Taxation Law 1 Reviewer
Taxation Law 1 Reviewer
2011
3. Constitutional Limitations
Due Process of Law
Equal Protection of the Laws
Rule of Uniformity and Equity in Taxation
Prohibition against imprisonment for non-payment of poll tax
Prohibition against impairment of obligations of contracts
Prohibition against appropriation of proceeds
Prohibition against taxation of religious, charitable and
educational entities
Prohibition against taxation of non-stock, non-profit
educational institutions
OthersGrant of tax exemption
Veto of appropriation, revenue or tariff bills
Non-impairment of the jurisdiction of the Supreme Court
Revenue bills shall orginate from the House of
Representative
Infringement of Press Freedom
Grant of Franchise
a. Due process of law
There must be a valid law
Tax measure should not be unconscionable and unjust as to amount
to confiscation of property
Tax statute must not be arbitrary as to find no support in the
Constitution
When does the power of taxation impinge the due process
clause?
The due process clause may be invoked where a taxing statute is
so arbitrary that it finds no support in the Constitution, as where
it can be shown to amount to a confiscation of property, [Reyes v.
Almanzor, 196 SCRA 322].
Sec. 1, Art. III, 1987 Constitution
No person shall be deprived of life, liberty, or property
without due process of law, nor shall any person be denied equal
protection of the laws.
REQUIREMENTS OF DUE PROCESS IN TAXATION
1) Tax must be for a Public purpose
2) Imposed within the Territorial jurisdiction
3) No arbitrariness or oppression in
A) assessment, and
B) collection
DUE PROCESS IN TAXATION DOES NOT REQUIRE
1) Determination through judicial inquiry of
A) property subject to tax
B) amount of tax to be imposed
2) Notice of hearing as to:
A) amount of the tax
B) manner of apportionment
Tan v. del Rosario, supra.
The due process clause may correctly be invoked only when there
is a clear contravention of inherent or constitutional limitations
in the exercise of tax power.
Sison v. Ancheta, supra.
It is undoubted that the due process clause may be invoked where
a taxing statute is so arbitrary that it finds no support in the
Constitution. An obvious example is where it can be shown to amount
to the confiscation of property. That would be a clear abuse of
power. It then becomes the duty of this Court that such an
arbitrary act amounted to the exercise of an authority not
conferred. That property calls for the application of the Holmes
dictum The power to tax is not the power to destroy while this
Court sits.
It has been held that where the assailed tax measure is beyond
the jurisdiction of the state, or is not for a public purpose, or
in case a retroactive statute is so harsh an unreasonable , it is
subject to attack on due process grounds.
b. 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 equal
protection of the laws. Sec. 1, Art. III, 1987 Constitution
Sison v. Ancheta, supra.
The taxing power has the authority to make reasonable and
natural classification for purposes of taxation, but the
governments act must not be prompted by spirit of hostility, or at
the very least discrimination that finds no support in reason. It
suffices then that the laws operate equally and uniformly on all
persons under similar circumstances or that all persons must be
treated in the same manner, the conditions not being different both
in privileges conferred and liabilities imposed, [Sison v. Ancheta,
130 SCRA 654].
Villegas vs, Hiu Chiong Tsai Pao HoGR L-29646, 10 November
1978
Facts: The Municipal Board of Manila enacted Ordinance 6537
requiring aliens (except those employed in the diplomatic and
consular missions of foreign countries, in technical assistance
programs of the government and another country, and members of
religious orders or congregations) to procure the requisite mayors
permit so as to be employed or engage in trade in the City of
Manila. The permit fee is P50, and the penalty for the violation of
the ordinance is 3 to 6 months imprisonment or a fine of P100 to
P200, or both.
Issue: Whether the ordinance imposes a regulatory fee or a
tax.
Held: The ordinances purpose is clearly to raise money under the
guise of regulation by exacting P50 from aliens who have been
cleared for employment. The amount is unreasonable and excessive
because it fails to consider difference in situation among aliens
required to pay it, i.e. being casual, permanent, part-time, rank
and-file or executive.
[ The Ordinance was declared invalid as it is arbitrary,
oppressive and unreasonable, being applied only to aliens who are
thus deprived of their rights to life, liberty and property and
therefore violates the due process and equal protection clauses of
the Constitution. Further, the ordinance does not lay down any
criterion or standard to guide the Mayor in the exercise of his
discretion, thus conferring upon the mayor arbitrary and
unrestricted powers. ]
Tan v. del Rosario, supra.
The court cannot freely delve into those matters which, by
constitutional fiat, rightly rest on legislative judgment. Of
course, where a tax measure becomes so unconscionable and unjust as
to amount to confiscation of property, courts will not hesitate to
strike it down, for, despite all its plenitude, the power to tax
cannot override constitutional proscriptions.
The legislative intent to increasingly shift the income tax
system towards the schedular approach in the income taxation of
individual taxpayers and to maintain, by and large, the present
global treatment on taxable corporations, we certainly do not view
this classification to be arbitrary and inappropriate.
CIR v. CA & Alhambra Ind., 267 SCRA 557 (1997)
Tiu v. CA, 301 SCRA 278 (1999)
The Constitutional right to equal protection of the law is not
violated by an executive order, issued pursuant to law, granting
tax and duty incentives only to businesses within the secured area
of the Subic Special Economic Zone and denying them to those who
live within the Zone but outside such fenced in territory. The
Constitution does not require absolute equality among residents. It
is enough that all persons under like circumstances or conditions
are given the same privileges and required to follow the same
obligations. In short, a classification based on valid and
reasonable standards does not violate the equal protection
clause.
We find real and substantial distinctions between the
circumstances obtaining inside and those outside the Subic Naval
Base, thereby justifying a valid and reasonable classification.
c. Uniformity and equity in taxation
Sec. 28 c, Art. VI of the Constitution provides that the rule of
taxation shall be uniform and equitable.
Uniformity in Taxation
The concept of uniformity in taxation implies that all taxable
articles or properties of the same class shall be taxed at the same
rate. It requires the uniform application and operation, without
discrimination, of the tax in every place where the subject of the
tax is found. It does not, however, require absolute identity or
equality under all circumstances, but subject to reasonable
classification.
Equity in Taxation
The concept of equity in taxation requires that the
apportionment of the tax burden be, more or less, just in the light
of the taxpayers ability to shoulder the tax burden and, if
warranted, on the basis of the benefits received from the
government. Its cornerstone is the taxpayers ability to pay.
Classification of taxpayers, subject or items to be taxed
REQUISITES OF A VALID CLASSIFICATION (S A G E )
1. It must be based on substantial distinction.
2. Germane/relevant to the purpose of the law/ordinance.
3. Applies not only to the present condition, but also to future
substantially identical conditions.
4. Equally applicable to all members of the same class.
Tolentino v. Sec. of Finance, supra., supra.
The constitution does not really prohibit the imposition of
indirect taxes which like VAT are regressive. What is simply
provides is that the congress shall evolve a progressive system of
taxation. Indeed, the mandate of congress is not to prescribe, but
to evolve a progressive tax system. Otherwise, sales taxes, which
perhaps are the oldest form indirect tax would have been
prohibited.
Mla. Race Horse v. dela Fuente, 88 Phil 60 (1951)
Ordinance No. 3065-tax on license stables, license fees for
boarding stable for race horses. Tax assessed on the owners of the
boarding stables for race horses is valid because there is equity
and no arbitrary classification even no such tax imposed on
boarding stables for other types of horses.
The owners of the stables are class by themselves, and are
appropriately taxed when other kinds are taxed less or not at all,
considering that equity in taxation is generally conceived in terms
of liability In relation to the benefits received by the tax payer.
Race horses as devoted to gambling, their owners derive fat income,
and such demands heavy burden of resource from the government such
as police supervision. Hence, taking into everything into account,
the differentiation against which the plaintiffs complain conform
to the practical dictates of justice and equity, and is not
discriminatory within the meaning of the constitution.
Not valid or discriminatory when other boarding stables for race
horses with the same number of horses were made to pay less or not
at all.
Eastern Theatrical v. Alfonso, 83 Phil 852 (1949)
An ordinance which imposes a fee on the price of every admission
ticket sold by the cinema, theaters, and boxing exhibitions is
valid because same class, same rate.
Equality and uniformity in taxation means that all taxable
articles or kinds or property of the same class shall be taxed at
the same rate. The taxing power has the authority to make
reasonable and natural classifications for purposes of taxation,
and the appellant cant point out what places of amusement taxed by
the ordinance do not constitute a class by themselves and which can
be confused with those not included in the ordinance.
