: S. C. Johnson and Son, Inc. entered into a license agreement with SC Johnson and Son, United States of America (USA) For the use of the trademark or technology, S. C. Johnson and Son, Inc. was obliged to pay SC Johnson and Son, USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments S. C. Johnson and Son, Inc. filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that the preferential tax rate of 10% should apply to them Issue: Whether or not SC Johnson and Son, USA is entitled to the"most favored nation" tax rate of 10% on royalties as providedin the RP-US Tax Treaty in relation to the RP-West GermanyTax Treaty. Held/Ratio: NO. Under Article 13 of the RP-US Tax Treaty, the Philippines may impose one of three rates 25 percent of the gross amount of the royalties; 15 percent when the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; or the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third state. The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10percent rate granted

under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances

CIR v. CA (Construction of Statutes granting tax exemption : general rule) FACTS: YMCA is a non-stock, non-profit institution, which conducts various programs and activities that are beneficial to the public, especially the young people, pursuant to its religious, educational and charitable objectives. CIR issued an assessment including surcharge and interest, for deficiency tax. YMCA protested but denied by the CIR, so it filed in the CTA. CTA ruled in favor of YMCA, so CIR appealed to CA CA in favor of CIR but upon MR by YMCA, it ruled in favor of the latter. Hence, this petition. CIR argues the income received by YMCA enumerated in Section 27 (now Section 26) of the NIRC is, as a rule, exempted from the payment of tax in respect to income received by them as such, the exemption does not apply to income derived xxx from any if their properties, real or personal, or from any of their activities conducted for profit, regardless, of the disposition made of such income xxx. YMCA argues that it is an exempt organization due to its nature and because the income it derives from renting its space and the fees it derives from parking is minimal (therefore not for profit). ISSUE: WON the income derived from rentals of real property owned by YMCA exempt from tax? HELD: NO, YMCA not exempt organization since it doesn't come within the purview of the provision. Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict interpretation in construing tax exemptions. A claim of statutory exemption from taxation should be manifest and unmistakable from the language of the law on which it is based. Thus, the claimed exemption must expressly be granted in a statute stated in a language too clear to be mistaken." Where the language of the law is clear and unambiguous, its express terms must be applied. Laws allowing tax exemption are construed strictissimi juris. DISPOSITIVE: YMCA to pay tax liability