Tax 1 Midterms Reviewer

UP Law C2015 Taxation Law 1 Midterms 2013

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MODULE 1—GENERAL PRINCIPLES OF TAXATION

A. Concept, Nature, Basis, Purpose

1. CONCEPT Taxation is the act of laying a tax, i.e., the process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government. As a power, taxation refers to the inherent power of the state to demand enforced contributions for public purpose or purposes. (de Leon) Taxation is a mode by which governments make exactions for revenue in order to support their existence and carry out their legitimate objectives. The term may refer to either or both the power to tax or the act or process by which the taxing power is exercised. (Vitug) 2. NATURE OF THE POWER OF TAXATION

(1) IT IS INHERENT IN SOVEREIGNTY It is an incident or attribute of sovereignty and is essential to the existence of every government. It exists apart from constitutions and without being expressly conferred by the people. Hence, it can be exercised by the government even when the constitution is silent on the subject. In our constitution, the provisions relating to the power of taxation merely constitute limitations upon a power which would otherwise be practically without limit. (2) IT IS LEGISLATIVE IN CHARACTER It cannot be exercised by the executive or judicial branch of the government. While it is the Congress that can impose taxes, the levy of a tax may also be made by a local legislative body, subject to such limitations as may be provided by law.

(3) IT IS SUBJECT TO CONSTITUTIONAL AND INHERENT LIMITATIONS

Most limitations are specifically provided in the Constitution or implied therefrom, while the rest are inherent and they are those which spring from the nature of the taxing power itself. Individual equities or equalities are not regarded. The mere fact that taxation is unjust or oppressive with respect to a particular taxpayer does not of itself render a tax law invalid, where no constitutional provision has been violated. 3. THEORY AND BASIS OF TAXATION (1) The power of taxation proceeds upon the

theory that the existence of the government is a necessity; that it cannot continue without means to pay its expenses. For these means, it has a right to compel all of its citizens and property within its limits to contribute.

Taxes are the lifeblood of the government and their prompt and certain availability are an imperious need. (Commissioner v. Pineda) Upon taxation depends the government’s ability to serve the people for whose benefit taxes are collected. (Vera v. Fernandez) (2) The basis of taxation is found in the

Benefits-Received Principle where there is a reciprocal duty of protection and support between the state and its inhabitants. In return for his contribution, the taxpayer receives the general advantages and protection which the government affords the taxpayer and his property.

But there is a qualification: It does not mean that only those who pay taxes can enjoy the privileges and protection given to a citizen by the government. Even those who do not pay taxes enjoy such privileges and protection. The reason is that the protection in the enjoyment of his rights is a duty owed by the State to every citizen.


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From the contribution received, the government renders no special or commensurate benefit to any particular property or person. A tax is not imposed on the basis of a special benefit accruing to each citizen in proportion to the tax paid. The only benefit the taxpayer is entitled to is that derived from his enjoyment of the privileges of living in an organized society. Taxation is the indispensable and inevitable price for civilized society; without taxes, the government would be paralyzed. (Commissioner v. Algue) 4. PURPOSE OF TAXATION The primary purpose of taxation on the part of the government is to provide funds or property with which to promote the general welfare and protection of its citizens.

CASES Commissioner v. Pineda (1967) Facts: Manuel’s father Atanasio died. After Atanasio’s estate was divided, the BIR investigated the income tax liability of the estate and found that the corresponding income tax returns were not filed. Manuel was held liable to pay all of the unpaid taxes. He now claims that he is liable only up to the extent of and in proportion to any share he received. Held: Manuel is liable for the whole amount. The Government has 2 ways of collecting the tax in question. One, by going after all the heirs and collecting from each one of them the amount of the tax proportionate to the inheritance received. Two, pursuant to the lien created by Sec. 315 of the Tax Code, is by subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due the estate– which was availed of here. The BIR must be given the necessary discretion to avail if the most expeditious way to collect tax. This is because “taxes are the lifeblood of the government and their prompt and certain availability is an imperious need.” Nonetheless, Manuel can still demand contribution from his co-heirs.

Vera v. Fernandez (1979) Facts: The government here is claiming unpaid taxes from the estate of Luis Tongoy. The administrator Francis opposed, claiming that the government was barred under Rule 86, Sec. 5 of the Rules of Court, which provides that all claims for money against the decedent, arising from contracts must be filed within the time limited in the notice ; otherwise they are barred forever. Issue is WON the statute of non-claims of the RoC bars the government’s claim for unpaid taxes. Held: No. While the rule invoked by Francis does not apply to monetary obligations created by law, there is another reason why the government is not barred: Upon taxation depends the government ability to serve the people, for whose benefit taxes are collected. To safeguard such interest, neglect or omission of government officials entrusted with the collection of taxes should not be allowed to bring harm or detriment to the people. In the same manner, private persons may be made to suffer individually on account of his own negligence, the presumption being that they take good care of their personal affairs. This should not hold true to government officials with respect to matters not of their own personal concern. This is the philosophy behind the government's exception, as a general rule, from the operation of the principle of estoppel. Commissioner v. Algue (1988) Facts: Algue, Inc. was assessed delinquency income taxes by the CIR. Algue protested and claimed a P75k deduction as legitimate business expenses. This was denied. Held: Algue’s appeal was filed seasonably. Its letter of protest was not taken into account before the warrant of distraint and levy was issued. The Collector of Internal Revenue was incorrect in disallowing the P75k deduction. The amount was legitimately paid by Algue in the form of promotional fees. The burden is on the taxpayer to prove the validity of the claimed deduction. In this case, the onus has been discharged satisfactorily. Taxes are what we pay for civilized society. Without taxes, the government would be


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paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to 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 moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.

B. Principles of a Sound Tax System

1. FISCAL ADEQUACY Sources of revenue, taken as a whole, should be sufficient to meet the demands of public expenditure. Excess or deficiency is not in keeping with this principle. 2. EQUALITY OR THEORETICAL JUSTICE The tax burden should be in proportion to the taxpayer’s ability to pay. This is known as the Ability-to-Pay Principle. It also connotes that the contribution of each person towards the expense of the government should be so apportioned such that he would feel neither more nor less inconveniences from his share of the payment than every other person experiences from his. 3. ADMINISTRATIVE FEASIBILITY Tax laws should be capable of convenient, just, and effective administration. Each tax in the system should be clear and plain to the taxpayer, capable of uniform enforcement by the government officials, convenient as to time, place, and manner of payment, and not unduly burdensome upon, or discouraging to business activity. Tax laws should close up loopholes for tax evasion and deter unscrupulous officials from committing frauds in the assessment and collection of taxes.

C. Aspects of Taxation

1. Taxation— Levying or imposition of tax

which is a legislative act. 2. Tax Administration— Collection of tax

levied which is essentially administrative in character.

The two processes together constitute the “Taxation System”

D. Essential Characteristics of Taxation

1. IT IS AN ENFORCED CONTRIBUTION A tax is not a voluntary payment or donation and its imposition is not dependent upon the will or assent of the person taxed. 2. IT IS GENERALLY PAYABLE IN MONEY Tax is an exaction to be discharged alone in the form of money which must be in legal tender. Take note: “generally.” Property can be expropriated in payment of taxes and government bonds can also be used to pay for taxes. 3. IT IS PROPORTIONATE IN CHARACTER A tax is laid based on ability to pay. 4. IT IS LEVIED OF PERSONS OR PROPERTY A tax may also be imposed on acts, transaction, rights, or privileges. In each case, it is only a person who pays the tax. The property is resorted to for the purpose of ascertaining the amount of tax that must be paid and of enforcing payment in case of default of the taxpayer. 5. IT IS LEVIED BY THE STATE WHICH HAS

JURISDICTION OVER THE PERSON OR PROPERTY

The object to be taxed must be subject to the jurisdiction of the taxing state. This necessary in order that the tax can be enforced. 6. IT IS LEVIED BY THE LAW-MAKING BODY

OF THE STATE The power to tax is a legislative power which under the Constitution only the Congress can exercise through the enactment of tax statutes.


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However, local governments are also granted the power to tax, subject to such limitations as may be provided by law. 7. IT IS LEVIED FOR PUBLIC PURPOSE OR

PURPOSES Taxation involves a charge or burden imposed to provide income for public purposes—the support of the government, the administration of the law, or the payment of public expenses. Revenues derived from taxes cannot be used for purely private purposes.

E. Classification of Taxes

1. AS TO SUBJECT MATTER OR OBJECT

(1) PERSONAL, POLL, OR CAPITATION Tax of a fixed amount imposed on persons residing within a specified territory, whether citizens or not, without regard to their property or the occupation or business in which they may be engaged. Ex.: Community Tax

(2) PROPERTY Tax imposed on property, whether real or personal, in proportion either to its value, or in accordance with some other reasonable method of apportionment. Ex.: Real Estate Tax (3) EXCISE Any tax which does not fall within the classification of a poll tax or a property tax. It is a charge imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation, profession, or business. Synonymous with “privilege tax.” Ex.: income tax, VAT, estate tax, donor’s tax 2. AS TO WHO BEARS THE BURDEN (1) DIRECT Tax which is demanded from the person who also shoulders the burden of the tax; or tax for which the taxpayer is directly liable or which he cannot shift to another. Ex.: Corporate and individual income taxes, community tax, estate tax, donor’s tax

(2) INDIRECT Tax which is demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another. The burden is passed on to another. Ex.: VAT, excise taxes on certain specific goods, customs duties 3. AS TO DETERMINATION OF AMOUNT (1) SPECIFIC Tax of a fixed amount imposed by the head or number, or by some weight or measurement. Ma’am L: There is less room for corruption with this kind of tax. Ex.: Tax on distilled spirits, wines, fireworks (2) AD VALOREM Tax of a fixed proportion of the value of the property with respect to which the tax is assessed. Ad Valorem literally means “according to value.” Ex.: Real estate tax, excise taxes on cigarettes, gasoline and others, customs duties 4. AS TO PURPOSE (1) GENERAL, FISCAL, OR REVENUE Tax imposed for the general purpose of the government Ex.: Income tax, VAT, and almost all taxes (2) SPECIAL OR REGULATORY Tax imposed for a special purpose, i.e. to achieve some social or economic ends irrespective of whether revenue is actually raised or not. Ex.: Protective tariffs, or customs duties on imported goods 5. AS TO SCOPE (OR AUTHORITY

IMPOSING THE TAX)

(1) NATIONAL Tax imposed by the national government Ex.: National internal revenue taxes, customs duties, and national taxes imposed by special laws (2) MUNICIPAL OR LOCAL


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Tax imposed by municipal corporations or local government units Ex.; Real estate tax, professional tax 6. AS TO GRADATION OR RATE (1) PROPORTIONAL Tax based on a fixed percentage of the amount of the property, receipts, or other basis to be taxed. Ex.: Real estate tax, VAT, and other percentage taxes (2) PROGRESSIVE OR GRADUATED Tax the rate of which increases as the tax base or bracket increases. Ex.: Income tax, estate tax, donor’s tax (3) REGRESSIVE Tax rate of which decreases as the tax base or bracket increases. We have no regressive taxes. (4) MIXED Part progressive, part regressive.

F. Distinguished from Certain Kinds of Exactions

1. LICENSE FEE A charge imposed under the police power for purposes of regulation. It is in the nature of a special privilege, of a permission or authority to do what is within its terms. It makes lawful and act which would otherwise be unlawful.

License Fee Tax Legal compensation or reward of an officer for specific services

An enforced contribution assessed by sovereign authority to defray public expenses

Imposed for regulation Levied for revenue Involves the exercise of police power

Involves the exercise of taxing power

Amount should be limited to the necessary expenses of inspection and

No limit as to the amount of tax that may be imposed

regulation Imposed on the right to exercise a privilege

Also imposed on persons or property, aside from privilege

Failure to pay makes the act or business illegal

Failure to pay does not necessarily makes the act or business illegal

CASES Procter and Gamble v. Municipality of Jagna (1979) Facts: P&G owns a bodega in the Municipality of Jagna where it stores copra. It was taxed by the Municipality pursuant to an ordinance imposing storage fees on all exportable copra deposited in the bodega within the Municipality of Jagna. P&G assails the validity of the ordinance. Held: The ordinance is valid. Municipalities are authorized to impose 3 kinds of licenses: 1) regulation of useful occupations or enterprises; 2) for restriction or regulation of non-useful occupations or enterprises; and 3) license for revenue. The Ordinance is a license for revenue, its purpose being to reimburse the Municipality for the service of supervising the copra being stored in bodegas within its territory. “License tax” has no fixed meaning, and may refer to different impositions exacted for the exercise of various privileges Municipalities are allowed wide discretion in determining the rates of imposable license fees, and it falls upon P&G to prove any alleged arbitrariness of the questioned rates. There was no sufficient showing of arbitrariness of the rate imposed by the Ordinance. The Ordinance is also a valid exercise of police power granted to municipalities under Sec. 2238 of the Revised Administrative Code or the general welfare clause. Since warehouses used for storing copra may endanger public safety (the oil content of copra, when ignited, is different to put under control by water — use of chemicals is needed to put out the fire), all exportable copra deposited within the municipality is “part of the surveillance and lookout of the municipal authorities.” Morcoin v. City of Manila (1961) Facts: Morcoin owned and operated a jukebox in the City of Manila. Pursuant to an Ordinance,


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they paid P5.00 annually for the right to operate the jukeboxes. One day, the City of Manila, in order to curb the use of pinball machines, amended the Ordinance to the effect that any mechanical contrivance or automatic apparatus which functions through the introduction of money shall require a license to operate. The license called for an annual fee of P300.00. Morcoin brought an action before the CFI assailing the Ordinance on the ground that the license fee of P300.00 was exorbitant, excessive, confiscatory, and substantially disproportionate to the reasonable expenses of issuing the license for and regulating the said machines. Held: The City of Manila’s Charter granted the Municipal Board the power to regulate the operation of slot machines—not to impose tax. Since regulation of license fees involves the exercise of police power, the rates could not be so high as to be confiscatory. It should be approximately commensurate with and sufficient to cover all the necessary or probable expenses of issuing the license and of such inspection, regulation, and supervision as may be lawful. Any ordinance which imposes a license fee which is substantially in excess of the reasonable expense of issuing the license and regulating the occupation to which it pertains, is invalid. Golden Ribbon Lumber v. City of Butuan (1964) Facts: Golden Ribbon operated a lumber mill and lumber yard in the city of Butuan. The City enacted an ordinance supposedly imposing a tax on the lumber yard or mills but requiring tax to be paid for every board foot of lumber sawn, manufactured, or produced. The City collected tax from Golden Ribbon, alleging that the ordinance imposed a license tax on lumber mills. Golden Ribbon contends that the tax was on sawn manufactured lumber which are forest products and are therefore beyond the power of the city to impose. Held: The ordinance is invalid. The tax imposed was not for the enjoyment of the privilege to engage in a particular trade or business. Neither is it a condition precedent to the enjoyment of such privilege. It also does not state that the non-payment of tax would result in the

cancellation of any previous license granted. The only consequence of its non-payment appears to be the imposition of a surcharge or liability to suffer the penal sanctions. Progressive Development Corp. v. Quezon City (1989) Facts: Progressive, owner of Farmers Market, opposed the City’s 5% tax on gross receipts on rentals of privately-owned market spaces. According to Progressive, the tax was an income tax—a type of tax that cannot be imposed by local governments. Held: The tax constituted a license tax or fee for the regulation of the business in which Progressive is engaged. Local governments are allowed wide discretion in determining the rates of imposable license fees even in cases of purely police power measures, in the absence of proof as to particular arbitrariness or unreasonableness of the questioned rates. As a market established for the rendition of service to the general public, it warrants close supervision and control by Quezon City for the protection of the health of the people. This regulation is for the protection and promotion of public interest; thus, it is within the City’s authority to authorize the tax. PAL v. Edu (1988) Facts: Pursuant to a legislative act, PAL is exempt from the payment of taxes. Since 1956, PAL has not been paying motor vehicle registration fees. In 1971, the Land Transportation Commissioner issued a regulation requiring all tax exempt entities, among them PAL to pay motor vehicle registration fees. PAL protested invoking the legislative act. The LTC contended that registration fees of motor vehicles are not taxes, but regulatory fees imposed as an incident of the exercise of the police power of the state. Held: They are taxes. If the purpose is primarily revenue, or if revenue is at least one of the real and substantial purposes, then the exaction is a tax. Here, the law itself provides that all such money from motor vehicle registration fees shall accrue to the funds for the construction and maintenance of public roads, streets and bridges. It is thus obvious that the fees are not


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collected for regulatory purposes for their express object is to provide revenue for the construction and maintenance of public highways for everybody's use. They are veritable taxes, not merely fees. 2. TOLL A sum of money for the use of something, generally applied to a consideration which is paid for the use of a road, bridge, or the like, of a public nature.