Pepsi Cola v. City of Butuan, supra.
Valid classification of taxes are not full met by the city
ordinance which imposes a tax upon the sale of merchandise payable
only by agent/consignee of any outside dealer of such merchandise
while the sales of the local dealers regardless of the amount would
be exempt.
Shell v. Vano, Mun. Treas. of Cordova, Cebu, 94 Phil 389
(1954)
A municipal ordinance imposing an occupation tax on the
profession or occupation of installation manager is valid even
there is only one person with such occupation in the municipality.
A person cant challenge the validity of an ordinance as being
discriminatory since he is only one adversely effected because all
other installation managers who may come within the jurisdiction of
the municipality would be subject to tax under the ordinance.
What the ordinance tax is the occupation itself regardless who
or how many exercise it. It will be applicable to any person/firm
who may come to exercise such calling.
City of Baguio v. de Leon, 25 SCRA 938 (1968)
Equality and uniformity of taxation, means that, all taxable
articles or kinds of property of the same class be taxed at the
same rate. The taxing power has the authority to make reasonable
and natural classification for purposes of taxation. To satisfy
this requirement, it is enough that the statute applies equally to
all persons, forms and corporations placed in similar
situation.
Kapatiran v. Tan, supra.
VAT law does not discriminate unduly against custom brokers who
are subject to said tax.
Villanueva v. City of Iloilo, supra.
An ordinance exacting tax on apartment owners/operators are
violative of rule of uniformity of taxation because (a) R.A. 2264
does not empower cities to impose apartment taxes, (b) it is
oppressive and unreasonable for it penalizes owners of tenement
houses who fail to the pay tax, (c) it constitutes not only double
taxation, but treble at that, and (d) that it violates the rule of
uniformity of taxation.
Asso. of Customs Brokers v. Mun. Board, supra.
An ordinance which imposes tax upon owners of vehicles operating
inside Manila is an infringement of rule of uniformity of taxation
as ordained by the constitution because it does not distinguish the
vehicle for hire or for private use, neither does it distinguish
vehicle registered in the City of Manila or outside.
The owners of vehicles residing outside Manila who also use the
streets are not made to share the corresponding burden. In this
case, those owners of the vehicles which use the streets of Manila,
regardless whether they are citizen or not fall within the same
class.
5. Prohibition against imprisonment for non-payment of poll
tax
No person shall be imposed for debt or non-payment of poll tax.
[Sec. 20, Art. III, Constitution]
The non-imprisonment rule applies to non-payment of poll tax
which is punishable only by a surcharge, but not to other
violations like falsification of community tax certificate and
non-payment of other taxes.
Poll tax
Poll tax is a tax of fixed amount imposed on residents within a
specific territory regardless of citizenship, business or
profession. e.g. community tax
Sec. 20, Art. III, 1987 Constitution
community tax v. poll tax
Sec. 156-164, R. A. 7160
156. Community Tax-Cities or Municipalities may levy a community
tax in accordance with the provisions of this article.
157. Individual Liable to Community Tax-Every inhabitants of the
Philippines 18 yrs or over that has been regularly employed on a
wage or salary base for at least 30 days....
158. Juridical Persons Liable to CT- Every Corp no matter how
created or organize, domestic or foreign, engaged in or doing
business in the Phils.
159. Exemptions-1.Diplomatic and consular representatives,
2.Transient visitors staying not more than 3 months
6. Prohibition against impairment of obligation of contracts
Sec. 10, Art. III, 1987 Constitution
No law impairing the obligation of contracts shall be
passed.
The obligation of a contract is impaired when its terms or
conditions are changed by law or by party without the consent of
the other, thereby weakening the position or rights of the
latter.
An example of impairment by law is when a later taxing statute
revokes a tax exemption based on a contract. But this only applies
when the tax exemption has been granted for a valid
consideration.
A later statute may revoke exemption from taxation provided for
in a franchise because the Constitution provides that a franchise
is subject to amendment, alteration or repeal.
Sec. 11, Art. XII, 1987 Constitution
No franchise, certificate, or any other form of authorization
for the operation of a public utility shall be granted except to
citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines, at least sixty per
centum of whose capital is owned by such citizens; nor shall such
franchise, certificate, or authorization be exclusive in character
or for a longer period than fifty years. Neither shall any such
franchise or right be GRANTED except under the condition that it
shall be subject to amendment, alteration, or repeal by the
Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general
public. The participation of foreign investors in the governing
body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be
citizens of the Philippines.
Tolentino v. Sec. of Finance, (1994) supra.
CREBA contends Imposition of the VAT on the sales and leases of
real estate by virtue of contracts entered into prior to the
effectivity of the law. However, the Non-impairment of Contract
Clause has never been thought as limitation on the exercise of the
States power of taxation save only where a tax exemption has been
granted for a valid consideration.
Oposa Vs. Factoran
Police power prevails over the non-impairment clause
La Insular Vs. Manchuca
A lawful tax on a new subject or an increased tax on an old one,
does not interfere with a contract or impairs its obligation.
The non-impairment clause applies only to contracts and not to a
franchise.
The non-impairment clause applies to taxation but not to police
power and eminent domain. Furthermore, it applies only where one
party is the government and the other, a private individual.
As a rule, the obligation to pay tax is based on law. But when,
for instance, a taxpayer enters into a compromise with the BIR, the
obligation of the taxpayer becomes one based on contract
The rule does not apply to public utility franchises. According
to Sec 11, Art XI of the constitution, no public utility franchise
or right shall be granted except under the condition that it shall
be granted that it is subject to amendment, alteration or repeal by
the Congress when the common good so requires.
Congress could impair the companys legislative franchise by
making it liable for income tax. The Constitution provides that a
franchise is subject to amendment, alteration or repeal by the
Congress when the public interest so requires.
When can a grant of tax-incentive be taken away by the
government without violating the rule on non-impairment of
contracts?
It depends on whether the grant is unilaterally or bilaterally
given by the government. If unilaterally given, there is no
impairment. It constitutes a mere revocation of a grant of
privilege. If bilaterally given, there is impairment (Art. III,
Sec. 10, Constitution). Exception: In case of grant of franchise to
public utilities when common good so requires (Art. XII, Sec. 11,
Constitution)
7. Prohibition against infringement of religious freedom
No law shall be made respecting an establishment of religion, or
prohibiting the free exercises thereof.
Sec. 5, Art. III, 1987 Constitution
The free exercise and enjoyment of religious profession and
worship, without discrimination or preference, shall forever be
allowed. No religious test shall be required for the exercise of
civil or political rights.
Am. Bible Society v. City of Manila, 101 Phil 386 (1957)
The payment of license fees for the distribution and sale of
bibles by a non-stock, non-profit, missionary organization at
minimal profit suppresses the constitutional right of free exercise
of religion which is guaranteed by the Constitution.
But a tax on the sale of religious materials is not
unconstitutional because it is imposed after the activity (sale)
taxed is done.
Tolentino v. Sec. of Finance, (1995) supra.
The power to impose a license tax on the exercise of these
freedoms is indeed as potent as the power of censorship which this
Court has repeatedly struck down
A tax on the income of one who engages in religious activities
is different from a tax on property used or employed in connection
with those activities.
8. Prohibition against appropriation of proceeds of taxation
No money shall be paid out of the Treasury except in pursuance
of an appropriation made by law.
-taxes can only be levied for public purpose
Sec. 29, (2) Art. VI, 1987 Constitution
No public money or property shall be appropriated, applied,
paid, or employed directly or indirectly, for the use, benefit, or
support of any church, denomination, sectarian institution or
system of religion, or of any priest, preacher, minister or other
religious teacher, or dignitary as such except when such priest,
preacher, minister or dignitary is assigned to the armed forces, or
to any penal institution, or government orphanage or
leprosarium.
(Sec. 29 (3) ART VI) Use of tax levied for a special purpose
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.
-Separation of the Church and State
If a President of the Philippines spent a special fund for a
general purpose, he can be charged with culpable violation of the
Constitution.
Osmena v. Orbos, supra.
OPSF as a special fund may be placed in a special trust.
9. Prohibition against taxation of religious, charitable and
educational entities
Sec. 28 (3), Art. VI, 1987 Constitution
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 is an exemption from real property tax only.
Public Cemeteries are exempt from the payment of taxes.
The term exclusively used for religious purposes does not
necessarily mean total or absolute use for religious, charitable
and educational purposes. Even is the property is incidentally used
for said purposes, the tax exemption will apply.
