Chapter 7 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 ‘ut 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 ‘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 poner fo tax is considered inherent in a sovereign State because it is a necessary attrbute of sovereignty. Wfthout 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 atbute of sovereignty, belonging as @ matter of right to every independent State of goverment. Na 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 ctizens and property within its limits to contrbute, hence, the emergence of the power to tx. (Gt Am. ut Taxation 40), t « « 1Fradanertal Prnaites RELATED PonsiCola Bottling Company of the Philppines, In. v. Manlopaliy of| CASE Tanauan, Leyte, GR No L-31156, February 27,1976 ISSUE: ‘Whether a legislative body may enact laws to raise revenues inthe absence of 1 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 taxis inherent in the government ‘and not merely 8 constitutional grant. The power of taxation is an essential and inherent attibute of sovereignty belonging as a mater of right to every The Three (3) Inherent Powers of the State 1. Police Power. Itis the power of the State for prornoting 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. Its the power by which the State r 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. es revenue Meaning of INHERENT Power" = Bultin, inbom, ingrained ‘*Exstng in something as a permanent, essental, or characteristic attribute * Vested in someone (., Slate or goverment) asa right or privilege. Similarities among the three (3) Inherent powers of the State 1. They are inherent in the State. 2. They exist independently of the Constitution although the conditions for their exercise may be prescribed by the Constitution. 3. Ways by which the State Interfere with private rights and property. 4. Legislative in nature and character. 5. Presuppose an equivalent compensation received, directly or indirectly, by the persons affected,Taxation, Power to enforce ‘contributions to raise gov't funds, 2. Authority Government only 4. Nature For the support ofthe government 3, Purpose 4.Persons Community ora class of affected individuals. Applies to all persons, property and excises that may be subject thereto Plenary, comprehensive, supreme 4. Scope Contribution becomes part of public fund 5. Effect 6.Benefits In orm of protection and received benefits received from government 7.Amount No limit of imposition ERM SLE eR = Fardanetel Prinses Police Power Power to make and implement laws for the general welfare. Government only Promotion of general welfare through regulation Community or a dass of individuals. Applies to all persons, property and excises that may be subject thereto. Broader in application. General power to make and implement law, No transfer or tile. There ‘may just bea restraint on the injurious use of property No direct and immediate benefit but only such as may arise from the maintenance of a heathy economic standard of society. Sufficient to cover cost of the license and the necessary expenses of police survelance and equation. TOM eels Eminent Domain Power to take private property for public use with just compensation. May be granted to public servicelutilty companies The taking of private property for public use. (On an individual as the ‘owner of personal property. Only particular property is comprehended. Merely a power to take private property for public use ‘There is @ transfer of ttle to property. Market value of property taken. No imposition. The ‘owner is paid equivalent to the fair value of his properly.Fandanental l Principle 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 taxes. Secondary: Regulatory Purpose (or Sumptuary/Compensatory) While the primary purpose of taxation is to raise revenue for the support of the government, taxation is often employed as a devise for regulation or control {implementation of State's police power) by means of which certain effects or conditions envisioned by the government may be achieved such as: a) Promotion of General Welfare b) Reduction of Social Inequality ©) Economic Growth Excise taxes for sin products such as Examples of Taxes. * cigarettes and alcohols imposed for regulation = Amusement taxes for ‘amusement places" such as night and day clubs, cockpits and racetracks Increasing taxes in periods of prosperity to of attaining some curb spending power and halt inflation. social or economic * Granting tax incentives to promote objectives through _newlpioneer industries and encourage growth taxation of local industries. = Lowering taxes in case of economic breakdown due to pandemic such as the Covid19 pandemic (i¢., CREATE Law signed by the President on March 26, 2021) Examples of means = )- as ;Fundamental Tries | RELATED CALTEX V. COMMISSIONER, 208 SCRA 755 ] | CASES “Taxation is no longer a measure merely fo raise revenue to | | ‘support the existence of the goverment. Taxes may be levied with a regulatory purpose to provide means for the rehabiliation and stabilization of a threatened industy 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’. TIO V. VIDEOGRAM, 181 SCRA 208 PD1987 which created the Videogram Regulatory Board also imposed a 30% tax on the gross receipts payable to the local | government. The Supreme Coutt upheld the validity ofthe law ruling | that the 30% tax also served a regulatory purpose to answer the | need for regulating the video industry, particularly the rampant film ne piracy, the flagrant violation of intellectual property rights, and the proliferation of porographic video tapes. THEORY and BASIS OF TAXATION Theory (Authority): LIFEBLOOD THEORY andlor NECESSITY THEORY 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; Snd 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 goverment and their prompt and certain availabilty is an imperious need” {Eifeblood 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.Frudanertal Principles [RELATED COMMISSIONER. MOE SS ee CASES The Supreme Court held that taxes are the lifeblood of the Id be collected without unnecessary Findrance. Thoy are what we pay for a civiized 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 tenets intended 10 | respond in the form of tangible and intangible improve the lives of the