Toll Tax Demand of proprietorship

Demand of sovereignty

Paid for the use of another’s property

Paid for the support of government

Amount of toll depends upon the cost of construction, maintenance of the public improvement used

Generally no limit on the amount of tax that may be imposed

May be imposed by the government or private individuals or entities

May be imposed only by the government

CASES City of Ozamiz v. Lumapas (1975) Facts: Lumapas, a bus operator, opposed the imposition of a parking fee by Ozamiz City on his buses that were temporarily parked on Zulueta Street while waiting for passengers to board. According to him, the charge was not a parking fee but a toll fee in disguise. The local government cannot impose toll fees without the approval of the president; and as a result, the ordinance imposing parking fee is null and void. Held: It is a parking fee for the regulation of the use of Ozamiz’s streets. The ordinance defines parking mean the stoppage of a motor vehicle of whatever kind on any portion of the existing parking areas for the purpose of loading and unloading passengers or cargoes. The word "toll" when used in connection with highways has been defined as a duty imposed on goods

and passengers travelling public roads. The toll for use of a toll road is for its use in travelling thereon, not for its use as a parking place for vehicles. Considering that the buses are only charged the fee when they stop on "any portion of the existing parking areas for the purpose of loading or unloading passengers or cargoes," the fees collected are actually in the nature of parking fees and not toll fees for the use of Zulueta Street. 3. SPECIAL ASSESSMENT OR LEVY An enforced proportional contribution from owners of lands especially or peculiarly benefited by public improvements.

Special Assessment Tax Levied only on land Levied on persons and

property Not a personal liability of the person assessed, i.e. his liability is limited only to the land involved

May be personal liability of person assessed

Based wholly on benefits

Based on necessity and benefits

Exceptional both as to time and place

Has general application

4. DEBT OR ORDINARY OBLIGATION Based upon juridical tie and is created by law, contract, quasi-contract, delict, and quasi-delict between parties for their private interest, or resulting from their own acts or omissions.

Debt Tax Generally based on contract, express or implied

Based on law

assignable Cannot generally be assigned

May be paid in kind Generally payable in money

May be subject of a set-off or compensation

Generally not subject to set-off or compensation

Person cannot be imprisoned for non-payment of debt

Imprisonment is a sanction for the non-payment of tax (except


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poll tax) Governed by ordinary periods of prescription

Governed by special prescriptive periods provided for in the tax code

Draws interest when it is so stipulated or when there is default

Does not draw interest except only when delinquent

CASES Victorias Milling Co. v. PPA (1987) Facts: VMC operated a private wharf on its own land. It spends for the wharf’s repair and maintenance. The PPA required VMC to pay berthing fees and remit 10% of its gross income as handling charges. VMC refused claiming that it was exempt from paying the charges because the wharf was its own and was located on its own property. Held: VMC is not exempt from paying the fees and charges. The fees and charges PPA collects are not for the use of the wharf that petitioner owns but for the privilege of navigating in public waters, of entering and leaving public harbors and berthing on public streams or waters. Berthing charges against a vessel are collectible regardless of the fact that mooring or berthing is made from a private pier or wharf. This is because the government maintains bodies of water in navigable condition and it is to support its operations in this regard that dues and charges are imposed for the use of piers and wharves regardless of their ownership. As to the 10% remittance, Section 6B-(ix) of the Presidential Decree No. 857 authorized the PPA "To levy dues, rates, or charges for the use of the premises, works, appliances, facilities, or for services provided by or belonging to the Authority, or any organization concerned with port operations." This 10% government share of earnings of arrastre and stevedoring operators is in the nature of contractual compensation to which a person desiring to operate arrastre service must agree as a condition to the grant of the permit to operate. Philex Mining Corp. v. CIR (1998) Facts: The BIR demanded that Philex pay its tax liabilities. Philex protested on the ground that it

had pending claims for VAT input credit/refund that it had paid before. They ask that the refund be applied against the tax liabilities. Held: Taxes cannot be subject to compensation for the reason that the government and the taxpayer are not creditors and debtors to each other. There is a distinction between taxes and debt: Debts are due to the government in its corporate capacity. Taxes are due to the government in its sovereign capacity.

G. Scope and Limitations of

Taxation

1. IN GENERAL The power to tax is not without limitations, these may be classified into: (1) INHERENT LIMITATIONS or those which restrict the power although they are not embodied in the Constitution

1. Taxation is for public purpose 2. Taxation is inherently legislative 3. Taxation is territorial 4. Taxation is subject to international

comity 5. Exemption of government agencies and

instrumentalities

(2) CONSTITUTIONAL LIMITATIONS or those expressly found in the Constitution or implied from its provisions.

1. Due Process and Equal Protection 2. Non-impairment of obligations of

contracts 3. No imprisonment for failure to pay a

poll tax 4. Equality and Uniformity 5. Delegation of taxing power to President 6. Exemption of Religious, Charitable, and

Educational Institutions fro Property tax 7. Concurrence of Congress in granting tax

exemptions 8. Tax levied for special purpose shall be

put in a special fund


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9. Presidential Veto of tariff and revenue bills

10. Non-impairment of jurisdiction of SC in tax cases

11. Delegation of taxing power to Local Governments

12. Exemption of non-stock, non-profit educational institutions from tax

CASES Sison v. Ancheta (1984) Facts: Sison challenged the constitutionality of BP 135, a new Tax Law amending Sec. 21 of the NIRC, that imposed a lower rate on net income than gross income, depending on employment. Held: BP 135 upheld, since it was not shown to have violated any of the restrictions in the Constitution. The field of state activity has assumed a much wider scope, because the areas which used to be left to private enterprise and initiative continue to lose their well-defined boundaries and to be absorbed within activities that the government must undertake if it is to meet the increasing social challenges of the times, hence the need for more revenues. The power to tax, an inherent prerogative, has to be availed of to assure the performance of vital state functions. It is the bulk of public funds. Taxes being the lifeblood of the government, their prompt and certain ability is of the essence. According to Justice Malcolm, the power to tax is an attribute of sovereignty. It is the strongest of all the powers of government. However, it is not unconfined, as there are restrictions in the Constitution, specifically the due process and equal protection clauses. If it were otherwise, then the power of tax would involve the power to destroy, as stated by Justice Frankfurter. Commissioner v. Algue (1988) Facts: Algue was assessed delinquency income taxes. Although it filed a letter of protest, it was still presented with a warrant of distraint and levy. Held: Algue’s appeal was filed seasonably. Its letter of protest was not taken into account

before the warrant of distraint and levy was issued. Taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Despite the natural reluctance to surrender part of one’s hard earned income to taxing authorities, every person who is able must contribute his share in the running of 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 moral and material values. This symbiotic relationship is the rationale of taxation. But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. Pepsi Cola v. Municipality of Tanuan (1976) Facts: Pepsi assails RA 2264, or the Local Autonomy Act (LAA) for being an undue delegation of taxing authority as well as Ordinances 23 and 27 of the municipality of Tanuan, Leyte, declared null and void for covering the same subject matter and imposing the same production rates. Held: RA 2264 is constitutional. the legislative power to create political corporations for purposes of local self-government carries with it the power to confer on the latter the power to tax, for local concerns. Local governments are authorized by the Constitution to create their own sources of revenue. In delegating authority, State is not limited to exact measure of power which is exercised by itself. There may be delegated such measure of power to impose and collect taxes as the legislature may deem expedient. Thus, municipalities may be permitted to tax subjects, which for reasons of public policy the State has not deemed wise to tax for general purposes. 2. INHERENT LIMITATIONS (1) TAXATION IS FOR A PUBLIC PURPOSE

Public/Governmental purpose:


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Purpose affecting the inhabitants of the state or taxing district as a community and not merely as individuals. Test: Proceeds of tax must be used: For the support of the government. For any of the recognized objects of

government. To promote the welfare of the community. Reason: Tax levied for private purpose constitutes taking of property without due process of law. Since the government is established for public purpose, public money can only be spent for the same purpose. The purpose need not be exclusively public; it can have incidental benefit to private interest. The test is not as to who receives the money but the character of the purpose for which it is expended. Taxpayer’s right to question purpose of tax: Taxpayers have sufficient interest of preventing illegal expenditures of money raised by taxation; but he is not relieved from obligation of paying a tax because of his belief that it is being misappropriated by certain officials. However, a taxpayer has no legal standing to question executive acts that do not involve use of public funds.

CASES Pascual v. Secretary of Public Works (1960) Facts: A feeder road was private property of Jose Zulueta. He offered to donate the said road to the Municipality of Pasig, but no deed of donation had been executed. RA 920 was passed appropriating funds for public work on the road. On the same day, a deed of donation was finally executed. Held: RA 920 was unconstitutional. Legislature is without power to appropriate public revenues for anything but a public purpose. It is the essential character of the direct object of the expenditure which must determine its validity as justifying a tax and not the magnitude of the interests to be affected nor the degree to which the general advantage of the community may

be ultimately benefited by their promotion. Incidental advantage to the public or to the State, which results from the promotion of private enterprises or businesses, does not justify their aid by the use of public money.

Lutz v. Araneta (1955) Facts: The US was going to tax imported sugar. In response, the Sugar Adjustment Act imposed new tax in,to protect the sugar industry. Lutz challenged the constitutionality of the tax imposed on owners of lands devoted to the cultivation of sugarcane, saying that it is for the aid of the sugar industry exclusively, which is not a public purpose for which a tax may be constitutionally levied. Held: Court held that it was valid because the protection, promotion and advancement of the sugar industry, a crucial industry in the country, would redound to the benefit of the general welfare. It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation. There might be other industries that are also in need of similar protection; but the legislature is not required by the Constitution to adhere to a policy of all or none. Gomez v. Palomar (1968) Facts: Benjamin Gomez sent a letter which was returned to him for not bearing a special anti-TB stamp which was implemented by RA 1635 and subsequent AOs by the postmaster general. Gomez filed a case praying for the unconstitutionality of the law it being violative of equal protection. Held: The eradication of a dreaded disease is a public purpose, but if by public purpose the petitioner means benefit to a taxpayer as a return for what he pays, then it is sufficient answer to say that the only benefit to which the taxpayer is constitutionally entitled is that derived from his enjoyment of the privileges of living in an organized society, established and safeguarded by the devotion of taxes to public purposes. Any other view would preclude the


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levying of taxes except as they are used to compensate for the burden on those who pay them and would involve the abandonment of the most fundamental principle of government — that it exists primarily to provide for the common good. Valentin Tio v. Videogram Regulatory Board (1987) Facts: Tio challenged the constitutionality of PD 1987, the law creating the Videogram Regulatory Board, pointing out, among others, that its tax provision is harsh and oppressive. Held: The creation of the VRB is a necessary measure to protect the then rising video industry, which was up against the abundance of pirated and pornographic materials in the market. A tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. The power to impose taxes is one so unlimited in force and so searching in extent, that the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it. The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax was to favor one industry over another. It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that "inequities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation". (2) TAXATION IS INHERENTLY LEGISLATIVE General Rule The power of taxation being purely legislative, Congress cannot delegate the power to others. (Based on the doctrine of separations of powers which is implied from the provisions of the Constitution.) Exception Proper delegation to: 1. President

Constitutionally authorized under Sec. 28 (2) of Article VI.

2. LGUs In line with the well accepted principle that the power to create municipal corporations for purposes of local self-government carries with it by necessary implication, the power to confer the power to tax on such local governments. Also now expressly granted in our Constitution (Sec. 5, Art. X) and the Local Government Code

3. Administrative agencies Other aspects of the taxing process that are not legislative may be vested in an administrative agency.

Limitations on Delegation 1. It shall not contravene any constitutional

provision or inherent limitation. 2. It is effected either by the Constitution or by

validly enacted legislative measures or statute.

3. The delegated levy power, EXC when the delegation is by an express provision of Constitution, should only be in favor of the local legislative body of the local or municipal government concerned.

Legislative authority includes the authority: 1. To determine:

a. Nature (kind) b. Object (purpose) c. Extent (amount or rate) d. Coverage (subjects and objects) e. Situs (place)

2. To grant tax exemptions or condonations. 3. To specify or provide for administrative,

judicial remedies that either the government or taxpayer may avail themselves of in the proper implementation of the measure.

CASES National Power Corporation v. Albay (1990) Facts: The Province of Albay auctioned of properties of NAPOCOR to settle the tax deficiencies of NAPOCOR. NAPOCOR claims that their tax exemption had been restored


12

under FIRB Resolution No. 17-87, which was also affirmed by Executive Secretary Macaraig. Held: Under PD 776 which created the FIRB, the FIRB has no authority to impose taxes or revoke existing ones, which, after all, is legislative under the Constitution. They merely have the power to “recommend” tax exemptions, and cannot by itself prescribe or restore taxability. EO 93 which gave the prerogative to restore tax and/or duty exemptions may only be given prospective effect and cannot affect the Board’s past acts. Cu Unjieng v. Patstone (1917) Facts: Cu Enjieng wanted to build a warehouse, but the City of Manila wanted him to comply with City Ordinance 301, and make an arcade and pay an exhorbitant license fee for it before giving him a building permit. He filed a petition for mandamus to compel the city engineer to issue him the permit. Lower court refused. Held: The SC held that while the Municipal Board could compel him to build an arcade, it did not have the power to impose a fee purely for revenue, because such a power is legislative in nature, and thus should be expressly conferred on them. Legislative powers in regard to taxes and licenses are not inherent in municipal corporations; they must be granted by statute either expressly or by necessary implication. Like other delegated powers, taxation by municipal corporations are subject to strict construction. Cervantes v. Auditor General (1952) Facts: Cervantes, the manager and board chairman of NAFCO was given the maximum salary granted by its charter and also quarters allowance. However, the Auditor General disallowed such disapproved by the Control Committee of the Government Enterprises Council, which was created by EO 93 in pursuance to the President’s authority under RA 51. Held: EO 93 did not constitute an illegal delegation of legislative power. So long as the Legislature "lays down a policy and a standard is established by the statute" there is no undue delegation. R.A. No. 51 in authorizing the President of the Philippines, among others, to

make reforms and changes in government-controlled corporations, lays down a standard and fixes a policy that the purpose shall be to promote simplicity, economy and efficiency in their operations. The President had to carry the mandate. This he did by promulgating the executive order in question which, tested by the rule above cited, does not constitute an undue delegation of legislative power. Maceda v. Macaraig (1993) Facts: The petition sought to nullify certain decisions, orders, ruling, and resolutions of the Executive Secretary, Secretary of Finance, Commissioner of Internal Revenue, Commissioner of Customs, and the FIRB exempting NPC from indirect tax and duties. Commonwealth Act 120 created NPC as a public corporation. RA 6395 revised the charter of NPC and provided in detail the exemption of NPC from all taxes, duties and other charges by the government. There were many resolutions and decisions that followed after RA 6395 which withdrew/reinstated NPC’s tax exemption. Held: NPC, as a non-profit public corporation, was created for the general good and welfare of the people. From the very beginning of its corporate existence, NPC enjoyed preferential tax treatment to enable it to pay its debts and obligations. From the changes made in the NPC charter, the intention to strengthen its preferential tax treatment is obvious. The tax exemption is intended not only to insure that the NPC shall continue to generate electricity for the country but more importantly, to assure cheaper rates to be paid by consumers. The FIRB Resolution, restoring NPC’s tax exemption was validly issued. The delegation in the law, to the President and/or Ministry of Finance, of the power to restore tax exemptions was held to be valid. EO 93, which is complete in itself, was a sufficient delegation of power then to the FIRB. (3) TAXATION IS TERRITORIAL

General Rule A state may not tax property lying outside its borders or lay an excise or privilege tax upon the


13

exercise or enjoyment of a right or privilege derived from the laws of another estate and therein exercised and enjoyed. Within the territorial jurisdiction, the taxing authority may determine the place of taxation (tax situs) Reason Tax laws do not operate beyond a country’s territorial limits; property wholly within the jurisdiction of another state receives none of the protection for which a tax is supposed to be compensation. Exception A person may be taxed where there is between him and the taxing state, a privity of relationship justifying the levy. (4) TAXATION IS SUBJECT TO

INTERNATIONAL COMITY Art. II, §2, 1987 Constitution The Philippines renounces war as an instrument of national policy, adopts the generally accepted principles of international law as part of the law of the land and adheres to the policy of peace, equality, justice, freedom, cooperation, and amity with all nations.

