nr vo4auwz| 8Facuury or Crvit Law (1734) TAXATION LAW 2021 GOLDEN NOTES FACULTY OF CIVIL LAW UNIVERSITY OF SANTO TOMAS MANILAThe UST GOLDEN NOTES is the annual student-edited bar review material of the University of Santo Tomas, Faculty of Civil Law. Communications regarding the Notes should be addressed to the Academics Committee of the Team: Bar-Ops. Address: Academics Committee UST Bar Operations Faculty of Civil Law University of Santo Tomas Espafia, Manila 1008 Tel.No: (02) 731-4027 (02) 406-1611 loc. 8578 Academics Committee Faculty of Civil Law University of Santo Tomas Espaiia, Manila 1008 All rights reserved by the Academics Committee of the Faculty of Civil Law of the Pontifical and Royal University of Santo Tomas, the Catholic University of the Philippines. 2021 Edition. No portion of this material may be copied or reproduced in books, pamphlets, outlines or notes, whether printed, mimeographed, typewritten, copied in different electronic devises or in any other form, for distribution or sale, without a written permission. A copy of this material without the corresponding code either proceeds from an illegal source or isin possession of one who has no authority to dispose the same. Released in the Philippines. 2021ACADEMIC YEAR 2020-2021 CIVIL LAW STUDENT COUNCIL LYODYCHIE Q. CAMARAO. PRESIDENT MARIA FRANCES FAYE R. GUTIERREZ VICE PRESIDENT INTERNAL ‘STEPHEN FLOYD A. GOPEZ VICE PRESIDENT EXTERNAL KRYSTAL GAYLE R. DIGAY ‘SECRETARY NATHAN RAPHAEL D.L AGUSTIN ‘TREASURER GIAN JUSTIN E. VERONA PUBLIC RELATIONS OFFICER IRIS ABIGAIL C. PORAQUE CHIEF-OF-STAFF UST BAR-OPS KRIZA NINA B. MALALUAN CHAIRPERSON ELISHA ELAINE D. BAYOT VICE-CHAIRPERSON INTERNAL JOSEPHINE GRACE W. ANG VICE CHAIRPERSON EXTERNAL MARINETTE M. SOBREVILLA SECRETARY ‘SARAH ANGELA D.EVA HEAD, PUBLIC RELATIONS OFFICER REBECCA JOY M.MALITAO HEAD, FINANCE COMMITTEE JEDIDIAH R. PADUA. HEAD, HOTEL ACCOMMODATIONS COMMITTEE SABINA MARIA H.MABUTAS _ASST. HEAD, HOTEL ACCOMMODATIONS COMMITTEE JOEMARI MATHEW R. AGARIN HEAD, LOGISTICS COMMITTEE JOHN FREDERICK A. NOJARA LOGISTICS COMMITTEE KIER JOHN V. UY LOGISTICS COMMITTEE CHRISTINE JOYCE P. ANDRES ‘SENIOR MEMBER ELOUISA ANN D.C. CARREON ‘SENIOR MEMBER NICOLE MARIE A. CORTES ‘SENIOR MEMBER PATRICIA MAE D. GUILLERMO ‘SENIOR MEMBER GLENN MATTHEW C. MANLAPID ‘SENIOR MEMBER CIARI T. MENDOZA ‘SENIOR MEMBER MARYLOU RENZIM, OLOTEO ‘SENIOR MEMBER LOUELLE JUDE B. QUE ‘SENIOR MEMBER JAMES ROSSL. TAN ‘SENIOR MEMBER ATTY. AL CONRAD B. ESPALDON ‘ADVISERACADEMICS COMMITTEE 2021 MARIA FRANCES FAYE R. GUTIERREZ SECRETARY GENERAL NATHAN RAPHAEL D.L. AGUSTIN ASST. SECRETARY GENERAL JOHN EDWARD F. FRONDA EXECUTIVE COMMITTEE, ANGEL ISAH M. ROMERO EXECUTIVE COMMITTEE KIRBY ANNE C. RENIA EXECUTIVE COMMITTEE KAREN ABBIE C. ASPIRAS EXECUTIVE COMMITTEE JOSE CHRISTIAN ANTHONY I. PINZON EXECUTIVE COMMITTEE MARIA FRANCES FAYE R. GUTIERREZ LAYOUT ARTIST CIARIT. MENDOZA COVER DESIGN ARTIST TAXATION LAW COMMITTEE 2021 MA. SELYNA V.RONO TAXATION LAW COMMITTEE HEAD AIRE! KIM P. GUANGA ASST. HEAD INCOME TAXATION, ‘TRANSFER TAXES MARFE B. GADDI ASST. HEAD GENERAL PRINCIPLES, LOCAL GOVERNMENT TAXATION PATRICIA ANNE D. BAUTISTA ‘ASST. HEAD TAX REMEDIES, BUSINESS TAXATION FRANCES GRACE L. CRUZ MERVIN ANGELO V. MANALO LESLEY YSABEL B. SUMAGPANG MICHAELLA G. RAMIREZ LOUIZEALLAINE T. ARENO ANTHONY LUIGI B. DE VERA FELIX ANGELO S. RAMOS ATTY, KENNETH GLENN L. MANUEL ATTY. CLARICE ANGELINE V. QUESTIN AdvisersACADEMICS COMMITTEE 2020 AYA DOMINIQUE S. CAPARAS SECRETARY GENERAL MARIA FRANCES FAYE R. GUTIERREZ. ASST. SECRETARY GENERAL RUTH MAE G. SANVICTORES EXECUTIVE COMMITTEE NICOLEG. AMANTE EXECUTIVE COMMITTEE JAYSON GABRIEL R. SORIANO EXECUTIVE COMMITTE CARA ANGELAN. FLORES EXECUTIVE COMMITTEE IANA CASSANDRA Y. ESMILE EXECUTIVE COMMITTEE AYA DOMINIQUE S. CAPARAS LAYOUT ARTIST CIARIT. MENDOZA COVER DESIGN ARTIST TAXATION LAW COMMITTEE 2020 JOANNA MARIE REYES ‘TAXATION LAW COMMITTEE HEAD, LAUREN STAR BORROMEO ASST. HEAD, INCOME TAXATION ROCHELLENIEVA CURIBA. ‘SHARMAINE ELIZA T. MACASERO GERMAINE VIDAL. CARREON LIRAH ALORRA R. CALUAG ATTY, KENNETH GLENN L MANUEL AdviserFACULTY OF CIVIL LAW UNIVERSITY OF SANTO TOMAS ACADEMIC OFFICIALS ATTY. NILO T. DIVINA REV. FR. ISIDRO C. ABANO, 0.P. DEAN REGENT ATTY. ARTHUR B. CAPILI FACULTY SECRETARY ATTY. ELGIN MICHAEL C. PEREZ LEGAL COUNSEL UST CHIEF JUSTICE ROBERTO CONCEPCION LEGAL AID CLINIC JUDGE PHILIP A. AGUINALDO SWDB COORDINATOR LENY G. GADIANA, R.G.C. GUIDANCE COUNSELOROUR DEEPEST APPRECIATION TO OUR MENTORS AND INSPIRATION JUSTICE JAPAR B. DIMAAMPAO, ATTY. ABELARDO T. DOMONDON ATTY. NOEL M. ORTEGA ATTY. VIRGINIA JEANNIE P. LIM ATTY. PRUDENCE ANGELITA A. KASALA ATTY. BENEDICTA DU-BALADAD ATTY. RIZALINA V. LUMBERA ATTY. LEAN JEFF M. MAGSOMBOL ATTY. KENNETH GLENN L. MANUEL ATTY. CLARICE ANGELINE V. QUESTIN For being our guideposts in understanding the intricate sphere of Taxation Law. -Academics Committee 2021DISCLAIMER THE RISK OF USE OF THIS BAR REVIEW MATERIAL SHALL BE BORNE BY THE USERTABLE OF CONTENTS 1 GENERAL PRINCIPLES. A. CONCEPT AND PURPOSE OF TAXATIO! 1 Definition. 2. Purpose. 3. Distinguish: tax and other forms of exactions B. DISTNGUISH: POWER OF TAXATION, POLICE POWER, AND FMINENT DOMAIN... (. THEORY AND BASIS OF TAXATION. 1 Lifeblood theory. 2. Necessity theory. 3. Benefits-received theory. D. JURISDICTION OVER SUBJECT AND OBJECTS. E, PRINCIPLES OF A SOUND TAX SYSTEM 1 Fiscal adequacy. 2. Theoretical justice... 3, Administrative feasibility. F. INHERENT AND CONSTITUTIONAL LIMITATIONS ON TAXATION. . STAGES OR ASPECTS OF TAXATION H, REQUISITES OF A VALID TAX. 1 KINDS OF TAXES. J. GENERAL CONCEPTS IN TAXATION. 1, Prospectivity of taw laws. 2. Imprescriptbility. 3 Situs of taxation. 4. Double taxation.. a Strict sense. b. Broad sense. Tax treatiesas relief from double taxation. 7 Coen 5. Escape from taxation... ‘a Shifting of tax burden. b. Distinguish: tax avoidance and tax evasion. 6. Exemption from taxation... 7. Equitable recoupment. 8 Prohibition on compensation and set-off. 9, Compromise... 10. Tax amnesty, K. CONSTRUCTION AND INTERPRETATION OF TAX LAWS, RULES AND REGULATIONS....... IL NATIONAL TAXATION. A. TAXING AUTHORITY. 1 Jurisdiction, power, and functions of the Commissioner of Internal Revenue... 2, Rule-making authority of the Secretary of Finance B. INCOME TAX... 1 Definition, nature and general principles.. a. Income tax systems i.Global b. Features ofthe Philippine income tax law .. Criteria in imposing Philippine income taxlaw.{.Citizenship. 4, General principles of income taxation, e. Types of Philippine income tax.. 2. Concept of income.. b. When income is taxable... i. Existence of income.. til, Recognition of income. ¢ Tests in determining whether income: i Realization test. i. Claim of right doctrine or doctrine of ownership, command or control ii, Economic benefit test or doctrine of proprietary interest... iv. Severance test. 4, Method of accounting... i Distinguish: cash and accrual method... 1 Speci method:instaliment deferred payment percentage of completion (in longterm earned for tax purposes. v. Income from dealings in property. 69 (a) Distinguish ordinary asset and capital asset. (b) Types of gains.. (c) Special rules pertaining to income or loss from dealings in property classified as capital asset (loss limitation rule, loss carry-over rule, holding period rule), (@) Taxtree exchanges. (b) Dividend (c) Royalty incom (@) Rental vii, Annuities and proceeds from rizes and awards... ix. Pension, retirement benefit, or separation pay.. x Income from any source. (a) Condonation of indebtedness. (b) Recovery of accounts previously written off. (c) Receiptof tax refunds or credit.. 4. Exclusions. Rationale. i. Taxpayers who may avail. i, Distinguish: exclusions, deductions, and tax credits. 4. Requirements for deductible items:€-Items not deductble.. 5 Incometax on individuals. 2 Resident citizens, non-r L.coverag: ii Taxation on compensation income. (@) Inclusions. (©) Exclusions Taxation of business income income from practice of profession. (2) Schedular. (&) 2% option Taxation of partners in ageneral professional partnership.. v. Taxation of passive income. vi Taxation of capital gains... {@) Income irom sale of shares of stock ofa Philippine corporation. (©) Income from sale of real property situated in the Philippines. (c) Income from sale, exchange, and other disposition of other capital ‘assets - ». Non-resident aliens engeged in trade or business. € Non-resident aliens not engaged in trade or business 161 4. Aliens employed by regional headquarters, regional operating headquarters, offshore banking units, and petroleum service contractors. Individual taxpayers exempt from income tax i. Minimum wage earner ii, Exemptions granted under international agreements. 6.Incometax on corporations nnn 2. Domestic Corporatians.. Taxation in general (a) Regular Corporate Income Tax (RCIT). (b) Minimum Corporate Income Tax (MCIT) (©) Taxation of passive income... (4) Taxation of capital gains (©) Improperly accumulated earnings tax ii. Proprietary educational institutions and non-profithospitals |. Government-ownedor controlled corporations, agencies, instrumental iv. Foreign currency deposit units... b Resident foreign corporstions.... i. Taxation in general (@) Regular Corporate income Tax (REIT) (b) Minimum Corporate Income Tax (MCIT) (©) Branch Profits Remittance Tax (BPRT) (@) Taxation of passive income... (c) Taxation of capital gains. ii. Resident foreign corporations subject to preferential tax rates (2) International carriers (b) Foreign currency deposit units and offshore banking units (©) Regional or area headquarters and regional operating headquarters ~- ¢ Non-resident foreign corporations (NRFC). i. Taxation of NRFCin general. AL.NRFCs subject to preferential tax rates 4. Corporations exempt from income tax.. 179 € Taxon other business entities; general partnerships, general professional partnerships, co- ‘ewnerships, joint ventures, and consortia ta 7 Filing of returnsand payment... 186 186 196 187 188 b. Corporate retunseecnncnonn - - aga i. Quarterly income tax 188 Who are required to file; exceptions4. Final adjustment return... iii, When and where to file... iv, Return of corporations contemplating dissolution or reorganization... «¢ Returnon capital gains realized from sale of shares of stock and real estate. 8, Withholding tax. ». Final withholding tax... ¢.Creditable withholding x. i. Expanded withholding tax. ii, Withholding tax on compensation. 4. Fringe benefits tax. e. Duties of a withholding agent. C. ESTATE TAX. 1. Basic principles, concept, and definition. 