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Tax1

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Tax1

TAXATION has been defined as the power of the sovereign to impose burdens or charges upon
persons, property or property rights for the use and support of the government to be able to discharge
its functions.

It is one of the inherent powers of the state.

“power of the sovereign”

3 inherent powers of the state:

1. Police Power

2. Eminent Domain
3. Taxation

NATURE OF THE POWER OF TAXATION:

1. It is inherent in sovereignty – the power of taxation exists independent of any legislation. There is
no need to enact a law to exercise that power because that power springs at the moment you have the
existence of the state. This is inherent because this is based on necessity. Taxation is the life-blood of
government.

2. It is legislative in character - But in the exercise of that power, that power is assigned to the law
making body. It is not assigned to the judiciary or to the executive branch of the government. It is
assigned to Congress, the law-making body.

3. It is subject to constitutional and inherent limitations – To a certain extent, Congress will abuse that
power. To a certain extent, you have that principle also that the power to tax involves the power to
destroy. Congress may abuse that power given to it by the people through the electoral process.

“to impose”

The power of taxation is

· Compulsory

· Comprehensive
· Involuntary

ASPECTS/PHASES OF THE POWER OF TAXATION

(STAGES OF TAXATION)

1. Levying stage – This is legislative in character. This is the role of Congress – determining and
enacting a tax law. It is Congress which determines the rate and the kind of tax and the facility
or mode of collecting the tax. Once you have a complete law, it is the executive branch which
implements that tax law.

2. Assessment/Collection – Tax Administration

3. Payment of the Tax – Tax Administration

This is what we call tax administration. It is not legislative. It is executive. The

implementation and administration of your tax laws are done or implemented by the
executive branch of the government (BIR, Bureau of Customs).

The power to tax is purely legislative in character. It is up to Congress which will determine the
subjects or objects to be taxed, purpose, the amount of the rate and the manner and means of its
collection. Courts cannot question the motive of Congress or the law-making body, on the levy that is
introduced by Congress or the law-making body.
THEORY OF TAXATION

The theory of taxation or taxation proceeds from the theory that the existence of government is a
necessity. The government will not be able to discharge its functions without the revenues or taxes.
This theory of taxation proceeds from this principle that government is a necessity.

Taxes are the lifeblood of the government.

The basis for this power is that reciprocal obligation or duty between the state and the citizens or its
inhabitants.

The obligation of the state is to provide protection, that it would be able to have an orderly society.
The citizens, on the other hand, have the duty to support the state. In that sense, when the citizens are
required to support the state, it means to financially support the state. And that financial support is
through the process of taxation.

Even if one pays more and the other pays less, what the state can guarantee or ensure is that
protection will be provided equally. No obligation on the part of the state that one who pays more taxes
should be given more protection. That is not the essence of that obligation. What the state would
assure is everyone will have a just and orderly society.

CANONS/PRINCIPLES OF A SOUND TAX SYSTEM

1. Fiscal adequacy – means that the sources of revenue, taken as a whole, should be sufficient to meet
the varying levels of expenditure, regardless of business condition and problems on economic
adjustment. The tax laws within the state are sufficient enough to expand or contract to the needs and
expenditures of the state.
2. Theoretical justice – means the power of taxation should be based on one’s ability to pay. So, one
who earns more has the capacity to pay more.

3. Administrative feasibility – the essence of administrative feasibility is convenience. Taxes, being

burdens, the state should not add more burden by providing convenience not only to the one who is
imposing or collecting the tax but also the one who is going to pay the tax. This boils down to the
principle of convenience and efficiency on the manner of collection and payment of the tax.

“burdens or charges”

Kinds of taxes:

a. As to the subject matter:

1. Personal tax – Poll tax. Tax on the person, like the poll tax or the cedula or community tax
certificate. It is a tax imposed on the person, including natural as well as juridical persons, who establish
residency in a particular locality and made to pay this personal tax.

2. Property tax – Tax imposed on the property

3. Excise tax – Tax imposed for the exercise of a privilege - of transferring property, entering into a
business, of exercising an occupation.

b. As to who bears the burden: (common question in the bar)

1. Direct – is one where the statutory taxpayer is the person who is required by law to pay the tax. The
statutory taxpayer shoulders the burden as well as the liability of the tax. Example: income tax, estate
tax, donor’s tax
2. Indirect – is one where the law provides that this is the statutory taxpayer but this statutory
taxpayer is allowed to pass on or to shift, not the liability, but the burden of the tax to another person.

Example:

i. business taxes like VAT – The VAT is passed on to the buyer of that item or merchandise.

ii. percentage tax – another form of business tax;

iii. excise tax

c. As to the determination of amount:

1. Specific – based on a certain or a manner of measurement; on the basis of weight. This type of tax
is peculiar to those products which are produced or manufactured like gasoline, alcohol products, cigars
and cigarettes.

2. Ad valorem – amount is determined on the value; means “based on the value of the article”.

d. As to purpose:

1. General – also known as fiscal or revenue. The purpose is principally to raise revenue.

2. Special – also known as regulatory. While the purpose is to raise revenue, it carries an incidental or
special or regulatory purpose like for regulatory power or as basis for just compensation.

e. As to scope or authority imposing the tax:

1. National – taxes legislated by Congress which are found under the tax code (NIRC) as well as the
Tariff and Customs Code

2. Municipal or Local – taxes authorized to local government units and found under the Local
Government Code; either by the province, city or municipality

f. As to graduation or rate:

1. Proportional

2. Progressive

3. Regressive

PROGRESSIVE SYSTEM OF TAXATION

This is different from a progressive tax rate. In the case of progressive or graduated tax rate, this is
where the rate increases as the tax base increases. In the case of income, the more income you have,
the higher will be the tax rate.

Progressive System of Taxation means that the state has more direct taxes than indirect taxes.
REGRESSIVE SYSTEM OF TAXATION

The regressive rate is different from the regressive system of taxation.

Regressive System of Taxation means that there are more indirect taxes than direct taxes. Example:
VAT – regardless of your economic status as a taxpayer, the purchase of an item or commodity,
regardless of who the buyer is, they are made to pay the same tax. Whether you are rich or poor and
you buy the same item, you pay the same tax.

Tax is also distinguished from other terms:

PENALTY does not operate as a tax. It is a sanction imposed for a violation, whether you will be made to
pay a fine or subject yourself to imprisonment for such violation. But when you are made to pay a tax,
that enforced contribution does not operate as a penalty.

DEBT:

1. A debt arises from a contract, express or implied, while a tax is created by law.

2. As to effect of non-payment, no person can be imprisoned for non-payment of a debt. In case of

non-payment of a tax, you will be made to pay a fine or imprisonment or both, in addition to the
payment of the basic tax plus other surcharges such as interest. 3. As to set-off or compensation (bar
question), taxes are not subject to set-off or compensation. Taxes are not debts. Taxes arise from
compulsory obligation imposed upon citizens or inhabitants of the state.
 If a taxpayer owes something to the government by way of taxes, and the government has a debt
which it has to pay to the taxpayer, set-off or compensation is not allowed. Taxpayers and the
government do not have a debtor and creditor relationship. Taxes cannot operate like a debt or
indebtedness of a taxpayer. It is not subject to set-off or compensation.

· Republic vs. Mambulao (February 28, 1962)

Mambulao Lumber is an operator of a logging concession. Part of its obligation is that once they cut
trees, they are required to reforest. Under that set-up, the reforestation expenses will be reimbursed by
the government. There is pending claim for reimbursement by Mambulao Lumber against the Republic.

Mambulao has unpaid forestry charges in the exercise of its activity as a logging concession.
Mambulao asked for offset.

The SC said NO. The taxpayer and the government do not have a debtor and creditor relationship.
Taxes are not debts.

· Republic vs. Ericta (122 SCRA 623)

Set-off or compensation was also disallowed.

· Francia vs. IAC (June 28, 1988)

 Francia has real properties in Pasay. A portion of these real properties were expropriated by
national government and subject to just compensation. But she was not yet paid. Now, Francia has
unpaid real property taxes to the City of Pasay.