Under international comity, the property of foreign state or government may not be taxed by another. Basis: 1. Sovereign equality among states (one state

cannot exercise its sovereign powers over another).

2. Usage among states (when one enters the territory of another, there is an implied understanding that the former does not intend to degrade its dignity by placing itself under the jurisdiction of the latter).

3. Foreign government may not be sued without its consent.

Government agencies and instrumentalities are exempted from taxation Reason: Government would be taxing itself

if it levies a tax upon public property; functions of government shall not be unduly impeded; to reduce amount that has to be

handled by the government in the course of its operations.

Entities exempted: Government entities through which the government immediately exercises its sovereign powers.

GOCCs performing proprietary functions: Generally subject to tax in absence of tax exemptions in their charters or special laws creating them.

However, if Congress so desires, it may tax the government as there is no constitutional prohibition against the government taxing itself.

3. CONSTITUTIONAL LIMITATIONS Constitutional provisions are meant and intended more to regulate and define, rather than to grant, the power emanating therefrom. (Vitug) (1) ART. III, §1, 1987 CONSTITUTION (DUE

PROCESS OF LAW AND EQUAL

PROTECTION OF THE LAWS)

No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws.

Application of Due Process to taxation: A tax imposed for a private purpose or

which is beyond the jurisdiction of the government to levy and collect offends the due process of law.

If judicially declared as invalid, any tax levied cannot be enforced and thus must be refunded if paid.

A taxpayer may not be deprived of his property for non-payment of taxes without notice of tax liability as well as of the sale at public auction.

A tax law denying taxpayer the fair opportunity to assert his substantial rights before a competent tribunal is invalid.

The procedure prescribed for paying the tax or contesting the same must be reasonable and not unjust or oppressive to title taxpayer.

Application of Equal Protection of the law.


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All persons subject to legislation shall be treated alike under all circumstances and conditions both in the privileges conferred and liabilities imposed.

What the Constitution prohibits is class legislation. So long as there are rational or reasonable grounds for so doing, Congress may group the persons or properties to be taxed and it is sufficient if all of the same class are subject to the same rate and the tax is administered impartially upon them.

Applies alike to all entities placed in similar situation, or differently to entities belonging to different classes, provided all those belonging to one class are treated alike.

Equal treatment under the law and may involve the same or different treatment depending on the circumstances.

(2) ART. III, §10, 1987 CONSTITUTION (NON-

IMPAIRMENT OF THE OBLIGATION OF

CONTRACTS)

No law impairing the obligation of contracts shall be passed. This provision is impaired when its terms or conditions are changed by law or by a party without the consent of the other, thereby weakening the position or the rights of the latter. Includes contracts entered into by the

government, executive orders, administrative orders or circulars, and ordinances.

Exception A franchise granted by the government, although in a sense is an exemption based on a contract, such may be revoked because under the Constitution, a franchise is “subject to amendment, alteration or repeal” by Congress. (3) ART. III, §20, 1987 CONSTITUTION (NO

IMPRISONMENT FOR NON-PAYMENT OF A

POLL TAX)

No person shall be imprisoned for debt or non-payment of a poll tax.

The only penalty for delinquency is payment of surcharge in the form of interest. (24% pa under the LGC) A person is subject to imprisonment for violation of community tax law other than for non-payment of tax and for non-payment of other taxes if so expressly provided for. Basis: Liberty of abode (4) ART. VI, §28 (1), 1987 CONSTITUTION (RULE

OF UNIFORMITY AND EQUITY IN

TAXATION)

The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. General Rule All taxable articles or properties of the same class shall be taxed at the same rate. (Rate is uniform on the same class everywhere) There should be uniform application and operation, without discrimination, of the tax in every place where the subject of it is found. Equality in burden, NOT equality in amount

or equality in its strict and literal meaning. Uniformity implies equality in burden, not equality in amount or equality in its strict and literal meaning. The rule of uniformity has been interpreted

as equivalent to the requirements of valid classification under the equal protection guarantee for all that is required is that the tax applies equally to all persons, firms and corporations place in similar situation.

Uniformity in taxation is effected through the apportionment of the tax burden among the taxpayers which under the Constitution must be equitable. Such apportionment must be more or less

just in the light of the taxpayer’s ability to shoulder the tax burden.

It may be uniform but inequitable where the amount of tax imposed is excessive or unreasonable.

The requirement implies the use of reasonable classification of entities or individuals who are to be affected by a tax.


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Progressive System: Tax laws shall place emphasis on direct rather than indirect taxation, with ability to pay as principal criterion.

Distinction between equal protection and uniformity and equity While equal protection refers to like treatment of persons in like circumstances, uniformity and equity refer to proper relative treatment for tax purposes of persons in unlike circumstances. Ma’am L: They are practically the same.

CASES City of Baguio v. De Leon (1968) Facts: Ordinance 99 is at question, which imposed a license fee on entities doing business in Baguio. It is being assailed on the grounds that it imposed double taxation and violated the rule of uniformity as guaranteed by the Constitution. Held: Affirming that the ordinance was valid, the Court cited RA 329 which gave authority to Baguio to promulgate said ordinance. Equality and uniformity in taxation means that all taxable articles or kinds of 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. To satisfy this requirement then, all that is that the statute or ordinance in question "applies equally to all persons, firms and corporations placed in similar situation." Pepsi v. City of Butuan (1968) Facts: M.O. No. 110 was enacted by the City of Butuan, imposing a tax any agent and/or consignee of any person, association, partnership, company or corporation engaged in selling soft drinks or carbonated drinks. Held: M.O. No. 110, as amended, is null and void for being in the nature of an import tax and for being discriminatory. Only sales by "agents or consignees" of outside dealers would be subject to the tax. Sales by local dealers, not acting for or on behalf of other

merchants, regardless of the volume of their sales, and even if the same exceeded those made by said agents or consignees of producers or merchants established outside the City of Butuan, would be exempt from the disputed tax. The classification made in the exercise of this authority, to be valid, must, however, be reasonable and this requirement is not deemed satisfied unless: (1) it is based upon substantial distinctions

which make real differences; (2) these are germane to the purpose of the

legislation or ordinance; (3) the classification applies, not only to

present conditions, but, also, to future conditions substantially identical to those of the present; and

(4) the classification applies equally all those who belong to the same class.

Eastern Theatrical Co v. Alfonso (1949) Facts: Motion picture corporations questioned an ordinance passed by the Municipal Board of Manila which imposed a fee on the price of admission tickets, crying unconstitutionality, injustice and abuse of power by the Board, as well as a conflict between the Revised Administrative Code and the National Internal Revenue Code. Defendants in turn opposed them and also alleged that the corporations have actually been pocketing the money that was taxed from their patrons instead of giving it to the government. Held: The ordinance stands. The NIRC did not repeal the RAC and thus take away the power to impose amusement tax, and neither can the RAC be interpreted to only grant the City of Manila the authority to grant tax on business and not amusement tax. Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. Just because some places of amusement are taxed while others are not is no argument against equality and uniformity in taxation, which means that all taxable articles or kinds of 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.


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Basco v. Pagcor (1991) Facts: The four petitioner-lawyers sought to have the PAGCOR Charter, PD 1869, annulled based on several grounds—one of which is its alleged forcing the City of Manila to waive its right to impose taxes since the PAGCOR can practically operate tax-free. Held: The Court said that the City, as a municipal corporation, is without an inherent right to impose taxes, and that as such, it cannot tax instrumentalities of the National Government, such as PAGCOR. The Equal Protection clause does not preclude classification of individuals who may be accorded different treatment under the law as long as the classification is not unreasonable or arbitrary. A law does not have to operate in equal force on all persons or things to be conformable to the Equal protection clause. The "equal protection clause" does not prohibit the Legislature from establishing classes of individuals or objects upon which different rules shall operate. The Constitution does not require situations which are different in fact or opinion to be treated in law as though they were the same. Association of Customs Broker v. Municipal Board of Manila (1953) Facts: Petitioners question Ordinance 3379 which levies a property tax, claiming that inter alia it constitutes double taxation as violates the rule on uniformity of taxation. Held: the ordinance infringes the rule of the uniformity of taxation ordained by our Constitution. The ordinance exacts the tax upon all motor vehicles operating within the City of Manila. It does not distinguish between a motor vehicle for hire and one which is purely for private use; and does not distinguish between a motor vehicle registered in the City of Manila and one registered in another place but occasionally comes to Manila and uses its streets and public highways. There is no pretense that the ordinance equally applies to motor vehicles who come to Manila for a temporary stay or for short errands, and it cannot be denied that they contribute in no

small degree to the deterioration of the streets and public highway. The fact that they are benefited by their use they should also be made to share the corresponding burden. This is an inequality which is found in the ordinance, and which renders it unconstitutional. Sison v. Ancheta (1953) Facts: Supra Held: According to Justice Laurel in Philippine Trust v. Yatco, this requirement is met when the tax operates with the same force and effect in every place where the subject may be found. It does not call for perfect uniformity or perfect equality, because this is hardly attainable. Equality and uniformity of taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has authority to make reasonable and natural classifications for the purposes of taxation. Where the differentiation complained of conforms to the practical dictates of justice and equity, it is not discriminatory and therefore uniform. All that the principle requires is that the tax applies equally to all persons, firms, and corporations placed in a similar situation. (5) ART. VI, §28 (2), 1987 CONSTITUTION

(DELEGATION OF TAXING POWER TO THE

PRESIDENT)

The Congress may, by law, authorize the President to fix within specified limits, and subject to such limitations and restrictions as it may impose, tariff rates, import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national development program of the Government.

Section 401, Tariff and Customs Code Flexible Clause. —

a. In the interest of national economy, general welfare and/or national security, and subject to the limitations herein prescribed, the President, upon recommendation of the National Economic and Development Authority (hereinafter referred to as NEDA), is hereby empowered: (1) to increase, reduce or remove existing protective rates of import duty (including any necessary change in


17

classification). The existing rates may be increased or decreased to any level, in one or several stages but in no case shall the increased rate of import duty be higher than a maximum of one hundred (100) per cent ad valorem; (2) to establish import quota or to ban imports of any commodity, as may be necessary; and (3) to impose an additional duty on all imports not exceeding ten (10%) per cent ad valorem whenever necessary; Provided, That upon periodic investigations by the Tariff Commission and recommendation of the NEDA, the President may cause a gradual reduction of protection levels granted in Section One Hundred and Four of this Code, including those subsequently granted pursuant to this section.

b. Before any recommendation is submitted to the President by the NEDA pursuant to the provisions of this section, except in the imposition of an additional duty not exceeding ten (10) per cent ad valorem, the Commission shall conduct an investigation in the course of which they shall hold public hearings wherein interested parties shall be afforded reasonable opportunity to be present, produce evidence and to be heard. The Commission shall also hear the views and recommendations of any government office, agency or instrumentality concerned. The Commission shall submit their findings and recommendations to the NEDA within thirty (30) days after the termination of the public hearings.

c. The power of the President to increase or decrease rates of import duty within the limits fixed in subsection "a" shall include the authority to modify the form of duty. In modifying the form of duty, the corresponding ad valorem or specific equivalents of the duty with respect to imports from the principal competing foreign country for the most recent representative period shall be used as bases.

d. The Commissioner of Customs shall regularly furnish the Commission a copy of all customs import entries as filed in the Bureau of Customs. The Commission or its duly authorized representatives shall have access to, and the right to copy all liquidated customs import entries and other documents

appended thereto as finally filed in the Commission on Audit.

e. The NEDA shall promulgate rules and regulations necessary to carry out the provisions of this section.

f. Any Order issued by the President pursuant to the provisions of this section shall take effect thirty (3) days after promulgation, except in the imposition of additional duty not exceeding ten (10) per cent ad valorem which shall take effect at the discretion of the President.

(6) ART. VI, §28 (3), 1987 CONSTITUTION

(EXEMPTION OF RELIGIOUS, CHARITABLE, AND EDUCATIONAL ENTITIES NON-PROFIT

CEMETERIES AND CHURCHES FROM

PROPERTY TAXATION) Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation.

This provision covers only PROPERTY TAXES. It is the USE of property, and NOT ownership that is taxed. To be exempt, the property must be ACTUALLY, DIRECTLY AND EXCLUSIVELY USED for the purposes mentioned. The word “exclusively” was originally

interpreted to mean “primarily”. However, jurisprudence has explained that it means “solely”

The exemption extends to facilities which are incidental to or reasonably necessary for accomplishment of said purposes.

CASES Herrera v. QC Board of Assessment Appeals (1961) Facts: The Herreras were running St. Catherine’s Hospital, a hospital and midwifery school in QC. Though initially granted a tax exemption, after


18

three years they were assessed for real property taxes. Held: Though the hospital derived some profit, since it was spent in improving the charity ward the hospital’s purpose was still primarily for charity. The admission of pay patients does not detract from the charitable character of a hospital, if all its funds are devoted exclusively to the maintenance of the institution as a public charity, Also, the exemption in favor of property used exclusively for charitable or educational purposes is “not limited to property actually indispensable” therefor, but extends to facilities which are “incidental to and reasonably necessary for” the accomplishment of said purposes. The presence of the school furnished another ground for exemption, hence it was improper to assess the Herreras’ hospital properties for real property taxes. The Constitution grants real property tax exemptions to institutions which are exclusively devoted to religious, charitable, or educational purposes. Abra Valley College v. Aquino (1988) Facts: The lot and building of Abra Valley College were subjected to auction because of non-payment of taxes because part its first floor was being leased for a commercial purpose and because its second floor was being used by the school director as a residence for him and his family. A complaint to void its sale and seizure failed because of the same reasons. Held: Buildings used exclusively for educational purposes, as well as facilities which are incidental to and reasonably necessary for the accomplishment of said purposes, are exempt from tax via the Constitution. The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution. The term "exclusively used for educational purposes" is not limited to property actually indispensable therefor but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes. The use of the second floor may be argued to be incidental, but the leasing of part of the first floor for a commercial purpose necessitates the payment of taxes. Lung Center v. QC (2004)

Facts: The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established by virtue of Presidential Decree No. 1823. A big space at the ground floor is being leased to private parties, for canteen and small store spaces, and to medical or professional practitioners who use the same as their private clinics for their patients whom they charge for their professional services. Almost one-half of the entire area on the left side of the building along Quezon Avenue is vacant and idle, while a big portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is being leased for commercial purposes to a private enterprise known as the Elliptical Orchids and Garden Center. The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients, both paying and non-paying. Aside from its income from paying patients, the petitioner receives annual subsidies from the government Held: To determine whether an enterprise is a charitable institution/entity or not, the elements which should be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-laws, the methods of administration, the nature of the actual work performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties. In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts under the influence of education or religion, by assisting them to establish themselves in life or otherwise lessening the burden of government. It may be applied to almost anything that tend to promote the well-doing and well-being of social man. It embraces the improvement and promotion of the happiness of man. The word “charitable” is not restricted to relief of the poor or sick. The test of a charity and a charitable organization are in law the same. The test whether an enterprise is charitable or not is whether it exists to carry out a purpose reorganized in law as charitable or whether it is maintained for gain, profit, or private advantage.


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The words “dominant use” or “principal use” cannot be substituted for the words “used exclusively” without doing violence to the Constitutions and the law. Solely is synonymous with exclusively. (7) ART. VI, §28 (4) 1987 CONSTITUTION

(CONCURRENCE BY A MAJORITY OF ALL

THE MEMBERS OF CONGRESS FOR THE

PASSAGE OF A LAW GRANTING TAX

EXEMPTION)

No law granting any tax exemption shall be passed without the concurrence of a majority of all the Members of the Congress.

(8) ART. VI, §29 (3), 1987 CONSTITUTION (TAX

LEVIED FOR SPECIAL PURPOSE AS

SPECIAL FUND)

All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government.