Abra Valley College v. Aquino, 162 SCRA 106 (1988)
The exemption in favor of property used exclusively for
charitable or educational purpose is not limited to property
actually indispensable therefore, but extends to facilities which
are incidental to and reasonably necessary for the accomplishment
of said purpose.
Province of Abra v. Hernando 107 SCRA 104
To be exempt from realty taxation, there must be proof of
actual, direct and exclusive use of lands, buildings and
improvements for religious or charitable purposes.
Lung Center of the Philippines v. Quezon City G.R. 144104, June
29, 2004
Petitioner failed to discharge its burden to prove that the
entirety of its real property is actually, directly, and
exclusively used for charitable purposes. Thus the court ruled that
portions of the land leased to private interties as well as those
parts of the hospital leased to private individuals are not exempt
from taxes.
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. a
charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying
patients, whether out-patient, or confined in the hospital, or
receives subsidies from the government, so long as the money
received is devoted or used altogether to the charitable object
which it is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution. (Lung
Center of the Philippines v. QC, GR 144104, 29 June 2004)
10. Prohibition against taxation of non-stock, non-profit
educational institutions
Sec. 4 (3, 4), Art. XIV, 1987 Constitution
All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties. Upon
the dissolution or cessation of the corporate existence of such
institutions, their assets shall be disposed of in the manner
provided by law.
Requisites For Exemption:
1) It must be a private educational institution
2) It must be non-stock and non-profit
3) Its assets (property) and revenues (income) must be used
actually, directly and exclusively for educational purposes
RULES:
1) If the first requisite is absent (meaning, its a government
educational institution), it is nonetheless exempt from income
tax
2) If the second requirement is absent (meaning, it is stock and
profit) as long as the third requirement is present, it is
nonetheless exempt from real estate tax
3) If the third requirement is absent, as long as it is
non-stock and non-profit, it is nonetheless exempt from income
tax
4) If the third requirement is absent, but it is private and
non-profit, it is subject to income tax, but at the preferential
rate of ten percent (10%)
> Under the present tax code, for a private educational
institution to be exempt from the payment of income tax, all it has
to be is non-stock and non-profit. However, a governmental
educational institution is exempt from income tax without any
condition
EXEMPTION DOES NOT EXTEND TO:
1) Income derived by these educational institutions from their
property, real or personal, and
2) From activities conducted by them for profit regardless of
the disposition made on such income
Sec. 28 (3), Art. VI, Constitution
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. (Property Tax Exemption)
Sec. 27 (B) NIRC
(B) Proprietary Educational Institutions and Hospitals. -
Proprietary educational institutions and hospitals which are
nonprofit shall pay a tax of ten percent (10%) on their taxable
income except those covered by Subsection (D) hereof: Provided,
that if the gross income from unrelated trade, business or other
activity exceeds fifty percent (50%) of the total gross income
derived by such educational institutions or hospitals from all
sources, the tax prescribed in Subsection (A) hereof shall be
imposed on the entire taxable income. For purposes of this
Subsection, the term 'unrelated trade, business or other activity'
means any trade, business or other activity, the conduct of which
is not substantially related to the exercise or performance by such
educational institution or hospital of its primary purpose or
function. A 'Proprietary educational institution' is any private
school maintained and administered by private individuals or groups
with an issued permit to operate from the Department of Education,
Culture and Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development Authority
(TESDA), as the case may be, in accordance with existing laws and
regulations.
SEC. 30. Exemptions from Tax on Corporations. - The following
organizations shall not be taxed under this Title in respect to
income received by them as such:.
(H) A nonstock and nonprofit educational institution;
Note however the last paragraph of Sec. 30, which states:
Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing
organizations form any of their property, real or personal, or from
any of their activities conducted for profit, regardless of the
disposition made of such income, shall be subject to tax imposed
under this Code.
Department of Finance Order 145-85
Non-stock, non-profit educational institutions are exempt from
taxes on all their revenues and assets used actually, directly and
exclusively for educational purposes.
However, they shall be subject to internal revenue tax on income
from trade, business or other activity, the conduct of which is not
related to the exercise or performance by such educational
institutions of its educational purposes or functions.
Interest income shall be exempt only when used directly and
exclusively for educational purposes. To substantiate this claim,
the institution must submit annual information return and duly
audited financial statement. A certification of actual utilization
and the Board resolution or the proposed project to be funded out
of the money deposited in banks shall also be submitted.
Department of Finance Order 137-87
An educational institution means a non-stock, non-profit
corporation or association duly registered under Philippine law,
and operated exclusively for educational purposes, maintained and
administered by a private individual or group offering formal
education, and with an issued permit to operate by the DECS.
Revenues derived from and assets used in the operation of
cafeteria/canteens, dormitories, and bookstores are exempt from
taxation provided they are owned and operated by the educational
institution as ancillary activities and the same are located within
the school premises.
CIR v. CA, CTA and YMCA, 298 SCRA 83 (1998)
In this case, the SC held that the income derived by YMCA from
leasing out a portion of its premises to small shop owners, like
restaurants and canteen operators, and from parking fees collected
from non-members are taxable income
CIR v. CA, CTA and Ateneo, 271 SCRA 605 (1997)
Petitioner asserted that Ateneo de Manila University in
conducting researches and studies of social organizations and
cultural values thru one of its unit, the Institute for Philippines
Culture thus subject to 3% independent contractors tax under Sec.
205 of NIRC to wit:
Sec. 25: Contractors, proprietors or operators of dockyards and
othersA contractors tax of 3% of the gross receipts is hereby
imposed on the following.
(16) Business agents and other independent contractors, except
persons, associations and corporations under contract for
embroidery and apparel for export, as well as their agents and
contractors, and except gross receipts of or from a pioneer
industry registered with the Board of Investments under provision
of R.A. 5168
According to the CIR the contractor the term independent
contractor is not specifically defined so as to de limit its scope,
so much that any person who renders physical and mental service for
a fee, is now indubitably considered as an independent contractor
liable to 3% contractors tax. According to petitioner, Ateneo has
the burden of proof to show its exemption from the coverage of the
law.
The court held that Ateneo is mandated by law to undertake
research activities to maintain its university status. In fact, the
researches carried out by IPC is not on business or profit but on
social sciences studies of Philippine Society. Since the university
can only finance limited number of IPC research projects, private
respondents occasionally accept sponsorships from international
organizations, private foundations and governmental agencies. These
sponsorships are subject to the terms and conditions set by Ateneo
such as no proprietary or commercial purpose research is done,
topic confined to university academic agenda, and the absolute
right to publish and ownership of the results conducted by IPC.
ARTICLE XIV AND ARTICLE VI COMPARED
Art. XIV, Sec. 4 (3)
Art. VI Sec. 28(3)
Grantee
Non-stock, non-profit, educational institution
Religious, educational, charitable, institutions
Taxes Covered
Income tax
Custom Duties
Property Tax
Property Tax
OTHER TAXES
TAX
Exempted Institution
Bases
Donors Tax
Non-stock, non-profit educational Institution
All grants, endowments, donations, contributions used, actually,
exclusively, for educational purposes shall be exempt from tax.
Art. XIV, Sec. 4 (4)
Estate Tax
Only transfers to social welfare, cultural and charitable
institution are exempt from estate tax.
Sec. 87 R.A. 8424
11. Others
i.Grant of tax exemption (more on this under D4)
Sec. 28 (4), Art. VI, 1987 Constitution
No law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of the Congress.
RULES ON VOTE REQUIREMENT
1) Law granting any tax exemption = (absolute majority)
2) Law withdrawing any tax exemption= (Relative majority)
* Tax exemption, amnesties, refunds are considered in the nature
of tax exemptions.
* A law granting such needs approval of the absolute majority of
the Congress
Chavez v. PCGG, supra.
PCGG a body created by the executive department cannot enter
into agreement with the Marcos to exempt the properties of the
latter considered as ill-gotten wealth because it is only congress
can do such.
ii.Veto of appropriation, revenue or tariff bills
Sec. 27 (2), Art. VI, 1987 Constitution
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,
[Sec. 27(2), Art. VI, Constitution].
Gonzales v. Macaraig, 191 SCRA 452 (1990)
An item in a bill refers to particulars, details, the distinct
and severable parts of a bill. In budgetary legislation, an item is
an invalid sum of money dedicated to a stated purpose.
iii.Non-impairment of the jurisdiction of the Supreme Court
Sec. 5 (2b), Art. VIII, 1987 Constitution
The Supreme Court shall have the power to review, revise,
reverse, modify or affirm on appeal or certiorari, all cases
involving the legality of any tax imposed, assessment, or toll, or
any penalty imposed in relation thereto.