people and enhance their moral and material | values. | PHIL, GUARANTEE CO., INC. v CIR, 13 SCRA 775 | attribute of sovereignty. It is a power government and shoul | The power to tax is an | ‘emanating from necessity. It is @ necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy 10 defend its shores from invasion, 2 | corps of cil servants to serve, public improvements designed for fe | enjoyment ofthe citizenry and thase which come win the State's temiory, and facies and protection which a goverment is | ide. Considering that the reinsurance premiums in | supposed to provi | fforded protection by the government and the recipient foreign reinsurers exercised rights and privileges Guaranteed by our laws, such reinsurance premiums and reinsurers Should share the burden of maintaining the State, —_— tion: BENEFITS RECEIVED or RECIPROCITY THEORY ‘The basis is the reciprocal duties of protection and support betweert the State and its inhabitants, The State collects taxes from the subjects of teen in order that Kt may be able to perform the functions of government, The citizens, on the other hand, pay taxes in order that they Sey be secured in the enjoyment ofthe benefits of organized society. This theory spawned the Doctrine of Symbiotic Relationship which means, tence are what we pay for a civilized society (Commissioner v. Algue). ts from taxes through the protection the State affords to them, For the protection they get arises their obligation to Support the government through payment of taxes. (CIR v. Algue, Inc., GR. No. L-28896, February 17, 1988, 158 SCRA 9) 2. BASIS of Taxal Taxpayers receive benefitFureneatal Vrineipe Every person whois able fo, must contribute his share inthe runing of the ‘government by paying taxes. In retum 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. MANIFESTATION OF THE LIFEBLOOD THEORY: a) Rule of “No Estoppel against the Government.” It means that in the performance of its governmental functions, = The State cannot be estopped by the neglect of its agentslofficers. = Erroneous application and enforcement of law’ by public officers do rot 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 the Court of Tax Appeals (through Le ee ‘administrative remedies when collection ne, Seer could jeopardize the interest of the Coed without ‘goverment or taxpayer - Section 11, recessary del RA 1125), shall have the authority to seine =: grant an’ injunction to restrain the aaa 1 be bi raat collection of any national internal i arinendia revenue tax, fee of charge imposed by Wu svhtanness the tax code.°) Fardanntall Vrincple ‘This prohibition shall apply 1o all collection actihties, inctucing impostion ahd colecton of taxea, esuance of warrants of Catrack ‘and garnishment, andior levy on final decisions of the BIR on disputed ‘assessments, cases filed bofore the CTA, and the eale 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 laim for taxes is not a debt or contract. A distinguishing feature of a {ax is that it is compulsory rather than a matier of bargain. if taxes could be a subject of compensation or set off, t can easily give rise to confusion and abuse, depriving the government of authority over the manner by which taxpayers can credit and offset their tax liabilties. 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 taxes 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 takes place by operation of law and both obiigations are extinguished to their concurrent amounts (Domingo v. Gariitos, 8 SCRA 443), X is the owner of a residential lot situated at Quirino Avenue, Pasay City. The lot has an area of 300 square meters. On June 1, 1994, 100 square meters of said lot owned by X was expropriated | by the govemment to be used inthe widening of Quirino Avenue, for P300,000.00 representing the estimated assessed value of said portion. From 1991 fo 1995, X, who is a businessman, has | nt been paying his income taxes. X is now being assessed for Tee ee eee acme of E150,0000. x ims his income tax liability has already been the amount of P30 00 wih he govenment owes hin fr he | ‘expropriation of his property. Decide. |Feadanartal Prinses ANSWER: The income tax labilty of X cannot be compensated with the amount owed by the Government as compensation for his | | property expropriated, taxes are of distinct kind, essence and nature than ortnary obligations. Taxes and debis cannot be the subject of compensation because the Goverment and X are not mutual creditors and debtors of each other anda caim for taxes is nota debt, demand, contract, or judgment as is allowable to be set off. PHILEX MINING CORP. V. CIR, GRINO. 125704, Auf. 28, 1998). May a taxpayer who has pending claims for VAT input creditor refund, setof said claims against his ore tax habits? ANSWER: No, Setoff is avaiable only i both obiigalions are | liquidated and demandable. Liquidaed debts are those where the | ‘exact amounts have already been determined. In the instant case, | the claim ofthe taxpayer for VAT refund is stil pending and the ‘amount has sil to be determined. The liquidated obligation of the taxpayer tothe government cannot, therefore, be set-off against the uniquidated claim which the taxpayer conceived to exist in his favor Se we d) Right to select objects (subjects) of taxation ‘The power to tax is essentially legislative in nature. Hence, the right to select the objects/subjects of taxation rests with the Congress. The matters within the competence of the legislature include the determination of: 41) The subject or object to be taxed 2) The purpose ofthe tax as long as itis a public purpose. 3) The amount or rate of the tax. 4) Kind of tax 5) Apportionment of the tax 6) Situs of taxation 7) The manner, means, and agencies of collection of the tax. tFandanertal Principles e) A valid tax may result in the destruction of the taxpayer's property. The power to tax includes the “power fo destroy’, where the tax ig a valid tax. This is s0 because a taxpayer could not seek the \ehification of the valid tax solely upon the premise that the tax will impoverish him. Likewise, the exercise of the power to lax is “not veetructive of taxpayer's property” where It is an invalid tax, which ferent or constitutional limitations. This is so because violates the inht 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 imposiion of lawful regulatory taxes would be destructive to the taxpayers and business establishments because the government can compel payment of tax and retro propery Uvough te exercise of poles 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 Giscourage 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. 