CASE Gaston v. Republic Planters Bank (1988) Facts: Pursuant to Sec. 7 of PD No 388 (creating the PHILSUCOM), a stabilization fund was set up in favor of the sugar industry. The fund was maintained through the deduction of P1.00 per picul from sugar proceeds of the sugar producers. Petitioners who are sugar producers, planters, and millers now pray for a writ of mandamus to command Republic Planters Bank (RPB) to implement its privatization by the transfer and distribution of the shares of stock in the bank now held by the SRA, on the ground that such stocks were funded by the stabilization fund. Petitioners argue that the stabilization fees collected from sugar planters and millers pursuant to Sec. 7 of P.D. No. 388 are funds in trust for them. Therefore, the stocks also belonged to them. Held: The stocks in RPB also belong to the Government. The stabilization fees collected are

in the nature of a tax, which is within the power of the State to impose for the promotion of the sugar industry. The levy is primarily in the exercise of the police power of the State. To rule in petitioners' favor would contravene the general principle that revenues derived from taxes cannot be used for purely private purposes or for the exclusive benefit of private persons. The Stabilization Fund is to be utilized for the benefit of the entire sugar industry. (9) ART. VI, §27 (2), 1987 CONSTITUTION

(POWER OF THE PRESIDENT TO VETO ANY

PARTICULAR ITEM OR ITEMS IN A

REVENUE OR TARIFF BILL) The President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill, but the veto shall not affect the item or items to which he does not object.

General Rule: The President may not veto a bill in part and approve it in part. Exceptions: Appropriation, revenue or tariff bill. (10) ART. VIII, §5 (2.B), 1987 CONSTITUTION

(NON-IMPAIRMENT OF THE JURISDICTION

OF THE SUPREME COURT IN TAX CASES)

The Supreme Court shall have the following powers: (2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may provide, final judgments and orders of lower courts in: (b) All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto.

The Supreme Court is the final arbiter of tax cases. (11) ART. X, §5 (2), 1987 CONSTITUTION

(DELEGATION OF TAX POWER TO LOCAL

GOVERNMENTS) Each local government unit shall have the power to create its own sources of revenues and to levy


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taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments. This provision is an exception to the general rule that constitutional tax provisions, normally addressing themselves to national tax where the power inheres in sovereignty, are designed to limit rather than to grant tax powers. (Vitug) Power to create municipal corporations for purposes of local self-government carries with it, by necessary implication, the power to confer the power to tax on such local governments. (12) ART. XIV, §4(3), 1987 CONSTITUTION

(EXEMPTION OF NON-STOCK, NON-PROFIT EDUCATIONAL INSTITUTIONS

FROM TAXATION) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions, subject to the limitations provided by law, including restrictions on dividends and provisions for reinvestment.

Covers income, property and donor’s taxes and

customs duties, and other taxes imposed by

either or both national government or political

subdivisions.

The exemption does not cover revenues derived

from or assets used in unrelated activities or

enterprise.

Institution Exemption Religious, Charitable and Educational Entities

Property Tax

Non-profit, non- Income, Property

stock Educational Institution

and Donor’s Tax

Proprietary Educational Institutions

Property Tax and Income Tax if provided by law.

H. Interpretation and Construction of Tax Statutes A SUMMARY OF THE RULES 1. When law is clear, NO ROOM FOR

INTERPRETATION. Plain meaning only.

2. In case of DOUBT, apply the following rules:

General Rule: Strictly against government; liberally in favor of taxpayer.

WHY: As taxes are a burden, they are not to be presumed beyond what the statute expressly and clearly declares.

Exceptions: o EXEMPTIONS: Strictly against

claimants. In case of doubt, rule in favor of taxation. Cannot be granted by vague

implication. Exemptions by omission: strict

against government. Exceptions: When exemptions

liberally construed in favor of claimants: • When law provides for the

exemption. • Exemptions in favor of the

government, its political subdivisions or instrumentalities.

o REFUNDS: Same rule as Exemptions. o REWARDS: Liberally in favor of

awardees. WHY: Positive and effective means

to check anomalies committed to the detriment of the State’s finances; leads to collection of revenue.

o AMNESTIES: General pardon or intentional

overlooking by the State of its


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authority to impose penalties on persons otherwise guilty of evasion or violation of revenue or tax law. Policy of “forgive and forget”.

Terms of amnesty: Strictly against applicant.

Effects of amnesty: Liberally in favor of qualified claimant.

3. Other rules: Law must be interpreted according to the

purpose for which it was passed. Special laws prevail over general laws.

o The National Internal Revenue Code prevails over general statutes like the Civil Code.

Courts may take judicial notice of the origin and history of the statutes, as well as jurisprudence of the jurisdiction from which the statute is derived.

o As the NIRC was taken from the United States, U.S. decisions have suppletory application in interpretation.

CASES Commissioner v. Fireman’s Fund Insurance (1987) Facts: Fireman’s Fund bought and paid for documentary stamps for its insurance policies; however, it affixed these stamps onto documents not authorized by law. These documents were later lost, so the CIR assessed documentary stamp taxes against Fireman’s Fund, with a penalty for failing to affix the stamps onto the policies themselves. The CIR’s decision was reversed by the CTA, which ruling was affirmed by the SC. Held: In cases of doubt, tax statutes must be construed strongly against the government and in favor of the citizens, because the burden shouldn’t be imposed beyond what the statutes expressly and clearly meant. Fireman’s Fund had presented uncontested evidence that it had bought and paid for the stamps; the government shouldn’t unjustly enrich itself by demanding that Fireman’s Fund pay the taxes again.

CIR v. CA (1999) Facts: Two companies purchased certain quantities of manufactured mineral oil, motor fuel, diesel and fuel oil which were used in their mining and forest concessions respectively. They then filed claims with the Commissioner of Internal Revenue (CIR) for a tax refund representing 25% of the specific taxes collected on the items they purchased. Their cases reached the Court of Tax Appeals which granted refunds pursuant to Sec. 5 of R.A. 1435, in relation to Sec. 142 (b) and (c) of the National Internal Revenue Code and Sec. 145 as prescribed under Secs. 1 and 2 of R.A. 1435. The cases were eventually brought before the SC with the companies arguing that the refund should have been based on the higher rates under the 1977 Tax Code as amended by P.D. 1672 and E.O. 672. Held: A partial refund under Sec. 5 of R.A. 1435 is in the nature of a tax exemption, and therefore, must be construed strictissimi juris against the grantee. Since there is nothing in Sec. 5 of R.A. 1435 which authorizes a tax refund based on the higher rates under Sections 153 and 156 of the Tax Code, such rates cannot be used as basis for the refund. Floro Cement v. Gorospe (1991) Facts: The Municipality of Lugait filed a complaint for collection of taxes against Floro Cement Corporation (FCC). The taxes sought to be collected referred to “manufacturer’s and exporter’s taxes” based on Ordinances Nos. 5 and 10 which were enacted pursuant to P.D. No. 231 and P.D. No. 426 respectively. In its defense, FCC claimed that it wasn’t liable to pay the taxes because under Sec. 42 of P.D. No. 463, the Municipality cannot levy and collect taxes of any kind on mines, mining claims, mineral products, or on any operation, process, or activity connected therewith. Held: Tax exemptions cannot be allowed upon a mere vague implication or inference. It must be shown indubitably to exist. Here, FCC was not able to clearly show that it was entitled to the tax exemption. The manufacture and export of cement is not exempted from taxation because it is not a mineral product.


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Luzon Stevedoring v. CTA (1988) Facts: Luzon Stevedoring insisted on getting a tax refund for the imported parts used for the maintenance of the tugboats, claiming that tugboats fall under “cargo vessel” under the tax exemption provisions of Sec. 190 of the NIRC. As such, the spare parts and equipment the company imported should be exempted from compensating tax. Held: Based on the definitions, tugboats aren’t passenger/cargo vessels; therefore, they couldn’t be exempted from compensating tax. As a rule, the relinquishment of tax is never presumed and any reduction or diminution thereof with respect to its mode or its rate, must be strictly construed, and the same must be coached in clear and unmistakable terms in order that it may be applied. NPC v. Albay (1990) Facts: The Province of Albay, Albay Governor Romeo R. Salalima, and Albay Provincial Treasurer Abundio M. Nuñez caused the publication of a notice of auction sale involving the properties of petitioner NAPOCOR and Philippine Geothermal Inc. in their offices at Tiwi, Albay. The amounts to be realized from the auction sale would be applied to NAPOCOR’s tax delinquencies (i.e. real property taxes on the properties amassed between June 11, 1984 and March 10, 1987). NAPOCOR opposed the sale, and the SC issued a TRO. But the TRO didn’t reach respondents on time, and the sale pushed through. Held: The auction sale was valid. NAPOCOR’s tax-exempt status has been granted, withdrawn, and restored over the years c/o various R.A.s, P.D.s, Resolutions, and Memoranda. NAPOCOR must be held liable for taxes in the interregnum between June 11, 1984 (the date its tax exemption was withdrawn c/o promulgation of P.D. 1931) and March 10, 1987 (the date it was restored c/o the Memorandum from the Office of the President affirming Resolution No. 17-87). The SC saw nothing wrong with taxing NAPOCOR’s properties because real property taxes form part and parcel of the financing apparatus of the government in development and nation-

building, particularly in the local government level. Republic v. IAC (1991) Facts: BIR sued the Spouses Pastor for deficiency income tax. Spouses alleged that already availed of the tax amnesty under P.D. Nos. 23, 213, and 370. TC ruled in favor of the spouses. Government appealed to the IAC, alleging that the benefits under P.D. No. 213 only applied to those who had no pending tax assessments against them. Spouses countered that nothing in the language of the LOI regarding implementation of the P.D. gave the BIR the power to restrict the application of the P.D. Held: In case of doubt, tax statutes are to be construed strictly against the government and liberally in favor of the taxpayer. A tax amnesty is a general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law. Its effects must be construed in favor of qualified claimant. Wonder Mechanical Engineering v. CTA (1975) Facts: Wonder Mechanical was given tax exemptions for the manufacture of machines for the making of certain articles. It was assessed taxes for the manufacture and sale of those articles. Held: It is clear that the tax exemption is for the manufacture of the machines, not the manufacture and sales of the articles produced by those machines. Tax exemptions are disfavored by law. He who claims it must prove it; it must be clearly expressed and cannot be established by implication. Maceda v. Macaraig (1993) Facts: Maceda questioned the NPC’s exemption from tax. He argued that since there was no mention of the phrase “all taxes” in the amending law, there is no longer an exemption and the refunds NPC was asking for must not be granted. Held: The rule on strict construction of provisions providing for tax exemptions does


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not apply in the case of exemptions running to the benefit of the government itself or its agencies. Strict construction is applied to statutes granting tax exemptions or deductions to minimize differential treatment and foster impartiality, fairness and equality of treatment among tax payers. This reason does not apply in the case of exemptions running to the benefit of the government itself or its agencies. In such case, the practical effect of an exemption is merely to reduce the amount of money that is to be handled by government in the course of its operations. Therefore, provisions granting exemptions to government agencies may be construed liberally, in favor of non-tax liability of such agencies. Penid v. Virata (1983) Facts: Petitioners filed Confidential Information No. 28 with the BIR, informing Commissioner Vera of underpayment of the 2% common carriers percentage tax by 27 shipping companies and agents. When interviewed by a BIR Examiner, petitioners revealed that it was a common practice. Because of this, the BIR investigated ALL shipping companies and agents operating in the Philippines, and in December 1962 eventually assessed certain firms for deficiency taxes. One of those was Pan Fil Co., Inc., which was NOT one of the 27 firms listed. Collection was held in abeyance pending resolution of a protest filed by Royal Inter-Ocean Lines with the CTA. When BIR finally collected, the total collection included an amount paid by Pan Fil. Petitioners filed a claim for 25% of the deficiency taxes collected, as their reward under Sec. 1 of R.A. No. 2338. Finance Secretary Virata excluded the amount collected from Pan Fil in computing petitioners’ reward, and set the reward at 25% of the deficiency taxes collected ONLY for the period covered by Confidential Information No. 28, excluding taxes which accrued after 1962. Held: The deficiency taxes collected from Pan Fil should be included in the computation of the reward. Petitioners’ information allowed the government to discover the erroneous method of computation used by Pan Fil, even though it wasn’t listed in Confidential Information No. 28, and thus recover a substantial (if unexpected) income. To exclude the amount paid by Pan Fil

would constitute a derogation of the basic tenet of both American and Philippine jurisprudence: statutes offering rewards must be liberally construed in favor of informers, and with regard for their intended purpose. CIR v. CA and Ateneo de Manila University (1997) Facts: The CIR assessed Ateneo for alleged deficiency contractor’s tax, because of the work undertaken by its Institute of Philippine Culture. Ateneo contested the assessment, claiming it was not covered by the 3% tax because it was not an independent contractor. The CIR claims that Ateneo had the burden of proving it was exempted from the law. Held: Tax statutes are to be construed strictly against the government, and that CIR must have first proved that Ateneo was covered by the law. The SC also found that Ateneo was not an independent contractor. A statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express words for that purpose. Republic v. Gancayco (1964) Facts: Gancayco was assessed by the CIR on June 13, 1946 for P11k. Gancayco made several requests for reinvestigation. His last request was made on March 14, 1949. CIR took no action on his request until May 17, 1960, when the CIR requested to Gancayco to pay. When he failed to pay CIR filed an action against him with CFI on July 16, 1960. Gancayco moved to dismiss on the ground of prescription. The Solicitor General, citing the civil code, argued that extrajudicial demands tolled the prescriptive period. Held: CIR’s action is barred by prescription. According to the internal revenue code, only a written agreement between the taxpayer before the expiration of the 5-year prescriptive period can suspend it. The Internal Revenue Code being a special law, prevails over a general law. US v. De Guzman (1915) Facts: Venancio de Guzman was discharged as an accused by the prosecution in exchange for his testimony against the accused. However,


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when the time came for him to testify, he refused to do so. A second case was thus filed against him in which he as convicted. Held: For the proper construction and application of the terms and provisions of legislative enactments which have been borrowed, it is, at times, essential to review the legislative history of such enactments and to find an authoritative guide for their interpretation and application in the decision of American and English courts of last resort construing and applying similar legislation in those countries. People v. Papaguitan (1999) Facts: Pagpaguitan and Salazar were found guilty by the trial court of the rape of Evelyn. Held: [same ruling as US v. De Guzman]

I. CLASSIFICATIONS OF TAX EXEMPTION

EXEMPTION It is a grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay. It is an inherent attribute of sovereignty, much like the power to tax itself. RATIONALE Public interest will be subserved by the exemption allowed. This public benefit or interest will be sufficient to offset the monetary loss entailed in the grant of the exemption GROUNDS 1. Contract

Ordinarily, the provisions of a contract of exemption from taxation are contained in the charter of the corporation to which the exemption in granted.

2. Public policy To encourage new and necessary industries To foster charitable and other benevolent

institutions

To make the public at large interested in favoring or encouraging the class or interest in whose behalf the exemption is made.

3. Reciprocity, or to lessen the rigors of international double or multiple taxation

NOTE: Equity is not a ground for tax exemption.

NATURE 1. Personal privilege of grantee Cannot be assigned No vested rights Construed strictly against claimant 2. Generally revocable by government Unless founded on a contract protected by

the non-impairment clause.

3. Implies waiver on part of government of its right to collect what would be due it

4. Not necessarily discriminatory As long as the exemption has a reasonable

foundation or rational basis; otherwise, it may be challenged under the equal protection clause.

AS TO MANNER OF CREATION 1. Express or Affirmative Granted by Constitution, statutes, treaties,

ordinances, franchises or contracts

2. Implied or by Omission Occurs when a tax levied on certain classes

of persons, properties or transactions without mentioning the other classes.

The omission may be accidental or intentional/

Example: In documentary stamp tax, if not within the list of DST, it is exempt by implication.

3. Contractual: Those agreed to by the taxing authority in

contracts lawfully entered into by them under an enabling law.

Usually by virtue of a franchise, or registration agreement with PEZA.

For franchises:


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o Tax exemptions for franchises can be subject to amendment by Congress (Art XII §11); the non-impairment of contracts clause does not apply.

o When a special law granted a tax exemption to a legislative franchise, it could not have been said to have been repealed by a more general taxing statute unless there was an intent to repeal or alter the special law.

AS TO SCOPE 1. Total When certain persons, property or

transactions are exempted, expressly or impliedly, from all taxes.

2. Partial When certain persons, property or

transactions are exempted, expressly or impliedly, from certain taxes, either entirely or in part.

AS TO OBJECT 1. Personal Granted directly in favor of such persons as

are within the contemplation of the law granting the exemption.

2. Impersonal Those granted directly in favor of a certain

class of property.