The SC said NO to the offset. There is no debtor or creditor relationship between the government
and the taxpayer. And under the peculiar facts of the case, the one who expropriated is the national
government. And the liability of Francia for the real property taxes is not to the national government,
but to the local government of Pasay.

· Caltex vs. COA (208 SCRA 727)

COA directed Caltex to remit to the Oil Price Stabilization Fund (OPSF) its collection, excluding tht
unremttied for the years 1986 and 1988, of the additional tax on petroleum products. Caltex contends
that the amounts due to the OPSF may be offset against Caltex’ outstanding claims from the said fund.

It was held that a taxpayer may not offset taxes due form the claims that he may have against the
government. With respect to the taxes for the OPSF, the oil companies merely act as agents for the
Government in the latter's collection since the taxes are, in reality, passed unto the end-users –– the
consuming public. In that capacity, the petitioner, as one of such companies, has the primary obligation
to account for and remit the taxes collected to the administrator of the OPSF. This duty stems from the
fiduciary relationship between the two; petitioner certainly cannot be considered merely as a debtor. In
respect, therefore, to its collection for the OPSF vis-a-vis its claims for reimbursement, no compensation
is likewise legally feasible. Firstly, the Government and the petitioner cannot be said to be mutually
debtors and creditors of each other. Secondly, there is no proof that petitioner's claim is already due
and liquidated.

That compensation had been the practice in the past can set no valid precedent. Such a practice has
no legal basis. Lastly, R.A. No. 6952 does not authorize oil companies to offset their claims against their
OPSF contributions. Instead, it prohibits the government from paying any amount from the Petroleum
Price Standby Fund to oil companies which have outstanding obligations with the government, without
said obligation being offset first subject to the rules on compensation in the Civil Code.
· San Carlos Milling vs. CIR (Nov. 23, 1993)

Petitioner had for 1982 an overpayment reflected as a creditable income tax. In 1984, petitioner
applied the creditable amount against its taxes.

What petitioner obviously seeks is judicial sanction of its act of unilaterally declaring as tax credit its
excess estimated quarterly income taxes paid in a given year against its tax liabilities for the quarters of
the succeeding taxable year. If petitioner's theory were to be sustained, this could wreak havoc and
confusion in the tax system.

There should first be an investigation to ascertain the correctness of the corporate returns and the
amount sought to be credited. Once a taxpayer opts for either a refund or the automatic tax credit
scheme, and signified his option in accordance with the regulation, this does not ipso facto confer on
him the right to avail of the same immediately. An investigation is necessary to enable the
Commissioner to determine the correctness of the petitioner's returns, and the tax amount to be
credited.

· Philex Mining vs. CIR (August 28, 1988)

Philex Mining has a pending claim for refund against the BIR for VAT or percentage taxes. Philex
Mining was subject to an assessment of unpaid internal revenue taxes. There is a pending assessment
of a tax deficiency of this amount by the BIR. Philex Mining asked for offsetting. Peculiar in this case is
Philex Mining has pending liability for VAT/percentage tax. It also has an application for a tax refund.
So, Philex asked for set-off.

The SC disallowed. No offsetting. No debtor-creditor relationship. It was still a pending claim for a
refund or tax credit certificate.

If the case was different, that the tax refund or the tax credit had been approved by BIR and that
there is only a directive to issue a tax refund/credit certificate, then, in that case, you can now allow set-
off or compensation. The tax refund/credit certificates are allowed to be used as payments for tax
deficiencies. But if it still pending, set-off not yet allowed

· Domingo vs. Carlitos (June 29, 1963)

This is the only case where the Court allowed set-off or compensation. Where the claim for
government for taxes and the taxpayer for services rendered have already become overdue and
demandable as well as fully liquidated, then, compensation takes place by operation of law. In this case,
the taxpayer here has unpaid internal revenue taxes to the government and the taxpayer has a claim for
compensation for his services against the government. COA approved the release of those funds. Both
the claim of the Government for inheritance taxes and the claim of the intestate for services rendered
have already become overdue and demandable as well as fully liquidated. Thus, compensation takes
place by operation of law, in accordance with Articles 1279 and 1290 of the Civil Code. Both debts are
extinguished to their current amounts.

A LICENSE FEE operates for purposes of police power, for regulation, while tax operates to raise
revenue. This is the basic distinction between a tax and a license fee.

a. Taxes arise from the exercise of taxing power while license fees arise from police power.

b. Taxes are for revenue while license fees are for regulation.

c. License fees cannot exceed the reasonable cost for regulation while taxes are not so limited

d. License fees can be imposed only on legal businesses and activities while taxes can be imposed
on legal and illegal businesses.
 e. Failure to pay license fees makes the business illegal while failure to pay a tax does not
necessarily make the act or business illegal.

3 Kinds of License Fees:

1. License Tax – this is purely a tax. The purpose is to raise revenue

2. License Fee to regulate a useful occupation – police power. The purpose is to regulate.

3. License Fee to regulate a non-useful occupation – police power. The purpose is to regulate.

License Fee to regulate a useful occupation - The amount of fees that is to be imposed for purposes
of regulation should be reasonable amount to cover the cost of inspection, surveillance or regulation.

License Fee to regulate a non-useful occupation – It could go over and above the requirement of
reasonableness because the purpose of a license fee to regulate a non-useful occupation is to
discourage people from going into a non-usefil occupation.

· Physical Therapists Organization vs. City of Manila

P 100 license fee was questioned because it was too much. According to them, it was equivalent to
an act of taxation. The imposition of P 100 license fee for that profession, aside from the constitutional
limitation on equality and due process, it was more of a nature of a tax than a license fee.
 The Supreme Court said: NO, the license fee imposed here is not to regulate a useful occupation but
to regulate a non-useful occupation. If the purpose of the regulation is to regulate a non-useful
occupation, then, you can go over and above the reasonable costs of regulation and occupation to
discourage people from going into that kind of activity. There is no violation insofar as due process and
equality of the treatment of that imposition.

Q: How do you determine whether the exaction or imposition is an act of taxation or an act of
regulation?

A: The determination is made by going into the primary purpose of the exaction. If the primary or
principal purpose of the imposition is to regulate, while an incidental revenue may be generated from
that imposition, it is still an exercise of police power. Therefore, it is a license fee.

When the principal purpose is to raise revenue, even if there is an incidental act of regulation, it is
an act of taxation.

What is to be determined is the principal or the primary purpose of the imposition.

TOLL is not a tax. It is paid when you use or pass through a private property.

Toll – consideration for the use of a property

Tax – enforced contribution, the purpose of which is to raise revenue

SPECIAL ASSESSMENT/SPECIAL LEVY is different from a tax. An example is the special levy found in your
Local Government Code. Its is purpose to recover that cost of improvement or infrastructure introduced
by the LGU. Such that, only real property owners who were benefited by that improvement are subject
to tax. When the government has already recovered the cost, the collection stops. Collection is limited,
unlike in tax, where it will continue unless Congress will repeal.

This special levy is imposed on the land. If you have an area not accessible to commercial activity
because there are no roads or bridges, the local government will build roads or bridges to have an
access to that remote area. It is exceptional both as to time and locality.

For as long as the tax is not repealed, then the tax is assessed and collected against you forever, but
not in the case of a special assessment. A special assessment is not a tax.

Q: Who are the subjects of these burdens or charges?

“upon persons, property or property rights”

This brings us to the principle that the scope of the power of taxation is unlimited or
comprehensive. It almost covers all subjects.

We have this principle that the power to tax involves the power to destroy. If you would be
imposing too many burdens on the inhabitants of the state, then, this will destroy the state as well as
the inhabitants.
 But this principle was rebutted by another principle – the power to tax does not involve the power
to destroy while this court sits. This tells us that while the power of taxation is unlimited or
comprehensive, it is subject to the limitations or restrictions of that power.

LIMITATIONS ON THE POWER OF TAXATION

Classifications:

a. Inherent limitations

b. Constitutional limitations

a. INHERENT LIMITATIONS – these are limitations or restrictions that spring from its very own power.
While the power of taxation is inherent in sovereignty, there are also limitations or safeguards which
spring from its own inherent power.

1. Limitation on public purpose – It is an essential characteristic of the power of taxation that the tax is
imposed is for a public purpose, and not for a private purpose. It should be for a governmental purpose
– for the public welfare or the common good.