10i Furdanental Princip ‘SCOPE of the Power of Taxation 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 the government. It has the broadest scope of all the powers of the government because in the absence of limitations, it is considered as ‘comprehensive’ unlimited, plenary and supreme. @. Comprehensive - as it covers persons, businesses, activities, professions, rights and privileges. b. Unlimited — 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 itis subject to any restrictions.. ©. Plenary — as it is complete; 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 a 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. Itis generally payable in money. _Itis a pecuniary burden payabl money which must be in legal tender. c. Itis 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. d. tis levied on persons, property, or the exercise of a right or privilege (subjects or objects of taxation). e. tis levied by the law-making body of the State. The power of “imposing” a tax, being purely legislative function. Congress cannot delegate such power, This limitation arises from the doctrine of separation of powers among the three branches of the government. 1. Itis levied for public purpose "Fardanertal Pinal ASPECTS of Taxation ‘Aspects refer to “stages or phases” that are included or embodied in the term “taxation” such as: 4. Levying or imposition ofthe tx which is legislative actor function. 2. Assessment or determination of the correct amount of applicable tax. i xdministrative in 3. Collection of the tax levied which is essentially ai corettier ‘The national agency charged with the function of collecting ‘hternal revenue taxes is the Bureau of Internal Revenue. PEW UaroaLunlon ce 3. Collection 1. Levyi (Executive Function) (Legislative Function) 2. Assessment (Executive Function) NATURE/CHARACTERISTICS of the State’s Power to Tax Zug 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. ‘ecin, Power to tax (levying or imposition) is peculiarly and exclusively legislative in nature. It cannot be exercise by the executive or judicial branches of the government. 12Ferdanental Prinses EXCEPTIONS to non-delegation rule: Delegation as 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. Delegation to local government units as provided under Section 5, Art Xof 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. TEER aie eer NATIONAL LOCAL Authority Inherent Delegated (through ‘constitutional grant) Nature Legislative innatue through Legislative in nature through enactment of fx ws by the enactment of local Congress and the Senate ordinances by the local lative 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). 13Fardaneatal | Crnisle jnistrative agencies Foe ots of te taxing process that are not really legislative in nature aro vested in administrative agencies such a: . wer to value property J Power to assess and collect taxes 2 Power to perform details of computation, appraisement or adjustment; among others. [HLLUSTRATIVE The Secrelayof Finance, upon reconmendton ofthe] CASE Commissioner of Internal Revenue, issued a Revenue Regulation | using 9108s income as the tax base for corporations doing business in the Philippines. Is the Revenue Regulation valid? ANSWER: NO | ‘The regulation establishing gross income as the tax base for ‘corporations doing business in the Philippines (domestic as well as | resident foreign) is not valid. This is no longer implementation of the law (administrative function) but actually it constitutes legislation becquse among the powers that are exclusively within ‘the legislative authority to tax is the power to determine the amount of the tax, 4. Itis subject to Constitutional and inherent limitations ILLUSTRATIVE The Congress, ater much public hearing and consultations wih various 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 ocal ‘government units. Would such a law be valid under the present Constitution? ‘ANSWER: NO ‘The law centralizing the imposition and collection of all taxes in the ‘national government would contravene the Constitution which mandates that: "Fach local government unit shall have the power to ereae ther own sources of revenue ond fo levy faxes, fees, and charges subject to such guidelines and limitations as Congress may provide consistent wih he besie policy of local autonomy.” tis clear that Congress can only give the guideines and limitations onthe exercise by the local governments of the power to tax but what was ted by the fundamental aw cannat be withdrawn 14Furdanental Prncpl 3, Exemption of government entities, agencies and_instrumentalies, Immunity is necessary in order that governmental functions will not be impeded. Otherwise, the government will be taxing itself to raise money for itself. The following rules shall apply in determining whether or not government entities and agencies are subject to tax: 2. Agencies performing governmental functions are tax exempt unless expressly taxed b. Agencies performing proprietary functions are subject to tax unless expressly exempted. c. 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 Seourity System (SSS) Philippine Health Insurance Corporation (PHIC) Local Water Districts (RA 10026) Home Development Mutual Fund (HOMF or Pag-ibia) NOTE. ao OME o:Pag-big is exert upn the effectivity of CREATE Law on Apa 1, 2024 TpOSO became taxable begining Jan. 1, 2018 or upon efectvt of he 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. 7 When one State enters the territory of another State, there is an implied understanding thatthe former does not intend to denigrate its dignity by placing itself under the jurisdiction of the other State = Immunity from suit of a State : 5, Limitation on territorial jurisdiction Tax laws cannot operate beyond a State's territorial limits. Property outside one's urisdction does not receive any protection from the State. 6. Svongest among the innerent powers ofthe State (Sison v. Ancheta, 130 SCRA 654). 