Congress cannot take away from the Supreme Court the power given
to it by the Constitution as the final arbiter of the tax
cases.
The decisions of BIR are appealable to CTA. Court of Tax Appeals
may be appealed to the Court of Appeals. Decision rendered by the
CA may be elevated to the Supreme Court.
CIR v. Santos, 277 SCRA 617 (1997)
Lower Courts (CFI) has the authority to decides questions of
constitutionality of a law does not extend on deciding questions
which pertains to legislative policy.
San Miguel Corp. v. Avelino, 89 SCRA 69 (1979)
CFI judge has the authority to pass upon the validity of a city
tax ordinance even after its validity ahd been contested before the
Secretary of Justice who rendered a decision thereon. The decision
of Sec. Justice that the ordinance in questions I of doubtful
validity is not a declaration that it is unlawful.
iv.Revenue bills shall originate from the House of
Representatives
Sec. 24, Art. VI, 1987 Constitution
All appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application, and
private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with
amendments.
It is not the revenue law but the revenue bill which is required
by the constitution to originate exclusively in the House of
Representative.
Tolentino v. Sec. of Finance, supra., supra.
The Constitution simply requires that there must be that
initiative coming from the House of Representatives relative to
appropriation, revenue and tariff bills on the theory that, elected
as they were from the districts, the members of the House can be
expected to be more sensitive to the local needs and problems.
It is not the law, but the revenue bill, which is required by
the Constitution to originate exclusively in the HR, because a bill
originating in the House may undergo such extensive change in the
Senate that result may be rewriting of the whole, and a distinct
bill may be produced. (amendment by substitution)
The Constitution does not also prohibit the filing in the Senate
of a substitute bill in anticipation of its receipt of the bill
from the House, as long as action by the Senate is withheld until
receipt of said bill
v.Infringement of press freedom
Sec. 24, Art. III, 1987 Constitution
No law shall be passed abridging the freedom of speech, of
expression, or of the press, or the right of the people peaceably
to assemble and petition the government for redress of
grievances.
Tolentino v. Sec. of Finance, (1995) supra.
The VAT is, however, different. It is not a license tax. It is
not a tax on the exercise of a privilege, much less a
constitutional right. It is imposed on the sale, barter, lease or
exchange of goods or properties or the sale or exchange of services
and the lease of properties purely for revenue purposes. To subject
the press to its payment is not to burden the exercise of its right
any more than to make the press pay income tax or subject it to
general regulation is not to violate its freedom under the
Constitution. (PPI v. de Ocampo GR 115931, 30 October 1995)
vi.Grant of Franchise
Tax exemptions included in the grant of a franchise may be
revoked by another law as it is specifically provided in the
Constitution that the grant of any franchise is always subject to
amendment, alteration, or repeal by the Congress when the common
good so requires.
Sec. 11, Art. XII, 1987 Constitution
No franchise, certificate, or any other form of authorization
for the operation of a public utility shall be granted except to
citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines, at least sixty per
centum of whose capital is owned by such citizens; nor shall such
franchise, certificate, or authorization be exclusive in character
or for a longer period than fifty years. Neither shall any such
franchise or right be granted except under the condition that it
shall be subject to amendment, alteration, or repeal by the
Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general
public. The participation of foreign investors in the governing
body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be
citizens of the Philippines.
Tolentino v. Sec. of Finance, (1995) supra.
Congress may withdraw tax exemption granted to any corporations
or GOCCs such as PAL. The law could take back the privilege anytime
without offense to the constitution. By granting exemptions, the
State does not forever waive the exercise of its sovereign
prerogative.
C.Situs of Taxation and Double Taxation
The power to tax is limited only to persons, property or
businesses within the jurisdiction or territory of the taxing
power.
EXCEPT:
A) Where the tax laws operate outside territorial
jurisdiction
1) TAXATION of resident citizens on their incomes derived from
abroad
B) Where tax laws do not operate within the territorial
jurisdiction of the State
1) When exempted by treaty obligations
2) When exempted by international comity
1. Meaning of situs
Situs- place where a thing is considered for taxation. It is
necessary for the exercise of dominion/authority of a state over a
subject matter.
The determination of the situs of taxation depends on various
factors including the:
1. Nature of the tax;
2. Subject matter thereof (e.g. persons, property, act or or
activity);
3. Possible protection and benefit that may accrue both to the
government and the taxpayer;
4. Residence or citizenship of the taxpayer; and
5. Source of income.
2. Situs of subjects of taxation
KIND OF TAX
SITUS
Personal or Community Tax
Residence or domicile of the taxpayer
Real Property Tax
Location of the property
Personal Property Tax
TANGIBLE: where it is physically located or permanently kept
(Lex Rei Sitae)
INTANGIBLE: Subject to Sec 104 of the NIRC * and the principle
of Mobilia Sequuntur Personam **
Business Tax
Place of Business
Excise or Privilege Tax
Where the act is performed or where occupation is pursued
Sales Tax
Where the sale is consummated
Income Tax
Consider: (1) citizenship, (2) residence,
(3) source of income (Sec 42, 23, NIRC of 1997)
Transfer Tax
Residence or citizenship of the taxpayer
or location of the property
Donors Tax
Location of the property
and the citizenship of the donor (Sec 98, NIRC 1997)
Estate Tax
Location and citizenship of the decedent.(Sec 85, NIRC)
Franchise Tax
state which granted the franchise
*Lex Rei Situs -where the property is located
* Mobilia Sequuntur Personam movables follow the person.
According to this maxim, the situs of personal property is the
domicile of the owner. This is a merely a fiction of law intended
for convenience and not to be controlling where justice does not
demand it.
** the following intangible properties are considered as
properties with a situs in the Philippines:
a. Franchise which must be exercised in the Philippines
b. Shares, obligations or bonds issued by any corporation or
sociedad anonima organized or constituted in the Philippines in
accordance with its laws.
c. Shares, obligations or bonds issued by any foreign
corporation 85% of business which is located in the Philippines
d. Shares, obligations, or bonds issued by any foreign
corporation if such shares, obligations or bonds have acquired a
business situs in the Philippines; and
e. Shares or rights in any partnership business or industry
established in the Philippines.
Sec. 42, 104
CIR v. British Overseas Airway Corp., supra.
Revenue derived by an of-line international carrier without any
flight from the Philippines, from ticket sales through its local
agent are subject to tax on gross Philippine billings
CIR v. Japan Airlines, supra.
JAL made PAL its sales ticket agent in the Philippines. For the
source of income to be considered coming from the Philippines, it
is sufficient that the income is derived from the activities within
this country regardless of the absence of flight operations within
Philippine territory.
Wells Fargo Bank v. Collector, 70 Phil 325 (1940)
The shares of stock are subject to Philippine inheritance tax
considering that the decedent was domiciled in California
Tan v. del Rosario, supra.
All subjects of taxation similarly situated are to be treated
alike both in privileges confirmed and liabilities imposed.
3. Multiplicity of Situs, Collector v. de Lara, 102 Phil 813
(1958)
CIR v. De Lara, 102 Phil 813
The Supreme Court did not subject to estate and inheritance
taxes the shares of stock issued by Philippine corporations which
were left by a non-resident alien after his death. Considering that
he is a resident of a foreign country, his estate is entitled to
exemption from inheritance tax on the intangible personal property
found in the Philippines. This exemption is granted to
non-residents to reduce the burdens of multiple taxation, which
otherwise would subject a decedents intangible personal property to
the inheritance tax both in his place of residence and domicile and
the place where those are found.
This is, therefore, an exception to the decision of the Supreme
Court in Wells Fargo v. CIR. This has since been incorporated in
Sec. 104 of the NIRC.
Sec. 104, NIRC- No tax shall be collected for intangible
personal property if the decedent at time of his death was citizen
and resident of a foreign country.
Multiplicity of suits
Multiplicity of situs, or the taxation of the same income or
intangible subjects in several taxing jurisdictions, arises from
various factors:
1. The variance in the concept of domicile for tax purposes;
2. Multiple distinct relationships that may arise with respect
to intangible personal property; or
3. The use to which the property may have been devoted all of
which may receive the protection of the laws of jurisdictions other
than the domicile of the owner thereto.