2. Limitation on territorial jurisdiction - The power of taxation is limited only within the boundary or
territory of the state. The state cannot exercise its power of taxation outside its territory. If the subject
of taxation is found abroad, then, the state could not anymore tax that.

By way of exception to territorial jurisdiction, the state may exercise personal jurisdiction. Even if
the subject of taxation is outside the territory, the state can still impose its power of taxation by invoking
personal jurisdiction. Before the exemption of the non-resident citizens, like the OFWs, we used to tax
the income of non-resident citizens or the OFWs because we invoked then personal jurisdiction.

3. Non-delegation of the legislative power of taxation – As a nature of the power of taxation, it is

legislative in character. That power cannot be delegated to others.

When the State grants taxing power to another agency, then that is a violation of the inherent
limitation. However, this non-delegation admits exceptions:

a. Article VI, Section 28 (2) -involves the delegation to the President to fix tariff rates, import and
export quotas, tonnage and wharfage dues and another duties and imposts.

b. Article X, Section 5 - This is the power of taxation of LGUs to create their own sources of revenues,
levy taxes, fees and charges. The power of taxation of LGUs is not inherent. It may be granted either by
the Constitution or by legislation. In our structure, the grant of the taxing power to the LGU is by
Constitutional grant.

c. Delegation to administrative agencies – in the implementation or tax administration

d. People’s initiative and referendum under RA 6735

4. International comity - the power of taxation is imposed only within the state. The state could not
tax another sovereign, under the principles of international law of which we adhere. This is on the basis
of Article II, Section 2.

5. Exemption of government agencies – government immunity from tax. This is a self-imposed

practical limitation that the government does not tax itself. The government exercising
governmental/sovereign functions is not taxed. But when the government agency exercises proprietary
function, taxation is the rule.

b. CONSTITUTIONAL LIMITATIONS
 1. Requirement of Due Process (Article III, Section 1)

- When the state exercises the power of taxation, the taking of the
property should be subject to due process. There must be a basis for the taking.

- If the state exercises its power outside of its territory or when it tax
another sovereign, it is also a violation of due process.

2. Equal Protection of the Laws (Article III, Section 1)

3. Uniformity and Equity in Taxation (Article VI, Section 21)

- There is no more distinction between equality and uniformity in taxation

- Equitability or Equity in Taxation – based on one’s ability to pay

- Valid and reasonable classification

a. The classification must be based on substantial distinctions which make real differences.

b. It must be germane to the purpose of the law or of the legislation.

c. It must apply not only to present conditions but also to future conditions substantially
identical to those present.

d. It must apply equally to all those who belong to the same class wherever they may be
found within the jurisdiction of the taxing authority.
· Sison vs. Ancheta (130 SCRA 654)

BP 135 was enacted providing for an imposition of the system of net income taxation upon the
income arising from the exercise of profession while retaining the gross system of income taxation for
salaried individual taxpayers. Petitioner complains that he would be unduly discriminated against by
such imposition.

The SC held that it is a valid exercise of taxation power. It is enough that the classification must rest
upon substantial distinctions that make real differences. There is a real distinction between
professionals and purely fixed income earners. For the professionals and businessmen, there is no
uniformity in the costs or expenses necessary to produce their income. For the purely fixed income
earners, there is practically no overhead expense. These taxpayers are not entitled to make deductions
for income tax purposes because they are in the same situation more or less.

The discernible basis of classification is the susceptibility of the income to the application of
generalized rules removing all deductible items for all taxpayers within the class and fixing a set of
reduced tax rates to be applied to all of them. Taxpayers who are recipients of compensation income are
set apart as a class.

Apparently, what misled petitioner is his failure to take into consideration the distinction between a
tax rate and a tax base. It would not be just to disregard the disparities by giving all of them zero
deduction and indiscriminately impose on all like the same tax rates on the basis of gross income. There
is ample justification to adopt the gross system of income taxation to compensation income, while
continuing the system of net income taxation as regards professional and business income.

Dictum of Chief Justice Marshall that “the power to tax involves the power to destroy (Graves v
New York).

Justice Holmes: “The power to tax is not the power to destroy while this Court sits.” So it is in the
Philippines.-Chief Justice Fernando.
 Equality and uniformity in taxation means that all taxable articles or kinds or property of the same
class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation.

4. Rule on Progressive Taxation (Article VI, Section 21)

While it is found in the Constitution, this is not a mandatory requirement to be imposed

upon Congress. This is just a directive to Congress. When the State imposes more indirect taxes
than direct taxes, you could not compel Congress that it should devolve a progressive system of
taxation.

· Tolentino vs. Secretary of Finance (Aug. 25, 1994)

RA 7716 or the Expanded Value-Added Tax Law (E-VAT Law) seeks to widen the tax base of the
existing VAT system and enhance its administration by amending the National Internal Revenue Code.

The broad argument against the VAT is that it is regressive and that it violates the requirement that
"The rule of taxation shall be uniform and equitable [and] Congress shall evolve a progressive system of
taxation."

The SC held that E-VAT may not be questioned on that ground that it is a regressive tax. What
Congress is required by the Constitution to do is to "evolve a progressive system of taxation." This is a
DIRECTIVE TO CONGRESS, These provisions are put in the Constitution as moral incentives to legislation,
NOT AS JUDICIALLY ENFORCEABLE RIGHTS.

5. Prohibition against impairment of obligation and contracts

 (Article III, Section 10)

Taxing power cannot alter or revoke existing rights and obligations under valid contracts.
When a taxpayer enjoys a contractual tax exemption, then, it is protected by the non-
impairment clause. If there is a later law which taxes that activity and that person has been
granted contractual tax exemption, then, that person affected can invoke the non-impairment
clause. He could not be subject to that new tax law.

But when one enjoys an exemption or a lesser tax rate by virtue of a franchise, then, the non-
impairment clause cannot be invoked. A franchise, under Article XII, Section 11 of the
Constitution, is subject to amendment, alteration or repeal by Congress when public interest
requires.

· Tolentino vs. Secretary of Finance (Aug. 25, 1994)

One of petitioners was PAL. PAL invoked the non-impairment clause. PAL was enjoying a franchise
and subject to a lesser tax. When RA 7716 took effect, the common carriers were now subject to the
VAT.

The SC held that the non-impairment clause is not applicable to a franchise because a franchise is
subject to amendment, alteration or repeal by Congress.

The non-impairment clause is also not applicable on the imposition of tax on existing contracts so as
to increase the debt of one party or lessen the security of another or impose additional burdens upon
one class and release the burden of another. It does not impair the obligations and contracts.

Example: You have contract where the vendor will supply to the buyer these products for 10 years
at a specific price, tax included. Later, the tax rate to that activity to which the vendor was engaged was
increased (e.g VAT increased to 12% from 10%). He now charges the buyer additional. The buyer
cannot invoke the non-impairment clause.
 The non-impairment clause is superior to the power of taxation.

6. Prohibition against imprisonment for non-payment of poll tax (Article III, Section 20)

7. Non-impairment of the jurisdiction of the Supreme Court to review final decisions on tax matters.
(Article VIII, Section 5(2))

Congress cannot make a law that the decision of the BIR is appeable to the CTA and the
decision of the CTA is final and executory and cannot be appealed, even by certiorari. That is
not valid.

8. The free exercise of religious profession and worship is superior to the power of taxation (Article III,
Section 5)

9. No public money or property shall be appropriated for the use of religious purposes, exempt in
payment for services rendered as mentioned therein (Article VI, Section 29 (2))

10. Exemption from real property taxation on properties which are used for religious, charitable
institutions and educational purposes. (Article VI, Section 28 (3))

The basis of the exemption is actual use. It is not ownership but the purpose or use for which
the properties are being utilized. The scope of the exemption does not only cover the actual
use of the properties but also those which are incidental to the purpose.

Example: Charitable hospital providing facilities/quarters for their medical staff – This is
exempted because it is incidental to its charitable purpose.
 The exemption provisions in the Constitution do not require any legislative action.
Congress need not enact a law for purposes of granting the exemptions. The exemptions in
the Constitution are self-executory. The Executive Department, through the Department of Finance,
will just promulgate the necessary rules and regulations for the implementation of the
constitutional tax exemptions.