15Fardanental Prin, ciples Classification of Taxes tetera ional Government (e.g. income tax, | — imposed by the National Gover . 7 : cain ‘tax donor’ tax, VAT other percentage taxes, documentary stamp tax) = imposed by local government units such as municipal sonnoraions (eg cea esata ox and professional tax receipts). The local government unit's power to tax is based on a constitutional grant that paved the way for the enactment of the Local Government Code cof the Philippines. Hence, the local government's power to tax is not inherent. As to subject matter or object: a. 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) ¢. 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.9. 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 AAs to who bears the burden: 2. 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 he Neidence (iabilly for the payment of the tax) as well as the impact or burden of the tax falls on the same person (e.9, estate tax, donor's tax). Powis (a: Jeotten tax, 16Fandanertal Pras b. Indirect — tax which is demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another. These are taxes wherein the incidence of or the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person (e.g. VAT, percentage tax, excise tax on exciseable articles). In the case of Maceda v. Macaraig (197 SCRA 771), an indirect tax is 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, 4, As to determination of amount: a. Specific — 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. va, income tax, donor's tax and estate tax) TABLE 1-5: SAMPLE COMPUTATION OF AD-Valorem and Specific Tax DISTILLED SPIRITS (based on Republic Act No. 10351) Pree PoE ‘AD-VALOREM TAX RATE = Based on the Net Retail Price (NRP) per proof (excluding the excise and value-added taxes) 15% 15% 20% 0% SPECIFIC TAX Per poo ue CIGARETTES, PER PACK (based on Republic Act No, 10351) Pema 1 CT SPECIFIC TAX ON Cigarettes packed by machine where the NRP (excluding excise and VAT) per pack is w75. As to purpose: 6. Ast 11.50 and below Riz ey Pt P25 ‘More than 214.50 p25 P27 P28 P29 J, or Revenue Purpose- tax imposed solely for the Primary, Fiscal General’ purpose of the government, i.e., to raise revenue for Government purposes (@. income tax, donor’ tax and estate tax). ‘Special or Sumptuary Purpose ~ tax imposed i1e. to achieve some social or economic ends nue is actually raised or not (e.9. tariff and Secondary, Regulatory, for a specific purpose, imespective of whether rever certain duties on imports). (0 graduation or rate: Proportional — tax based on a fixed percentages of amount of the property, receipts, or other basis to be taxed [e.9. VAT, Table 1-5 above (Ad-valorem tax on distilled spirits)] Progressive or graduated tax the rate of which increases as the tax base or bracket increases (e.g. income tax on individual taxpayers) 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 watercraft, and electric power consumption + Sugar adjustment taxes + Travel tax + Private motor vehicle tax b. Local - taxes imposed by local government units 18Fandanen tal Prins ELEMENTS OF SOUND TAX SYSTEM a. Fiscal Adequacy The fundamental purpose of taxation is to raise the revenue Necessary to 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. b. 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. ¢. 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 benefiting 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. It has been said that the best test of rightful taxation is that 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 19Fandamental Prine 7 c. To promote the welfare of the community. In the case of Gomez vs. Palomar (25 SCRA 827) ang Philippine Guarantee Company vs. CIR (13 SCRA 775), ithas been held that tax has been utilized for public purpose if the welfare of the nation or the greater portion of its population has benefited for use. 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 fora public purpose, it can no longer be a subject of inquiry. RELATED TiO vs. VDEOGRAM CASE itis not the immediate result but the ultimate result that 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. Pubic purpose is determined by the use to which the tax money is devoted. If it benefits the community in general, then itis for public purpose no matter who collects i’ pina Oe b) Prohibition against delegation of the taxing power What cannot be delegated is the legislative “enactmenvimposition/levying” of tax measure. However, a regards to administrative implementation of a tax law (.€. assessment, collection, valuation of property for tax purposes), that can be delegated. ©) Territorial limitation (Refer to page 15) 20Fan fetal Vine hs 2. Constitutional Limitations a) Due process of law There must be a valid law and the measure should not be Uunconscionable 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 ot 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. [RELATED TiU.etalvs.CA (GR.No. 127410, January 20, 1999) 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 Consituional right to equal protection ofthe law violated by the Executive Order? ANSWER: | No. Equal protection ofthe law cause i subject to reasonable Classification. Classification, tobe valid, must = Reston substantial dstnctons, + Be germane tothe purpose ofthe aw, ‘+ Note limited o exstng conditions ony, ‘Apply equally to all members ofthe same class. 