2. Classification of decedent 3. Composition of gross estate. a. Items to be included in determining gross estate... i. Decedent's interest. ii, Transfers in contemplation of death... fii, Revocable transfers a vn 202 iv. Property passing under a general power of appointment... 203 v. Proceeds of life insurance. vi. Prior interests. vi. Transfers for insufficient considerat b, Allowable deductions from gross estate... ¢ Exclusions irom gross estate and exemptions of certain acqui 4d. Tax credit for estate taxes paid to a foreign country. «Filing of estate tax returns and payment of estate tax. D. DONOR'S TAX... 1. Basic principles, concept and defi 2. Requisites of a valid donation. 43. Transfers which may be considered as donation. exception . . Condonation or remission of debt... ¢ Renunciation of inheritance; exception. 4, Classification of donor... 5. Determination of gross git. a. Composition of gross gi b. Valuation of gifts made in property. ¢. Exemption of certain gifts. 6. Tax credit for donor's taxes paid to a foreign country. 7. Filing of return and payment. E. VALUE-ADDED TAX 1. Natureand characteristics of value-added tax.. ‘a. Tax on value added b. Sales tax, Tax on consumption. 4d. Indirect tax; impactand incidence of tax. e. Tax credit method. £ Destination principle and cross-border principle... 2. Person: liable to value-added tax. 3. Imposition of value-added tax. a. Onsale of goods or properties... i. Tax base: gross selling price ii, Transactions deemed sale... lil. Change or cessation of status as value-added tax-registered persoiOnsale of services and use or lease of properties 4. Zero-rated and effectively zero-rated sales of goods or properties, and services. 246 5, Value-added tax-exempt transactions. 6 Input and output tax. 7. Refund or tax credit of excess input tax; procedure. 8 Compliance requirements.. 2. Registration. b. Invoicing requirements.. Filing of returnsand payment. <. Withholding of final value-added tax on sales to government. ¢. Administrative and penal sanctions... F, PERCENTAGE TAXES: CONCEPT AND NATUR} G. EXCISE TAX: CONCEPT AND NATURE H, DOCUMENTARY STAMP TAX: CONCEPT AND NATURE TAX REMEDIES UNDER THE NATIONAL INTERNAL REVENUE CODE. 1, Assessment of internal revenue taxes. a Procedural due process in tax assessments. i Letter ofauthority and tax audit... Informal conference. Preliminary assessment notice... Formal letter of demand and final assessment notice. v. Disputed assessment. vi. Administrative decision on a disputed assessment. vil, Appeal from an administrative decision on disputed assessment. 1. Requisites of a valid assessment. ¢ Tax delinquency and tax deficiency... 4d. Prescriptive period for assessment... General rule. Distinguish: false returns, fraudulent returas, and non-fling of returns... |. Suspension of statute of limitations. 2, Taxpayer's remedies. 2 Protesting an assessment... i. Period to file protest... . oo 7 ii, Kinds of protest - request for reconsideration or reinvestigation... |. Submission of supporting documents... Effect of failure to file protest. v. Action of the Commissioner on the protest filed. (@) Period w file protest... (b) Remedies of the taxpayer in case of denial or (o) Effect of failure to appeal b, Recovery of tax erroneously or illegally collected 319 is for filing a claim for refund or issuance of a tax credit 319 ii Proper party to file claim for refund or tax credit fi, Proper party to file claim for refund or tax credit 324 il, Distinguish from input value-added tax refund 332 Power of Commissioner of Internal Revenue to compromise. 334 ¢. Non-retroactivity of uli 340 3. Government remedies for collection of delinquent taxes ‘340 a. Requisites.. 340 b. Prescriptive periods; suspension of running of statute of limitations... 341 Administrative remedies... 342 Tax lien.. 342 Distraint and levy 343, Forfeiture of real property. . 7 ey") Suspension of business operation... 348v Judicial remedies. 4. No injunction rule; exceptions... 4, Civil penalties... a. Delinquency interest and deficiency interest b. Surcharge. ¢. Compromise penalty. 4. Fraud penalty. ML, LOCAL TAXATION erent = ase A. LOCAL GOVERNMENT TAXATION.. 358 1. Fundamental principles. 358 2. Natureand source of taxing power... 359 .Grant of local taxing power under the Local Government Code... 359 b. Authority to prescribe penalties for tax violations. « Authority to grant local tax exem 4, Withdrawal of exemptions, . Authority to adjust local tax rates. £ Residual taxing power of local governments 3. Scope of taxing powei 4, Specific taxing power of local government units. 5. Common revenue raising powers, 6. Community tax. 7. Common limitations on the taxing powers of local government units. 8. Requirements for a valid tax ordinance... 9, Taxpayer's remedies. ¢. Action before the Secretary af Justice 10, Assessment and collection of local taxes... a. Remedies of local government units... ». Prescriptive period. B. Real Property Taxation. 1. Fundamental principles. 394, 2. Nature, 3. Imposition a. Powerto levy. . Exemption from real property tax... 4. Appraisal and assessment... Classes of real property b. Assessment based on actual ust 5. Collection... - . : Date of accrual. b. Periods to collect... ¢ Remedies of local government units. 6. Taxpayer's remedies.. ‘Contesting an assessm i. Payment under protest; exceptions ... ii File protest with Treasurer. fii, Refunds or credits of real property taxes: ». Contestinga valuation of real property... i. Appeal to the Local Board of Assessment Appeals (LBAA). ii Appeal to the Central Board of Assessment Appeals (CBAA)_. iil Efiect of payment of taxes... ¢ Compromising real property tax assessment IV. JUDICIAL REMEDIES . A. JURISDICTION OF THE COURT OF TAX APPEALS. 1. Exclu2, Exclusive original and appellate jurisdiction over criminal cases. B, PROCEDURE... 1 Filing of an action for collection of taxes... a Internal revenue taxes 2. Civil cases. a. Who may appeal, mode of appeal, and effect of appeal . b. Suspension of collection of taxes. ¢ Injunction not available to restrain collection. 3. Criminal cases. 2 Institution and prosecution of criminal 2 b. Institution of civil actionin criminal action. Period to appeal. 4, Appeal to the Court of Tax Appeals en banc.. 5, Petition for review on certiorari to the Supreme Court.TAXATION LAW (GENERAL PRINCIPLES CONCEPT AND PURPOSE OF TAXATION En ‘Taxation is the power by which the sovereign, through its law-making body, raises revenue to defray the necessary expenses of government. It is merely a way of apportioning the costs of government among those who, in some measure are privileged to enjoy its benefits and must bear its burdens. (Aban, 2001) It is a mode by which governments make exactions for revenue In order to support their existence and carry out their legitimate objectives. Taxation may refer to either or both the power to tax or the act or process by which the taxing power is exercised. (Vitug, 2006) In other words, taxation is: 1. The inherent power of the sovereign exercised through legislature To impose burdens Upon subjects and objects Within its jurisdiction For the purpose of raising revenues To carry out the legitimate objects of government asd 1. Primary or revenue purpose ~ to raise funds or property to enable the State to promote the general welfare and protection ofthe people. 2. Secondary or non-revenue purposes (PREEP) a, Promotion of general welfare - taxation may be used as an implement of police power to promote the general welfare of the people. In the case of Lutz v. Araneta (GR. No. L- 7859, December 22, 1955), the Supreme Court upheld the validity of the Sugar Adjustment Act, which imposed a tax on milled sugar since the purpose of the law was to strengthen an industry that is so undeniably vital to the economy ~ the sugar industry. (Aban, 2001) b Regulation of activities/industries Taxes may also be imposed for a regulatory purpose as, for instance, in the rehabilitation and stabilization of a threatened industry which is affected with public interest, like the oil industry. (Calter Philippines, Inc. v. Commission on Audit, et al, GR. No. 92585, May 8, 1992) Taxation also has a regulatory purpose 1s in the ease of taxes levied on excises or privileges like those imposed on tobacco and alcoholic products, or amusement places like night clubs, cabarets, cockpits, ete. (Aban, 2001) Reduction of social inequality - a progressive system of taxation prevents the undue concentration of wealth in the hands of few _ individuals, Progressivity is based on the principle that those who are able to pay more should shoulder the bigger portion of the tax burden. Encourage economic growth - the grant of incentives or exemptions encourage investment thereby _ stimulating economic activity. Protectionism ~ Protective tariffs and customs duties are imposed as taxes in order to protect important sectors of the economy or local industries, as in the case of foreign importations. To tax is two-fold. It is both inherent and legislative in nature. Dry TST DUTIES An alk | Only a kind of embracing | tax; therefore, term to | limited include coverage. various kinds of enforced contributions imposed upon for UNIVERSITY OF SANTO TOMAS Pacutty oF Civit LawGENERAL PRINCIPLES OF TAXATION NOTE: Taxes may be imposed only by the government under its sovereign authority; toll fees may be demanded by either the government cr private individuals oF en of ownership. ies, as an attribute Du PE Imposed to | For regulation Purpose | siserevenue. | and control Collected under | Collected under Basis | the power of | police power. taxation. Generally, Timited to the amount is | necessary Amount | unlimited. expenses of regulation and control Imposed on | Imposed on the persons, exercise of a Subject | properties, right or rights or | privilege such transactions | as the Te tsnment of —— Tiject — Perens, —] Goods Won-payment | Roncpyenet property, | impored or Effect OF | oes nor make | makes the hon Printers, or | expored Nom |e, basis: | busines ig Pantone thea atterthestareof | beore "the Me re | \rine og [ose | commences Contribution — | ofa road bridge Postactiity Definition | rom gereons | or the tke of fopeation” | preactvty for ue parpose/e (A mumtopatiy, B5, kas an octinance nose [Domania Demand —ar] | whieh requires tac all stores resaurants, Soecenty — [promidorsip’| | and other establishments “selling liquor senate iimted. to the| | Subsequent, che muniapal bard proposed amcunt, [lied to ae] | ordinance imposing scales tax egal as ‘maintenance of to 5% of the amount paid for the purchase or publi constnptionefliqucr in stores resus Publ ment, | | and otfer estibishments, The municipal Purpose Jot Mine | seomers the ground’ that it would constate, double svernment |property cnnaion isthe refit ofthe mayor pstmed? fig “Sepia bemapd| | Reason briefly. 