CASES Cagayan Electric v. Commissioner (1985) Facts: Cagayan Electric’s franchise was granted a tax exemption. However, RA 5431 was later passed amending the Tax Code, removing the tax exemption for all corporate taxpayers not specifically exempt under Sec. 27 of the Tax Code. The Commissioner held Cagayan Electric liable for income tax. Held: The franchise was subject to amendments by Congress, which in this case came in the form of RA 5431. Cagayan Electric was liable.

Province of Misamis Oriental v. Cagayan Electric (1990) Facts: Pursuant to a PD, the Province of Misamis Oriental enacted a provincial revenue ordinance imposing a franchise tax of ½% on businesses enjoying franchise. The Provincial Treasurer demanded payment from CEPALCO. The province filed in the CFI, a complaint for declaratory relief, praying that the court exercise its power to construe the Local Tax Code in relation to the franchise of CEPALCO and declare that the Local Tax Code has amended the franchise. Held: A special and local statute applicable to a particular case is not appealed by a later statute which is general in terms, unless there is manifest intent to repeal or alter the special law. Presumption: special statutes are exceptions to the general law because they pertain to a special charter granted to meet a particular set of conditions and circumstances. CIR v. CTA (1991) Facts: Eastern Extension was a foreign company with a legislative franchise to operate a submarine telegraph cable in Manila. Under its franchise, it was exempted from paying any taxes other than a franchise tax. The CIR declared that the franchise was ineffective, since Eastern violated the constitutional requirement that a corporation with a franchise be at least 60% Filipino-owned, and assessed deficiency income taxes. The CTA ruled in favor of Eastern. Held: The SC affirmed the CTA’s decision and said that the legislative franchise granted to Eastern was an operative act; therefore Eastern was tax-exempt. Franchises sprung from contracts between the sovereign power and private citizens made upon valuable considerations, for purposes of individual advantage as well as public benefit. It was generally considered that the obligation resting upon the grantee to comply with the terms and conditions of the grant constituted a sufficient consideration. It could also be said that the benefit to the community might constitute the sole consideration for the grant of a franchise by the state. Such being the case, the franchise was the law between the parties and they were bound by the terms thereof.


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J. Certain Doctrines in Taxation 1. PROSPECTIVITY OF TAX LAWS Laws shall have no retroactive effect, unless the contrary is provided. (Hydro Resources v. CA) A tax statute may be applied retroactively, but the legislative intent for such retroactive effect should be perfectly clear. (Lorenzo v. Posadas) If a tax law is so harsh and oppressive in its retroactive application, it transgresses the Constitution. (Republic v. Fernandez) The prohibition on ex post facto laws only applies to criminal or penal matters; the collection of interest in tax cases is not penal in nature. (Central Azucarera v. CTA) Tax laws are not political in nature; they continue in force even during enemy occupation. (Hilado v. Collector)

CASES Hydro Resources v. CA (1990) Facts: In 1978, Hydro entered into a contract with the NIA for the Magat River Project. Hydro was allowed to procure construction equipment, the payment of which would be advanced by NIA. Hydro would then reimburse NIA, and upon completion of payment, ownership over the equipment would be transferred to Hydro. The transfer of ownership was done in 1983. Hydro was assessed a 3% ad valorem tax prescribed by EO 860, which took effect in 1982. Held: Hydro should not be made to pay the ad valorem tax. The contract was entered into in 1978, while EO 860 took effect in 1982. It is a cardinal rule that laws shall have no retroactive effect, unless the contrary is provided. EO 860 does not provide for its retroactivity. Hilado v. Collector (1956) Facts: Hilado filed his income tax return for 1951. Pursuant to GC No. V-123 issued by the

Collector of Internal Revenue, he claimed a certain sum as a deductible item from his gross income as a loss consisting in a portion of his war damage claim. Meanwhile, GC No. V-139 was issued. It revoked the earlier GC, and laid down the rule that losses of property during the war are only deductible in the year of actual loss, in line with the NIRC which provides that losses sustained are only allowable as deduction only during the taxable year. Consequently, Hilado's claim for deduction was disallowed. Hilado contends that there is no such taxable year during the war since tax laws are unenforceable during enemy occupation. Held: Hilado cannot claim the deduction. Tax laws are not political in nature; they continued in force even during the enemy occupation. Such tax laws are deemed to be laws of the occupied territory, not of the occupying enemy. Law, once established, continues until changed by some competent legislative power; it is not changed merely by change of sovereignty. GC No. V-123, having been issued on a wrong construction of the law, could not have given rise to a vested right. Thus, GC No. V-139 can be given retroactive effect. Central Azucarera v. CTA (1967) Facts: Central was assessed deficiency income tax. It protested the assessment. A revised assessment was made, under which interest was imposed. The interest imposed was by virtue of RA 2343, which amended the NIRC, and became effective on June 20, 1959, while the taxable income involved were earned prior to the effectivity of the said law. Central argues that the imposition of the interest is tantamount to giving the law retroactive effect. Held: There is no retroactive application of the law. Prior to the amendment, the interest is imposed from the time the tax became due; after the amendment, the interest is imposed on the deficiency from the date prescribed for the payment of the tax. Since the deficiency income tax was assessed and unpaid when the amendment was in force, and the CIR sought to collect the interest only from the date of effectivity of the amendment, the interest was validly imposed. There is no ex post facto application of the law. The prohibition on ex


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post facto laws only applies to criminal or penal matters; the collection of interest in tax cases is not penal in nature. Lorenzo v. Posadas (1937) Facts: Thomas Hanley died in 1922. Lorenzo was appointed as executor of the estate. In 1931, the Collector of Internal Revenue assessed inheritance tax due from the estate of Hanley. The assessment was done under the provisions of Act No. 3606, which went into effect in 1930, thus not in force at the time of Hanley's death. Held: Inheritance taxation is governed by the statute in force at the time of death of the decedent. A tax statute may be applied retroactively, but the legislative intent for such retroactive effect should be perfectly clear. Act No. 3606 contains no provision indicating legislative intent to give it retroactive effect. Republic v. Fernandez (1956) Facts: The Spouses Olimpio and Angelina Fernandez acquired several real properties during the Japanese occupation. Olimpio died before the end of the war. After the war, the War Profits Tax Law was enacted. The Collector of Internal Revenue assessed war profits tax on Olimpio's estate. Held: The prohibition on ex post facto laws only applies to criminal or penal matters, not to laws which concern civil matters or proceedings generally, or which affect or regulate civil or private rights. Retrospective laws, when not of a criminal nature, do not come in conflict with the Constitution, unless obnoxious to its provisions on other grounds. In order to declare a tax as transgressing the constitutional limitation, it must be so harsh and oppressive in its retroactive application. The War Profits Tax Law, far from being harsh and oppressive, is both wise and just. Commissioner v. Marubeni Corporation (2001) Facts: Marubeni was assessed several deficiency taxes. It filed petitions for review with the CTA on September 1968. EO 41 was issued on August 1968. It provided for a tax amnesty covering unpaid income tax. The scope of the tax amnesty under EO 41 was expanded by EO

64. The CTA ruled in favor of Marubeni. The Collector contends that Marubeni is disqualified from availing of the tax amnesty under EO 41 because as provided “those with income tax cases already filed in Court as of the effectivity hereof” may not avail of the amnesty. Held: With respect to the benefits claimed under EO 41, Marubeni is not liable to pay the assessed tax. When EO 41 took effect, Marubeni had not yet filed cases with the CTA, thus is did not fall under the exception. With respect to the benefits claimed under EO 64, the ruling with regard to EO 41 cannot be applied. While an amendment is generally construed as if it had always been contained in the original act, it may not be given a retroactive effect unless it is so provided expressly or by necessary implication. Where a statute amending a tax law is silent as to whether it operates retroactively, the amendment will not be given a retroactive effect so as to subject to tax past transactions not subject to tax under the original at. In an amendatory act, every case of doubt must be resolved against its retroactive effect. 2. IMPRESCRIPTIBILITY OF TAXES The right of the Government to assess and collect taxes is imprescriptible, unless otherwise provided by express statutory provision. (Commissioner v. Ayala Securities Corporation)

CASES Commissioner v. Ayala Securities Corporation (1980) Facts: In 1961, Ayala was assessed 25% surtax and interest on the company's surplus for 1955. It is contented that the assessment was made beyond the 5-year prescriptive period provided in Sec. 331 of the NIRC. Held: There is no prescription in this case. Sec. 331 does not apply to taxes which don't require the filing of a return, such as the tax assessed upon Ayala. The limitations upon the right of the government to assess and collect taxes will not be presumed in the absence of clear legislation to the contrary. Where the government has not by express statutory


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provision provided a limitation upon its right to assess unpaid taxes, such right is imprescriptible. 3. DOUBLE TAXATION There is no constitutional prohibition against double taxation in the Philippines. It is something not favored, but is permissible, provided some other constitutional requirement is not violated. (Villanueva v. City of Iloilo) In order to constitute double taxation in the prohibited sense, the same property must be: taxed twice when it should be taxed but once; both taxes must be imposed on the same property or subject-matter, for the same purpose, by the same State, Government, or taxing authority, within the same jurisdiction or taxing district, during the same taxing period, and they must be the same kind or character of tax. (Villanueva v. City of Iloilo) In its broad sense, double taxation is taxation other than direct duplicate. It extends to all cases in which there is a burden of two or more pecuniary nature. (De Leon) Double taxation in its narrow sense is undoubtedly unconstitutional, but in the broader sense is not necessarily so. (De Leon) Where double taxation in its narrow sense occurs, the taxpayer may seek relief under the uniformity rule or the equal protection guarantee. (De Leon) Ma’am Loriega: Double taxation in its strict sense is a violation of due process.

CASES Villanueva v. City of Iloilo (1968) Facts: Ordinance 11 was enacted by the City of Iloilo. It imposed license tax on tenement houses. It is contended that the ordinance constitutes double taxation because the taxpayers were already paying real estate tax on the property, and income tax on derived from the property, as provided in the NIRC.

Held: There is no constitutional prohibition against double taxation in the Philippines. It is something not favored, but is permissible, provided some other constitutional requirement is not violated. There is no double taxation in this case: 1) the same tax may be imposed by the national government as well as by the local government; 2) license tax may be levied upon a business or occupation although the land or property used therein is subject to property tax. Procter & Gamble v. Municipality of Jagna (1979) Facts: Procter & Gamble owns a bodega in the Municipality of Jagna where it stores copra purchased in the municipality. The municipality enacted an ordinance where a storage fee is imposed on exportable copra deposited within the jurisdiction of Jagna. The company argues that the ordinance constitutes double taxation because its products is already subjected to tax. Held: No double taxation. A tax on the company's products is different from a tax on the privilege of storing copra in a bodega situated within the territorial boundary of defendant municipality. Commissioner v. Lednicky (1964) Facts: The Spouses Lednicky are American citizens residing the Philippines. They derive their income wholly from Philippine sources. They paid their taxes, but subsequently claimed for refunds based on the income taxes they paid to the US government. They claim that such payment should be deducted from the taxes they paid in the Philippines, otherwise they would be subject to double taxation. Held: No double taxation. Double taxation becomes obnoxious where the taxpayer is taxed twice for the benefit of the same governmental entity. While the taxpayers would have to pay two taxes on the same income, the Philippine government only receives the proceeds of one tax. Justice and equity demand that the tax on the income should accrue to the benefit of the Philippines, for it is where the income was earned, and the taxpayer is domiciled. Any relief from the alleged double taxation should come from the US since the its right to burden the taxpayer is solely predicated on his citizenship,


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without contributing to the production of the wealth that is being taxed. 4. POWER TO TAX INVOLVES THE POWER TO DESTROY The power to tax is not the power to destroy while this Court sits. (Justice Holmes in Panhandle Oil Co. v Mississippi) "The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmes's pen: 'The power to tax is not the power to destroy while this Court sits.' " So it is in the Philippines. (Justice Fernando in Sison v Ancheta, quoting Justice Frankfurter, quoting Justice Holmes) "The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmes's pen: 'The power to tax is not the power to destroy while this Court sits.' "So it is in the Philippines. (Justice Fernando in Sison v. Ancheta, quoting Justice Frankfurter, quoting Justice Marshall)

CASES Sison v. Ancheta (1984) Facts: BP 135 was enacted, amending the NIRC. It prescribed a higher tax rate for professionals than compensation income earners. Sison argues that the law violated due process, equal protection, and uniformity in taxation. Held: The power to tax is an attribute of sovereignty. But, there are restrictions to such power as defined in the Constitution. Adversely affecting as it does property rights, both the due process and equal protection clauses may properly be invoked to invalidate in appropriate cases a revenue measure. Otherwise, there would be truth to the dictum that “the power to tax involves the power to destroy.” Since there are restrictions to such power, “the power to tax is not the power to destroy while this Court sits.” However, the petition must be dismissed, for Sison has not shown any violation of the Constitution. 5. ESCAPE FROM TAXATION

Note: Ma’am Loriega discussed only Tax Evasion and Tax Avoidance (1) SHIFTING Transfer of the burden of a tax by the original payer or one whom the tax was assessed or imposed to another. It is possible only when there is an exchange of commodities. (2) CAPITALIZATION Reduction in the price of the taxed object equal to the capitalized value of the future taxes which the purchaser expects to be called upon to pay. It occurs when the tax falls on an income-producing property. (3) TRANSFORMATION Method of escape where the manufacturer upon whom tax has been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and endeavors to recoup himself by improving his process of production thereby turning out his units of products at a lower costs. In such case, the loss occasioned by the tax may be offset by the gains resulting from the economics of production. (4) EXEMPTION The grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay. (5) EVASION The use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of tax. It is also known as tax dodging, and it is punishable by law. (6) AVOIDANCE The use by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income, in order to avoid or reduce tax liability. The taxpayer uses tax saving devices or means allowed by law. It is also called tax planning, or tax minimization. TAX EVASION V. TAX AVOIDANCE (De Leon) Evasion is accomplished by breaking the letter of the tax law. Avoidance covers escape


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accompanied by legal procedures or means which may be contrary to the intent of the sponsors of the tax law, but nevertheless do not violate the letter of the law. The tax evader breaks the law; the tax avoider sidesteps it.

Tax Evasion Tax Avoidance Illegal Legal Breaks the law Uses the law to lessen

taxes The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted. (Delpher Trades Corporation v. IAC)

CASES Delpher Trades Corporation v. IAC (1988) Facts: The Pachecos leased real property to Hydro Pipes, with a provision granting a right of first refusal in favor of Hydro Pipes. A deed of exchange was executed between the Pachecos and Delpher, where the former conveyed the leased property for shares of stocks of the latter. Hydro Pipes challenged the deed of exchange arguing that it was a violation of the right of first refusal; that Delpher is a family corporation used for estate planning scheme to avoid taxes. Held: Delpher was used as a business conduit of the Pachecos. They invested their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes. There is nothing objectionable about this estate planning scheme of the Pachecos. The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted. There was no violation of the right of first refusal since there was no sale; the Pachecos merely changed their ownership from one form to another. Ma'am Loriega: Under Rev. Reg. 6-2013, the scheme by Delpher will not be allowed.

6. DOCTRINE OF EQUITABLE RECOUPMENT (taken from Collector v. UST) There is Equitable Recoupment: (1) For the taxpayer, when the refund of a tax

illegally or erroneously collected or overpaid by a taxpayer is barred by the statute of limitations and a tax is being presently assessed against the taxpayer, said present tax may be recouped or set off against the tax, the refund of which has been barred.

(2) For the government, when the government has failed to collect a tax within the period of limitation and said collection is already barred, and the taxpayer has to his credit a tax illegally or erroneously collected/overpaid, whose refund is not yet barred, the Government need not make refund of all the illegally/erroneously collected tax, but it may set off against it the tax whose collections is barred by the statute of limitations.

The reason for the doctrine is to mitigate the harshness of the law on limitations which bar: (3) The collection of any tax after a certain

period from the time that the tax return is filed or an assessment thereon by the Government, through its agents.

(4) The refund of a tax illegally or erroneously collected or any overpayment made by the taxpayer, after a certain period from said collection or payment.

Reasons to not apply the doctrine: It lowers the bars of prescription. The

statute of limitations has a salutary effect; under which, the parties won’t sleep on their rights, and would not burden the courts with suits for collection of taxes already barred or refund of taxes also barred.

It could tempt the collecting agency to neglect the collection of taxes because it could still recover such the tax by having it recouped from any tax which it may have illegally collected from the tax payer.

It could tempt the taxpayer to delay the filing of suit for refund of erroneously collected tax, because he can recover by refusing to pay a valid tax assessed against him by compelling the government to set


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off the same against a tax payment he could no longer recover.