24Fardanental | Prinses — There are substantial differences between big investors being ] gntced to the “secured area" and the business operators Sutsde that are in aocord wit the equal protection clause that) does not require teritorial uniformity of laws. The classification ‘apples equally to all the resident individuals and businesses | wihin the ‘secured area’, The residents, being in tke | ‘Greumstances to contributing directly to the achievement of | the end purpose of the law, are not categorized further. Instead, they are similarly treated, both in privileges granted and obligations required. ). Rule of uniformity and equity in taxation “The rule of taxation shall be uniform and equitable.” It requires the unform application and operation, without discrimination, of the tax in every place where the subject of the tax is found. It does not, however, require absolute identity or equality under all circumstances, but subject to reasonable classification. For classification to be valid, the following must concur: + Itmust be based on substantial distinction ‘= It must apply both to present and future con = Itmust be germane to the purposes of the law = {tmust apply equally to all members of the same class. [RELATED PLDT s. GLOBE and SMART ] | CASE RA 7926 provides for equality of treatment of the | telecommunications industry cannot be a valid basis for PLOT to | claim the same exemption and privilege granted to GLOBE and SMART. PLDT is not similarly situated nor isthe same as GLOBE and SMART who provide for handheld phone communication. Being rot similarly stated, the same is not of similar lass. Hence, no ________ 0m fr the application of uniformity and equality. as A progressive system of taxation means that tax laws shall place emphasis on direct taxes rather than on indirect taxes, with ‘bility 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 rales shoud be ciferentated rom a regressive system of taxation which exists when there are mi i wit ee are more indirect taxes imposed than 22Fardanertal T nce 4) Prohibition against imprisonment for non-payment of “poll tax” 'No person shall be imprisoned for debt or non-payment of poll ax, The non-imprisonment rule applies to non-payment of Poll tax which is punishable only by a surcharge, but not to other violations like falsification of community tax certificate and non-payment of other taxes. Poll fax is a tax of fixed amount imposed on residents within a specific territory regardless of citizenship, business or 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 consideration. If the tax exemption pertains, for instance, to a franchise tax, a later statute may evoke such exemption because the constitution provides that a franchise tax is subject to amendment, alteration or repeal. f) 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 23h) Furdaneatal rineiple 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 property tax only. The exemption in favor of property used exclusively for charitable or educational purposes is not limited to property actually indispensable therefore, but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes. The test of exemption refers to actual use, not ‘ownership. The term “exclusively” should be interpreted as * “primarily” rather than “solely”. ILLUSTRATIVE Mr. Ramos is the owner of a 6,000 sq. m. parcel of land located | CASE in the city limits of Naga City. He leased the property for 50,000 a year toa religious congregation for a period of fiteen (15) years (2010-2025). The religious congregation built on 2 1,000 sq. m. portion a seminary and a chapel that it used in connection with its religious activites. It constructed a ten (10) story building on the remaining 4,000 so. m. which it rented out to various commercial estabishments, the proceeds of which go to the support of is various seminaries located throughout the | Philippines. These seminaries are organized as non-profit and rnon-stock educational institutions. * Questions: 1. 2 {s 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 remaining 4,000 54.m. | 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-story bulding because the basis for taxation of real property is use and not ownership. However, itis 24LLL Feadancatal Prinses ‘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 80 because they are actually, drecly and exclusively used for religious purposes. The treatment is diffrent with regard tothe 4,000 sq.m. lot and the 10 story 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 constitutional tax exemptions refer ony to real property that are actualy, directly and exclusively used for reigious, charitable or educational Purposes, and thatthe only constitutionally recognized exemption from taxation of revenues are those eamed by non-profit, non-stock ‘educational institutions which are actually, direclly and excusivey used for educational purposes, |) Prohibition against taxation of non-stock, non-profit educational institutions. All revenues and assets of non. ~~~ ~ ‘stock, non-profit educational institutions Nongroftnon-tock \ used’ actually, directly, and exclusively | Educatonal Insitution for educational purposes shall _be | Thisexemploncovers ‘exempt from taxes and duties. However, | income, property, donors they shall be subject to internal revenue | tax, and customs duties tax on income from trade, business or | (distinguish from exemption | other activity, the conduct of which is not in the preceding page which related to the exercise or performance pertains only to property by such educational institution of its tax). } ‘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 Frcomes which are subject to different tax rates as discussed in Chapter 4. 25Fardanental Pp incites j) OTHERS 1. Grant of tax exemption No law granting any tax exemption (Le., amnesties, condonations and refunds) shall be passed without the concurrence of a majority of all Members of Congress (voting separately). Veto of appropriation, revenue, tariff bills by the President 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 to a stated purpose. Delegated authority of President to impose tariff rates, import and export quotas, tonnage and wharfage dues as delegated by Congress through a law (subject to Congressional limits and restrictions) within the framework of national development program. Non-impairment of the Supreme Court (SC) jurisdiction Congress cannot take away from the Supreme Court the power given to it by the Constitution as the final arbiter of tax cases. The Supreme Court shall have the following powers: Review, revise, reverse, modify, or affirm on appeal 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, Sesessment, or toll, or any penalty imposed in relation thereto. REVENUE BILLS shall originate exclusively from the House of Representatives "Al appropriation, revenue or tariff bills, bills authorizing an increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments. The Constitution that the initiative for the filing of bills must simply means 26[pa RELATED (TOLENTINO V. SECRETARY OF FINANCE, | CASE Feadancatal Vrncpls 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 with 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 bil. (Tolentino v. Secretary of Finance, 235 SCRA 630) Wo. 115455, | Oct. 30, 1995). ISSUE: The House of Representatives introduced HB 7000 which envisioned to levy a tax on various transactions. After 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 2 ) deliberation on the House Bill, the Senate introduced SB 8000 ‘which was its own version 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 Commitee. 