2004 BAR) Imposing | imposed by te | by’ priate enter Impantonsare of diferent mature 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. Roth a license fee and a tax may be imposed on the same business or occupation, or for selling the same article and this is not in violation of the rule against double taxation. (Campania General de Tabacos de Filipinos v. City of Manila, 8 SCRA 367 (1963) aa sy ‘An enforced] An enforced proportional contribution proportional contribution from persons | from owners and property| of lands for public | especially purpose/s. | those who are peculiarly benefited _by UNIVERSITY OF SANTO TOMAS 2021GoLvEN NottsTAXATION LAW Interest. - rate to be imposed ‘collected on any unpaid amount oftax (deficiency interest or delinquency interest) Refer to Civil Penalties for farther discussion expresly, stipulated in writing, (Article 1956, Civil Code) There — shall be assessed and collected on any unpaid amount of tex, interest at the rate of double the legal interest rate for leans, or forbearance of any money in the absence of an express stipulation as set by the Bangko Sentral ng Pilipinas (BSP) from the date prescribed for payment until the amount is fully paid. Interest depends upon the written stipulation of the parties. If no written stipulation, as to the rate, legal rate of interest shall beimposed pail Improvement Tnposd on Levied only Subject | persons, onland propery Fieits, or transactions A personal | Nota orsoaal Person | iibity ofthe |hablty of the tapayer | person Ecosse Way be | May only be Imposing imposed by | imposed” by Authority | national or |the local toc government government purpose | f°" the | Contribution Pose | support of the | to the cost of forerament | pubic Improvement Regular] Exepttonal as Scone exaction to time and locality rm ro Bass] Obligation | Obligation created by based on tow contrac express or imped Assignabii | Not a Ne nahie _ | Assn Mode —of| Generally [Payable Payment | payable in| kind or in money, in| money. exceptional instances, my be sated in iad Setoff | Net sabjen | Sutjectto we spect of | Mayresultin_] No none” | Imprisonmen | imprisonment payment t (except when det arises from erie) Interest =| No terest [No interes Stipulation | untess' there | shall be due Tequireme | shal” be | unless tt has me assessed and | been Prescriptio Governed by the — special prescriptive periods provided for in the National Internal Revenue Code (NIRC). Governed by the ordinary periods of prescription. UNIVERSITY OF SANTO TOMAS Pacutty oF Civit LawGENERAL PRINCIPLES OF TAXATION DISTNGUISH: POWER OF TAXATION, POLICE POWER, AND EMINENT DOMAIN Oa ENT ‘Authority who its [Government oF Government or public exercises the | political subdivision political subdivision service companies and power public utilities To raise revenue in [Promotion of general | To facilitate the taking of support of __ the | welfare through | private property for Purpose | Government. Regulation is | regulations | pe purpose merely incidental Upon the community or |Upon the community or |On an individual as the Persons affected | class of individuals class of individuals owner of a particular property Amount of | No ceiling except inherent | Limited to the cost of | No imposition, the owner monetary | limitations. regulation, issuance of | is paid the fair market imposition license, or surveillance value of his property. Protection of a secured | Maintenance of healthy | The person receives just organized society, benelits | economic standard of | compensation (the fai received from | society, intangible | market value of the overnment, no direct | altruistic feeling that he | property taken from him) Se nett har contributed tothe | SrectbencRt rosea general welfare, no direct benefit, Tax laws generally do not | Contracts may be | Contracts. maybe impair contracts unless | impaired. impaired. Non-impairment | the government is party to ofcontracts | contract granting exemption fora consideration. NOTE: Taxation is distinguishable from police a power as to the means employed to implement No limit Limited to the cost of these public good goals. Those doctrines that are regulation, issuance of unique to taxation arose from peculiar te ikense, or considerations such as those especially punitive surveillance effects of taxation, and the belief that taxes are Benefits Received the lifeblood of the State yet at the came time, it No special or direct [No direct benef Is has been recognized that taxation may be made beneht is received by | recelved; a. healthy the implement of the State's police power. Gouthern Cross Cement Corporation v. Cement ‘Manufacturers Association of the Philippines, et al, GR. No, 158540, August 3, 2005) Q: Distinguish taxation power from police power. &: Purpose Toriserevenue — To promote public perpose through regulations Amount of Exaction economic standard of society isattained, the taxpayer; merely general benefit of protection. ‘Non-impairment of Contracts Contracts may not be | Contracts may be impaired impaired. ‘Transfer of Property Rights Taxes paid become | No tansier but only partof publicfunds. | restraint in its Scope ‘All persons, property and excises All persons, property, rights and privileges UNIVERSITY OF SANTO TOMAS 2021GoLvEN NottsTAXATION LAW. Q: Ordinance No. SP-2095 of the Quezon City government imposes a Socialized Housing Tax (SHT) equivalent to 0.5% on the assessed value of land in excess of Php100,000. The SHT will be used as one of the sources of funds for urban development and housing program. Can Quezon City impose such tax? As YES. Cities are allowed to exercise such powers and discharge such functions and responsibilities as are necessary, appropriate, or incidental to efficient and effective provision of the basic services and facilities which include, among others, programs and projects for low: cost housing and other mass dwellings. The collections made accrue to its socialized housing programs and projects. The tax Is not a pure exercise of taxing power or merely to raise revenue; it is levied with a regulatory purpose. ‘The levy is primarily in the exercise of the police power for the general welfare of the entire city. (Ferrer, Jr. vs. Bautista, G.R. No. 210551, June 30, 2015) @ Galaxia Telecommunications Company constructed a telecommunications tower for the purpose of receiving and transmitting cellular communications. Meanwhile, the municipal authorities passed an ordinance entitled “An Ordinance Regulating the Establishment of Special Projects’ which imposed fees to regulate activities particularly related to the construction and maintenance of various structures, certain construction activities of the identified special projects, which includes “cell sites” or telecommunications towers. Is the imposition of the fee an exercise of the power of taxation? A: NO. The designation given by the municipal authorities does not decide whether the imposition is properly a license tax or a license fee. The determining factors are the purpose and effect of the imposition as may be apparent from the provisions of the ordinance. Ifthe generating 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 incidentally revenue is also obtained does not make the imposition a tax (Gerochi v. Department of Energy, 527 SCRA 696, 2007) ‘The fees in the ordinance are not impositions on the building or structure itself: rather, they are impositions on the activity subject of government regulation, such as the installation and construction of the structures. It is primarily regulatory in nature, and not primarily revenue- raising. While the fees may contribute to the revenues of the municipality, this effect is merely incidental. Thus, the fees imposed in the said ordinance are not taxes. (Smart Communications, Inc, v. Municipality of Malvar, Batangas, GR. No. 204429, February 18, 2014) Q: Revenue laws R.A. 6260 and P.D. 276 were enacted to establish the Coconut Investment Fund and Coconut Consumers Stabilization Fund (coco-levy funds). These funds shall be owned by the coconut farmers in their private capacities under the Coconut Industry Code. In 2000, E.0. 313 was issued creating the Coconut Trust Fund and designating the UCPR as the trustee bank This aimed to provide financial assistance to the coconut farmers, to the coconut industry, and to other agriculture-related programs. CPB suggested that the coco-levy funds are closely similar to the SSS funds, which have been declared not to be public funds but properties of the SSS members and held merely in trust by the government. Are the coco-levy funds in the nature of taxes and thus, can only be used for public purpose? ‘A: YES. The coco-levy funds were raised pursuant to law to support a proper governmental purpose. They were raised with the use of the police and taxing powers of the State for the benefit of the coconut industry and. its farmers in general Unlike ordinary revenue laws,R.A.6260 and PD. 276 did not raise money to boost the government's general funds but to provide means for the rehabilitation and stabilization of a threatened industry, the coconut industry, Which is so affected with public interest as to be within the police power of the State. The subject laws are akin to the imposed sugar liens. It cannot be likened to SSS Law which collects premium contributions that are not taxes and not for public purpose. The SSS members pay contribution: in exchange for insurance protection and benefits like loans, medical or health services, and retirement package. UNIVERSITY OF SANTO TOMAS Pacutry oF Civit LawGENERAL PRINCIPLES (Pambansang Koalisyon ng mga Samahang ‘Magsasaka at Manggagawa sa Niyugan v. Executive Secretary, G.R. Nox. 147036-37, April 10, 2012) Q: On February 26, 2004, RA 9257 was issued, amending R.A. 7432, which provides that the 20% senior citizen discount may be daimed as a tax deduction from gross income, gross sales, or gross receipts. Petitioners challenge its constitutionality and pray that the tax credit treatment of the 20% discount be reinstated. They posit that the resolution of this case les in the determination of whether the legally mandated 20% senior citizen discount is an exercise of police power or eminent domain. IFit is police power, no just compensation is warranted, But if it is eminent domain, the tax deduction scheme is unconstitutional because it is not a peso for peso reimbursement of the 20% discount given to