When the taxpayer remembers and decides to get the refund, the Government may find itself financially embarrassed because it has already spent the money. On the other hand, if the Government suddenly decides to collect the tax by way of recoupment, the taxpayer might be unable to meet the demand.

The Doctrine of Equitable Recoupment is

not applicable in the Philippines, unless the Legislature makes it so.

CASES Collector v. UST (1958) Facts: UST claimed a refund against the Government for taxes erroneously paid. The Collector denied the refund, and assessed the payment of deficiency tax. Upon review by the CTA, it ruled that the claim of UST is erroneously collected tax, but it cannot be refunded because the claim was filed out of time. However, the CTA applied the doctrine of equitable recoupment to set-off the refund claim of UST against the deficiency assessment charged by the Collector. Held: The doctrine of equitable recoupment is a common law principle, and is not binding in this jurisdiction. Though there are advantages both to the government and the taxpayer, its drawbacks outweigh the benefits. It cannot be applied, unless the Legislature finds it fit to introduce the doctrine in this jurisdiction. 7. SET-OFF OF TAXES A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. (Republic v. Mambulao Lumber) Tax may be set-off if the claims of the Government and the taxpayer against each other are due, demandable, and fully liquidated. (Domingo v. Garlitos) Ma’am Loriega: Republic v. Mambulao is still the rule. Domingo v. Garlitos is a deviation; apply its ruling only in very similar facts.

A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. (Francia v. IAC) Taxes are not subject of compensation because the government and the tax payer are not mutually creditors and debtors of each other. (Philex Mining Corporation v. Commissioner) It is the general rule not to allow the setting of of excess taxes paid against other taxes payable to the Government. The Commissioner of Internal Revenue, however, is authorized by Sec. 204(C) of the NIRC to grant refund or credit of taxes erroneously or illegally paid. (De Leon)

CASES Republic v. Mambulao Lumber (1962) Facts: The defendants are being charged by the Government certain amounts of money for forest charges. They claim that they had previously paid reforestation charges; that the reforestation charges were not used by the Government; therefore, the charges they already paid should be used to compensate the charge presently levied against them. Held: The reforestation charges are in the nature of taxes. Taxes cannot be subject of set-off or compensation. A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. Domingo v. Garlitos (1963) Facts: The Government claimed inheritance and estate taxes against the estate of the late Walter Price. In a previous case, the tax claims were declared final and executory. The Government then sought to execute the claim against the estate. The petition to execute the judgment was denied because the Government owed the estate a higher sum of money, and that the money was already appropriated by virtue of RA 2700. Held: The denial of the execution was proper. Under the circumstances, compensation could take place by operation of law. The claims of the Government against the estate, and the claims


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of the estate against the government are both overdue, demandable, and liquidated. Francia v. IAC (1988) Facts: Part of Francia's land was expropriated for P4,116.00. Later, since he had a real estate tax delinquency of P2,400.00, his property was sold a public auction. Francia filed a complaint to annul the public sale. He contends that he had no tax liability because the the said liability was set-off by operation of law by the amount owed him by the government due to the expropriation. Held: Francia is liable for the tax delinquency. There can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. Philex Mining Corporation v. Commissioner (1998) Facts: Philex was asked by BIR to settle its tax liabilities. Philex protested saying that it has a pending tax refund claim. BIR rejected Philex's claim saying that the refund has not yet been established with certainty. Philex was orderd by the CTA to pay its tax liabilities. Eventually, Philex was given the tax refund. It claimed that such refund should work as a set-off or compensation to it tax liabilities. Held: Taxes are not subject of compensation. The government and the tax payer are not mutually creditors and debtors of each other. Taxes are not debts which can be the subject of compensation. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. Ma'am Loriega: While the appeal was pending, Philex was granted its tax refund. While there could have been set-off, the question presented in this appeal is whether a tax refund claim may be compensated with a tax claim. 8. MANDATORY AND DIRECTORY PROVISIONS OF TAX STATUTES

Mandatory provisions - those provisions of a statute relating to the assessment of taxes, which are intended for the security of the citizen, or to insure the equality of taxation, or for certainty as to the nature and amount of each person's tax. Directory provisions - those designed merely for the information or direction of officers or to secure methodical and systematic modes of proceedings are merely directory. (Hijos de Pedro Roxas v. Rafferty) The omission to follow the mandatory provisions renders invalid the act or proceeding which it relates; the omission to follow the directory provisions does not involve such consequence.

CASES Hijos de Pedro Roxas v. Rafferty (1918) Facts: The city assessor and collector of Manila assessed the unfinished improvements of Roxas Building. The assessment and the notice of such assessment were done prior to the completion of the improvements. Held: The notice of the assessment was not given during the time fixed by the Manila Charter. The Manila Charter provides for a period when a notice of tax assessment must be given. Such provision is intended for the security of the citizen, therefore it is a mandatory provision. Since the notice of the assessment was not give during the time fixed by the law, the assessment is invalid. 9. COMPROMISES Ma’am Loriega: One way of paying taxes. Two grounds of the BIR to compromise tax: (1) Reasonable doubt as to the validity of the

claim against the taxpayer; or (2) Inability of taxpayer to pay. (NIRC, Sec

204[A])

K. Sources of Tax Laws

INDEPENDENT SOURCES OF TAX LAWS:


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(1) Constitution (2) Legislation (includes PDs during the martial

law, EOs when the President possessed legislative powers)

OTHER SOURCES: (Necessarily based on the Constitution or existing laws) (1) Tax ordinance by local governments. (2) Administrative rules and regulations;

rulings or opinions of tax officials, particularly the Commissioner of Internal Revenue, including the Secretary of Justice.

(3) Judicial decisions. They evidence what the law means.

L. Tax Treaties Tax treaties or agreements entered into by the Philippines with other countries are also a source of tax law. They have the same force and effect as statutes. They are entered into for the avoidance of double taxation. (De Leon)


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MODULE 2—GENERAL PRINCIPLES OF TAXATION

A. Overview of Income Taxation

1. INCOME TAX

A tax on all yearly profits arising from property, profession, trades or offices, or as a tax on a person’s income, emoluments, profits and the like. It is a direct tax on actual presumed income of a taxpayer during the taxable year. A final income tax may also be imposed on certain one-time transactions like the sale of real properly classified as capital asset. 2. INCOME TAX LAW

(1) RA 8424 (TAX REFORM ACT OF 1997) The Philippine income tax law is embodied in Title II of the National Internal Revenue Code of 1997, consisting of 16 chapters and 62 Sections. RA 8424 became effective January 1, 1998. Ma’am Loriega: Covers Secs. 22-83. (2) REVENUE REGULATIONS These are the formal interpretations of Tax Code provisions promulgated by the Secretary of Finance upon the recommendation of the Commissioner of Internal Revenue. They cannot just be amended or changed by rulings or other administrative issuances signed by the Commissioner. To revoke, modify or amend existing regulations, another regulation is required. (3) BIR RULINGS These are less formal interpretations of the Tax Code provisions issued by the Commissioner of Internal Revenue. To revoke, modify or amend existing BIR rulings, another ruling is necessary. (4) OTHER SOURCES Constitution, tax treaties, general and special laws, judicial decisions (SC, CA, CTA)

3. FEATURES OF PHILIPPINE INCOME TAX LAW

(1) IT IS A DIRECT TAX The tax burden is borne by the income recipient upon whom the tax is imposed. It is a tax demanded from the very person who, it is intended or desired, should pay it. This is unlike indirect tax where the tax is demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else. Ma’am Loriega: It is something you cannot pass on. (2) IT IS A PROGRESSIVE TAX The tax base increases as the tax rate increases. It is founded on the ability to pay principle – those who receive more income and thus have more capacity to pay shall pay more in taxes. This is consistent with the Constitutional provision that “Congress shall evolve a progressive system of taxation” (Sec.. 28, Art VI, 1987 Constitution) Maam Loriega: true only for individual income tax. Income of Corporations are subjected to a fixed rate. (3) THE PHILIPPINES HAS ADOPTED THE MOST

COMPREHENSIVE SYSTEM OF IMPOSING INCOME

TAX Three principles are adopted. Any one of the tree principles is enough to justify the imposition of income tax on the income of a resident citizen and domestic corporations tat are taxed on worldwide income. Other types of taxpayers are taxed only on their income from sources within the Philippines beginning January 1, 1998, following the territoriality principle. Citizenship principle Residence Principle Source Principle Some Questions by Ma’am Loriega: 1. What if a nonresident foreign corporation

sells its land in the Philippines?


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Taxable because source of income is the Philippines. 2. What if a Japanese lawyer earns income

from a case in the Philippines Taxable because source of income is the Philippines.

(4) THE PHILIPPINES FOLLOWS THE SEMI-

SCHEDULAR, SEMI-GLOBAL SYSTEM OF INCOME

TAXATION

Schedular The different types of income tax are subject to different set of graduated or flat income tax rates. The applicable tax rates will depend on the classification of taxable income and the basis could be gross income or net income. Different sources of income are categorized, and different categories have different tax rates. Global The total allowable deductions, sans exemptions, are deducted from the gross or sum total of all items of table income, profit and gain, to arrive at the net taxable income. The net taxable income is then subjected to income tax rates, regardless of the type. Aggregate of all items/sources of income, minus the deductions and exemptions, shall be subject to a single tax rate/range of tax rates. Semi-schedular, semi-global (System

adopted in the Philippines) Compensation income, business or professional income, capital gain and passive income not subject to final tax, and other income are added together to arrive at the gross income. Then the sum of allowable deductions and personal and additional exemptions are deducted from the gross income to arrive at the taxable income. Such taxable income is subjected to one set of tax rates (Semi-global). However, for passive investment income subject to final tax and capital gain for the sale or transfer of stocks of a domestic corporation and real properties remain subject to different sets of taxes and covered by different tax returns (Semi-schedular) Ma’am Loriega’s Discussion:

Step 1. identify the items subject to the schedular rate. Then apply the respective rates. Step 2. Lump the rest of the income together and apply the fixed rate. (5) PHILIPPINE TAX LAW IS OF AMERICAN ORIGIN As a result, authoritative decisions of the American official charged with enforcing the US Internal Revenue Code has peculiar force and persuasive effect for the Philippines. When meaning of provisions are doubtful, great weight should be given to the construction of a department charged with its execution. 4. CRITERIA IN IMPOSING PHILIPPINE

INCOME TAX 1. CITIZENSHIP A citizen of the Philippines is subject to Philippine tax on: Worldwide income, if he resides in the

Philippines; or Only on his income from sources within the

Philippines, if he qualifies as a nonresident citizen; hence, his income from sources outside the Philippines shall be exempt from Philippine income tax

2. RESIDENCE An alien used to be subject to Philippine

Income tax on his worldwide income because of his residence in the Philippines. RA 8424 discarded this, in view of the complex tax administration required. Now, a resident alien is liable to pay Philippine income tax only on his income from sources within the Philippines.

3. SOURCE OF INCOME An alien is subject to Philippine income tax

because he derives income from sources within the Philippines. Thus, a non-resident alien is liable to pay Philippine income tax on his income from sources within the Philippines, such as dividend, interest, rent, or royalty, despite the fact that he has not set foot in the Philippines.

5. TYPES OF PHILIPPINE INCOME TAX


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(1) Graduated income tax on individuals (2) Normal corporate income tax on

corporations (3) Minimum corporate income tax on

corporations (4) Special income tax on certain corporations (5) Capital gains tax on sale or exchange of

shares of stock of a domestic corporation classified as capital assets

(6) Capital gains on sale or exchange of real property classified as a capital asset

(7) Final withholding tax on certain passive investment income paid to residents

(8) Final withholding tax on income payments made to non-residents

(9) Fringe benefit tax on fringe benefits of supervisory or managerial employees

(10) Branch profit remittance tax (11) Tax on improperly accumulated earnings of

corporations 6. WHEN IS INCOME TAXABLE Income, gain, or profit is subject to income tax, when the following requisites are present: (1) There is income, gain or profit; (2) The income, gain or profit is received or

realized during the taxable year; (3) The income, gain or profit is not exempt

from income tax Income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as flow of the fruits of one's labor. (Conwi v Commissioner) Income is realized from the sale, exchange, or other disposition of property. No income is derived nor a loss incurred by the owner until after the actual sale or other disposition of the property in excess of its cost or adjusted basis. Income is received not only when it is actually handed to a person, but also when it is merely constructively paid to him. (Mamalateo) For example: where a tenant deposited in court his rental payment in court due to the refusal of lessor to accept the payment, through no fault

of the tenant, the lessor is deemed to have constructively received payment. Thus, the fact that the rental was withdrawn at a later time is not a justification for its non-declaration as income tax. (Limpan Investment v Commissioner) Ma'am Loriega: It depends on the applicable accounting method: 1. Cash Basis—realized when received 2. Accrual basis—realized when income is

realized. In Accounting, you realize income when the earnings process is complete, or virtually complete.

The earnings process is complete when there is exchange or specifically, delivery of the money.

Example of virtual completion: When there is a ready market such as the power sector, the moment you produce the power, there is already income realized.

In installment sales, we recognize income using the gross profit method:

o For example you sell 10M worth on installment (1M per fiscal year) with a 30% gross profit.

o On the first installment only 300,000 is realized (1M x 30%)

When your assets increase, there is a flow of wealth. Thus, there may be taxable income. Some Questions by Ma’am Loriega: In these cases, is there a flow of wealth? 1. You borrow a book and return it after 10

days (NO) 2. What if inside the book there is a bookmark

worth $1.99. (YES, assets increased) 3. You own a parcel of land worth 1M. You

place it in a corporation in exchange for 1M worth of shares of stocks. (NO, assets only converted. Still end up with 1M worth of property)

4. What if you get 1.5M worth of stocks (YES, assets increased by 0.5M)

5. What if you get into an accident and your face got disfigured. You undergo cosmetic surgery. If repair only for damage—NO If repair with enhancement, and more

money is asked—YES


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6. Inheritance of money (YES, but WON it creates taxable income is another matter)

CASES Conwi v Commissioner (1992) Facts: Conwi et. al. are Filipino citizens, who are employees of P&G, and were assigned to work abroad, during which they were paid in US Dollars. They filed their ITRs using a USD-PHP conversion rate prescribed under a BIR ruling and 2 Revenue Memorandum Circulars. Later, they filed amended ITRs using the par value of the peso. This caused a difference in the values, thus they claimed a refund. They claimed that the BIR ruling and the Memorandum Circulars did not apply to them because they were working abroad, and no part of their income was remitted to the Philippines. Held: Their dollar earnings are the fruits of their labors. It was a definite amount of money which came to them within a specified period of time as payment for their services. The NIRC provides that a tax shall be imposed upon the taxable net income received during each taxable year from all sources by every individual, whether a citizen of the Philippines residing therein or abroad. Being taxable, such income is subject to the rules and regulations promulgated for the enforcement of the provisions of the NIRC. Limpan Investment v Commissioner (1966) Facts: Limpan is in the business of leasing real property. The BIR discovered that Limpan underdeclared its income tax from some of its rental income. One of its contentions is that a tenant deposited his rental payment in court; that such rental payment was only withdrawn by Limpan in the following year; and therefore, it is correct in not declaring the rental payment in the year it was alleged to have underdeclared its income. Held: The deposit in court of the tenant of his rental was resorted to due to the refusal of Limpan to accept the payment. Limpan is deemed to have constructively received such rental in the year it was deposited. Thus, it should have declared it as part of its income.

7. EFFECTS OF APPLICATION OF TAX TREATIES Generally, the provisions of the tax code shall apply only on the income of any person liable to Philippine income tax. However, there are bilateral tax treaties which the Philippines has concluded with other States that may have difference tax treatments with respect to incomes and tax rates. In case of conflict between the tax treaty and the domestic tax law, the provisions of the treaty generally prevail. However, there are occasions when the domestic law is applied, such as when the rate of tax imposed by the domestic law is lower. The purpose of entering into tax treaties is to avoid double taxation on the same income, not to increase tax collection arising from higher tax rates under the treaty.

The Heart of Income Taxation

SEC. 23, NIRC. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code: (A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines; (B) A nonresident citizen is taxable only on income derived from sources within the Philippines; (C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker; (D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; (E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable


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only on income derived from sources within the Philippines.