· Abra Valley College vs. Aquino (162 SCRA 106)

The ground floor of Abra Valley College was used for commercial purposes. The second floor was
used as the residence of the School Director. The third and the upper floors were used as classrooms.
Are the properties exempted?

As to the third and upper floors, they are exempted because they are used for educational
purposes. The ground floor, which is being used for commercial purposes, is not covered by exemption.
They are part of the school building but since they are not used for educational purpose but for a
commercial purpose, then, they are not exempted. They will be subject to real property tax.

The second floor is covered by the exemption because the use, even though it is not actually,
directly, and exclusively used for religious, charitable or educational purposes, it includes those which
are incidental to those.

· Lung Center vs. Quezon City (June 29, 2004)

In the case of Lung Center, some parts of its premises were used as clinics of the medical
practitioners in the exercise of their profession. Some parts of its premises were used as hospitals and
other purposes of Lung Center. Quezon City assessed Lung Center of real property tax. Is Lung Center is
liable?

You segregate. In this case of Lung Center, the real property will be exempted for as long as they
are used for charitable purposes, including the buildings. But those portions of the buildings beings
used as clinics, in the exercise of the profession of these medical practitioners, then, they will not be
exempted. They will be subject to the real property tax.

Even if the petitioner is a charitable institution those portions of its real property that are leased to
private entities are not exempt from real property taxes as these are not actually, directly and
exclusively used for charitable purposes.

The tax exemption under Sec 28 (30, Art 6) covers property taxes only. What is exempted is not the
institution itself those exempted from real estate taxes are lands, buildings and improvements actually,
directly and exclusively used for religious, charitable or educational purposes.

Accordingly, the portions of the land leased to private entities as well as those parts of the hospital
leased to private individuals are not exempt from such taxes. On the other hand, the portions of the
land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-
paying, are exempt from real property taxes.

11. Exemption on the non-stock, non-profit educational institutions (Article XIV, Section 3-4)

The revenue and assets of these institutions are exempted from tax. The extent of this
exemption includes the other operations of non-stock, non-profit educational institutions.
The exemption will include bookstores or bank accounts where interest income is earned.

When you have a proprietary educational institution, they are not covered by the
exemption.

Of those were granted exemptions, it will only cover the direct taxes. If the non-stock,
non-profit educational institution will purchase hardware items/supplies, then, they could not
invoke the exemption. They are subject to whatever VAT or any percentage taxes (indirect
taxes) passed on to them.

This also does not require legislation.

12. Ratification requirement on tax exemptions (Article VI, Section 28 (4)

This requires the concurrence of the majority of all the members of the Congress to grant tax
exemptions. This is not majority constituting a quorum, but majority of all members of Congress. It
should be a majority of the members of the Congress, voting separately.

13. Tax measures, revenue and tariff bills shall originate in the House of Representatives.

Tax measures, revenue and tariff bills shall originate in the House of Representatives. This does not
mean that the House is more superior than the Senate. The appropriation, revenue and tariff bills shall
originate in the House of Representatives because it is in the House of Representatives where we have
the representation of the people. It is the legislative department where we have representatives voted
by the people who will represent the sovereign.

But this does not mean that the Senate could not make its own version. For as long as there is a bill
similar one to the House, Senate can make its own version – a similar piece of legislation. A revenue
measure, on its own, cannot proceed at the instance of the Senate without a corresponding version
from the House. When a revenue measure originates in the House, it does not follow that the Senate
has another version.

When the revenue measure reaches the bicameral and the final bill is totally different from the
House or Senate version, there is no third bill.

· Tolentino vs. Secretary of Finance (Aug. 25, 1994)

 In the bicameral conference, the final draft of the EVAT lLaw was totally different from the Senate
and the House of Representatives. So, it was challenged that it did not originate from the House of
Representatives. Is that contention correct?

A bill originating in the House may undergo such extensive changes in the Senate that the result
may be a rewriting of the whole. As a result of the Senate action, a distinct bill may be produced. To
insist that a revenue statute — and not only the bill which initiated the legislative process culminating in
the enactment of the law — must substantially be the same as the House bill would be to deny the
Senate's power not only to "concur with amendments" but also to "propose amendments." It would be
to violate the coequality of legislative power of the two houses of Congress and in fact make the House
superior to the Senate. the revenue bills in question actually originated from the House of
Representatives and were amended by the Senate only after they were transmitted to it. Perhaps, if the
factual circumstances in those cases were exactly the same as the ones at bench, then the subject
revenue or tariff bill may be upheld in this jurisdiction on the PRINCIPLE OF SUBSTANTIAL COMPLIANCE,
as they were in the United States, except possibly in instances where the House bill undergoes what is
now referred to as "AMENDMENT BY SUBSTITUTION," for that would be in derogation of our
Constitution which vests solely in the House of Representatives the power to initiate revenue bills. A
Senate amendment by substitution simply means that the bill in question did not in effect originate from
the lower chamber but from the upper chamber and not disguises itself as a mere amendment of the
House version.

While Art. VI, §24 provides that all appropriation, revenue or tariff bills, bills authorizing increase of
the public debt, bills of local application, and private bills must "originate exclusively in the House of
Representatives," it also adds, "but the Senate may propose or concur with amendments." In the
exercise of this power, the Senate may propose an entirely new bill as a substitute measure.

· ABAKADA vs. ERMITA (469 SCRA 1)

The rulings here (as to the RVAT law) are the same as those held in Tolentino vs. Secretary of
Finance, with regard to VAT law, which is in connection with the constitutional requirement that
revenue measures should originate in the House. Even if the final bill is totally different from the House
bill, the fact that there is a similar bill initiated by the House, that satisfies a substantial compliance of
that constitutional requirement that revenue measures should emanate or originate from the House.
14. Tax money collected for a special purpose shall be treated as a special fund

SITUS of Taxation

This means the place of taxation

DOUBLE TAXATION can be defined as “taxing twice” by the same taxing authority within the same taxing
jurisdiction or the same taxing district for the same purpose, of the same year or taxing period and of
the same property.

Double Taxation, NOT Prohibited

Now, whether it is a (1) direct duplicate or direct double taxation, or (2) indirect duplicate or indirect
double taxation, double taxation has been called as not to be prohibited. Double taxation is not
unconstitutional.

When you have a law that was enacted resulting to a double tax, you could not invoke double taxation
because it is not unconsitutitional. The manner of attacking that law should not be based on the
argument on double taxation but it should be attacked on the basis of constitutional or inherent
limitations.
If real property is subject to a percentage tax under the NIRC and subject to a real property tax under
the LGC, there is no double taxation because there are 2 taxing authorities – one imposed by the State
and the other imposed by the LGU.

You may have gross receipts of the business establishment subject to income tax and VAT under the
NIRC and business tax under local taxation. There is no double taxation (income tax and VAT) because
they are for 2 different purposes – one is for income and the other is for excise. Income tax and VAT are
imposed by the state and the business tax is imposed by the LGU. So, there is not double taxation
because they are imposed by different taxing authorities.

In a deed of sale, that sale is subject to capital gains tax and doc stamp tax, both under the NIRC. There
is no double taxation because because the 6% capital gains tax is for income and the doc stamps tax is
an excise tax for the privilege of entering into a transaction.

· Republic Planter’s Bank case

The bank, for violation of the illegal reserve requirement, was imposed a tax under the NIRC and for
that same violation, was also imposed a certain charge or imposition by the Central Bank. Now, the bank
was the former name of the Republic Planter’s Bank. This bank questioned the imposition contending
that the imposition is a double taxation.

There is no double taxation. While the constitution does not prohibit double taxation, however in
this case, there was no double taxation. The one imposed under the NIRC for the same violation, where
it was made to pay a certain a tax, a certain percentage for that violation, is a tax, the purpose of which
is to raise revenue. While the one imposed by the Central Bank for such violation operates as an exercise
of police power. So, they are of different purpose. One is to raise revenue as an act of taxation; the
other one is for regulation for the purpose of police power. So, there is no double taxation because they
are of two different purposes.