The remedy to avoid or reduce the consequent burden in case of
multiplicity of situs is either to:
1. Provide exemptions or allowance of deduction or tax credit
for foreign taxes; or
2. Enter into tax treaties with other States.
4. Double Taxation
Definition: Taxing the same person, property, business, object
twice when it should only be taxed once.
Is Double Taxation Prohibited In The Phils?
No, there is no Constitutional prohibition against double
taxation. It is not favored but permissible. (Pepsi Cola Bottling
Co. v. City of Butuan, GR L-22814, 28 August 1968)
Double taxation becomes obnoxious only when the taxpayer is
taxed twice for the benefit of the same government entity.
(Commissioner vs. Lednicky (GR L-18169, L-18286, L-21434; 31 July
1964)
1. Kinds of Double Taxation
a. Direct Double or Duplicate Taxation this is objectionable or
prohibited because this constitutes a violation of substantive due
process.
ELEMENTS: (Villanueva v. City of Iloilo, supra)
Taxing twice
By the same taxing authority
Within the same jurisdiction or taxing district
For the same purpose
In the same taxing period
The same subject or object
Of the same kind or character of tax.
b. Indirect Duplicate Taxation not legally objectionable. The
absence of one or more of the above-mentioned elements makes the
double taxation indirect.
EXAMPLES:
A) The taxpayers warehousing business although carried on in
relation to the operation of its sugar central is a distinct and
separate taxable business.
B) A license tax may be levied upon a business or occupation
although the land or property used in connection therewith is
subject to property tax.
C) Both a license fee and a tax may be imposed on the same
business or occupation for selling the same article and this is not
in violation of the rules against double taxation.
D) When every bottle or container of intoxicating beverages is
subject to local tax and at the same time the business of selling
such product is also subject to liquors license.
E) A tax imposed on both on the occupation of fishing and of the
fishpond itself
c. Domestic this arises when the taxes are imposed by the local
or national government (within the same state)
d. International refers to the imposition of comparable taxes in
two or more states on the same taxpayer in respect of of the same
subject matter for identical periods
a.Meaning
In its strict sense, referred to as direct duplicate taxation,
double taxation means:
1. Taxing twice;
2. by the same taxing authority;
3. within the same jurisdiction or taxing district;
4. for the same purpose;
5. in the same year or taxing period;
6. same property in the territory.
CIR v. S.C. Johnson and Son, Inc., 309 SCRA 87 (1999)
Double Taxationtakes place when a person is resident of a
contracting state and derives income from, or owns capital in the
other contracting state and both states impose tax on that income
or capital.
b. Double taxation in its broad sense
In its broad sense, referred to as indirect double taxation,
double taxation is taxation other than direct duplicate taxation.
It extends to all cases in which there is a burden of two or more
impositions.
Villanueva v. City of Iloilo, supra.
An ordinance imposing a municipal tax on tenement houses was
challenged because the owners already pay real estate taxes and
also income taxes under the NIRC. The Supreme Court held that there
was no double taxation , so long as it does not violates any other
constitutional provision. The same tax may be imposed by the
National Government as well as the local government. There is
nothing inherently obnoxious in the exaction of license fees or
taxes with respect to the same occupation, calling or activity by
both the state and a political subdivision thereof. Further, a
license tax may be levied upon a business or occupation although
the land used in connection therewith is subject to property
tax.
b. Constitutionality of double taxation
City of Baguio v. de Leon, supra.
The argument against double taxation may not be invoked where
one tax is imposed by the state and the other imposed by the city,
it being widely recognized that there is nothing inherently
obnoxious in the requirement that license fees or taxes be exacted
with respect to the same occupation, calling or activity by both
the state and a political subdivision thereof. And where the
statute or ordinance in question applies equally to all persons,
firms and corporations placed in a similar situation, there is no
infringement of the rule on equality.
Pepsi Cola Bottling v. City of Butuan, supra.
An ordinance imposing sales tax on agents/consignee selling
merchandise from outside dealers does not amount to double
taxation. Double taxation, in general, is not forbidden by our
fundamental law. However, the ordinance is arbitrary to other
member of the same taxable class hence the law violates the rule of
uniformity in taxation. There is no constitutional prohibition
against double taxation in the Philippines. It is something not
favored but is permissible, provided that the other constitutional
requirements is not thereby violated
Sanchez v. Collector, 97 Phil 687 (1955)
A license tax may be levied upon a business or occupation
although the land or property used therein is subject to property
tax. The state may collect an ad volarem tax on property used in a
calling, and at the same time impose a license tax on the pursuit
of that calling, the imposition of the later kind of tax that being
no sense as double tax.
City of Mla. v. Interisland Gas Service, 99 Phil 847 (1956)
The fees paid by the defendant under a city ordinance was a
license fee, in the exercise of police power and not under its
inherent power of taxation, and double taxation is not prohibited
in our constitution.
Cpa. General de Tabacos v. City of Mla., supra.
Both license fee and a tax may be imposed on the same business
or occupation, or for selling the same article, this is not being a
violation of the rule against double taxation.
Doctrines On Double Taxation
1) Direct Double Taxation (DDT) is not allowed because it
amounts to confiscation of property without due process of law
2) You can question the validity of double taxation if there is
a violation of the Equal protection clause or Equality or
Uniformity of Taxation
3) All doubts as to whether double taxation has been imposed
should be resolved in favor of the taxpayer
D.Means of Avoiding and Minimizing the Burden of Taxation
1. Shifting of tax burden
SHIFTING
Shifting is the transfer of the burden of a tax by the original
payer or the one on whom the tax was assessed or imposed to someone
else.
Process by which such tax burden is transferred from statutory
taxpayer to another without violating the law.
a. Ways of shifting the tax burden
1) FORWARD SHIFTING
When the burden of the tax is transferred from a factor of
production through the factors of distribution until it finally
settles on the ultimate purchaser or consumer.
Example:
Manufacturer or producer may shift tax assessed to wholesaler,
who in turn shifts it to the retailer, who also shifts it to the
final purchaser or consumer
2) BACKWARD SHIFTING
When the burden of the tax is transferred from the consumer or
purchaser through the factors of distribution to the factors of
production.
Example:
Consumer or purchaser may shift tax imposed on him to retailer
by purchasing only after the price is reduced, and from the latter
to the wholesaler, or finally to the manufacturer or producer.
3)ONWARD SHIFTING
When the tax is shifted two or more times either forward or
backward
Example:
Thus, a transfer from the seller to the purchaser involves one
shift; from the producer to the wholesaler, then to retailer, we
have two shifts; and if the tax is transferred again to the
purchaser by the retailer, we have three shifts in all.
b.Taxes that can be shifted
Sec. 105-VAT
Only indirect taxes may be shifted: VAT, professional tax,
amusement tax, customs duties
c. Meaning of impact and incidence of taxation
Impact of taxation is the point on which a tax is originally
imposed. In so far as the law is concerned, the taxpayer is the
person who must pay the tax to the government. He is also termed as
the statutory taxpayer-the one on whom the tax is formally
assessed. He is the subject of the tax.
Incidence of taxation is that point on which the tax burden
finally rests or settle down. It takes place when shifting has been
effected from the statutory taxpayer to another.
Relationship between impact, shifting, and incidence of a
tax
The impact is the initial phenomenon, the shifting is the
intermediate process, and the incidence is the result. Thus, the
impact in a sales tax (i.e. VAT) is on the seller (manufacturer)
who shifts the burden to the customer who finally bears the
incidence of the tax.
Impact is the imposition of the tax; shifting is the transfer of
the tax; while incidence is the setting or coming to rest of the
tax.
2. Tax evasion
It is also known as tax dodging
It is punishable by law.
Tax evasion is the use by the taxpayer of illegal or fraudulent
means to defeat or lessen the payment of tax.
Elements of tax evasion
Tax evasion connotes the integration of three factors:
1. The end to be achieved. Example: the payment of less than
that known by the taxpayer to be legally due, or in paying no tax
when such is due.
2. An accompanying state of mind described as being evil, in bad
faith, willful, or deliberate and not accidental.
3. A course of action (or failure of action) which is
unlawful.
INDICIA of FRAUD IN TAX EVASION
Failure to declare for taxation purposes true and actual income
derived from business for two (2) consecutive years; or
Substantial under-declaration of income tax returns of the
taxpayer for four (4) consecutive years coupled with unintentional
overstatement of deductions
EVIDENCE TO PROVE TAX EVASION
Since fraud is a state of mind, it need not be proved by direct
evidence but may be proved from the circumstances of the case.
