2nd Meeting

Bong-Bong Marcos Issue

 Doctrine: non – filing of ITR does not involve a crime involving moral turpitude
 Non – filing of ITR is considered as mala prohibitum only and not mala in-se

Power of Congress to Tax

 The Power of Congress to Tax is supreme, unlimited, plenary and comprehensive

 What are the limitations/restrictions of the power of congress to tax?
o Constitutional Limitations
o Inherent restrictions
o Contracts
o Doctrine of territoriality
 What are the Inherent restrictions?
o Doctrine of territoriality
o The government is exempt from taxation
o Doctrine of international comity
o Principle of non – delegability of the power of taxation
 Is it true that all the time the government is exempt from taxation?
o No. not all the time the government is exempt from taxation. If the government is
exercising a governmental function, it is exempt from taxation. However, if the
government is exercising a proprietary function, it is not exempt from taxation.
o What are the examples of a proprietary function to which the government is not
exempted from the payment of tax?
 Purchase of office supplies, payment of electricity, leasing of property (renting)
o What are the examples of a governmental function to which the goernement is
exempted from the payment of tax?
 Requesting of Birth certificate, renewal of driver’s license etc.

PRIMARY PURPOSE RULE

 Primary Purpose Rule

o It is a rule in order to determine the purpose of the collected money
o If the purpose is to collect money = it is called a TAX
o If the purpose is to regulate, control the business of the people = it is called a FEE
 How to withdraw (expenditure) the collected by the government? – in short, how can the
government use and spend the collected money from the people?
o Answer: there must be an appropriation law before the tax collected can be used. If
there is no law passed in order to use the collected money, it is considered as illegal
expenditure of public fund and any taxpayer may question the illegal expenditure of
public fund by filing a tax payer suit before the court.
 How can the taxpayer question the illegal expenditure of public fund?
o By filing a taxpayer suit
 o A tax payer suit is a class suit filed in court because public funds were illegally
withdrawn.
 Can an alien file a taxpayer suit?
o Answer: Yes, because they ae also taxpayer.
 How should tax be used?
o For public purpose only
o Benefiting the majority of people
o Governmental functions/objectives
o Greater good

The money cannot be used by private purpose

 ILLUSTRATION

Bayan, maraming ilong. Government build bridges and under the bridge, there are illegal
settlers. Then, typhoon Sisang came, it poses regular danger to the illegal settlers who are
staying under the bridge because of rise of the water. Hence, the illegal settlers are always
being evacuated by the government every time there is a typhoon and at the same time.

One day, the government decided to transfer the illegal settlers in a safe place, this time,
permanently. but the illegal settlers are only moving permanently if they will be provided with
money.

A taxpayer complained that the taxes are being used illegally since only the illegal settlers are
enjoyed the privilege

Question: Where do you file the taxpayer suit?

Answer: RTC

Question: Is there are an illegal expenditure of public funds?

Answer: No. As a general rule, public funds must be spent for public purpose only. However,
public funds can also be used benefiting private individuals or corporation, provided that:

1. it will enhance, social justice program of the government. Meaning, the poor shall have more
in law because they have less in life.
2. the expenditure of the public funds is of transcendental importance. Meaning its for
emergency and calamity
3. the expenditure has far reaching implication. Meaning it benefits people now and in the
future.

Hence, it could be inferred that:

GR: public funds must be spent for public purpose only

EXPNS: public funds can also be used benefiting private individuals or corporation, provided
that:
 1. it will enhance, social justice program of the government. Meaning, the poor shall have more
in law because they have less in life.
2. the expenditure of the public funds is of transcendental importance. Meaning its for
emergency and calamity
3. the expenditure has far reaching implication. Meaning it benefits people now and in the
future.

 ILLUSTRATION

Isang bayan, yung palengke nasunog, hindi na natayo ung palangke. Sangguniang Bayan wants
to rebuild the public market. However, the LGU’s tax collection is weak. They decided to
borrow money for a long term from the banks and financial intermidiaries.

LGU approve the proposal of one of the banks that has a higher interest rate of 20% rather
than those proposals of other banks that has lower rates of 10%.

A taxpayer payer decided to file a taxpayer suit against the LGU, however the RTC dismissed
the case on the ground of the principle of relativity of contracts

Question: Is the RTC correct?

Answer: No. the RTC is wrong in dismissing the case on the ground of principle of relativity of
contracts. Under the tax law, anybody can file a taxpayer suit if it involves illegal expenditure of
public funds.

Question: What does the taxpayer needs to prove in a taxpayer suit?

Answer: Prove that the government illegally spent the public funds.

DOCTRINE OF INTERNATIONAL COMITY

 Doctrine of International Comity
o It is a principle which provides that “all states are co – equal”
o Hence, government cannot tax another government of other country, as long as that
latter is performing a governmental function.
 Hence, the Philippines cannot tax the embassy of the America, Japan, korea etc. that are
situated here in the Philippine territory because of the doctrine of international comity.
o Is true that at all times, these embassies are exempt from the payment of tax?
 Answer: No. these embassies are not all the time exempt from the payment of
tax because in order for it to be exempted, these embassies must at the time of
the transaction is/are performing governmental functions.

Hence, embassies cannot be taxed by the Philippine government performing

governmental functions.
o What about if the foreign government is exercising a proprietary function? Can it be
taxed?
  Answer: Yes.
o What are the examples of governmental functions of these embassies?
 Answer: Renewal of visas, application for visa etc.
o What is the difference between passport and visa?
 Passport is the permit to leave your own country, whereas, visa is a permit to
enter in a foreign country.
 Note: for every economic activity, the government is your silent partner.