There are instances where the same subject of the tax will be taxed not only twice but more than
twice – not just double but multiple taxation. Since it will cause burden to the taxpayer, the state must
provide measures to reduce the harshness of a multiple taxation where the same subject is taxed more
than twice.

Remedies:

1. Tax exemptions

2. Tax deductions

3. Tax credits

4. Enter into tax treaties or agreements on the basis of reciprocity

Forms of Escape

1. SHIFTING is the transfer of the tax burden by the person on whom it is imposed by law to another
person.
 Shifting is peculiar only to certain forms of taxes and this is peculiar only in indirect
taxes. There is no shifting in the case of direct taxes.

Ex: VAT, Percentage Tax, Business Tax

Forms of Shifting:

1. Forward Shifting - is a form of transfer of the tax from the factors of production through the factors
of distribution until the burden finally rests to the consumer

2. Backward Shifting - s the transfer of the burden of the tax from the point of consumption to the
factors of distribution to the factors of production.

3. Onward Shifting - is a series of shifts. So The series of shifts will be either two or more forward
shifting or two or more backward shifting or a combination of forward or backward shifting, an you have
what you call an onward shifting. This occurs when the tax is shifted two or more times either forward
or backward.

2. TAX CAPITALIZATION is a form of backward shifting whereby real taxes on property sold are
capitalized at the time of purchase and deducted in lump sum from the selling price.
 Example: Sale of real properties where you have savings – acquiring the property at a lesser price.
From that savings you have, the savings will be capitalized to pay your future tax obligations when you
would now own that property. The future taxes on the property sold are capitalized at the time of
purchase and deducted lump sum from the selling price.

3. TRANSFORMATION is effected through the process of production. The producer on whom the tax is
imposed, fearing the loss of his market if he adds the tax to the price, takes the tax and recovers his
additional expense by improving his method of production thereby turning out units at lesser costs. This
is peculiar only in the production process – when you are a manufacturer or producer.

When one improves his means, methods or manner of production, this would turn out more units
at a lesser cost. The tax is transformed into a gain through the medium of production.

4. TAX EVASION is the use of illegal means to defeat or lessen the payment of a tax. It is also known
as “TAX DODGING” and it is also punishable by law.

Example: Underpricing in your Deed of Sale is tax evasion.

5. TAX AVOIDANCE is the use of legally permissible method to reduce tax payment or what we call
“TAX MINIMIZATION”.
6. TAX EXEMPTIONS – This is a grant of immunity to particular persons or corporations or to persons
of a particular class from a tax which persons are generally within the same state or taxing district who
are obliged to pay for the tax. It is an immunity or the non-payment of a tax.

The power to tax carries with it the power to grant tax exemptions. The principles of the power of
taxation are the same principles to be applied in the grant of tax exemptions – legislative in character,
public purpose, subject to territorial restriction, constitutional limitations, due process, equality,
uniformity.

The more important basis for granting tax exemption is public interest. The consequence of such
exemption is that the state will incure monetary loss. By reason of public interest, the state is willing to
incur a monetary loss provided that public interest will be served by the grant of the exemption. The
public interest must be sufficient to offset the monetary loss entailed in the grant of the exemption.

Grounds for the grant of tax exemption

1. Exemptions may be granted on the basis of contracts.

2. The exemption may be contained in the charter or in the law creating the corporation or entity to
which the exemption is granted.

3. The exemption may be based on some ground of public policy. For purposes of encouraging and
promoting industries, we grant tax benefits or tax exemptions for a certain period of time so that they
would encourage and develop their industries.

4. Tax exemption may be created on the basis of tax treaties or agreements between two states on
the basis of reciprocity.
Equity is not a ground for tax exemption

When your neighbor is exempted, you cannot claim exemption on the ground that “I should be
exempted because my neighbor is also exempted.” You cannot invoke equity. There must be a basis for
the grant of exemption. There must be a law. There must be due process.

Tax exemptions are strictly construed against the taxpayer. The law must be clear that you are
covered in that exemption. A taxpayer invoking the exemption must show or prove or has the burden
that it will be exempted or that he is covered by the exemption. Taxation is the rule and exemption is
the exception.

· Floro Cement Corp vs. Gorospe (200 SCRA 472)

Floro Cement was granted with this mining concession to explore and exploit mineral resources. In
the grant, its mining activity was given a tax exemption. The minerals that they extracted from the land
were used as raw materials in the production of cement. Now, the BIR assessed Floro Cement for the
taxes in the manufacturing of cement. Flore Cement protested the assessment claiming that “if my
mining activity is exempted, then, my cement activity is likewise exempted because the materials that
are used for cement are also taken from that mineral land which is an exempted activity.” Is that
correct, invoking equity as a ground for tax exemption?

The SC said NO. Your exemption applies only to your mining activity. So, you are covered only as to
your mining activity. Your exemption cannot go beyond. Even if the raw materials you used were taken
from or sourced from the exempted activity. So, you cannot invoke equity as a ground for tax
exemption.
· Garrison, et al vs. CIR

There was then the RP-US Military Bases Agreement where the US Service men at Clark and Subic
were exempted from income tax. The income of US personnel at Clark and Subic were exempted from
income tax. Since they were exempted, the US Service men did not file an income tax return. The BIR
assessed them penalties for not filing. The invoked that why will they file an income tax return when
they are exempted from income tax.

The SC said NO. The principle of equity is not a ground for tax exemption. The subject of your
exemption is on the income that we earn. The treaty did not say that the exemption includes the filing
of the income tax return. Even if you are exempted from the tax, you are still required to file an income
tax return. If you did not file, you are subject to penalties for not filing an income tax return.

In the same way, non-stock, non-profit educational institutions’ revenues and assets are exempted
from taxes. But this does not include extension for filing returns.

Another example – In the NIRC, the professional partnership is not subject to tax, the partnership is
still required to file a return. The exemption does not carry with it exemption from filing a return, unless
the law says that it includes the filing of the return.

RA 9504 – It now exempts from income tax those receiving within the statutory minimum wage
(minimum wage earners), as well from filing returns.
 Tax exemptions pertain only to direct taxes. It does not carry with it indirect taxes, unless you are
classified as “absolutely exempted”. When one is absolutely exempted from tax, it includes direct and
indirect, national and local taxes.

7. TAX AMNESTY - operates as a condonation of your tax liability. It is also construed strictly against
the taxpayer.

When you avail of a tax amnesty, the government cannot run after you for other deficiency tax.
Once you avail of the tax amnesty for a certain tax periond, then, you are released from any liability or
deficiency. The state has granted you condonation. Tax amnesty partakes of an absolute forgiveness or
waiver on the part of the government to collect what otherwise would be due it. And in a sense,
prejudicial thereto, particularly to give tax evaders who wish to relent and are willing to reform a chance
to do so, thereby become part of the new society with a clean slate. This is a full immunity.

“for the use and support of the government”

PURPOSE

The purpose of taxation is to raise revenue. This is the principal purpose of tax.

It also has secondary or incidental purposes (non-revenue purposes:

 a. As an implement of police power – when a tax is imposed, it can be used to
regulate (e.g. motor vehicle registration fees – while they are called fees, they are in the nature of
taxes)

b. To protect local industries

c. To reduce inequalies of wealth

d. As an implement of eminent domain

Q: Can the power of taxation be used hand-in-hand with the power of eminent domain?

Eminent domain is an inherent power of the government to take away private property subject to
payment of just compensation.

This has been illustrated in granting benefits to senior citizens.

Cases:

· CIR vs. Central Luzon Drug (April 15, 2005)

· Bicolandia Drug Corp (June 22, 2006)

· Super Drug case

 Before the amendment of the Senior Citizen’s Act, the senior citizens were given discounts when
they purchase medicines. In the case of these drug stores, can they ask for refund? Before, said
discounts were by way of tax credits. You add up all your discounts and the aggregated amount will now
be claimed as a tax credit, which is deductible from the tax due. There is a taking of property of the drug
store and they cannot recover it from the supplier. They still pay the regular price to the supplier. The
tax credit is the just compensation that will be given to the drug store who gives the senior citizens’
discount.

Later, in 2004 or 2005, the Senior Citizen’s Act was amended. The senior citizens’ discount was not
anymore allowed as a tax credit. This time, the senior citizens’ discount was allowed as a tax deduction.
The discounts that were given will be claimed as a deduction against gross income. Still, it is a manner
of just compensation.