Republic v. Gonzales, 13 SCRA 633 (1965)
The Supreme Court affirmed the assessment of a deficiency tax
against Gonzales, a private concessionaire engaged in the
manufacture of furniture inside the Clark Air Base, for
under-declaration of his income. SC held that the failure of the
taxpayer to declare for taxation purposes his true and actual
income derived from his business for two consecutive years is an
indication of his fraudulent intent to cheat the government of
taxes due to it.
Sec. 254-Attempt to Evade or Defeat Tax-Any person willfully
attempts in any manner to evade or defeat any tax imposed under
this code of the payment thereon shall, in addition to other
penalties provided by law, upon conviction thereof, be punished by
a fine of not less then Php 30,000.00 but not more than Php
100,000.00 and suffer imprisonment of not less than 2 years but not
more than 4 years. Provided, that the conviction or acquittal
obtained under this Section shall not be a bar to the filing of a
civil suit for the collection of taxes.
3. Tax avoidance
Tax avoidance is the exploitation by the taxpayer of legally
permissible alternative tax rates or methods of assessing taxable
property or income in order to avoid or reduce tax liability. It is
politely called, tax minimization and is not punishable by law
Ways of avoiding tax (minimizing or escaping tax)
1. Shifting
2. Capitalization
3. Evasion
4. Exemption
5. Transformation
6. Avoidance
Note: With the exception of evasion, all are legal means of
avoiding taxes.
What is TRANSFORMATION?
The manufacturer in an effort to avoid losing his customers,
maintains the same selling price and margin of profit, not by
shifting the tax burden to his customers, but by improving his
method of production and cutting down or other production cost,
thereby transforming the tax into or earn through the medium of
production.
Delpher Traders Corp. v. IAC, 157 SCRA 349 (1988)
The Supreme Court upheld the estate planning scheme resorted to
by the Pacheco family in converting their property to shares of
stock in a corporation which they themselves owned and controlled.
By virtue of the deed of exchange, the Pacheco co-owners saved on
inheritance taxes. The Supreme Court said the records do not point
to anything wrong and objectionable about this estate planning
scheme resorted to. The legal right of the 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.
Yutivo v. CTA, 1 SCRA 160 (1961)
The intention to minimize taxes, when used in the context of
fraud, must be proven by clear and convincing evidence amounting to
more than mere preponderance. Mere understatement of tax in itself
does not prove fraud.
4. Exemption from taxation
a.meaning of exemption from taxation
It is 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. It is an immunity or
privilege; it is freedom from a financial charge or burden to which
others are subjected.
1. Principle Governing Exemptions
In the construction of tax statutes, exemptions are not favored
and are construed strictissimi juris against the taxpayer.
One who claims exemption should prove by convincing proof that
he is exempted.
Taxation is the rule and exemption is the exemption
Exemption is not presumed
Constitutional grants of tax exemption are self executing
Tax exemption are personal and cannot be delegated.
Exemption generally covers direct tax, unless otherwise
provided.
Exemption is allowed only if there is a clear provision there
for.
It is not necessarily discriminatory as long as there is a
reasonable foundation or rational basis.
Exemptions are not presumed, but when public property is
involved, exemption is the rule and taxation is the exemption.
Greenfield v. Meer, 77 Phil 394 (1946)
PLDT v. City of Davao, 363 SCRA 522 (2001)
with the passing of LGC which grant taxing power to the Local
Government, all exemptions granted to all persons, whether natural
or juridical, including those which in the future might be granted,
are withdrawn unless the law granting the exemption expressly
states that the exemption also applies to local taxes.
PLDT v. City of Davao, G.R. 143867, March 25, 2003
Legal effect of the constitutional grant to local governments
simply means that in interpreting statutory provisions on municipal
taxing powers, doubts must be resolved in favor of municipal
corporations.
i.compared with tax remission, condonation
There is a tax condonation or remission when the State desists
or refrains from exacting, inflicting or enforcing something as
well as to reduce what has already been taken. The condonation of a
tax liability is equivalent to and is in the nature of a tax
exemption. Thus, it should be sustained only when expressed in the
law.
Tax exemption, on the other hand, is the grant of immunity to
particular persons or corporations of a particular class from a tax
of which persons and corporations generally within the same state
or taxing district are obliged to pay. Tax exemptions are not
favored and are construed strictissimi juris against the
taxpayer.
Juan Luna Subd. V. M. Sarmiento, 91 Phil 371 (1952)
The word remit means to desist or refrain from exacting,
inflicting or enforcing something as well as to restore what has
already been taken. The remission of taxes due and payable to the
exclusion of taxes already collected does not constitute unfair
discrimination. Such a set of taxes is a class by itself and the
law would be open to attack as class legislation only if all
taxpayers belonging to one class were not treated alike.
Surigao Corp. Min. v. Collector, 9 SCRA 728 (1963)
The condonation of a tax liability is equivalent to and is in
the nature of a tax exemption. Thus, it should be sustained only
when expressly provided in the law.
Condonation of taxes which are unpaid does not extend to refund
of paid taxes.
For refund of taxes, in the suit for recovery of the payment of
taxes as having been illegally collected, the burden is upon the
taxpayer to establish the facts which show the illegality of the
tax or that the determination thereof is erroneous.
ii.tax amnesty
tax amnesty
Tax amnesty, being 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 to collect
what otherwise would be due it and, in this sense, prejudicial
thereto. It is granted particularly to tax evaders who wish to
relent and are willing to reform, thus giving them a chance to do
so and thereby become a part of the new society with a clean
slate.
Note:
Like tax exemption, tax amnesty is never favored nor presumed in
law, and the terms of the tax amnesty shall be strictly construed
against the tax payer and liberally in favor of the government.
Unlike tax exemption, tax amnesty has limited applicability as
to cover a particular taxing period or transaction only.
Commissioner v. CA and ROH Auto, 240 SCRA 368 (1995)
People v. Castaneda, 165 SCRA 327 (1988)
To be entitled to the extinction of liability under PD370, the
claimant must have (1) voluntarily disclosed his previously untaxed
income or wealth and paid the required 15% tax on such previously
untaxed income or wealth. In this case, claimant is not entitled
since the disclosure or previously untaxed income was not
voluntarily but was a result of tax cases already pending.
Pascual v. CIR, 166 SCRA 560 (1988)
2 isolated transactions is not a case of partnership, hence
petitioners are not liable for corporate income tax. As they have
availed of the benefits of tax amnesty as individual taxpayers in
these transactions, they are relieved of any further tax liability
arising therefrom.
Republic v. IAC, 196 SCRA 335 (1991)
Tax amnesty payments bar an action for recovery of deficiency
income taxes under PDs 23, 213, and 370. Even the deficiency tax
assessment against the spouses were correct, since the latter have
already paid almost the equivalent amount to the Government by way
of amnesty taxes under P.D. 213, and were granted not merely an
exemption, but an amnesty, for their past tax failings, the
Government is stopped from collecting the difference between the
deficiency tax assessment and the amount already paid by them as
amnesty tax.
CIR v. Marubeni Corp., 372 SCRA 576 (2001)
He who claims exception (or an amnesty) from the common burden
must justify his claim by the clearest grant of organic or state
law. It cannot be allowed to exist upon a vague implication. If a
doubt arises as to the intent of the legislature, that doubt must
be resolved in favor of the state.
In this case, amnesty (EO 41) is given except (sec 4, b) those
with income tax cases already filed in court as of the effectivity
thereof which is on August 22, 1986. Since the case against the
corporation was filed on Sept. 26, 1986, it is not disqualified to
avail the amnesty for income tax under EO 41.
iii.VAT zero-rating, Sec. 106 (A) (2)
R.A. 7716 (An act restructuring the value added tax (vat)
system, widening its tax based and enhancing its administration and
for these purposes amending and repealing the relevant provisions
of the national internal revenue code, as amended, and for other
purposes.)
"(b)transactions subject to zero-rate. The following services
performed in the Philippines by VAT-registered persons shall be
subject to 0%:
"(1)Processing, manufacturing or repacking goods for other
persons doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP).
"(2)Services other than those mentioned in the preceding
sub-paragraph, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP).
"(3)Services rendered to persons or entities whose exemption
under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such
services to zero rate.
"(4)Services rendered to vessels engaged exclusively in
international shipping; and
"(5)Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an enterprise
whose export sales exceed seventy percent (70%) of total annual
production.