PROCEDURE ON HOW THE GOVERNMENT WILL TAX A PARTICULAR SUBJECT

 Question: Paano namimili ang Congress na isa-subject nya for taxation?

o Answer: the choice of the government must be able to pass certain test. Hence,
classification statute is the law that will justify the valid choice for taxation purposes.

Requisites of a valid classification statute

1. Substantial distinction between those chosen ad not

2. The choice is germane (related) to the purpose of the law, legislation or tax ordinance
enacted by Congress

3. The choice did not violate any existing law

4. the choice is equally applicable to all those similarly situated

5. the choice is applicable today and also in the future.

 Case Illustration

CREBA – is an association of real estate developer. Congress enacted a law, stating that CREBA
will pay withholding tax return for EVERY SALE.

CREBA argued that the law must also be applicable to all sale of motor vehicle and not only to
them. Hence CREBA argued that there is violation of equality and uniformity of the
Constitution.

QUESTION: Is there a violation of the valid classification statute?

Answer: None. The Supreme Court held that no violation of equality and uniformity clause of
the constitution. With regard to substantial distinction the nature of the business of CREBA is
entirely different from others since not every time CREBA generate sales. Hence, no single out
has been made to CREBA because the law requires that in order to invoke a violation of the
classification statute, the subject must be similarly situated which in this case is not.

CREDITABLE WITHHOLDING TAX

 Creditable withholding tax is also known as returnable withholding tax which means that the
same can be used again. It is a tax paid in advance and it can be used gain at the end of the year
to deduct your tax liability.
 Example: worker works for factory. The employer deducted the withholding tax in the wage of
the worker every month. At the end of the year this deduction made by the employer may be
used as creditable withholding tax.

Note: Final withholding tax is not subject to creditable withholding tax because final withholding
tax is considered to be final. Nothing is be deducted. Example is – you have money and you
open a savings account, the savings account earns income. This income is considered to be a
passive income. Passive income is subject to final withholding tax.

What is the percentage interest? 20% interest.

o 5,000 – to get the 20% the formula is 5000 x. .20 = 1000 (no need to report to BIR).
Hence, the 4000 is not subject to income tax anymore since it is already subjected to the
final withholding tax

Note:
o Total na sweldo mo, multiply the tax rate is equals to the tax payable but deduct the
creditable witholding tax. Kung may matira meron pang babayran kung wala edi wala.
o The final withholding tax and income tax cannot be deducted by the BIR at the same.
 Example: Property - the principal resident of the family. And the same is not
used in the business. Hence, it is a capital asset.

However, the property (house and lot) was sold. You bought the house for 10
million way back 2010 and now you sold it at 20 million this 2022. You had an
income of 10 million in total.

Question: What taxes will you pay?

Answer: Capital gains tax and documentary stamp tax. Capital gains tax is a final
withholding tax. Hence, it cannot be subjected to income tax.

 If the property (house and lot) is income generating and used in the business
and it is considered to be an ordinary asset, what taxes will you pay?

Answer: The following are the taxes that you will pay:

1. Income tax, Sure to lagi na babayran

2. withholding tax
3. Creditable withholding tax.
4. VAT – applicable only if real estate dealer, if not no VAT

ESCAPES FROM TAXATION

 Escapes from taxation will not cause loss from the government. Hence, no loss from the
government.
 What are the escapes from taxation that will not cause loss of revenue to the government?
o Shifting - walang talo ang govt. Example: VAT, selling of products/goods
  ILLUSTRATION: supplier (businessman) – consumer. VAT is included in the
purchase price.
o Capitalization – it means that you wait for more time to sell your property (house and
lot) so that you can sell it in a higher price.
 ILLUSTRATION: House and lot – your inheritance from your father. You paid the
estate tax. But you decided not to sell it this in year 2010 because the value of
the house and lot is only 5 million. After 12 years, you decided to sell it (2022)
for 20 million. Hence the government does not loose revenue because the
property whose value was 5 million only in 2010 was sold to a higher price
(20million), thus, the government can put a higher tax base on the value of the
property.
o Transformation
 the tax is transformational to the advantage of the business and beneficial use.
 Example:

Shampoo v. 1 = good quality, the price is 40 pesos

Shampoo v. 2 = law quality, the price is 20 pesos.

Hence, the Shampoo v. 1 in order to cope with the price of Shampoo v. 2 will
lower its price but the content (not the quality, but volume or ung laman ng
shampoo) will be lessor.
 What are the escapes from taxation that will cause loss of revenue to the government?
o Tax avoidance
 Purpose: to reduce the amount of tax in a legal manner. Here, there is no deceit
or malice in tax avoidance.
 Example: If you have 5 million pesos, I will use the 5 million in business. What
taxes will I be paying?

Answer: Business Tax regardless if the business is income generating or not.

o Tax evasion
 Activity that is adopted maliciously and by the deliberate act of the taxpayer to
escape the payment of tax.
 Example:

Underdeclared income. Businessman claiming more expenses compared that

what was actually incurred.

Note: Rent is an allowable deduction.

 BBM (Bong Bong Marcos Case) – there is no tax evasion because it is not BBM
who computed his tax, rather, it is the employer (the withholding agent) who
made the computation. No deliberate or malicious act on the part of BBM in
escaping to pay his tax. The employer is the one who is responsible to compute
and eventually deduct the income tax of BBM.
 Though, no liable for tax evasion, BBM is still required to pay his deficiency.
o Tax exemption
 The law provides for certain tax exemption because of treaty stipulation or by
enactment of congress to certain, individuals or transaction to be exempted
from the payment of tax.
 Note:
o Tax Evasion there is malice and deceit, whereas, tax avoidance there is no malice or
deceit.