“to be able to discharge its functions”

Classification Statutes

Classification statute is one which specifies those subject to the tax and those not subject to the tax.
Is a classification statute an exemption statute?

The answer is NO. The classification statute is not an exemption statute. It is a regular and ordinary
revenue measure which determines who are subject of the tax and who are not subject. The law simply
classifies and specifies. It is not an exemption statute, thus, we do not apply strict construction on
classification statutes. We apply liberal construction on classification statutes.
Nature of our Internal Revenue / Tax Laws

Our tax laws, as a rule, are civil in nature. They are not political nor penal nor criminal in nature.
Our tax laws provide penalties, sanctions, impose fines or imprisonment or both. The penalties are
there to assure prompt payment of taxes. The penalties are not there to make our tax laws criminal or
penal in nature. While others are prosecuted for violation does not necessarily make our tax laws penal
or criminal in nature. We still maintain its nature as civil. We do not apply the ex post facto law or the
bill of attainder in the case of tax laws.

Rules on construction of our tax laws

1. Legislative intent – Tax statutes are to receive reasonably construction with the view to carry out
their purpose and intent. If there is some issue on construction and interpretation, we determine what
was the intent of the legislators. We go back to the deliberations, debates, arguments.

2. When there is doubt – In case of doubt, they are construed strictly against the government and
liberally in favor of the taxpayer. Tax laws are, therefore, given liberal construction for the reason that
taxes are burdens.

3. Where the language is plain - But when the language of the tax law is plain and clear, which does
not require independent interpretation or construction, the rule of strict construction against the
government is not applicable where the language of the tax statute is plain and there is not doubt as to
its legislative intent.

4. Where taxpayer claims exemption – The rule is strict construction

Application of tax laws

 Tax laws are applied prospectively. We do not apply retroactivity in the case of tax laws. Tax laws
are generally applied prospectively because the nature and amount of the tax could not be foreseen and
understood by the taxpayer at the time the transaction which the law seeks to task was completed.

Exceptions where we apply retroactivity:

1. When retroactivity is not harsh and oppressive and it does not violate due process

· Castro vs. Collector (4 SCRA 119)

Castro questioned this War Profits Tax Law. After the second World War, the Congress enacted this
War Profits Tax Law imposing and collecting taxes to those who made money and profited during the
war. Castro questioned this law because it is made to be applied retroactively because the objects that
are to be taxed are those profits during the second World War.

The SC ruled that there is basis for retroactivity. The War Profits Tax Law, although effective
retroactively, is not harsh or oppressive. It is both wise and just, and therefore, it is not
unconstitutional. So, the War Profits Tax Law was held to be a valid law.

The law should clearly provide and stipulate that it will allow retroactivity. So, you go now to the
literal and express provision of the tax law.

(Note: I checked the full text of this case – Castro vs. Collector (April 26, 1965). It did not elaborate the
validity of the War Profits Tax law as it was already held valid in the case of Republic vs. Vda. De
Fernandez (Sept. 25, 1956). This is what was stated in the Republic case - The law may not be
considered harsh and oppressive because of the force of its impact fell on those who had amassed
wealth or increased their wealth during the war, but did not touch the less fortunate. The policy
followed is the same as that which underlies the Income Tax Law, imposing the burden upon those who
have and relieving those who have not.
 As to the Castro case, a MFR was filed and as resolved by the Supreme Court (December 28, 1962),
Castro was still made to pay. In the resolution, it was stated that assuming without deciding, that this
particular section (Section 51 of RA 2343) is applicable to war profits taxes, we agree with the Solicitor
General that there is no legal ground for applying retroactively to the delinquencies of the petitioner
under the War Profits Tax Law (and which accrued since September 23, 1950, when the corresponding
tax assessment was issued) the terms of a law (R.A. 2343) enacted almost 9 years later. It is elementary
that laws are presumed to operate only prospectively, and have no retroactive effect in the absence of
clear provision to the purpose.

Anyhow, I just included here for information purposes. Just go back to the principle na there can be
retroactive application if it is not harsh and oppressive J)

2. When retroactive operation is expressly declared by law or clearly by the legislative intent

Mandatory and directory provisions

Your tax laws contain mandatory and directory provisions. There is an importance or significance of
the distinction because of the consequence. In case of default, what would be the consequence for
failure to follow the mandatory or directory provisions?

1. Mandatory provisions – They are intended for the security of the taxpayer. They are designed to
insure equality of taxation or certainty as to the nature and amount of each person’s tax. Failure to
follow mandatory provisions renders the act or proceeding invalid.

Examples:
a. Deadlines – In the case of the filing and payment of the annual income tax, the deadline is April 15.
When you file and pay your tax after April 15, there is a corresponding consequence. You will be
charged with interest, penalties and charges as a result of your failure to follow mandatory provisions.

b. Notice of Tax Deficiency - When the taxpayer receives a notice of tax deficiency, he is required by
law to protest this within 30 days. If the protest is done after the 30th day, the consequence is that the
tax deficiency is final and executory.

c. Proceedings – In case your protest is denied, the taxpayer is given 30 days to go to the CTA. If you
go beyond that period, then, your appeal will be dismissed because the law strictly provides that you
should bring that up to the CTA within the said period.

2. Directory provisions – They are for information or direction of officers or to secure methodical and
systematic modes of proceedings.

a. Payment of taxes – In the NIRC, the payment of tax should be made through the BIR, in the case of
internal revenue tax. But the mode of payment nowadays is that it is not anymore that you go directly
to the BIR. You could pay now through the banking system. They are authorized to receive payments.
That is directory – for the information and direction of taxpayers, to secure a methodical and systematic
mode.

Payment of taxes could be done if you have tax credit certificates or if you have an approved tax
refund. These are just directory provisions.

TAXPAYER’S SUIT

It is an action of the nature of a class representative suit filed to secure relief on action’s of public
officers or officials involving the disposal of public funds adversely affecting the common interest of a
class of taxpayers or taxpayers in general within the jurisdiction of a taxing authority.
 The general rule is that the validity of statute will be constested only by one who will sustain a
direct injury as a result of the enforcement of the law.

This requirement of direct injury is no longer required or sufficient for purposes of filing a taxpayer’s
suit. Taxpayers have been held to have sufficient interest in preventing the illegal expenditure of money
raised by taxation. Personal damage or injury is not necessary but public interest. When public interest
is involved, then you have a legal standing for filing a taxpayer’s suit.

· Kilosbyan vs. Guingona (232 SCRA 110)

This is the operation of the on-line lottery by PCSO. What PCSO did is to have a lottery contracted
to PGMC, a private entity. Kilosbayan, headed by Senator Salonga, filed a petition questioning that
contract of lease entered by PCSO and PGMC. PCSO and PGMC contended that there is no direct injury
sustained as a result of that contract of lease.

The SC said NO. Kilosbayan has the legal personality to file a taxpayer’s suit. Objections to
taxpayer’s suit for lack of sufficient personality or standing or interest may be brushed aside because
they are technicalities of procedure. What is important is that there is a transcendental importance to
the public of these cases, which demand that they be settled promptly and definitely. The issues raised
are of paramount public interest. The ramifications of such issues immeasurably affect the social,
economic and moral well-being of the people even in the remotest barangays of the country and the
counter-productive and retrogressive effects of the of the envisioned on-line lottery system re as
staggering as the billions in pesos it is expected to raise. The legal standing then of the petitioners
deserves recognition and, in the exercise of its sound discretion, this Court hereby brushes aside the
procedural barrier which the respondents tried to take advantage of. So, public interest has been used
as basis for filing a taxpayers’ suit.

NEW CASES:
2007 cases

· Public Interest vs. Roxas (January 31, 2007)

Even if it is still a taxpayer’s suit, you can still invoke res judicata or lis pendens. An earlier case,
involving the same cause of action, was already dismissed. The present case was already dismissed
because of the principle of res judicate or lis pendens.

A taxpayer’s suit is a suit brought by citizens and taxpayers to determine a public right or a matter
of public interest. All citizens and taxpayers are regarded as parties to the proceedings by
representation and are bound by the judgment rendered therein.