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 revenve bills ‘should originate from the House of Representatives had been violated. Resolve the issue. ANSWER: There is no violation ofthe constitutional requirement that all revenue ils should originate from the House of Representatives. What is 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 mater consonant wih the latter's power to propose ‘or concur with amendments. Ths fllows from the co-equalily of the two chambers of Congress. | arFundamental | Pracples 6. Infringement of press freedom Meiners 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. ILLUSTRATIVE "X" Corporation was the recipient of two tax exemptions both | CASE from Congress, one law exempting the company's bond issues from taxes and the other exempting the company from taxes in the operation ofits public utltes. The two laws extending the | tax exemptions were revoked by 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 isthe | rule and tax exemption, the exception, any tax exemption | Unilateraly 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 lawfuly 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, L tia September 11, 1996), z 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. 28Fandancetal U ince FAA ee siTUS OF TAXATION: IN DETERMINING THE Subject matter (person, property, or activity) Nature of the tax Citizenship Residence of thé taxpayer ‘Source of income Place of excise, business or occupation being taxed SES eae -paece | Persons Residence ofthe taxpayer | | Real Property Location | Personal Location; Pace of sale or transaction Property | | Intangible Domicile of the owner except when the intangible has a situs elsewhere | Personal such as: Property * Franchise, patents, copyrights, trademarks: Situs isthe place or county where such intangibles are exercised. | Receivables: Domicile or residence of the debtor ‘= Bank deposits: Location of the depository bank. "shares of stock in a domestic corporation of a nonresident alien are | | taxable in the Philippines because the sald shares receive the | protection and benefit ofthe Philippine laws: | Income ** Source of income ‘= Occupation = where the occupation is engaged in ‘= Transaction — where the transaction took place Business Place of the business Gratuitous Residence or ctizensip ofthe taxpayer or location ofthe property Transfer 4 ‘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. 29Fandanental Prin wiles Demand of proprietorship ‘Demand of sovereignty Paid forthe use of another's property Paid for the support of government ‘Amount is based on cost of construction Amount is based on the necessities of or maintenance of the public the State improvement used Maybe imposed by the government or May be imposed only by the State rivate individuals or entities 2. TAX versus PENALTY 3 Penalty is a sanction imposed as a punishment for viol ion of law cr acts deem injurious. The violation of tax may give right to imposition of penalty. Designed to regulate conduct Primarily aimed at rising revenue May be imposed by the government or May be imposed only by the government rivate individuals or entities 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. Its purpose is to finance such improvement, thus accruing only to the owners thereof who, after all, pay the assessment. Itis 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. Not a personal liability of the person assessed ¢. Based wholly on benefits (not necessary) 4. Exceptional both as to time and place 30. TAX versus REVENUE Fardanental Principle Revenue refers to all the funds or income derived by the government, whether from tax or any other source. cee essa [Amount collected ae er ie . TAX versus SUBSIDY ‘Amount impo: Subsidy is a pecuniary aid directly granted the government fo an individual or private commercial enterprise deeme .d beneficial to the public, Subsidy is not a tax although tax may have to be imposed to pay it. . TAX versus PERMIT or LICENSE FEE Permit or License is a charge imposed under the police power for purposes of regulation. PERMIT Of ENSE FEE For regulation Exercise of poice power ‘Amount is limited to the necessary expenses of regulation Imposed on the right of reward of an officer for specific services Legal compensation or reward of an officer for specific services Failure to pay license fee makes the act or business illegal TEST IN DETERMINING IF TI LICENSE FEE: For revenue Exercise of taxing power Generally no limit Imposed also on persons or property ‘An enforced contribution assesses by sovereign authority to defray public expenses ‘An enforced contribution assesses by sovereign authority .to defray public HE IMPOSITION IS A TAX OR = If the purpose is primarily or if revenue is, at least, one of the real and substantial purposes, then the exaction is a : tax. (PAL v. Edu) 31 If the purpose is regulatory in nature, it is a license ———— TTPAL vs. EDU, 164 SC! ‘The Supreme taxes even though they al be mac Fandanental Prise RA 320 (1988) Court ruled that “Fees” may be regarded as iso serve as instruments of regulation de as an implementation of the taxation may : beige ifthe purpose of the “fee” is primarily to State's police power. P raise revenue or if “revenue! substantial purposes, thé the case provi vehicles to pay funds for the construc much lesser degree, administering agency. Hence, su tax. 7. TAXversus DEBT | Besedon contact May be pai in kind ‘Assignable'May be the subject of set-off ‘or compensation ‘A person cannat be imprisoned for non- payment of debt (except when it arses from a crime) Draw interest when stipulated or when of prescription default = 8, TAX versus CUSTOMS DUTIES is at least one of the real and fen the exaction is properly called tax. In ‘ded, the purpose behind the law requiring owners of for their registration is mainly to raise revenue or iclion and maintenance of highways and, to a pay: the operating expenses of the ich exaction or fee is classified as Based on law Generally payable in money Cannot generally be assignable/subject of set-off or compensation Imprisonment is a sanction for non- payment of tax (except pol tax) Does NOT draw interest except only “when delinquent Customs duties are taxes imposed on goods exported from or imported into a country. 