Sec. 106 (A)(2) The following sales by VAT-registered persons
shall be subject to zero percent (0%) rate:
(a) Export Sales. - The term "export sales" means:
(1) The sale and actual shipment of goods from the Philippines
to a foreign country, irrespective of any shipping arrangement that
may be agreed upon which may influence or determine the transfer of
ownership of the goods so exported and paid for in acceptable
foreign currency or its equivalent in goods or services, and
accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP);
(2) Sale of raw materials or packaging materials to a
nonresident buyer for delivery to a resident local export-oriented
enterprise to be used in manufacturing, processing, packing or
repacking in the Philippines of the said buyer's goods and paid for
in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);
(3) Sale of raw materials or packaging materials to
export-oriented enterprise whose export sales exceed seventy
percent (70%) of total annual production;
(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP);
and
(5) Those considered export sales under Executive Order NO. 226,
otherwise known as the Omnibus Investment Code of 1987, and other
special laws.
(b) Foreign Currency Denominated Sale. - The phrase "foreign
currency denominated sale" means sale to a nonresident of goods,
except those mentioned in Sections 149 and 150, assembled or
manufactured in the Philippines for delivery to a resident in the
Philippines, paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP).
(c) Sales to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a
signatory effectively subjects such sales to zero rate.
iv.exclusions, deductions, Sec. 32 (B), 34
EXCLUSION
Exclusion refers to income received or earned but is not taxable
as income because it is exempted by law or by treaty. Such tax-free
income is not to be included in the income tax return unless
information regarding it is specifically called for.
NIRC Sec. 32 (B) Exclusions from Gross Income. - The following
items shall not be included in gross income and shall be exempt
from taxation under this title:
1. Proceeds from life insurance
2. Amount received by insured as return of premium
3. Gifts, bequests and devises
4. Compensation for injuries or sickness
5. Income exempt under treaty
6. Retirement benefits, pensions, gratuities, etc.
7. Income derived by foreign government
8. Income derived by the Philippine Government or its political
subdivisions
9. Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary or civic
achievement.
10. Prizes and awards in sports competitions sanctioned by the
national sports associations
11. 13th month pay and other benefits not exceeding P30,000.00.
Applies both to public and private employees.
12. GSIS, SSS, Medicare and other contributions
13. Gains from the sale of bonds, debentures or other
certificate of indebtedness. 5 eyars or more. If maturity is less
than 5 years, it is taxable.
14. Gains from redemption of shares in mutual fund. It must be
emanate from the mutual fund.
DEDUCTIONS FROM GROSS INCOME
Deductions are items or amounts which the law allows to be
deducted under certain conditions from gross income in order to
arrive at taxable income.
NIRC SEC. 34. Deductions from Gross Income. - Except for
taxpayers earning compensation income arising from personal
services rendered under an employer-employee relationship where no
deductions shall be allowed under this Section other than under
subsection (M) hereof, in computing taxable income subject to
income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C);
and 28 (A) (1), there shall be allowed the following deductions
from gross income;
1. Expenses
2. Interest
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletion of oil and gas wells and mines
8. Charitable and other contributions
9. Research and development
10. Pension trusts
11. Premium payments on health and/or hospitalization insurance
of an individual taxpayer
Deduction v. exemption
Deduction is an amount allowed by law to be subtracted from
gross income to arrive at taxable income. Exemption from taxation
is the grant of immunity to particular persons or corporations or
to persons or corporations of a particular class from a tax which
others generally within the same taxing district are obliged to
pay.
Deduction v. exclusion
Deduction is an amount allowed by law to be subtracted from
gross income to arrive at taxable income. Exclusion refers to
income received or earned but is not taxable as income because
exempted by law or by treaty. Such tax-free income is not to be
included in the income tax return unless information regarding it
is specifically called for. [Section 61, Revenue Regulation 2]
Basic principles governing deductions
1. The taxpayer seeking a deduction must point to some specific
provisions of the statute authorizing the deduction; and
2. He must be able to prove that he is entitled to the deduction
authorized or allowed.
Kinds of deductions
1. Itemized deduction which is available to individual and
corporate taxpayers
2. Optional standard deduction which is available to individual
taxpayers only, except a non-resident alien.
3. Special deductions which is available, in addition to the
itemized deductions, to certain corporations, i.e. insurance
companies and propriety educational corporations.
Time within which to claim deduction
1. As a rule, if a taxpayer does not, within a year, deduct
certain of his expenses, losses, interests, taxes, or other
charges, he cannot deduct them from the income of the next or any
succeeding year.
2. If he keeps his books on the cash receipts basis, the
expenses are deductible in the year they are paid.
3. If on the actual basis, then in the year they are incurred,
whether paid or not.
Who may not avail of deductions form gross income?
1. Citizens and resident aliens whose income is purely
compensation income.
* They are allowed personal and additional exemptions and
deduction for premium payments on
health and hospitalization insurance.
2. Non-resident aliens not engaged in trade or business in the
Philippines
3. Non-resident foreign corporations.
Some rules on deduction
Itemized deduction may apply to corporate tax payer as well as
individual taxpayer.
A corporation may avail only of the deduction from (1) to (10):
premium payments on health and/or hospitalization insurance is
deductible only by an individual taxpayer.
A corporation may avail only of the itemized deductions: an
individual, except a non-resident alien, may elect the itemized
deductions or the optional standard deduction.
Thus, the optional standard deduction is not available to
corporations.
An individual earning purely compensation income is not allowed
itemized deductions, except premium payments on health and/or
hospitalization insurance. In addition, he is also granted personal
and additional exemptions.
An individual, who earns income other than purely compensation
income, is allowed personal additional exemptions in addition to
the itemized deductions or the optional standard deductions.
Two kinds of deduction available to individuals, except a
non-resident alien
1. Itemized deduction
2. Optional standard deduction
Note: Optional standard deduction is not available to
corporations.
b. Kinds of tax exemption
Express or implied, total or partial
Kinds of Tax Exemption According to Manner of Creation
1) Express or affirmative exemption
When certain persons, property or transactions are, by express
provision, exempted from all certain taxes, either entirely or in
part.
2) Implied exemption or exemption by omission
When a tax is levied on certain classes of persons, properties,
or transactions without mentioning the other classes.
3) Contractual
Agreed to by the taxing authority in contracts lawfully entered
into them under enabling laws. (i.e.: treaty, licensing
ordinance)
Kinds of Tax Exemption According to Scope or Extent
1) TOTALwhen certain persons, property or transactions are
exempted, expressly or impliedly from all taxes.
2) PARTIALwhen certain persons, property or transactions are
exempted, expressly or impliedly from certain taxes, either
entirely or in part.
Exemption from direct tax, from indirect tax
A law granting exemption from direct tax does not exempt the
subject form indirect tax.
Does the provision in a statute granting exemption from all
taxes include indirect taxes?
No. As a general rule, indirect taxes are not included in the
grant of such exemption unless it is expressly stated.
Atlas Fertilizer v. Commissioner, 100 SCRA 556( 1980)
While the burden of proof is on the claimant to establish his
right of exemption, there may be situations when he need not to
adduce further evidence to show that he is entitled to
exemption.
Commissioner v. Phil. Ace Line, 25 SCRA 912 (1968)
Every tax exemption implies a waiver of the right to collect
what otherwise would be due to the government. The Constitution
does not bar tax exemption. Purpose of tax exemption is some public
benefit or interest, which the lawmaking body considers sufficient
to offset the monetary loss entailed in the grant of the
exemption.
Com. v. RTN Mining, 202 SCRA 137 (1991); 207 SCRA 549 (1992)
When obvious inconsistency between an earlier law and latter law
granting an exemption, the court is compelled to abide by the maxim
that all doubts granting exemption must be resolved in favor of the
taxing authority. Tax exemptions must be strictly construed and can
only be given force when the grant is clear and categorical.
Caltex v. COA, supra.
In claiming tax exemption, the burden of proof lies upon the
claimant
It cannot be created by mere implication
It cannot be presumed that you are entitled to tax exemption
You must prove it
c. Nature of the power to grant tax exemption
1. National government
The power to grant tax exemptions is an attribute of sovereignty
for the power to prescribe who or what persons or property shall be
taxed implies the power to prescribe who or what persons or
property shall be taxed implies the power to prescribe who or what
persons or property shall not be taxed.
2. Local governments
Municipal corporations are clothed with no inherent power to tax
or to grant tax exemptions. But the moment the power to impose a
particular tax is granted, they also have the power to grant
exemptions therefrom unless forbidden by some provision of the
Constitution or the law.
The legislature may delegate its power to grant tax exemptions
to the same extent that it may exercise the power to exempt.