Res judicata applies to litigations instituted by taxpayer’s. It has no legal standing anymore since
similar suits filed earlier were dismissed.

· Plaridel Abaya vs. Ebdane (515 SCRA 720)

Taxpayer’s suit – issue of legal standing

Abaya and other retired AFP generals filed a taxpayer’s suit questioning the P 952 M road project in
Catanduanes entered into DPWH with China Road and Bridge Corporation as being overpriced.
 The legal standing of Abaya and the other retired generals was questioned.

The SC allowed the suit. Abaya and the other retired generals have legal standing. Locus standi is a
matter of procedure. It has been recognized that in some cases, suits are not brought by parties nor
persons injured by operation of a law or any government act but by concerned citizens or taxpayers or
voters who actually sue for public interest.

In a taxpayer’s suit, it is not necessary that it should be filed by a party who would be benefited or
injured. It could be filed by any citizen or taxpayer or voter who actually sues for public interest.

The Court in a number of cases has adopted a liberal stance on locus standi, including cases
involving taxpayers. The prevailing doctrine in taxpayer’s suit is to allow taxpayers to question contracts
entered into by the national government or GOCCs allegedly in contravention to law. A taxpayer is
allowed to sue where there is a claim that public funds are illegally disbursed or that it is being deflected
to any improper purpose or that there is wastage of public funds through an enforcement of an invalid
or an unconstitutional law. A taxpayer need not be a party to the contract to challenge such contract.
Public interest is the criteria or the issue of the case is of paramount importance so that they will be
recognized to have a legal standing to file a taxpayer’s suit.

· Carlos Superdrug vs. DSWD (526 SCRA 113)

The application of the Senior Citizen’s discount now is by way of tax deduction, not a tax credit,
under RA 9257. The amendment of the Senior Citizen’s Law has provided that the application of the
Senior Citizen’s discount is by way of a tax deduction. This means that the discount given by the drug
store will be claimed as a deduction against gross income, not anymore as a tax credit or a tax deduction
against the tax due.

That is the manner of just compensation for the loss incurred by the drug store for giving the senior
citizens discount for which they could not pass on that loss. The power of eminent domain there is
contextualized by the taking of property by way of discount. Private property, in the context of a
discount, was taken from the store. But in the taking of the discount, there should be just
compensation. In the context of eminent domain, the just compensation is by way of tax deduction.
· Gerochi vs. Department of Energy (527 SCRA 696)

This is with regard to the EPIRA law – the unbundling of the power rates. In this case, Gerochi and
other consumer groups filed a taxpayer’s suit. They questioned Section 34 of the EPIRA, which imposes
a universal charge on consumers for the recovery of power loss.

The Supreme Court allowed and recognized that they have a legal standing because the suit
involves a constitutional suit. The petitioners filed before us an original action particularly denominated
as a Complaint assailing the constitutionality of Sec. 34 of the EPIRA imposing the Universal Charge and
Rule 18 of the EPIRA's IRR. No doubt, petitioners have locus standi. They impugn the constitutionality of
Sec. 34 of the EPIRA because they sustained a direct injury as a result of the imposition of the Universal
Charge as reflected in their electric bills.

The theory behind the exercise of the power to tax emanates from necessity; without taxes,
government cannot fulfill its mandate of promoting the general welfare and well-being of the people.

Police power is the power of the state to promote public welfare by restraining and regulating the
use of liberty and property. It is the most pervasive, the least limitable, and the most demanding of the
three fundamental powers of the State.

In this case, the petitioners were recognized to have legal standing.

In connection with the imposition of the universal charge, is that a valid provision? The Supreme
Court said YES, that is taxation as an implement of police power. The universal charge under the EPIRA
law is valid because that is an act of taxation as an implement of police power.

We have held that the power to "regulate" means the power to protect, foster, promote, preserve,
and control, with due regard for the interests, first and foremost, of the public, then of the utility and of
its patrons. The conservative and pivotal distinction between these two powers rests in the purpose for
which the charge is made. If generation of revenue is the primary purpose and regulation is merely
incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that revenue is
incidentally raised does not make the imposition a tax.
 In exacting the assailed Universal Charge through Sec. 34 of the EPIRA, the State's police power,
particularly its regulatory dimension, is invoked. Such can be deduced from Sec. 34 which enumerates
the purposes for which the Universal Charge is imposed and which can be amply discerned as regulatory
in character.

It is an already established doctrine that the taxing power may be used as an implement of police
power. In Valmonte v. Energy Regulatory Board, et al. (162 SCRA 521) and in Gaston v. Republic Planters
Bank (158 SCRA 626), this Court held that the Oil Price Stabilization Fund (OPSF) and the Sugar
Stabilization Fund (SSF) were exactions made in the exercise of the police power. The doctrine was
reiterated in Osmeña v. Orbos with respect to the OPSF. Thus, we disagree with petitioners that the
instant case is different from the aforementioned cases. With the Universal Charge, a Special Trust Fund
(STF) is also created under the administration of Power Sector Asset Liability Management (PSALM).

Over the years, however, the range of police power was no longer limited to the preservation of
public health, safety and morals, which used to be the primary social interests in earlier times. Police
power now requires the State to "assume an affirmative duty to eliminate the excesses and injustices
that are the concomitants of an unrestrained industrial economy." Police power is now exerted "to
further the public welfare", a concept as vast as the good of society itself." Hence, "police power is but
another name for the governmental authority to further the welfare of society that is the basic end of all
government."

One of the landmark pieces of legislation enacted by Congress in recent years is the EPIRA. It
established a new policy, legal structure and regulatory framework for the electric power industry.

In the power sector, you have these electric power cooperatives registered with the NEA or CBA.
Those registered with the CBA are exempted from tax. Those with NEA do not have a tax exemption.

The new thrust is to tap private capital for the expansion and improvement of the industry as the
large government debt and the highly capital-intensive character of the industry itself have long been
acknowledged as the critical constraints to the program.
· Chavez vs. NHA (530 SCRA 235)

Taxpayer’s suit – Chavez filed a taxpayer’s suit to declare null and void the joint-venture agreement
between NHA and R-II Builders and the Smokey Mountain Development and Reclamation Project
embodied therein to develop the Smokey Mountain as an NHA Resettlement Low Cost Housing. The
case filed by Chavez was questioned that he has no legal standing.

The Supreme Court allowed Chavez to be a proper party to file a taxpayer’s suit.

Only a person who stands to be benefited or injured by the judgment in the suit or entitled to the
avails of the suit can file a complaint or petition. Respondents claim that petitioner is not a proper
party-in-interest as he was unable to show that “he has sustained or is in immediate or imminent danger
of sustaining some direct and personal injury as a result of the execution and enforcement of the
assailed contracts or agreements.” Moreover, they assert that not all government contracts can justify a
taxpayer’s suit especially when no public funds were utilized in contravention of the Constitution or a
law.

We explicated in Chavez v. PCGG (299 SCRA 744) that in cases where issues of transcendental public
importance are presented, there is no necessity to show that petitioner has experienced or is in actual
danger of suffering direct and personal injury as the requisite injury is assumed. We find our ruling in
Chavez v. PEA (384 SCRA 152) as conclusive authority on locus standi in the case at bar since the issues
raised in this petition are averred to be in breach of the fair diffusion of the country’s natural resources
and the constitutional right of a citizen to information which have been declared to be matters of
transcendental public importance.

If the issue involves transcendental and paramount public importance, then, you are recognized to
file a taxpayer’s suit.
· Republic vs. Caguio (536 SCRA 198)

This is connection with the non-impairment clause.

In RA 9334, it amended and increased the excise tax rates on alcohol and tobacco products under
the 1997 NIRC. Operators at the Subic Economic and Free Port Zone went to the RTC to restrain the
enforcement of RA 9334, as the law now taxes its products when brought into the freeport zone. RA
7227 grants tax and duties exemption when these products are brought to the freeport zone. Is there a
violation of the non-impairment clause?

Non-impairment clause is not applicable as Congress can withdraw a tax exemption. R.A. No. 7227
granted private respondents exemption from local and national taxes, including excise taxes, on their
importations of general merchandise, for which reason they enjoyed tax-exempt status until the
effectivity of R.A. No. 9334.