9. TAX versus TARIFF Tariff may be used in one of three (3) senses: ‘a. Abook of rates drawn usually in alphabetical order containing the 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 ¢. The system or principle of imposing duties on the importation (or exportation) of goods. “The term tarif and customs duties are used interchangeably in the Tarif ‘and Customs Code 32Fandaneatal Preise DOUBLE TAXATION In its strict sense, double taxation referred to is direct duplicate aw taxation. In its broad sense, double ( @ Direct double | taxation is referred to as indirect double |~") taxalion becomes legally objectionable for being of sive and pres inequitable. It violates the taxation. It extends to all cases in which there isa burden of two or more impositions. ___ Direct double taxation means concept of equal taxing twice protection, uniformity and 1. By the same taxing authority, ‘equitableness of taxation | jurisdiction or taxing district in the Constitution. 2. For the same purpose seerirone 3. In the same year or taxing period 4. Same subject or object le} 5. Same kind/character of the tax There is indirect double/duplicate taxation (Broad Sense - which is not prohibited by the constitution) if any of the elements described above is not present. Unlike the United States Constitution, our Constitution does not expressly prohibit direct double taxation. However, it is something not favored. Such taxation should, whenever possible, be avoided and prevented. RELATED — VILLANUEVA vs. 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 once provided both taxes must be imposed = On the same property or subject matter For the same purpose By the same State! Government or taxing authority ‘+ Within the same jurisdiction or taxing district ‘During the same period; and ___They must be the same kit character of tax 33Fusarentall Principles 's double taxation in the following independent cases: |. Jimsom, a lessor of a property, pays the following; real estate tax on the premises, areal estate dealer’ tax based on rental receipts and income tax (nthe rentals. _Jimson claims that this is double taxation. Decide. Answer There is no double taxation, DOUBLE TAXATION means taxing for the same {ax 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 is a 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 eam an income. These {axes are imposed by different taxing authorities and are essentially of diferent 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 seling 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 forthe purchase or Consumption of iquor 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 refusal ofthe mayor justified? Answer: No, The refusal ofthe mayor is not justified. The imposiins are of diferent nature and character. The fixed annual fee is in the nature of a license fee imposed through the exercise of police power while the 5% tax on purchase or Consumption is a local tax imposed through the exercise of taxing powers. Both a license fee and a tax may be imposed on the same business or occupation, or for selling the same article and this is notin violation ofthe rule ‘against double taxation (Campania General de Tabacos de Filipinos v. City of Manila, 8 SCRA 367 [1963). MEANS OF AVOIDING OR MINIMIZING THE BURDEN OF TAXATION 1. Shifting Shifting 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.Fundamental | Princip Example: + Manufacturer or producer may shift tax assessed to wholesaler, who in tum 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 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 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. “xample. = Deliberate failure to report a taxable income or property; deliberate reduction 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's politely Balled “tax minimization” and is not punishable by law [ILLUSTRATIVE Pedro's income from leasing his property reaches the maximum rate | CASE of tax under the law. He donated one-half of his said property to a | rnon-stock, non-profit educational insittion whose income and assets are actualy, decly and excusvely used for educational | purposes, and therefore qualified for tx exemption under Article XIV, | ‘Section 4 (3) of the Constitution and Section 30 (h) of the Tax Code. | | Having thus transfered a portion of his said asset, Pedro sucoeeded | 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? eet zits acdFundamental Principles ? ANSWER: There is tax avoidance. Pedro has exploited a fully permissive alteratve method to reduce his income tax by transfering part of his rental income to a tax exempt entity through a donation of one- half of the income producing propery. The donation is likewise "2 donors tax. The donation is the legal means | ‘exempt from the | employed 10 transfer the incidence of income tax on the rental income, na 8 8. Exemption It is the grant of immunity to particular persons or corporations or rations of a particular class from a tax which ions generally within the same State or taxing Sistrict are obliged to pay. It is an immunity or privilege; it is freedom from a financial charge or burden to which others are subjected (Greenfield v. Meer - 77 Phil 394), Exemption is allowed only if there is a clear provision therefor. It is not necessarily discriminatory as fong as there is a reasonable foundation or rational basis. In the construction of tax statutes, exemptions are not favored and are construed against the taxpayer. to persons oF corpor persons and corporat Grounds for granting tax exemptions ‘a. May be based on contract. In such a case, the public which is represented by the government is supposed to receive a full equivalent therefore, ie. 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. 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. 