SEC. 42, NIRC. Income from Sources Within the Philippines.- (A) Gross Income From Sources Within the Philippines. - The following items of gross income shall be treated as gross income from sources within the Philippines: (1) Interests. - Interests derived from sources within the Philippines, and interests on bonds, notes or other interest-bearing obligation of residents, corporate or otherwise; (2) Dividends. - The amount received as dividends: a) from a domestic corporation; and b) from a foreign corporation, unless less than

fifty percent (50%) of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines as determined under the provisions of this Section; but only in an amount which bears the same ration to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources.

(3) Services. - Compensation for labor or personal services performed in the Philippines; (4) Rentals and royalties. - Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for - a) The use of or the right or privilege to use in

the Philippines any copyright, patent, design or model, plan, Secret formula or process, goodwill, trademark, trade brand or other like property or right;

b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment;

c) The supply of scientific, technical, industrial or commercial knowledge or information;

d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is

mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c);

e) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person;

f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and

g) The use of or the right to use: (i) Motion picture films; (ii) Films or video tapes for use in connection with television; and (iii) Tapes for use in connection with radio broadcasting.

(5) Sale of Real Property. - gains, profits and income from the sale of real property located in the Philippines; and (6) Sale of Personal Property. - gains; profits and income from the sale of personal property, as determined in SubSection (E) of this Section.

xxx (E) Income From Sources Partly Within and Partly Without the Philippines.- Items of gross income, expenses, losses and deductions, other than those specified in SubSections (A) and (C) of this Section, shall be allocated or apportioned to sources within or without the Philippines, under the rules and regulations prescribed by the Sec.retary of Finance, upon recommendation of the Commissioner. Where items of gross income are separately allocated to sources within the Philippines, there shall be deducted (for the purpose of computing the taxable income therefrom) the expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be included in full as taxable income from sources within the Philippines. In the case of gross income derived from sources partly within and partly without the Philippines, the taxable income may first be


39

computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income; and the portion of such taxable income attributable to sources within the Philippines may be determined by processes or formulas of general apportionment prescribed by the Secretary of Finance. Gains, profits and income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without the Philippines. Gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely form sources within the country in which sold: Provided, however, That gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely form sources within the Philippines regardless of where the said shares are sold. The transfer by a nonresident alien or a foreign corporation to anyone of any share of stock issued by a domestic corporation shall not be effected or made in its book unless: (1) the transferor has filed with the Commissioner a bond conditioned upon the future payment by him of any income tax that may be due on the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, if any, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be the duty of the transferor and the corporation the shares of which are sold or transferred, to advise the transferee of this requirement.

Ma'am Loriega's discussion: - Section 23 is the heart of income taxation. Categories of income tax payers under Sec. 23

Income from within and without the Philippines taxable

Only income from within the Philippines taxable

Resident citizens (Sec. Nonresident citizen (Sec.

23[A]) 23[B])

Domestic corporation (Sec. 23[E])

Overseas contract worker (Sec. 23[C])

Alien individual (Sec. 23[D])

Foreign corporation (Sec. 23[F])

How do you determine whether income is from within or without the Philippines? - By using the situs rules in Section 42. Basic situs rules under Section 42: 1. For interests, situs is the residence of the

debtor. (Sec. 42[A][1]), (Sec. 42[C][1]) 2. For dividends, situs is where the corporation

is located. 3. For services, situs is the place of

performance. (Sec. 42[A][3]), (Sec. 42[C][3]) 4. Situs not changed by place of payment. Ex:

A person who worked in the Philippines, but was paid outside. His income is considered from within the Philippines.

5. For rentals, situs is where the property generating the income is located. (Sec. 42[A][4]), (Sec. 42[C][4])

6. For sale of real property, situs is where the property is located. (Sec. 42[A][5]), (Sec. 42[C][5])

7. For sale of personal property, situs is the place of sale, except where the subject of the sale is the share - of stock of a domestic corporation. (Sec. 42[A][6]), (Sec. 42[E])

B. Definition of terms Note: Ma’am discussed only until (M)

SEC.. 22, NIRC. Definitions - When used in this Title: (A) The term 'person' means an individual, a trust, estate or corporation. (B) The term 'corporation' shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy


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operations pursuant to an operating consortium agreement under a service contract with the Government. 'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. (C) The term 'domestic,' when applied to a corporation, means created or organized in the Philippines or under its laws. (D) The term 'foreign,' when applied to a corporation, means a corporation which is not domestic. (E) The term 'nonresident citizen' means: (1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. (2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. (3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. (4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. (5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section. (F) The term 'resident alien' means an individual whose residence is within the Philippines and who is not a citizen thereof. (G) The term 'nonresident alien' means an individual whose residence is not within the Philippines and who is not a citizen thereof. (H) The term 'resident foreign corporation' applies to a foreign corporation engaged in trade or business within the Philippines.

(I) The term 'nonresident foreign corporation' applies to a foreign corporation not engaged in trade or business within the Philippines. (J) The term 'fiduciary' means a guardian, trustee, executor, administrator, receiver, conservator or any person acting in any fiduciary capacity for any person. (K) The term 'withholding agent' means any person required to deduct and withhold any tax under the provisions of Section 57. (L) The term 'shares of stock' shall include shares of stock of a corporation, warrants and/or options to purchase shares of stock, as well as units of participation in a partnership (except general professional partnerships), joint stock companies, joint accounts, joint ventures taxable as corporations, associations and recreation or amusement clubs (such as golf, polo or similar clubs), and mutual fund certificates. (M) The term 'shareholder' shall include holders of a share/s of stock, warrant/s and/or option/s to purchase shares of stock of a corporation, as well as a holder of a unit of participation in a partnership (except general professional partnerships) in a joint stock company, a joint account, a taxable joint venture, a member of an association, recreation or amusement club (such as golf, polo or similar clubs) and a holder of a mutual fund certificate, a member in an association, joint-stock company, or insurance company.

xxx

Ma'am Loriega's discussion: Under Sec. 22(B) the definition of 'Corporation' is very broad. It need not be formed under the Corporation Code; it also includes partnership, joint ventures, etc. General professional partnerships (GPPs) are not taxable for income tax purposes. But while they do not pay income tax, the partners pay income tax. For GPPs, take note that they must be formed for “the sole purpose of exercising their common profession”. Thus, a partnership by a lawyer and accountant is taxable. Under Sec. 22(E)(3), “most of the time” means more than 50% of the year, which means at least 183 days in a year.


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Under Sec. 22(E)(4), part of the income earned in one year may be earned as a non-resident, while part may be earned as resident. Sec. 22 (L) follows the broad definition of a corporation.

C. Kinds of Income Taxpayers 1. INDIVIDUAL TAXPAYERS KINDS OF INDIVIDUAL TAXPAYERS: 1. Resident citizen: taxable on worldwide

income 2. Non-resident citizen: taxable only on

income from sources within the Philippines 3. Alien individuals: whether or not a resident

of the Philippines, taxable on income derived from sources within the Philippines.

CITIZENSHIP Who are citizens? Under the 1987 Constitution Art. IV § 1: (1) Those who are citizens of the Philippines at

the time the 1987 Constitution was adopted: February 2, 1987 [De Leon v Esguerra]

(2) Those whose fathers or mothers are citizens of the Philippines.

(3) Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority.

(4) Those who are naturalized in accordance with law.

Filipino citizens who marry aliens shall

retain their Philippine citizenship, unless by their omission they are deemed under the law to have renounced their citizenship. Loss or reacquisition of citizenship is in the manner provided by law.

RESIDENCE Important because taxation of worldwide income is justified by the protection he gets from the Philippine government even when he is outside its territory. For as long as one is a citizen of the Philippines, the Philippines retains

personal jurisdiction over the person of the former. Resident Citizen [RC] Three types:

(1) RC without an employer: engaged in trade or business or in the exercise of a profession in the Philippines without an employer-employee relationship

(2) RC employed by a company: not engaged in trade or business or in the exercise of a profession in the Philippines

(3) RC with mixed income: engaged in trade/business or in the exercise of a profession and deriving compensation and other income.

The above distinction is important because an RC engaged in trade or business or in the exercise of a profession is entitled to deduct certain items of deduction from his business or professional income, capital gains not subject to final tax and other income.

Non-Resident Citizen [NRC] SEC. 22. Definitions - When used in this Title: E) The term 'nonresident citizen' means: (1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. (2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. (3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. (4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources


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abroad until the date of his arrival in the Philippines. (5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section.

Under § 22 (E):

(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein.

(2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis.

(3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.

o “Most of the time”: at least 183 days, or half of the taxable year. The presence abroad need not be continuous.

(4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines.

Overseas contract workers: An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker [§ 23 (C)]

The taxpayer shall submit proof to the Commissioner of Internal Revenue to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be. ALIENS SEC. 22. Definitions - When used in this Title: (F) The term 'resident alien' means an individual whose residence is within the Philippines and who is not a citizen thereof. (G) The term 'nonresident alien' means an individual whose residence is not within the Philippines and who is not a citizen thereof.

Two types:

(1) Resident Aliens - an individual whose residence is within the Philippines and who is not a citizen thereof [§ 22 (F)]

(2) Non-Resident Aliens - an individual whose residence is not within the Philippines and who is not a citizen thereof [§ 22 (G)]

Both types are taxable only on income from sources within the Philippines.

The taxing power is derived from the Philippines being a “host state” or “country of source” exercising its taxing rights due to the territorial link of the income.

Resident Aliens [RA] Revenue Regulation No. 2 Sec. 6. Loss of residence by alien. - An alien who has acquired residence in the Philippines retains his status as a resident until he abandons the same and actually departs from the Philippines. An intention to change his residence does not change his status as a resident alien to that of a nonresident alien. Thus an alien who has acquired a residence in the Philippines is taxable as a resident for the remainder of his stay in the Philippines. An alien actually present in the Philippines who is not a mere transient or sojourner is a resident for income tax purposes. No/Indefinite Intention = RESIDENT: If he

lives in the Philippines and has no definite


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intention as to his stay, he is a resident. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient.

Definite Intention = TRANSIENT: One who comes to the Philippines for a definite purpose, which in its nature may be promptly accomplished, is a transient.

Exception: Definite Intention but such cannot be promptly accomplished; If his purpose is of such nature that an extended stay may be necessary for its accomplishment, and thus the alien makes his home temporarily in the Philippines, then he becomes a resident.

A resident alien who leaves the Philippines with a re-entry permit is not considered to have abandoned his residence in the Philippines [BIR Ruling, Mar. 12, 1974]

Non-Resident Aliens [NRA] Revenue Regulation No. 2 Sec. 5. Definition. – A “non-resident alien individual means an individual” – (a) Whose residence is not within the Philippines; and(b) Who is not a citizen of the Philippines. An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient. But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned.

Two sub-classifications:

(1) NRA engaged in trade or business in the Philippines

deemed thus if the aggregate period of his stay in the country is more than 180 days during each calendar year [§ 25 (A)]

taxed on income within the Philippines at the graduated income tax rates of 5% to 32% while his passive investment incomes shall generally be subject to 20% final tax.

(2) NRA not engaged in trade or business in the Philippines

if the aggregate period of his stay does not exceed 180 days, the alien’s compensation, business or professional income, capital gain, passive investment income and other income from sources within the Philippines is taxed at a flat rate of 25%

but capital gains from sales or exchanges of shares of stocks in a domestic corporation shall be subject to the capital gains tax or stock transaction tax, as the case may be

2. DOMESTIC CORPORATIONS Sec.. 22, NIRC. (B) The term 'corporation' shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. 'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business

Sec.. 22, NIRC. (C) The term 'domestic,' when

applied to a corporation, means created or

organized in the Philippines or under its laws.


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General Rule: Domestic Corporations are taxable on all income derived from sources within and without the Philippines. Exceptions: 1. General Professional Partnerships 2. Joint Ventures or Consortiums formed for

the purpose of: Undertaking construction projects Engaging in petroleum, coal,

geothermal, and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government

The partners of a business partnership are taxed on a two-tier level

First, at the corporate level at 32% Second, at the level of individual

partners at 10% of the after-tax profit deemed distributed

No legal personality is required to be formed in order for the partnership to be taxable. (Collector v. BTCo.) Whether a partnership is formed for a single venture (Gatchalian v. CIR) or for a continuing business (Evangelista v. CIR), they are subject to tax. Joint Ventures is a gray area in Philippine jurisprudence. Usually, there is a single business transaction where:

Each party makes a contribution of capital, services skills, knowledge, material, or money.

Profits are shared Each party has a joint proprietary

interest and right of mutual control over the subject matter of the enterprise.1

CASES Collector v. Batangas Transport Corp. (1958) Facts: BTCo. and LTBCo. entered into a joint management called “Joint Emergency Operation” to economize in overhead expenses. At the end of each calendar year, the net profits

1 BIR Ruling No. 317-92

were divided fifty-fifty. Each company then prepared its separate income tax. Held: The Joint Emergency Operation is a taxable entity. The tax code defines the term ”corporation” as including partnership no matter how created or organized, thereby indicating that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations. Although no legal personality may have been created by the Joint Emergency Operation, nevertheless, said joint management operated the business affairs of the 2 companies as though they constituted a single entity, company or partnership. Ma’am L: The term “corporation” is very broad Gatchalian v. CIR (1939) Facts: Gatchalian et. al. contributed a total of P2 to purchase a sweepstakes ticket. They won P100,000 and the CIR required them to file the corresponding income tax return covering the prize won. Held: A partnership was formed because each of them put up money to buy a sweepstakes ticket for the sole purpose of dividing equally the prize which they may win. Hence, the winnings were taxable. Evangelista v. CIR (1957) Facts: The sisters Evangelista borrowed money from their father in order to buy a grand total of 24 parcels of land. For their transactions, the CIR assessed income tax on corporations, residence tax on corporations, and real estate broker’s tax on them. They contended that they should not be assessed such tax, as they were merely co-owners, not partners. Held: They formed a partnership and are thus subject to tax. The two essential elements of a partnership are (a) an agreement to contribute money, property or industry to a common fund, and (b) an intention to divide the profits among the parties. Here, both the elements are present. While the first element is clearly existent, as the


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Evangelistas had already agreed to contribute money and property to a common fund, the Second element of intent had to be justified by the SC, as it did via the ff.: 1. The common fund was not inherited by the

siblings pro indiviso. They created it purposely, by jointly borrowing a substantial portion thereof in order to establish the fund.

2. The common fund was not merely invested in one transaction, but in a series of transactions, as listed in the facts portion. The number of lots acquired and the brief period in between the transactions is strongly indicative of a common design not limited to the conservation and preservation of the common fund and property. There was a character of habituality peculiar to business transactions engaged in with the purpose of gain.

3. The lots they bought were not used for residential or personal use; they were leased to several persons in consideration of rents.

4. The properties had been placed under the management of Simeon, who was authorized to perform acts as if handling the affairs of a corporation or business operated for profit.

5. These conditions have existed for more than 15 years.

6. No evidence has been adduced by the Evangelista to show what their purpose was in creating the relation between themselves.

While all these circumstances, if taken singly, might not be enough to establish the intent necessary to form a partnership, taken together, they leave no doubt as to the existence of the partnership to form a partnership. Gatchalian Evangelista Difference Single venture Continuing

venture Similarity Contributed money

Divided the profit among themselves

Some Questions by Ma’am Loriega: 1. What if an accountant and a lawyer form a

partnership? Is the partnership exempted from income tax?

No. In order to be exempted, the partnership must be for the sole purpose of exercising a common profession. 2. What if the accountant, who is good at

singing, and the lawyer, who is good at cooking, put up a singing waiter restaurant?

No. The partnership must not be engaged in any trade or business. 3. Bhoyet owns an apartment compound

which is being rented out. When he died, his children Jhun, Bubhoy, and Bheng Beng inherited it and continued renting it out. Is the income taxable?

No. There is no partnership, only a co-ownership. They did not contribute to a common fund for the purpose of dividing the profits among themselves. They merely inherited it. If, however, they start investing funds into the apartment for its repair, a partnership is formed, and they will be liable for income tax. The inevitable deterioration of the property is the reason why ma’am says co-ownerships formed by reason of inheritance cannot be sustainable. 3. FOREIGN CORPORATIONS

Sec.. 22, NIRC. (D) The term 'foreign,' when applied to a corporation, means a corporation which is not domestic.

Sec.. 22, NIRC. (H) The term 'resident foreign corporation' applies to a foreign corporation engaged in trade or business within the Philippines.

Sec.. 22, NIRC. (I) The term 'nonresident foreign corporation' applies to a foreign corporation not engaged in trade or business within the Philippines.