By subsequently enacting R.A. No. 9334, however, Congress expressed its intention to withdraw
private respondents’ tax exemption privilege on their importations of cigars, cigarettes, distilled spirits,
fermented liquors and wines.

There is no vested right in a tax exemption, more so when the latest expression of legislative intent
renders its continuance doubtful. Being a mere statutory privilege, a tax exemption may be modified or
withdrawn at will by the granting authority.

To state otherwise is to limit the taxing power of the State, which is unlimited, plenary,
comprehensive and supreme. The power to impose taxes is one so unlimited in force and so searching in
extent, it is subject only to restrictions which rest on the discretion of the authority exercising it.

As a general rule, tax exemptions are construed strictissimi juris against the taxpayer and liberally in
favor of the taxing authority. The burden of proof rests upon the party claiming exemption to prove that
it is in fact covered by the exemption so claimed. In case of doubt, non-exemption is favored.
 Flowing from the basic precept of constitutional law that no law is irrepealable, Congress, in the
legitimate exercise of its lawmaking powers, can enact a law withdrawing a tax exemption just as
efficaciously as it may grant the same under Section 28(4) of Article VI of the Constitution. There is no
gainsaying therefore that Congress can amend Section 131 of the NIRC in a manner it sees fit, as it did
when it passed R.A. No. 9334.

There is no violation of the non-impairment clause. With the amendment introduced by RA 9334,
the exemption granted to the operators at the Subic Freeport in the importation of alcohol and tobacco
products under RA 7227 has been withdrawn.

The exemption that can be invoked for the non-impairment clause is when the taxpayer enjoys
contractual tax exemptions. The exemption enjoyed by the freeport operators in the importation of
alcohol and tobacco products is not in the context of contractual tax exemptions. That exemption can
be withdrawn by Congress.

2006 Cases

· Bicolandia Drug vs. CIR (492 SCRA 575)

· CIR vs. Central Luzon Drug (492 SCRA 159)

The application of the Senior Citizens’ Discount in these cases is by way of tax credit. This was still
under the original Senior Citizen’s Law, RA 7432. (But now, this is by way of tax deduction – see Carlos
Superdrug case J)
· MIAA vs. CA (495 SCRA 91)

The MIAA has been considered as a government instrumentality and as such, it is exempted from
taxes. It is doing a governmental function.

However, this ruling is only insofar as MIAA case. In the earlier ruling of Mactan Cebu International
Airport vs. Marcos, the operation of the airport was treated as an operation of a GOCC. So, they were
subject to taxes. But the MIAA is considered as a governmend instrumentality, not a GOCC. Being a
government instrumentality, it would not be subject to taxes.

2005 Cases

· ABAKADA Guro Party List vs. Ermita 469 SCRA 1

This is in connection involving the constitutionality of RA 9337, the Reformed Value Added Tax Law
(RVAT). The RVAT Law was challenged as unconstitutional. One of the issues raised was that the law did
not originate in the House of Representatives. The House amended the VAT provisions in the NIRC.
When it was submitted to the Senate, it came out with its own bill – not only amending the VAT but also
provisions on income taxation. In the bicameral conference committee, a different draft came out,
which was the one submitted to Congress for ratification.

It was also questioned that the law was not valid because it granted the President the power to
increase the VAT to 12%, when certain conditions occur, which amounts to undue delegation of the
taxing power, which is purely legislative and does not cover the exception on tariff powers of the
President.

On the issue on whether the law is unconstitutional because it failed to comply with the
requirement that a tax bill must originate in the House, the Supreme Court said that it does not violate
such constitutional limitation.

There is no question that the revenue bill originated in the House. When the Senate had its own
version, it was acting within its power to introduce amendments to the House bill, where it included in
the Senate Bill amending income. The Senate version included VAT and income tax. RA 9337, while
popularly known as RVAT, it actually contained amendments to income taxation. The corporate income
tax was increased to 35% tax rate.

Article VI, Section 24 of the 1987 Constitution does not prohibit the Senate from making such
amendment. The main purpose of the bill to originate from the House is to bring sizeable revenues for
the government to supplement the country’s serious financial problems and improve tax administration.

The bicameral conference committee is mandated to settle and harmonize the differences in the
House and Senate bills. It is within the power of the conference committee to include in its report an
entirely new provision, not found either in the House or Senate Bill. If the committee can propose
amendment, there is no reason why it cannot propose several provisions collectively considered as an
amendment in the nature of a substitute so long as the amendment is germane to the subject bill.

The charge that the conference committee acted as a third chamber is without basis. RA 9337 is
valid.

As in the case of Tolentino vs. Secretary of Finance, the House version was different from the Senate
version and the version of the bicameral is totally different. The Supreme Court has sustained that it is
valid. There is no violation of the constitutional requirement that the bill should originate from the
House.
 Was there an undue delegation of taxing power to the President?

The power of taxation cannot be delegated. One of the exceptions of non-delegation is that the
power of taxation may be given to the President, as provided in the Constitution. The President 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.

Under RA 9337, the President was allowed to increase the 10% to 12% VAT, under certain
conditions. Since the power of taxation delegated to the President is only in connection witn import and
tariff duties, does the granting the President the power to increase the VAT, which is not a duty or an
import levy, violate the constitutional requirement?

The Supreme Court held that there was no undue delegation of the taxing power to the President to
increase the 10% VAT to 12%. While Congress is prohibited from delegating a power which is strictly
and inherently legislative, the case before us is not a delegation of legislative power. What was given to
the President was not a legislative power. It is simply a delegation of ascertainment of facts upon which
enforcement and administration of the increase rate under the law is contingent.

No discretion would be exercised by the President. The operation of the 12% VAT effective January
2006 is contingent upon a specified fact or condition, that is, when the VAT collection, as a percentage
of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (24/5%) or the
national government deficit as a percentage of GDP of the previous year exceeds one and one-half
percent (1½%).

The Secretary of Finance, as agent of Congress, is the one who will determine and declare the event
and report this to the President, whose ministerial duty is to impose the 12% upon the existence of the
conditions.

What was given to the President was not a taxing power but a delegation of ascertainment of facts
to impose and administer the increase rate, wherein they have delegated to the Secretary of Finance to
determine the conditions. If these conditions prevail, the President must be informed so that the
President will have the ministerial duty to impose the 12%.

The President is mandated to increase it to 12% because of the existence of the conditions. The
President has no leeway.
 There is no undue delegation of legislative power but only of the discretion as to the execution of a
law. This is constitutionally permissible. To increase the VAT to 12% came from Congress. The
President only executes the legislative policy.

Q: What if the law says upon the existence of the conditions, the President may or may not increase
the VAT rate to 12%?

A: In that case, it is within the discretion of the President. It becomes now an undue delegation. But
that is still debatable J

The law here is valid and constitutional.

Increasing the VAT to 12% is a demand of the principle of fiscal adequacy, that sources of revenue
must be adequate to make government expenditures. There is no proof invoked that the law violates
due process and equal protection. The Court will not interfere absent a showing of arbitrariness,
unreasonableness or discrimination. RA 9337 is equitable and uniform within a particular class.

The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of
progressive taxation has no relation with the VAT system inasmuch as the VAT paid by the consumer or
business for every goods bought or services enjoyed is the same regardless of income. The Court cannot
strike down a law as unconstitutional simply because of its yokes.

Taxes are the life blood of the government. The judiciary is the repository of remedies for all
political or social ills; We should not forget that the Constitution has judiciously allocated the powers of
government to three distinct and separate compartments; and that judicial interpretation has tended to
the preservation of the independence of the three, and a zealous regard of the prerogatives of each,
knowing full well that one is not the guardian of the others and that, for official wrong-doing, each may
be brought to account, either by impeachment, trial or by the ballot box.
 In other words, you cannot go to court to question the wisdom of that imposition made by the
Congress. If Congress enacted a tax law, the wisdom of that imposition is within the discretion of
Congress.

· Yamane vs. Lepanto

Q: Is a condominium corporation a taxable entity? Is it subject to taxes?

RA 4726 (Condominium Act) – It is not a taxable entity. Therefore, it is exempted from taxes.

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