36Fardamental Principles A b. Local governments. Municipal corporations are clothed with no inherent power to tax or to grant tax exemptions. But the moment the power to impose a particular tax is granted, they also have the Power to grant exemption therefrom unless forbidden by some Provision of the Constitution 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. Kinds of Exemption As to basis: * Constitutional. immunities from taxation which originate from the constitution. : Statutory. Immunities from taxation which emanates from legis! As to form: 1. Express. Exemptions expressly granted by statute. 2. Implied. When particular persons, property, or rights are deemed exempt as they fall outside the scope of the taxing provision itself. As to extent: 1. 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 organic or statute law because tax exemptions are not presumed. if 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 | | CASE established companies in certain economic zone exemption from all taxes, duis, fees, imposts and other charges fora period of three years, ABC Corp. was organized and was granted such incentive. In “the course of business, ABC Corp. pure ‘mechanical | 37Fardanental | Crncipls ————sguipment fom XYZ tne. The latter, in its ordinary ‘business | | Gealigs, is subject to sales tax. XYZ Ino. claims, however, that | ‘since it sold the equipment to ABC Corp. which is tax exempt, it should not be liable to pa the sales tx. 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. tax on the seller who is not exempt from taxes. Since XYZ Inc. is directly able for the sales tax and no tax exemption priviege is ever given to him, its claim thatthe sale is tax exempt is not tenable. A fax exemption is construed in strictssimi juris and it cannot be | permitted to exist upon vague implications. tian Amnesty It is the general or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of an absolute forgiveness or waiver of the Government of its right to collect. It is a way to give tax evaders, who wish to relent and are willing to reform a chance to do so. ‘Amnesty involves immunity from all criminal, civil and administrative liabilities from non-payment of taxes. Capitalization The reduction in the sel amount equal to the capi by the purchaser ling price of income producing property by an italized value of future taxes that may be paid Avoidance Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in {900d faith and at arm's length. ‘Tax evasion, on the other hand, is a ‘scheme used outside of those lawful means which is not acceptable. Elements of Tax Evasion (Commissioner of Internal Revenue, petitioner, vs. The Estate of Benigno P. Toda, Jr., G.R. No. 147188, September 14, 2004) 38Fandamental Prin Tax evasion connotes the integration of three factors: a) The end to be achieved, ie., the payment of fess than that known by the taxpayer to be legally due, or the non-payment of tax when itis shown that a tax is due b) An accompanying state of mind which is described as being “evil in "bad faith," "wilful" or “deliberate and not accidental and ©) A-course of action or failure of action which is unlawful SOURCES of Tax Laws Constitution National Internal Revenue Code Tariff and Customs Code Local Government Code (Book I!) Local tax ordinances/ City or municipal tax codes Tax treaties and international agreements 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. OOSens 8. Special laws 9. Decisions of the Supreme Court and the Court of Tax Appeals 10. Revenue rules and regulations and administrative rulings 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. Purpose of rules and regulations * ‘a. To properly enforce and execute the laws : b. To clarify and explain the law c. Tocarry into.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. 39Fandamental Prin ope TLUSTRATIVE ‘Saint Paul College of Makatl vs. Hon. Kim Jacinto 8. 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 a prerequisite 10 the enjoyment by non-stock, non-profit educational institutions of the privilege of tax exemption under the Constitution both a registration and approval requirement particulary, 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. Tis requirement of filing a TER is in addition tothe filing of an Annual Information Retum 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. Nature of Internal Revenue Laws Internal revenue laws are not political in nature. Tax laws are civil and not penal in nature, although there are penalties provided for their violation. The purpose of tax laws in imposing penalties for delinquencies is to compel the timely payment of taxes or to punish evasion or neglect of duty in respect thereof. 40Fandanental Prin wpe Construction of Tax Laws * Public purpose is always presumed. IT 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 so 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. Tax laws operate prospectively unless the purpose of the legislature to give retrospective effect is expressly declared or may be implied 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 or plain import of a taxing statute. In every case of doubt, tax statutes are construed strictly against the government and liberally in favor of the taxpayer (Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue, et al., 293 SCRA 76, 88). Taxes, being burdens, are not to be presumed beyond what the statute expressly and clearly declares. (Lincoln Philippine Life Insurance Company, Inc., etc., v. Court of Appeals, et al., 293 SCRA 92, 99). PROVISIONS GRANTING TAX EXEMPTIONS Such provisions are construed strictly against the taxpayer claiming tax exemption. When a 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] APPLICATION OF TAXLAWS General rule: Tax laws are prospective in operation because the nature and amount of the tax could not be foreseen and understood by the taxpayer at the time the transactions which the law seeks to tax was completed. awFandanental Pria ot 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 (Femandez vs Femandez- 99 Phil. 934; CIR vs Filipinas Cia de Seguros — 107 Phil. 1055). Section 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 Exception: Taxpayer's Suit Itis 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 govemmental 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. 42