senior citizens. Thus, it constitutes taking of private property without payment of just ‘compensation. Is the tax deduction scheme an exercise of police power or the power of eminent domain? A: POLICE POWER. The 20% discount given to senior citizens is a valid exercise of police power. Thus, even if the current law, through its tax deduction scheme (which abandoned the tax credit scheme under the previous law), does not provide for a peso for peso reimbursement of the 20% discount given by _ private establishments, no constitutional infirmity obtains because, being a valid exercise of police power, payment of just compensation is not warranted, ‘The 20% discount is intended to improve the welfare of senior citizens who, at their age, are less likely to be gainfully employed, more prone to illnesses and other disabilities, and thus, in need of subsidy in purchasing basic commodities. The discount serves to honor senlor citizens who presumably spent the productive years of their lives on contributing to the development and progress of the nation, This distinct cultural Filipino practice of honoring the elderly is an integral part of this law, As to its nature and effects, the 20% discount is a regulation affecting the ability of private establishments to price their products and services relative to a special class of individuals, senior citizens, for which the Constitution affords preferential concern (Manila Memorial Park v. DSWD, 2013) ‘THEORY AND BASIS OF TAXATION The theories underlying the power of taxation 1. _Lifeblood theory; 2. Necessity theory; and 3. Benefits-protection theory (Doctrine of symbiotic relationship), Penn Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents, (CIR v CTA, GR. No. 106611, July 21, 1994) The government chiefly relies on taxation to obtain the means to carry on its operations. Taxes are essential to its very existence. (CIR ¥. Solidbank Corporation, GR No. 148191, November 25,2003) Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need. (CIR v. Pineda, GR No. L-22734, September 15, 1967) Manifestations of lifeblood theory: 1. Imposition even in the absence of constitutional grant. 2. State's right to select objects and subjects of taxation, 3. No injunction to enjoin collection of taxes except for a period of 60 days upon application to the CTA as an incident of its appellate jurisdiction, 4, Taxes could not be the subject of compensation and set-off, subject to certain exceptions. 5. A valid tax may result in destruction of Property, Q: Discuss the meaning and the implications of the statement: “Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need’. (1991 BAR) A: It expresses the underlying basis of taxation which is governmental necessity. For indeed, BB) Urvensiry or santo Tomas i) 2021 Gouven NotesTAXATION LAW without taxation, a government can neither exist nor endure. Considering that taxes are the lifeblood of the government, and in Holmes’ memorable metaphor, the price we pay for civilization, tax laws must be faithfully and strictly implemented (CIR v. Acosta, GR. No. 154068, August 3, 2007) axe should be collected promptly. No court shall have the authority to grant an injunction to restrain the collection of any internal revenue tax, fee or charge imposed by the NIRC. (Angeles City v. Angeles Electric Cooperation, 622 SCRA 43, 2010) Reseach ‘The theory behind the exercise of the power to tax emanates from necessity. Without taxes, the government cannot fulfill its mandate of promoting the general welfare and well-being of the people. (Gerochi v. DOE, G.R. No. 159796, July 47, 2007) It is a necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements for the enjoyment of the citizenry, and those which come within the State's territory and facilities and protection which a government is supposed to provide. (Dimaampao, 2015) Egy It involves the power of the State to demand and receive taxes based on the reciprocal duties of ‘support and protection between the State and its citizens. Taxes are what we pay for a civilized society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one’s earned income to the taxing authorities, every person who is able must contribute his share in the running of the government. The government, for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their material and moral values”. (CIR v. Algue, GR. No, L-28896, February 17, 1988) Special benefits to taxpayers are not required. A person cannot object to or resist the payment of taxes solely because no personal benefit to him can be pointed out arising from the tax. (Lorenzo v. Posadas, 64 Phil 353) The expenses of government, having for their object the interest of all, should be borne by everyone, and the more man enjoys the advantages of society, the more he ought to hold. himself honored in contributing to those expenses (ABAKADA Guro Party List . Ermita, GR. No. 168056, September 1, 2005) JURISDICTION OVER SUBJECT AND OBJECTS It is the country, state or sovereign that gives protection and has the right to demand payment of taxes with which to finance activities so it could continue to give protection. Taxation is territorial because it is only within the confines of its territory that a country, state or sovereign may give protection, PRINCIPLES OF A SOUND TAX SYSTEM 1. Fiseal Adequacy 2. Administrative Feasibility 3. Theoretical Justice es Revenue raised must be sufficient to meet government/public expenditures and other public needs. (Chavez v. Ongpin, GR. No. 76778, June 6, 1990) Neither an excess nor a deficiency of revenue vis-i-vis the needs of government would be in keeping with the principle. (Vitug, 2005) Eran one Must take into consideration the taxpayer's ability to pay (Ability to Pay Theory) Art. VI, Sec. 28(1), 1987 Constitution mandates that the rule on taxation must be uniform and equitable and that the State must evolve a progressive system of taxation. Pre eee e The tax system should be capable of being effectively administered and enforced with the least inconvenience to the taxpayer. (Diaz v. Secretary of Finance, GR. No. 193007, July 13, UNIVERSITY OF SANTO TOMAS Pacutty oF Civit LawGENERAL PRINCIPLES 2011) Q: True or False. A law that allows taxes to be paid either in cash or in kind is valid. A: TRUE. There is no law which requires payment of taxes in cash only. However, a law allowing payment of taxes in kind, although valid, may pose problems of valuation. Hence, will violate the principle of administrative feasibility A violation of the principle of a sound tax A tax law will retain its validity even ifitis not in consonance with the principles of fiscal adequacy and administrative feasibility because the Constitution does not expressly require so. ‘These principles are only designated to make cour tax system sound. However, if taxlaw runs contrary to the principle of theoretical justice, such violation will render the law unconstitutional considering that under the Constitution, the rule of taxation should be uniform and equitable. (Dimaampao, 2015) Q Is the VAT law violative of the administrative feasibility principle? A: NO. The VAT law is principally aimed to rationalize the system of taxes on goods and services. Thus, simplifying tax administration and making the system more equitable to enable the country to attain economic recovery. (apatiran ng Mga Naglilingkod sa Pamahalaan v. Tan, GR No. 81311, June 30, 1988) Q: Is the imposition of VAT on tollway operations valid? A: YES. Administrative fessibility is one of the ‘canons ofa sound tax system. Non-observance of the canon, however, will not render a tax imposition invalid “except to the extent that specific constitutional or statutory limitations are impaired.” Thus, even if the imposition of VAT on tollway operations may seem burdensome to implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or the Constitution. (Diaz v. Secretary of Finance, 654 SCRA 96, GR. No. 193007, July 19, 2011) @ Frank Chavez, as taxpayer, and Realty Owners Association of the Philippines, Inc. (ROAP), alleged that F.0. 73 providing for the collection of real property taxes as provided for under Section 21 of P.D. 464 (Real Property Tax Code) is unconstitutional because it accelerated the application of the general revision of assessments to January 1, 1987 thereby increasing real property taxes by 100% to 400% on improvements, and up to 100% on land which would necessarily lead to confiscation of property. Is the contention of the Chavez and ROAP correct? A: NO. Without E.. 73, the basis for collection of real property taxes will stil be the 1978 revision. of property values. Certainly, to continue collecting real property taxes based on valuations arrived at several years ago, ia disregard of the increases in the value of real properties that have occurred since then, is not in consonance with 2 sound tax system. Fiscal adequacy, which is one of the characteristics of a sound tax system, requires thet sources of revenues must be adequate to meet government expenditures and their variations. (Chavez v. Ongpin, 186 SCRA 331, GR. No. 7676, June 6, 1990) NOTE: The case above was decided before the effectivity of the Local Government Code (LGU). INHERENT AND CONSTITUTIONAL LIMITATIONS ON TAXATION Public Purpose Inherently Legislative Territorial International Comity Exemption of government entities, agencies and instrumentalities Constitutional limitations, 1. Provisions directly affecting taxation a. Prohibition against imprisonment for non-payment of poll tax (Art Ill, Sec 20) b. Uniformity and equality of taxation (Art V1, Sec. 28) Grant by Congress of authority to the president to impose tariff rates (Art V1, Sec. 28) d. Prohibition against taxation of religious, charitable entities, and educational entities (Art. VI, Sec. 28) Bip) Uuivensiry of Santo Tomas i) 2021 Gouven NotesTAXATION LAW. fe. Prohibition against taxation of non- stock, non-profit educational Institutions (Are. IX, Sec. 4) f. Majority vote of Congress for grant of tax exemption (Art Vi, Sec. 28) & Prohibition on use of tax levied for special purpose (Art. VI, Sec. 29) President's veto. power on appropriation, revenue, tariff bills (Art. V1, Sec. 27) Non-impairment of jurisdiction of the Supreme Court (Art. VI, Sec. 30) Grant of power to the LGUs to create its own sources of revenue (Art. IX, Sec. 3) Origin of Revenue and Tarif Bills (Art. V1, Sec. 24) 1. No appropriation or use of public money for religious purposes (Art. VI, Sec.28) 6 2, Provisions indirectly affecting taxation (Art. I, 1987 Constitution) Due process (Sec. 1) b. Equal protection (Sec. 1) Religious freedom (Sec. 5) d. Non-impairment