Basco v. PAGCOR [196 SCRA 52]
The power to tax of municipal corporations must always yield to
a legislative act of Congress which is superior, having been passed
by the State itself. Municipal corporations are mere creatures of
Congress which has the power to create and abolish municipal
corporations due to its general legislative powers. If Congress can
grant the power to tax, it can also provide for exemptions or even
take back the power.
Maceda v. Macaraig, (1993) supra.
In the case of property owned by the state or a city or other
public corporations, the express exception should not be construed
with the same degree of strictness that applies to exemptions
contrary to the policy of the state, since as to such property
exception is the rule and taxation the exception.
d. Rationale for tax exemption
Rationale for granting tax exemptions
Its avowed purpose is some public benefit or interest which the
lawmaking body considers sufficient to offset the monetary loss
entailed in the grant of the exemption.
The theory behind the grant of tax exemptions is that such act
will benefit the body of the people. It is not based on the idea of
lessening the burden of the individual owners of property.
Davao Light v. Com., 22 SCRA 122 (1972)
Facts: Davao Light is a grantee of a legislative franchise to
install, operate and maintain an electric light, heat
and power plant in the city of Davao, for 50 years. On two
occasions, it imported electrical supplies, materials
and equipment for installation in its power plant. The
importations arrived in the port of Cebu City, where the
Collector imposed custom duties and taxes amounting to P9,928.
Davao Light paid under protest, claiming it
is similarly tax-exempted as the National Power Corporation,
which is allegedly posing as competition to
Davao Light in its business.
Issue: Whether Davao Light is similarly tax-exempt as
Napocor.
Held: Davao Lights purpose in securing a franchise to establish
and operate an electric plant and power
stations was to engage in a business or profit-making venture,
while Napocor was specifically created to
undertake the development of hydraulic power nationwide and the
production of power from other sources,
for use of the government and the general public. In isolated
sale of electric power to one government-owned
plant (National Development Co., in Davao) would not be enough
to classify the Napocor as a competing
concern to Davao Lights enterprise. Napocors tax exemption (RA
358) was granted in order to facilitate the
liquidation by said corporation of its liabilities, and the
consequential release by the government itself from its
obligation in the transactions entered into by the President on
behalf of Napocor. Davao Light is not entitled
to the same exemption privileges enjoyed by another operator
without an express provision of the law to that
effect. Exemption from taxation is never presumed. For tax
exemption to be recognized, the grant must be
clear and express. It cannot be made to rest on vague
implications.
Tan Kim Kee v. CTA, 7 SCRA 670 (1963)
NPC v. RTC Presiding Judge, Cagayan de Oro, 190 SCRA 477
(1990)
When conflict between general and special law arises, the
special law prevails. When the law does not distinguished as to the
kinds of tax exemptions withdrawn, the plain meaning is that all
tax exemptions are covered.
Chavez v. PCGG [GR No. 130716, Dec. 6, 1998]
In a compromise agreement between the Philippine Government,
represented by the PCGG, and the Marcos heirs, the PCGG granted tax
exemptions to the assets which will be apportioned to the Marcos
heirs. The Supreme Court ruled that the PCGG has absolutely no
power to grant tax exemptions, even under the cover of its
authority to compromise ill gotten wealth cases. The grant of tax
exemptions is the exclusive prerogative of Congress.
In fact, the Supreme Court even stated that Congress itself
cannot grant tax exemptions in the case at bar because it will
violate the equal protection clause of the Constitution.
Davao Gulf v. CIR, 293 SCRA 76 (1998)
A tax cannot be imposed unless it is supported by the clear and
express language of a statute; on the other hand, once the tax is
unquestionably imposed, a claim of exemption from tax payments must
be clearly shown and based on language in the law too plain to be
mistaken. Since the partial refund authorized under Sec. 5, RA
1435, is in the nature of a tax exemption, it must be construed
strictissimi juris against the grantee. Hence, petitioners claim
for refund based on specific taxes it actually paid must expressly
be granted in a statute stated in a language too clear to be
mistaken.
Maceda v. Macaraig, (1993) supra.
Tolentino v. Sec. of Finance,(1995) supra.
By granting exemptions, the State does not forever waive the
exercise of its sovereign prerogative.
e. Nature of tax exemption
1) It is a mere personal privilege of the grantee.
2) It is generally revocable by the government unless the
exemption is founded on a contract which is contract which is
protected from impairment.
3) It implies a waiver on the part of the government of its
right to collect what otherwise would be due to it, and so is
prejudicial thereto.
4) It is not necessarily discriminatory so long as the exemption
has a reasonable foundation or rational basis.
5) It is not transferable except if the law expressly provides
so.
Tolentino v. Sec. of Finance, (1995) supra.
PLDT v. City of Davao, (2001) supra.
Maceda v. Macaraig, (1991) supra.
Applying the rule of strict construction to statutory provisions
granting tax exemptions or deductions would minimize differential
treatment and foster fairness and equality of treatment among
taxpayers.
Phil. Acetylene v. Commissioner, supra.
In the construction of tax statutes, exemptions are not favored
and are construed stictissimi juris.
Wonder Mech v. CTA, 64 SCRA 555 (1975)
A tax exemption in the manufacture and sale of machines for
making cigarettes paper does not include the manufacture and sale
of the products produced by these machines of the manufacture and
sale of other types of machines for cigarettes production.
Atlas Fertilizer v. Com., supra.
The Secretary of Finance was convinced that the equipment
imported were not only needed for exclusive use in the manufacture
of fertilizer but the same were actually used therefore thus
approving the application for exemption without adducing evidence
that he is entitled for exemption.
f. Laws granting tax exemption, incentives
i. Constitution
Sec. 28 (3), Art. VI and Sec. 4 (3, 4), Art. XIV, 1987
Constitution
Sec. 28 (3), Art. VI, Constitution . (Property Tax
Exemption).
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
Sec. 4 (3, 4), Art. XIV, 1987 Constitution (Income tax, Property
Tax, and Donors Tax exemption)
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. Sec.4, (3)
Subject to the conditions prescribed by law, all grants,
endowments, donations or contributions used actually, directly, and
exclusively for educational purposes shall be exempt from tax. Sec.
4, (4)
Abra Valley v. Aquino, supra.
The test of exemption from taxation is the use of the property
for the purpose mentioned in the Constitution. The term exclusively
uses does not necessarily means total or absolute use for
religious, charitable, educational purposes. Even if the property
is incidentally and necessarily used for the accomplishment of the
said purposes, tax exemption will apply.
Lung Center of the Philippines v Quezon City, G.R. 144104, 433,
June 29, 2004 SCRA 119
When the property is used for one or more commercial purposes,
it is subject to taxation. Portions of the land leased to the
private entities as well as those parts of the hospital leased to
private individuals are not exempt from taxes.
ii.tax statutes
Sec. 30, 32 (B), 106, 199 Exemption Granted by NIRC (R.A.
7716)
SEC. 30. Exemptions from Tax on Corporations. - The following
organizations shall not be taxed under this Title in respect to
income received by them as such:
(A) Labor, agricultural or horticultural organization not
organized principally for profit;
(B) Mutual savings bank not having a capital stock represented
by shares, and cooperative bank without capital stock organized and
operated for mutual purposes and without profit;
(C) A beneficiary society, order or association, operating for
the exclusive benefit of the members such as a fraternal
organization operating under the lodge system, or mutual aid
association or a nonstock corporation organized by employees
providing for the payment of life, sickness, accident, or other
benefits exclusively to the members of such society, order, or
association, or nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the
benefit of its members;
(E) Nonstock corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans, no part
of its net income or asset shall belong to or inures to the benefit
of any member, organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade, not
organized for profit and no part of the net income of which inures
to the benefit of any private stock-holder, or individual;
(G) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance company,
mutual ditch or irrigation company, mutual or cooperative telephone
company, or like organization of a purely local character, the
income of which consists solely of assessments, dues, and fees
collected from members for the sole purpose of meeting its
expenses; and
(K) Farmers', fruit growers', or like association organized and
operated as a sales agent for the purpose of marketing the products
of its members and turning back to them the proceeds of sales, less
the necessary selling expenses on the basis of the quantity of
produce finished by them;
Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed
under this Code.
NIRC Sec. 32 (B) Exclusions from Gross Income. - The following
items shall not be included in gross income and shall be exempt
from taxation under this title:
1. Proceeds from life insurance
2. Amount received by insured as return of premium
3. Gifts, bequests and devises
4. Compensation for injuries or sickness
5. Income exempt under treaty
6. Retirement benefits, pensions, gratuities, etc