A nonresident foreign corporation is not taxable for income earned in the Philippines because its source of income is not earned in the Philippines. For a resident foreign corporation, its can only be taxed on the income it earns from the Philippines.


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Marubeni Corp. v. CIR (1989) Facts: Marubeni had a Philippine branch through which it did business locally. It also invested in and was paid dividends by AG&P. Marubeni sough a ruling from the BIR on whether or not the dividends it received from AG&P are effectively connected with its conduct or business in the Philippines as to be considered as branch profits. It claimed however, that the dealings with AG&P resulted in a singular tax liability to the Marubeni local branch and head office, based on its agency relationship. BIR ruled that the dividends received by Marubeni from AG&P are not income arising from the business activity in which Marubeni is engaged. The dividends are not to be considered branch profits since the income was not derived from the business activity in which the corporation is engaged. Held: The alleged overpaid taxes were incurred for the remittance of dividend income to the head office in Japan, a separate and distinct income taxpayer from the Philippine branch. The general rule that a foreign corporation is the same juridical entity as its branch office in the Philippines is inapplicable. But when the foreign corporation transacts business in the Philippines independently of its branch, the principal-agent relationship is set aside. The transaction becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer is the foreign corporation, not the branch or the resident foreign corporation. Corollarily, if the business transaction is

conducted through the branch office, the latter becomes the taxpayer, and not the foreign corporation. Ma’am L: This case illustrates that for tax purposes, there can be dual personalities. In this case, Marubeni was both a resident foreign corp. and a nonresident foreign corp. CIR v. BOAC (1987) Facts: BOAC is a 100% British-owned GOCC operating air transportation services. It was not authorized to land in the Philippines. However, through a local sales agent, it sold transportation tickets over the routes of the other Interline Air Transport Association (IATA) members. It was assessed by the CIR for deficiency income taxes. BOAC claimed that it should be absolved from liability for the deficiency income tax because it did not perform any of its services within the Philippines. Held: BOAC is a resident foreign corporation under Sec.. 22(h) of the NIRC. There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character.

“TOX” (2013)


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Bar Questions: 1. There is no taxable income until such income is recognized. Taxable income is recognized when the (A) taxpayer fails to include the income in his income tax return. (B) income has been actually received in money or its equivalent. (C) income has been received, either actually or constructively. (D) transaction that is the source of the income is consummated. 2. Which theory in taxation states that without taxes, a government would be paralyzed for lack of power to activate and operate it, resulting in its destruction? (A) Power to destroy theory (B) Lifeblood theory (C) Sumptuary theory (D) Symbiotic doctrine 3. Double taxation in its general sense means taxing the same subject twice during the same taxing period. In this sense, double taxation (A) violates substantive due process. (B) does not violate substantive due process. (C) violates the right to equal protection. (D) does not violate the right to equal protection. 4. Guidant Resources Corporation, a corporation registered in Norway, has a 50 MW electric power plant in San Jose, Batangas. Aside from Guidant's income from its power plant, which among the following is considered as part of its income from sources within the Philippines? (A) Gains from the sale to an Ilocos Norte power plant of generators bought from the United States. (B) Interests earned on its dollar deposits in a Philippine bank under the Expanded Foreign Currency Deposit System. (C) Dividends from a two-year old Norwegian subsidiary with operations in Zambia but derives 60% of its gross income from the Philippines. (D) Royalties from the use in Brazil of generator sets designed in the Philippines by its engineers. 5. Tong Siok, a Chinese billionaire and a Canadian resident, died and left assets in China valued at P80 billion and in the Philippines assets valued at P20 billion. For Philippine estate tax purposes the allowable deductions for expenses, losses, indebtedness, and taxes, property previously taxed, transfers for public use, and the share of his surviving spouse in their conjugal partnership amounted to P15 billion. Tong's gross estate for Philippine estate tax purposes is (A) P20 billion. (B) P5 billion. (C) P100 billion. (D) P85 billion. 6. Aplets Corporation is registered under the laws of the Virgin Islands. It has extensive operations in Southeast Asia. In the Philippines, Its products are imported and sold at a mark-up by its exclusive distributor, Kim's Trading, Inc. The BIR compiled a record of all the imports of Kim from Aplets and imposed a tax on Aplets net income derived from its exports to Kim. Is the BIR correct? (A) Yes. Aplets is a non-resident foreign corporation engaged in trade or business in the Philippines. (B) No. The tax should have been computed on the basis of gross revenues and not net income. (C) No. Aplets is a non-resident foreign corporation not engaged in trade or business in the Philippines. (D) Yes. Aplets is doing business in the Philippines through its exclusive distributor Kim's Trading. Inc. 7. The actual effort exerted by the government to effect the exaction of what is due from the taxpayer is known as (A) assessment. (B) levy. (C) payment. (D) collection.


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8. Although the power of taxation is basically legislative in character, it is NOT the function of Congress to (A) fix with certainty the amount of taxes. (B) collect the tax levied under the law. (C) identify who should collect the tax. (D) determine who should be subject to the tax. 9. Federico, a Filipino citizen, migrated to the United States some six years ago and got a permanent resident status or green card. He should pay his Philippine income taxes on (A) the gains derived from the sale in California, U.S.A. of jewelry he purchased in the Philippines. (B) the proceeds he received from a Philippine insurance company as the sole beneficiary of life insurance taken by his father who died recently (C) the gains derived from the sale in the New York Stock Exchange of shares of stock in PLDT, a Philippine corporation. (D) dividends received from a two year old foreign corporation whose gross income was derived solely from Philippine sources. 10. An example of a tax where the concept of progressivity finds application is the (A) income tax on individuals. (B) excise tax on petroleum products. (C) value-added tax on certain articles. (D) amusement tax on boxing exhibitions. 11. What is the rule on the taxability of income that a government educational institution derives from its school operations? Such income is (A) subject to 10% tax on its net taxable income as if it is a proprietary educational institution. (B) Exempt from income taxation if it is actually, directly, and exclusively used for educational purposes. (C) subject to the ordinary income tax rates with respect to incomes derived from educational activities. (D) Exempt from income taxation in the same manner as government-owned and controlled corporations. 12. Alain Descartes, a French citizen permanently residing in the Philippines, received several items during the taxable year. Which among the following is NOT subject to Philippine income taxation? (A) Consultancy fees received for designing a computer program and installing the same in the Shanghai facility of a Chinese firm. (B) Interests from his deposits in a local bank of foreign currency earned abroad converted to Philippine pesos. (C) Dividends received from an American corporation which derived 60% of its annual gross receipts from Philippine sources for the past 7 years. (D) Gains derived from the sale of his condominium unit located in The Fort, Taguig City to another resident alien. 13. Income is considered realized for tax purposes when (A) it is recognized as revenue under accounting standards even if the law does not do so. (B) the taxpayer retires from the business without approval from the BIR. (C) the taxpayer has been paid and has received in cash or near cash the taxable income. (D) the earnings process is complete or virtually complete and an exchange has taken place. 14. Real property owned by the national government is exempt from real property taxation unless the national government (A) transfers it for the use of a local government unit. (B) leases the real property to a business establishment. (C) gratuitously allows its use for educational purposes by a school established for profit. (D) sells the property to a government-owned non-profit corporation. 15. Real property taxes should not disregard increases in the value of real property occurring over a long period of time. To do otherwise would violate the canon of a sound tax system referred to as (A) theoretical justice. (B) fiscal adequacy. (C) administrative feasibility. (D) symbiotic relationship.


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16. The power to tax is the power to destroy. Is this always so? (A) No. The Executive Branch may decide not to enforce a tax law which it believes to be confiscatory. (B) Yes. The tax collectors should enforce a tax law even if it results to the destruction of the property rights of a taxpayer. (C) Yes. Tax laws should always be enforced because without taxes the very existence of the State is endangered. (D) No. The Supreme Court may nullify a tax law, hence, property rights are not affected. 17. Zygomite Minerals, Inc., a corporation registered and holding office in Australia, not operating in the Philippines, may be subject to Philippine income taxation on (A) gains it derived from sale in Australia of an ore crusher it bought from the Philippines with the proceeds converted to pesos. (B) gains it derived from sale in Australia of shares of stock of Philex Mining Corporation, a Philippine corporation. (C) dividends earned from investment in a foreign corporation that derived 40% of its gross income from Philippine sources. (D) interests derived from its dollar deposits in a Philippine bank under the Expanded Foreign Currency Deposit System. 18. Pierre de Savigny, a Frenchman, arrived in the Philippines on January 1, 2010 and continued to live and engage in business in the Philippines. He went on a tour of Southeast Asia from August 1 to November 5, 2010. He returned to the Philippines on November 6, 2010 and stayed until April 15, 2011 when he returned to France. He earned during his stay in the Philippines a gross income of P3 million from his investments in the country. For the year 2010, Pierre’s taxable status is that of (A) a non-resident alien not engaged in trade or business in the Philippines. (B) a non-resident alien engaged in trade or business in the Philippines. (C) a resident alien not engaged in trade or business in the Philippines. (D) a resident alien engaged in trade or business in the Philippines. 19. Lualhati Educational Foundation, Inc., a stock educational institution organized for profit, decided to lease for commercial use a 1,500 sq. m. portion of its school. The school actually, directly, and exclusively used the rents for the maintenance of its school buildings, including payment of janitorial services. Is the leased portion subject to real property tax? (A) Yes, since Lualhati is a stock and for profit educational institution. (B) No, since the school actually, directly, and exclusively used the rents for educational purposes. (C) No, but it may be subject to income taxation on the rents it receives. (D) Yes, since the leased portion is not actually, directly, and exclusively used for educational purposes. 20. Which of the following are NOT usually imposed when there is a tax amnesty? (A) Civil, criminal, and administrative penalties (B) Civil and criminal penalties (C) Civil and administrative penalties (D) Criminal and administrative penalties 21. Which among the following concepts of taxation is the basis for the situs of income taxation? (A) Lifeblood doctrine of taxation (B) Symbiotic relation in taxation (C) Compensatory purpose of taxation (D) Sumptuary purpose of taxation 22. The head priest of the religious sect Tres Personas Solo Dios, as the corporation sole, rented out a 5,000 sq. m. lot registered in its name for use as school site of a school organized for profit. The sect used the rentals for the support and upkeep of its priests. The rented lot is (A) not exempt from real property taxes because the user is organized for profit. (B) exempt from real property taxes since it is actually, directly, and exclusively used for religious purposes. (C) not exempt from real property taxes since it is the rents, not the land, that is used for religious purposes. (D) exempt from real property taxes since it is actually, directly, and exclusively used for educational purposes.


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True or false: 1. A law that allows taxes to be paid either in cash or in kind is valid. 2. When the financial position of the taxpayer demonstrates a clear inability to pay the tax, the Commissioner

of Internal Revenue may validly compromise the tax liability. 3. The doctrine of equitable recoupment allows a taxpayer whose claim for refund has prescribed to offset

tax liabilities with his claim of overpayment. 4. A law imposing a tax on income of religious institutions derived from the sale of religious articles is valid.

Essay: 1. XYZ Shipping Corporation is a branch of an international shipping line with voyages between Manila and the

West Coast of the U.S. The company’s vessels load and unload cargoes at the Port of Manila, albeit it does not have a branch or sales office in Manila. All the bills of lading and invoices are issued by the branch office in Makati which is also the company’s principal office.

The City of Manila enacted an ordinance levying a 2% tax on gross receipts of shipping lines using the Port of Manila. Can the City Government of Manila legally impose said levy on the corporation? Explain. (3%) 2. A inherited a two-storey building in Makati from his father, a real estate broker in the ‘60s. A group of Tibetan

monks approached A and offered to lease the building in order to use it as a venue for their Buddhist rituals and ceremonies. A accepted the rental of P1 million for the whole year.

The following year, the City Assessor issued an assessment against A for non-payment of real property taxes. Is the assessor justified in assessing A’s deficiency real property taxes? Explain. (3%) 3. The Sangguniang Bayan of the Municipality of Sampaloc, Quezon, passed an ordinance imposing a storage fee

of ten centavos (P0.10) for every 100 kilos of copra deposited in any bodega within the Municipality's jurisdiction. The Metropolitan Manufacturing Corporation (MMC), with principal office in Makati, is engaged in the manufacture of soap, edible oil, margarine, and other coconut oil-based products. It has a warehouse in Sampaloc, Quezon, used as storage space for the copra purchased in Sampaloc and nearby towns before the same is shipped to Makati. MMC goes to court to challenge the validity of the ordinance, demanding the refund of the storage fees it paid under protest.

Is the ordinance valid? Explain your answer. (4%) 4. Kenya International Airlines (KIA) is a foreign corporation, organized under the laws of Kenya. It is not licensed

to do business in the Philippines. Its commercial airplanes do not operate within Philippine territory, or service passengers embarking from Philippine airports. The firm is represented in the Philippines by its general agent, Philippine Airlines (PAL), a Philippine corporation.

KIA sells airplane tickets through PAL, and these tickets are serviced by KIA airplanes outside the Philippines. The total sales of airline tickets transacted by PAL for KIA in 1997 amounted to P2,968,156.00. The Commissioner of Internal Revenue assessed KIA deficiency income taxes at the rate of 35% on its taxable income, finding that KIA's airline ticket sales constituted income derived from sources within the Philippines. KIA filed a protest on the ground that the P2,968,156.00 should be considered as income derived exclusively from sources outside the Philippines since KIA only serviced passengers outside Philippine territory. Is the position of KIA tenable? Reason. (4%) 5. The City of Manila enacted Ordinance No. 55-66 which imposes a municipal occupation tax on persons

practicing various professions in the city. Among those subjected to the occupation tax were lawyers. Atty. Mariano Batas, who has a law office in Manila, pays the ordinance-imposed occupation tax under protest. He goes to court to assail the validity of the ordinance for being discriminatory. Decide with reasons. (3%)

6. Enumerate the four (4) inherent limitations on taxation. Explain each item briefly. (4%) 7. The City of Manila enacted an ordinance, imposing a 5% tax on gross receipts on rentals of space in privately-

owned public markets. BAT Corporation questioned the validity of the ordinance, stating that the tax is an income tax, which cannot be imposed by the city government. Do you agree with the position of BAT Corporation? Explain. ( 5% )


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8. What is the nature of the taxing power of the provinces, municipalities and cities? How will the local government units be able to exercise their taxing powers?

9. What kind of taxes, fees and charges are considered as National Internal Revenue Taxes under the National

Internal Revenue Code (NIRC)? 10. XYZ Corporation, an export oriented company, was able to secure a Bureau of Internal Revenue (BIR) ruling in

June 2005 that exempts from tax the importation some of its raw materials. The ruling is of first impression, which means the interpretations made by the Commissioner of Internal Revenue is one without established precedents. Subsequently, however, the BIR issued another ruling which in effect would subject to tax such kind of importation. XYZ Corporation is concerned that said ruling may have a retroactive effect, which means that all their importations done before the issuance of the second ruling could be subject to tax.

a. What are BIR rulings? b. What is required to make a BIR ruling of first impression a valid one? c. Does a BIR ruling have a retroactive effect, considering the principle that tax exemptions should be

interpreted strictly against the taxpayer?

11. Z is a Filipino immigrant living in the United States for more than 10 years. He is retired and he came back to the Philippines as a balikbayan. Every time he comes to the Philippines, he stays here for about a month. He regularly receives a pension from his former employer in the United States, amounting to US$1, 000 a month. While in the Philippines, with his pension pay from his former employer, he purchased three condominium units in Makati which he is renting out for P15, 000 a moth each.

a. Does the US$1, 000 pension become taxable because he is now residing in the Philippines? Reason briefly.

b. Is his purchase of the three condominium units subject to any tax? Reason briefly. 12. Enumerate the 3 stages or aspects of taxation. Explain each. 5%

13. Distinguish "direct taxes" from "Indirect taxes". Give examples. 5%

14. What properties are exempt from the real property tax? 5% 15. The Constitution provides "charitable institutions, churches, parsonages or convents appurtenant thereto,

mosques, and non- profit cemeteries and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation." This provision exempts charitable institutions and religious institutions from what kind of taxes? Choose the best answer. Explain. 5%

a. from all kinds of taxes, i.e., income, VAT, customs duties, local taxes and real property tax b. from income tax only c. from value-added tax only d. from real property tax only e. from capital gains tax only


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Answers to MCQ

1. C 2. B 3. C 4. A 5. A 6. C 7. D 8. B 9. C 10. A 11. B 12. A 13. D 14. B 15. B 16. D 17. B 18. B 19. D 20. A 21. B 22. D

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