of obligations of contracts (Sec. 10) e. Freedom of the press (Sec. 4) ‘The limitations are discussed in detail below INHERENT LIMITATIONS Po a ‘The proceeds of tax must be used (a) for the support of the State; or (b) for some recognized objective of the government or to directly promote the welfare of the community. ‘Tax is considered for public purpose if 1. Itis for the welfare of the nation and/or for greater portion ofthe population; 2. Ie affects the area as a community rather thanas individuals; and 3. It is designed to support the services of the government for some of its recognized objects. ‘Tests in determining public purpose 1. Duty test’ - Whether the thing to be furthered by the appropriation of public revenue is something which is the duty of the State as a governmentto provide. NOTE: The term “public purpose” is not defined. It is an elastic concept that can be hammered to fit’ modern standards. Jurisprudence states that “public purpose” should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public money may now be used for the relocation of illegal settlers, low-cost housing and urban agrarian reform. (Planters Products, Inc. v. Fertiphil Corporation, G.R. No. 166006, March 14, 2008) 2. Promotion of general welfare test - Whether the proceeds of the tax will directly promote the welfare of the community in equal measure. When a tax law is only a mask to exact funds from the public when its true intent is to give undue benefit and advantage to a private enterprise, that law will not satisfy the requirement of "public purpose’. (Planters Products, In. v. Fertiphil Corporation, GR No. 166006, March 14, 2008) ‘Determination when enacted tax Jaw is for public purpose Determination lies in the Congress. However, this will not prevent the court from questioning the propriety of such statute on the ground that the law enacted Is not for a public purpose; but once it is settled that the law is for a public purpose, the court may no longer inquire into the wisdom, expediency or necessity of such tax NOTE: If the tax measure is not for public purpose, the act amounts to confiscation of Property. ‘Principles relative to publicpurpase 1. Tax revenue must not be used for purely private purposes or for the exclusive benefit, Of private persone, UNIVERSITY OF SANTO TOMAS Pacutry oF Civit LawGENERAL PRINCIPLES 2. Inequalities resulting from the singling out of one particular class for taxation or exemption infringe no constitutional limitation because the legislature is free to select the subjects of taxation. NOTE: Legislature is not required to adopt a policy of ‘all or none” for the Congress has the power to select the object of taxation, (Lutz v. Araneta, GR. No. L-7859, 22 December 1955) 3. An individual taxpayer need not derive direct benefits from the tax, 4, Public purpose is continually expanding. ‘Areas formerly left to private initiative now lose their boundaries and may be undertaken by the government if it is to meet the increasing social challenges of the times. 5. The public purpose of the tax law must exist at the time of its enactment. (Pascual v. ‘Secretary of Public Works, G.R. No, L-10405, December 29, 1960) Q: Are subsequent laws, which convert a public fund to private properties, valid? A: NO. Taxes could be exacted only for a public purpose; they cannot be declared private Properties of individuals although such individuals fall within a distinct group of persons. (Pombansang Koalisyon ng mga Samahang Magsasake at Manggagagawa sa ‘Niyugan v. Exec. Sec, G.R. Nos. 147036-37, April 10,2012) Q: Lutz assailed the constitutionality of Sections 2 and 3 of CA. 567, which provided for an increase of the existing tax on the manufacture of sugar. Lutz alleged such tax as unconstitutional and void for not being levied for a public purpose but for the aid and support of the sugar industry exclusively. Is the tax law increasing the existing tax on the manufacture of sugar valid? A: YES, The protection and promotion of the sugar industry is a matter of public concern. The legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Legislative discretion must be allowed full play, subject only to the test of reasonableness. If objective and methods alike are constitutionally valid, there is tno reason why the State may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made to implement the State's police power. (Lutz v. Araneta, GR. No. 1-7859, December 22,1955) Q: Is the tax imposed on the sale, lease or disposition of videograms for a public purpose? A: YES. Such tax is imposed primarily for answering the need for regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights, the proliferation of pornographic videotapes. While the direct beneficiary of said imposition is the movie industry, the citizens are held to be its indirect beneficiaries. (Tio v. Videogram Regulatory Board, GR. No. 75597, June 18, 1987) inane Only the legislature has the full discretion as to the persons, property, occupation or business to be axed provided these are all within the State's territorial jurisdiction. It also fully determine the amount or rate of tax, the kind of tax to be imposed and method of collection. (I Cooley 176-184) and GR: The power to tax is exclusively vested in the legislative body, being inherent in nature. Hence, it may not be delegated. (Delegate potestas non potest delegari) The powers which Congress is prohibited from delegating are those which are strictly, or inherently and exclusively, legislative. Purely legislative power, which can never be delegated, has been described as the authority to make a complete law, complete as to the time when it shall take effect and as to whom it shall be applicable; and to determine the expediency of its enactment. (ABAKADA Guro Party List v. Hon Exec Sec, GR. No. 168056 September 1, 2005) It cannot be delegated without infringing upon the theory of separation of powers. (Pepsi-Cola Bottling Company of the Phil. v Mun. of Tanauan, 69 SCRA 460, February 27, 1976) Non-delesable legislative powers UNIVERSITY OF SANTO TOMAS 2021GoLvEN Notts 10TAXATION LAW. 1. Selection of subject to be taxed 2. Determination of purposes for which taxes shall be levied 3. Fixing of the rate/amount of taxation 4. Situsof tax 5. Kind of tax XPNs: 1. Delegation to Local Government ~ Refers to the power of LGUs to create its own sources of revenue and to levy taxes, fees, and charges. (Art. X, See. 5, 1987 Constitution) NOTE: Art. X, Sec. 5 of the Constitution does not change the doctrine that municipal corporations do not possess inherent powers of taxation; what It does Is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue and they no longer have to wait for a statutory grant of these powers and the power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers. Thus, in interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in favor of municipal corporations. (Quezon City et al v. ABS-CBN Broadcasting Corporation, GR. No. 162015, March 6, 2006) 2. Delegation to the President ~ The authority of the President to fix tariff rates, import or export quotas, tonnage and wharfage dues or other duties and imposts. (Art. VI, Sec. 28(2), 1987 Constitution) NOTE: When Congress tasks the President or his/her alter egos to impose safeguard measures under the delineated conditions, the President or the alter egos may be properly deemed as agents of Congress to perform an act that inherently belongs as a matter of right to the legislature. It is basic agency law that the agent may not act beyond the specifically delegated powers or disregard the restrictions imposed by the principal. (Southem — Cross Cement Corporation v. Cement Manufacturers Association of the Phil, GR. No. 158540, August 3, 2005) 3. Delegation to administrative agencies When the delegation relates merely to administrative implementation that may call for some degree of discretionary powers under sufficient standards expressed by law (Cervantes v. Auditor General, GR. No. L- 4043, May 26, 1952) or implied from the policy and purpose of the act. (Maceda v. ‘Macaraig, G.R. Na 88291, June 8, 1993) NOTE: Technically, this does not amount to 1a delegation of the power to tax because the questions which should be determined by Congress are already answered by Congress before the tax law leaves Congress Q: mn order to raise revenue for the repair and maintenance of the newly constructed City Hall of Makati, the City Mayor ordered the collection of P1.09, called “elevator tax’, every time a person rides any of the high- tech elevators in the City Hall during the hours of 8am to 10am, and 4pm to 6pm. Is. the imposition of elevator tax valid? (2003 BAR) A: NO. The imposition ofa tax, fee, or charge, or the generation of revenue under the Local Government Code (LGC), shall be exercised by the Sanggunian of the LGU concerned through an appropriate ordinance (Sec. 132, LGC). The city mayor alone could not order the collection ofthe tax; as such, the “elevator tax" is an invalid imposition. Q: The Municipality of Malolos passed an ‘ordinance imposing a tax on any sale or transfer of real property located within the ‘municipality ata rate of % of 1% of the total consideration of the transaction. “X” sold a parcel of land in Malolos which he inherited from his deceased parents and refused to pay the aforesaid tax. He instead filed appropriate case asking that the ordinance be declared null and void since such a tax can only be collected by the national government, as in fact he has paid the BIR the required capital gains tax. ‘The Municipality countered that under the Constitution, each local government is vested with the power to create its own sources of revenue and to levy taxes, and it imposed the subject tax in the exercise of said Constitution authority. Resolve the controversy. (1991 BAR) ‘A: The ordinance is void. The LGC only allows 1 UNIVERSITY OF SANTO TOMAS Pacutry oF Civit LawGENERAL PRINCIPLES provinces and cities to impose a tax on the transfer of ownership of real property (Secs. 135 ‘nd 151, LGC). Municipalities are prohibited from imposing said tax that provinces are specifically authorized to levy. While it is true that the Constitution has given broad powers of taxation to LGUs, this delegation, however, is subject to such limitations as may be provided by law. (Art. X, Sec. §, 1987 Constitution) RA. 9337 (The VAT Reform Act) provides that the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%) after any of the following conditions have been satisfied: “(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) national government deficit as a percentage of GDP of, the previous year exceeds one and one-half percent (1 %%)". Was there an invalid delegation of legislative power? A: NO. There is no undue delegation of legislative power but only of the discretion as to the execution of the law. This is constitutionally permissible. Congress did not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it, and what is the scope of his authority. The Secretary of Finance, in this case, becomes merely the agent of the legislative department, to determine and declare the event upon which its expressed willis to take effect. The President cannot set aside the findings of the Secretary of Finance, who is not under the conditions acting as her alter ego or subordinate, (ABAKADA Guro Party List v. Ermita, ete, et al, G R No. 168056, September 1, 2005) Q: The Court promulgated a decision declaring the phrase “internal revenue” appearing in Sec. 284 of RA. 7160 (Local Government Code) unconstitutional and deleted the same. The Office of the Solicitor- General (OSG), however, contends that the provisions of the LGC are not contrary to Sec. 6, Art. X of the Constitution. I the OSG's contention correct? ‘A: NO. Sec. 6, Art. X of the 1987 Constitution textually commands the allocation ta the LGUs of the just share in the national taxes. Sec. 6 embodies three mandates: (1) the LGUs shall hhave a Just share in the national taxes; (2) the just share shall be determined by law, and (3) the just share shall be automatically released to the LGUs. Congress has exceeded its constitutional boundary by limiting to the NIRTs the base from which to compute the just share of the LGUs. Although the power of Congress to make laws is plenary in nature, congressional lawmaking remains subject to the limitations stated in the 1987 Constitution. Thus, the phrase “national internal revenue taxes” engrafted in Sec. 284 is undoubtedly more restrictive than the term national taxes written in Sec. 6. (Congressman Hermilardo I, Mandanas, et al. v. Executive Secretary Paquito N. Ochoa, jr, et al, G.R No. 199802/208488, April 10, 2019) Pn Taxation may be exercised only within the territorial jurisdiction, the taxing authority (61 Am. Jur. 88). Within the territorial jurisdiction, the taxing authority may determine the “place of taxation” or “tax situs.” GR: The taxing power of a country is limited to persons and property within and subject to its jurisdiction. Reasons: 1. Taxation is an act of sovereignty which could only be exercised within a country’s territorial limits, 2. This is based on the theory that taxes are paid for the protection and services provided by the taxing authority which could not be provided outside the territorial boundaries of the taxing State, XPNs: 1. Where tax laws operate outside territorial jurisdiction — eg, Taxation of resident citizens on their incomes derived abroad. 2. Where tax laws do not operate within the territorial jurisdiction of the State. UNIVERSITY OF SANTO TOMAS 2021GoLvEN Notts 2TAXATION LAW. a. When exempted by treaty obligations b. When comity. POET It refers to the respect accorded by nations to each other because they are sovereign equals. ‘Thus, the property or income of a foreign state may not be the subject of taxation by another state, exempted by _ international This is a limitation founded on reciprocity designed to productive relationships among the various state. Under international comity, a state must recognize the generally-accepted tenet: of international law, among which are the priniciples of sovereign equality among states and of their freedom from suit without their consent, that limits that authority of 2 government to effectively impose taxes In a sovereign state and its instrumentalities, as well as in its property held and activities undertaken, in that capacity International comity asa limitation on the power totax aintain harmonious an ‘The Constitution expressly adopted the generally accepted principles of international law as part of the law of the land, (Art. Il Sec. 2 41987 Constitution) ‘Thus, a State must recognize such generally accepted tenets of international law that li the authority of the government to effectively impose taxes upon @ sovereign State and its instrumentalities. Reasons: 1. Par in parem non habet imperium. As between equals, there is no sovereign @ocirine of Sovereign Equality). 2. The concept that when a foreign sovereign centers the territorial jurisdiction of another, it does not subject itself to the jurisdiction of the other. 3. The rule of international law that a foreign government may not be sued without its consent so that it is useless to impose a tax which could not be collected. Q: ABCD Corporation (ABCD) is a domestic corporation with individual and corporate shareholders who are residents of the United States. For the 2nd quarter of 1983, these US-based individual and corporate stockholders received cash dividends from the corporation. The corresponding withholding tax on dividend income --- 30% for individual and 35% for corporate non- resident stockholders -- was deducted at source and remitted to the BIR. On May 15, 1984, ABCD filed with the Commissioner of Internal Kevenue a formal claim for refund, alleging that under the RP- US Tax Treaty, the deduction withheld at source as tax on dividends earned was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the withholding tax due on the cash nds given to its non-resident stockholders in the US. The Commissioner denied the claim. On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA) reiterating its demand for refund. Is the contention of ABCD Corporation correct? Why or why not? (2009 BAR) ‘A: YES. The provision of a treaty must take precedence over and above the provisions of the local taxing statute consonant with the principle comity. Tax treaties accepted limitations to the power of taxation, Thus, the CTA should apply the treaty provision so that the claim for refund representing the difference between the amount actually withheld and paid to the BIR and the amount due and payable under the treaty should be granted. (Hawaiian-Philippine Company v. CIR, CTA Case No. 3887, May 31, 1988) ‘Principle of Pacta Sunt Servanda in Taxation Observance of any treaty obligation binding upon the government of the Philippines is anchored on the constitutional provision that the Philippines ‘adopts the generally accepted principles of international law as part of the law ofthe land. (Art Il, Sec. ,1987 Constitution) of international are Pacta servanda is a fundamental international law principle that requires agreeing parties to comply with their treaty sunt 3B UNIVERSITY OF SANTO TOMAS Pacutry oF Civit LawGENERAL PRINCIPLES obligations in good faith. Hence, the application of the provisions of the NIRC must be subject to the provisions of tax treaties entered into by the Philippines with foreign countries. (Air Canada vs. CIR, GR. No 169507, January 11, 2016) ona ENTS GR: The government is exempt from tax. RATIONALE: Otherwise, we would be “taking money from one pocket and putting it in another.” (Board of Assessment Appeals of Laguna v. CTA, G.R. No. L-18125, May 31, 1962) XPN: When it chooses to tax itself. Nothing Prevents Congress fram decreeing that even instrumentalities or agencies of the government performing government functions may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no fone can doubt its wisdom. (MCIAA v. Marcos, G.R- ‘No. 120082, September 11, 1996) ‘Government may taxitselt Since sovereignty is absolute and taxation is an fact of high scvereignty, the State if so minded could tax itself, including its political subdivisions. (Maceda v. Macaraig, G.R. No. 68291, June 8, 1993) ‘National government is exempt from local taxation If the taxing authority is the LGU, RA. 7160 expressly prohibits LGUs from levying tax on the National Government, its agencies and inctrumentalities and other LGUs In Manila International Airport Authority (MIAA) v. CA GR. No. 155650 (2006). MIAA's Airport Lands and Buildings are exempt from real estate tax imposed by local governments. Being an instrumentality of the national government, it is exempt from local taxation. Also, the real properties of MIA are owned by the Republic of the Philippines and thus exempt from real estate tax. Agency of the government It refers to any of the various units of the government, including a department, bureau, office, instrumentality, or government-owned or controlled corporation, or a local government or a distinct unit therein, 1. Taxability of agencies of government 2. Performing governmental functions: tax exempt unless expressly taxed 3. Performing proprietary functions: subject to tax unless expressly exempted instrumentality of the government It refers to any agency of national government, not integrated within the — department framework, vested with special functions or jurisdiction by law, endowed with some if not all. corporate powers, administering special funds, and enjoying operational autonomy, usually through charter. Tenhil i iti ‘ government A government instrumentality falls under Section 133(0) ofthe LGC, which states. "SEC. 133Common Limitations on the Taxing Powers of Local Government Units. — Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, ‘municipalities, and barangays shall not extend to the levy of the following: xxx (0) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities and local goverament units.” Q LLL is a government instrumentality created by Executive Order to be primarily responsible for integrating and directing all reclamation projects for the National Government. It was not organized as a stock or a non-stock corporation, nor was it intended to operate commercially and compete in the private market. By virtue of its mandate, LLL reclaimed several portions of the foreshore and offshore areas of the Manila Bay, some of which were within the territorial jurisdiction of Q City. Certificates of title to the reclaimed properties in Q City were issued in the name of LLL in 2008. In 2014, Q City issued Warrants of Levy on said reclaimed properties of LLL based on the assessment for delinquent property taxes for the years UNIVERSITY OF SANTO TOMAS 2021GoLvEN Notts rTTAXATION LAW. 2010 to 2013. a. Are the reclaimed properties registered in the name of LLL subject to real property tax? b, Will your answer be the same in (a) if from 2010 to the present time, LLL is Teasing portions of the reclaimed properties for the establishment and use of popular fastfood restaurants J Burgers, G Pizza, and K Chicken? (2015 BAR) a. The reclaimed properties are not subject to teal property tax because LLL is 2 government instrumentality. Under the law, real property owned by the Republic of the Philippines is exempt rom real property tax unless the beneficial use thereof has been granted to a taxable person (Sec. 234, LGC) When the title of the real property is transferred to LLL, the Republic remains the owner of the real property. Thus, arrangement does not result in the loss of the tax exemption, (Republic of the Philippines, represented by The Philippine Reclamation Authority v. City of Paranaque, 677 SCRA 246, 2012) such b. NO. As a rule, properties owned by the Republic of the Philippines are exempt from real property tax except when beneficial use thereof has been granted, for consideration, or otherwise, to a taxable person. When LLL leased cut portions of the reclaimed properties to taxable entities, such as popular fast food restaurants, the reclaimed properties are subject to real property tax. (Sec. 234(a), LGC; GSIS v. Clty Treasurer and City Assessor of the City of Manila, 2009) Q: Is PEZA a government instrumentality or a GOCC? Is it exempt from real property taxation? A: PEZA is an instrumentality of the government. Ie is not integrated within the department framework but is an agency attached to the Department of Trade and Industry, PEZA is also vested with special functions or jurisdiction by law. Congress created the PEZA to operate, administer, manage, and develop special economic zones in the Philippines. Although @ body corporate vested with some corporate powers, the PEZA is not a GOCC that is taxable for real property taxes because it was not organized asa stock or non-stock corporation, Being an instrumentality of the national government, it cannot be taxed by LGUs. (PEZA v. Lapu-lapu City, 742 SCRA 524) Q: The Philippine Fisheries Development Authority (PFDA) took over the management and operation of the Lucena Fishing Port Complex (LFPC) which is one of the fishery infrastructure projects undertaken by the National Government under the Nationwide Fish Port-Package built on a reclaimed land. The City Government of Lucena then demanded payment of realty taxes on the LFPC property. Is PFDA lable for the real property tax assessed on the Lucena Fishing Port Complex? ‘A: NO. The exercise of the taxing power of LGUs is subject to the limitations enumerated in Sec. 133 of the LGC. Under Sec. 133(0) of the LGC, LGUs have no power to tax instrumentalities of the national government like the PFDA. Thus, PFDA is not liable to pay real property tax except those portions which are leased to private persons oF entities. Also, as property of public dominion, the Lucena Fishing Port Complex is owned by the Republic of the Philippines and thus exempt from real estate tax. (Philippine Fisheries Development Authority v. Central Board of Assessment Appeals, G.R. No. 178030, December 15, 2010) Government-owned and controlled. ‘corporation (GOCC) Itrefers to any agency: 1. organized as a corporation; 2. vested with functions relating to public needs whether goveramental or proprietary in nature; and 3. owned by the Government directly or through its instrumentalities either wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty- one (51) percentof its capital stock. stock or non-stock NOTE: Government instrumentality may include a GOCC and there may be “instrumentality” that does not qualify 2s GOCC. ‘Taxability of GOccs 15 UNIVERSITY OF SANTO TOMAS Pacutry oF Civit LawGENERAL PRINCIPLES GOCCs perform proprietary functions. Hence, they are subject to taxation, However, certain corporations have been granted exemption under Section 27(0 of RA. £424 as amended by RA. 9337, which took effect (on July 1,200, to wit: 1. Government Service Insurance (Gsis) 2. Social Security System (SSS) 3. Philippine Health Insurance Corporation (PHIQ) 4, Local Water Districts (LWDs) System NOTE: Philippine Charity Sweepstakes Office (PCSO) were removed by TRAIN and replaced by LWDs. ‘CONSTITUTIONAL LIMITATIONS ‘Taxation, being inherent in sovereignty, need not be clothed with any constitutional authority for it to be exercised by the sovereign state. Instead, constitutional provisions are meant and. intended more to regulate and define, rather than to grant, the power emanating therefrom. ‘CONSTITUTIONAL LIMITATIONS: PROVISIONS DIRECTLY AFFECTING ‘TAXATION Penn Peeves BASIS: No person shall be imprisoned for debt (or non-payment of a poll tax. (Art Ill, Sec. 20) A poll tax is one levied on persons who are residents within the territory of the taxing authority without regard to their property, business, or occupation. Thus, only the basic community tax under the LGC could qualify as a poll tax, and the non-payment of other additional) taxes imposed, not being in the nature of poll taxes, may validly be subjected by law to imprisonment. (Vitug, 2006) In other words, while a person may not be imprisoned for non-payment of a cedula or poll tax, he may be imprisoned for non-payment of other kinds of taxes where the law so expressly provides. (Dimaampao, 2015) ‘The rule of taxation shall be uniform and equitable. The Congress shall progressive system of taxation. (Art. VI, Sec 25(1) Q: Explain the following concepts in taxation: ‘a. Uniformity; b. Equitability; c. Equality. nd a. Uniformity - It means that all taxable artides or Kinds of property of the same class shall be taxed at the same rate. A tax is considered uniform when it operates with the same force and effect in every place where the subject Is found. Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere, with all people at all times. b. Equitability — Taxation is said to be equitable when its burden falls on those better able to pay. Equality - It is accomplished when the burden of the tax falls equally and impartially upon all the persons and property subject to it. Q: Explain the requirement of uniformity as a limitation in the imposition and/or collection of taxes. (1998 BAR) ‘A: Uniformity in the imposition and/or collection of taxes means that all taxable artides, or kinds of property of the same class shall be taxed at the same rate. The requirement of uniformity is complied with when the tax operates with the same force and effect in every place where the subject of it is found (Churchill & Tait v. Concepcion, 34 Phil. 969). Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere with all people at all times. Accordingly, singling out one particular class tor taxation purposes does not infringe the requirement of uniformity. Q: A law was passed exempting doctors and lawyers from the operation of the value: UNIVERSITY OF SANTO TOMAS 2021GoLvEN Notts 16TAXATION LAW. added tax. Other professionals complained and filed a suit questioning the law for being discriminatory and violative of the equal protection clause of the Constitution since ‘complainants were not given the same ‘exemption, Is the suit meritorious or not? Reason briefly. (2004 BAR) A: YES, the suit is meritorious. The VAT is designed for economic efficiency. Hence, should be neutral to those who belong to the same dass. Professionals are a class of taxpayers by. themselves who, in compliance with the rule of equality of taxation, must be treated alike for tax purposes. Exempting lawyers and doctors from. 2 burden to which other professionals are subjected will make the law discriminatory and violative of the equal protection clause of the Constitution. While singling out a class for taxation purpose: will not infringe upon this constitutional limitation (Shell v. Vano, 94 Phil. 389 (1954)), singling out a taxpayer from a class will no doubt transgress the constitutional limitation [Ormoc Sugar Co. Inc, v. Treasurer of Ormoc City, 22 SCRA 603 (1968)). Treating doctors and lawyers as a different class of professionals will not comply with the Fequirements of a reasonable, hence valid dassification, because the classification is not based upon substantial distinction which makes real differences. The classification does not comply with the requirement that it should be ‘germaneto the purpose ofthe law either. (Pepsi- Cola Rottling Co, Inc. v. City of Butuan, 24 SCRA 789 (1968) Q: Heeding the pronouncement of the President that the worsening traffic condition in the metropolis was a sign of ‘economic progress, the Congress enacted R.A. 10701, also known as An Act Imposing a Transport Taxon the Purchase of Private Vehicles. Under RA. 10701, buyers of private vehicles are required to pay a transport tax equivalent to 5% of the total purchase price per vehicle purchased. RA. 10701 provides that the Land Transportation Office (LTO) shall not accept for registration any new vehicles without proof of payment of the 5% transport tax. R.A. 10701 further provide that existing owners of private vehicles shall be required to pay a tax equivalent to 5% of the current fair market value of every vehicle registered with the LTO, However, RA. 10701 exempts owners of public utility vehides and the Government from the coverage of the 5% transport tax. A group of private vehicle owners sue on the ground that the law is unconstitutional for contravening the Equal Protection Clause of the Constitution. Rule on the constitutionality and validity of RA.10701. (2017 BAR) A: RA. 10701 is valid and constitutional. A levy of tax is not unconstitutional because it is not intrinsically equal and uniform in its operation. The uniformity rule does not prohibit classification for purposes of taxation. (British American Tobacco v. Jose Isidro N. Camacho, GR. No. 163583, April 15, 2009) Uniformity in taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities. Uniformity does not _forfend classification as long as: (1) the standards that are used therefor are substantial and not arbitrary; (2) the categorization is germane to achieve the legislative purpose; (3) the law applies, all things being equal, to both present and future conditions; and (4) the classification applies equally well to all those belonging to the same class. (Rufino R. Tan v. Ramon R. Del Rosario, Jr, GR. Nos. 109289, October 3, 1994, 237 SCRA 324) All of the foregoing requirements of a valid classification having been met and those which are singled out are a class in themselves, there is no violation of the "Equal Protection Clause” of the Constitution. Q: Does the 20% Sales Discount for Senior Citizens and Persons with Disabilities violates the constitutional right of equal protection clause? A: NO. The equal protection clause is not infringed by legislation which applies only to those falling within a specified class. If the groupings are characterized by substantial distinctions that make real differences, one class may be treated and regulated differently from another. (Southern Luzon Drug Corporation v. DSWD, GR. No. 199669, April 25, 2017) 7 UNIVERSITY OF SANTO TOMAS Pacutry oF Civit LawGENERAL PRINCIPLES Progressive taxation 1. Delegated by Congress through a law - The authorization granted to the President must ‘Taxation is progressive when tax rate Increases be embodied in a law. Hence, the as the income of the taxpayer increases. It is justification cannot be supplied simply by based on the prindple that those who are able to inherent executive powers pay more should shoulder the bigger portion of the tax burden. It is Congress which authorizes the President to impose tariff rates, import and Q: Does the Constitution prohibit regressive export quotas, tonnage and wharfage dues, taxes? and other duties or imposts. Thus, the authority cannot come from the Finance ‘A: NO, the Constitution does not really prohibit Department, the National Economic the imposition of regressive taxes. What it Development Authority, or the World Trade simply provides is that Congress shall evolve a Organization, no matter how insistent or progressive system of taxation. persistent these bodies may be. (Southern Cross Cement Corporation v. Cement Meaning of “evolve” as used e Manufacturers Association of the Phil, GR. ‘Constitution No, 158540, August 3, 2005) ‘The constitutional provision has been. 2. Subject to Congressional limits and interpreted to mean simply that “direct taxes restrictions - The authorization to the are to be preferred and 2s much as possible, President can be exercised only within the indirect taxes should be minimized.” The specified limits set in the law and is further mandate of Congress is not to prescribe but to subject to limitations and restrictions which evolve a progressive tax system, This Is a mere Congress may impose. Consequently, if directive upon Congress, not a justiciable right Congress specifies that the tariff rates or a legally enforceable one. We cannot avoid should not exceed a given amount, the regressive taxes but only minimize them, President cannot impose a tariff rate that (Tolentino etal. v. Secretary of Finance, GR. No. exceeds such amount. 115455, Oct. 30, 1995) Assuming there is a conflict between the specific limitation in the Constitution and the general executive power of control and supervision, the former prevails in the specific instance of safeguard measures such as tariffs and imposts and would thus serve to qualify the general grant to the President of the power to exercise control and supervision over his/her subalterns. (Southern Cross Cement Corporation Cement Manufacturers Association of the Phil, GR.No, 158540, August 3, 2005) the Congress may, by law, authorize the President to fix within specified limits and subject to such limitations and restrictions at it may impose, tariff rates, import and export ‘quotas, tonnage and wharfage dues and other cuties or imposts within the framework of the national development program of the Government. (Art. VI, Sec. 28 (2)) exible tariff clause ‘This clause provides the authority given to the President to adjust tariff rates under Sec. 1608 of RA. 10863, known as Customs Modernization and Tariff Act (CMTA) of 2016. This authority, however, is subject to limitations and restrictions indicated within the law itself. BASIS: Charitable institutions, churches and parsonages or convents appurtenant thereto, ‘Requisites on the authority of the President ‘mosques, non-profit cemeteries, and all lands, inimpasing tax buildings, and improvements, actually, directly, and exclusively used for religious, charitable, 3. Within the framework of _ national development program, UNIVERSITY OF SANTO TOMAS 18 2021GoLvEN NottsTAXATION LAW. or educational purposes shall be exempt from taxation. (Art. IV, Sec. 28 (3)) : What isthe coverage of tax exemption? AD it real property taxes only. Accordingly, a conveyance of such exempt property can be subject to transfer taxes. Properties exempt under the Constitution fromthe payment of property taxes 1. Charitable institutions, 2. Churches and parsonages or appurtenant thereto; 3. Mosques; Non-profit cemeteries; and 5. All lands, buildings, and improvements actually, directly and exclusively used for religious, purposes shall be exempt from taxation. (Art. VI Sec. 23(3)) ‘Meaning of “charitable” It is not restricted to relief of the poor or sick ‘The test whether an enterprise is charitable or not is whether it exists to carry out a purpose recognized in law as charitable or whether it is maintained for gain, profit, or private advantage (Lung Conter of the Philippines v. Quezon City, GR No, 144104, June 29, 2004) convents charitable or educational Also, an organization must meet the substantive test of charity. Charity is essentially a gift to an indefinite number of persons which lessens the burden of government In other words, charitable institutions provide for free goods and services to the public which would otherwise fall on the shoulders of government. (CIR v. St. Luke's Medical Center, Inc, GR. No. 4195909 September 26,2012) ‘Meaning of “actual. direct and exclusive use ofthe property for religious charitable and ‘educational purposes” Itis the direct, immediate, and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property isused for tax-exempt purposes. NOTE: In the case of Lung Center of the Philippines v. City Assessor of Quezon City (433 ‘SCRA 119), the Court ruled that under the 1987 Constitution, for “lands, bulldings, and improvements” of the charitable institution to be considered exempt, the same should not only be “exdlusively” used for charitable purposes; itis required that such property be used “actually” and “directly” for such purposes. “Exclusive” is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and “exclusively” is defined, “in a manner to exclude; as enjoying a privilege exclusively.” If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but {s subject to taxation, The words “dominant use” or “principal use” cannot be substituted for the words exclusively” without doing violence to the Constitution and the law. “used In sum, the Court ruled that 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 taxes. Rules on taxation of non-stock corporations for charitable and religious purposes 1. For purposes of income taxation a. The income of non-stack corporations operating exclusively for charitable and religious purposes, no part of which inures to the benefit of any member, organizer, officer, or any specific person, shall be exempt from tax. However, the income of whatever kind and nature from any of their properties, real or personal or from any of their activities for profit regardless of the disposition made of such income shall be subject to tax. (Sec. 30 (E) and last par, NIRC) NOTE: An organization may be considered as non-profit if it does not distribute any part of its income to stockholders or members. However, despite its being a tax-exempt institution, any income such institution earns from activities conducted for 19 UNIVERSITY OF SANTO TOMAS Pacutry oF Civit LawGENERAL PRINCIPLES profit is taxable, as expressly provided in the last paragraph of Sec. 30. (CIR v. St Luke's Medical Center, Inc, G.R. No. 195909, September 26,2012) Refer to Corporations exempt from Income Tax” ‘or further discussion. “Income Taxation b. Donations received by religious, charitable, and educational institutions are considered as income but not taxable income as they are items of exclusion. (Sec. 32(8)(3), NIRC) On the part of the donor, such deductible expense provided that no part of the income of which inures to the benefit of any private stockholder or individval in an amount not exceeding 10% in case of individual, and 5% in case of a corporation, of the taxpayer's taxable income derived from trade or business or profession. (Sec. 34 (H), NIRG) donations are Refer to “Gross Income - Exclusions* for {farther discussion. 2. For purposes of estate tax - Donations in favor of charitable institutions are generally not subject to tax. Provided, however, that not more than 30% of the said bequests, devises, legacies, or transfers shall be used by such institutions for administration purposes. (Sec. 87(D), NIRC) Refer to “Estate Tox ~ Exclusions from Gross Estate, exemptions of ‘acquisitions and transmissions" for further discussion and certain 3. For purposes of donor's tax ~ Donations in favor of religious and charitable institutions are generally not subject to tax provided, however, that not more than 30% of the sald bequests, devises, legacies, or transfers stall be used by such institutions for administration purposes. (Sec. 101, NIRC) Refer to “Donor’s Estate - Exemption of certain gifts” for further discussion. ‘SUMMARY OF RULES ON EXEMPTION OF PROPERTIES ACTUALLY, DIRECTLY, AND EXCLUSIVELY USED FOR RELIGIOUS, EDUCATIONAL AND CHARITABLE PURPOSES Covers real property tax only, Coverage of | The income of whatever kind constitutional | and nature from any of their provision properties, real or personal, or from any of their activities for profit regardless of the disposition made of such income shall be subject to tax. Requisite to [Property must be “actually, avail of this | directly, and exclusively exemption | used’ by religious, charitable, and educational institutions. Test for the | Use of the property for such grant of this | purposes, not the ownership exemption _| hereof, NOTE: Under the 1987 Constitution, the doctrine of exemption by incidental parpose is no longer applicable. Such doctrine is only applicable to cases where the cause of action arose under the 1935 Constitution. Under the 1987 Constitution, it must be proved that the properties are ACTUALLY, DIRECTLY, and EXCLUSIVELY used for the purpose of institution for the exemption to be granted, (Sababar, 2008) Ea ogee en) ioe BASIS: All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt irom taxes and duties. Subject to conditions prescribed by law, all grants, endowments, donations, or contributions used actually, directly, and exclusively for educational purposes shall be exempt from tax. (See 4 (3) and (4), Art XIV) Actually. directly, and exclusively used The use of the term “actually, directly, and exclusively used” referring to religious institutions cannot be applied to non-stock, non- profit educational institutions. The provision of Article VI, Section 20(3) applies to religious, charitable, and educational institutions - while Article XIV applies solely to non-stock, non- profit educational institutions, (BB Urvensiry or santo Tomas (BE) 2021 Gorven Notes 20